International Business

Sixteenth Edition, Global Edition

Chapter 5

Strategies for
International Business

Copyright © 2018 Pearson Education Limited. All Rights Reserved.

Learning Objectives

1 Explain the idea of strategy in the MNEs

2 Assess approaches to create value
3 Compare global integration and local
responsiveness
4 Differentiate the types of strategies used by
MNEs
IB Strategy
• What is strategy?
- Strategy is an integrated set of choices and
commitments that supports and sustains an
MNE’s competitiveness.
- Or actions that managers take to attain the goals of
the firm.
- A set of plans, choices and decisions that supports
and sustains the firm.
- It defines and communicates an MNE’s plan on
how it will use its resources, capabilities, and
competencies to compete in different countries.
Strategy Process

Figure 12.1 The Role of Strategy in IB

Strategies Pyramid
Visio
n
Missio
n
Goals

Strategies

Tactics

Action Plan
Mission and Vision
• What is a vision?
• a future-oriented declaration of its purpose and
aspirations, outlines its broad ambitions.
• What is a mission?
• The MNE’s mission complements its vision.
• Whereas the vision statement inspires people to dream,
the mission statement inspires them to action. It
communicates what the MNE is going to do, why it’s
going to do that, and the general approach to doing so.
Examples of Mission and Visons
Objective 12-1
Table 12.1 Vision and Mission Statements, Leading MNEs
Creation of Value

• The firm’s value creation is measured by the

difference between V and C (V - C);
• Value in economic terms: the difference between
the cost of making a product and the price that
customers are willing to pay for it => MNEs
generates profits, and hence, creates value.
• Cost Leadership Strategy
• Differentiation Strategy
• Integrating Cost Leadership/Differentiation
Strategies
Value creation
LEVELS OF PRODUCT AND SERVICES
 Strategic Choice in
the International
Hotel Industry

The efficiency frontier shows all of the different positions that a firm can adopt with
regard to adding value to the product (V) and low cost (C) assuming that its internal
operations are configured efficiently to support a particular position
The Value Chain

Figure 12.2 Visualizing the Value Chain

Recognize how firms can profit by expanding globally

Firms that operate internationally are able to:

1. Expand the market for their domestic product offerings by
selling those products in international markets.
2. Realize location economies by dispersing individual value
creation activities to those locations around the globe where
they can be performed most efficiently and effectively.
3. Realize greater cost economies from experience effects by
serving an expanded global market from a central location,
thereby reducing the costs of value creation.
4. Earn a greater return by leveraging any valuable skills
developed in foreign operations and transferring them to
other entities within the firm’s global network of operations.
(1) Expanding the market:
Leveraging products and competencies
• A company can increase its growth rate by taking
goods or services developed at home and selling
them internationally.
• Almost all multinationals started out doing just
this: Procter and Gamble, Microsoft, Toyota
• The success of many multinational companies that
expand in this manner is based not just upon the
goods or services that they sell in foreign nations,
but also upon the core competencies that underlie
the development, production, and marketing of
those goods or services.
(1) Expanding the market:
Leveraging products and competencies
• The term core competence refers to skills within
the firm that competitors cannot easily match or
imitate.
• These skills may exist in any of the firm’s value
creation activities—production, marketing, R&D,
human resources, logistics, general management,
and so on.
• Such skills are typically expressed in product
offerings that other firms find difficult to match or
imitate.
• Core competencies are the bedrock of a firm’s
competitive advantage.
(2) Location Economies

• The firm will benefit by basing each value creation

activity it performs at that location where economic,
political, and cultural conditions, including relative
factor costs, are most conducive to the performance of
that activity.
• Firms that pursue such a strategy can realize what we
refer to as location economies, which are the
economies that arise from performing a value creation
activity in the optimal location for that activity
• Do what we do best, outsource the rest
(3) Experience Effects

• The experience curve refers to systematic reductions in

production costs that have been observed to occur over the
life of a product.
• A number of studies have observed that a product’s
production costs decline by some quantity about each time
cumulative output doubles.
• Figure 13.5 illustrates this experience curve relationship
between unit production costs and cumulative output (the
relationship is for cumulative output over time, and not
output in any one period, such as a year).
• Two things explain this: learning effects and economies of
scale.
(3.1) Learning effects
• Learning effects refer to cost savings that come from
learning by doing.
• Labor, for example, learns by repetition how to carry
out a task, such as assembling airframes, most
efficiently.
• Labor productivity increases over time as individuals
learn the most efficient ways to perform particular
tasks.
• Equally important, in new production facilities
management typically learns how to manage the new
operation more efficiently over time
Experience Curve
(3.2) Economies of Scale

• Economies of scale refer to the reductions in unit

cost achieved by producing a large volume of a
product.
• Attaining economies of scale lowers a firm’s unit
costs and increases its profitability.
• Economies of scale have a number of sources.
One is the ability to spread fixed costs over a large
volume.
• Fixed costs are the costs required to set up a
production facility, develop a new product, and the
like.
• They can be substantial.
(4) Leveraging Subsidiary Skills
• For more mature multinationals that have already
established a network of subsidiary operations in
foreign markets, the development of valuable skills can
just as well occur in foreign subsidiaries.
• Skills can be created anywhere within a multinational’s
global network of operations, wherever people have the
opportunity and incentive to try new ways of doing
things.
• The creation of skills that help lower the costs of
production, or enhance perceived value and support
higher product pricing, is not the monopoly of the
corporate center
Cost Pressures and Pressures for
Local Responsiveness
Why should we adapt the local
demands….
• Differences in consumer tastes &
preferences
• Differences in infrastructure & traditional
practices
• Differences in distribution channels
• Host-Government requirements
→ Diversifying product line: design, quality,
tastes…
Why should we cut the cost….
• Emerging demand of global standardized
products
• Major competitors are based in low-cost
locations
• Consumers tend to be sensitivity and price
elasticity
• Free trade and trade liberalization
→ cutting the whole functional costs or some
specific functional costs: marketing, r&d…
Corporates challenge with two main pressure:
• Pressures for local responsiveness
• Pressure of cost reduction
International Corporate Level Strategies

• International Strategy
• Localization Strategy (Multidomestic)
• Global Strategy
• Transnational Strategy
 International Business basic strategies
High
Pressure of Cost reduction

Transnation
Global
al
Strategy
Strategy

Multi-
Internation
domestic
alStrategy
Strategy
Low

Low Pressure of Local Responsiveness High

Global Integration or Local Responsiveness?

Table 12.6 Motivations of Global Integration and Local Responsiveness

Considerations with Global Integration or
Local Responsiveness

• Potential to standardize
• Responding to local customers preferences
• Institutional agents
• Mapping interaction
The Integration Responsiveness Grid
Figure 12.4 The Integration-Responsiveness Grid
International Business basic strategies
 International strategy

“Centralize product development function at home (head

quarter) and establish manufacturing, marketing functions in
local country but head office exercises tight control over it”
• Think global – Act global
• First step to enter to global market, mostly use the export mode
• Create value by transferring valuable core competencies to
foreign markets that indigenous competitors lack
• Limit product customization.
• Effective for the first step to enter the global market and if firm
faces weak pressures for local responsive and cost reductions
Core competencies
“Skills within the firm that competitors cannot easily match
or imitate”
• Earn greater returns by transferring these skills and/or unique
product offerings to foreign markets who lack them.
(McDonalds)
• Examples:
– Consumer marketing skills of U.S. firms allowed them to
dominate European consumer product market in 1960s
and 70s
Activity:
Study some Vietnamese companies:
- Do they have core competencies? (Identify and
name if they have)
- Briefly draft some recommendations.
 Multi-domestic strategy
“Customize product offering, market strategy including
production, and R&D and marketing according to the real
national conditions”
• Think local – Act local
• Each marketplace – each product & service line
• Main aim is maximum local responsiveness
• Generally unable to realize value from experience curve
effects and the economies of scale
• Possess high cost structure
• Effective: where the consumer demands are diversified
Global strategy
“Production, marketing, and R&D concentrated in few
favorable functions”
• Think global – Act global
• One product & Service for the whole global marketplace
• Focus is on achieving a low-cost strategy by reaping cost
reductions that come from experience curve effects and
economies of scale.
• Market standardized product to keep cost’s low
• Effective: where strong pressures for cost reductions and
low demand for local responsiveness
Economies of scale
“Refers to reduction in unit cost by producing a large
volume of a product”
• Sources:
o Reduces fixed costs by spreading it over a large volume
o Ability of large firms to employ increasingly specialized
equipment or personnel
Transnational strategy
“To meet competition firms aim to reduce costs, transfer
core competencies while paying attention to pressures for
local responsiveness”
• Mixed strategy
• Exploit both the national similarities and differences
• Local Adjusting – Global learning system
• Effective: when MNEs challenge both the pressure of local
responsiveness and cost reduction
Global learning
• Valuable skills and knowledge (i.e: R&D) can develop in any
of the firm’s world wide operations (not only in the R&D
favorable location or head – quarter)
• Transfer from foreign subsidiary to home country and
across other foreign nation subsidiaries
• Managers must create an environment where incentives are
given to take necessary risks and reward them
• Need a process to identify new skill development
• Need to facilitate transfer of new skills within the firm
 Pros & Cons of the 4 IB strategies
Strategy Pros Cons
Global - Exploit the experience curve (EC) - Lack of regional
effects and the economy of scale responsiveness
(ES)
- Cost effectiveness
International - Transfer core competencies to - Lack of regional
foreign markets responsiveness
- Unable to exploit the EC
and ES
Multi- - Customize products and services - High cost
domestic along with the real demands of
market
Transnational - Exploit the experience curve (EC) - Require the good –
effects and the economy of scale structuring organization
(ES)
- Cost effectiveness
- Customize products and services
along with the real demands of
market
- Develop the global learning
Strategies of IB
2.2. By business philosophy
• Ethnocentric strategy - Chiến lược định hướng vị
chủng/hướng tâm
• Polycentric strategy - Chiến lược đa tâm
• Regiocentric strategy - Chiến lược khu vực
• Geocentric strategy - Chiến lược địa tâm

45
 46
Source: Adapted from Bleicher (1992, p. 10)
Strategy Process
Objective 12-1
Figure 12.1 The Role of Strategy in IB
 Tangible and Intangible Resources
Objective 12-3
Table 12.2 Resources of the Firm: Specification and Profile