The strategy of international business

Dr. Sharon Skim introduces Chapter 13 on the strategy of international business. The chapter covers concepts of global strategy, profiting from global expansion, understanding cost reduction pressures, local responsiveness, and different global strategies. The discussion shifts from the macro-environment to organizational strategy, focusing on increasing revenue and profitability through market development and value creation.

Value creation is defined as the difference between production cost and perceived customer quality. Michael Porter suggests two ways to achieve value creation: low-cost (cost leadership) or differentiation. Cost leadership involves reducing costs throughout the supply chain, while differentiation focuses on demonstrating unique product value. Organizations must be explicit about their strategic choices to direct operational decisions and achieve competitive advantage.

Organizational strategy involves considering the organization as a value chain, comprising primary and support activities. Primary activities include design, creation, delivery, marketing, and after-sales service. Support activities, such as information systems, human resources, and infrastructure, facilitate these primary activities. Effective international expansion requires aligning domestic operations and product designs.

Expanding internationally offers several benefits: expanding market size, realizing location economies (cost efficiencies from optimal activity locations), achieving greater cost economies from experience effects, and a higher return on investment. Core competencies, which are unique organizational skills, are crucial for successful international expansion.

Experience effects refer to systematic reductions in production costs over time, through learning by doing and economies of scale. Global expansion also allows organizations to leverage valuable skills developed in foreign subsidiaries, transferring knowledge across the global network. Identifying and facilitating the transfer of these skills is key to increasing profitability.

International businesses face pressures for cost reductions, especially in commodity markets with price-based competition and excess capacity. They also face pressures for local responsiveness due to variations in customer tastes, infrastructure differences, technical standards, distribution channels, and local content requirements by host governments. The rise of regionalism can influence these pressures, allowing for regional product standardization.

Choosing a strategy involves a trade-off between standardization and customization. Four international strategies are discussed: Global Standardization (high cost reduction pressure, low local responsiveness, e.g., Coca-Cola), International Strategy (low cost reduction pressure, low local responsiveness, e.g., Procter & Gamble), Transnational Strategy (high cost reduction pressure, high local responsiveness, e.g., Ford), and Localization Strategy (low cost reduction pressure, high local responsiveness, e.g., Heinz).

Strategy must be dynamic and adapt to changes in the macro-environment and competitor actions. Organizations need to continuously monitor market dynamics and adjust their strategies. For example, localization and international strategies may need to shift towards a transnational strategy as competition increases, to maintain competitive advantage.