Profiting from Global Expansion, Global Expansion and Business Level Strategy, Pressures for Cost Reduction and Local Responsiveness; International Strategies- International Multinational, Domestic, Global and Transnational Strategies; Strategic Alliance- Types of Competitive Strategic Alliances, Advantages and Disadvantages of Strategic Alliances

1. Unit 4; Strategies for International
Business

2. Author Details
Asha S
Faculty and Research Scholar,
Government First Grade College,
Shivamogga

3. Unit -5 M.Com IV Sem K U
Course Input:
Profiting from Global Expansion Global Expansion and
Business Level Strategy
Pressures for Cost Reduction and Local Responsiveness
International Strategies- International Multinational,
Domestic, Global and Transnational Strategies
Strategic Alliance- Types of Competitive Strategic
Alliances, Advantages and Disadvantages of Strategic
Alliances

4. The Firm as a Value Chain
• Primary Activities of a Firm:
The activities having to do with production, marketing and delivering
the product to customers and providing support and after-sales
service.
• Supportive activities:
Provide inputs that allow primary activities to happen

5. Value Creation activity
• Production
• Marketing
• Distribution
Primary
Activity
• Infrastructure
• Information System
• Human Resource
• R&D
Supportive
Activity

6. Profiting from Global Expansion
Global Expansion allows firms to increase their profitability
• Firms that operate Internationally are able to:
Earn a greater return from their distinctive skills or core competencies.
Realize location economies by dispersing particular value creation
activities to those locations where they can be performed most
efficiently.
Realize greater experience curve economies, which reduce the cost of
value creation.

7. Transferring Core Competencies
• Core competencies are the bedrock of a firm's competitive advantage. 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, general management
• Such skills are typically expressed in product offerings that other firms find
difficult to match
• They enable a firm to reduce the costs of value creation and/or to create
value in such a way that premium pricing is possible.

8. Realizing Location Economies
• Location Economies: The economies that arise from performing a value
creation activity in the optimal location for that activity, wherever in the
world that might be (transportation costs and trade barriers permitting)
Location Economies can have one or two effects.
• It can lower the costs of value creation and help the firm to achieve a
low-cost position, and/or
• It can enable a firm to differentiate its product offering from that of
competitors.

9. Realizing Location Economies-Conti---
• Creating a Global Web: A firm realizes location economies by the creation
of a global web of value creation activities, with different stages of the value
chain being dispersed to those locations around the globe where value added
is maximized or where the costs of value creation are minimized.
• Caveats: When making location decisions:
Consider trade barriers and transportation costs
Assess political and economic risks

10. Realizing Experience Curve Economies
• The experience curve refers to the systematic reductions in production costs that have been
observed to occur over the life of a product
Learning Effects
• Learning Effects refer to cost savings that come from learning by doing Ex-Labor, who learns by
repetition how to carry out a task
• Managements typically learns how to manage the new operation more efficiently over time. Hence,
production costs eventually decline due to increasing labour productivity and management efficiency.
Economies of Scale
• Economies of Scale refer to the reductions in unit cost achieved by producing a large volume of a
product. Economies of scale have a number of sources, one of the most important of which seems
to be the ability to spread fixed costs over a large volume.

11. Realizing Experience Curve Economies-
Conti….
Economies of scale refer to the reductions in unit cost achieved by producing a large volume of a
product.
Sources of economies of scale include:
• Spreading fixed costs over a large volume
• Utilizing production facilities more intensively
• Bargaining power with suppliers
• By moving down the experience curve
• To get down the experience curve quickly, firms can use a single plant to serve global markets
Strategic Significance
• Moving down the experience curve allows a firm to reduce its cost of creating value. The firm that
moves down the experience curve most rapidly will have a cost advantage vis-à-vis its competitors.
.

12. Pressures for Cost Reductions and
Local Responsiveness
Firms that compete in the Global Marketplace typically face two types of
competitive pressure. They face
• Pressures for Cost reductions
• Pressures to be Locally Responsive
. These pressures place conflicting demands on the firm
• Pressure for cost reductions force the firm to lower unit costs
• Pressure for local responsiveness require the firm to adapt its product to
meet local demands in each market— a strategy that raises costs

13. Pressures for Cost Reductions
• International businesses face pressures for cost reductions.
• This requires a firm to try to lower the costs of value creation by mass producing a
standardized product at the optimal location in the world to try to realize location and
experience curve economies.
• Pressures for cost reductions can be particularly intense in industries producing
commodity products where meaningful differentiation on non price factors is difficult
and price is the main competitive weapon. This tends to be the case for products that
serve universal needs.

14. Pressures for Local Responsiveness
• Pressures for local responsiveness arise from a number of sources
including
(a) Differences in consumer tastes and preferences
(b) Differences in infrastructure and traditional practices
(c) Differences in distribution channels, and
(d) Host government demands.

15. Strategic Choice
• Firms have four basic strategies to compete in the international environment Each
strategy has its advantages and disadvantages. The appropriateness of each strategy varies
with the extent of pressures for cost reductions and local responsiveness
A. International Strategy
B. Multi-Domestic Strategy
C. Global Strategy, and
D. Transnational Strategy

16. A. International Strategy
• Firms that pursue an international strategy try to create value by transferring valuable
skills and products to foreign markets where indigenous competitors lack those skills and
products.
• Most international firms have created value by transferring differentiated product
offerings developed at home to new markets overseas. They tend to centralize product
development functions at home (e.g., R&D).
• However, they also tend to establish manufacturing and marketing functions in each
major country in which they do business. But while they may undertake some local
customization of products and marketing strategy, this tends to be limited.
• Ultimately, in most international firms, the head office retains tight control over
marketing and product strategy.

17. B. Multi-Domestic Strategy
• Firms pursuing a Multi-Domestic strategy orient themselves toward achieving maximum
local responsiveness
• Multi-Domestic firms extensively customize both their product offering and their
marketing strategy to match different national conditions
• They also tend to establish a complete set of value creation activities--including
production, marketing, and R&D - in each major national market in which they do
business.

18. C. Global Strategy
• Firms that pursue a global strategy focus on increasing profitability by reaping the cost
reductions that come from experience curve effects and location economies.
• They are pursuing a low-cost strategy. The production, marketing, and R&D activities of
firms pursuing a global strategy are concentrated in a few favorable locations.
• Global firms tend not to customize their product offering and marketing strategy to local
conditions because customization raises costs (it involves shorter production runs and the
duplication of functions).
• Instead, global firms prefer to market a standardized product worldwide so they can reap
the maximum benefits from the economies of scale that underlie the experience curve.
• They also tend to use their cost advantage to support aggressive pricing in world markets.

19. D. Transnational Strategy
• Bartlett and Ghoshal refer to the following strategy pursued by firms that are trying to
achieve all these objectives simultaneously as a transnational strategy
• Firms must exploit experience-based cost economies and location economies
• They must transfer core competencies within the firm while paying attention to
pressures for local responsiveness
• Core competencies do not reside just in the home country. They can develop in any of
the firm's worldwide operations.
• Flow of skills and product offerings should not be all one way, from home firm to
foreign subsidiary. Rather, the flow should also be from foreign subsidiary to home
country and from foreign subsidiary to foreign subsidiary - a process they refer to
as global learning.

20. A. Global Strategy
Advantages
• Exploit experience curve effects
• Exploit location economies
Disadvantages
• Lack of local responsiveness

21. B. International Strategy
Advantages
• Transfer distinctive competencies
to foreign markets
Disadvantages
• Lack of local responsiveness
• Inability to realize location
economies
• Failure to exploit experience curve
effects

22. C. Multi-Domestic Strategy
Advantages
• Customize product offerings and
marketing in accordance with local
responsiveness
Disadvantages
• Inability to realize location
economies
• Failure to exploit experience curve
effects
• Failure to transfer distinctive
competencies to foreign markets

23. D. Transnational Strategy
Advantages
• Exploit experience curve effects
• Exploit location economies
• Customize product offerings and
marketing in accordance with local
responsiveness
• Reap benefits of global learning

24. Strategic Alliances
• This strategy seeks to enhance the long term competitive advantage of the
firm by forming alliance with its competitors, existing or potential in critical
areas, instead of competing with each other.
• The goal is to leverage critical capabilities, increase the flow of innovation
and increase flexibility in responding to market and technological changes

25. Types of Strategic Alliances
1. Equity Strategic Alliance
a. International Joint Venture
b. International Mergers and Acquisitions.
2. Non Equity Strategic Alliance
a. Exploration Consortium:
b. R&D Consortium
c. Co-Production Agreement
d. Co-Service Agreement
e. Co-Marketing Agreement
f. Co-Management Agreement
g. Long Term Supply Agreement

26. 1. Equity Strategic Alliance:
• These are agreements between two or more firms where the parties have a
financial stake and assume an ownership interest in the success of the
venture. Equity alliances are either in the form of
a. International Joint venture
b. International Mergers and Acquisitions.

27. (a) International Joint Venture:
• A joint venture is a business venture in which two or more independent
companies join together, contribute to equity capital in equal or agreed
proportion and establish a new company.
• Joint ventures are long term ventures formed for an indefinite period.

28. Types of Joint Ventures
a. Between two or more companies in the same industry
b. Between two or more companies across different industries
c. Between a local company and a foreign company with the technological
capability in the home country.
d. Between a local company (home country) and a foreign company in the foreign
country (host country)
e. Between local company (home country) and foreign company in a third
country

29. (b) International Merger &
Acquisition
• It is a combination of two or more companies in which one acquires the
assets and liabilities of the other in exchange for shares or cash, or
• The organisations are dissolved and a new company is formed which takes
over the assets and liabilities of the dissolved organisations and new shares
are issued. It is known as consolidation or amalgamation, when a new
company is formed and
• The company takes over the other company, then it is known as acquisition.

30. International Acquisition
• In acquisition, one company takes over another organisation- its resources
management and control.
• It can also be defined as an organisation that develops its resources and competence
by taking over another organisation.
• Hence, it is also referred to as take-over. The acquisition could be on the basis of
mutual agreement or by stock market operations or Financial Institutions against the
wishes of the company.
• The company which takes over is known as acquiring company and the company
which gives in is known as acquired company.

31. 2. Non Equity Strategic Alliance
• Non equity Alliance is an investment vehicle used by two or more forms and
responsibilities and profits are assigned to each party according to a contract.
No new form is created. Each party enters the alliance as a separate legal
entity and bears its own liabilities.

32. Types of Non Equity Strategic Alliance
• Exploration Consortium: This type of alliance is formed between two or three forms of countries to explore
and extract natural resources for commercial purpose
• R&D Consortium: R&D Consortium is formed when two or more entities share research and development
costs but then go their separate ways in applying or marketing the benefits of the consortium.
• Co-Production Agreement: In co-production agreement companies form allies to share the production cost
for a major manufacturing project.
• Co-Service Agreement: An agreement to share services between two or three firms. This type of agreement
mutually benefits all the agreed parties.
• Co-Marketing Agreement: An agreement to share marketing efforts among agreed parties
• Co-Management Agreement: An agreement to share management expertise in such areas as production
management, supply chain management, employee training and development, and information systems
development.
• Long Term Supply Agreement: In this type of agreement one company decides to provide supply to another
company on long term basis in exchange for information update on changing products and technologies.

33. Benefits of Strategic Alliance
• Ease of market entity: When a company forms alliances with the local companies, it
becomes easy to understand and enter the market. It helps them to convince the local
government and get support from them. The local allied helps the MNC to understand
and establish easily in the local market.
• Shared risk: The international business involves lot of risk and as the companies
collaborate, the risk is shared among the alliances. This helps the company to reduce ridk
when entering the new market.
• Shared knowledge: MNC brings new technique and knowledge and in return the local
allied help them to understand the new local market. Thus, this knowledge is shared
between both the parties.
• Synergistic Payoff: As the cost and risk is reduced because of alliances, companies
competitive strength in the market increases. Thus, the can benefit more synergistic
payoffs compared to company’s entering without any alliances.

34. Drawbacks of Strategic Alliances
• Conflicting Goals: If the allies have difference of opinion and their basic objective are different, then
there could be problems in handling the performance
• Lack of Openness of trust: If the allies lack mutual trust among each other, then the company will
not be able to yield the desired result. The alliances formed without mutual trust will not be able to
sustain for very long in the market.
• Disagreement over Income Distribution: Sometimes the partners may disagree in re-investing of
money in the market. One of the partners may like the profit earned to be invested in expansion or
research and development, where as other partners would like to share it among equity holders. This
may result in conflict and breaking of the alliances.
• Loss of Local Control: One of the partners may keep on introducing new product in the market and
the other may still push with the older product. This may gradually result in loss of control on the
product by the allies and breaking of the alliance.
• Changing Circumstances: Business environment is dynamic, it is ever changing. Hence, a major
change the political or economic environment of the host country may no longer bring same benefit to
the alliances like earlier. This may lead to dissolution of alliance.