Chapter 6: The Strategy of the International Business

At the end of the discussion, you should be able to:

1. Understand the differences of Entrepreneurship and Entrepreneur

2. Understand the differences between Global Entrepreneurship and Intrapreneurship

3. Explain the Concept of global strategy

4. Recognize how firms can profit by expanding globally

5. Understand how pressures for cost reductions and local responsiveness influence
strategic choice

6. Identify and choose different global strategies for competing in the global marketplace

Sir Dema-ala International Business and Trade Lesson PH

Introduction
Entrepreneurship is defined as “the recognition of opportunities
(needs, wants, problems, and challenges) and the use or creation of
resources to implement innovative ideas for new, thoughtfully planned
ventures

➢Entrepreneur is a French word that means “to undertake.” In

the business world, this term applies to someone who wants to
start a business or enterprise

Sir Dema-ala International Business and Trade Lesson PH

Prevalent Entrepreneurship Myths
1. Entrepreneurs are born, not made
➢ The most prevalent myth about entrepreneurs is that they are born with
the skills that will make them successful and that anyone who’s not born
with those skills will not succeed

2. Entrepreneurs make more money

➢ Surprisingly, the typical entrepreneur earns less than he or she would earn
if working as an employee
3. Being Original is Essential
➢ Another entrepreneurial myth is that entrepreneurs who get to the
market first gain the most.

Sir Dema-ala International Business and Trade Lesson PH

Prevalent Entrepreneurship Myths
4. It takes a lot of money to start a business
➢ entrepreneurs find that success comes easier when they have money
to invest in their businesses. Without it, securing the supplies and
equipment they need and tackling unexpected expenses can be
difficult, if not impossible

5. Entrepreneurs must be risk takers

➢ According to this myth, entrepreneurs are good at starting businesses

but can’t manage them once they grow.

Sir Dema-ala International Business and Trade Lesson PH

Global Entrepreneurship
➢Global entrepreneurs are
those who seek out and
conduct new and innovative
business activities like
exporting, licensing, opening a
new sales office, or acquiring
another venture across
national borders. And global
entrepreneurship refers to
entrepreneurship done on a
worldwide basis.

Sir Dema-ala International Business and Trade Lesson PH

Global Entrepreneurship
Advantages of Global entrepreneurship:

➢ You get the opportunity to grow the business in new markets.

➢ You will meet new experts and talents.
➢ Your customer’s reach expands.
➢ You will learn the workings of foreign markets and compete with
them.
➢ You are less dependent on seasonal trends.

Sir Dema-ala International Business and Trade Lesson PH

Global Entrepreneurship
Challenges faced by global start-ups:

➢ The logistical problems, differences in culture, language,

education systems, religion, and economic development levels.
➢ As startups already have so many various things to spend on and
in such a situation, accommodating the world's various
workweek schedules can be difficult.
➢ Managing the different nations' political, regulatory, judicial, tax,
and labor environments.

Sir Dema-ala International Business and Trade Lesson PH

Global Entrepreneurship
Being a global entrepreneur is not a cakewalk. Various prominent companies took years
to launch themselves in the global market. Now, when you are starting global, here is
some advice you will need to succeed:

1. Understanding culture
➢ You can not connect with the customers, investors, market until and unless
you understand the culture of the country you want to work with.

2. Think Global
➢ The surroundings you live in have a bigger impact on your thinking. In
such a situation, before going globally, it is important to understand how
your competitor thinks then only you can compete with them.

Sir Dema-ala International Business and Trade Lesson PH

Global Entrepreneurship
3. Check the availability of funding
➢ In the last few years, several accelerators have undergone global expansion. For
example, a venture-backed by Germany’s government called German
Accelerator helps startups operate in Boston, New York City, Silicon Valley,
Singapore, and various other places. So, before setting up your business lookout
for such accelerators that can help fund their citizens’ ventures.
4. Focus on Global Needs
➢ If you want to make a bigger impact, solve the problems that have a global
impact. When you are solving a problem in your region, look for other
regions where it can be beneficial as well.

Sir Dema-ala International Business and Trade Lesson PH

Global Intrapreneurship

Intrapreneurship is an
activity that facilitates and
encourages employees to
generate creative and innovative
ideas within a company.
Additionally, they increase the
value of the other activities and
services they offer.

Sir Dema-ala International Business and Trade Lesson PH

Global Intrapreneurship
Advantages of intrapreneurship

➢ It is a win-win situation where the employee does not have

to worry about the risk involved
➢ Boosts creativity
➢ Increases company morale
➢ Decreases employee turnover levels
➢ Increases levels of employee dedication and loyalty
➢ Increases job satisfaction

Sir Dema-ala International Business and Trade Lesson PH

Global Intrapreneurship
Disadvantages of intrapreneurship
➢ Anonymity: the product belongs to the company and not to the employee
who developed it
➢ Inequity: economic benefits and prestige belong to the company
➢ Limited management freedom
➢ Benefits according to the established agreement

Sir Dema-ala International Business and Trade Lesson PH

Global Intrapreneurship

Sir Dema-ala International Business and Trade Lesson PH

Global Intrapreneurship

Sir Dema-ala International Business and Trade Lesson PH

Global Intrapreneurship

Sir Dema-ala International Business and Trade Lesson PH

Strategy and the Firm
Basic Principles of Strategy

Strategy refers to actions that managers take to attain the goals of the firm.

Goal is to maximize the value of the firm for owners and shareholders.

➢ Profitability is the rate of return a firm makes on its invested capital.

➢ Profit growth measures percentage increase in net profits over time.

Sir Dema-ala International Business and Trade Lesson PH

Figure 6.1 Determinants of Enterprise Value

Sir Dema-ala International Business and Trade Lesson PH

Strategy and the Firm
Value Creation

➢ Measured by difference between a firm’s costs of production and the

quality that consumers perceive in its products.

➢ The more value customers place on a firm’s products, the higher the
price the firm can charge for those products.
Measured by the difference between V (value) and C (cost).

Sir Dema-ala International Business and Trade Lesson PH

Global Expansion, Profitability, and Profit Growth
Leveraging Subsidiary Skills

➢ In mature multinationals, development of valuable skills can

occur in foreign subsidiaries.

➢ Leveraging skills created within subsidiaries and applying

them to other operations within the firm’s global network may
create value.

Sir Dema-ala International Business and Trade Lesson PH

Global Expansion, Profitability, and Profit Growth
Leveraging Subsidiary Skills continued

Multinational enterprise managers must:

➢ Recognize that valuable skills that lead to competencies can arise anywhere
within the firm’s global network, not just at the corporate center.

➢ Establish an incentive system that encourages local employees to acquire

new skills.

➢ Have a process for identifying when valuable new skills have been created
in a subsidiary.

➢ Act as facilitators, helping transfer valuable skills within the firm.

Sir Dema-ala International Business and Trade Lesson PH

Global Expansion, Profitability, and Profit Growth
Profitability and Profit Growth Summary

Firms that expand globally can increase profitability and profit growth by:

➢ Entering new markets where competitors lack similar competencies.

➢ Lowering costs and adding value to product offering through location

economies.

➢ Exploiting experience curve effects.

➢ Transfer of valuable skills between subsidiaries.

Sir Dema-ala International Business and Trade Lesson PH

Cost Pressure and Pressures for Local Responsiveness
Pressures for Cost Reductions

Require a firm to try to lower the costs of value creation.

Greater in industries producing commodity-type products.

▪ Universal needs—when the tastes and preferences of consumers in

different nations are similar if not identical. Examples: steel, sugar.
Also intense in industries where major competitors are based in low-cost
locations, where there is persistent excess capacity, and where consumers are
powerful and face low switching costs.

Sir Dema-ala International Business and Trade Lesson PH

Cost Pressure and Pressures for Local Responsiveness
Mass Production of Standardized Product

Sir Dema-ala International Business and Trade Lesson PH

Cost Pressure and Pressures for Local Responsiveness
Outsourcing

Sir Dema-ala International Business and Trade Lesson PH

Cost Pressure and Pressures for Local Responsiveness
Pressures for Local Responsiveness

Differences in Customer Tastes and Preferences:

➢ Customer demands for local customization are on the decline worldwide in

some markets.
➢ Significant differences in consumer needs, wants, tastes still exist across
cultures.
Differences in Infrastructure and Traditional Practices:
➢May require the delegation of manufacturing and production functions to
foreign subsidiaries.
• Example: technical standards.
➢Traditional practices also often vary across nations.

Sir Dema-ala International Business and Trade Lesson PH

Cost Pressure and Pressures for Local Responsiveness
Differences in Customer Differences in Infrastructure
Tastes and Preferences: and Traditional Practices:
AUTOMOBILE INDUSTRIES IN
1980’S AND 1990 MOVES
TOWARDS THE CREATION OF
“WORLD CAR”

220 Volts

US and India
European and Asian China and
American Consumers
Japan
SUV and Pick up Consumer

Sir Dema-ala International Business and Trade Lesson PH

Cost Pressure and Pressures for Local Responsiveness
Pressures for Local Responsiveness continued

Differences in Distribution Channels:

➢ May necessitate delegation of marketing functions to national

subsidiaries.
Host-Government Demands:

➢Economic and political demands by host-country governments.

➢Threats of protectionism, economic nationalism, and local content rules

dictate that international businesses manufacture locally.

Sir Dema-ala International Business and Trade Lesson PH

Cost Pressure and Pressures for Local Responsiveness
Differences in Distribution Channels:

In the pharmaceutical industry, for example, the British and Japanese distribution systems are radically different
from the U.S. system. British and Japanese doctors will not accept or respond favorably to a U.S.-style high-
pressure sales force. Thus, pharmaceutical companies have to adopt different marketing practices in Britain and
Japan compared with the United States—soft sell versus hard sell.

Sir Dema-ala International Business and Trade Lesson PH

Cost Pressure and Pressures for Local Responsiveness

Sir Dema-ala International Business and Trade Lesson PH

Cost Pressure and Pressures for Local Responsiveness
Host-Government Demands:

Subject to Local Clinical Testing

Registration Procedures
Pricing Restrictions

Sir Dema-ala International Business and Trade Lesson PH

Figure 6.3 Pressures for Cost Reductions and Local Responsiveness

Sir Dema-ala International Business and Trade Lesson PH

Choosing a Strategy
Need to customize product to local conditions may work against the
implementation of a global standardization strategy.

➢ Concessions may need to be made to local conditions.

➢ Requires cost/benefit analysis and opportunity assessment.

Sir Dema-ala International Business and Trade Lesson PH

Figure 6.4 Four Basic Strategies

Sir Dema-ala International Business and Trade Lesson PH

Choosing a Strategy
Global Standardization Strategy

➢ Looks to reap cost reductions that come from economies of scale, learning
effects, location economies.

➢ Goal is to pursue low-cost strategy on global scale.

➢ Production, marketing, R&D, and supply chain activities are concentrated in

a few favorable locations.

➢ Avoids customization.

➢ Makes sense when there are strong pressures for cost reductions and
demands for local responsiveness are minimal.

Sir Dema-ala International Business and Trade Lesson PH

Choosing a Strategy
Global Standardization Strategy

focus on increasing profitability and profit growth by

reaping the cost reductions that come from economies of
scale, learning effects, and location economies

Sir Dema-ala International Business and Trade Lesson PH

Choosing a Strategy
Localization Strategy

Customizes goods or services so they are a good match to tastes and preferences
in different national markets.

Most appropriate when:

➢ Substantial differences across nations regarding consumer tastes and

preferences.
➢ Cost pressures are not too intense.

Customization limits the ability to capture the cost reductions associated with
mass-producing a standardized product for global consumption.

Sir Dema-ala International Business and Trade Lesson PH

Choosing a Strategy
Localization Strategy

Nestle efficiently adapts its products to the local focuses on increasing profitability by customizing the firm’s
market. For instance, in Japan, the company goods or services so that they provide a good match to tastes
markets coffee-flavored candies. Since Japan is and preferences in different national markets.
traditionally a tea-drinking nation, Nestle
introduced these candies so that kids could develop
a taste for coffee.

Sir Dema-ala International Business and Trade Lesson PH

Choosing a Strategy
Transnational Strategy

Achieve low costs, differentiate product offerings to account for local

differences, foster multidirectional flow of skills between subsidiaries.

Makes most sense when demands for local responsiveness are high and the cost
pressures are High as well.

Places conflicting demands on the company:

➢ Differentiating product to respond to local demands in different

geographic markets raises costs, which runs counter to goal of reducing
costs.
➢ Complex and challenging to achieve.

Sir Dema-ala International Business and Trade Lesson PH

Choosing a Strategy
Transnational Strategy

Komatsu Ltd. or Komatsu is a

Caterpillar Inc. is an American Japanese multinational corporation
construction, mining and other that manufactures construction,
engineering equipment mining, forestry and military
manufacturer. The company is equipment, as well as diesel engines
the world's largest Low cost
and industrial equipment like press
manufacturer of construction machines, lasers and thermoelectric competitor
equipment. generators.

Sir Dema-ala International Business and Trade Lesson PH

Choosing a Strategy
Transnational Strategy
▪ Caterpillar redesigned its products to use
many identical components and invest in a
few large-scale component manufacturing
facilities

▪ It also augments the centralized

manufacturing of components with
assembly plants in each of its major global
markets.

▪ Caterpillar adds local product features,

Tailoring the finished product to local
needs.

Sir Dema-ala International Business and Trade Lesson PH

Choosing a Strategy
International Strategy

Taking products developed for domestic market and selling them

internationally with minimal local customization.

For firms with low cost pressures and low pressures for local responsiveness.

Tend to centralize product development functions such as R&D at home but

establish manufacturing and marketing functions in each major country or
geographic region in which they do business.

➢ Resulting duplication may raise costs.

Sir Dema-ala International Business and Trade Lesson PH

Choosing a Strategy
International Strategy ➢ Sometimes it is possible to identify
multinational firms that find
themselves in the fortunate
position of being confronted with
low cost pressures and low
pressures for local responsiveness.

➢ Many of these enterprises have

pursued an international strategy,
taking products first produced for
their domestic market and selling
them internationally with only
minimal local customization.

Sir Dema-ala International Business and Trade Lesson PH

Choosing a Strategy
The Evolution of Strategy

International strategy may not work long term.

➢ Over time, competitors will emerge.

➢ Firms may need to shift to global standardization or transnational
strategy in advance of competitors.

Localization strategy may also face competitors and have to shift to a

transnational strategy.
International and localization strategies less viable as competitors emerge.

Sir Dema-ala International Business and Trade Lesson PH

Figure 6.5 Changes in Strategy Over Time

Sir Dema-ala International Business and Trade Lesson PH