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Chapter 11 - The Strategy of International Business

The Strategy of International Business Chapter Outline OPENING CASE: The Evolving Strategy of Coca-Cola INTRODUCTION STRATEGY AND THE FIRM Value Creation Strategic Positioning Operations: The Firm as a Value Chain Organization: The Implementation of Strategy In Sum: Strategic Fit GLOBAL EXPANSION, PROFITABILITY, AND PROFIT GROWTH Expanding the Market: Leveraging Products and Competencies Location Economies Experience Effects Leveraging Subsidiary Skills Summary COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS Pressures for Cost Reductions Pressures for Local Responsiveness CHOOSING A STRATEGY Global Standardization Strategy Management Focus: Vodafone in Japan Localization Strategy Transnational Strategy International Strategy The Evolution of Strategy Management Focus: Evolution of Strategy at Procter & Gamble

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STRATEGIC ALLIANCES The Advantages of Strategic Alliances Management Focus: Cisco and Fujitsu The Disadvantages of Strategic Alliances Making Alliances Work SUMMARY CRITICAL THINKING AND DISCUSSION QUESTIONS CLOSING CASE: IKEA – The Global Retailer

Learning Objectives 1. Explain the concept of strategy. 2. Understand how firms can profit by expanding globally. 3. Understand how pressures for cost reductions and pressures for local responsiveness influence strategic choice. 4. Be familiar with different strategies for competing globally and their pros and cons. 5. Explain the pros and cons of using strategic alliances to support global strategies.

Chapter Summary This chapter focuses on the strategies that firms use to compete in foreign markets. At the outset, the chapter reviews the reasons that firms engage in international commerce, which range from earning a greater return from distinctive skills to realizing location economies by dispersing particular value creation activities to locations where they can be performed most efficiently. A major portion of the chapter is dedicated to the pressures that international firm's face for cost reductions and local responsiveness. These pressures place conflicting demands on firms. On the one hand, cost reductions are best achieved through product standardization and economies of scale. On the other hand, pressures for local responsiveness require firms to modify their products to suit local demands. The chapter also discusses the four basic strategies that firms utilize to compete in international markets. These strategies include a global standardization strategy, a localization strategy, a transnational strategy, and an international strategy. The advantages and disadvantages of each of these strategies are discussed. The chapter concludes with a discussion of international strategic alliances.

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Opening Case: The Evolving Strategy of Coca Cola Summary The opening case describes the evolution of Coca Cola’s international strategy. When Coca Cola initially began its international expansion, the company took a localized approach to markets. Local subsidiaries were given significant latitude in determining which products were sold, how they were marketed and so on. In the 1980s and 1990s, the company moved to a more standardized approach, but then in 2000 reverted back to a more localized strategy which gave country managers more autonomy. Discussion of the case can revolve around the following questions: QUESTION 1: Using the framework developed in this chapter, how would you describe Coca Cola’s strategy for competing internationally when it originally expanded internationally? Why did Coca Cola want to expand internationally? ANSWER 1: Coca Cola initially began its international expansion in 1902. Just a couple of decades later, the product was sold in 76 countries, and during World War II, Coca Cola made a deal with the U.S. military to sell Coke wherever the military went. Coca Cola wanted to continue its international expansion because it believed that the U.S. market would eventually reach maturity, and that growth prospects were better overseas. For much of its initial expansion, Coca Cola followed a localization strategy, allowing each country unit to manage its own operations. QUESTION 2: Why did Coca Cola change its initial strategy? What strategy did Coca Cola start to pursue in 2000? What were the benefits of this strategy to Coca Cola? What were the drawbacks? ANSWER 2: In the 1980s, Coca Cola changed its strategy from a localization approach where individual country units essentially ran their own operations, to a more centralized approach where key management and marketing activities took place at the company headquarters in Atlanta. The company extended this strategy to include foreign bottlers. By taking equity stakes in the bottlers, Coca Cola was able to exert greater control over them. Coca Cola made the shift to the global standardization strategy because it believed that by doing so, the company could gain significant economies of scale. However, by 2000, the company was ready to change its strategy once again. Coca Cola was losing market share to companies that used a more localized strategy, and under the guidance of its new CEO, Coca Cola began once again to give local managers more decision making power. This time however, while giving country managers the autonomy to tailor product development, pricing, and marketing to local markets, the company maintained some control at the headquarters. Most students will probably recognize that Coca Cola’s new strategy is a transnational approach. This strategy allows the company to combine the benefits of both a localization strategy and a global standardization strategy, and at the same time leverage good ideas across country units.

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Teaching Tip: To clearly get a feel for the differences and similarities in Coca Cola’s strategy in various markets, students should go to{http://www.coca-cola.com/glp/d/index.html}, and click on its sites around the world.

Chapter Outline with Lecture Notes, Video Notes, and Teaching Tips INTRODUCTION A) The primary concern so far in this book has been with aspects of the larger environment in which international businesses compete. Now, our focus shifts from the environment to the firm itself and, in particular, to the actions managers can take to compete more effectively as an international business. STRATEGY AND THE FIRM A) A firm’s strategy can be defined as the actions that managers take to attain the goals of the firm. Profitability can be defined as the rate of return the firm makes on its invested capital. Profit growth is the percentage increase in net profits over time. Value Creation B) The way to increase profitability is to create more value. In general, the more value customers place on the firm’s products, the higher the price the firm can charge for those products. C) The value created by a firm is measured by the difference between V (the price that the firm can charge for a product given competitive pressures) and C (the costs of producing the product). D) Firms can increase their profits in two ways: by adding value to a product so that customers are willing to pay more for it or by lowering the costs. Thus, there are two basic strategies for improving a firm’s profitability- a differentiation strategy and a low cost strategy. Strategic Positioning E) Michael Porter notes that it is important for a firm to be explicit about its choice of strategic emphasis with regard to value creation and low cost, and to configure its internal operations to support that strategic emphasis. F) A central tenet of the basic strategy paradigm is that in order to maximize its long run return on invested capital, a firm must do three things: (a) pick a position on the efficiency frontier that is viable in the sense that there is enough demand to support that choice; (b) configure its internal operations so that they support that position; and (c) make sure that the firm has the right organization structure in place to execute its strategy.

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Operations: The Firm as a Value Chain G) It is useful to think of the firm as a value chain composed of a series of distinct value creation activities, including production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure. We can categorize these value creation activities as primary activities and support activities (see Figure 11.4 in the text). Lecture Note: Building a productive global team is a challenge for many organizations. To extend this discussion consider {http://www.businessweek.com/magazine/content/07_34/b4047405.htm? chan=search}. Primary Activities H) The primary activities of a firm have to do with creating the product, marketing and delivering the product to buyers, and providing support and after-sale service to the buyers of the product. Support Activities I) Support activities provide the inputs that allow the primary activities of production and marketing to occur. The logistics function controls the transmission of physical materials through the value chain - from procurement through production and into distribution. The efficiency with which this is carried out can significantly reduce the cost of creating value. Organization: The Implementation of Strategy J) The strategy of a firm is implemented through its organization. The term organization architecture can be used to refer to the totality of a firm’s organization, including formal organizational structure, control systems and incentives, organizational culture, processes, and people (see Figure 11.5 in the text). K) Organizational structure means three things. First, the formal division of the organization into subunits; second, the location of decision-making responsibilities within that structure; and third, the establishment of integrating mechanisms to coordinate the activities of subunits including cross functional teams and or pan-regional committees. L) Controls are the metrics used to measure the performance of subunits and make judgments about how well managers are running those subunits. Incentives are the devices used to reward appropriate managerial behavior. M) Processes are the manner in which decisions are made and work is performed within the organization. Organizational culture is the norms and value system that are shared among the employees of an organization. Finally, by people we mean not just the employees of the organization, but also the strategy used to recruit, compensate, and retain those individuals and the type of people that they are in terms of their skills, values, and orientation.

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In Sum: Strategic Fit N) In sum, for a firm to attain superior performance and earn a high return on capital, its strategy must make sense given market conditions (see Figure 11.6 in the text). GLOBAL EXPANSION, PROFITABILITY, AND PROFIT GROWTH Video Note: The iGlobe CEO Weighs Consequences of Globalization explores how Ethan Allen, the American furniture company, has changed its strategy to reflect the globalization of markets. The iGlobe fits in well with this discussion of firm strategy either as an introduction at the beginning of the discussion or as a summary at the end of the material. Notes for the iGlobe are available below. A) Firms that operate internationally are able to: • Expand the market for their domestic product offerings by selling those products in international markets, • Realize location economies by dispersing individual value creation activities to locations around the globe where they can be performed most efficiently and effectively, • Realize greater cost economies from experience effects by serving an expanded global market from a central location, thereby reducing the costs of value creation, • 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. Expanding the Market: Leveraging Products and Competencies B) A company can increase its growth rate by taking goods or services developed at home and selling them internationally. The success of firms that expand in this manner is based not only on the goods or services they sell, but also on their core competencies, or skills within the firm that competitors cannot easily match or imitate. Core competencies enable the firm to reduce the costs of value creation and/or to create perceived value in such a way that premium pricing is possible. Location Economies C) Trade barriers and transportation costs permitting, 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 as strategy can realize 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. D) Locating a value creation activity in the optimal location for that activity can have one of 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 the offerings of competitors.

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Creating a Global Web E) Multinational firms that take advantage of different locational economies around the world create a global web of value creation activities, with different stages of the value chain being dispersed to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized. Some Caveats F) Introducing transportation costs and trade barriers complicates this picture. For example, due to favorable factor endowments, New Zealand may have a comparative advantage for automobile assembly operations, but high transportation costs would make it an uneconomical location for most firms. Another caveat concerns the importance of assessing political risks when making location decisions. Experience Effects G) The experience curve refers to the systematic reductions in production costs that have been observed to occur over the life of a product. The experience curve relationship between production costs and cumulative output is illustrated in Figure 11.7 in the text. Learning Effects H) Learning effects refer to cost savings that come from learning by doing. In other words, labor productivity increases over time as individuals learn the most efficient ways to perform particular tasks and management typically learns how to manage the new operation more efficiently over time. Economies of Scale I) Economies of scale refers to the reductions in unit cost achieved by producing a large volume of a product. Economies of scale have a number of sources including the ability to spread fixed costs over a large volume, and the ability of large firms to employ increasingly specialized equipment or personnel. Strategic Significance J) The strategic significance of the experience curve is clear. Moving down the experience curve allows a firm to reduce its cost of creating value. Serving a global market from a single location is consistent with moving down the experience curve and establishing a low-cost position.

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Leveraging Subsidiary Skills K) Leveraging the skills created within subsidiaries and applying them to other operations within the firm’s global network may create value. Managers must have the humility to recognize that valuable skills can arise anywhere within the firm’s global network, not just at the corporate center. Managers must also establish an incentive system that encourages local employees to acquire new skills. Summary L) Managers need to keep in mind the complex relationship between profitability and profit growth when making strategic decisions about pricing. COST PRESSURES AND PRESSURES FOR LOCAL RESPONSIVENESS A) Firms that compete in the global marketplace typically face two types of competitive pressures. They face pressures for cost reductions and pressures to be locally responsive. These pressures place conflicting demands on a firm. Pressures for Cost Reductions B) Responding to cost pressures requires that a firm try to lower the costs of value creation by massproducing a standard product at the optimal locations worldwide. Pressures for cost reductions are greatest in industries producing commodity type products where price is the main competitive weapon. C) This tends to be the case for products that serve universal needs, or needs that exist when the tastes and preferences of consumers in different nations are similar if not identical. Pressures for cost reductions are also intense when major competitors are based in low cost locations, where there is persistent excess capacity, and where consumers are powerful and face low switching costs. Pressures for Local Responsiveness D) Pressures for local responsiveness arise from differences in consumer tastes and preferences, differences in traditional practices and infrastructure, differences in distribution channels, and from host government demands. Differences in Consumer Tastes and Preferences E) Strong pressures for local responsiveness emerge when consumer tastes and preferences differ significantly between countries. Differences in Infrastructure and Traditional Practices

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F) Pressures for local responsiveness emerge when there are differences in infrastructure and/or traditional practices between countries. Differences in Distribution Channels G) A firm's marketing strategies may have to be responsive to differences in distribution channels between countries. Host Government Demands H) Economic and political demands imposed by host country governments may necessitate a degree of local responsiveness. Lecture Note: It can be tempting to assume teenagers like the same things and act the same way regardless of where they are located, but recent research shows that this type of thinking may be misleading. To extend this discussion, consider {http://www.businessweek.com/globalbiz/content/jul2006/gb20060731_829548.htm?chan=search }. CHOOSING A STRATEGY A) Firms use four basic strategies to compete in the international environment: a global standardization strategy, a localization strategy, a transnational strategy, and an international strategy. The appropriateness of each strategy varies with the extent of pressures for cost reductions and local responsiveness. Figure 11.8 in the text illustrates when each of these strategies is most appropriate. Global Standardization Strategy B) Firms that pursue a 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. Their strategic goal is to pursue a low-cost strategy on a global scale. This strategy makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal. Management Focus: Vodafone in Japan Summary This feature examines the strategy of the United Kingdom’s Vodafone, the world’s largest provider of wireless telephone service. As part of its strategy to expand internationally, Vodafone acquired Japan’s J-Phone in 2002, but later sold the company for a loss. Analysts believe that the acquisition was not successful because Vodafone failed to pay attention to local market conditions in Japan, and instead tried to sell Japanese consumers a standardized product. Discussion of the feature can revolve around the following questions:

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Suggested Discussion Questions 1. Why do you think that Vodafone was pursuing a global standardization strategy? How did it hope that this strategy would boost profitability and profit growth? Discussion Points: Vodafone’s vision was to build a global brand using a phone that would work anywhere in the world. To achieve that vision, the company offered consumers a standardized product with the same technology regardless of where they were located. In theory, by offering the same basic product everywhere, Vodafone would not only capitalize on a brand name, it would also capitalize on a streamlined production process. However, the company failed to recognize that consumers in different locations values different features. 2. Why did the strategy not work in Japan? In retrospect, what should Vodafone have done differently? Discussion Points: In Japan, Vodafone was selling primarily to younger people who did not travel much, and did not value the global portability of the company’s phones. Instead, Japanese consumers were more interested in other features like games and cameras. In retrospect, Vodafone probably should have paid more attention to local preferences. The company delayed introduction of phones using 3G technology that would allow users to watch video clips and teleconference because it wanted to launch the technology only when it had a phone that would work inside and outside Japan. Teaching Tip: To learn more about Vodafone, go to {http://www.vodafone.com/hub_page.html}. Lecture Note: To extend this discussion, go to {http://www.businessweek.com/globalbiz/content/may2008/gb20080527_542953.htm? chan=search}. Localization Strategy C) A localization strategy focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets. Localization is most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense.

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Transnational Strategy D) Firms pursuing a transnational strategy are trying to simultaneously achieve low costs through location economies, economies of scale, and learning effects; achieve low costs through location economies, economies of scale, and learning effects, differentiate their product offering across geographic markets to account for local differences; and foster a multidirectional flow of skills between different subsidiaries in the firm’s global network of operations. A transnational strategy makes sense when cost pressures are intense, and simultaneously, so are pressures for local responsiveness. International Strategy E) When there are low cost pressures and low pressures for local responsiveness, an international strategy is appropriate. An international strategy involves taking products first produced for the domestic market and then selling them internationally with only minimal local customization. The Evolution of Strategy G) An international strategy may not be viable in the long term, and to survive, firms may need to shift to a global standardization strategy or a transnational strategy in advance of competitors. Similarly, localization may give a firm a competitive edge, but if the firm is simultaneously facing aggressive competitors, the company will also have to reduce its cost structures, and the only way to do that may be to shift toward a transnational strategy. Management Focus: The Evolution of Strategy at Procter & Gamble Summary This feature explores the evolution of Procter & Gamble’s global strategy. In 1915, Procter & Gamble opened its first foreign operation in Canada. In the 1950s and 1960s, Procter & Gamble expanded into Western Europe, and then, in the 1970s, into Japan and other parts of Asia. Throughout this expansion, the company maintained all product development at its Cincinnati, Ohio headquarters, while each subsidiary took on the responsibility for manufacturing, marketing, and distributing the products. Procter & Gamble shifted its strategy in the 1990s, closing several foreign locations and moving to a more regional approach to global markets. More recently, the company implemented “Organization 2005”, a business unit approach whereby different units are entirely responsible for generating profits for a product group. Discussion of this feature can begin with the following questions:

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Suggested Discussion Questions 1. Discuss the evolution of Procter & Gamble’s strategy. Do you think Procter & Gamble was reactive or proactive in its approach to strategy in the late 1990s and early 2000s? Discussion Points: Many students will probably suggest that Procter & Gamble took a reactive approach to its strategy in the early 1990s, but was more proactive in the late 1990s and early 2000s. The company’s initial reorganization was a reaction to a changing marketplace and sluggish profits, however, when it became apparent that the reorganization attempt was not really fixing the problems that existed, the company embarked on a new strategy. This time, rather than simply trying to adjust its existing strategy as the company had done in 1993, Procter & Gamble completely dismantled the structure that had been in place for a quarter of a century and reorganized as a company ready to operate in a global marketplace. 2. What factors have forced Procter & Gamble to change its strategy? As a competitor to Procter & Gamble, what can you learn from the company’s experiences? Discussion Points: Numerous factors prompted Procter & Gamble to change its strategy. Because of its country-by-country approach to the market, the company had extensive duplication of manufacturing, marketing, and administrative facilities that were driving up costs. In addition, the retailers that the company relied on were operating globally and demanding deeper discounts from Procter & Gamble. With its new strategy, the company has eliminated these problems. Now, Procter & Gamble’s competitors are facing many of the same challenges. Some students will probably suggest that a key element that competitors can learn from Procter & Gamble’s experiences is that operating in a global market is significantly different from selling internationally to individual markets. 3. How would you characterize Procter & Gamble’s current strategy? What challenges do you foresee with the new strategy? Discussion Points: Students will probably suggest that Procter & Gamble is trying to take a transnational approach to markets. The company has reorganized into business units so that each unit is responsible for its own profits. Each unit has been directed to develop global brands where possible, and keep costs low. While this new approach eliminates many of the problems facing the company under its old structure, it does introduce a new challenge in that there is little communication between business units which effectively minimizes the possibility of cross-unit learning and information sharing. So far, the new strategy seems to be working. Profits at Proctor & Gamble were up for the time period 2003-2007. Interestingly, the company’s competitors – Kimberly-Clark and Colgate-Palmolive reported more mixed results for the same time period. Teaching Tip: To explore Procter & Gamble’s international strategy in more depth, go to {http://www.pg.com/en_US/index.jhtml}. Click on “P&G Global Operations” to compare the company’s domestic operations to those in numerous foreign locations.

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Lecture Note: Unilever, a competitor to Proctor& Gamble, has recently made changes to its strategy that could threaten Proctor & Gamble’s success. To extend this discussion consider {http://www.businessweek.com/innovate/content/mar2008/id2008035_909480.htm?chan=search}. STRATEGIC ALLIANCES A) Strategic alliances refer to cooperative agreements between potential or actual competitors. Here, we are concerned specifically with strategic alliances between firms from different countries. The Advantages of Strategic Alliances: B) Strategic alliances may facilitate entry into a foreign market. Alliances allow firms to share the fixed costs (and associated risks) of developing new products or processes. An alliance is a way to bring together complementary skills and assets that neither company could easily develop on its own. It can make sense to form an alliance that will help the firm establish technological standards for the industry that will benefit the firm. Management Focus: Cisco and Fujitsu Summary This feature examines Cisco Systems’ joint venture with Fujitsu. Cisco, the world’s largest manufacturer of Internet routers, entered the alliance in 2004 in an effort to jointly develop the next generation of high end routers for sales in Japan. Cisco believed the Japanese market was important, and wanted to expand its presence there. Fujitsu wanted the routers so that it can offer end-to-end communications solutions to its customers. Discussion of the feature can begin with the following questions. Suggested Discussion Questions 1. What did Cisco hope to gain by forming an alliance with Fujitsu? What risks are involved for Cisco with this alliance? How can Cisco limit those risks? Discussion Points: Cisco hoped to achieve several goals through its alliance with Fujitsu. The company hoped that by sharing R&D, new product development would be quicker, that combining its technology expertise with Fujitsu’s production expertise would result in more reliable products, that it would gain a bigger sales presence in Japan, and that by bundling its routers together with Fujitsu’s telecommunications equipment, the alliance could offer end-to-end communications solutions to customers. Students will probably suggest that the biggest risk for Cisco is that by sharing its proprietary technology with Fujitsu, it could potentially create a competitor. To avoid this, Cisco will need to take steps to protect its technology by making sure that safeguards are written into alliance agreements, and it will need to ensure that it is getting an equitable gain from the agreement.

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2. What did Fujitsu bring to the alliance? Why was it important for Cisco to have a Japanese presence? What were the advantages of the alliance for Fujitsu? Discussion Points: One of the key attractions of an alliance with Fujitsu’s was the company’s strong presence in the Japanese market. Japan is at the forefront of second generation high speed Internet based telecommunications networks, and Cisco wanted to be a part of that market. For Fujitsu, the alliance meant that it could fill the gap in its product line for routers, reduce product development costs and time, and produce more reliable products. 3. What does the alliance between Cisco and Fujitsu mean to other competitors in the router market? Discussion Points: For other competitors in the market, the alliance between Cisco and Fujitsu is significant. Together, the companies can offer one-stop shopping end-to-end communications solutions. Furthermore, because the two companies are pooling their resources, development costs are lower, which will put additional pressure on competitors. Teaching Tip: To find out more about Cisco and Fujitsu, students can visit the company web sites at {http://www.cisco.com/} and {http://www.fujitsu.com/global/}. In addition, a new release about the Cisco- Fujitsu alliance is available at {http://www.cisco.com/web/partners/pr67/fujitsu/index.html}. The Disadvantages of Strategic Alliances C) Strategic alliances can give competitors low-cost routes to new technology and markets. Unless a firm is careful, it can give away more than it receives. Making Alliances Work D) The failure rate for international strategic alliances seems to be high. The success of an alliance seems to be a function of three main factors: partner selection, alliance structure, and the manner in which the alliance is managed. Lecture Note: The Association for Strategic Alliance Professionals maintains a web site with information on how to make alliances more successful. The site is available at {http://www.strategic-alliances.org/}.

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Partner Selection E) One of the keys to making strategic alliance work is to select the right kind of ally. A good ally or partner has three principal characteristics. First, a good partner helps the firm achieve its strategic goals- whether they are market access, sharing the costs and risks of new product development, or gaining access to critical core competencies. In other words, the partner must have capabilities that the firm lacks and that it values. Second, a good partner shares the firm’s vision for the purpose of the alliance. Third, a good partner is unlikely to try to opportunistically exploit the alliance for its own ends: that it, to expropriate the firm’s technological know-how while giving away little in return. Alliance Structure F) The alliance should be structured such that the firm’s risks of giving too much away to the partner are reduced to an acceptable level. Alliances can be designed to make it difficult (if not impossible) to transfer technology not meant to be transferred. Contractual safeguards can be written into an alliance agreement to guard against the risk of opportunism by a partner. Both parties to an alliance can agree in advance to swap skills and technologies that the other covets, thereby ensuring a chance for equitable gain. Finally, the risk of opportunism by an alliance partner can be reduced if the firm extracts a significant credible commitment from its partner in advance. Managing the Alliance G) Once a partner has been selected and an appropriate alliance structure has been agreed on, the task facing the firm is to maximize its benefits from the alliance. Part of the trick of managing an alliance successfully seems to be to build interpersonal relationships between the firms' managers. H) After a five-year study of 15 strategic alliances between major multinationals, Gary Hamel, Yves Doz, and C.K. Prahalad concluded that a major determinant of how much a company gains from an alliance is its ability to learn from its alliance partners.

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Critical Thinking and Discussion Questions 1. In a world of zero transportation costs, no trade barriers, and non-trivial differences between nations with regard to factor endowments, firms must expand internationally if they are to survive. Discuss. Answer: Given differences in countries with respect to factor endowments, the theory of comparative advantage suggests that different activities should take place in the countries that can perform them most efficiently. If there are also no barriers or costs to trade, then it is likely that a lot of industries will be based out of the countries that provide the best set of factor endowments. Firms located in sub-optimal locations, will either have to expand internationally or switch to a different industry where the factor endowments are in their favor. For firms already located in the countries with the most favorable factor endowments for their industry, however, there may not be a need to expand internationally. The firm may be content to simply focus on the domestic market. But if the firm does want to expand internationally, it may be able to do so via licensing or exporting, and need not necessarily undertake foreign direct investment. Thus, not only in theory, but also in practice many firms are able to survive quite well without having to expand internationally. 2. Plot the position of the following firms on Figure 11.8 - Procter & Gamble, IBM, Nokia, CocaCola, Dow Chemical, US Steel, and McDonald's. In each case justify your answer. Answer: Procter & Gamble would be located in the middle right-hand portion of the graph. This is a position of high pressures for local responsiveness and moderate pressures for cost reductions. P&G sells personal and home care products, which do face pressures for local responsiveness. Although these products are not commodities, there are many competitors in the industry, which implies a moderate degree of cost pressures. IBM would be in the upper middle portion of the graph. This is a position of moderate pressure for local responsiveness and high pressure for cost reductions. There is a moderate amount of pressure for local responsiveness for IBM products, due to language differences and differing voltage requirements for electronic products across countries. IBM is in a very competitive industry, and cost pressures are high. Nokia manufactures wireless handsets and infrastructures such as switches. Nokia, because it must customize its product offering according to the technical standards prevailing in a given country would be in the lower right hand side of the graph. Dow Chemical and U.S. Steel would both be located in the upper left-hand portion of the graph. Both Dow and U.S. Steel sell products that are commodity-like by nature. As a result, cost pressures would be high and local responsiveness pressures would be low for these products. Finally, McDonald’s and Coca Cola would be located in the middle left-hand portion of the graph. Pressures for local responsiveness would be low because a selling feature for both companies is the “American experience,” and cost reduction pressures would be moderate.

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3. Re-Read the Management Focus box on Procter & Gamble and then answer the following questions: a) What strategy was Procter & Gamble pursuing when it first entered foreign markets in the period up until the 1980s? b) Why do you think this strategy became less viable in the 1990s? c) What strategy does Procter & Gamble appear to be moving toward? What are the benefits of this strategy? What are the potential risks associated with it? Answer: Procter & Gamble initially expanded internationally when it entered Canada in 1915. However, even after expanding into Western Europe and Asia in the 1960s and 1970s, the company sill maintained all product development at its headquarters location in Cincinnati, Ohio. Subsidiary units were responsible for manufacturing, marketing, and distributing the products in their local markets. However, by the 1990s several factors caused Procter & Gamble to reconsider its international strategy. Barriers to low-cost trade were falling rapidly worldwide, and fragmented national markets were merging into larger regional or global markets. In addition, the retailers through which the company distributed its products were growing larger and more global, and were demanding price discounts from Procter & Gamble. The company now appears to be moving towards a transnational strategy in which there are seven self-contained business units, each responsible for the complete generation of profits from its products, and for manufacturing, marketing, and development. A transnational strategy is complex, and the company will have to balance the demands of responding to local market needs for its consumer products, while at the same time reaching its cost savings goals. 4. What do you see as the main organizational problems that are likely to be associated with the implementation of a transnational strategy? Answer: Simultaneously trying to achieve cost efficiencies, global learning, and local responsiveness places difficult and contradictory demands on an organization. Managing these conflicting demands requires the setting of control and motivational policies for people and organizations that force balancing of these demands at multiple levels within firms. The organizational challenges involve managing these inherent conflicts to resolutions that serve the best interests of the firm overall.

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5. Reread the Management Focus box on the alliance between Cisco and Fujitsu. What are the benefits to Cisco and Fujitsu respectively of the alliance? What are the risks to Cisco? How can Cisco mitigate those risks? Answer: The Cisco-Fujitsu venture was important to both companies as they develop the next generation of routers. The firms will be able to pool their R&D efforts, share complementary technology, and get products to market more quickly. The two companies also believe that the combination of Cisco’s technology together with Fujitsu’s production expertise will enable them to produce more reliable products. In addition, the alliance provides Cisco with access to the Japanese market, a market that it believes will be important in the future, and a more complete product line for Fujitsu. Cisco will have to ensure that it puts proper safeguards in place as it shares its technology with Fujitsu, or it risks creating a competitor.

Closing Case: IKEA – The Global Retailer Summary The closing case describes examines the operations and strategy of Ikea, the household goods and home furnishings retailer. Ikea was established in Sweden in 1943, and now operates 230 stores in 33 countries. Ikea’s strategy is the same everywhere—selling furniture and household items that reflect Swedish style at low prices to the global middle class. So far, the formula is a success. The company now generates sales of $18 billion. Ikea relies on a network of 1,300 suppliers located in 53 countries, and while a similar product line is sold everywhere, the company does adapt to meet the needs of consumers in different markets. Discussion of the closing can revolve around the following questions: QUESTION 1: How is IKEA profiting from global expansion? What is the essence of its strategy for creating value by expanding internationally? ANSWER 1: International expansion has been critical to the success of IKEA, which currently operates 230 stores in 33 countries. IKEA has targeted the global middle class, and hosts some 410 million customers each year. Without expanding into the global marketplace, IKEA’s customer base would have been limited to the relatively small middle class in Sweden. QUESTION 2: How would you characterize IKEA’s original strategic posture in foreign markets? What were the strengths of this posture? What were its weaknesses? ANSWER 2: Ikea’s basic strategy is to sell Swedish-inspired furnishings and households goods to middle class consumers across the globe at low prices. To achieve this strategy, the company relies on some 1,300 suppliers located in 53 countries. Because Ikea aims to reduce its prices by 2-3 percent each year, finding the right supplier is critical to the success of the firm. Ikea tries to avoid high shipping costs by working with suppliers in each of its big markets. In addition, the company gains efficiencies by concentrating production of certain items in markets like China.

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QUESTION 3: How has the strategic posture of IKEA changed as a result of its experiences in the United States? Why did it change its strategy? How would you characterize the strategy of IKEA today? ANSWER 3: Ikea has been able to learn from its experiences in the U.S. market, where for example, the company had to adapt to American sized beds and kitchen appliances in their effort to meet the needs of U.S. consumers. In China, the company is designing its store layout to reflect the style of Chinese apartments, and is including a balcony section since most Chinese apartments have balconies. Most students will probably suggest that IKEA is following a transnational strategy. Teaching Tip: Students can explore Ikea’s global operations at the company’s web site as {http://www.ikea.com/}.

Continuous Case Concept When the big three Japanese auto companies initially expanded into the U.S., they changed their strategies to meet the needs of the new market. Similarly, BMW and Mercedes changed their strategies when they began to manufacture in the U.S. Now, as China and India become growth markets, the world’s automakers are responding with new strategic charges. Already, Ford’s existing factory in China is too small, and the company is looking for a new facility. Similarly, Daimler AG is ramping up production in China. Perhaps more interesting is the news from BMW’s Rolls Royce division that it is planning on opening three new dealerships in China in 2008. China is now the firm’s third largest market in the world! •

Ask students to reflect on the strategic changes made by the auto companies. What factors have contributed to the changes the companies have made?

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Next, ask students, to discuss, based on what they already know about Toyota, Nissan, and Honda, the notion of creating a global web of value creation activities. How does this concept play out with the Japanese auto companies? Does the response to this question differ if the American auto companies are considered?

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Then, ask students to consider whether, given that consumer preferences in America appear to be quite different from those of Japanese consumers, there any way for automakers to realize the traditional benefits of selling in multiple markets?

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Finally, ask students of the four basic international strategies described in the textbook, which strategy is the most appropriate for most global automobile companies? Why?

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The first part of this feature can be used at the beginning of the discussion on strategy. Students should be able to identify basic strategic changes made by the companies and many of the factors that prompted those changes. The next question fits in with the discussion of the global web of value creation activities. Finally, the last two questions provide a practical opportunity to review the material on the four basic strategic alternatives, their advantages, and their disadvantages.

globalEDGE Exercises Use the globalEDGE Resource Desk {http://globalEDGE.msu.edu/ResourceDesk/} to complete the following exercises.

Exercise 1 Several classifications and rankings of the world’s largest companies are prepared by a variety of sources. Find one such ranking system and identify the criteria that are used in ranking the top global companies. Extract the list of the highest ranked 25 companies, paying particular attention to the home countries of the companies. Answer: There are a variety of surveys that rank multinational corporations. Each of these surveys uses a slightly different method for ranking the companies, although size (assets or revenues) is typically one of the primary criteria. Some of the most influential rankings of this kind are the Financial Times FT Global 500, the Fortune Global 500, the Fortune Global Most Admired Companies, and the Forbes Global 2000. A full list and links to these studies can be accessed under the “Rankings” category of the globalEDGE Resource Desk at http://globaledge.msu.edu/ResourceDesk/. The Forbes Global 2000 ranking is listed below: Search Term: “world’s largest companies” Resource Name: Forbes: Global 2000 Website: http://www.forbes.com/global2000 globalEDGE Category: “Research: Rankings”

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Exercise 2 The top management of your company, a manufacturer and marketer of laptop computers, has decided to pursue international expansion opportunities in Eastern Europe. To achieve economies of scale, management is aiming toward a strategy of minimum local adaptation. Focusing on an eastern European country of your choice, and using the Countries section of globalEDGE (select Countries on the main menu), prepare an executive summary that features those aspects of the product where standardization will simply not work and adaptation to local conditions will be essential. Answer: The country specific information can be found in the Country Insights section of globalEDGE. Both summary and detailed information regarding each country can be accessed by using the drop-down menu on the right, or by clicking the “Europe” link. For illustration purposes, we will choose Bulgaria. The synopsis information indicates that the language of the country (Bulgarian) and the voltage used (110/220V) will be two of the critical variables that have to be considered in the adaptation of the product. More detailed analysis by following the external links, such as the Country Commercial Guide, will surely highlight additional aspects. globalEDGELocation: Countries/ Europe/ Bulgaria Resource Name: Bulgaria Website: http://globaledge.msu.edu/countryInsights/country.asp?countryID=40

Additional Readings and Sources of Information Multinationals: Expanding Abroad - And Growing at Home http://www.businessweek.com/magazine/content/07_07/b4021038.htm?chan=search Multinationals: Are They Good for America? http://www.businessweek.com/magazine/content/08_10/b4074041212646.htm?chan=search Building Expertise through Collective Innovation http://www.businessweek.com/innovate/content/mar2008/id2008035_909480.htm?chan=search Jet Blue Makes a Deal with Lufthansa http://www.businessweek.com/bwdaily/dnflash/content/dec2007/db20071213_593734.htm? chan=search

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