Introduction

Our primary concern thus far in this book has been with aspects of the larger environment in which international businesses compete. This environment has included the different political, economic, and cultural institutions found in different nations, the international trade and investment framework, and the international monetary system. Now our focus shifts from the environment to the firm, and in particular, to the actions that managers can take to compete more effectively as an international business. In this chapter, we look at how firms can increase their profitability by expanding their operations in foreign markets. We discuss the different strategies that firms pursue when competing internationally, consider the pros and cons of these strategies, discuss the various factors that affect a firm's choice of strategy, and look at the tactics firms adopt when competing head to head across various national markets. In subsequent chapters, we shall build on the framework established here to discuss a variety of topics including the design of organization structures and control systems for international businesses, the use and misuse of strategic alliances, strategies for exporting, and the various manufacturing, marketing, R&D, human resource, accounting, and financial strategies that are pursued by international businesses.

General Motors, which was profiled in the opening case, gives us a preview of some issues we will deal with in the current chapter. As described in the case, General Motor's international expansion is being driven by a belief that emerging markets offer the greatest potential for future demand growth. GM is not alone in this belief. Not only are many other automobile firms also pursuing a similar expansion strategy, but so are firms based in a wide range of industries. Although GM has long had operations overseas, until recently these took second place in the company's Detroit-centric view of the world. Now GM is recognizing that if it is to compete successfully in emerging markets, it is no longer enough to transfer outdated technology and designs from Detroit. It must build a globally integrated corporation that draws on centers of excellence wherever they may reside in the world to engineer "global" cars and state-of-the-art production systems. But for all its economic benefits, the trend toward greater integration of its global operations is raising concerns within GM's European units. They fear that an ability to respond to local market needs may be lost in the process. As we shall see in this chapter, GM's struggle with this issue is not unique. Many multinational enterprises are struggling to find the right balance between global integration and local responsiveness.

Strategy and the Firm

The fundamental purpose of any business firm is to make a profit. A firm makes a profit if the price it can charge for its output is greater than its costs of producing that output. To do this, a firm must produce a product that is valued by consumers. Thus, we say that business firms engage in value creation. The price consumers are prepared to pay for a product is a measure of the value of the product to consumers.

Firms can increase their profits in two ways: by adding value to a product so that consumers are willing to pay more for it and by lowering the costs of value creation (i.e., the costs of production). A firm adds value to a product when it improves the product's quality, provides a service to the consumer, or customizes the product to consumer needs in such a way that consumers will pay more for it; that is, when the firm differentiates the product from that offered by competitors. For example, consumers will pay more for a Mercedes-Benz car than a Hyundai car because they value the superior quality of the Mercedes. Firms lower the costs of value creation when they find ways to perform value creation activities more efficiently. Thus, there are two basic strategies for improving a firm's profitability--a differentiation strategy and a low-cost strategy.¹

The Firm as a Value Chain

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 12.1).²

Primary Activities

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. We consider the activities involved in the physical creation of

Figure 12.1

The Firm as a Value Chain

the product as production and those involved in marketing, delivery, and after-sale service as marketing. Efficient production can reduce the costs of creating value (e.g., by realizing scale economies) and can add value by increasing product quality (e.g., by reducing the number of defective products), which facilitates premium pricing. Efficient marketing also can help the firm reduce its production costs (e.g., by generating the volume sales necessary to realize scale economies) and can add value by helping the firm customize its product to consumer needs and differentiate its product from competitors' products--both of which facilitate premium pricing.