Deck 12: The Strategy of International Business

Question 1

What are the advantages of strategic alliances?

Answer 1

A Strategic Alliance is formed when one firm allies itself with another for a perceived strategic advantage. This firm may be a present or potential competitor. The purpose of this alliance would be to:
1) Gain entry into a foreign market where there are barriers for foreign firms to operate.
2) Enter certain areas of production that may be restricted to local firms only.
3) Pool the development resources to the advantage of both firms. This brings together certain complementary skills that neither company possesses on iys own.
4) Share to development investment costs.
5) Gain a competitive advantage in the world market.
These are the advantages of a strategic alliance.

Question 2

What is the difference between the primary and support activities of a firm's value chain?

Answer 2

A firm's supply chain has both primary and support activities. Primary activities are those activities which are essential in the process of the firm delivering a product or service to its consumers. These normally are:
1) Research, Design and Development. This is usually the starting point of the value chain. This is because this is where decisions are taken as to what the firm's products are going to be and how they are going to be produced.
2) Production. This is the main engine that drives the entire value chain. Value is added to the inputs at every stage of the production process.
3) Marketing and Sales. This is what gets the product to the consumer. This is where the product positioning, the marketing strategy, product differentiation strategy and market feedback is collected. The feedback is important since it helps the Design people come up with more customer-centric products.
4) Customer Service. This is actually the front-end of the operation. This is where actual contact with the consumer is made and a true assessment of one's product in the market can be obtained. Also in today's world where many products like electronic goods have become commoditized, customer service if often the only differentiating factor.
However, to ensure that the primary activities are carried out efficiently and at the least cost, one has to have a series of supporting activities. In traditional organizational structures these would be classified as line and staff functions.
These supporting activities often provide the inputs for the primary activities. There are sometimes as important in the value chain, if not more important, than the primary activities
These supporting activities are:
1) Information Systems. These are in today's world the backbone of any firm's operations.
2) Communications Systems. Without the communication systems the information systems cannot function in their most efficient manner, that is, in real-time.
3) Logistics. These are inward logistics which bring in raw materials and components, and outward logistics that carry the finished products to the markets. Apart from this the logistics within the firm are important. Where goods stored and how they are moved down the value chain is also important.
4) Human Resources. This is the activity that provides the manpower required to operate the value chain efficiently. The right type of manpower can make a great difference in the ultimate competitive advantage of any firm.
5) Finance and Accounting. All the inputs for the costs of various stages of the value chain are obtained for historical financial records. So are the future trends in the market place.
Therefore it is seen that the primary activities are those that are the value-adding activities in the value chain. However it is difficult to imagine how they could function, with any degree of efficiency, without any of the supporting activities.

Question 3

How does a firm create value?

Answer 3

Value is defined as the perceived benefit or benefits that the consumer gets by acquiring any product. This value in monetary terms has to be higher than the price that the consumer pays for the product. Therefore when there are competing products at the same price, the one with the higher perceived value would be purchased in preference to the others. These benefits could be anything from convenience, to better health, to being more attractive looking or, as in the case of very expensive products, a status symbol.
Hence the aim of all firms would be to maximize this creation of value. By maximizing value it can maximize its profit, since higher the value, higher is the price that can be charged for the product.
A firm creates value by either processing a raw material or assembling components to produce a final product. By doing this it keeps on adding value at each step of the conversion process. This process is sometimes defined as the Value Chain.

Question 4

Avon Products
For six years after Andrea Jung became CEO in 1999 of Avon Products, the beauty products company famous for its direct-sales model, revenues grew in excess of 10 percent a year. Profits tripled, making Jung a Wall Street favorite. Then in 2005, the success story started to turn ugly. Avon, which derives as much as 70 percent of its revenues from international markets, mostly in developing nations, suddenly began losing sales across the globe. A ban on direct sales had hurt its business in China (the Chinese government had accused companies that used a direct-sales model of engaging in pyramid schemes and of creating "cults"). To compound matters, economic weakness in eastern Europe, Russia, and Mexico-all drivers of Avon's success-stalled growth there. The dramatic turn of events took investors by surprise. In May 2005, Jung had told investors that Avon would exceed Wall Street's targets for the year. By September, she was rapidly backpedaling and the stock fell 45 percent.
With her job on the line, Jung began to reevaluate Avon's global strategy. Until this point, the company had expanded primarily by replicating its U.S. strategy and organization in other countries. When it entered a nation, it gave country managers considerable autonomy. All used the Avon brand name and adopted the direct-sales model that has been the company's hallmark. The result was an army of 5 million Avon representatives around the world, all independent contractors, who sold the company's skin care and makeup products. However, many country managers also set up their own local manufacturing operations and supply chains, were responsible for local marketing, and developed their own new products. In Jung's words, "they were the king or queen of every decision." The result was a lack of consistency in marketing strategy from nation to nation; extensive duplication of manufacturing operations and supply chains; and a profusion of new products, many of which were not profitable. In Mexico, for example, the roster of products for sale had ballooned to 13,000. The company had 15 layers of management, making accountability and communication problematic. There was also a distinct lack of data-driven analysis of new-product opportunities, with country managers often making decisions based on their intuition or gut feeling.
Jung's turnaround strategy involved several elements. To help transform Avon, she hired seasoned managers from well-known global consumer products companies such as Procter Gamble and Unilever. She flattened the organization to improve communication, performance visibility, and accountability, reducing the number of management layers to just eight and laying off 30 percent of managers. Manufacturing was consolidated in a number of regional centers, and supply chains were rationalized, eliminating duplication and reducing costs by more than $1 billion a year. Rigorous return on investment criteria were introduced to evaluate product profitability. As a consequence, 25 percent of Avon's products were discontinued. New-product decisions were centralized at Avon's headquarters. Jung also invested in centralized product development. The goal was to develop and introduce blockbuster new products that could be positioned as global brands. And Jung pushed the company to emphasize its value proposition in every national market, which could be characterized as high quality at a low price.
By 2007, this strategy was starting to yield dividends. The company's performance improved and growth resumed. It didn't hurt that Jung, a Chinese American who speaks Mandarin, was instrumental in persuading Chinese authorities to rescind the ban on direct sales, allowing Avon to recruit 400,000 new representatives in China. Then in 2008 and 2009, the global financial crisis hit. Jung's reaction: This was an opportunity for Avon to expand its business. In 2009, Avon ran ads around the world aimed at recruiting sales representatives. In the ads, female sales representatives talked about working for Avon. "I can't get laid off, I can't get fired," is what one said. Phones started to ring of the hook, and Avon was quickly able to expand its global sales force. She also instituted an aggressive pricing strategy, while packaging was redesigned for a more elegant look at no additional cost. The idea was to emphasize the "value for money" the Avon products represented. Media stars were used in ads to help market the company's products, and Avon pushed its representatives to use online social networking sites as a medium for representatives to market themselves.
The result of all this was initially good: In the difficult years of 2008 and 2009, Avon gained global market share and its financial performance improved. However, the company started to stumble again in 2010 and 2011. The reasons were complex. In many of Avon's important emerging markets, the company found itself increasingly on the defensive against rivals such as Procter Gamble who were building a strong retail presence there. Meanwhile, sales in developed markets spluttered in the face of persistently slow economic growth. To complicate matters, there were reports of numerous operational mistakes-problems with implementing information systems, for example-that were costly for the company. Avon also came under fire for a possible violation of the Foreign Corrupt Practices Act when it was revealed that some executives in China had been paying bribes to local government officials. Under pressure from investors, in December 2011 Andrea Jung relinquished her CEO role, although she will stay on as chairman until at least 2014.
Do you think that Avon's problems in 2010 and 2011 were a result of the changes in its strategy, or were there other reasons for this?

Question 5

Avon Products
For six years after Andrea Jung became CEO in 1999 of Avon Products, the beauty products company famous for its direct-sales model, revenues grew in excess of 10 percent a year. Profits tripled, making Jung a Wall Street favorite. Then in 2005, the success story started to turn ugly. Avon, which derives as much as 70 percent of its revenues from international markets, mostly in developing nations, suddenly began losing sales across the globe. A ban on direct sales had hurt its business in China (the Chinese government had accused companies that used a direct-sales model of engaging in pyramid schemes and of creating "cults"). To compound matters, economic weakness in eastern Europe, Russia, and Mexico-all drivers of Avon's success-stalled growth there. The dramatic turn of events took investors by surprise. In May 2005, Jung had told investors that Avon would exceed Wall Street's targets for the year. By September, she was rapidly backpedaling and the stock fell 45 percent.
With her job on the line, Jung began to reevaluate Avon's global strategy. Until this point, the company had expanded primarily by replicating its U.S. strategy and organization in other countries. When it entered a nation, it gave country managers considerable autonomy. All used the Avon brand name and adopted the direct-sales model that has been the company's hallmark. The result was an army of 5 million Avon representatives around the world, all independent contractors, who sold the company's skin care and makeup products. However, many country managers also set up their own local manufacturing operations and supply chains, were responsible for local marketing, and developed their own new products. In Jung's words, "they were the king or queen of every decision." The result was a lack of consistency in marketing strategy from nation to nation; extensive duplication of manufacturing operations and supply chains; and a profusion of new products, many of which were not profitable. In Mexico, for example, the roster of products for sale had ballooned to 13,000. The company had 15 layers of management, making accountability and communication problematic. There was also a distinct lack of data-driven analysis of new-product opportunities, with country managers often making decisions based on their intuition or gut feeling.
Jung's turnaround strategy involved several elements. To help transform Avon, she hired seasoned managers from well-known global consumer products companies such as Procter Gamble and Unilever. She flattened the organization to improve communication, performance visibility, and accountability, reducing the number of management layers to just eight and laying off 30 percent of managers. Manufacturing was consolidated in a number of regional centers, and supply chains were rationalized, eliminating duplication and reducing costs by more than $1 billion a year. Rigorous return on investment criteria were introduced to evaluate product profitability. As a consequence, 25 percent of Avon's products were discontinued. New-product decisions were centralized at Avon's headquarters. Jung also invested in centralized product development. The goal was to develop and introduce blockbuster new products that could be positioned as global brands. And Jung pushed the company to emphasize its value proposition in every national market, which could be characterized as high quality at a low price.
By 2007, this strategy was starting to yield dividends. The company's performance improved and growth resumed. It didn't hurt that Jung, a Chinese American who speaks Mandarin, was instrumental in persuading Chinese authorities to rescind the ban on direct sales, allowing Avon to recruit 400,000 new representatives in China. Then in 2008 and 2009, the global financial crisis hit. Jung's reaction: This was an opportunity for Avon to expand its business. In 2009, Avon ran ads around the world aimed at recruiting sales representatives. In the ads, female sales representatives talked about working for Avon. "I can't get laid off, I can't get fired," is what one said. Phones started to ring of the hook, and Avon was quickly able to expand its global sales force. She also instituted an aggressive pricing strategy, while packaging was redesigned for a more elegant look at no additional cost. The idea was to emphasize the "value for money" the Avon products represented. Media stars were used in ads to help market the company's products, and Avon pushed its representatives to use online social networking sites as a medium for representatives to market themselves.
The result of all this was initially good: In the difficult years of 2008 and 2009, Avon gained global market share and its financial performance improved. However, the company started to stumble again in 2010 and 2011. The reasons were complex. In many of Avon's important emerging markets, the company found itself increasingly on the defensive against rivals such as Procter Gamble who were building a strong retail presence there. Meanwhile, sales in developed markets spluttered in the face of persistently slow economic growth. To complicate matters, there were reports of numerous operational mistakes-problems with implementing information systems, for example-that were costly for the company. Avon also came under fire for a possible violation of the Foreign Corrupt Practices Act when it was revealed that some executives in China had been paying bribes to local government officials. Under pressure from investors, in December 2011 Andrea Jung relinquished her CEO role, although she will stay on as chairman until at least 2014.
What changes did Andrea Jung make in Avon's strategy after 2005? What were the benefits of these changes? Can you see any drawbacks?

Question 6

Reread 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?
?a) What strategy does P G appear to be moving toward? What are the benefits of this strategy? What are the potential risks associated with it?

Question 7

When are pressures for local responsiveness likely to be important?

Question 8

What are the benefits of leveraging subsidiary skills?

Question 9

What are the strengths and limitations of an international strategy?

Question 10

Why is organization architecture so important for the attainment of high performance?

Question 11

Plot the position of the following firms on Figure 12.6: Procter Gamble, IBM, Nokia, Coca-Cola, Dow Chemicals, US Steel, McDonald's. In each case justify your answer.

Question 12

What do you see as the main organizational problems that are likely to be associated with implementation of a transnational strategy?

Question 13

What are location economies?

Question 14

What do we mean by the concept of strategic fit? Why does this matter?

Question 15

The Strategy of International Business
Use the globalEDGE Resource Desk (http://globaledge.msu.edu/Reference-Desk) to complete the following exercises:
The top management of your company, a manufacturer and marketer of smart phones, has decided to pursue international expansion opportunities in eastern Europe. To ensure success, management's goal is to enter into countries with a high level of global connectedness. Identify the top 3 eastern European countries in which your company can market its current product line. Prepare an executive summary to support your recommendations.

Question 16

Reread the Management Focus box on the alliance between Cisco and Fujitsu. What are the benefits to Cisco and Fujitsu respectively of the alliances? What are the risks to Cisco? How can Cisco mitigate those risks?

Question 17

What are the risks and drawbacks associated with strategic alliances?

Question 18

What is the difference between a low-cost strategy and a differentiation strategy?

Question 19

Avon Products
For six years after Andrea Jung became CEO in 1999 of Avon Products, the beauty products company famous for its direct-sales model, revenues grew in excess of 10 percent a year. Profits tripled, making Jung a Wall Street favorite. Then in 2005, the success story started to turn ugly. Avon, which derives as much as 70 percent of its revenues from international markets, mostly in developing nations, suddenly began losing sales across the globe. A ban on direct sales had hurt its business in China (the Chinese government had accused companies that used a direct-sales model of engaging in pyramid schemes and of creating "cults"). To compound matters, economic weakness in eastern Europe, Russia, and Mexico-all drivers of Avon's success-stalled growth there. The dramatic turn of events took investors by surprise. In May 2005, Jung had told investors that Avon would exceed Wall Street's targets for the year. By September, she was rapidly backpedaling and the stock fell 45 percent.
With her job on the line, Jung began to reevaluate Avon's global strategy. Until this point, the company had expanded primarily by replicating its U.S. strategy and organization in other countries. When it entered a nation, it gave country managers considerable autonomy. All used the Avon brand name and adopted the direct-sales model that has been the company's hallmark. The result was an army of 5 million Avon representatives around the world, all independent contractors, who sold the company's skin care and makeup products. However, many country managers also set up their own local manufacturing operations and supply chains, were responsible for local marketing, and developed their own new products. In Jung's words, "they were the king or queen of every decision." The result was a lack of consistency in marketing strategy from nation to nation; extensive duplication of manufacturing operations and supply chains; and a profusion of new products, many of which were not profitable. In Mexico, for example, the roster of products for sale had ballooned to 13,000. The company had 15 layers of management, making accountability and communication problematic. There was also a distinct lack of data-driven analysis of new-product opportunities, with country managers often making decisions based on their intuition or gut feeling.
Jung's turnaround strategy involved several elements. To help transform Avon, she hired seasoned managers from well-known global consumer products companies such as Procter Gamble and Unilever. She flattened the organization to improve communication, performance visibility, and accountability, reducing the number of management layers to just eight and laying off 30 percent of managers. Manufacturing was consolidated in a number of regional centers, and supply chains were rationalized, eliminating duplication and reducing costs by more than $1 billion a year. Rigorous return on investment criteria were introduced to evaluate product profitability. As a consequence, 25 percent of Avon's products were discontinued. New-product decisions were centralized at Avon's headquarters. Jung also invested in centralized product development. The goal was to develop and introduce blockbuster new products that could be positioned as global brands. And Jung pushed the company to emphasize its value proposition in every national market, which could be characterized as high quality at a low price.
By 2007, this strategy was starting to yield dividends. The company's performance improved and growth resumed. It didn't hurt that Jung, a Chinese American who speaks Mandarin, was instrumental in persuading Chinese authorities to rescind the ban on direct sales, allowing Avon to recruit 400,000 new representatives in China. Then in 2008 and 2009, the global financial crisis hit. Jung's reaction: This was an opportunity for Avon to expand its business. In 2009, Avon ran ads around the world aimed at recruiting sales representatives. In the ads, female sales representatives talked about working for Avon. "I can't get laid off, I can't get fired," is what one said. Phones started to ring of the hook, and Avon was quickly able to expand its global sales force. She also instituted an aggressive pricing strategy, while packaging was redesigned for a more elegant look at no additional cost. The idea was to emphasize the "value for money" the Avon products represented. Media stars were used in ads to help market the company's products, and Avon pushed its representatives to use online social networking sites as a medium for representatives to market themselves.
The result of all this was initially good: In the difficult years of 2008 and 2009, Avon gained global market share and its financial performance improved. However, the company started to stumble again in 2010 and 2011. The reasons were complex. In many of Avon's important emerging markets, the company found itself increasingly on the defensive against rivals such as Procter Gamble who were building a strong retail presence there. Meanwhile, sales in developed markets spluttered in the face of persistently slow economic growth. To complicate matters, there were reports of numerous operational mistakes-problems with implementing information systems, for example-that were costly for the company. Avon also came under fire for a possible violation of the Foreign Corrupt Practices Act when it was revealed that some executives in China had been paying bribes to local government officials. Under pressure from investors, in December 2011 Andrea Jung relinquished her CEO role, although she will stay on as chairman until at least 2014.
What strategy was Avon pursuing until the mid-2000s? What were the advantages of this strategy? What were the disadvantages?

Question 20

Avon Products
For six years after Andrea Jung became CEO in 1999 of Avon Products, the beauty products company famous for its direct-sales model, revenues grew in excess of 10 percent a year. Profits tripled, making Jung a Wall Street favorite. Then in 2005, the success story started to turn ugly. Avon, which derives as much as 70 percent of its revenues from international markets, mostly in developing nations, suddenly began losing sales across the globe. A ban on direct sales had hurt its business in China (the Chinese government had accused companies that used a direct-sales model of engaging in pyramid schemes and of creating "cults"). To compound matters, economic weakness in eastern Europe, Russia, and Mexico-all drivers of Avon's success-stalled growth there. The dramatic turn of events took investors by surprise. In May 2005, Jung had told investors that Avon would exceed Wall Street's targets for the year. By September, she was rapidly backpedaling and the stock fell 45 percent.
With her job on the line, Jung began to reevaluate Avon's global strategy. Until this point, the company had expanded primarily by replicating its U.S. strategy and organization in other countries. When it entered a nation, it gave country managers considerable autonomy. All used the Avon brand name and adopted the direct-sales model that has been the company's hallmark. The result was an army of 5 million Avon representatives around the world, all independent contractors, who sold the company's skin care and makeup products. However, many country managers also set up their own local manufacturing operations and supply chains, were responsible for local marketing, and developed their own new products. In Jung's words, "they were the king or queen of every decision." The result was a lack of consistency in marketing strategy from nation to nation; extensive duplication of manufacturing operations and supply chains; and a profusion of new products, many of which were not profitable. In Mexico, for example, the roster of products for sale had ballooned to 13,000. The company had 15 layers of management, making accountability and communication problematic. There was also a distinct lack of data-driven analysis of new-product opportunities, with country managers often making decisions based on their intuition or gut feeling.
Jung's turnaround strategy involved several elements. To help transform Avon, she hired seasoned managers from well-known global consumer products companies such as Procter Gamble and Unilever. She flattened the organization to improve communication, performance visibility, and accountability, reducing the number of management layers to just eight and laying off 30 percent of managers. Manufacturing was consolidated in a number of regional centers, and supply chains were rationalized, eliminating duplication and reducing costs by more than $1 billion a year. Rigorous return on investment criteria were introduced to evaluate product profitability. As a consequence, 25 percent of Avon's products were discontinued. New-product decisions were centralized at Avon's headquarters. Jung also invested in centralized product development. The goal was to develop and introduce blockbuster new products that could be positioned as global brands. And Jung pushed the company to emphasize its value proposition in every national market, which could be characterized as high quality at a low price.
By 2007, this strategy was starting to yield dividends. The company's performance improved and growth resumed. It didn't hurt that Jung, a Chinese American who speaks Mandarin, was instrumental in persuading Chinese authorities to rescind the ban on direct sales, allowing Avon to recruit 400,000 new representatives in China. Then in 2008 and 2009, the global financial crisis hit. Jung's reaction: This was an opportunity for Avon to expand its business. In 2009, Avon ran ads around the world aimed at recruiting sales representatives. In the ads, female sales representatives talked about working for Avon. "I can't get laid off, I can't get fired," is what one said. Phones started to ring of the hook, and Avon was quickly able to expand its global sales force. She also instituted an aggressive pricing strategy, while packaging was redesigned for a more elegant look at no additional cost. The idea was to emphasize the "value for money" the Avon products represented. Media stars were used in ads to help market the company's products, and Avon pushed its representatives to use online social networking sites as a medium for representatives to market themselves.
The result of all this was initially good: In the difficult years of 2008 and 2009, Avon gained global market share and its financial performance improved. However, the company started to stumble again in 2010 and 2011. The reasons were complex. In many of Avon's important emerging markets, the company found itself increasingly on the defensive against rivals such as Procter Gamble who were building a strong retail presence there. Meanwhile, sales in developed markets spluttered in the face of persistently slow economic growth. To complicate matters, there were reports of numerous operational mistakes-problems with implementing information systems, for example-that were costly for the company. Avon also came under fire for a possible violation of the Foreign Corrupt Practices Act when it was revealed that some executives in China had been paying bribes to local government officials. Under pressure from investors, in December 2011 Andrea Jung relinquished her CEO role, although she will stay on as chairman until at least 2014.
In terms of the framework introduced in this chapter, what strategy was Avon pursuing by the late 2000s?

Question 21

When are pressures for cost reductions likely to be strong?

Question 22

What does the MTV story tell you about the tension between pressures for local responsiveness and pressures for cost reductions (see the Management Focus Feature)?

Question 23

When does a global standardization strategy make sense? When does a localization strategy make sense?

Question 24

Why might a firm want to pursue a transnational strategy? Why is a transnational strategy difficult to implement?

Question 25

In a world of zero transportation costs, no trade barriers, and nontrivial differences between nations with regard to factor conditions, firms must expand internationally if they are to survive. Discuss.

Question 26

In what kind of industries does a localization strategy make sense? When does a global standardization strategy make most sense?

Question 27

How can a firm increase its profitability and profit growth rate by expanding internationally?

Question 28

How do experience effects help a firm gain a competitive advantage?

Question 29

The Strategy of International Business
Use the globalEDGE Resource Desk (http://globaledge.msu.edu/Reference-Desk) to complete the following exercises:
Several classifications and rankings of the world's largest companies are prepared by a variety of sources. Find one such composite ranking system and identify the criteria that are used to rank the top global companies. Extract the list of the top 20 ranked companies, paying particular attention to their home countries.

Question 30

Describe the steps a firm can take to ensure that its strategic alliances produce the desired benefits.