Quiz 12: The Strategy of International Business
A# until the 2000s used to have a much dispersed strategy. It had a lot of localization with each of the country managers replicating the US business model. Each manager developed his own suppliers as well as some new products. This meant that there was a lot of duplication of the manufacturing activity and no consistency in the marketing strategy from country to country. Mexico for instance had 13,000 products for sale. The A# management consisted of 15 layers. There was no data-driven analysis. All decisions at country level were by gut feel only. The only advantage of this strategy was that it was highly localized and had no cost advantage features. Any cost pressure would collapse this strategy. The disadvantages of this strategy were that it had no economies of scale, no learning effects and could not benefit from the benefit of local economies. Manufacturing was duplicated from country to country and the marketing strategy was in total disarray.
The theory of comparative advantage is a measure of profit gained from trade practices to an individual and nation. It suggests that the activities in the countries must be so efficient that can produce effective factors of production. If there were zero transportation costs, no trade barriers, and nontrivial differences between nations regarding factor conditions, then firms are said to provide the best set of factors of production. As factor endowments evolve, the firm may want to disperse its value-creating activities to those markets that offer comparative advantages. If the firm is in a competitive market, this provides global exposure to establish new business operations. A firm may be able to survive in a local market without international expansion, if the local market is not targeted by competitors that have taken advantage of the economies offered by dispersing their value-creation activities internationally. An example is an inefficient, high-priced locally-owned supermarket that has not yet faced the entry of Wal-Mart in its market. When assuming location economies, a firm develops internationally its value creation activities, so that it can take advantage of different factors in different countries. The location of value creation activities "can have one of two effects i.e., it can lower the costs of value creation and helps to achieve a low-cost position. Hence, well established firms in a country can offer the greatest set of factor conditions to produce their products, might not need to expand internationally. A firm's value creation activities may need to be scattered to other countries with a comparative advantage as factor conditions change.
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.