Global Business Management
(MGT380)
Lecture #18: Global Strategy
Learning Objectives
Understand the concept of strategy
 Understand how firms can profit from
expanding their activities globally
 Be familiar with the different strategies for
competing globally
 How cost pressure influences a firm’s choice of
global stretegy
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Recap of the last lecture
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A country following a pegged exchange rate system pegs the
value of its currency to that of another major currency
Countries using a currency board commit to converting their
domestic currency on demand into another currency at a fixed
exchange rate
There are three main types of financial crises which IMF
tackles:
Currency crisis
Banking crisis
Foreign debt crisis
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Currency crises: occurs when a speculative attack on the
exchange value of a currency results in a sharp depreciation in
the value of the currency, or forces authorities to expend large
volumes of international currency reserves and sharply
increase interest rates in order to defend prevailing exchange
rates
A banking crisis refers to a situation in which a loss of
confidence in the banking system leads to a run on the banks,
as individuals and companies withdraw their deposits
A foreign debt crisis is a situation in which a country cannot
service its foreign debt obligations, whether private sector or
government debt
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The Mexican currency crisis of 1995 was a result of high Mexican debts
and a pegged exchange rate that did not allow for a natural adjustment of
prices. To keep Mexico from defaulting on its debt, the IMF created a $50
billion aid package
By mid-1997, several key Thai financial institutions were on the verge of
default because of speculation against the baht. Thailand abandoned the
baht peg and allowed the currency to float
All IMF loan packages require tight macroeconomic and monetary policy
However, critics worry
 the “one-size-fits-all” approach to macroeconomic policy is
inappropriate for many countries
 the IMF is exacerbating moral hazard - when people behave recklessly
because they know they will be saved if things go wrong
 the IMF has become too powerful for an institution without any real
mechanism for accountability
Currency management, Business strategy, Bus-Gov relations
Introduction
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What actions can managers take to compete more
effectively as an international business?
How can firms increase profits through international
expansion?
What international strategy should firms pursue?
Strategy And The Firm
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A firm’s strategy refers to 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
Expanding internationally can boost profitability
and profit growth
Strategy And The Firm
Figure 12.1: Determinants of Enterprise Value
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The value creation is the performance of actions that increase the worth of
goods, services or even a business. A business is composed to different
value creation activities production, marketing, material management, R&D,
HR, information system. We can categorize them as
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Primary activities: It has to do with creating the product, marketing, and delivering
the product to buyers and providing support and after sale service to the buyers of
a product. For example: Efficient production can reduce the costs of creating value
and add value by increasing product quality. Efficient marketing can help the firm
reduce its cost creating value and add value by helping the firm customise its product
to consumer needs and differentiate its product from competitor’s product.
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Support activities: support activities provide the inputs that allow the primary
activities of production and marketing to occur. For example, material management,
R&D
Value Creation
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It is measured by a firm is measured by the
difference between V (the price that the firm can
charge for that product given competitive pressures)
and C (the costs of producing that product)
The higher the value customers place on a firm’s
products, the higher the price the firm can charge
for those products, and the greater the profitability
of the firm
Value Creation
Value Creation
The value of a product to an average consumer is V; the average price that
the firm can charge a consumer for that product given competitive pressures
and its ability to segment the market is P; and the average unit cost of
producing that product is C (C comprises all relevant costs, including the
firm’s cost of capital). The firm’s profit per unit sold () is equal to P C, while
the consumer surplus per unit is equal to V P (another way of thinking of the
consumer surplus is as “value for the money”; the greater the consumer
surplus, the greater the value for the money the consumer gets). The firm
makes a profit so long as P is greater than C, and its profit will be greater the
lower C is relative to P. The difference between V and P is in part determined
by the intensity of competitive pressure in the marketplace; the lower the
intensity of competitive pressure, the higher the price charged relative to V.4
In general, the higher the firm’s profit per unit sold is, the greater its
profitability will be, all else being equal.
Review question:
What is the rate of return the firm makes on its
invested capital?
a) Profit growth
b) Profitability
c) Net return
d) Value created
Value Creation
Profits can be increased by:
 adding value to a product so that customers are
willing to pay more for it – a differentiation
strategy
 lowering costs – a low cost strategy
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Michael Porter argues that superior profitability
goes to firms that create superior value by lowering
the cost structure of the business and/or
differentiating the product so that a premium price
can be charged
Strategic Positioning
Michael Porter argues that firms need to choose
either differentiation or low cost, and then configure
internal operations to support the choice
To maximize long run return on invested capital, firms
must:
 pick a viable position on the efficiency frontier
 configure internal operations to support that
position
 have the right organization structure in place to
execute the strategy
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Strategic Positioning
Figure: Strategic Choice in the International Hotel
Industry
The convex curve in Figure is what economists refer to as an
efficiency frontier. The efficiency frontier shows all of the
different positions that a firm can adopt with regard to adding
value to the product (V) and low cost (C) assuming that its
internal operations are configured efficiently to support a
particular position (note that the horizontal axis in Figure 12.3 is
reverse scaled—moving along the axis to the right implies lower
costs). The efficiency frontier has a convex shape because of
diminishing returns. Diminishing returns imply that when a firm
already has significant value built into its product offering,
increasing value by a relatively small amount requires significant
additional costs. The converse also holds, when a firm already
has a low-cost structure, it has to give up a lot of value in its
product offering to get additional cost reductions.
Operations: The Firm As A Value
Chain
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A firm’s operations can be thought of 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
Value creation activities can be categorized as
primary activities (R&D, production, marketing and
sales, customer service) and support activities
(information systems, logistics, human resources)
Review question
Which of the following is not an example of a
primary activity?
a) Logistics
b) Marketing and sales
c) Customer service
d) Production
Operations: The Firm As A Value
Chain
Figure 12.4: The Value Chain
Global Expansion, Profitability,
And Profit Growth
International firms can:
 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
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Firms can increase growth by selling goods or services
developed at home internationally
The success of firms that expand internationally
depends on the goods or services they sell, and on
their core competencies (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
Toyota has CC in producing high-quality and well
designed cars.
Location Economies
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When firms base each value creation activity at
that location where economic, political, and cultural
conditions, including relative factor costs, are most
conducive to the performance of that activity, they
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)
By achieving location economies, firms can:
lower the costs of value creation and achieve a low
cost position
differentiate their product offering
Summery of the lecture
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A firm’s strategy refers to 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

Expanding internationally can boost profitability and profit growth


It is measured by a firm is measured by the difference between V (the price
that the firm can charge for that product given competitive pressures) and C
(the costs of producing that product)
The higher the value customers place on a firm’s products, the higher the
price the firm can charge for those products, and the greater the
profitability of the firm
Profits can be increased by:


adding value to a product so that customers are willing to pay more for it –
a differentiation strategy ------lowering costs – a low cost strategy
Michael Porter argues that superior profitability goes to firms that create
superior value by lowering the cost structure of the business and/or
differentiating the product so that a premium price can be charged
To maximize long run return on invested capital, firms must:

pick a viable position on the efficiency frontier

configure internal operations to support that position

have the right organization structure in place to execute the strategy
Value creation activities can be categorized as primary activities (R&D,
production, marketing and sales, customer service) and support activities
(information systems, logistics, human resources)
International firms can:
 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
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