hello everyone welcome to business school 101 I am Dr Yang firms that compete in the global Marketplace typically face two types of competitive pressures pressures for cost reductions and pressures to be locally responsive these two pressures Place conflicting demands on a firm responding to pressures for cost reductions requires that a firm try to minimize its unit costs but responding to pressures to be locally responsive requires that a firm differentiate its product offering and marketing strategy from country to Country in an effort to accommodate the diverse demands because differentiation across countries can involve significant duplication and a lack of product standardization it may raise costs so how do differences in the strength of those pressures affect a firm's choice of strategy in this video I will introduce four major International strategies to you let's begin by discussing the pressures for the cost reduction in competitive Global markets International businesses often face pressures for cost reductions responding to pressures for cost reduction requires a firm to try to lower the cost of value creation for example a manufacturer might Mass produce a standardized product at an optimal location in the world wherever that might be to realize economies of scale learning effects and location economy alternatively a firm might Outsource certain functions to lowcost for foreign suppliers in an attempt to reduce costs thus many American companies have outsourced their call centers to India and the Philippines where qualified technicians who speak English can be hired for a much lower wage than in the United States pressures for cost reduction can be particularly intense in Industries producing commodity type products where meaningful differentiation on non-price factors is difficult and price is the main competitive weapon this is particularly evident for products that serve Universal needs Universal needs exist where the tastes and preferences of consumers in different nations are similar if not identical this is the case for conventional commodity products such as bulk chemicals petroleum steel sugar and the like it also tends to be the case for many industrial and consumer products for example smartphones semiconductor chips and person computers pressures for cost reduction are also intense in Industries where major competitors are based in lowcost locations where there is persistent excess capacity and where consumers are powerful and face low switching costs the liberalization of the World Trade and investment environment in recent decades by facilitating greater International competition has generally increased cost pressures in contrast pressures for local responsiveness mainly arise from four major perspectives first differences in customer tastes and preferences strong pressures for local responsiveness emerge when customer tastes and preferences differ significantly between countries as they often do for deeply embedded historic and cultural reasons in such cases a multinationals products and marketing message have to be customized to appeal to the tastes and preferences of local customers for example the automobile industry in the 1980s and early 1990s moved towards the creation of world cars the idea was that global companies such as General Motors Ford and Toyota would be able to sell the same basic vehicle the world over sourcing it from centralized production locations if successful the strategy would have enabled automobile companies to reap significant gains from global scale economies however this strategy frequently ran ground upon the hard rocks of consumer reality consumers in different automobile markets seem to have different tastes and preferences and demand different types of vehicles for example American consumers show a strong demand for large SUVs and pickup trucks but in many European and Asian countries consumers prefer fuele efficient smaller size Vehicles second differences in infrastructure and traditional practices pressures for local responsiveness arise from differences and infrastructure or traditional practices among countries creating a need to customize products accordingly fulfilling this need may require the delegation of manufacturing and production functions to foreign subsidiaries for example in Japan consumer electrical systems are based on 100 volts whereas in China 220 volt systems are standard thus domestic electrical appliances have to be customized for this difference in infrastructure in addition some traditional practices also often vary across Nations for example in India and Japan people drive on the left hand side of the road creating a demand for right-and drive cars whereas in the US and China people drive on the right hand side of the road and therefore want left-hand drive cars obviously automobiles have to be customized to accommodate this difference in traditional practice third differences in distribution channels a firm marketing strategy may have to be responsive to differences in distribution channels among countries which may necessitate the delegation of marketing functions to National subsidiaries for example in the pharmaceutical industry the British and Japanese Distribution Systems are radically different from the US system British and Japanese doctors will not accept or respond favorably to a US style high- pressure Salesforce thus pharmaceutical companies have to adopt different marketing practices in Britain and Japan compared with the US fourth host government demands economic and political demands imposed by host country governments may require local responsiveness for example pharmaceutical companies are subject to local clinical testing registration procedures and pricing restrictions all of which make it necessary that the manufacturing and marketing of a drug should meet local requirements because governments and government agencies control a significant propor por of the healthcare budget in most countries they are in a powerful position to demand a high level of local responsiveness more generally threats of protectionism economic nationalism and local content rules dictate that International businesses manufacture locally now that we understand these two types of pressures let us discuss how differences in the strength of those pressures affect a firm's choice of strategy firms typically choose among four main Strate IC postures when competing internationally these can be categorized as a global standardization strategy a localization strategy a transnational strategy and an international strategy the appropriateness of each strategy varies given the extent of pressures for cost reductions and local responsiveness the following figure illustrates the conditions under which each of these strategies is most appropriate as you can see two types of pressures gener generate four types of strategies that internationally operating businesses can pursue first Global standardization strategy this strategy makes the most sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal increasingly these conditions Prevail in many industrial goods Industries whose products often serve Universal needs in the semiconductor industry for example Global standards have emerged creating enormous demands for standardized Global products accordingly companies such as Intel Texas Instruments and fiser all pursue a global standardization strategy however these conditions are not yet found in many consumer goods markets where demands for local responsiveness remain high 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 that is their strategic goal is to pursue a lowcost strategy on a global scale the production marketing and R&D activities of firms pursuing a global standardization strategy are concentrated in a few favorable locations second localization strategy this strategy 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 by customizing the product offering to local demands The Firm increases the value of that product in the local market in other words 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 a great example of localization strategy is Nestle Nestle uses a unique marketing and sales approach for each of its markets in which it operates furthermore it adapts its products to local taste by offering different products in different markets on the downside because it involves some duplication of functions and smaller production runs customization limits the ability of the firm to capture the cost reductions associated with mass producing a standardized product for Global consumption therefore the localization strategy may make sense only if if the added value associated with local customization supports higher pricing which enables The Firm to recoup its higher cost or if it leads to substantially greater local demand enabling The Firm to reduce costs through the attainment of some scale economies in the local market third transnational strategy we've argued that a global standardization strategy makes most sense when cost pressures are intense and demands for local responsiveness limited conversely ly a localization strategy makes most sense when demands for local responsiveness are high but cost pressures are moderate or low what about when the firm simultaneously faces both strong cost pressures and strong pressures for local responsiveness how can managers balance the competing and inconsistent demands such Divergent pressures place on the firm According to some researchers the answer is to pursue what has been called a transnational strategy in in essence firms that pursue a transnational strategy are trying to simultaneously achieve low cost through location economies economies of scale and learning effects differentiate their product offering across Geographic markets to account for local differences and Foster a multi-directional flow of skills between different subsidiaries in the firm's Global Network of operations as attractive as this may sound in theory the strategy is not an easy one to pursue since it places conflicting demands on the company few if any Enterprises have perfected the Strategic posture but some Clues as to the right approach can be derived from a number of companies for example consider the case of caterpillar the need to compete with lowcost competitors such as KATU of Japan forc caterpillar to look for greater cost economies however variations in construction practices and government regulations across countries means that caterpillar also has to be responsive to local demands therefore caterpillar confronted significant pressures for cost reductions and for local responsiveness to deal with cost pressures caterpillar redesigned its products to use many identical components and invested in a few large scale component manufacturing facilities cited at favorable locations to fill Global demand and realize scale economies at the same time the company augments the centralized manufacturing of components with assembly plants in each of its major Global markets at these plants caterpillar adds local product features tailoring the finished product to local needs thus caterpillar is able to realize many of the benefits of global manufacturing while reacting to pressures for local responsiveness by differentiating its product among National markets fourth International strategy sometimes it is possible to identify multinational firms that find themselves in the fortunate position of being confronted with lowcost pressures and low pressures for local responsiveness many of these Enterprises have pursued an international strategy taking products first produced for the domestic market and selling them internationally with only minimal local customization the distinguishing feature of many such firms is that they are selling a product that serves Universal needs but they do not face significant competitors and thus unlike firms pursuing a global standardization strategy they are not confronted with pressures to reduce their cost structure firms that have pursued the international strategy include Proctor and Gamble and Microsoft historically Proctor and Gamble developed Innovative new products in Cincinnati and then transferred them wholesale to local markets similarly the bulk of Microsoft's product development work occurs in Redmond Washington where the company is headquartered although some localization work is undertaken elsewhere this is limited to producing foreign language versions of popular Microsoft programs please keep in mind that the Achilles heel of the international strategy is that over time competitors inevitably emerge and if managers do not take proactive steps to reduce their firm's cost structure it will be rapidly outflanked by efficient Global competitors therefore the international strategy may not be viable in the long term and to survive firms need to shift toward different strategies in advance of competitors now let's wrap up today's topic with a brief summary in this video we discussed how multinational companies normally face two major types of pressure pressure for cost Productions and pressures to be locally responsive in addition we use a 2X two Matrix to illustrate four different types of international strategies the appropriateness of each strategy varies given the extent of pressures for cost reductions and local responsiveness for example the global standardization strategy makes most sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal conversely localization strategy 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 when the firm simultaneously faces both strong cost pressures and strong pressure for local responsiveness they should pursue a transnational strategy which aimed to both reduce costs and meet consumers various demands how however if both pressures are low then firms can apply the international strategy taking products first produced for their domestic market and selling them internationally with only minimal local customization so do you have any questions or thoughts about firms International strategies please leave your comments below thanks for watching and I will see you next time