CHAPTER 12:
1 INTB Study Guide
CHAPTER 12: 1. What’s a firm’s strategy? Actions managers take to attain the firm’s goals. For most firms, the preeminent goal is to maximize the value of the firm for its owners, its shareholders as long as it’s legal. 1.A What does a firm need to do to maximize the value of a firm? To maximize the value of a firm managers must pursue strategies that increase the profitability of the enterprise and its rate of profit growth over time. 2. What is profitability? A ratio or rate of return concept. The rate of return that the firm makes on its invested capital (ROIC) can be calculated by diving the net profits of the firm by total invested capital. 3. What if Profit Growth? “The percentage increase in net profits over time.” The higher profitability and a higher rate of profit growth will increase the value of an enterprise and thus the returns garnered by its owners, the shareholders. 4. How can Managers increase the profitability of a firm? Managers can increase the profitability of the firm by pursuing strategies that lower costs or by pursuing strategies that add value to the firm’s products, which enables the firm to raise prices. 5. How Managers increase the rate of profit growth of a firm? Managers can increase the rate at which the firm’s profits grow over time by pursuing strategies to sell more products in existing markets or by pursing strategies to enter new markets. 6. How do you add value to a product? The amount of value a firm creates is measured by the difference between its cost of production and the value that consumers perceive in its products.
2 The more value consumers place on a firm’s products, the higher the price the firm can charge for those products. The price a firm charge for a good or service is typically less than the value placed on that good or service by the customer. Consumer capture some of that value in the form of what economists call a consumer surplus. It is impossible to charge customers a price that reflects the value of a product; economists call this customer’s reservation price. The consumer surplus per unit is equal to V (the value of a product on average)-P (the average price a firm can charge a consumer for a product); the greater the consumer surplus the greater the value for their money the consumer gets. 7. What is Value Creation? “Performing activities that increase the value of good or services to consumers” A firm’s Value Creation is measured by the difference between V and C (the unit cost of production) (V-C). A company creates value by converting inputs that cost C into a product on which consumers place a value of V. A company can create more value either by lowering production cost, C, or by making the product more attractive through superior design, styling, functionality, features, reliability, after-sale service, and etc. All of these things make costumers place a greater value on a firm’s product. 8. What is strategy focused primarily on lowering costs called? Low-cost strategy 9. What is a strategy that focuses on primarily increasing value called? Differentiation strategy Superior value creation relative to rivals does not necessarily require a firm to have the lowest cost structure in an in industry, or to create the most valuable product in the eyes of consumers. However, it does require that the gap between value and cost of production be greater than the gap attained by competitors. 10. What are the two basic strategies needed to create value and attain a competitive advantage in an industry?
3 Michal Porter has argued that low cost and differentiation are two basic strategies for creating value and attaining a competitive advantage in an industry.
Strategic Positioning: According to Porter a firm has to configure its internal operations to support its strategic emphasis (differentiation or low cost). 11. What is the Efficiency Frontier? The efficiency Frontier shows all the different positions that a firm can adopt with regard to adding value to the product and low cost assuming that its international operations are configured efficiently to support a particular position. 12. Why is the Efficiency Frontier downward slopping? Because of the law of increasing opportunity cost. Diminishing returns imply that when a firm already has significant value built into its product offering, increasing value by relatively small amount requires significant additional costs. 13. What three things does a firm have to do to maximize its profitability? 1. Pick a position on the Efficiency Frontier that is viable in the sense that there is enough demand to support that choice. 2. Configure its internal operations, such as manufacturing, marketing, logistics, information systems, human resources, and so on, so that they support that position, and 3. Make sure that the firm has the right organizational structure in place to execute is strategy. 14. What do operations mean in this context? The various value creation activities a firm undertakes. 15. What’s another way of looking at operations? The Operations of a firm can be though of as a value chain composed of a series of distinct value creation activities, including: 1. Production 2. Marketing and sales 3. Materials management 4. R&D (Research and Development) 5. Human Resources 6. Information Systems
4 7. And the firm infrastructure These activities can be categorized as support and primary activities. 16. What are support activities? 1. Information Systems: When coupled with the communications feature of the Internet, can alter the efficiency and effectiveness with which affirm manages its other value creating activities. 2. Logistics: Controls the transmission of physical material through the value chain, from procurement through production and into distribution. The efficiency with which this is carried out can significantly reduce cost. 3. Human Resources: The HR function can help create more value by: a. Ensuring that the company has the right mix of skilled people to perform its value creating activities effectively. b. Ensures ppl are trained, motivated, compensated to perform their value creation tasks. 4. Infrastructure (Top Management is part of this): The context within which all the other value creation activities occur. The infrastructure includes: a. The organizational structure b. Control systems, and c. Culture of the firm. 17. What are Primary Activities? 1. R&D: Concerned with the design of products and production processes. Many service companies also undertake R&D. Through superior product design, R&D can increase the functionality of products, which make them more attractive to consumers raising value. 2. Production: Creates value by performing its activities efficiently so lower cost result (lower C) and/or by performing them in such a way that a higher –quality product is produce (which results in higher v). 3. Marketing and Sales: Through brand positioning and advertising, the marketing function can increase the value that consumers perceive to be contained in a firms’ product, If these create a favorable impressions of the firm’s product in the minds of consumers, they increase the price that can be charged for the firm’s product. Marketing and sales can also create value by discovering consumer needs and communicating them back to the R&D function of the company. 4. Customer Service: Provide after-sale service and support. This function can create a perception of superior value in the minds of consumers by solving problems and supporting customers after they have purchased the product. 18. What do primary activities have to do with? Primary activities have to do with the design, creation, and delivery of the product; its marketing, and its support and after-sale service.
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Organization: The implementation of Strategy 19. How is a firm’s strategy implemented? A firms’ strategy is implemented through its organization: 20. What does the term Organizational Architecture mean? “The totality of a firm’s organization, including: 1. Formal organizational structure: a. These means three things: i. The formal division of the organization into subunits such as product divisions, national operations, and functions ii. The location of decision-making responsibilities within that structure iii. The activities and subunits including cross-functional teams and or pan –regional committees. 2. Control systems and (In book controls and Incentives is one category): “The metrics used to measure the performance of subunits and make judgments about how well managers are running those subunits”. 3. Incentives: “The devices used to reward appropriate managerial behavior” 4. Organizational culture: “The values and norms shared among an organization’s employees”. 5. Processes, and: “The manner in which decisions are made an work is performed within any organization”. 6. People: Not just employees of the organization, but also the strategy used to recruit, compensate, and retain those individuals and the type of people that they are in terms of their skills, values, and orientation. View figure 12.5 to look at Organization Architecture (page 341). 21. If a firm want to maximize its profitability, what most it do? If a firm want to maximize its profitability it must pay close attention to achieving internal consistency among the various components of its architecture, and the architecture must support the strategy and operations of that firm. 22. What happens if a firm’s strategy no longer fits the market? In such circumstances, the firm must change its strategy, operations, and organization to fit the new reality-which can be an extraordinary difficult challenge.
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Global Expansion, Profitability, and Profit Growth: 23. What does a firm have to consider when pursuing strategies to increase its profitability and profit growth? Such strategies are constrained by the need to customize its product offering marketing strategy, and business strategy to differing national conditions-that is, by the imperative of localization. 24. What is one thing a company can do to increase its growth rate? A company can increase its growth rate by taking goods or services developed at home and selling them internationally. The returns from such a strategy are likely greater if indigenous competitors in the nations that a company enters lack comparable products. 25. What are firms that operate internationally able to do? Look at page 343. 26. What else besides the goods or services that a firm sells in a foreign market matters when talking about expanding the market by taking goods or services developed at home and selling them internationally? The success of many multinational companies also depends upon the core competencies that underlie the development, production, and marketing of those good or services. The term Core Competence refers to skills within the firm that competitors cannot easily match or imitate. 27. What do services based companies have to do to succeed when expanding their market? Expanding the market for their services often means replicating their business model in foreign nations (with some changes to account for local differences) 28. What can firms that pursue an expanding market strategy realize? Firms that pursue an expanding market strategy can realize what we refer to as location economies, which are the economies (cost advantages) that arise form performing a value creation activity in the optimal location for that activity, wherever in the world that might be. 29. What is one possible outcome of realizing location economies?
7 One of this kind of thinking is the creation of a global web of value creation activities, with different stages of the value chain being dispersed to those locations around the globe where perceived value is maximized or where the cost of value creation is minimized. 30. What things (caveats) complicate the picture of Location Economies? Transportation cost and trade barriers complicate this picture. Another thing (caveat) concerns the importance of assessing political and economic risks when making location decisions. If a country’s gov is unstable or totalitarian, the firm might be advised not to base production there. If the gov appears to be pursuing inappropriate economic policies that could lead to foreign exchange risk, that might be another reason to not base production in that country. 31. What is the experience curve? “Systematic production cost reductions that occur over the life of a product.” A number of studies have observed that a product’s production costs decline by some quantity about each time cumulative out doubles. 32. What does an experience curve graphs show? It shows the relationship between unit production costs and cumulative output (the relationship is for cumulative output over time, and not output in any one period, such as a year). 33. What are Learning Effects? “Cost saving form learning by doing”. Learning effects tend to be more significant when a technologically complex task is repeated. No matter how complex the task, learning effects typically disappear after a while. It has been suggested that they are important only during the start-up period of new processes and that they cease after two or three years.” 34 What are Economies of Scale and what are its sources? “Cost advantages associated with large-scale production”. Sources: 1. Fixed cost: Costs required to set up a production facility, develop a new product, and the like. The only way to recoup such high fixed costs may be to sell the product worldwide, which reduces average unit costs by spreading fixed costs over a larger volume. 2. A firm many not be able to attain an efficient scale of production unless it serves global markets. By serving domestic and international markets form its production facilities, a firm may be able to utilize those facilities more intensively.
8 3. As global sales increase the size of the enterprise, its bargaining power with suppliers increases as well, which many allow it to attain economies of scale in purchasing, bargaining down the cost of key inputs and boosting profitability. 35. What is the strategic significance of the experience curve? Moving down the experience curve allows a firm to reduce its cost of creating value (to lower C). One key to progressing downward on the experience curve as rapidly as possible is to increase the volume produced by a single plant as rapidly as possible. Global markets are larger than domestic markets, a firm that serves a global market form a single location is likely to build accumulated volume more quickly than a firm that serves only its home market or that serves multiple markets from multiple locations. 36. What’s another way to create value? Leveraging the skills created within subsidiaries and applying them to other operations within the firm’s global network my create value. 37. What challenges can leveraging skills bring? For the managers of the multinationals enterprise, this phenomenon creates important new challenges: 1. They must have the humility to recognize that valuable skills that lead to competencies can arise anywhere within the firm’s global network, no just at the corporate center. 2. They must establish an incentive system that encourages local employees to acquire new skills. Creating new skills involves a degree of risk. 3. Managers must have a process for identifying when valuable new skills have been created in a subsidiary. 4. Managers need to act facilitators, helping to transfer valuable skills within the firm. In sum, managers need to keep in mind the complex relationships between profitability and profit growth when making strategic decisions about pricing.
Cost Pressures and Pressures for Local Responsiveness 38. What are the two types of pressures that firms that compete in in a global market face? 1. Pressures for cost reductions 2. Pressures to be locally responsive 39. What does a firm have to do to respond to these two pressures?
9 Responding to pressures for cost reductions require that a firm try to minimize its unit costs. But responding to pressures to be locally responsive that a firm differentiate its products offering and marketing strategy form country to country to accommodate to the diverse demands. 40. Where can pressure to reduce price be intense? Pressures for cost reductions can be particularly intense in industries producing commodity-type products where meaningful differentiation on “nonprice” factors is difficult and price is the main competitive weapon. This tends to be the case for products meeting Universal Needs: Needs that are the same all over the world such as steel, bulk chemicals, and industrial electronics. 41. When do pressures for local responsiveness arise? 1. 2. 3. 4.
Pressures for local responsiveness arise from national differences in: Consumer tastes and preferences: Strong pressures for local responsiveness emerge when customer tastes and preference differ significantly among countries, as they often do for deeply embedded historic or cultural reasons. Infrastructure and Accepted business practices: Pressures for local responsiveness arise form differences in infrastructure or traditional practices among countries, creating a need to customize products accordingly. Distribution channels, and: A firms marketing strategy may have to be responsive to difference in distribution channels among countries, which may necessitate the delegation of marketing functions to nation subsidiaries. From host-gov demands: Economic and political demands imposed by host country government may require local responsiveness. More generally threats of protectionism, economic nationalism, and local content rules, which require that a certain % of a product should be manufacture locally.
Choosing a Strategy: 42. How do differences in the strength of pressures for cost reductions versus those for local responsiveness affect a firm’s choice of strategy? Firms typically choose among four main strategic postures when competing internationally. These can be characterize as a 1. Global standardization Strategy: “A firm focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale learning effects, and location economies.” Firms pursuing this strategy try not to customize their product offering and marketing strategy to local conditions because customization involves shorter production runs and the duplication of functions, which tends to raise costs. 2. Localization Strategy: “Increasing profitability by customizing the firm’s goods and services so that they provide a good match to tastes and preferences in
10 different national markets.” Localization 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. 3. Transnational Strategy: “Attempt to simultaneously achieve low costs through location economies, economies of scale, and learning effects while also differentiating product offerings across geographic markets to account for local differences and fostering multidirectional flows of skills between different subsidiaries in the firm’s global network of operations.” This strategy places conflicting demands of the company. Differentiating the product to respond to local demands in different geographic markets raises costs, which runs counter to the goal of reducing costs. How best to implement a transnational strategy is one of the most complex questions that large multinationals are grappling with today. Caterpillar executed this strategy very well (p.g 356). 4. International Strategy: “Trying to create value by transferring core competencies to foreign markets where indigenous competitors lack those competencies. Usually happens when multinational are confronted with low cost pressures and low pressures for local responsiveness. Another definition is-Taking products first produced for their domestic market and selling them internationally with only minimal local customization. Happens a lot with firms that serve Universal Needs, but they do not face significant competitors. Look at 12.9 on page 353. 43. What do firms need to survive in today’s global environment? Two researches, Christopher and Barlett and Sumantra Ghoshal, argue that in today’s global environment, competitive conditions are so intense that to survive firms must do all they can to respond to pressures for cost reductions and local responsiveness. 44. What is the Achilles’ hell of international strategy? Over time, competitors inevitably emerge, and if mangers do not take proactive steps to reduce their firm’s cost structure, it will rapidly outflanked by efficient global competitors. International strategy may not be viable in the long term and to survive, firms need to shift toward a global standardization strategy or a transnational strategy in advance of competitors. 45. What are strategic alliances? Strategic alliances refer to cooperative agreements between potential or actual competitors. 46. What are the two types of strategic alliances?
11 Strategic alliances fun the range from 1. Formal joint ventures: Two or more firms have equity stakes. 2. Shot-term contractual agreements: Two companies agree to cooperate on a particular task (such as developing a new product). 47. What are the advantages of Strategic alliances? 1. May facilitate entry into a foreign market. 2. Allow firms to share the fixed costs (and associated risks) of developing new products or processes. 3. An alliance is a way to bring together complementary skills and assets that neither company could easily develop on its own. 4. It can make sense to form an alliance that will help the firm establish technological standards for the industry that will benefit the firm. 48. What are the disadvantages of Strategic alliances? They (strategic alliances) give competitors a low-cost route to new technology and markets. In the long run the results can be hollowed out U.S firms that have no competitive advantage in the global marketplace. 49. How can a company make and alliance work? The failure rate of international strategic alliance seems to be high. However, the success of an alliance seem to be the function o three main factors: 1. Partner Selection: A good partner has three characteristics: a. Helps the firm achieve its strategic goals. The partner must have capabilities that firm lacks and values. b. Share the firm’s vision for the purpose of the alliance. c. A good partner is unlikely to try to opportunistically exploit the alliance for its own ends, that is, to expropriate the firm’s technological know-how while giving away nothing in return. For a firm to select a partner with these strategies it must go through a comprehensive research on potential alliance candidates. See page 360. 2. Alliance Structure: Alliance should be structured so that the firm’s risks of giving too much away to the partner are reduced to an acceptable level: a. Alliances can be designed to make it difficult (if not impossible) to transfer technology not meant to be transferred. b. Contractual safeguards can be written into an alliance agreement to guard against the risk of opportunism by a partner. c. Both parties to an alliance can agree in advance to swap skills and technologies that the other covets, thereby ensuring a change for equitable gain. Cross-licensing agreements are the way to achieve this goal.
12 d. The risk of opportunism by an alliance partner can be reduced if the firm extracts a significant credible commitment form its partner in advance. (50/50 joint venture) 3. The manner in which the alliance is managed: a. Many differences in management styles are attributed to cultural differences, and managers, need to make allowances for these in dealing with their partner. b. Managing an alliance successfully requires building interpersonal relationships between the firm’s mangers, or what is sometimes referred to as relational capital. Personal relationships also foster an informal management network between the firms. 50. What does a firm have to do to maximize the learning benefits of an alliance? To maximize the learning benefits of an alliance a firm must try to learn from its partner and then apply the knowledge within its own organization.
CHAPTER 13: Entering Foreign Markets What is the best way to enter a foreign market? 1. Turnkey Projects: A project in which a firm agrees to set up and operating plant for foreign client and hand over the key when the plant is fully operational. Firms that specialize in the design, construction, and start-up of turnkey plants are common in some industries. In a turnkey project, the contractor agrees to handle every detail of the project for the foreign client, including, the training of operating personnel. This is a means of exporting process technology to other countries. A turnkey strategy projects are most common in the chemical, pharmaceutical, petroleum-refining, and metal-refining industries, all of which use complex, expensive production technologies. Example: The governments of many oil-rich countries have set out to build their own petroleum-refining industries, so they restrict FDI in their oil-refining
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sectors. But because many of these countries lack petroleum-refining technology, they gain it by entering into turnkey projects with foreign firms that have the technology. What are advantages and disadvantages of Turnkey Projects? •
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Advantages: The know-how required to assemble and run a technologically complex process, such as refining petroleum or steel, is a valuable asset. Turnkey projects are a way of earning great economic returns from that asset. A turnkey strategy can also be less risky than conventional FDI. In a country with unstable political and economic environments a longer-term investment might expose the firm to unacceptable political and/or economic risk. Disadvantages: Three main disadvantages: o The firm that enters into a turnkey deal will have no long-term interest in the foreign country o The firm that enters into a turnkey project with a foreign enterprise may inadvertently create a competitor. For example, many of the western firms that sold oil-refining technology to firms in Saudi Arabia, Kuwait, and other Gulf states now find themselves competing with these firms in the world oil market. o If the firm’s process technology is a source of competitive advantage, the selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors.
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CHAPTER 12: 1. What’s a firm’s strategy? Actions managers take to attain the firm’s goals. For most firms, the preeminent goal is to maximize the value of the firm for its owners, its shareholders as long as it’s legal. 1.A What does a firm need to do to maximize the value of a firm? To maximize the value of a firm managers must pursue strategies that increase the profitability of the enterprise and its rate of profit growth over time. 2. What is profitability? A ratio or rate of return concept. The rate of return that the firm makes on its invested capital (ROIC) can be calculated by diving the net profits of the firm by total invested capital. 3. What if Profit Growth? “The percentage increase in net profits over time.” The higher profitability and a higher rate of profit growth will increase the value of an enterprise and thus the returns garnered by its owners, the shareholders. 4. How can Managers increase the profitability of a firm? Managers can increase the profitability of the firm by pursuing strategies that lower costs or by pursuing strategies that add value to the firm’s products, which enables the firm to raise prices. 5. How Managers increase the rate of profit growth of a firm? Managers can increase the rate at which the firm’s profits grow over time by pursuing strategies to sell more products in existing markets or by pursing strategies to enter new markets. 6. How do you add value to a product? The amount of value a firm creates is measured by the difference between its cost of production and the value that consumers perceive in its products.
2 The more value consumers place on a firm’s products, the higher the price the firm can charge for those products. The price a firm charge for a good or service is typically less than the value placed on that good or service by the customer. Consumer capture some of that value in the form of what economists call a consumer surplus. It is impossible to charge customers a price that reflects the value of a product; economists call this customer’s reservation price. The consumer surplus per unit is equal to V (the value of a product on average)-P (the average price a firm can charge a consumer for a product); the greater the consumer surplus the greater the value for their money the consumer gets. 7. What is Value Creation? “Performing activities that increase the value of good or services to consumers” A firm’s Value Creation is measured by the difference between V and C (the unit cost of production) (V-C). A company creates value by converting inputs that cost C into a product on which consumers place a value of V. A company can create more value either by lowering production cost, C, or by making the product more attractive through superior design, styling, functionality, features, reliability, after-sale service, and etc. All of these things make costumers place a greater value on a firm’s product. 8. What is strategy focused primarily on lowering costs called? Low-cost strategy 9. What is a strategy that focuses on primarily increasing value called? Differentiation strategy Superior value creation relative to rivals does not necessarily require a firm to have the lowest cost structure in an in industry, or to create the most valuable product in the eyes of consumers. However, it does require that the gap between value and cost of production be greater than the gap attained by competitors. 10. What are the two basic strategies needed to create value and attain a competitive advantage in an industry?
3 Michal Porter has argued that low cost and differentiation are two basic strategies for creating value and attaining a competitive advantage in an industry.
Strategic Positioning: According to Porter a firm has to configure its internal operations to support its strategic emphasis (differentiation or low cost). 11. What is the Efficiency Frontier? The efficiency Frontier shows all the different positions that a firm can adopt with regard to adding value to the product and low cost assuming that its international operations are configured efficiently to support a particular position. 12. Why is the Efficiency Frontier downward slopping? Because of the law of increasing opportunity cost. Diminishing returns imply that when a firm already has significant value built into its product offering, increasing value by relatively small amount requires significant additional costs. 13. What three things does a firm have to do to maximize its profitability? 1. Pick a position on the Efficiency Frontier that is viable in the sense that there is enough demand to support that choice. 2. Configure its internal operations, such as manufacturing, marketing, logistics, information systems, human resources, and so on, so that they support that position, and 3. Make sure that the firm has the right organizational structure in place to execute is strategy. 14. What do operations mean in this context? The various value creation activities a firm undertakes. 15. What’s another way of looking at operations? The Operations of a firm can be though of as a value chain composed of a series of distinct value creation activities, including: 1. Production 2. Marketing and sales 3. Materials management 4. R&D (Research and Development) 5. Human Resources 6. Information Systems
4 7. And the firm infrastructure These activities can be categorized as support and primary activities. 16. What are support activities? 1. Information Systems: When coupled with the communications feature of the Internet, can alter the efficiency and effectiveness with which affirm manages its other value creating activities. 2. Logistics: Controls the transmission of physical material through the value chain, from procurement through production and into distribution. The efficiency with which this is carried out can significantly reduce cost. 3. Human Resources: The HR function can help create more value by: a. Ensuring that the company has the right mix of skilled people to perform its value creating activities effectively. b. Ensures ppl are trained, motivated, compensated to perform their value creation tasks. 4. Infrastructure (Top Management is part of this): The context within which all the other value creation activities occur. The infrastructure includes: a. The organizational structure b. Control systems, and c. Culture of the firm. 17. What are Primary Activities? 1. R&D: Concerned with the design of products and production processes. Many service companies also undertake R&D. Through superior product design, R&D can increase the functionality of products, which make them more attractive to consumers raising value. 2. Production: Creates value by performing its activities efficiently so lower cost result (lower C) and/or by performing them in such a way that a higher –quality product is produce (which results in higher v). 3. Marketing and Sales: Through brand positioning and advertising, the marketing function can increase the value that consumers perceive to be contained in a firms’ product, If these create a favorable impressions of the firm’s product in the minds of consumers, they increase the price that can be charged for the firm’s product. Marketing and sales can also create value by discovering consumer needs and communicating them back to the R&D function of the company. 4. Customer Service: Provide after-sale service and support. This function can create a perception of superior value in the minds of consumers by solving problems and supporting customers after they have purchased the product. 18. What do primary activities have to do with? Primary activities have to do with the design, creation, and delivery of the product; its marketing, and its support and after-sale service.
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Organization: The implementation of Strategy 19. How is a firm’s strategy implemented? A firms’ strategy is implemented through its organization: 20. What does the term Organizational Architecture mean? “The totality of a firm’s organization, including: 1. Formal organizational structure: a. These means three things: i. The formal division of the organization into subunits such as product divisions, national operations, and functions ii. The location of decision-making responsibilities within that structure iii. The activities and subunits including cross-functional teams and or pan –regional committees. 2. Control systems and (In book controls and Incentives is one category): “The metrics used to measure the performance of subunits and make judgments about how well managers are running those subunits”. 3. Incentives: “The devices used to reward appropriate managerial behavior” 4. Organizational culture: “The values and norms shared among an organization’s employees”. 5. Processes, and: “The manner in which decisions are made an work is performed within any organization”. 6. People: Not just employees of the organization, but also the strategy used to recruit, compensate, and retain those individuals and the type of people that they are in terms of their skills, values, and orientation. View figure 12.5 to look at Organization Architecture (page 341). 21. If a firm want to maximize its profitability, what most it do? If a firm want to maximize its profitability it must pay close attention to achieving internal consistency among the various components of its architecture, and the architecture must support the strategy and operations of that firm. 22. What happens if a firm’s strategy no longer fits the market? In such circumstances, the firm must change its strategy, operations, and organization to fit the new reality-which can be an extraordinary difficult challenge.
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Global Expansion, Profitability, and Profit Growth: 23. What does a firm have to consider when pursuing strategies to increase its profitability and profit growth? Such strategies are constrained by the need to customize its product offering marketing strategy, and business strategy to differing national conditions-that is, by the imperative of localization. 24. What is one thing a company can do to increase its growth rate? A company can increase its growth rate by taking goods or services developed at home and selling them internationally. The returns from such a strategy are likely greater if indigenous competitors in the nations that a company enters lack comparable products. 25. What are firms that operate internationally able to do? Look at page 343. 26. What else besides the goods or services that a firm sells in a foreign market matters when talking about expanding the market by taking goods or services developed at home and selling them internationally? The success of many multinational companies also depends upon the core competencies that underlie the development, production, and marketing of those good or services. The term Core Competence refers to skills within the firm that competitors cannot easily match or imitate. 27. What do services based companies have to do to succeed when expanding their market? Expanding the market for their services often means replicating their business model in foreign nations (with some changes to account for local differences) 28. What can firms that pursue an expanding market strategy realize? Firms that pursue an expanding market strategy can realize what we refer to as location economies, which are the economies (cost advantages) that arise form performing a value creation activity in the optimal location for that activity, wherever in the world that might be. 29. What is one possible outcome of realizing location economies?
7 One of this kind of thinking is the creation of a global web of value creation activities, with different stages of the value chain being dispersed to those locations around the globe where perceived value is maximized or where the cost of value creation is minimized. 30. What things (caveats) complicate the picture of Location Economies? Transportation cost and trade barriers complicate this picture. Another thing (caveat) concerns the importance of assessing political and economic risks when making location decisions. If a country’s gov is unstable or totalitarian, the firm might be advised not to base production there. If the gov appears to be pursuing inappropriate economic policies that could lead to foreign exchange risk, that might be another reason to not base production in that country. 31. What is the experience curve? “Systematic production cost reductions that occur over the life of a product.” A number of studies have observed that a product’s production costs decline by some quantity about each time cumulative out doubles. 32. What does an experience curve graphs show? It shows the relationship between unit production costs and cumulative output (the relationship is for cumulative output over time, and not output in any one period, such as a year). 33. What are Learning Effects? “Cost saving form learning by doing”. Learning effects tend to be more significant when a technologically complex task is repeated. No matter how complex the task, learning effects typically disappear after a while. It has been suggested that they are important only during the start-up period of new processes and that they cease after two or three years.” 34 What are Economies of Scale and what are its sources? “Cost advantages associated with large-scale production”. Sources: 1. Fixed cost: Costs required to set up a production facility, develop a new product, and the like. The only way to recoup such high fixed costs may be to sell the product worldwide, which reduces average unit costs by spreading fixed costs over a larger volume. 2. A firm many not be able to attain an efficient scale of production unless it serves global markets. By serving domestic and international markets form its production facilities, a firm may be able to utilize those facilities more intensively.
8 3. As global sales increase the size of the enterprise, its bargaining power with suppliers increases as well, which many allow it to attain economies of scale in purchasing, bargaining down the cost of key inputs and boosting profitability. 35. What is the strategic significance of the experience curve? Moving down the experience curve allows a firm to reduce its cost of creating value (to lower C). One key to progressing downward on the experience curve as rapidly as possible is to increase the volume produced by a single plant as rapidly as possible. Global markets are larger than domestic markets, a firm that serves a global market form a single location is likely to build accumulated volume more quickly than a firm that serves only its home market or that serves multiple markets from multiple locations. 36. What’s another way to create value? Leveraging the skills created within subsidiaries and applying them to other operations within the firm’s global network my create value. 37. What challenges can leveraging skills bring? For the managers of the multinationals enterprise, this phenomenon creates important new challenges: 1. They must have the humility to recognize that valuable skills that lead to competencies can arise anywhere within the firm’s global network, no just at the corporate center. 2. They must establish an incentive system that encourages local employees to acquire new skills. Creating new skills involves a degree of risk. 3. Managers must have a process for identifying when valuable new skills have been created in a subsidiary. 4. Managers need to act facilitators, helping to transfer valuable skills within the firm. In sum, managers need to keep in mind the complex relationships between profitability and profit growth when making strategic decisions about pricing.
Cost Pressures and Pressures for Local Responsiveness 38. What are the two types of pressures that firms that compete in in a global market face? 1. Pressures for cost reductions 2. Pressures to be locally responsive 39. What does a firm have to do to respond to these two pressures?
9 Responding to pressures for cost reductions require that a firm try to minimize its unit costs. But responding to pressures to be locally responsive that a firm differentiate its products offering and marketing strategy form country to country to accommodate to the diverse demands. 40. Where can pressure to reduce price be intense? Pressures for cost reductions can be particularly intense in industries producing commodity-type products where meaningful differentiation on “nonprice” factors is difficult and price is the main competitive weapon. This tends to be the case for products meeting Universal Needs: Needs that are the same all over the world such as steel, bulk chemicals, and industrial electronics. 41. When do pressures for local responsiveness arise? 1. 2. 3. 4.
Pressures for local responsiveness arise from national differences in: Consumer tastes and preferences: Strong pressures for local responsiveness emerge when customer tastes and preference differ significantly among countries, as they often do for deeply embedded historic or cultural reasons. Infrastructure and Accepted business practices: Pressures for local responsiveness arise form differences in infrastructure or traditional practices among countries, creating a need to customize products accordingly. Distribution channels, and: A firms marketing strategy may have to be responsive to difference in distribution channels among countries, which may necessitate the delegation of marketing functions to nation subsidiaries. From host-gov demands: Economic and political demands imposed by host country government may require local responsiveness. More generally threats of protectionism, economic nationalism, and local content rules, which require that a certain % of a product should be manufacture locally.
Choosing a Strategy: 42. How do differences in the strength of pressures for cost reductions versus those for local responsiveness affect a firm’s choice of strategy? Firms typically choose among four main strategic postures when competing internationally. These can be characterize as a 1. Global standardization Strategy: “A firm focuses on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale learning effects, and location economies.” Firms pursuing this strategy try not to customize their product offering and marketing strategy to local conditions because customization involves shorter production runs and the duplication of functions, which tends to raise costs. 2. Localization Strategy: “Increasing profitability by customizing the firm’s goods and services so that they provide a good match to tastes and preferences in
10 different national markets.” Localization 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. 3. Transnational Strategy: “Attempt to simultaneously achieve low costs through location economies, economies of scale, and learning effects while also differentiating product offerings across geographic markets to account for local differences and fostering multidirectional flows of skills between different subsidiaries in the firm’s global network of operations.” This strategy places conflicting demands of the company. Differentiating the product to respond to local demands in different geographic markets raises costs, which runs counter to the goal of reducing costs. How best to implement a transnational strategy is one of the most complex questions that large multinationals are grappling with today. Caterpillar executed this strategy very well (p.g 356). 4. International Strategy: “Trying to create value by transferring core competencies to foreign markets where indigenous competitors lack those competencies. Usually happens when multinational are confronted with low cost pressures and low pressures for local responsiveness. Another definition is-Taking products first produced for their domestic market and selling them internationally with only minimal local customization. Happens a lot with firms that serve Universal Needs, but they do not face significant competitors. Look at 12.9 on page 353. 43. What do firms need to survive in today’s global environment? Two researches, Christopher and Barlett and Sumantra Ghoshal, argue that in today’s global environment, competitive conditions are so intense that to survive firms must do all they can to respond to pressures for cost reductions and local responsiveness. 44. What is the Achilles’ hell of international strategy? Over time, competitors inevitably emerge, and if mangers do not take proactive steps to reduce their firm’s cost structure, it will rapidly outflanked by efficient global competitors. International strategy may not be viable in the long term and to survive, firms need to shift toward a global standardization strategy or a transnational strategy in advance of competitors. 45. What are strategic alliances? Strategic alliances refer to cooperative agreements between potential or actual competitors. 46. What are the two types of strategic alliances?
11 Strategic alliances fun the range from 1. Formal joint ventures: Two or more firms have equity stakes. 2. Shot-term contractual agreements: Two companies agree to cooperate on a particular task (such as developing a new product). 47. What are the advantages of Strategic alliances? 1. May facilitate entry into a foreign market. 2. Allow firms to share the fixed costs (and associated risks) of developing new products or processes. 3. An alliance is a way to bring together complementary skills and assets that neither company could easily develop on its own. 4. It can make sense to form an alliance that will help the firm establish technological standards for the industry that will benefit the firm. 48. What are the disadvantages of Strategic alliances? They (strategic alliances) give competitors a low-cost route to new technology and markets. In the long run the results can be hollowed out U.S firms that have no competitive advantage in the global marketplace. 49. How can a company make and alliance work? The failure rate of international strategic alliance seems to be high. However, the success of an alliance seem to be the function o three main factors: 1. Partner Selection: A good partner has three characteristics: a. Helps the firm achieve its strategic goals. The partner must have capabilities that firm lacks and values. b. Share the firm’s vision for the purpose of the alliance. c. A good partner is unlikely to try to opportunistically exploit the alliance for its own ends, that is, to expropriate the firm’s technological know-how while giving away nothing in return. For a firm to select a partner with these strategies it must go through a comprehensive research on potential alliance candidates. See page 360. 2. Alliance Structure: Alliance should be structured so that the firm’s risks of giving too much away to the partner are reduced to an acceptable level: a. Alliances can be designed to make it difficult (if not impossible) to transfer technology not meant to be transferred. b. Contractual safeguards can be written into an alliance agreement to guard against the risk of opportunism by a partner. c. Both parties to an alliance can agree in advance to swap skills and technologies that the other covets, thereby ensuring a change for equitable gain. Cross-licensing agreements are the way to achieve this goal.
12 d. The risk of opportunism by an alliance partner can be reduced if the firm extracts a significant credible commitment form its partner in advance. (50/50 joint venture) 3. The manner in which the alliance is managed: a. Many differences in management styles are attributed to cultural differences, and managers, need to make allowances for these in dealing with their partner. b. Managing an alliance successfully requires building interpersonal relationships between the firm’s mangers, or what is sometimes referred to as relational capital. Personal relationships also foster an informal management network between the firms. 50. What does a firm have to do to maximize the learning benefits of an alliance? To maximize the learning benefits of an alliance a firm must try to learn from its partner and then apply the knowledge within its own organization.
CHAPTER 13: Entering Foreign Markets What is the best way to enter a foreign market? 1. Turnkey Projects: A project in which a firm agrees to set up and operating plant for foreign client and hand over the key when the plant is fully operational. Firms that specialize in the design, construction, and start-up of turnkey plants are common in some industries. In a turnkey project, the contractor agrees to handle every detail of the project for the foreign client, including, the training of operating personnel. This is a means of exporting process technology to other countries. A turnkey strategy projects are most common in the chemical, pharmaceutical, petroleum-refining, and metal-refining industries, all of which use complex, expensive production technologies. Example: The governments of many oil-rich countries have set out to build their own petroleum-refining industries, so they restrict FDI in their oil-refining
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sectors. But because many of these countries lack petroleum-refining technology, they gain it by entering into turnkey projects with foreign firms that have the technology. What are advantages and disadvantages of Turnkey Projects? •
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Advantages: The know-how required to assemble and run a technologically complex process, such as refining petroleum or steel, is a valuable asset. Turnkey projects are a way of earning great economic returns from that asset. A turnkey strategy can also be less risky than conventional FDI. In a country with unstable political and economic environments a longer-term investment might expose the firm to unacceptable political and/or economic risk. Disadvantages: Three main disadvantages: o The firm that enters into a turnkey deal will have no long-term interest in the foreign country o The firm that enters into a turnkey project with a foreign enterprise may inadvertently create a competitor. For example, many of the western firms that sold oil-refining technology to firms in Saudi Arabia, Kuwait, and other Gulf states now find themselves competing with these firms in the world oil market. o If the firm’s process technology is a source of competitive advantage, the selling this technology through a turnkey project is also selling competitive advantage to potential and/or actual competitors.
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