Chapter 12: The Strategy of International Business
A central tenet of the basic strategy paradigm is that to maximize its profitability, a firm must do three things:
(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 organization structure in place to execute its strategy
Managers must thus make a judgment call about the appropriate level of aggregation (cluster), given:
(1) the product market they are looking at and (2) the nature of national differences and trends for regional convergence
More generally, threats of -----, ------, and ------(which require that a certain percentage of a product should be manufactured locally) dictate that international businesses manufacture locally.
-protectionism -economic -nationalism local content rules
Firms that operate internationally are able to
1. Expand the market for their domestic product offerings by selling those products in international markets. 2. Realize location economies by dispersing individual value creation activities to those locations around the globe where they can be performed most efficiently and effectively. 3. Realize greater cost economies from experience effects by serving an expanded global market from a central location, thereby reducing the costs of value creation. 4. 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
To select a partner with these three characteristics, a firm needs to conduct comprehensive research on potential alliance candidates. To increase the probability of selecting a good partner, the firm should
1.) Collect as much pertinent, publicly available information on potential allies as possible. 2.) Gather data from informed third parties. These include firms that have had alliances with the potential partners, investment bankers that have had dealings with them, and former employees. 3.) Get to know the potential partner as well as possible before committing to an alliance. This should include face-to-face meetings between senior managers (and perhaps middle-level managers) to ensure that the chemistry is right.
Sony's basic strategy is to first categorize their products and services into ------—whereas Red Bull focuses on a universal global brand
12 core business segments
SMEs are companies that have fewer than ---- employees (U.S.) or fewer than ---- employees (Europe)
500 250
----- between competitors is fashionable; recent decades have seen an explosion in the number of strategic alliances
Collaboration
----- often have to be made to local conditions
Concessions
----- are the bedrock of a firm's competitive advantage
Core competencies
----- are one way to achieve this goal
Cross-licensing agreements
----- 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
Diminishing returns
As illustrated by the arrows in Figure 12.5, the various components of an organization's architecture are not independent of each other:
Each component shapes, and is shaped by, other components of architecture
----- pursuing an international strategy have followed a similar developmental pattern as they expanded into foreign markets
Enterprises
are the costs required to set up a production facility, develop a new product, and the like
Fixed costs
-----in our earlier discussion of core competencies is the idea that valuable skills are developed first at home and then transferred to foreign operations
Implicit
Locating a value creation activity in the optimal location for that activity can have one of two effects:
It can lower the costs of value creation and help the firm to achieve a low-cost position, and/or it can enable a firm to differentiate its product offering from those of competitors
are societies of individuals who come together to perform collective tasks
Organizations
----- have to do with the design, creation, and delivery of the product; its marketing; and its support and after-sale service
Primary activities
----- is concerned with the creation of a good or service
Production
The percentage increase in net profits over time
Profit Growth
is measured by the percentage increase in net profits over time
Profit Growth
The differences between Red Bull and Sony in international strategy are clear: one company has an almost universal appeal to customers and drives that point home in sponsored events and content marketing (-----), while the other has a very structurally defined approach to international strategy (----)
Red Bull Sony
is concerned with the design of products and production processes
Research and development (R&D)
the value chain support activities: Primary activities:
S: Company infrastructure: information system, logistics, human resources P: R&D, Production, marketing and sales, customer service
To begin the sequence of chapters on running a firm, which comprise the remainder of the text, this chapter looks at how organizations can increase revenue (and profitability) by expanding their operations in foreign markets:
This is international business strategy
Because global markets are larger than domestic markets, a firm that serves a global market from 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 production locations
The role of the enterprise's service activity is to provide
after-sale service and support
They also tend to use their cost advantage to support ----- in world markets
aggressive pricing
One key to making a strategic alliance work is to select the right
ally
Finally, as global sales increase the size of the enterprise, its ----- with suppliers increases as well, which may allow it to attain economies of scale in purchasing, bargaining down the cost of key inputs and boosting profitability that way
bargaining power
Once a firm has established a low-cost position, it can act as a ----- to new competition
barrier
While some enterprises, such as firm A in Figure 12.8, face high pressures for cost reductions and low pressures for local responsiveness, and others, such as firm B, face low pressures for cost reductions and high pressures for local responsiveness, many companies are in the position of firm C. They face high pressures for ----- cost reductions and local responsiveness
both
Through ---- and -----, the marketing function can increase the value (V) that consumers perceive to be contained in a firm's product
brand positioning advertising
While this is still often the case, there is also a tendency toward the convergence of tastes, preferences, infrastructure, distribution channels, and host-government demands within a ----- that is composed of two or more nations
broader region
This is the case for conventional commodity products such as
bulk chemicals, petroleum, steel, sugar, and the like
They tend to ----- product development functions such as R&D at home
centralize
The strategic significance of the experience curve is
clear
Pressures for cost reduction can be particularly intense in industries producing ----- products where meaningful differentiation on nonprice factors is difficult and price is the main competitive weapon
commodity-type
The final support activity is the ------, or the context within which all the other value creation activities occur
company infrastructure
The returns from such a strategy are likely to be greater if indigenous competitors in the nations that a company enters lack ------
comparable products
Starting with this "strategy" chapter, our focus now shifts from the macro environment to the firm itself and, in particular, to the actions managers can take to
compete more effectively as an international business
However, it does require that the gap between value (V ) and cost of production (C ) be greater than the gap attained by
competitors
Third, an alliance is a way to bring together -----
complementary skills and assets that neither company could easily develop on its own
As attractive as this may sound in theory, the strategy is not an easy one to pursue because it places
conflicting demands on the company
As noted earlier, if a firm is to implement its strategy efficiently and position itself on the efficiency frontier shown in Figure 12.3, it must manage these activities effectively and in a manner that is ---- with its strategy
consistent
The strategy, operations, and organization of the firm must all be ----- with each other if it is to attain a competitive advantage and garner superior profitability
consistent
Marketing and sales can also create value by discovering ----- and communicating them back to the R&D function of the company, which can then design products that better match those needs
consumer needs
This is because the customer captures some of that value in the form of what economists call a -----
consumer surplus
The metrics used to measure the performance of subunits and make judgments about how well managers are running those subunits
controls
The most obvious example of a region is the European Union and particularly the euro zone countries within that trade bloc, where there are institutional forces that are pushing toward
convergence
We tend to see this when there are strong pressures for ----- due to, for example, a shared history and culture or the establishment of a trading block where there are deliberate attempts to harmonize trade policies, infrastructure, regulations, and the like
convergence
Firm skills that competitors cannot easily match or imitate
core competence
The firm that moves down the experience curve most rapidly will have a
cost advantage vis-á-vis its competitors
The liberalization of the world trade and investment environment in recent decades, by facilitating greater international competition, has generally increased ----
cost pressures
We have argued that a global standardization strategy makes most sense when ---- are intense and demands for ----- are limited
cost pressures local responsiveness
In competitive global markets, international businesses often face pressures for
cost reductions
On the downside, because it involves some duplication of functions and smaller production runs, customization limits the ability of the firm to capture the ---- associated with mass-producing a standardized product for global consumption
cost reductions
The resulting duplication can raise costs, but this is less of an issue if the firm does not face strong pressures for
cost reductions
This strategy makes most sense when there are strong pressures for ----- and ------ are minimal
cost reductions demands for local responsiveness
The appropriateness of each strategy varies, given the extent of pressures for ----- and local ------
cost reductions responsiveness
Two of these researchers, Christopher Bartlett and Sumantra Ghoshal, argue that in the modern 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
They face pressures for
cost reductions and pressures to be locally responsive
According to Porter, superior profitability goes to those firms that can create superior value, and the way to create superior value is to drive down the ---- of the business and/or ----- the product in some way so that consumers value it more and are prepared to pay a premium price
cost structure differentiate
They enable a firm to reduce the ---- of value creation and/or to create perceived ----- in such a way that premium pricing is possible
costs value
The amount of value a firm creates is measured by the difference between its
costs of production and the value that consumers perceive in its products
For MTV, production is concerned with the
creation, programming, and broadcasting of content, such as music videos and thematic shows
Fourth, the risk of opportunism by an alliance partner can be reduced if the firm extracts a significant ------ from its partner in advance
credible commitment
The term is often used to embrace a variety of agreements between actual or potential competitors, including
cross-shareholding deals, licensing arrangements, formal joint ventures, and informal cooperative arrangements
As in all international business deals, an important factor is sensitivity to -----
cultural differences
They have their own distinctive patterns of
culture and subculture
Also, it is normally impossible to segment the market to such a degree that the firm can charge each customer a price that reflects that individual's assessment of the value of a product, which economists refer to as a
customer's reservation price
The need to ----- the product offering to local conditions, whether national or regional, may work against the implementation of such a strategy
customize
Pressures for local responsiveness arise from differences in infrastructure or traditional practices among countries, creating a need to
customize products accordingly
In such cases, a multinational's products and marketing message have to be ----- to appeal to the tastes and preferences of local customers
customized
Some have argued that customer demands for local customization are on the ----- worldwide
decline
Strong pressures for local responsiveness emerge when customer tastes and preferences differ significantly among countries, as they often do for -------
deeply embedded historic or cultural reasons
This typically creates pressure to-------- and functions to a firm's overseas subsidiaries
delegate production and marketing responsibilities
For services such as banking or health care, "production" typically occurs when the service is
delivered to the customer (e.g., when a bank originates a loan for a customer, it is engaged in "production" of the loan)
Of course, the issue is more complex than illustrated in Figure 12.6. For example, the firm can influence market conditions through its choice of strategy—it can create
demand by leveraging core skills to create new market opportunities
These competitive pressures place conflicting ---- on a firm
demands
A service business such as a bank might respond to cost pressures by moving some back-office functions, such as information processing, to ------ where wage rates are lower
developing nations
The success of many multinational companies that expand in this manner is based not just upon the goods or services that they sell in foreign nations but also upon the core competencies that underlie the
development, production, and marketing of those goods or services
Significant ----- in consumer tastes and preferences still exist across nations, regions, and cultures
differences
Traditionally, we have tended to think of pressures for local responsiveness as being derived from national ---- in tastes and preferences, infrastructure, and the like
differences
In this section, we are concerned specifically with strategic alliances between firms from
different countries
By operations, we mean the -------a firm undertakes
different value creation activities
But responding to pressures to be locally responsive requires that a firm ------- in an effort to accommodate the diverse demands arising from national (or regional) differences in consumer tastes and preferences, business practices, distribution channels, competitive conditions, and government policies
differentiate its product offering and marketing strategy from country to country (or in some cases, region to region)
We refer to a strategy that focuses primarily on increasing the attractiveness of a product as a
differentiation strategy
No matter how complex the task, however, learning effects typically ----- after a while
disappear
Indeed, the senior management ranks of many multinationals are becoming increasingly ----, as managers from a variety of national backgrounds have ascended to senior leadership positions
diverse
A number of studies have observed that a product's production costs decline by some quantity about each time cumulative output -----
doubles
Moving------the experience curve allows a firm to reduce its cost of creating value (to lower C in Figure 12.2) and increase its profitability
down
Any decline in the experience curve after such a point is due to
economies of scale
Cost advantages associated with large-scale production
economies of scale
refer to the reductions in unit cost achieved by producing a large volume of a product
economies of scale
A manufacturer, for example, might mass-produce a standardized product at the optimal locations in the world, wherever that might be, to realize -----, ------, ------
economies of scale, learning effects, and location economies
Pressures for local responsiveness imply that it may not be possible for a firm to realize the full benefits from
economies of scale, learning effects, and location economies
INFORMATION SYSTEMS, when coupled with the communications features of the Internet, can alter the ----- and ----- with which a firm manages its other value creation activities
efficiency effectiveness
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
Systematic production cost reductions that occur over the life of a product
experience curve
refers to systematic reductions in production costs that have been observed to occur over the life of a product
experience curve
First, strategic alliances may
facilitate entry into a foreign market
The theory of international trade also teaches that due to differences in -----, certain countries have a comparative advantage in the production of certain products
factor costs
In this respect, firms with reputations for "-----" probably make the best allies
fair play
In addition, shifts in market conditions caused by new technologies, government action such as deregulation, demographics, or social trends can mean that the strategy of the firm no longer
fits the market
The more rapidly that cumulative sales volume is built up, the more rapidly
fixed costs can be amortized over a large production volume and the more rapidly unit costs will fall
Similarly, if the government appears to be pursuing inappropriate economic policies that could lead to ------, that might be another reason for not basing production in that location, even if other factors look favorable
foreign exchange risk
Fulfilling this need may require the delegation of manufacturing and production functions to
foreign subsidiaries
However, for more mature multinationals that have already established a network of subsidiary operations in foreign markets, the development of valuable skills can just as well occur in
foreign subsidiaries
Rather, the flow should also be from ---- to ----- and from ---- to -----
foreign subsidiary to home country and from foreign subsidiary to foreign subsidiary
Through superior product design, R&D can increase the ------ of products, which makes them more attractive to consumers (raising V )
functionality
Beyond the 12 core segments that have served Sony well strategically for a long time, the company is embarking on ----- to create new business opportunities
global initiatives
Furthermore, rather than raising prices to reflect the higher perceived value of the product, the firm's managers may elect to hold prices low in order to increase
global market share and attain greater scale economies (in other words, they may elect to offer consumers better "value for money"
The result is the emergence of enormous ------ for standardized consumer products
global markets
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
global standardization strategy
The message in this story is that an international strategy may not be viable in the long term and to survive, firms need to shift toward a ----- or a ----- in advance of competitors
global standardization strategy transnational strategy
These can be characterized as a:
global standardization strategy, a localization strategy, a transnational strategy, and an international strategy
Generalizing from the Clear Vision example, one result of this kind of thinking is the creation of a ----- 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 costs of value creation are minimized
global web
When different stages of value chain are dispersed to those locations around the globe where value added is maximized or where costs of value creation are minimized
global web
The failure rate for international strategic alliances seems to be
high
The strategy is inappropriate when demands for local responsiveness are
high
The strategy may make sense, however, if the added value associated with local customization supports ------, which enables the firm to recoup its higher costs, or if it leads to substantially greater local demand, enabling the firm to reduce costs through the attainment of some ----- in the local market
higher pricing scale economies
In general, ----- and a ----- will increase the value of an enterprise and thus the returns garnered by its owners, the shareholders
higher profitability higher rate of profit growth
However, these conditions are not always found in many consumer goods markets, where demands for local responsiveness can remain
hight
Thus, they maintain that the flow of skills and product offerings should not be all one way, from
home country to foreign subsidiary
The ---- function also ensures that people are adequately trained, motivated, and compensated to perform their value creation tasks
human resource
The ----- function can help create more value in a number of ways. It ensures that the company has the right mix of skilled people to perform its value creation activities effectively
human resource
The devices used to reward appropriate managerial behavior
incentives
If these create a favorable impression of the firm's product in the minds of consumers, they ---- the price that can be charged for the firm's Page 328product
increase
To maximize the value of a firm to shareholders, managers must pursue strategies that
increase the profitability of the enterprise and its rate of profit growth over time
Thus, 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
Hence, production costs decline due to -----, which increases the firm's profatibility
increasing labor productivity and management efficiency
Consider -----: these systems refer to the electronic systems for managing inventory, tracking sales, pricing products, selling products, dealing with customer service inquiries, and so on
information systems
The support activities of the value chain provide ---- that allow the primary activities to occur
inputs
If a firm is going to maximize its profitability, it must pay close attention to achieving ----- among the various components of its architecture, and the architecture must support the ------ and ----- of the firm
internal consistency strategy and operations
This is what Procter & Gamble has been doing (see the earlier Management Focus). Thus, as competition intensifies, ---- and ----- tend to become less viable, and managers need to orient their companies toward either a global standardization strategy or a transnational strategy
international localization strategies
And last but by no means least, ----- adds another layer of complexity to the strategic challenges facing the firm
international expansion
Many of these enterprises have pursued an -------, taking products first produced for their domestic market and selling them internationally with only minimal local customization
international strategy
Trying to create value by transferring core competencies to foreign markets where indigenous competitors lack those competencies
international strategy
Strategic alliances run the range from formal -----, in which two or more firms have equity stakes (e.g., Fuji Xerox), to short-term -----, in which two companies agree to cooperate on a particular task (such as developing a new product)
joint ventures contractual agreements
The partner must have capabilities that the firm ---- and that it values
lacks
To maximize the learning benefits of an alliance, a firm must try to ----from its partner and then apply the ----- within its own organization
learn knowledge
Academics have argued that a major determinant of how much acquiring knowledge a company gains from an alliance is its ability to
learn from its alliance partner
Cost savings from learning by doing
learning effects
Figure 12.7 illustrates this experience curve 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). Two things explain this:
learning effects and economies of scale
For these reasons, the price that gets charged tends to be ---- than the value placed on the product by many customers
less
However, the price a firm charges for a good or service is typically ---- than the value placed on that good or service by the customer
less
Third, 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 -----
little in return
Economic and political demands imposed by host-country governments may require
local responsiveness
Conversely, a localization strategy makes most sense when demands for ----- are high, but ----- are moderate or low
local responsiveness cost pressures
Increasing profitability by customizing the firm's goods and services so that they provide a good match to tastes and preferences in different national or regional markets
localization strategy
Dealing with these conflicting and contradictory pressures is a difficult strategic challenge, primarily because being ----- tends to raise costs
locally responsive
For a firm that is trying to survive in a competitive global market, this implies that trade barriers and transportation costs permitting, the firm will benefit by basing each value creation activity it performs at that ---- where economic, political, and cultural conditions—including relative factor costs—are most conducive to the performance of that activity
location
Cost advantages from performing a value creation activity at the optimal location for that activity
location economies
Firms that pursue such a strategy can realize what we refer to as location economies, which are the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be (transportation costs and trade barriers permitting)
location economies
Processes are conceptually distinct from the -----responsibilities within an organization, although both involve decisions
location of decision-making
The ----- function controls the transmission of physical materials through the value chain, from procurement through production and into distribution
logistics
Michael Porter has argued that ---- and ---- are two basic strategies for creating value and attaining a competitive advantage in an industry
low cost differentiation
Pressures for cost reductions are also intense in industries where major competitors are based in -----, where there is persistent excess capacity, and where consumers are powerful and face low switching costs
low-cost locations
Some have criticized strategic alliances on the grounds that they give competitors a
low-cost route to new technology and markets
We refer to a strategy that focuses primarily on lowering production costs as a
low-cost strategy
that is, their strategic goal is to pursue air strategic goal is to pursue a ------
low-cost strategy on a global scale
The customer is able to do this because the firm is competing with other firms for the customer's business, so the firm must charge a ---- price than it could were it a monopoly supplier (has no competitors)
lower
The production activity of a firm creates value by performing its activities efficiently so ----- result (----) and/or by performing them in such a way that a ----- is produced (which results in higher V )
lower costs (lower C) higher-quality product
Responding to pressures for cost reduction requires a firm to try to
lower the costs of value creation
A company can create more value (V − C ) either by
lowering production costs, C, or by making the product more attractive through superior design, styling, functionality, features, reliability, after-sales service, and the like, so that consumers place a greater value on it (V increases) and, consequently, are willing to pay a higher price (P increases)
For physical products, when we talk about production, we generally mean
manufacturing
The motives for entering strategic alliances are varied, but they often include ----, which overlaps with the topic of entering foreign markets which we will cover in detail in Chapter 13
market access
In other words, as illustrated in Figure 12.6, -----,-----, ----, and ----- must all be consistent with each other, or fit each other, for superior performance to be attained
market conditions strategy operations organization
Although they may undertake some local customization of product offering and marketing strategy, this tends to be rather limited in scope. Ultimately, in most firms that pursue an international strategy, the head office retains fairly tight control over ------
marketing and product strategy
Such skills are typically expressed in product offerings that other firms find difficult to
match or imitate
Once a partner has been selected and an appropriate alliance structure has been agreed on, the task facing the firm is to ----- its benefits from the alliance
maximize
For most firms, the preeminent goal is to ------ (subject to the very important constraint that the activities undertaken are done in a legal, ethical, and socially responsible manner)
maximize the value of the firm for its owners and its shareholders
Instead, they prefer to market a standardized product worldwide so that they can reap the
maximum benefits from economies of scale and learning effects
Responding to pressures for cost reductions requires that a firm try to
minimize its unit costs
Learning effects tend to be more significant when a technologically complex task is repeated because there is
more that can be learned about the task
Thus, serving a global market from a single location is consistent with
moving down the experience curve and establishing a low-cost position
This means that the firm can also be called a ------
multinational enterprise, multinational corporation, international business, international organization, global company, and so on
Almost all ----- started out doing just this
multinationals
Despite being depicted as "poster child" for the proliferation of standardized global products, even McDonald's has found that it has to customize its product offerings (i.e., its menu) to account for ----- in tastes and preferences
national differences
At the same time, this perspective should not be pushed too far. There are still deep and profound cultural differences among France, Germany, and Italy—all members of the EU—that may in turn require some degree of local customization at the
national level
A firm's marketing strategies may have to be responsive to differences in distribution channels among countries, which may necessitate the delegation of marketing functions to
national subsidiaries
Keep in mind that we distinguish between revenue and profit; even nonprofit companies need to make revenue to
offsets costs
In addition, pressures for local responsiveness imply that it may not be possible to leverage skills and products associated with a firm's core competencies wholesale from
one nation or region to another
The ----- of a firm can be thought of as a value chain composed of a series of distinct value creation activities, including production, marketing and sales, materials management, research and development, human resources, information systems, and the firm infrastructure
operations
The various value creation activities a firm undertakes
operations
Also, the cost advantages of serving the world market from a single location will be even more significant if that location is the ---- one for performing the particular value creation activity
optimal
The strategy of a firm is implemented through its
organization
The totality of a firm's organization, including formal organizational structure, control systems and incentives, organizational culture, processes, and people
organization architecture
This can be used proactively to hire individuals whose internal values are consistent with those that the firm wishes to emphasize in its
organization culture
The values and norms shared among an organization's employees
organizational culture
By -----, we mean three things: first, the formal division of the organization into subunits such as product divisions, national operations, and functions (most organizational charts display this aspect of structure); second, the location of decision-making responsibilities within that structure (e.g., centralized or decentralized); and third, the establishment of integrating mechanisms to coordinate the activities of subunits including cross-functional teams and or pan-regional committee
organizational structure
The three-part structure of an organization, including its formal division into subunits such as product divisions, its location of decision-making responsibilities within that structure, and the establishment of integrating mechanisms to coordinate the activities of all subunits
organizational structure
The infrastructure includes the
organizational structure, control systems, and culture of the firm
Just as societies have cultures (see Chapter 4 for details), so do
organizations
When we talk about strategy and the firm, we refer to the firm in the most common way as a method to
organize activities
Alternatively, a firm might -----certain functions to low-cost foreign suppliers in an attempt to reduce costs
outsource
The success of an alliance seems to be a function of three main factors:
partner selection, alliance structure, and the manner in which the alliance is manage
An obvious example is the strategy regarding
people
The employees of the organization, 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
people
Incentives are very closely tied
performance metrics
As we shall see, organizational culture can have a profound impact on how a firm ----
performs
Many of the underlying sources of experience-based cost economies are
plant-based
Another caveat concerns the importance of assessing ------ risks when making location decisions
political and economic
In general, the more value customers place on a firm's products, the higher the ---- the firm can charge for those products
price
In addition, to get down the experience curve rapidly, a firm may need to ----- aggressively so demand will expand rapidly
price and market
We can categorize these value creation activities, or operations, as ---- and ------
primary activities and support activities
The manner in which decisions are made and work is performed within any organization
processes
As we will see, however, a firm's ability to increase its profitability and profit growth by pursuing these strategies is constrained by the need to customize its ------, -----, and ------ to differing national or regional conditions--that is, by the imperative of localization.
product offering marketing strategy business strategy
It will also need to build sufficient ----- for serving a global market
production capacity
Alternatively, R&D may result in more efficient production processes, thereby cutting -----. Either way, the R&D function can create value
production costs (lowering C)
These skills may exist in any of the firm's value creation activities:
production, marketing, R&D, human resources, logistics, general management, and so on
Responding to pressures to be locally responsive requires a firm to differentiate its ------- all of which tends to raise the firm's cost structure
products and marketing strategy from country to country or region to region to accommodate these factors
For completeness, it should be noted that strategies that increase profitability may also expand a firm's business and thus enable it to attain a higher rate of
profit growth
A ratio or rate of return concept
profitability
can be measured in a number of ways, but for consistency, we define it as the rate of return that the firm makes on its invested capital (return-on-investments, abbreviated as ROI), which is calculated by dividing the net profits of the firm by total invested capital
profitability
In sum, managers need to keep in mind the complex relationship between ---- and ---- when making strategic decisions about pricing
profitability profit growth
Expanding globally allows firms to increase their ----- and ---- in ways not available to purely domestic enterprises
profitability rate of profit growth
Managers can increase the profitability of the firm by ------ or by --------, which enables the firm to raise praices
pursuing strategies that lower costs or by pursuing strategies that add value to the firm's products
Managers can increase the rate at which the firm's profits grow over time by ------ or by pursuing strategies to -----
pursuing strategies to sell more products in existing markets or to enter new markets
Thus, Toyota increased its profits by entering the large automobile markets of North America and Europe, offering products that differed from those offered by local rivals (Ford and GM) in their superior
quality and reliability
Because differentiation across countries can involve significant duplication and a lack of product standardization, it may ----
raise costs
Differentiating the product to respond to local demands in different geographic markets ------, which runs counter to the goal of reducing costs
raises costs
Unless a firm is careful, it can give away more than it
recieves
The efficiency with which this is carried out can significantly ------, thereby creating more value
reduce cost (lower C)
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; thus, unlike firms pursuing a global standardization strategy, they are not confronted with pressures to
reduce their cost structure
Taking a regional perspective is important because it may suggest that localization at the -----rather than the national level is the appropriate strategic response
regional
Managing an alliance successfully requires building interpersonal relationships between the firms' managers, or what is sometimes referred to as
relational capital
Such a strategy could increase the firm's rate of profit growth even further, because consumers will be attracted by prices that are
relative to value
Following normal practice, in the value chain illustrated in Figure 12.4, the primary activities are divided into four functions:
research and development, production, marketing and sales, and customer service
Profit-focused companies, with shareholders, on the other hand, often focus on making a profit in addition to
revenue
The increase in the perceived value of the product may also attract more customers, thereby growing ---- as well
revenues and profits
These critics have a point; alliances have
risks
Second, contractual ----- can be written into an alliance agreement to guard against the risk of opportunism by a partner. (Opportunism includes the theft of technology and/or markets.)
safeguards
The ability to standardize product offering within a region allows for the attainment of greater -----, and hence lower costs, than if each nation had to have its own offering
scale economies
In response, firms such as Honda, Ford, and Toyota are pursuing a strategy of establishing top-to-bottom design and production facilities in each of these regions so that they can better serve local demands. Although such customization brings benefits, it also limits the ability of a firm to realize significant
scale of economies and location economies
For a retailer such as Walmart, "production" is concerned with
selecting the merchandise, stocking the store, and ringing up the sale at the cash register
The only way to recoup such high fixed costs may be to --------, which reduces average unit costs by spreading fixed costs over a larger volume
sell the product worldwide
A company can increase its growth rate by taking goods or services developed at home and
selling them internationally
The design, development, manufacture, and service of a product manufactured by an alliance can be structured so as to wall off ----- to prevent their leakage to the other participant
sensitive technologies
Second, a firm may not be able to attain an efficient scale of production unless it
serves global markets
Although we think of R&D as being associated with the design of physical products and production processes in manufacturing enterprises, many ---- companies also undertake R&D
service
Strategic alliances also allow firms to ----- of developing new products or processes
share the fixed costs (and associated risks)
Firms pursuing a global standardization 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
In theory, a firm that realizes location economies by dispersing each of its value creation activities to its optimal location should have a competitive advantage vis-à-vis a firm that bases all of its value creation activities at a
single location
It may not be possible to serve the global marketplace from a ------, producing a globally standardized product and marketing it worldwide to attain the cost reductions associated with experience effects
single low-cost location
It should be able to better differentiate its product offering (thereby raising perceived value, V) and lower its cost structure (C) than its
single-location competitor
A unique type of firm, though, is what we call an SME—a
small- or medium-sized enterprise
While the CEO might have ultimate responsibility for deciding what the strategy of the firm should be (i.e., the decision-making responsibility is centralized), the process he or she uses to make that decision might include the
solicitation of ideas and criticism from lower-level managers
This function can create a perception of superior value (V ) in the minds of consumers by
solving customer problems and supporting customers after they have purchased the product
Economies of scale have a number of sources. One is the ability to
spread fixed costs over a large volume
It has been suggested that they are important only during the -------of a new process and that they cease after two or three years
start-up period
----- refer to cooperative agreements between potential or actual competitors
strategic alliances
Cooperative agreements between potential or actual competitors
strategic alliances
Sony's structured approach—but also its focus on "-----"—has made Sony a global innovator for more than seven decades
strategic curiosity
Porter notes that it is important for a firm to be explicit about its choice of ----- with regard to value creation (differentiation) and low cost and to configure its internal operations to support that strategic emphasis
strategic emphasis
First, a good partner helps the firm achieve its ------, whether they are market access, sharing the costs and risks of product development, or gaining access to critical core competencies
strategic goals
Actions managers take to attain the firm's goals
strategy
In such circumstances, the firm must change its -----, -----, and ----- to fit the new reality—which can be an extraordinarily difficult challenge
strategy operations organization
The operations of the firm must be configured in a way that supports the ---- of the firm, and the organization architecture of the firm must match the ---- and ---- of the firm
strategy operations strategy
. For a firm to have superior return on invested capital (ROIC), its organization must support its
strategy and operations
A partner having been selected, the alliance should be ----- so that the firm's risks of giving too much away to the partner are reduced to an acceptable level
structured
Transnational enterprises, in other words, must also focus on leveraging
subsidiary skills
The strategy might also increase profitability if the scale economies that result from market share gains are
substantial
Localization is most appropriate when there are ----- across nations or regions with regard to consumer tastes and preferences and where cost pressures are not too -----
substantial differences intense
In terms of attaining a competitive advantage, ---- can be as important as, if not more important than, the primary activities of the firm
support activities
In a world where competitive pressures are increasing, such a strategy may become an imperative for
survival
Third, both parties to an alliance can agree in advance to ----- skills and technologies that the other covets, thereby ensuring a chance for equitable gain
swap
In a multinational enterprise, one of the things human resources can do to boost the competitive position of the firm is to
take advantage of its transnational reach to identify, recruit, and develop a cadre of skilled managers, regardless of their nationality, who can be groomed to take on senior management positions
According to this argument, modern communications and transport technologies have created the conditions for a convergence of the ------- of consumers from different nations
tastes and preferences
Fourth, it can make sense to form an alliance that will help the firm establish ------ for the industry that will benefit the firm
technological standards
Because ----can exert considerable influence in shaping these aspects of a firm, ----- should also be viewed as part of the firm's infrastructure
top management
Because core competencies are, by definition, the source of a firm's competitive advantage, the successful global expansion by manufacturing companies such as Toyota and P&G was based not just on leveraging products and selling them in foreign markets but also on the ----- in which indigenous competitors lack them
transfer of core competencies to foreign markets
First, alliances can be designed to make it difficult (if not impossible) to ----- not meant to be transferred
transfer technology
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
transnational strategy
The same can be said about a localization strategy. Localization may give a firm a competitive edge, but if it is simultaneously facing aggressive competitors, the company will also have to reduce its cost structure, and the only way to do that may be to shift toward a
transnational strategy
What happens, however, 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
Introducing ---- and ---- complicates this picture
transportation costs trade barriers
Many differences in management style are attributable to cultural differences, and managers need to make allowances for these in dealing with their partner. Beyond this, maximizing the benefits from an alliance seems to involve building----- between partners and----- from partners
trust learning
Skills can be created anywhere within a multinational's global network of operations, wherever people have the opportunity and incentive to
try new ways of doing things
Attaining economies of scale lowers a firm's ---- and increases its ------
unit costs profitability
Increasingly, these conditions prevail in many industrial goods industries, whose products often serve
universal needs
Needs that are the same all over the world, such as steel, bulk chemicals, and industrial electronics
universal needs
This tends to be the case for products that serve -----
universal needs
exist when the tastes and preferences of consumers in different nations or regions are similar, if not identical
universal needs
Even if a country looks very attractive as a production location when measured against all the standard criteria, if its government is ---- or -----, the firm might be advised not to base production there
unstable totalitarian
By serving domestic and international markets from its production facilities, a firm may be able to
utilize those facilities more intensively
By customizing the product offering to local demands, the firm increases the ---- of that product in the local market
value
Leveraging the skills created within subsidiaries and applying them to other operations within the firm's global network may create
value
The converse also holds: when a firm already has a low-cost structure, it has to give up a lot of ---- in its product offering to get additional cost reductions
value
The way to increase the profitability of a firm is to create more
value
This discussion suggests that a firm has high profits when it creates more ---- for its customers and does so at a ----
value lower cost
Porter emphasizes that it is very important for management to decide where the company wants to be positioned with regard to -------, to configure operations accordingly, and to manage them efficiently to make sure the firm is operating on the efficiency frontier
value (V ) and cost (C )
Performing activities that increase the value of goods or services to consumers
value creation
is measured by the difference between V and C (V − C ); a company creates value by converting inputs that cost C into a product on which consumers place a value of V
value creation
For each company, however, ----and ----- were the initial drivers of success, and these topics are covered in the first section of this chapter
value creation strategic positioning
However, not all positions on the efficiency frontier are
viable (successful)
Second, a good partner shares the firm's ----for the purpose of the alliance
vision
Bartlett and Ghoshal note that in the modern multinational enterprise, core competencies and skills do not reside just in the home country but can develop in any of the firm's
worldwide operations