Final Exam

Primary Activities

-Involves the design, creation, and delivery of the product; its marketing; and its support and after-sale service -Divided into: research and development, production, marketing and sales, customer service

Support Activities

-Provides the inputs that allow the primary activities to occur -Divided into: information systems, company infrastructure, logistics, human resources

A company might not want to consider a wholly-owned subsidiary as a means of entry into a foreign market because it is generally the most costly method from a capital investment standpoint. Firms must bear the full capital costs and risks of setting up overseas operations. Establishing a wholly owned subsidiary in a foreign market can be done two ways: set up a new operation in that country, often referred to as a greenfield venture, or it can acquire an established firm in that host nation and use that firm to promote its products, an acquisition.

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A local producer can best differentiate itself from foreign multinationals by focusing on market niches the multinational ignores or is unable to serve effectively if it has a standardized global product offering.

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A strategy that focuses primarily on increasing the attractiveness of a product (so consumers are willing to pay higher price) is referred to as a differentiation strategy.

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An international business can command higher prices for a particular product in a foreign market when the product offers greater value to customers in the foreign market. The value created in a market by a company's product offering is an important factor in entry decisions. Greater value translates into an ability to charge higher prices and/or to build sales volume more rapidly.

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Common pitfalls for new exporters include poor market analysis, a poor understanding of competitive conditions in the foreign market, a failure to customize the product offering to the needs of foreign customers, a lack of an effective distribution program, a poorly executed promotional campaign, and problems securing financing. Novice exporters tend to underestimate the time and expertise needed to cultivate business in foreign countries. Few realize the amount of management resources that have to be dedicated to this activity.

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Consequently, trust is a major hurdle to doing business internationally. Therefore, banks play an important role as intermediaries.

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Countertrade denotes a range of barter-like agreements; its principle is to trade goods and services for other goods and services when they cannot be traded for money. In the modern era, countertrade arose in the 1960s as a way for the Soviet Union and the communist states of Eastern Europe, whose currencies were generally nonconvertible, to purchase imports. There are several forms of countertrade, like simple barter, which is the direct exchange of goods and/or services between two parties without a cash transaction. The problems with barter are twofold. First, if goods are not exchanged simultaneously, one party ends up financing the other for a period. Second, firms engaged in barter run the risk of having to accept goods they do not want, cannot use, or have difficulty reselling at a reasonable price. For these reasons, barter is viewed as the most restrictive countertrade arrangement. Other forms of countertrade include counterpurchase, offset, switch trading, and buybacks. A buyback occurs when a firm builds a plant in a country—or supplies technology, equipment, training, or other services to the country—and agrees to take a certain percentage of the plant's output as partial payment for the contract.

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Despite institutional disadvantages, U.S. firms can increase their awareness of export opportunities. The most comprehensive source of information is the U.S. Department of Commerce and its district offices all over the country. Within that department are two organizations dedicated to providing businesses with intelligence and assistance for attacking foreign markets: the International Trade Administration and the U.S. Commercial Service. The Small Business Administration (SBA) is a government organization that can help potential exporters. Through its Service Corps of Retired Executives (SCORE) program, the Small Business Administration oversees several thousand volunteers with international trade experience to provide one-on-one counseling to active and new-to-export businesses

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Documents used in exports and international trade: A letter of credit, abbreviated as L/C, stands at the center of international commercial transactions. Issued by a bank at the request of an importer, the letter of credit states that the bank will pay a specified sum of money to a beneficiary, normally the exporter, on presentation of particular, specified documents. A draft (bill of exchange) is simply an order written by an exporter instructing an importer, to pay a specified amount of money at a specified time. Drafts fall into two categories, sight drafts and time drafts. A time draft allows for a delay in payment—normally 30, 60, 90, or 120 days. It is presented to the drawee, who signifies acceptance of it by writing or stamping a notice of acceptance on its face. The bill of lading is a document issued to the exporter by the common carrier transporting the merchandise. It serves as a receipt, a contract, and a document of title. As a contract, the bill of lading specifies that the carrier is obligated to provide a transportation service in return for a certain charge.

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Export financing and assistance: The Export-Import Bank, often referred to as ExIm Bank, is an independent agency of the U.S. government. The mission of the Export-Import Bank is to provide financing aid that will facilitate exports, imports, and the exchange of commodities between the United States and other countries.

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Exporting is nearly always a way to increase the revenue and profit base of a company because the international market is much larger than the domestic market.

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Firms engaged in international trade have to trust someone they may have never seen, who lives in a different country, who speaks a different language, who abides by (or does not abide by) a different legal system, and who could be very difficult to track down if he/she defaults on an obligation.

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Firms that compete in the global marketplace typically face two types of competitive pressure that affect their ability to realize location economies and experience effects, and to leverage products and transfer competencies and skills within the enterprise. They face pressures for cost reductions and pressures to be locally responsive. Pressures for cost reduction 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 that serve universal needs.

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High transportation costs, trade barriers, and political and economic risks are caveats against global expansion of business activities

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Licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee. A disadvantage of licensing is that it does not give a firm the tight control over manufacturing, marketing, and strategy that is required for realizing experience curve and location economies. Licensing typically involves each licensee setting up its own production operations. This severely limits the firm's ability to realize experience curve and location economies by producing its product in a centralized location

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Many Japanese firms are affiliated in some way with the sogo shosha, Japan's great trading houses. The sogo shosha have offices all over the world, and they proactively, continuously seek export opportunities for their affiliated companies large and small- e.g. Mitsubishi, Mitsui etc.

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Marketing and sales can create value by discovering consumer needs and communicating them back to the R&D function of the company, which can then design products that better match those needs.

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The company infrastructure refers to the context within which all the other value creation activities occur. The infrastructure includes the organizational structure, control systems, and culture of the firm. Top management should be viewed as part of the firm's infrastructure. Through strong leadership, top management can consciously shape the infrastructure of a firm.

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The drawbacks of countertrade agreements are that contracts may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably. Countertrade often requires the firm to invest in an in-house trading department dedicated to arranging and managing countertrade deals. This can be expensive and time-consuming. Countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrading. The masters of countertrade are Japan's giant trading firms, the sogo shosha, which use their vast networks of affiliated companies to profitably dispose of goods acquired through countertrade agreements.

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The efficiency frontier shows all of the different positions that a firm can adopt with regard to adding value to the product and low cost assuming that its internal operations are configured efficiently to support a particular position.

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The localization strategy is used if the added value associated with local customization supports higher pricing, or if it leads to substantially greater local demand. Localization involves some duplication of functions and smaller production runs. Customization limits the ability of the firm to capture the cost reductions associated with mass-producing a standardized product for global consumption. A firm is should pursue a transnational strategy when it simultaneously faces both strong cost pressures and strong pressures for local responsiveness

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Value creation activities, or operations, can be categorized as primary activities and support activities.

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While developed markets are desirable when considering international expansion, a relatively poor country can be an attractive target for inward investment because of potential for rapid economic growth. While some markets are very large when measured by number of consumers (e.g., China, India, and Indonesia), one must also look at living standards and economic growth. On this basis, China and India, while relatively poor, are growing so rapidly that they are attractive targets for inward investment.

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f a firm's competitive advantage (its core competence) is based on control over proprietary technological know-how, licensing and joint-venture arrangements should be avoided if possible to minimize the risk of losing control over that technology. Many acquisitions fail because there is a clash between the cultures of the acquiring and acquired firm. After an acquisition, many acquired companies experience high management turnover, possibly because their employees do not like the acquiring company's way of doing things.

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he efficiency frontier has a convex shape because of diminishing returns. Diminishing returns imply that when a firm already has significant value built into its product offering, increasing value by a relatively small amount requires significant additional costs

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Michael Porter's two basic strategies

1. Differentiation 2. Low cost

Scale of entry:

Entering a market on a large scale involves the commitment of significant resources and implies rapid entry. On the negative side, by committing itself heavily to one market, the company may have fewer resources available to support expansion in other desirable markets. Disadvantage of small-scale entry for a firm is the difficulty of building market share and capturing first-mover advantages. It may limit its potential losses, but it may also miss the chance to capture first-mover advantages

Modes of Entry:

Exporting, licensing, franchising, joint venture, wholly owned subsidiaries. Mode of entry depends upon transportation costs, trade barriers, political and economic risks, and firm strategy. Each mode of entry is associated The way around the problem of local marketing agents in exporting is to set up wholly owned subsidiaries in foreign nations to handle local marketing, sales, and service. By doing this, the firm can exercise tight control over marketing and sales in the country while reaping the cost advantages of manufacturing the product in a single location, or a few choice locations.

Timing of entry:

First-mover and late mover advantages and disadvantages. There can be first mover disadvantages associated with entering a foreign market before other international businesses, giving rise to pioneering costs, costs that an early entrant has to bear that a later entrant can avoid.

Service Providers:

Freight forwarder, Export management companies (EMC) handle all aspects of exporting, Export trading company, Export packaging company, Customs brokers, Confirming houses (buying agents), Export agents, merchants, remarketers, Piggyback marketing, Economic processing zones (EPZs). Commonly used, Customs brokers can help companies avoid the pitfalls involved in customs regulations. The customs requirements of many countries can be difficult for new or infrequent exporters to understand, and the knowledge and experience of the customs broker can be very important. For example, many countries have certain laws and documentation regulations concerning imported items that are not always obvious to the exporter.

Four basic strategies in global markets:

Global standardization, Localization, Transnational, International.

Incentives:

are the devices used to reward appropriate managerial behavior. Incentives are very closely tied to performance metrics

A joint venture

entails establishing a firm that is jointly owned by two or more otherwise independent firms. One of the advantages of joint ventures is that a firm benefits from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems, sharing of development costs and risks, and political acceptability.

In a Turnkey project,

firm agrees to set up an operating plant for a foreign client and hand over the plant when it is fully operational, including the training of operating personnel. At completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation—hence, the term turnkey.

Pioneering costs

include the costs of promoting and establishing a product offering, including the costs of educating customers. These can be significant when the product being promoted is unfamiliar to local consumers.

Strategic alliances

refer to cooperative agreements between potential or actual competitors. They run the range from formal joint ventures, in which two or more firms have equity stakes, to short-term contractual agreements, in which two companies agree to cooperate on a particular task (such as developing a new product). Unless a firm is careful, it can give away more than it receives. But there are many examples of apparently successful alliances between firms—including alliances between U.S. and Japanese firms. Some have criticized strategic alliances on the grounds that they give competitors a low-cost route to new technology and markets

Learning effects:

refer to cost savings that come from learning by doing. 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.

Economies of scale

refer to the reductions in unit cost achieved by producing a large volume of a product. One of their sources is the ability to spread fixed costs over a large volume.

Experience curve:

refers to systematic reductions in production costs that have been observed to occur over the life of a product.

Strategy:

the actions taken by managers to attain the goals of the firm

Value Creation

the difference between price that can be charged and costs of producing,

Consumer surplus

the difference between the value of a product to the average customer and the price of the product

Location economies:

the firm will benefit by basing each value creation activity it performs at that location where economic, political, and cultural conditions—including relative factor costs—are most conducive to the performance of that activity.

Profit growth:

the percentage increase in net profits over time

Profitability:

the rate of return the firm makes on its invested capital