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