The Strategy of International Business - INTB Exam 3 Chapter 12

What is the way to increase the profitability of a firm?

- Create more value and raise prices - Reduce Costs

Examples of host-government demands that create pressures for local responsiveness

- Protectionism - Economic nationalism - Local content rules

How to raise profit growth?

- Sell more in existing markets - Enter new markets

Primary Activities - what are they and what four functions are they divided into?

have to do with the design, creation, and delivery of the product; its marketing; and its support and after-sale service Four Functions: 1. Research and Development 2. Production 3. Marketing and Sales 4. Customer Service

Consumer Surplus (CS)

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Incentives

the devices used to reward appropriate managerial behavior

Purpose of Human Resources (Support Activity)

- ensures that the company has the right mix of skilled people to perform its value creation activities effectively - ensures that people are adequately trained, motivated, and compensated to perform their value creation tasks - in a multinational enterprise, it can boost the competitiveness of the firm by identifying, recruiting, and developing a cadre of skilled managers, regardless of their nationality, who can be groomed to take on senior management positions

Caveats of introducing transportation costs and trade barriers

- high transportation costs make for uneconomical locations - unstable governments lead to foreign exchange risk

Pressures for cost reduction can be particularly intense in industries producing...

...products that serve universal needs ...commodity-type products where meaningful differentiation on nonprice factors is difficult and price is the main competitive weapon

For good partner selection, a firm should (3):

1. Collect as much pertinent, publicly available information on potential allies as possible 2. Gather data from informed third parties (firms that've had alliances with potential partners, investment bankers that've had dealings with them, and former employees) 3. Get to know the potential partner as well as possible before committing to an alliance (face-to-face meetings between managers)

What are the pressures for local responsiveness?

1. Differences in customer tastes and preferences 2. Differences in infrastructure and traditional practices 3. Differences in distribution channels 4. Host-government demands

Firms that operate internationally are able to: (benefits)

1. Expand the market for their domestic product offerings by selling those products in international markets 2. Realize location economics 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 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

Four basic strategies

1. Global Standardization 2. Localization 3. Transnational 4. International

Support Activities

1. Information Systems 2. Logistics 3. Human Resources 4. Company Infrastructure

What are the two experience effects?

1. Learning effects 2. Economies of scale

The two basic strategies for creating value and attaining a competitive advantage in an industry...

1. Low-cost Strategy 2. Differentiation Strategy

Challenges for managers of leveraging and using new ideas and core competencies in subsidiaries

1. Managers must have the humility to recognize that valuable skills that lead to competencies can arise anywhere within the firm's global network (not just at the corporate center) 2. Managers must establish an incentive system that encourages local employees to acquire new skills 3. Managers must have a process for identifying when valuable new skills have been created in a subsidiary 4. Managers need to act as facilitators, helping to transfer valuable skills within the firm

The 3 Aspects of Making Strategic Alliances Work

1. Partner Selection 2. Alliance Structure 3. Managing the Alliance

To maximize its profitability, a firm must do three things (this is a central tenet of the basic strategy paradigm):

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 3. Make sure that the firm has the right organization structure in place to execute its strategy

The Two Determinants of Enterprise Valuation

1. Profitability 2. Profit Growth

The Value Chain (Primary Activities linked to Secondary Activities)

1. R&D - Information Systems 2. Production - Company Infrastructure and Logistics 3. Marketing and Sales - Company Infrastructure and Logistics 4. Customer Service - Human Resources

For good alliance structure (3):

1. alliances can be designed to make it difficult to transfer technology not meant to be transferred 2. contractual safeguards can be written into an alliance agreement to guard against the risk of opportunism by a partner 3. both parties to an alliance can agree in advance to swap skills and technologies that the other covets, ensuring equitable gain

Advantages of Strategic Alliances

1. strategic alliances may facilitate entry into a foreign foreign 2. they may allow firms to share the fixed costs of developing new products or processes 3. they are a way to bring together complementary skills and assets that neither company could easily develop on their own 4. it can help the firm establish technological standards for the industry that will benefit the firm

Disadvantages of Strategic Alliances

1. they give competitors a low-cost route to new technology and markets - firms can give away more than they receive

Differentiation Strategy

A strategy for high profits (creating value and attaining a competitive advantage in an industry) that focuses primarily on increasing the attractiveness of a product

Low-cost Strategy

A strategy for high profits (creating value and attaining a competitive advantage in an industry) that focuses primarily on lowering production costs

Strategy

Actions managers take to attain the firm's goals

Organizational Structure - What Three Things?

An organization's: 1. formal division into subunits such as product divisions 2. its location of decision-making responsibilities within that structure 3. the establishment of integrating mechanisms to coordinate the activities of all subunits

Regional Convergence - what is it and what does it mean for businesses

Convergence of tastes, preferences, infrastructure, distribution channels, and host-government demands within a region broader than just a single nation. Example: EU Sometimes businesses will need to approach localization at the regional level, not the national level.

Economies of Scale - what is it and what are its sources?

Cost advantages associated with large-scale production. Sources: 1. The ability to spread fixed costs over a large volume 2. A firm may not be able to attain an efficient scale of production unless it serves global markets 3. As global sales increase the size of the enterprise, its bargaining power with suppliers increases as well, lowering costs of inputs and boosting profitability

Location Economies - what are they and what are the two possible effects/benefits?

Cost advantages from performing a value creation activity at the optimal location for that activity Benefits: 1. It can lower the costs of value creation and help the firm to achieve a low-cost production 2. (and/or) it can enable the firm to differentiate its product offering from those of competitors

Some argue that customer demands for local customization are on the...

Decline (modern communications and transport tech have led to convergence of tastes). This argument DOESN'T hold for many consumer goods markets.

Core Competence

Firm skills that competitors cannot easily match or imitate. The source of a firm's competitive advantage. They exist in any of the firm's value creation activities: production, marketing, R&D, human resources, logistics, general management, etc.

Purpose of Company Infrastructure (Support Activity) - what is it and what does it include?

Includes the: - Organizational Structure - Control Systems - Organizational Culture

Localization Strategy - what is it and when does it make most sense?

Increasing profitability by customizing the firm's goods and services so that they provide a good match to tastes and preferences in different national markets Makes most sense when: - low cost reduction pressures - high local responsiveness pressures

Over time as competitors emerge, which two strategies have become less viable? Which strategies do businesses turn to instead?

International Strategy and Localization Strategy. Businesses using international strategy turn to either transnational strategy or global standardization strategy. Businesses using localization strategy turn to transnational strategy.

To manage an alliance well, there needs to be:

Interpersonal relationships between the firms' managers, AKA relational capital

Purpose of Logistics (Support Activity)

It controls the transmission of physical materials through the value chain, from procurement through production and into distribution. The efficiency with which this is carried out can significantly reduce cost (lower C), thereby creating more value.

How to calculate the amount of value a firm creates?

Its costs of production minus the value that consumers perceive in its products

Universal Needs

Needs that are the same all over the world, such as steel, bulk chemicals, and industrial electronics

Value Creation

Performing activities that increase the value of goods or services to consumers. V (value of product to an average consumer) - C (cost of production per unit)

Pressures for Cost Reductions and Local Responsiveness (Diagram)

Raising local responsiveness can incur higher costs.

Efficiency Frontier

Shows all of the different positions that a firm can adopt with regard to adding value to the product (V) and low cost (C), assuming that its internal operations are configured efficiently to support a particular position.

The Experience Curve

Systematic production cost reductions that occur over the life of a product. - a product's production costs decline by some quantity about each time cumulative output doubles - Moving down the experience curve allows a firm to reduce its cost of creating value

Operations - what are they and what are the two categories?

The various value creation activities a firm undertakes. Two Categories: 1. Primary Activities 2. Support Activities

How do managers maximize the value of the firm?

They must pursue strategies that increase the profitability of the enterprise and its rate of profit growth over time

Preeminent goal of most firms' strategies

To maximize the value of the firm for its owners, its shareholders

Value Creation Formulas

V = value of product to an average consumer P = price per unit C = cost of production per unit V - P = consumer surplus per unit P - C = profit per unit sold V - C = value created per unit

Purpose of Information Systems (Support Activity)

When coupled with the communications features of the Internet, can alter the efficiency and effectiveness with which a firm manages its other value creation activities.

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 Standardization Strategy - what is it and when does it make most sense?

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. Try NOT to customize their product offering and marketing strategy to local conditions (for cost reasons). Makes most sense when: - high cost reduction pressures - low local responsiveness pressures

Profitability - What is it and how do you calculate it?

a ratio or rate of return concept. The rate of return that the firm makes on its invested capital (ROIC); calculated by dividing net profits of the firm by total invested capital.

Transnational Strategy - what is it and when does it make most sense?

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 Makes most sense when: - high cost reduction pressures - high local responsiveness pressures

Strategic Alliances

cooperative agreements between potential or actual competitors

Learning Effects

cost savings that come from learning by doing

A firm has high profits when it....

creates more value for its customers and does so at a lower cost

People

the employees of an organization, its recruiting, compensation, and retention strategies, and the type of people who work at the organization

Processes

the manner in which decisions are made and work is performed within any organization

Controls

the metrics used to measure the performance of subunits and make judgements about how well managers are running those subunits

Profit Growth

the percentage increase in net profits over time

Organization Architecture - What does it include?

the totality of a firm's organization, including: - formal organizational structure - control systems - incentives - organizational culture - processes - people

Organizational Culture

the values and norms shared among an organization's employees

International Strategy - what is it and when does it make most sense?

trying to create value by transferring core competencies to foreign markets where indigenous competitors lack those competencies (great for monopolies; tend to do R&D at home and manufacturing globally) Makes most sense when: - low cost reduction pressures - low local responsiveness pressures