RM 4217 Final Exam Terms

value creation

" is measured by the difference between V and C (V 2 C); a company creates value by converting inputs that cost C into a product on which consumers place a value of V. A company can create more value (V 2 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)"

The optimal choice of entry mode depends on

"...the firm's strategy. When technological know- how constitutes a firm's core competence, wholly owned subsidiaries are preferred, since they best control technology. When management know-how constitutes a firm's core competence, foreign franchises controlled by joint ventures seem to be optimal. When the firm is pursuing a global standardization or transnational strategy, the need for tight control over operations to realize location and experience curve economies suggests wholly owned subsidiaries are the best entry mode."

"Expanding globally allows firms to increase their profitability and rate of profit growth in ways not available to purely domestic enterprises.10 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."

wholly owned subsidiaries/ acquisitions

"A firm can establish a wholly owned subsidiary in a country by building a subsidiary from the ground up, the so-called greenfield strategy, or by acquiring an enterprise in the target market. Acquisitions have three major points in their favor. First, they are quick to execute. By acquiring an established enterprise, a firm can rapidly build its presence in the target foreign market. Second, in many cases firms make acquisitions to preempt their competitors. The need for preemption is particularly great in markets that are rapidly globalizing, such as telecommunications, where a combination of deregulation within nations and liberalization of regulations governing cross-border foreign direct investment has made it much easier for enterprises to enter foreign markets through acquisitions. Third, managers may believe acquisitions to be less risky than greenfield ventures. When a firm makes an acquisition, it buys a set of assets that are producing a known revenue and profit stream. In contrast, the revenue and profit stream that a greenfield venture might generate is uncertain because it does not yet exist. When a firm makes an acquisition in a foreign market, it not only acquires a set of tangible assets, such as factories, logistics systems, customer service systems, and so on, but it also acquires valuable intangible assets including a local brand name and managers' knowledge of the business environment in that nation. Such knowledge can reduce the risk of mistakes caused by ignorance of the national culture."

global standardization strategy

"Firms that pursue a global standardization strategy focus on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies; that is, their strategic goal is to pursue a low-cost strategy on a global scale. The production, marketing, and R&D activities of firms pursuing a global standardization strategy are concentrated in a few favorable locations. 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. Instead, they prefer to market a standardized product worldwide so that they can reap the maximum benefits from economies of scale and learning effects. They also tend to use their cost advantage to support aggressive pricing in world markets."

turnkey projects

"Firms that specialize in the design, construction, and start-up of turnkey plants are common in some industries. In a turnkey project, the contractor agrees to handle every detail of the project for a foreign client, 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. This is a means of exporting process technology to other countries. Turnkey projects are most common in the chemical, pharmaceutical, petroleum-refining, and metal-refining industries, all of which use complex, expensive production technologies."

wholly owned subsidiaries/ greenfield venture

"The big advantage of establishing a greenfield venture in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants. This is a very important advantage for many international businesses, where transferring products, competencies, skills, and know-how from the established operations of the firm to the new subsidiary are principal ways of creating value. Greenfield ventures are slower to establish. They are also risky. As with any new venture, a degree of uncertainty is associated with future revenue and profit prospects. However, if the firm has already been successful in other foreign markets and understands what it takes to do business in other countries, these risks may not be that great."

ISO 9000

"The growth of international standards has also focused greater attention on the importance of product quality. In Europe, for example, the European Union requires that the quality of a firm's manufacturing processes and products be certified under a quality standard known as ISO 9000 before the firm is allowed access to the EU marketplace. Although the ISO 9000 certification process has proved to be somewhat bureaucratic and costly for many firms, it does focus management attention on the need to improve the quality of products and processes"

minimum efficient scale

"The level of output at which most plant-level scale economies are exhausted"

total quality management (TQM)

"The principal tool that most managers now use to increase the reliability of their product offering is the Six Sigma quality improvement methodology. The Six Sigma methodology is a direct descendant of the total quality management (TQM) philoso- phy that was widely adopted, first by Japanese companies and then American companies during the 1980s and early 1990s.4 The TQM philosophy was developed by a number of American consultants such as W. Edwards Deming, Joseph Juran, and A. V. Feigenbaum.5 Deming identified a number of steps that should be part of any TQM program. He ar- gued that management should embrace the philosophy that mistakes, defects, and poor- quality materials are not acceptable and should be eliminated. He suggested that the quality of supervision should be improved by allowing more time for supervisors to work with employees and by providing them with the tools they need to do the job"

strategy

"actions that managers take to attain the goals of the firm"

Turnkey projects.

"allow firms to export their process know-how to countries where FDI might be prohibited, thereby enabling the firm to earn a greater return from this asset. The dis- advantage is that the firm may inadvertently create efficient global competitors in the process."

flexible machine cells

"are another common flexible manufacturing technology. A flexible machine cell is a grouping of various types of machinery, a common materials handler, and a centralized cell controller (computer)"

Pressures for local responsiveness

"arise from national differences in consumer tastes and preferences, infrastructure, accepted business practices, and distribution channels, and from host-government demands. Responding to pressures to be locally responsive requires a firm to differentiate its products and marketing strategy from country to country to accommodate these factors, all of which tends to raise the firm's cost structure"

The disadvantages associated with alliances can

"be reduced if the firm selects partners carefully, paying close attention to the firm's reputation and the structure of the alliance so as to avoid unintended transfers of know-how."

Two keys to making alliances work seem to be

"building trust and informal communications networks between partners and taking proactive steps to learn from alliance partners."

profitability

"can be measured in a number of ways, but for consistency, we shall define it as the rate of return that the firm makes on its invested capital (ROIC), which is calculated by dividing the net profits of the firm by total invested capital"

Strategic alliances are

"cooperative agreements between actual or potential competitors. The advantage of alliances are that they facilitate entry into foreign markets, enable partners to share the fixed costs and risks associated with new products and processes, facilitate the trans- fer of complementary skills between companies, and help firms establish technical standards."

flexible manufacturing technology or lean production

"covers a range of manufacturing technologies designed to (1) reduce setup times for complex equipment, (2) increase the utilization of indi- vidual machines through better scheduling, and (3) improve quality control at all stages of the manufacturing process.14 Flexible manufacturing technologies allow the company to produce a wider variety of end products at a unit cost that at one time could be achieved only through the mass production of a standardized output"

joint venture

"entails establishing a firm that is jointly owned by two or more other- wise independent firms."

There are six modes of entering a foreign market:

"exporting, creating turnkey projects, licens- ing, franchising, establishing joint ventures, and setting up a wholly owned subsidiary."

localization strategy

"focuses on increasing profitability by customizing the firm's goods or services so that they provide a good match to tastes and preferences in different national markets. Localization is most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too intense. By customizing the product offering to local demands, the firm increases the value of that product in the local market. "

When establishing a wholly owned subsidiary in a country, a firm must decide whether to do so by

"greenfield venture or by acquiring an established enterprise in the target market."

mass customization

"has been coined to describe the ability of companies to use flexible manufacturing technology to reconcile two goals that were once thought to be incompatible—low cost and product customization.15 Flexible manufacturing technologies vary in their sophistication and complexity."

Exporting.

"has the advantages of facilitating the realization of experience curve economies and of avoiding the costs of setting up manufacturing operations in another country. Disadvantages include high transport costs, trade barriers, and problems with local marketing agents."

exporting

"has two distinct advantages. First, it avoids the often substantial costs of establishing manufacturing operations in the host country. Second, exporting may help a firm achieve experience curve and location economies (see Chapter 13). By manufacturing the product in a centralized location and exporting it to other national markets, the firm may realize substantial scale economies from its global sales volume. Exporting has a number of drawbacks. First, exporting from the firm's home base may not be appropriate if lower-cost locations for manufacturing the product can be found abroad (i.e., if the firm can realize location economies by moving production elsewhere). A second drawback to exporting is that high transport costs can make exporting uneconomical, particularly for bulk products. One way of getting around this is to manufacture bulk products regionally. This strategy enables the firm to realize some economies from large-scale production and at the same time to limit its transport costs. For example, many multinational chemical firms manufacture their products regionally, serving several countries from one facility. Another drawback is that tariff barriers can make exporting uneconomical. Similarly, the threat of tariff barriers by the host-country government can make it very risky. A fourth drawback to exporting arises when a firm delegates its marketing, sales, and service in each country where it does business to another company. "

primary activities

"have to do with the design, creation, and delivery of the product; its marketing; and its support and after-sale service."

specialized asset

"is an asset whose value is contingent upon a particular relationship persisting."

"Research and development (R&D)"

"is concerned with the design of products and production processes. Although we think of R&D as being associated with the design of physical products and production processes in manufacturing enterprises, many service companies also undertake R&D. R&D can increase the functionality of products, which makes them more attractive to consumers (raising V). Alternatively, R&D may result in more efficient production processes, thereby cutting production costs (lowering C). Either way, the R&D function can create value."

profit growth

"is measured by the percentage increase in net profits over time. In general, higher profitability and a higher rate of profit growth will increase the value of an enterprise and thus the returns garnered by its owners, the shareholders"

dynamic capabilities

"is used to describe skills that become more valuable over time through learning. Also, the experience learned producing one kind of product might create a capability that is then useful for producing another kind of product."

Acquisitions are

"quick to execute, may enable a firm to preempt its global competitors, and involve buying a known revenue and profit stream. Acquisitions may fail when the acquiring firm overpays for the target, when the cultures of the acquiring and acquired firms clash, when there is a high level of management attrition after the acquisition, and when there is a failure to integrate the operations of the acquiring and acquired firm."

Strategic alliances

"refer to cooperative agreements between potential or actual competitors."

learning effects

"refer to cost savings that come from learning by doing. Labor, for example, learns by repetition how to carry out a task, such as assembling airframes, most efficiently."

economies of scale

"refer to the reductions in unit cost achieved by producing a large volume of a product. Attaining economies of scale lowers a firm's unit costs and increases its profitability. Economies of scale have a number of sources. One is the ability to spread fixed costs over a large volume.20 Fixed costs are the costs required to set up a production facility, develop a new product, and the like. They can be substantial. Second, a firm may not be able to attain an efficient scale of production unless it serves global markets. Finally, as global sales increase the size of the enterprise, so its bargaining power with suppliers increases, which may allow it to attain economies of scale in purchasing, bargaining down the cost of key inputs and boosting profitability that way."

core competence

"refers to skills within the firm that competitors cannot easily match or imitate"

experience curve

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

Joint ventures have the advantages of

"sharing the costs and risks of opening a foreign market and of gaining local knowledge and political influence. Disadvantages include the risk of losing control over technology and a lack of tight control."

just in time systems (JIT)

"systems is to economize on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process and not before. The major cost saving comes from speeding up inventory turnover. This reduces inventory holding costs, such as warehousing and storage costs. It means the company can reduce the amount of work- ing capital it needs to finance inventory, freeing capital for other uses and/or lowering the total capital requirements of the enterprise"

international strategy

"taking products first produced for their domestic market and selling them internationally with only minimal local customization. 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, and thus unlike firms pursuing a global standardization strategy, they are not confronted with pressures to reduce their cost structure"

The advantage of a greenfield venture in a foreign country is

"that it gives the firm a much greater ability to build the kind of subsidiary company that it wants. For example, it is much easier to build an organization culture from scratch than it is to change the culture of an acquired unit."

The disadvantage of a strategic alliance is

"that the firm risks giving away technological know- how and market access to its alliance partner."

The main advantage of franchising is

"that the franchisee bears the costs and risks of opening a foreign market. Disadvantages center on problems of quality control of distant franchisees."

The main advantage of licensing is

"that the licensee bears the costs and risks of opening a foreign market. Disadvantages include the risk of losing technological know-how to the licensee and a lack of tight control over licensees."

operations

"the different value creation activities a firm undertakes, which we shall review next."

wholly owned subsidiary

"the firm owns 100 percent of the stock. Establishing a wholly owned subsidiary in a foreign market can be done two ways. The firm either can 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."

The advantages of wholly owned subsidiaries include

"tight control over technological know- how. The main disadvantage is that the firm must bear all the costs and risks of opening a foreign market."

transnational strategy

"try to simultaneously achieve low costs through location economies, economies of scale, and learning effects; differentiate their product offering across geographic markets to account for local differences; and foster a multidirectional flow of skills between different subsidiaries in the firm's global network of operations. As attractive as this may sound in theory, the strategy is not an easy one to pursue since it places conflicting demands on the company. Differentiating the product to respond to local demands in different geographic market raises costs, which runs counter to the goal of reducing costs. Companies such as Ford and ABB (one of the world's largest engineering conglomerates) have tried to embrace a transnational strategy and found it difficult to implement."

T or F? The costs and risks associated with doing business in a foreign country are typically high in an economically advanced and politically stable democratic nation.

(False) Answer: The costs and risks associated with doing business in a foreign country are typically lower in economically advanced and politically stable democratic nations, and they are greater in less developed and politically unstable nations.

T or F? Educating customers is a part of pioneering costs.

(True) Pioneering costs include the costs of promoting and establishing a product offering, including the costs of educating customers.

T or F? First-mover advantages are the advantages associated with entering a market early

(True) The advantages frequently associated with entering a market early are commonly known as first-mover advantages.

Trademarks

Brand names arent generally well-protected by international laws pertaining to trademarks

Pioneering costs

Costs that an early entrant has to bear that a later entrant can avoid

T or F? Exporting is most appropriate when lower-cost locations for manufacturing the product can be found abroad

False

T or F? A firm benefits from a local partner's knowledge of the host country's competitive conditions, culture, language, political systems, and business systems.

True

T or F? Competing in a global market may require a firm to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another. By its very nature, licensing limits a firm's ability to do this.

True

T or F? Exporting has two distinct advantages. First, it avoids the often substantial costs of establishing manufacturing operations in the host country. Second, exporting may help a firm achieve experience curve and location economies.

True

T or F? Firms pursuing global standardization or transnational strategies tend to prefer establishing wholly owned subsidiaries.

True

T or F? If the firm is seeking to enter a market where there are already well-established incumbent enterprises, and where global competitors are also interested in establishing a presence, it may pay the firm to enter via an acquisition.

True

T or F? Small-scale entry allows a firm to learn about a foreign market while limiting the firm's exposure to that market

True

T or F? The attractiveness of a country as a potential market for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country

True

T or F? The choice of which markets to enter should be driven by an assessment of relative long-run growth and profit potential.

True

T or F? The franchiser often assists the franchisee to run the business on an ongoing basis. As with licensing, the franchiser typically receives a royalty payment, which amounts to some percentage of the franchisee's revenues. McDonald's is a good example of a firm that has grown by using a franchising strategy.

True

T or F? The value an international business creates in a foreign market depends on the suitability of its product offering to that market and the nature of indigenous competition

True

T or F? Using a franchising strategy, a service firm can build a global presence quickly and at a relatively low cost and risk

True

"The best strategy for a firm to pursue often depends on

a consideration of the pressures for cost reductions and for local responsiveness."

"Many industries are now so competitive that firms must adopt a transnational strategy. This involves

a simultaneous focus on reducing costs, transferring skills and products, and boosting local responsiveness. Implementing such a strategy may not be easy."

small scale entry

allows a firm to learn about a foreign market while limiting the firm's exposure to that market. Small-scale entry is a way to gather information about a foreign market before deciding whether to enter on a significant scale and how best to enter. By giving the firm time to collect information, small-scale entry reduces the risks associated with a subsequent large-scale entry. But the lack of commitment associated with small-scale entry may make it more difficult for the small-scale entrant to build market share and to capture first-mover or early-mover ad- vantages. The risk-averse firm that enters a foreign market on a small scale may limit its potential losses, but it may also miss the chance to capture first-mover advantages."

"Large-scale entry into a national market constitutes a major strategic commitment that is likely to"

change the nature of competition in that market and limit the entrant's future strategic flexibility. Although making major strategic commitments can yield many benefits, there are also risks associated with such a strategy.

Location strategies either

concentrate or decentralize manufacturing. The choice should be made in light of country, technological, and product factors. All location decisions involve trade-offs.

"The choice of an optimal production location must consider

country factors, technological factors, and product factors.

"Firms pursuing a localization strategy

customize their product offering, marketing strategy, and business strategy to national conditions."

An essential issue in many international businesses is

determining which component parts should be manufactured in-house and which should be outsourced to independent suppliers.

"International expansion may enable a firm to

earn greater returns by transferring the product offerings derived from its core competencies to markets where indigenous competitors lack those product offerings and competencies."

Several firms have tried to attain the benefits of vertical integration and avoid its associated organizational problems by

entering long-term strategic alliances with essential suppliers.

"It may pay a firm to base each value creation activity it performs at that location where

factor conditions are most conducive to the performance of that activity. We refer to this strategy as focusing on the attainment of location economies."

"Firms pursuing a global standardization strategy

focus on reaping the cost reductions that come from experience curve effects and location economies."

A wholly owned subsidiary

gives a firm tight control over operations in different countries.

A strategic commitment

has a long-term impact and is difficult to reverse.

"A multinational firm can create additional value by

identifying valuable skills created within its foreign subsidiaries and leveraging those skills within its global network of operations."

Foreign factories can

improve their capabilities over time, and this can be of immense strategic benefit to the firm. Managers need to view foreign factories as potential centers of excel- lence and to encourage and foster attempts by local managers to upgrade factory capabilities.

Intangible property

includes patents, inventions, formulas, processes, designs, copyrights, and trademarks.

"By rapidly building sales volume for a standardized product,

international expansion can assist a firm in moving down the experience curve by realizing learning effects and economies of scale."

Making components in-house facilitates

investments in specialized assets and helps the firm protect its proprietary technology. It may improve scheduling between adjacent stages in the value chain also. In-house production also makes sense if the firm is an efficient, low-cost producer of a technology.

The most typical joint venture

is a 50/50 venture, in which there are two parties, each of which holds a 50 percent ownership stake and contributes a team of managers to share operating control.

licensing agreements

is an arrangement whereby a licensor grants the rights to in- tangible property to another entity (the licensee) for a specified period, and in return, the licensor receives a royalty fee from the licensee.15 Intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademarks."

Establishing a wholly owned subsidiary

is generally the most costly method of serving a foreign market from a capital investment standpoint. Firms doing this must bear the full capital costs and risks of setting up overseas operations.

The large-scale entrant

is more likely than the small-scale entrant to be able to capture first-mover advantages associated with demand preemption, scale economies, and switching costs

franchising

is similar to licensing, although franchising tends to involve longer-term commitments than licensing. Franchising is basically a specialized form of licensing in which the franchiser not only sells intangible property (normally a trademark) to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business. The franchiser will also often assist the franchisee to run the business on an ongoing basis."

Licensing

limits the firm's ability to realize experience curve and location economies by producing its product in a centralized location.

production and logistics

performed internationally to (1) lower the costs of value creation and (2) add value by better serving customer needs. We will discuss the contributions of information technology to these activities, which has become particularly important in the era of the Internet."

Buying components from independent suppliers facilitates

strategic flexibility and helps the firm avoid the organizational problems associated with extensive vertical integration. Outsourcing might also be employed as part of an "offset" policy, which is designed to win more orders for the firm from a country by pushing some sub- contracting work to that country.

Strategic commitments

such as rapid large-scale market entry, can have an important influence on the nature of competition. Large strategic commitments limit strategic flexibility

"A strategy can be defined as

the actions that managers take to attain the goals of the firm. For most firms, the preeminent goal is to maximize shareholder value. Maximizing shareholder value requires firms to focus on increasing their profitability and the growth rate of profits over time.

Technological factors include

the fixed costs of setting up production facilities, the minimum efficient scale of production, and the availability of flexible manufacturing technologies that allow for mass customization.

Country factors include

the influence of factor costs, political economy, and national culture on production costs, along with the presence of location externalities.

Six Sigma

the modern successor to TQM, is a statistically based philosophy that aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company. Six Sigma programs have been adopted by several major corporations, such as Motorola, General Electric, and Allied Signal. Sigma comes from the Greek letter that statisticians use to represent a standard deviation from a mean; the higher the number of "sigmas," the smaller the number of errors. At six sigma, a production process would be 99.99966 percent accurate, creating just 3.4 defects per million units. While it is almost impossible for a company to achieve such perfection, Six Sigma quality is a goal that several strive toward. Increasingly, companies are adopting Six Sigma programs to try to boost their product quality and productivity"

Product factors include

the value-to-weight ratio of the product and whether the product serves universal needs.

"Firms pursuing an international strategy

transfer the products derived from core competencies to foreign markets, while undertaking some limited local customization."

"Although alliances with suppliers can give a firm the benefits of

vertical integration without dispensing entirely with the benefits of a market relationship, alliances have drawbacks. The firm that enters a strategic alliance may find its strategic flexibility limited by commitments to alliance partners."