Firm's Strategy
Actions that managers take to attain the goals of the firm
Profitability
Rate of return the firm makes on its invested capital
Profit Growth
Percentage increase in net profits over time
4 things firms can do to increase profitability and profit growth
1. Add Value
2. Lower Costs
3. Sell more in existing markets
4. Expand internationally
Enterprise Evaluation
Profitability (reduce costs, add value, raise prices)
+
Profit Growth (sell more in existing markets, enter new markets)
Value Creation
Difference between V (the price that the firm can charge for that product given competitive pressures) and C (the costs of producing that product)
True
T/F: A firm has high profits when it creates more value for its customers and does so at a lower cost
2 ways to increase profits
1. Using a differentiation strategy
2. Using a low cost strategy
Differentiation strategy
Adding value to a product so that customers are willing to pay more for it
Low cost strategy
Lowering costs
True
T/F: Michael Porter argues that firms need to choose either differentiation or low cost, and then configure internal operations to support the choice.
Firm's Operations
Like a value chain composed of a series of distinct value creation activities: Production, marketing, materials management, R&D, human resources, information systems, and the firm infrastructure
Value Creation Activities
(How a firm's operations are configured)
1. Primary activities
2. Support activities
Primary Activities
1. R&D
2. Production
3. Marketing and Sales
4. Customer Service
Support Activities
1. Information systems (R&D)
2. Logistics (Production/Marketing & Sales)
3. Human resources (Customer service)
Increasing a firm's profits through international expansion
International firms can:
1. Expand their market (sell in international markets)
2. Realize location economies
3. Realize greater cost economies from experience effects (serve an expanded global market from a central location)
4. Earn a greater return
True
T/F: Firms can increase growth by selling goods or services developed at home internationally
What dictate the success of a firm that expands internationally
1. The goods of services sold
2. Firm's core competencies
Core Competencies (allow firms to reduce the costs of value creation and/or to create perceived value so that premium pricing is possible)
Skills within the firm that competitors cannot easily match or imitate
Location economies
Economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be
True
T/F: Firms that take advantage of location economies in different parts of the world create a GLOBAL WEB of value creation activities.
Experience curve
Systematic reductions in production costs that occur over the life of a product
Learning effects
Cost savings that come from learning by doing
Labor productivity increases
1. Individuals learn the most efficient ways to
perform particular tasks
2. Managers learn how to manage the new operation more efficiently
Economies of Scale
Reductions in unit cost achieved by producing a large volume of a product
4 key things that managers should do
1. Recognize that valuable skills that could be applied elsewhere in the firm can arise anywhere within the firm's global network - not just at the corporate center
2. Establish an incentive system that encourages local employees to acquire new skills
3.
2 competitive pressures
1. Pressures for cost reductions (force the firm to lower unit costs)
2. Pressures to be locally responsive (require the firm to adapt its product to meet local demands in each market)
4 times when pressures for cost reductions are greatest
1. In industries producing commodity type products that fill universal needs where price is the main competitive weapon
2. When major competitors are based in low cost locations
3. Where there is persistent excess capacity
4. Where consumers are powerful
4 times when pressures for local responsiveness are greatest
1. Difference in consumer taste and preferences
2. Differences in traditional practices and infrastructure
3. Differences in distribution channels
4. Host government demands
4 Basic strategies to compete in international markets
1. Global standardization
2. Localization
3. Transnational
4. International
Global standardization
Increase profitability and profit growth by reaping the cost reductions from economies of scale, learning effects, and location economies
Localization
Increase profitability by customizing goods or services so that they match tastes and preferences in different national markets
Transnational
Tries to simultaneously achieve low costs through location economies, economies of scale, and learning effects
International
Take products first produced for the domestic market and sell them internationally with only minimal local customization. May not be viable in the long term.