Strategy
actions that managers take to attain the goals of the firm
Common main goal of a firm
to maximize the value of the firm for its shareholders
How to maximize the value
pursuing strategies that increase profitability and profit growth
Profitability
rate of return the firm makes on its invested capital (ROIC). It is calculated by dividing the net profits by total invested capital.
Profit growth
the percentage increase in net profits over time.
How to increase profitability
pursuing strategies that lower cost or strategies that add value and raise prices.
How to increase profit growth
pursuing strategies to sell more products in existing markets or by strategies to enter new markets.
Value creation is measured by
V-C
V
the price that the firm can charge for that product given competitive pressures
C
the costs of producing that product
How to create more value...
Low-cost strategy
Differentiation strategy
Low-cost strategy
Lowering production costs
Differentiation strategy
Making the product more attractive through superior design, styling, features, after-sales service and the like
A firm has high profits when...
it creates more value for its customers and does so at a lower cost.
Low-cost strategy
Differentiation strategy
Michael porter has argued that these are the two basic strategies for creating value and attaining a competitive advantage in an industry.
Porter about a stractegic position...
Porter also affirms that a company has to be explicit about the strategy that it is going to use (differentiation or low cost) and to configure its operations to support such strategy.
Efficiency frontier
shows all the different positions a firm can adopt regarding differentiation and low cost, assuming that their internal operations are configured to support the chosen strategy.
The convex shape evidences ...
the diminishing returns: when a firm has built value, increasing value by a small amount requires significant increase in costs.
As a conclusion, if a firm wants to maximize its profitability, it has to...
1. Pick a position in the efficiency frontier that has enough demand to make it viable.
2. Configure their internal operations to support that position.
3. Make sure that the firm has the right organization structure to execute its strategy.
Operation
The different value creation activities a firm undertakes.
Value chain is composed by
Primary activities
Support activities
Primary activities
R&D, production, marketing and sales and customer service
Support activities
Information systems, Company infrastructure logistics and human resource
Firms that operate internationally are able to
Expand the market for their domestic product offerings by selling those products in international market.
Realize location economies by dispersing individual value creation activities to locations where those activities can be performed more efficiently a
A company can increase its growth rate by
taking goods or services developed at home and selling them internationally. The returns of this strategy are likely to be greater if competitors in the nations where a company enters lack comparable products.
Core competence
It refers to skills within the firm that competitors cannot easily match or imitate. These skills may exist in any of the firm`s valuation creation activities. It is the source of a firm's competitive advantage.
Location economies
the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be. (Trade barriers and transportation costs permitting).
For example: if the best designers for a product live
In theory, a firm that realizes location economies
should have a competitive advantage over a firm that bases all of its value creation activities at a single location.
Experience effects
systematic reductions in production costs that have been observed to occur over the life of a product.
Two things that explain the experience curve
Learning effects
Economies of scale
Learning effects
It refers to cost savings that come from learning by doing. Labor for example.
Economies of scale
It refers to the reductions in unit cost achieved by producing a large volume of product.
Economies of scale in purchasing
As global sales increase the size of the enterprise, so its bargaining power with suppliers increases
Strategic significance
Moving down the experience curve allows a firm to reduce its cost of creating value and increase its profitability.
Keys to progressing downward on the experience curve
To increase the volume produced by a single plant as rapidly as possible.
Serving a global market from a single location.
To price and market aggressively so demand will expand rapidly.
Leveraging subsidiary skills
Skills can be created anywhere within a multinational global network of operations, wherever people have the opportunity and incentive to try new ways of doing things. So, leveraging those skills created within subsidiaries and applying them to other oper
Types of presures faced by a firm in the global market
Pressures to reduce costs.
Pressures to be locally responsive.
Pressures to reduce costs
requires a firm to try to lower the costs of value creation.
Pressures to be locally responsive
They arise from national differences in consumer tastes and preferences, infrastructure, accepted business practices, and distribution channels, and from host-government demands. Responding to this pressure requires a company to differentiate its products
Consequences of the pressure to be locally responsive
it may not be possible for a firm to realize the full benefits from economies of scale, learning effects, and location economies. It may not be possible to serve the global marketplace from a single low-cost location, producing a globally standardized pro
Four strategies in international markets
International strategy
Global standardization strategy
Localization strategy
Transnational strategy
International strategy
This strategy is used when a company has low cost pressures, low local responsiveness. Companies using this strategy take products produced for their domestic markets and sell them internationally with minimal customization; this is possible if the compan
Pitfalls of the international strategy
because competitors eventually emerge, this strategy is no viable in the long term, so companies have to shift toward a global standardization strategy or a transnational strategy.
Global standardization strategy
The organization treats the world as largely one market and one source of supply with little local variation.
In that strategy companies prefer to market standardized products so they can get benefits from economies of scale, learning effects, and locatio
Localization strategy
Low pressures for cost reductions, high-pressures for local responsiveness. This 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 mar
Pitfalls of localization strategy
, it limits the opportunity to catch the benefits in costs from economies of scale, but if they have the chance to have higher pricing, this strategy could be very reliable.
Also, if a firm is facing aggressive competitors, the company might have to shift
Transnational strategy
Ideal when there are high pressures for cost reductions and high pressures for local responsiveness. Companies that pursue this strategy try to simultaneously achieve low cost through location economies, economies of scale and learning affects; differenti