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The á
 that managers take to á

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 á
 of the firm. The main goal of every firm is to gain
 
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TR = P x Q (price times quantity)
TC = C x Q (Cost per unit times total units produced)

A common goal of the firms is to á.


Two basic conditions determine firm¶s profits:

Dp The amount of value customers placeon the firm¶s goods or services [á
 ].
Dp The firm¶s !
 
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p p
p
p $p p
pp
p p
 pp $p
p pp
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To gain profit companies must try to increase the value added (V-C). There are two ways to increase
this,

Dp uy lowering the production cost which is called low cost strategy

Dp uy making the product more attractive through superior design, functionality, features, quality
etc. which is called differentiation strategy. uy following this strategy consumers will perceive
more value and will be ready to pay premium price. Though the cost for such strategy may be
high, additional cost will not affect the profit as it will be surmounted by high price.

The firm as a value chain:

The operations of a firm can be thought as a value chain composed of a series of distinct value creation
activities which are divided into two types

Primary activities

This is broken into four functions: research and development, production, marketing and sales and
service.

R&D: Through superior product design, R&D can increase the functionality of products which makes
them more attractive to the consumers raising V. Alternatively, R&D may result in more efficient
production processes, thereby cutting production cost and lowering C.

Production: The production of the firm created added value by performing the production task more
efficiently and thus lowering cost. Alternatively, by performing those in a way that a more reliable and
higher quality product is produced which results in increased V.

Marketing and sales: Through brand positioning and advertising marketing function increase V and
enable companies to charge higher price. Marketing research enable companies to identify consumers¶
needs and thus offer more value.

After sales service: this can also create superior value and enable companies to charge premium price.

Support activities:

The support activities of the value chain provide inputs that allow the primary activities to occur.

Material management from procurement, production to distribution should be done efficiently to

reduce cost.

Human resource: skilled personnel increase efficiency and reduce cost.

Information system: This help companies to manage and coordinate other value creation activities
efficiently.
Strategy in international business:

International business has become extremely competitive due to the liberalization of the world trade
and investment environment.

To be competitive companies must decide their strategic choice from the following two basic strategies:

1.p Cost leadership and

2.p Differentiation strategy.

E.g. Clear Vision example (pg 415)

Profiting from global expansion:

A firm¶s profitability depends on its ability to integrate the following factors in their global expansion
strategy:
1. Location economies:

Location economy arises from performing a value creation activity in the optimal location for that
activity, wherever that is possible.

It can lower the cost 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.

Different locations have competitive advantage in production of different products. Countries with
cheap labor have competitive advantage in production of labor intensive products like textile materials.
Again, countries with high tech skilled workers have competitive advantage for the production of
automobiles, electronics etc. This is what optimum location is called.

E.g. Clear vision.

uy conducting different activities of the value chain in different optimum locations companies can
create a global web.
E.g. GM conducts
- Designing in Germany as it is optimum location for engineering.
- Production of components in Japan, Taiwan and Singapore as these have relatively low cost but high
skilled labor which are needed for production of components.
- Assembly in south Korea as they have low cost low skilled labor and for assembly task high skilled
labor is not required.
- Advertising in uritain as uritish have reputation for advertising tasks.

Some caveats:

Dp Production in optimum locations is only possible if transportation cost and trade barrier
permits. It is not possible to produce in New Zealand and then ship to USA as the transportation
cost will be too high.
Dp E.g. Mexico and NAFTA (pg 418)
Dp Another important factors is to consider the political and economic risks even if the country is
the optimum location for production of the product.

2.p Experience effects:

The experience curve refers to systematic reduction in production cost that have been observed to
occur over the life of a product.

Unit cost of production reduces as the output accumulates. This happens due to two reasons,

Dp Learning effect: this refers to the cost saving that come from learning by doing. Learning
happens in two stages; floor level and managerial level.
At floor level, labor productivity increases over time as individuals learn the most efficient ways to
perform particular tasks.

At managerial level, managers learn how to manage the new operation more efficiently over time.

It has been suggested that reduction in unit cost due to learning effect occurs during the first two to
three years after the start of new operation and after that the effect cease. Any reduction in production
cost after that happens due to economies of scale.
 Dp Economies of scale: This refers to the reductions in unit cost achieved by producing a large
volume of product. E.g. in pharmaceutical industry, cost of R&D reduces if a large volume of
medicine is produced and sold.

Economies-of-scale also arises from the ability of large forms to employ increasingly specialised
equipment or personnel. uut for that large volume needs to be produced to overcome the cost of making
a specialised/ customized machine.

Strategic significance: Serving the global market from a single location enable companies to produce in
large volumes which help to achieve learning effect and economies of scale and consequently, move
down the experience curve and lower cost.

3.p Leveraging core competencies:

Core competence refers to skills within the firm that competitors cannot easily match or imitate.
Different companies have core competency at different levels of the value chain activities ± production,
marketing, R&D, human resources, general management etc.

Global expansion is way to utilize these skills and competency in international markets where
indigenous competitors lack such skills. E.g. Coca-cola, P&G have competency in branding and
advertisement which their competitors in most market lack. So they leverage these skills in
international markets and gain profit.

4.p Leveraging subsidiary skills:

Skills can be created anywhere within a MNCs global network of operations. Leveraging the skills
created within subsidiaries and applying them to other operations within the firm¶s global network may
create value.

E.g. See McDonalds example (pg 422)

To create skill at subsidiary level three things need to be ensured

 Dp First, company must have the humility to recognize that skills may arise anywhere in the global
network
Dp Second, there must be incentive system that encourages employees and subsidiaries to take risk
and discover new ideas.
Dp Third, there must be mechanisms to identify that skills are created and also there should be
ways to transfer that skill to other subsidiaries and head office as well.

Pressure for cost reduction and local responsiveness:

The extant of these two pressures determine whether companies will be able to attain these four factors
discussed above and based on that companies adopt their strategic choices in international markets.

Pressure for cost reduction:

Responding to pressures for cost reduction requires a firm to try to lower the costs of value creation by
mass producing a standardized product at optimal location in the world. For this companies need to
achieve location economies and experience curve economies.

Pressure for cost reduction is high when

Dp Product is commodity type and meaningful differentiation is not possible.

Dp âhen major competitors are based in low cost locations
Dp âhere consumers are powerful and face low switching cost

E.g. Tire industry (pg 424)

Pressures for local responsiveness:

1.p Differences in consumer tastes and preferences

Dp There are historic and cultural reasons for these differences.

E.g. McDonalds use mutton patties instead of beef patties in India.

 Levitt argued that modern communication and transportation technologies have created the
conditions for convergence of tastes and preferences of consumers of different nations.

2.p Differences in infrastructure and traditional practices

Dp Due to differences in infrastructure and traditions products may need to be customized to the
distinctive infrastructure and practices of different nations. For example, in USA consumer
electronics systems are based on 110 volts, while in some European countries 24- volt systems
are standard.

3.p Differences in distribution channels

Differences in distribution channel may necessitate the delegation of marketing functions to

national subsidiaries.

E.g. uritish, Japanese and US medicine distribution system.

4.p Host government demands

Economic and political demands imposed by host-country government may necessitate a degree of
local responsiveness.

Implication: Due to this responsiveness it is not always possible to produce standardized products
and gain the full benefit of experience curve and location economies.

Strategic choices:

International Strategy:

'p Create value by transferring valuable core competencies to foreign markets that indigenous
competitors lack
 'p Centralize product development functions at home
'p Establish manufacturing and marketing functions in local country but head office exercises tight
control over it
'p E.g. McDonalds, Microsoft (See pg 428)
'p Limit customization of product offering and market strategy
0p Strategy effective if firm faces weak pressures for local responsive and cost reductions

Multidomestic Strategy:

'p Main aim is maximum local responsiveness

'p Customize product offering, market strategy including production, and R&D according to
national conditions
'p Generally unable to realize value from experience curve effects and location economies
'p Possess high cost structure
'p E.g. Philips

Global Strategy:

'p Focus is on achieving a low cost strategy by reaping cost reductions that come from experience
curve effects and location economies
'p Production, marketing, and R&D concentrated in few favorable functions
'p Market standardized product to keep cost¶s low
'p Effective where strong pressures for cost reductions and low demand for local responsiveness
0p Semiconductor industry (Intel)

Transnational Strategy:

'p To meet competition firms aim to reduce costs, transfer core competencies while paying
attention to pressures for local responsiveness
'p Global learning
0p Valuable skills can develop in any of the firm¶s world wide operations
0p Transfer of knowledge from foreign subsidiary to home country, to other foreign
subsidiaries
'p Transnational strategy difficult task due to contradictory demands placed on the organization
0p Example : Caterpillar