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International business 7e chapter 12

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  • Managers can increase the profitability of the firm by pursuing strategies that lower costs or by pursuing strategies that add value to the firm’s products, which enables the firm to raise prices. Managers can increase the rate at which the firm’s profits grow over time by pursuing strategies to sell more products in existing markets or by pursuing strategies to enter new markets. As we shall see, expanding internationally can help managers boost the firm’s profitability and increase the rate of profit growth over time.
  • The value of a product to an average consumer is V; the average price that the firm can charge a consumer for that product given competitive pressures and its ability to segment the market is P; and the average unit cost of producing that product is C (C comprises all relevant costs, including the firm’s cost of capital). The firm’s profit per unit sold () is equal to P C, while the consumer surplus per unit is equal to V P (another way of thinking of the consumer surplus is as “value for the money”; the greater the consumer surplus, the greater the value for the money the consumer gets). The firm makes a profit so long as P is greater than C, and its profit will be greater the lower C is relative to P. The difference between V and P is in part determined by the intensity of competitive pressure in the marketplace; the lower the intensity of competitive pressure, the higher the price charged relative to V.4 In general, the higher the firm’s profit per unit sold is, the greater its profitability will be, all else being equal.
  • The answer is b.
  • The strategy, operations, and organization of the firm must all be consistent with each other if it is to attain a competitive advantage and garner superior profitability. Operations refers to the different value creation activities a firm undertakes.
  • The convex curve in Figure 12.3 is what economists refer to as an efficiency frontier. The 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 (note that the horizontal axis in Figure 12.3 is reverse scaled—moving along the axis to the right implies lower costs). The efficiency frontier has a convex shape because of diminishing returns. Diminishing returns imply that when a firm already has significant value built into its product offering, increasing value by a relatively small amount requires significant additional costs. The converse also holds, when a firm already has a low-cost structure, it has to give up a lot of value in its product offering to get additional cost reductions.
  • The answer is a.
  • The operations of a firm can be thought of as a value chain composed of a series of distinct value creation activities including production, marketing and sales, materials management, R&D, human resources, information systems, and the firm infrastructure. We can categorize these value creation activities, or operations, as primary activities and support activities (see Figure 12.4). If a firm is to implement its strategy efficiently, and position itself on the efficiency frontier shown in Figure 12.3, it must manage these activities effectively and in a manner that is consistent with its strategy.
  • The answer is d.
  • The answer is a.
  • Management Focus: Vodafone in Japan Summary This feature explores the strategic decisions of Vodafone, the world’s largest provider of wireless telephone service, in Japan. Vodafone acquired J-Phone, the number three player in Japan’s wireless market, in 2002. However, after a series of questionable decisions, Vodafone sold J-Phone at a loss in 2006. Discussion of the feature can revolve around the following questions: 1. Why type of strategy was Vodafone trying to pursue when it acquired J-Phone? How did it hope this strategy would boost profitability and profit growth? Answer: Vodafone’s vision was to build a global brand using a phone that would work anywhere in the world. To achieve that vision, the company offered consumers a standardized product with the same technology regardless of where they were located. In theory, by offering the same basic product everywhere, Vodafone would not only capitalize on a brand name, it would also capitalize on a streamlined production process. Most students twill recognize this as a global standardization strategy. 2. Why did the strategy fail in Japan? What should Vodafone have done differently? Answer: Vodafone failed to recognize that consumers in different locations values different features. In Japan, the company was selling primarily to younger people who did not travel much, and did not value the global portability of the company’s phones. Instead, Japanese consumers were more interested in other features like games and cameras. In retrospect, Vodafone probably should have paid more attention to local preferences. The company delayed introduction of phones using 3G technology that would allow users to watch video clips and teleconference because it wanted to launch the technology only when it had a phone that would work inside and outside Japan.
  • Management Focus: The Evolution of Strategy at Procter & Gamble Summary This feature explores the evolution of Procter & Gamble’s global strategy. In 1915, Procter & Gamble opened its first foreign operation in Canada. In the 1950s and 1960s, Procter & Gamble expanded into Western Europe, and then, in the 1970s, into Japan and other parts of Asia. Throughout this expansion, the company maintained all product development at its Cincinnati, Ohio headquarters, while each subsidiary took on the responsibility for manufacturing, marketing, and distributing the products. Procter & Gamble shifted its strategy in the 1990s, closing several foreign locations and moving to a more regional approach to global markets. More recently, the company implemented a business unit approach whereby different units are entirely responsible for generating profits for a product group. Discussion of this feature can begin with the following questions. Suggested Discussion Questions 1. Discuss the evolution of Procter & Gamble’s strategy. Do you think Procter & Gamble was reactive or proactive in its approach to strategy in the late 1990s and early 2000s? Discussion Points: Many students will probably suggest that Procter & Gamble took a reactive approach to its strategy in the early 1990s, but was more proactive in the late 1990s and early 2000s. The company’s initial reorganization was a reaction to a changing marketplace and sluggish profits, however, when it became apparent that the reorganization attempt was not really fixing the problems that existed, the company embarked on a new strategy. This time, rather than simply trying to adjust its existing strategy as the company had done in 1993, Procter & Gamble completely dismantled the structure that had been in place for a quarter of a century and reorganized as a company ready to operate in a global marketplace. 2. How would you characterize Procter & Gamble’s current strategy? What challenges do you foresee with the new strategy? Discussion Points: Students will probably suggest that Procter & Gamble is trying to take a transnational approach to markets. The company has reorganized into business units, each responsible for its own profits. Each unit has been directed to develop global brands where possible, and keep costs low. While this new approach eliminates many of the problems facing the company under its old structure, it does introduce a new challenge in that there is little communication between business units which effectively minimizes the possibility of cross-unit learning and information sharing. Another Perspective: Students can explore Procter & Gamble’s strategy in more depth by going to the company’s web site at { http://www.pg.com/en_US/index.jhtml }. Click on “P&G Global Operations” to compare the domestic site to those in numerous foreign locations.
  • The answer is d.
  • The answer is d.
  • Transcript

    • 1. InternationalBusiness 7eby Charles W.L. HillMcGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
    • 2. Chapter 12The Strategy of InternationalBusiness
    • 3. 12-3IntroductionWhat actions can managers take to compete moreeffectively as an international business?How can firms increase profits through internationalexpansion?What international strategy should firms pursue?
    • 4. 12-4Strategy And The FirmA firm’s strategy refers to the actions that managers taketo attain the goals of the firmProfitability can be defined as the rate of return the firmmakes on its invested capitalProfit growth is the percentage increase in net profitsover timeExpanding internationally can boost profitability and profitgrowth
    • 5. 12-5Strategy And The FirmFigure 12.1: Determinants of Enterprise Value
    • 6. 12-6Value CreationThe value created by a firm is measured by thedifference between V (the price that the firm can charge forthat product given competitive pressures) and C (the costsof producing that product)The higher the value customers place on a firm’sproducts, the higher the price the firm can charge for thoseproducts, and the greater the profitability of the firm
    • 7. 12-7Value CreationFigure 12.2: Value Creation
    • 8. 12-8Classroom Performance SystemWhat is the rate of return the firm makes on its investedcapital?a) Profit growthb) Profitabilityc) Net returnd) Value created
    • 9. 12-9Value CreationProfits can be increased by:adding value to a product so that customers are willing topay more for it – a differentiation strategylowering costs – a low cost strategyMichael Porter argues that superior profitability goes tofirms that create superior value by lowering the coststructure of the business and/or differentiating the productso that a premium price can be charged
    • 10. 12-10Strategic PositioningMichael Porter argues that firms need to choose eitherdifferentiation or low cost, and then configure internaloperations to support the choiceTo maximize long run return on invested capital, firmsmust:pick a viable position on the efficiency frontierconfigure internal operations to support that positionhave the right organization structure in place to executethe strategy
    • 11. 12-11Strategic PositioningFigure 12.3: Strategic Choice in the International HotelIndustry
    • 12. 12-12Operations: The Firm As A Value ChainA firm’s operations can be thought of a value chaincomposed of a series of distinct value creation activities,including production, marketing, materials management,R&D, human resources, information systems, and the firminfrastructureValue creation activities can be categorized as primaryactivities (R&D, production, marketing and sales, customerservice) and support activities (information systems,logistics, human resources)
    • 13. 12-13Classroom Performance SystemWhich of the following is not an example of a primaryactivity?a) Logisticsb) Marketing and salesc) Customer serviced) Production
    • 14. 12-14Operations: The Firm As A Value ChainFigure 12.4: The Value Chain
    • 15. 12-15Global Expansion, Profitability,And Profit GrowthInternational firms can:expand the market for their domestic product offerings byselling those products in international marketsrealize location economies by dispersing individual valuecreation activities to locations around the globe where theycan be performed most efficiently and effectivelyrealize greater cost economies from experience effectsby serving an expanded global market from a centrallocation, thereby reducing the costs of value creationearn a greater return by leveraging any valuable skillsdeveloped in foreign operations and transferring them toother entities within the firm’s global network of operations
    • 16. 12-16Expanding The Market: LeveragingProducts And CompetenciesFirms can increase growth by selling goods or servicesdeveloped at home internationallyThe success of firms that expand internationally dependson the goods or services they sell, and on their corecompetencies (skills within the firm that competitors cannoteasily match or imitate)Core competencies enable the firm to reduce the costs ofvalue creation and/or to create perceived value in such away that premium pricing is possible
    • 17. 12-17Location EconomiesWhen firms base each value creation activity at thatlocation where economic, political, and cultural conditions,including relative factor costs, are most conducive to theperformance of that activity, they realize locationeconomies (the economies that arise from performing avalue creation activity in the optimal location for thatactivity, wherever in the world that might be)By achieving location economies, firms can:lower the costs of value creation and achieve a low costpositiondifferentiate their product offering
    • 18. 12-18Location EconomiesFirms that take advantage of location economies indifferent parts of the world, create a global web of valuecreation activitiesUnder this strategy, different stages of the value chainare dispersed to those locations around the globe whereperceived value is maximized or where the costs of valuecreation are minimizedA caveat:transportation costs, trade barriers, and political riskscomplicate this picture
    • 19. 12-19Classroom Performance SystemWhat is created when different stages of a value chain aredispersed to locations where value added is maximized orwhere the costs of value creation are minimized?a) Experience effectsb) Learning effectsc) Economies of scaled) A global web
    • 20. 12-20Experience EffectsThe experience curve refers to the systematic reductionsin production costs that have been observed to occur overthe life of a productLearning effects are cost savings that come from learningby doingSo, when labor productivity increases, individuals learnthe most efficient ways to perform particular tasks, andmanagement learns how to manage the new operationmore efficiently
    • 21. 12-21Experience EffectsFigure 12.5: The Experience Curve
    • 22. 12-22Experience EffectsEconomies of scale refer to the reductions in unit cost achieved byproducing a large volume of a productSources of economies of scale include:spreading fixed costs over a large volumeutilizing production facilities more intensivelyincreasing bargaining power with suppliersBy moving down the experience curve, firms reduce the cost ofcreating valueTo get down the experience curve quickly, firms can use a singleplant to serve global markets
    • 23. 12-23Leveraging Subsidiary SkillsIt is important for managers to:recognize that valuable skills that could be appliedelsewhere in the firm can arise anywhere within the firm’sglobal network (not just at the corporate center)establish an incentive system that encourages localemployees to acquire new skillshave a process for identifying when valuable new skillshave been created in a subsidiary
    • 24. 12-24SummaryManagers need to keep in mind the complex relationshipbetween profitability and profit growth when makingstrategic decisions about pricingIn some cases, it may be worthwhile to price productslow relative to their perceived value in order to gain marketshare
    • 25. 12-25Cost Pressures And PressuresFor Local ResponsivenessFirms that compete in the global marketplace typically facetwo types of competitive pressures:pressures for cost reductionspressures to be locally responsiveThese pressures place conflicting demands on the firmPressures for cost reductions force the firm to lower unitcosts, but pressure for local responsiveness require thefirm to adapt its product to meet local demands in eachmarket—a strategy that raises costs
    • 26. 12-26Cost Pressures And PressuresFor Local ResponsivenessFigure 12.6: Pressures for Cost Reductions and LocalResponsiveness
    • 27. 12-27Pressures For Cost ReductionsPressures for cost reductions are greatest:in industries producing commodity type products that filluniversal needs (needs that exist when the tastes andpreferences of consumers in different nations are similar ifnot identical) where price is the main competitive weaponwhen major competitors are based in low cost locationswhere there is persistent excess capacitywhere consumers are powerful and face low switchingcosts
    • 28. 12-28Pressures For Local ResponsivenessPressures for local responsiveness arise from:differences in consumer tastes and preferences - strongpressures for local responsiveness emerge whenconsumer tastes and preferences differ significantlybetween countriesdifferences in traditional practices and infrastructure -pressures for local responsiveness emerge when there aredifferences in infrastructure and/or traditional practicesbetween countries
    • 29. 12-29Pressures For Local Responsivenessdifferences in distribution channels - a firms marketingstrategies needs to be responsive to differences indistribution channels between countrieshost government demands - economic and politicaldemands imposed by host country governments maynecessitate a degree of local responsiveness
    • 30. 12-30Classroom Performance SystemWhich of the following is not a pressure for localresponsiveness?a) Excess capacityb) Host government demandsc) Differences in consumer tastes and preferencesd) Differences in distribution channels
    • 31. 12-31Choosing A StrategyThere are four basic strategies to compete in theinternational environment:global standardizationlocalizationtransnationalInternationalThe appropriateness of each strategy depends on thepressures for cost reduction and local responsivness in theindustry
    • 32. 12-32Choosing A StrategyFigure 12.7: Four Basic Strategies
    • 33. 12-33Global Standardization StrategyThe global standardization strategy focuses onincreasing profitability and profit growth by reaping the costreductions that come from economies of scale, learningeffects, and location economiesThe strategic goal is to pursue a low-cost strategy on aglobal scaleThe global standardization strategy makes sense when:there are strong pressures for cost reductionsdemands for local responsiveness are minimal
    • 34. 12-34Localization StrategyThe localization strategy focuses on increasingprofitability by customizing the firm’s goods or services sothat they provide a good match to tastes and preferences indifferent national marketsThe localization strategy makes sense when:there are substantial differences across nations withregard to consumer tastes and preferenceswhere cost pressures are not too intense
    • 35. 12-35Transnational StrategyThe transnational strategy tries to simultaneously:achieve low costs through location economies,economies of scale, and learning effectsdifferentiate the product offering across geographicmarkets to account for local differencesfoster a multidirectional flow of skills between differentsubsidiaries in the firm’s global network of operationsThe transnational strategy makes sense when:cost pressures are intensepressures for local responsiveness are intense
    • 36. 12-36International StrategyThe international strategy involves taking products firstproduced for the domestic market and then selling theminternationally with only minimal local customizationThe international strategy makes sense whenthere are low cost pressureslow pressures for local responsiveness
    • 37. 12-37Classroom Performance SystemWhich strategy tries to simultaneously achieve low coststhrough location economies, economies of scale, andlearning effects, and differentiate the product offeringacross geographic markets to account for localdifferences?a) Internationalizationb) Localizationc) Global standardizationd) Transnational
    • 38. 12-38The Evolution of StrategyAn international strategy may not be viable in the longtermTo survive, firms may need to shift to a globalstandardization strategy or a transnational strategy inadvance of competitorsSimilarly, localization may give a firm a competitive edge,but if the firm is simultaneously facing aggressivecompetitors, the company will also have to reduce its coststructures, and the only way to do that may be to shifttoward a transnational strategy
    • 39. 12-39The Evolution of StrategyFigure 12.8: Changes in Strategy over Time
    • 40. 12-40Classroom Performance SystemWhich strategy makes sense when pressures are high forlocal responsiveness, but low for cost reductions?a) Global standardization strategyb) International strategyc) Transnational strategyd) Localization strategy