Strategy-A firm’s strategy can be defined as the actions that the managers take to attain goals of the firm. For most firms the preeminent goal is to maximize the value of the firm for its owners. To maximize the value of the firm managers must pursue strategies that increase the profitability of the enterprise and rate of profit growth over time. Managers can increase the profitability by choosing strategies lower costs or those that add value to the firm’s products. Both enable a firm to raise its prices. Managers can either sell in existing markets or enter new markets to maximize profits. In order to increase profitability a firm must keep on creating value. Value is measured by the difference in its cost of production and the value that consumers give to the products. The more value, the higher the price. Value is hard to attain because (1) It is competing with others in the market so it has to charge a lower price to stay in the business. (2)It is impossible to charge every customer a different price according to the value he/she may assume of the product. A firm has high profits when it creates more value and does so at a lower cost. Low cost strategy- Strategy which focuses mainly on lowering production costs. Differentiation strategy- Strategy that primarily focuses on increasing the attractiveness of a product. Superior profits go to those firms that create superior value. Either drive down the cost structure or differentiate products in some way so that consumers value them more and pay a premium price. Operations: The Firm As A Value Chain The operations of a firm can be thought of as a value chain composed of a series of distinct value creation activities such as production, marketing, R&D etc. If a firm is to implement a strategy efficiently it must manage these activities efficiently and in a manner that is consistent with its strategy. Primary Activities- Design, creation, marketing and after sales service. a) R&D- Through superior product design it can increase the functionality of products which make them more attractive or result in efficient production which drives down costs. b) Production- Perform activities efficiently to drive down costs or produce higher quality products. c) Marketing- Through advertising it can increase the value of that consumers perceive of the product. Thus higher prices can be charged. d) After sales service- This can create superior value in the eye of the customers by solving customer problems and supporting customers after they have purchased the product. Support Activities- These activities provide inputs that allow the primary activities to occur. Information systems, Logistics, human resource, company infrastructure. Expanding Globally Firms that operate internationally are able to: Expand the market for their domestic products by selling those products in the international markets. Realize location economies by dispersing individual value creation activities to those locations where they can be performed most efficiently and effectively. Realize greater cost economies from experience effects by serving a global market from a central location reducing cost of value creation. Earn a greater return by transferring any valuable skills developed in foreign operations and transferring them to other parts of the firm’s global network. Expanding The Market: Leveraging Products And Competences The success of many multinational companies that expand is based not just upon the goods or services but also on the core competences that underlie the development, production and marketing of those items. Core Competences- Skills within the firm that competitors cannot easily match or imitate. These skills may exist in any of the firm’s value creation activities. Such skills are expressed in product offerings that other firms find difficult to imitate. Core competences are crucial for competitive advantage. They enable a firm to reduce the costs of value creation and/or create perceived value so that premium pricing is possible. Location Economies For a firm to survive in a competitive global market, the firm will benefit by doing value creation activity at a location where economic, political, cultural conditions and factor costs are most supportive to its performance. Location Economies- Economies that arise from performing a value creation activity in the optimal location for the activity. These economies can lower costs of value creation and/or enable a firm to differentiate its product offering from those of competitors. A firm that realizes location economies by dispersing each of its value creation activities to its optimal location should have a competitive advantage over firms that base their value creation activities in one single place. Barriers-transport costs, trade barriers and political risks. Experience Effects Learning Effects- Cost savings that come from learning by doing. Labor productivity increases over time as individuals learn the most efficient ways to perform tasks. In new production facilities managers learn their job on how to manage the new operation more efficiently through time. Production costs decline ultimately. Learning effects are significant when a technologically task is repeated because more can be learned. Economies Of Scale- Reductions in unit cost achieved by producing a large volume of product. Economies of scale have a number of sources. 1) The ability to spread fixed costs over a large volume. The only way to recover high fixed costs is to sell the products worldwide which reduces average cost. 2) A firm may not be able to attain efficient scale of production unless it serves global markets. By serving both domestic and international markets a firm may be able to utilize its production facilities more effectively and efficiently. 3)As global sales increase its bargaining power increases with the suppliers which allows the firm to attain economies of scale in purchasing bringing down cost or production. Leveraging Subsidiary Skills The development of valuable skills can not only occur in the home office but also in foreign subsidiaries. Applying skill learned within subsidiaries and applying them in other parts of the global network can create value. Managers need to understand this phenomenon. 1. They must take into account that valuable skills that lead to competencies can arise anywhere within the firm’s global network, not only at the corporate center. 2. They must establish an incentive system that encourages local employees to acquire new skills. 3. They must have a process of identifying when valuable skills have occurred. 4. Act as facilitators helping to transfer the valuable skills. Pressures For Cost Reduction Pressures for cost reduction can be particularly intense in industries where meaningful differentiation is not the main factor and price is. Universal needs exist when tastes and preferences of different nations are similar. Pressures For Local Responsiveness Pressures for local responsiveness arrive from national differences in consumer tastes, distribution channels, government demands etc. Choosing A Strategy Global Standardization Strategy- Firms that follow this strategy focus on cost reductions that come from economies of scale, learning effects and location economies. Their goal is to pursue a low cost strategy on a global scale. The value creation activities are done at few favorable locations. Under this strategy products are not customized which involves shorter production runs which increase costs. Firms market a standardized product worldwide and opt for aggressive pricing. Localization Strategy- Firms focus on customizing goods and services to match tastes of different national markets. Customization increases expense but this strategy is acceptable when the added value associated with local customization supports higher pricing or if it leads to higher local demand. Firms will need to be efficient wherever possible. Transnational Strategy- Competitive conditions are sometimes so intense that to survive, firms must do all they can to reduce costs and also opt for local responsiveness. Firms must realize location economies and experience effects, transfer core competencies and skills and also go for local responsiveness. Flow of skills should be through any part of the firm’s global network. International Strategy- Firms that have low cost pressures and low pressures for local responsiveness apply this strategy. They sell products internationally with minimal local customization. They sell goods which serve universal needs and do not have many competitors And so do not need to push for cost minimization. Firms centralize development functions at home and marketing functions in foreign countries in which they are trading. The resulting duplication of duties can raise costs but firms do not have to worry as they are not facing cost reduction pressures.