11.1: Strategy and The Firm

Question 1

What are some key issues discussed in the chapter on international business strategy?

Answer 1

Key issues include value creation, global value chains, strategic alliances, and how companies of different sizes achieve superior performance.

Question 2

What are strategic alliances, and why do companies enter into them?

Answer 2

Strategic alliances are cooperative agreements between potential or actual competitors, including various forms of partnerships like joint ventures and licensing arrangements.

Companies enter into these alliances for various reasons, including gaining market access and sharing resources.

Question 3

What is the difference between revenue and profit in the context of international business strategy?

Answer 3

Revenue refers to the income generated from business activities, essential for both non-profit and profit-focused companies.

Profit, particularly for shareholder-driven companies, is the surplus after all expenses are deducted from revenue and often the primary focus.

Question 4

How is a firm defined in the context of international business strategy?

Answer 4

A firm is a method to organize activities and can be referred to as a

multinational enterprise,

multinational corporation,

international business,

international organization,

or global company.

SMEs (small or medium-sized enterprises) are a unique type of firm, typically with fewer than 500 employees in Canada and the U.S., or fewer than 250 employees in Europe.

Question 5

What is the preeminent goal of most firms according to basic principles of strategy?

Answer 5

The preeminent goal of most firms is to maximize the value of the firm for its owners and shareholders, ensuring that activities are conducted in a legal, ethical, and socially responsible manner.

Question 6

How is profitability measured in a firm?

Answer 6

Profitability is typically measured as the rate of return on invested capital (ROI), calculated by dividing the net profits of the firm by its total invested capital.

Question 7

What are the two main strategies managers can use to increase a firm’s profitability?

Answer 7

Managers can increase a firm’s profitability either by pursuing strategies that lower costs or by adding value to the firm’s products, enabling the firm to raise prices.

Question 8

How can managers increase the rate of profit growth in a firm?

Answer 8

Managers can increase the rate of profit growth by selling more products in existing markets or by entering new markets.

International expansion is a key strategy for boosting profitability and accelerating profit growth.

Question 9

Determinants of enterprise value (figure)

Answer 9

Question 10

How is the value created by a firm measured?

Answer 10

The value created by a firm is measured by the difference between its costs of production (C) and the value that consumers perceive in its products (V).

Question 11

What is consumer surplus?

Answer 11

Consumer surplus is the difference between the value consumers place on a product (V) and the price they actually pay for it (P). It represents the “value for the money” that consumers gain from a product.

Question 12

How does competitive pressure affect a firm’s pricing?

Answer 12

Competitive pressure typically forces a firm to charge a lower price than the maximum value perceived by the customer, resulting in a price (P) that is less than the consumer’s valuation of the product (V).

Question 13

What are the two basic strategies for creating value according to Michael Porter?

Answer 13

The two basic strategies for creating value are a low-cost strategy, which focuses on lowering production costs (C), and a differentiation strategy, which focuses on making the product more attractive so that consumers value it more (increasing V).

Question 14

What is required for a firm to achieve superior value creation relative to its rivals?

Answer 14

To achieve superior value creation relative to rivals, a firm must ensure that the gap between the value consumers place on its product (V) and its cost of production (C) is greater than that of its competitors.

Question 15

Figure: Value Creation

Answer 15

Question 16

What is the importance of a firm’s strategic emphasis in terms of value creation and low cost according to Porter?

Answer 16

Porter emphasizes the importance of a firm being explicit about its strategic emphasis on either value creation (differentiation) or low cost, and configuring its internal operations to support that strategic emphasis.

Question 17

What does the efficiency frontier represent?

Answer 17

The efficiency frontier shows the different positions a firm can adopt with regard to adding value to a product (V) and reducing costs (C), assuming its internal operations are efficiently configured to support a particular position.

Question 18

Why does the efficiency frontier have a convex shape?

Answer 18

The efficiency frontier has a convex shape due to diminishing returns, implying that significant additional costs are required to increase value in a product that already has high value, and significant value must be sacrificed to achieve further cost reductions in a low-cost structure.

Question 19

What does it mean for a firm to be on the efficiency frontier?

Answer 19

A firm being on the efficiency frontier indicates that its internal operations are well-configured to its strategy and are running efficiently, optimizing the balance between value creation and cost.

Question 20

What are the three things a firm must do to maximize its profitability according to the basic strategy paradigm?

Answer 20

To maximize profitability, a firm must:

1) Pick a viable position on the efficiency frontier with sufficient demand,
2) Configure its internal operations to support that position, and
3) Ensure the right organizational structure is in place to execute its strategy.

Question 21

What are the primary activities in a firm’s value chain?

Answer 21

The primary activities in a firm’s value chain include research and development, production, marketing and sales, and customer service.

Question 22

How does research and development (R&D) create value in a firm?

Answer 22

R&D creates value by designing products and production processes that either enhance the product’s functionality (increasing V) or make production more efficient (lowering C).

Question 23

What is the role of production in a firm’s value chain?

Answer 23

Production, whether it’s manufacturing a physical product or delivering a service, creates value by performing activities efficiently to lower costs (lower C) or by producing a higher-quality product (increasing V).

Question 24

How can marketing and sales functions create value in a firm?

Answer 24

Marketing and sales create value by increasing the perceived value (V) of a product through brand positioning, advertising, and understanding consumer needs, which can lead to higher prices (P) and better product design.

Question 25

What is the importance of the service activity in a firm’s value chain?

Answer 25

The service activity, which involves after-sale service and support, creates value by enhancing customer satisfaction and loyalty, solving customer problems, and supporting customers after purchase, thereby increasing the perceived value (V) of the product.

Question 26

Figure: Value Chain

Answer 26

Question 27

How do information systems contribute to a firm’s value chain?

Answer 27

Information systems enhance the efficiency and effectiveness of a firm’s operations by enabling real-time coordination with suppliers, reducing inventory levels, and optimizing production schedules, leading to significant cost savings.

Question 28

What is the role of logistics in a firm’s value chain?

Answer 28

The logistics function manages the transmission of physical materials through the value chain, from procurement to production and distribution.

Efficient logistics can significantly reduce costs and create more value.

Question 29

How does the human resource function create value in a multinational enterprise?

Answer 29

The human resource function creates value by ensuring the firm has the right mix of skilled personnel, providing adequate training, motivation, and compensation, and leveraging the firm’s transnational reach to recruit and develop a diverse cadre of skilled managers.

Question 30

What constitutes a company’s infrastructure in its value chain?

Answer 30

A company’s infrastructure includes its organizational structure, control systems, culture, and top management.

Strong leadership in these areas can shape the firm’s performance across all value creation activities.

Question 31

How can the concept of a value chain be applied to personal development and education?

Answer 31

By considering education and personal development activities (like internships, work, fitness, and extracurricular activities) as part of a personal value chain, one can assess the value received (knowledge, skills, networks) against the costs (tuition, time, lost income).

This perspective helps in aligning personal choices and activities with strategic goals for personal growth and value creation.

Question 32

What is organization architecture?

Answer 32

Organization architecture refers to the totality of a firm’s organization, including its formal structure, control systems and incentives, organizational culture, processes, and people.

Question 33

What are the three aspects of organizational structure?

Answer 33

The three aspects of organizational structure are:
1) the formal division of the organization into subunits,
2) the location of decision-making responsibilities within the structure,
3) the establishment of integrating mechanisms to coordinate activities of subunits.

Question 34

How do controls and incentives function in an organization?

Answer 34

Controls are metrics used to measure the performance of subunits and judge managerial effectiveness.

Incentives are devices used to reward appropriate managerial behavior and are often linked to performance metrics.

Question 35

What is the role of processes in an organization?

Answer 35

Processes in an organization dictate how decisions are made and work is performed.

This includes strategies for resource allocation, strategy formulation, and performance evaluation.

Question 36

What is organizational culture?

Answer 36

Organizational culture consists of the norms and value systems shared among the employees of an organization.

It influences and is influenced by the organization’s strategies and operations.

Question 37

How do the components of an organization’s architecture interact?

Answer 37

The components of an organization’s architecture, such as structure, culture, and people, are interdependent.

Each component shapes and is shaped by the others, contributing to the overall effectiveness and profitability of the organization.

Question 38

Figure: Strategic Fit

Answer 38

Question 39

What is strategic fit in the context of a firm’s performance?

Answer 39

Strategic fit refers to the alignment and consistency among a firm’s market conditions, strategy, operations, and organization architecture. This alignment is crucial for a firm to achieve superior performance and a high return on capital.

Question 40

Can a firm influence market conditions through its strategy?

Answer 40

Yes, a firm can influence market conditions through its strategy. It can create demand by leveraging core skills to create new market opportunities.

Question 41

What should a firm do when market conditions change?

Answer 41

When market conditions change due to factors like new technologies, government actions, demographics, or social trends, a firm must adapt its strategy, operations, and organization to fit the new reality.

Question 42

How does international expansion add complexity to a firm’s strategic challenges?

Answer 42

International expansion introduces additional complexity to a firm’s strategic challenges, as it involves navigating different market conditions, regulatory environments, cultural nuances, and operational challenges in various countries.