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Flashcards in International Business Ch. 13 Deck (29):


defined as the actions that managers take to attain the goals of the firm.



can be measured in a number of ways, the most consistent is the rate of return that the firm makes on its invested capital (ROIC).
- Calculated by dividing the net profits of the firm by total
invested capital.


Profit Growth

is measured by the percentage increase in net profits over time.


Value Creation

-A firm has high profits when it creates more value for it's customers and does so at a lower cost.

-is measured by the difference between V and C (V-C); a firm creates value by converting inputs that cost C into a product on which consumers place a value of V. - A firm can create more value (V-C) either by lowering production costs, C, or by making the product more attractive through superior design, styling, functionality, features, reliability, after-sales service, and the like so that consumers place a greater value on it (V increases) and are willing to pay a higher price, P.



the different value creation activities a firm undertake.


Primary Activites

have to do with the design, creation, and delivery of the product; it's marketing; and it's support and after-sale service.

Four Main Functions:
-Research and Development
-Marketing and Sales
-Customer Service


Support Activities

activities of the value chain provide inputs that allow the primary activities to occur.
-i.e. Logistics, Information Services, etc.


Core Competencies

  • refers to skills with the firm that competitors cannot easily match or imitate.

    • can exist in any value creation activity

  • Core competencies allow firms to reduce the costs of value creation and/or create perceived value so that premium pricing is possible.


Location Economies

  • economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be.

  • Two Main Effects:

    • Can lower costs of VC to achieve a low-cost position.

    • Enable a firm to differentiate its product from competitors.

  • Firms that take advantage of location economies in different parts of the world, create a global web of value creation activites.

    • different stages of the value chain are dispersed to locations where perceived value is maximized or where the costs of value creation are minimized.


Global Web

different stages of the value chain being dispersed to those locations around the globe where perceived value is maximized or where the costs of value creation are minimized.


Experience Curve

  • systematic reductions in production costs that have been observed to occur over the life of the product.

    • by moving down the experience curve, firms reduce the cost of creating value.

    • to get down the experience curve quickly, firms can use a single plant to serve global markets.


Learning Effects

  • cost savings that come from learning by doing. -i.e. labor skills acquired through repetition.

  • When labor productivity increases:

    • individuals learn the most efficient ways to perform particular tasks.

    • managers learn how to manage the new operation more efficiently.


Economies Of Scale

  • reductions in the unit cost achieved by producing a large volume of a product.

  • Profitability Achieved Through:

    • spreads fixed costs over a large volume

    • efficient scale of production achieved by serving global markets

    • Increased bargaining power with suppliers


Universal Needs

exist when the tastes and preferences of consumers in diferent nations are similar if not identical.


Global Standardization Strategy

  • focus on increasing profitability and profit growth by reaping the costs reductions that come from economies of scale, learning effects, and location economies.

  • Strategic goal is to pursue a low-cost strategy on a global scale.

  • This strategy makes sense when there are strong pressures for cost reductions and demands for local responsiveness are minimal.


Localization 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 markets.

  • This strategy makes sense when there are substantial differences across nations with regard to consumer tastes and preferences and cost pressures are not too intense.


Transnational Strategy

  • focuses on trying to simultaneously achieve low costs through location economies, economies of scale, and learning effects; differentiate their product offering across geographic markets to account for local differences; and foster a multidirectional flow of skills between different subsidiaries in the firm's global network of operations.

    • firms differentiate their product across geographic markets to account for local differences and foster a multidirectional flow of skills between different subsidiaries in the firm's global network of operations.

  • This strategy makes sense when both cost pressures and pressures for local responsiveness are intense.


International Strategy

  • taking products first produced for their domestic market and selling them internationally with only minimal local customization.

  • This strategy make sense when there are low cost pressures and low pressures for local responsiveness.


** International and Localization strategies may not be viable in the long-term:

  • to survive a firm may need to shift to a global standardization strategy or a transnational strategy in advance of competitors.

  • If a firm is facing aggressive competitors, they may have to move away from a localization strategy to reduce it's cost structure and shift towards a  transnational strategy.


Profits can be increased by:

1.  Using a differentiation strategy

-adding value to a product so that customers are willing to pay more for it.


2.  Using a low cost strategy

- lowering costs.


Michael Porter's Strategic Positioning Argument:

- firms need to choose either differentiation or low cost, and then configure internal operations to support the choice.


- to maximize long run ROIC, firms must

    -pick a viable position on efficiency frontier

    -configure internal operations to support that position

    -have the right organizational structure in place to

     execute the strategy



Value creation activities can be categorized as:


1. Primary Activities

  • R&D

  • Production

  • Marketing and Sales

  • Customer Service 

2. Support Activities

  • Information Systems

  • Logistics

  • Human Resources


To increase profits, International firms can:

1.  Expand their market

  • sell in international markets

2.  Realize location economies

  • disperse value creation activities to locations where they can be performed most efficiently and effectively

3.  Realize greater cost economies from experience effects.

  • serve an expanded global market from a central location.

4.  Earn a greater return

  • leverage skills developed in foreign operations and transfer them elswhere in the firm.




The success of firms that expand internationally depends on:


  • the goods or services sold

  • the firm's core competencies


To leverage Subsidiary Skills managers should:

  1. Recognize that valuable skills that could be applied elswhere in the firm can arise from anywhere withing th firm's global network - not just at the corporate center.

  2. Establish an incentive system that encourages local employees to acquire new skills.

  3. Have a process for identifying when valuable new skills have been created in a subsidiary.

  4. Act as facilitators to help transfer skills within the firm.


Two Competitive Pressures:

1.  Pressures for cost reductions

  • force the firm to lower unit costs.

2.  Pressures to be locally responsive

  • require the firm to adapt its product to meet local demands in each market.

  • but, this strategy can raise costs.


Pressures for cost reductions are greatest:

  1. In industries producing commodity type products that fill univeral needs, where price is the main competitive weapon.

  2. When major competitors are based in low cost locations.

  3. Where there is persistent excess capacity.

  4. Where consumers are powerful and face low switching costs.


Pressures for local responsiveness arise from:

1.  Differences in consumer tastes and preferences.

  • strong pressure emerges when consumer tastes and preferences differ significantly between countries.

2.  Differences in traditional practices and infrastructure.

  • strong pressure emerges when there are significant differences in infrastructure and/or traditional practices between countries.

3.  Differences in distribution channels.

  • need to be responsive to differences in distribution channels between countries.

4.  Host government demands.

  • economic and political demands imposed by host country's government may require local responsiveness.


How Does Strategy Evolve?

Changes in Strategy Over Time:


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Which Strategy Should a Firm Choose:

Four Basic Strategies:


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