W7: Hill & Hult. Chapter 13

Question 1

Chapter’s purpose

Answer 1

Looking at how firms can increase their profitability by expanding their operations in foreign markets and discuss the different strategies firms pursue when competing internationally and consider the pros and cons of these strategies

Question 2

Firm’s strategy

Answer 2

Can be defined as the actions that managers take to attain the goals of the firm. For most firms, the preeminent goal is to maximise the value of the firm for its owners and shareholders, in a legal, ethical, and socially responsible manner. To maximise the value of a firm, managers must pursue strategies that increase the profitability of the enterprise and its rate of profit growth over time

Question 3

Profitability

Answer 3

Can be measured in several ways. For consistency, it is defined as the rate of return that the firm makes on its invested capital (ROI), which is calculated by dividing the net profits of the firm by total invested capital. Managers can increase it by pursuing strategies that lower costs, add value to the firm’s products, sell more products in existing markets, or enter new markets, to raise price while maintaining existing customer base

Question 4

Profit growth

Answer 4

Measured by the percentage increase in net profits over time. In general, higher profitability and a higher rate of profit growth will increase the value of an enterprise and thus the returns garnered by its owners, the shareholders

Question 5

Consumer surplus

Answer 5

The reason why the price a firm charges for a good or service is typically less than the value placed on it by the customer. Because the firm is competing with other firms for the customer’s business, the firm must charge a lower price than it could if it were a monopoly supplier

Question 6

Value creation

Answer 6

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

Question 7

Low-cost strategy

Answer 7

Strategy that focuses primarily on lowering production costs

Question 8

Differentiation strategy

Answer 8

Strategy that instead focuses primarily on increasing the attractiveness of a product

Question 9

Efficiency frontier/production possibility frontier

Answer 9

Shows all the different positions a firm can adopt with regard to adding value to the product (V) and low costs (C), assuming that its internal operations are configured efficiently to support a particular position. It has a convex shape because of diminishing returns

Question 10

Diminishing returns

Answer 10

Implies 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

Question 11

Value chain

Answer 11

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, HR, information systems, and firm infrastructure. To implement its strategy efficiently and position itself on the efficiency frontier, the company must manage these activities effectively and consistently

Question 12

Primary activities

Answer 12

Have to do with the design, creation, and delivery of the product; its marketing, and its support and after-sale service. It consists of R&D, production, marketing and sales, and customer service

Question 13

Research and development (R&D)

Answer 13

Concerned with the design of products and production processes. Through superior product design, R&D can increase the functionality of products, which makes them more attractive to consumers (raising V) and result in more efficient production processes, thereby cutting production costs (lowering C)

Question 14

Production

Answer 14

Concerned with the creation of a good or service, creating value by performing its activities efficiently so lower costs result (lower C) and/or by performing them in such a way that a higher-quality product is produced (which results in higher V)

Question 15

Marketing and sales function

Answer 15

Can help create value in several ways. Through brand positioning and advertising, the marketing function can increase the value (V) that consumers perceive to be contained in a firm’s product. By discovering consumer needs and communicating them back to the R&D function of the company, the firm can then design products that better match those needs

Question 16

Enterprise’s service activity

Answer 16

To provide after-sale service and support. This function can create a perception of superior value in the minds of consumers by solving customer problems and supporting customers after they have purchased the product

Question 17

Support activities

Answer 17

Provide inputs that allow the primary activities to occur. In terms of attaining a competitive advantage, they can be as important as, if not more important than, the primary activities of the firm. It consists of information systems, logistics, human resources, and company infrastructure

Question 18

Information systems

Answer 18

Refer to the electronic systems for managing inventory, tracking sales, pricing products, selling products, dealing with customer service inquiries, etc. When coupled with the communications features of the internet, it can alter the efficiency and effectiveness with which a firm manages its other value creation activities

Question 19

Logistics function

Answer 19

Controls the transmission of physical materials through the value chain, from procurement through production and into distribution. The efficiency with which this is carried out can significantly reduce cost (lower C), thereby creating more value

Question 20

Human resource function

Answer 20

Ensures that the company has the right mix of skilled people and ensure that people are adequately trained, motivated, and compensated to perform their value creation task. In a multinational enterprise, on of the things HR can do to boost the competitive position of the firm is to take advantage of its transnational reach to identify, recruit, and develop a cadre of skilled managers, regardless of their nationality, who can be groomed to take on senior management positions

Question 21

Company infrastructure

Answer 21

Includes the organisation structure, control systems, and culture of the firm. Because top management can exert considerable influence in shaping these aspects of a firm, they should also be viewed as part of the firm’s infrastructure. Through strong leadership, top management can consciously shape the infrastructure of a firm and through that the performance of all its value creation activities

Question 22

Global expansion

Answer 22

Gives firms opportunities to increase their profitability and rate of profit growth in ways not available to purely domestic enterprises

Question 23

Market expansion

Answer 23

A company can increase its growth rate by taking goods or services developed at home and sell them internationally. The success of many multinationals that expand in this manner is not just based on the goods or services they sell in foreign nations, but also on the core competencies that underlie the development, production, and marketing of those goods or services

Question 24

Core competence

Answer 24

Refers to skills within the firm that competitors cannot easily match or imitate. These skills may exist in any of the firm’s value creation activities. Expanding the market for their services often means replicating their business model in foreign nations (with some changes to account for local differences)

Question 25

Theory of international trade

Answer 25

Teaches that due to differences in factor costs, certain countries have a comparative advantage in the production of certain products

Question 26

Location economies

Answer 26

The economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be (transportation costs and trade barriers permitting). This has one of two effects; (1) it can lower the costs of value creation and help the firm achieve a low-cost position, and/or (2) it can enable a firm to differentiate its product offering from those of competitors, both of which boost the profitability of the enterprise

Question 27

Global web of value creation activities

Answer 27

Different stages of the value chain are being dispersed to locations around the globe, where perceived value is maximised or where the costs of value creation are minimised. E.g., Lenovo computers were designed in the US because Lenovo believes the US is the best location to do basic design work. The case, keyboard, and hard drive are made in Thailand, etc. In each case, the components are manufactured and sourced from the optimal location, given current factor costs

Question 28

Experience curve

Answer 28

Refers to systematic reductions in production costs that have been observed to occur over the life of a product. A number of studies have observed that a product's production costs decline by some quantity about each time cumulative output doubles. Two things can explain this; (1) learning effects, and (2) economies of scale. Moving down the experience curve allows a firm to reduce its cost of creating value and increases its profitability. The firm that moves down most rapidly will have a cost advantage compared to its competitors

Question 29

Global efficiency dynamics

Answer 29

A reason to think carefully about location economies, i.e. countries pursuing nationalistic interests, higher trade barriers, and incentives for home-country companies

Question 30

Learning effects

Answer 30

Refer to cost savings that come from learning by doing. Labour, for example, learns by repetition how to carry out a task, e.g. assembling, most efficiently. Labour productivity increases over time as individuals learn the most efficient ways to perform particular tasks

Question 31

Economies of scale

Answer 31

Refer to the reductions in unit cost achieved by producing a large volume of a product. Attaining them lowers a firm's unit costs and increases its profitability. They have a number of sources. One is the ability to spread fixed costs over a large volume

Question 32

Fixed costs

Answer 32

The costs required to set up a production facility, develop a new product, etc. They can be substantial

Question 33

Pressures for cost reduction

Answer 33

Responding requires a firm to try to lower the costs of value creation. A manufacturer, e.g., might mass-produce a standardised product at the optimal location in the world to realise economies of scale, learning effects, and location economies. Alternatively, a firm might outsource certain functions to low-cost foreign suppliers in an attempt to reduce costs

Question 34

Universal needs

Answer 34

Exist when the tastes and preferences of consumers in different nations are similar if not identical. These are intense in industries where major competitors are based in low-cost locations, where there is persistent excess capacity and where consumers are powerful and face low switching costs

Question 35

Commodity-type products

Answer 35

E.g. bulk chemicals, steel, sugar, etc. In these industries, meaningful differentiation on non-price factors is difficult and price is the main competitive weapon. This tends to be the case for products that serve universal needs. Pressures for cost reducation can be particularly intense for these industries

Question 36

Pressures for local responsiveness

Answer 36

Arise from national differences in consumer needs and wants, infrastructure, business practices, distribution channels, and from host-government demands. Responding to them requires a firm to differentiate its products and marketing strategy from country to country to accomodate these factors, all of which tends to raise the firm's cost structure. Strong pressures emerge when customer tastes and preferences differ significantly between countries, as they often do for deeply embedded historic or cultural reasons. This typically creates pressure to delegate production and marketing responsibilities, as well as functions, to a firm's overseas subsidiaries

Question 37

Host-government demands

Answer 37

Economic and political demands imposed by host-country governments may require local responsiveness

Question 38

Rise of regionalism

Answer 38

Strong pressures for convergence due to, e.g., a shared history and culture or the establishment of a trading block where there are deliberate attempts to harmonise trade politices, infrastructure, regulations, etc. Taking a regional perspective is important because it may suggest that localisation at the regional rather than the national level is the appropriate strategic response. Managers must make a judgement call about the appropriate level of aggregation given (1) the product market they are looking at, and (2) the nature of national differences and trends for regional convergence

Question 39

Global standardisation strategy

Answer 39

Focus on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies. Their strategic goal is to pursue a low-cost strategy on a global scale. The production, marketing, R&D, and supply chain activities are concentrated in a few favourable locations and try not to customise their product offering and market strategy to local because customisation involves shorter production runs and duplication of functions, which tend to raise costs. Instead, they market a standardised product worldwide so that they can reap the maximum benefits from economies of scale and learning effects. They also tend to use their cost advantage to support aggressive pricing in world markets. Increasingly, these conditions prevail in many industrial goods industries, whose products often serve universal needs

Question 40

Localisation strategy

Answer 40

Focuses on increasing profitability by customising the firm's goods or services so that they can provide a good match to tastes and preferences in different national markets. It is most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences and where cost pressures are not too intense. However, because it involves some duplication of functions and smaller production runs, customisation limits the ability of the firm to capture the cost reductions associated with mass-producing a standardised product for global consumption

Question 41

Transnational strategy

Answer 41

The firm simulatenously faces both strong cost pressures and storng pressures for local responsiveness. Firms that pursue a transnational strategy are trying to simultaneously achieve low costs through location economies, economies of scale, and learning effects. They 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 operation

Question 42

International strategy

Answer 42

Take products first produced for the domestic market and sell them internationally with only minimal local customisation. The distinguishing feature of many such firms is that they are selling a product that serves universal needs, but they do not face significant competitors, and thus unlike firms pursuing a global standardisation strategy, they are not confronted with pressures to reduce their cost structure. In most firms, the head office retains fairly tight control over marketing and product strategy