Which strategy makes sense when the firm faces strong pressures for cost reductions and demands for local responsiveness are minimal?

Refers to the actions that managers take to attain the goals of a firm Goal is to maximise profit : profit = (price-cost) x qty sold Firms must pursue strategies that increase profitability and profit growth Profitability - the rate of return the firm’s Makes on its invested capital - the (p-c) part of the equation Reduce costs, add value and raise prices Profit growth - the percentage increase in net profits over time - “qty sold “Sell more in existing markets and enter new markets

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• Refers to the actions that managers take to attain the goals of a firm Goal is to maximise profit : profit = (price-cost) x qty sold Firms must pursue strategies that increase profitability and profit growth Profitability - the rate of return the firm’s Makes on its invested capital - the (p-c) part of the equation Reduce costs, add value and raise prices Profit growth - the percentage increase in net profits over time - “qty sold “Sell more in existing markets and enter new markets
• Firms must increase value to raise profits Difference between v (price they can charge given comp pressures ) and C (costs of producing the product )Will make the most profit when creating more value for a lower cost
• How is profitability increased
• 1) value creation - using a differentiation strategy - adding value so customers pay more 2) becoming more efficient : using a low cost strategy -lowering costs
• Michael porter argues that firms need to choose either differentiation or low cost and then configure internal operations to support the choice To maximise long run return on invested capital, firms must :-pick a viable position on the efficiency frontier -configure internal operations to support that position - have the right organisation structure in place to execute the strategy
• Operations: the firm as a value chain
• Firms operation are like a value chain composed of a series of distinct value creation activities -production,marketing,materials management, R&D,IT, firm infrastructure All of these must be managed effectively and consistently with firm strategy
• Operations primary activities
• R&D - can increase valuation of product (V) in high tech industries and lower CProduction - goods, services, content etc to reduce C and increase V Marketing and sales - can increased perceived value V Customer service - can create perception of superior value V
• Operations : supporting activities
• Information systems Logistics Human Resources Company infrastructure
• 1) Expand their market (sell in international markets)2) Realise location economies (focusing on locations where they can be performed most efficiently and effectively)3) Realise greater cost economies from experience effects (Serve an expanded global market from a central market) 4) Earn a greater return (Leverage skills developed in foreign operations and transfer them elsewhere )
• Leveraging products and competencies
• Core competencies- skills within the firm that competitors cannot easily match or imitate :-can exist in any value creation activity -core competencies allow firms to reduce costs of value creation and / or to create perceived value so that premium pricing is possible Eg Toyota ,McDonald’s
• Economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be By achieving location economies, firms can :-lower the cost of value creation and achieve a low cost position - differentiate their product offering Firms that take advantage of location economies in different parts of the world create a GLOBAL WEB OF VALUE CREATION ACTIVITIES -different stages done in the optimal location for each activity Eg Lenovo - US design,South Korean screen and memory, Malaysian wires, chinese assembly
• Experience curve refers to systematic reductions in production costs that occur over the life of the product :- moving down the curve reduces the cost of creating value - to move down fast firms can use a single plant to serve global markets
• Cost savings that come from learning by doing When labour productivity increases :-individuals learn the most efficient ways to perform particular tasks; - managers learn how to manage the new operation more efficiently
• The reductions is unit cost achieved by producing a large volume of a product Sources : -spreading fixed costs over a large volume -utilising production facilities more intensively -increasing bargaining power with suppliers Markets differ in what the minimum efficient scale is
• Leveraging subsidiary skills
• Managers should :Recognise that valuable skills that could be applied elsewhere in the firm can arise anywhere within the firms global network - not just at the corporate centre Establish an incentive system that encourages local employees to acquire new skills Have a process for identifying when valuable new skills have been created in a subsidiary Act as facilitators to help transfer skills within the firm
• Types of competitive pressure
• Firms competing in global marketplace face two conflicting pressures -pressure for cost reduction - pressures to be locally responsive These pressures limit the ability for firms to realise location economies and experience effects, leverage products , and transfer skills within the firm Dealing both issues is challenging
• Pressure for cost reduction
• Forced firm to lower costs Pressures are greatest:-in industries producing commodity type products that fill universal needs where price is the main competitive weapon- major competitors are based in low cost locations -where there is persistent excess capacity -where consumers are powerful and face low switching costs
• Pressure for local responsiveness
• Local responsiveness v standardising 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 (eg smart phones )2) differences in traditional practices and infrastructure -strong pressures emerge 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 (eg penetration if supermarkets )4) host government demands - economic and political demands imposed by host country governments may require local responsiveness (eg local content regulations)
• Types of basic strategies
• Four types of basic strategies to compete in international markets -Global standardisation (high pressure for cost reduction and low pressure for local responsiveness )-Localisation (low cost pressure high responsive pressures )-Transnational (high cost and responsive pressures)-International (low cost reduction and low responsive pressures )Localisation and international become less viable in competition
• It increases profitability and profit growth by reaping the cost reduction from economies of scale,learning effects, and location economies Goal is to pursue 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
• It increases profitability by customising goods or services so that they match 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
• Tries to simultaneously achieve low cost (through location economies, Econ of scale and learning effects ) and local responsiveness (differentiate products across geographical markets to account for local differences )Firms also attempt to foster a multidirectional flow of skills between different subsidiaries in the firms global network of operations This strategy makes sense when both cost pressures and pressures for local responsiveness are intense
• Takes products first produced for the domestic market and sells them internationally with only minimal local customisation This strategy makes sense when there are low cost pressures and low pressures for local responsiveness
• An international strategy may not be viable in the long term To survive firms may need to shift to a global standardisation strategy or a transnational strategy in advance if competitors Localisation may give a firm competitive edge, but if the firm is simultaneously facing aggressive competitors, the company will also have to reduce its cost structures Would require a shift toward a transnational strategy

Firms must increase value to raise profits Difference between v (price they can charge given comp pressures ) and C (costs of producing the product )Will make the most profit when creating more value for a lower cost

How is profitability increased

1) value creation - using a differentiation strategy - adding value so customers pay more 2) becoming more efficient : using a low cost strategy -lowering costs

Michael porter argues that firms need to choose either differentiation or low cost and then configure internal operations to support the choice To maximise long run return on invested capital, firms must :-pick a viable position on the efficiency frontier -configure internal operations to support that position - have the right organisation structure in place to execute the strategy

Operations: the firm as a value chain

Firms operation are like a value chain composed of a series of distinct value creation activities -production,marketing,materials management, R&D,IT, firm infrastructure All of these must be managed effectively and consistently with firm strategy

Operations primary activities

R&D - can increase valuation of product (V) in high tech industries and lower CProduction - goods, services, content etc to reduce C and increase V Marketing and sales - can increased perceived value V Customer service - can create perception of superior value V

Operations : supporting activities

Information systems Logistics Human Resources Company infrastructure

1) Expand their market (sell in international markets)2) Realise location economies (focusing on locations where they can be performed most efficiently and effectively)3) Realise greater cost economies from experience effects (Serve an expanded global market from a central market) 4) Earn a greater return (Leverage skills developed in foreign operations and transfer them elsewhere )

Leveraging products and competencies

Core competencies- skills within the firm that competitors cannot easily match or imitate :-can exist in any value creation activity -core competencies allow firms to reduce costs of value creation and / or to create perceived value so that premium pricing is possible Eg Toyota ,McDonald’s

Economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be By achieving location economies, firms can :-lower the cost of value creation and achieve a low cost position - differentiate their product offering Firms that take advantage of location economies in different parts of the world create a GLOBAL WEB OF VALUE CREATION ACTIVITIES -different stages done in the optimal location for each activity Eg Lenovo - US design,South Korean screen and memory, Malaysian wires, chinese assembly

Experience curve refers to systematic reductions in production costs that occur over the life of the product :- moving down the curve reduces the cost of creating value - to move down fast firms can use a single plant to serve global markets

Cost savings that come from learning by doing When labour productivity increases :-individuals learn the most efficient ways to perform particular tasks; - managers learn how to manage the new operation more efficiently

The reductions is unit cost achieved by producing a large volume of a product Sources : -spreading fixed costs over a large volume -utilising production facilities more intensively -increasing bargaining power with suppliers Markets differ in what the minimum efficient scale is

Leveraging subsidiary skills

Managers should :Recognise that valuable skills that could be applied elsewhere in the firm can arise anywhere within the firms global network - not just at the corporate centre Establish an incentive system that encourages local employees to acquire new skills Have a process for identifying when valuable new skills have been created in a subsidiary Act as facilitators to help transfer skills within the firm

Types of competitive pressure

Firms competing in global marketplace face two conflicting pressures -pressure for cost reduction - pressures to be locally responsive These pressures limit the ability for firms to realise location economies and experience effects, leverage products , and transfer skills within the firm Dealing both issues is challenging

Pressure for cost reduction

Forced firm to lower costs Pressures are greatest:-in industries producing commodity type products that fill universal needs where price is the main competitive weapon- major competitors are based in low cost locations -where there is persistent excess capacity -where consumers are powerful and face low switching costs

Pressure for local responsiveness

Local responsiveness v standardising 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 (eg smart phones )2) differences in traditional practices and infrastructure -strong pressures emerge 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 (eg penetration if supermarkets )4) host government demands - economic and political demands imposed by host country governments may require local responsiveness (eg local content regulations)

Types of basic strategies

Four types of basic strategies to compete in international markets -Global standardisation (high pressure for cost reduction and low pressure for local responsiveness )-Localisation (low cost pressure high responsive pressures )-Transnational (high cost and responsive pressures)-International (low cost reduction and low responsive pressures )Localisation and international become less viable in competition

It increases profitability and profit growth by reaping the cost reduction from economies of scale,learning effects, and location economies Goal is to pursue 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

It increases profitability by customising goods or services so that they match 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

Tries to simultaneously achieve low cost (through location economies, Econ of scale and learning effects ) and local responsiveness (differentiate products across geographical markets to account for local differences )Firms also attempt to foster a multidirectional flow of skills between different subsidiaries in the firms global network of operations This strategy makes sense when both cost pressures and pressures for local responsiveness are intense

Takes products first produced for the domestic market and sells them internationally with only minimal local customisation This strategy makes sense when there are low cost pressures and low pressures for local responsiveness

An international strategy may not be viable in the long term To survive firms may need to shift to a global standardisation strategy or a transnational strategy in advance if competitors Localisation may give a firm competitive edge, but if the firm is simultaneously facing aggressive competitors, the company will also have to reduce its cost structures Would require a shift toward a transnational strategy