short discussion after watching video

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LO1: Explain the concept of strategy.

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Managers can increase the profitability of the firm by pursuing strategies that lower costs or by pursuing strategies that add value to the firm’s products, which enables the firm to raise prices.

Managers can increase the rate at which the firm’s profits grow over time by pursuing strategies to sell more products in existing markets or by pursuing strategies to enter new markets. As we shall see, expanding internationally can help managers boost the firm’s profitability and increase the rate of profit growth over time.

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The value of a product to an average consumer is V; the average price that the firm can charge a consumer for that product given competitive pressures and its ability to segment the market is P; and the average unit cost of producing that product is C (C comprises all relevant costs, including the firm’s cost of capital). The firm’s profit per unit sold () is equal to P C, while the consumer surplus per unit is equal to V P (another way of thinking of the consumer surplus is as “value for the money”; the greater the consumer surplus, the greater the value for the money the consumer gets). The firm makes a profit so long as P is greater than C, and its profit will be greater the lower C is relative to P. The difference between V and P is in part determined by the intensity of competitive pressure in the marketplace; the lower the intensity of competitive pressure, the higher the price charged relative to V.4 In general, the higher the firm’s profit per unit sold is, the greater its profitability will be, all else being equal.

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The strategy, operations, and organization of the firm must all be consistent with each other if it is to attain a competitive advantage and garner superior profitability. Operations refers to the different value creation activities a firm undertakes.

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The convex curve is what economists refer to as an efficiency frontier. The efficiency frontier shows all of the different positions that a firm can adopt with regard to adding value to the product (V) and low cost (C) assuming that its internal operations are configured efficiently to support a particular position (note that the horizontal axis is reverse scaled—moving along the axis to the right implies lower costs). The efficiency frontier has a convex shape because of diminishing returns. Diminishing returns imply 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.

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LO2: Recognize how firms can profit by expanding globally.

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LO3: Understand how pressures for cost reductions and pressures for local responsiveness influence strategic choice.

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Management Focus: Local Responsiveness at MTV Networks describes MTV’s global strategy. Since its start in 1981, the network has expanded to reach some 330 million customers spread across 140 countries. Interestingly, MTV has found that its global strategy has to be surprisingly local. Consumers in different markets, while enjoying some American programming, prefer to see their own local superstars. To maintain the company’s culture and operating principles, MTV transfers expatriates from elsewhere in the world to new stations, then moves them elsewhere once the local station is well established.

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LO4: Identify the different strategies for competing globally and their pros and cons.

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The Market Entry of International Business

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What Are The Basic Decisions Firms Make When Expanding Globally?

• Firms expanding internationally must decide

Which markets to enter

When to enter them and on what scale

Which entry mode to use

exporting

licensing or franchising to a company in the host nation

establishing a joint venture with a local company

establishing a new wholly owned subsidiary

acquiring an established enterprise

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What Influences
The Choice Of Entry Mode?

• Several factors affect the choice of entry mode including

transport costs

trade barriers

political risks

economic risks

costs

firm strategy

• The optimal mode varies by situation – what makes sense for one company might not make sense for another

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Which Foreign Markets
Should Firms Enter?

• Favorable markets

are politically stable

have free market systems

have relatively low inflation rates

have low private sector debt

• Less desirable markets

are politically unstable

have mixed or command economies

have excessive levels of borrowing

• Markets are also more attractive when the product in question is not widely available and satisfies an unmet need

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When Should A Firm
Enter A Foreign Market?

• Once attractive markets are identified, the firm must consider the timing of entry

Entry is early when the firm enters a foreign market before other foreign firms

Entry is late when the firm enters the market after firms have already established themselves in the market

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Timing Of Entry

First mover:

• pre-empt rivals and capture demand
• build up sales volume
• ride down the experience curve ahead of rivals.
• switching costs

Pioneering (costs):

business failure

promoting and establishing a product offering (educating customers)

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Timing Of Entry

How quickly should you enter foreign markets?

Phased-in Entry

(Create beachhead first)

Strategic Importance

of the Market

Firm’s Ability to Exploit the Market

Opportunistic Entry

Ignore for Now

Rapid Entry

Low

High

Low

High

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On What Scale Should A Firm Enter Foreign Markets?

• After choosing which market to enter and the timing of entry, firms need to decide on the scale of market entry

firms that enter a market on a significant scale make a strategic commitment to the market

the decision has a long term impact and is difficult to reverse

small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm’s exposure to that market

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Scale Of Entry

large scale entry

• Cause rivals to rethink market entry (+).
• May lead to indigenous competitive response (-).
• Create firm image (+)
• Strategic commitments - long-term impact, difficult to reverse (-).

Small scale entry

Allowing a firm to learn about a foreign market (+);

limiting the firm’s exposure to that market (-).

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Is There A “Right” Way To Enter Foreign Markets?

• No, there are no “right” decisions when deciding which markets to enter, and the timing and scale of entry - just decisions that are associated with different levels of risk and reward

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How Can Firms
Enter Foreign Markets?

• six different ways to enter a foreign market

Exporting – a common first step for many manufacturing firms

later, firms may switch to another mode

Turnkey projects - the contractor handles every detail of the project for a foreign client, including the training of operating personnel

at completion of the contract, the foreign client is handed the "key" to a plant that is ready for full operation

Licensing - a licensor grants the rights to intangible property to the licensee for a specified time period, and in return, receives a royalty fee from the licensee

patents, inventions, formulas, processes, designs, copyrights, trademarks

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How Can Firms
Enter Foreign Markets?

Franchising - a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business

used primarily by service firms

Joint ventures with a host country firm - a firm that is jointly owned by two or more otherwise independent firms

most joint ventures are 50:50 partnerships

Wholly owned subsidiary - the firm owns 100 percent of the stock

set up a new operation

acquire an established firm

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International Entry Modes

Exploit Competitive

Advantage through

International Entry

Produce at home country and export

Turn-key, Licensing or Franchising

Equity-based Alliances or J.V

Cross-border acquisition

“Greenfield” subsidiaries

Foreign production

Own and control assets in foreign country

Majority or wholly-owned affiliates

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Why Choose A
Turnkey/licensing/franchising?

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Why Choose A
J.V/Wholly-owned subsidiary?

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How Do Core Competencies Influence Entry Mode?

• The optimal entry mode depends on the nature of a firm’s core competencies
• When competitive advantage is based on proprietary technological know-how

avoid licensing and joint ventures unless the technological advantage is only transitory, or can be established as the dominant design

• When competitive advantage is based on management know-how

the risk of losing control over the management skills is not high, and the benefits from getting greater use of brand names is significant

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How Do Pressures For Cost Reductions Influence Entry Mode?

• When pressure for cost reductions is high, firms are more likely to pursue some combination of exporting and wholly owned subsidiaries

allows the firm to achieve location and scale economies and retain some control over product manufacturing and distribution

firms pursuing global standardization or transnational strategies prefer wholly owned subsidiaries

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Which Is Better –
Greenfield or Acquisition?

• The choice depends on the situation confronting the firm

A greenfield strategy - build a subsidiary from the ground up

a greenfield venture may be better when the firm needs to transfer organizationally embedded competencies, skills, routines, and culture

An acquisition strategy – acquire an existing company

acquisition may be better when there are well-established competitors or global competitors interested in expanding

• The volume of cross-border acquisitions has been rising for the last two decades

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Why Choose Acquisition?

• Acquisitions are attractive because

they are quick to execute

they enable firms to preempt their competitors

they may be less risky than greenfield ventures

• Acquisitions can fail when

the acquiring firm overpays for the acquired firm

the cultures of the acquiring and acquired firm clash

anticipated synergies are slow and difficult to achieve

there is inadequate pre-acquisition screening

• To avoid these problems, firms should

carefully screen the firm to be acquired

move rapidly to implement an integration plan

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Why Choose Greenfield?

• The main advantage of a greenfield venture is that it gives the firm a greater ability to build the kind of subsidiary company that it wants
• But, greenfield ventures are slower to establish
• Greenfield ventures are also risky

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What Are Strategic Alliances?

• Strategic alliances refer to cooperative agreements between potential or actual competitors

range from formal joint ventures to short-term contractual agreements

• attractive because they

facilitate entry into a foreign market

allow firms to share the fixed costs and risks of developing new products or processes

bring together complementary skills and assets

help a firm establish technological standards for the industry that will benefit the firm

• But, the firm needs to be careful not to give away more than it receives

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What Makes
Strategic Alliances Successful?

• The success of an alliance is a function of

Partner selection

• A good partner

helps the firm achieve its strategic goals and has the capabilities the firm lacks and that it values

shares the firm’s vision for the purpose of the alliance

will not exploit the alliance for its own ends

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What Makes
Strategic Alliances Successful?

Alliance structure

• The alliance should

make it difficult to transfer technology not meant to be transferred

have contractual safeguards to guard against the risk of opportunism by a partner

allow for skills and technology swaps with equitable gains

minimize the risk of opportunism by an alliance partner

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What Makes
Strategic Alliances Successful?

The manner in which the alliance is managed

• Requires

interpersonal relationships between managers

cultural sensitivity is important

learning from alliance partners

knowledge must then be diffused through the organization

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Dynamics of Mode of Entry

Early market development

Exporting

WOS (Acquisition)

Strategic alliance

Licensing/ Franchising

WOS (greenfield)

Uncertain situation

IP not well protected

# of firms in the industry is growing fast

Need for global integration is high

Secure a strong presence in international market

Cost reduction pressure is high