IB Exam 2

first mover advantages

advantages accruing to the first to enter a market

timing of entry

entry is early when a firm enters a foreign market before other foreign firms and late when a firm enters after other international businesses have established themselves

location economies

cost advatnages from performing a value creation activity at the optimal location for that activity

low cost strategy

lowering production costs

differentiation strategy

increasing the attractiveness of a product

efficiency frontier

all the different positions that a firm can assume with regard to adding value to the product and low cost, assuming that the internal operations align with their strategy

controls

the metrics used to measure the perfomance of subunits and make judgements about how well managers are running those subunits

pressures for cost reductions

• lower cost for more profit

• differentiation and localization raise prices

• conflicting demands

• more intense when producing commodities

pressures to be locally responsive

• diferences in consumer tastes and preferences

• differences in infrastructure

• host government demands (regulations)

• differences in distribution channels (supermarkets ex)

global standardization

• a firm focuses on increasing profitability and profit growth by reaping the cost reduction that come from economies of scale, learning effects, and location economies

• pursure low cost strategy on a global scale

• try not to customize their product to local conditions (expensive)

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

localization strategy

• increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national or regional markets

• most appropiate when it comes to tastes and preferences of the product across nations and regions

• customization limits the ability of a firm to capture the cost reductions associated with mass producing

• added value or increased demand allows them to make up the lost money with a higher price

transnational strategy

• trying to simultaneously achieve low cost through location economies, economies of scale, and learning effects

• differentiate their product offering across geographic markets to account for local differences

• foster a multidirectional flow of skills between different subsidiaries in the firm’s global network of operations

• conflicting demand

• difficult to implement

international strategy

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

• selling a product that serves universal needs

organizational strcuture

the 3 part strcuture of an organization, including its formal division into subunits such as product divisions, its location of decision-making responsibilities within that structure, and the establishment or integration mechanisms to coordinate the activities of all subunits

organizational architecture

the totality of a firm’s organizations, including formal organizational strcture, control systems and incentives, organzational strcutre, processes, and people

core competencies

firms skills that competitors cannot easily match or imitate

learning effects

cost saving from learning by doing

economies of scale

cost advantages associated with large scale production

3 main factos for the success of an alliance

• partner selection

• allaince structure

• alliance management

cross border trade and investment

• lowering of barriers

• tariffs on the rise

3 conditions for profitability

• elements of the organizational architecture must be internally consistent

• architecture must match and fit the strategy of the firm

• strategy and architecture must make sense given the competitive conditions prevailing the firms markets

centralized decision making

• concentrated at top levels of mangement

• facilitate coordination

• ensure that decisions are consistent with organizational objectives

• give top levele managers the means to bring about needed organizational changes

decentralized decision making

• distributed across different levels

• more individual freedom

• greater flexibility

• better decisions: decisions are made closer to the spot by individuals who have better information than managers several levels up in a hierarchy

horizontal differentiation

• how the firm divides itself into subunit

• across the organization at the same level of hierarchy

vertical differentiation

• hierarchical levels in an organization

• top to lower levels

product divisional structure

• each division is responsible for a distinct product line

• self contained, largely autonomous entity with its own functions

• headquarters retains control for the overall strategic direction

international division structures

• organized on geography

• export the product manufactured at home to foreign subsidiaries

• dual structure can conflictand problems with coordination between domestic and foreign operations

• many firms start off with this structure

worldwide product divisional structure

• adopted by firms that are reasonably diversified, and accordingly, originall had domestic structures based on product divisions

• allows for worldwide coordination of value creation activities of each product division

• helps realize location economies and experience effects

• facilitiates the transfer of core competencies

• does not allow for local responsiveness

worldwide area strucure

• favored by firms with low degree of diversification and a domestic structure based on function

• divides the world into autonomous geographic areas

• decentralizes operational authority

• facilitates local responsiveness

• fragments an organization into highly autonomous entities

global matrix structure

• tries to minimize the limitations of the worldwide area structure and the worldwide product divisional structure

• horizontal differentiation proceeds along 2 dimensions

  • product division and geographic area

• dual decision making responsibility should be shared by the product divison and various areas of the firm

• does not always work as well as it states

• lead to power struggles between the areas and the product divisions

• difficult to be accountable

which markets to enter

• benefits, costs, and risks associated with doing business in that country

• size of the market, the purchasing power of consumers, future wealth

• living standards and economic growth

• future economic growht

• economically advanced and politically stable countries

• suitability of its product offering

when should a firm enter its market

• early

  • first mover advantages

  • ability to build sales volume

  • ability to create switching costs that tie customers into their products or services

  • pioneering costs (CON)

• late

  • other international businesses have already established themselves

on what scale should firms enter these markets

• large scale

  • more commitment

  • difficult to reverse

  • first mover advantages

  • lack of flexibility

• small scale

  • limit exposure while learning about a foreign maket

  • reduces risk

  • lack of commitment makes it more difficult to build market share

exporting

• many firms start off as exporters and then move to other modes

PRO

• avoid costs

• achieve experience curve and location economies

CON

• not appropiate if lower cost locations from manufacturing the product can be found abroad

• high transportation costs

• tariff barriers

• delegation of marketing, sales, and service

turnkey projects

• the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel

PRO

• earning great economic returns from the know how required to assemble and run a technologically complex process (especially where FDI is limited by host government)

• less risky than conventional FDI

CON

• no long term interest in the country to which they enter

• if a process’s technology is a competitive advantage, they run the risk of loosing the control of their technology

licensing

• arrangment whereby a licensor grants the rights to intangible property to another entity for a specific period of time, and in return, the licensor receives royalty fee from the licensee

• patents, inventions, formulas, processes, deisgns, copyrights, and trademarks

PRO

• not having to bear the development costs and risk associated with opening a foreign market

• avoids barriers to investment

• easier to respond to customer needs

CON

• lack of control over operations

• potential for creating a competitor

• requires a firm to coordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another

franchising

• a specialized form of licensing in which the franchiser not only sell intaginble property to the franchisee, but also abide by strict rules on how it does busienss

PRO

• the firm is relieved of the many costs and risks of opening a foreign market on its own

• very similar to those of licensing

CON

• quality control
  

joint ventures

• entails establishing a firm that is jointly owned by two or more otherwise independent firms

• 50-50

PRO

• benefit from a local partners knowledge of the host country’s competitive conditions, culture, language, political systems and business

• a firm might gain by sharing these costs and risks with a local partner

• political considerations make it the only feasible option

CON

• risks giving control of its technology to its partners

• may not have the tight control to realize learning effects or location economies

• shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time

greenfield investment

PRO

• reduce the risk of losing control over core competencies

• tight control in different countries necessary for global strategic cooridnation

• greatest opportunity for long term growth

CON

• firm bears the full cost and risk of setting up overseas operations

• slower to establish

• large investment and risk
  

foreign acquisition

PRO

• quick to execute

• less risky than greenfield ventures

• immediate local expertise

CON

• acquiring firm overpays for the acquired firm

• cultures of the acquiring and acquired firm clash

• anticipated synergies are slow and difficult to achieve

• inadequate pre-acquistion screening

management know how

• risk of losing control over management skills to franchisees or joing venture partners is not that great

geocentric

staffing with no matter nationality

ethnocentric

staffing done from home country

polycentric

home country nationals tkae care of management while host country nationals are recruited