Ch12 The Strategy of International Business.docx

The Strategy of International Business     1. A firm's strategy can be defined as the actions that managers take to attain the goals of the firm.    2. The preeminent strategic goal for most firms is to maximize the value of the firm for its owners.    3. Profitability can be defined as the rate of return that the firm makes on its invested capital, which is calculated by dividing the total sales of the firm by total invested capital.    4. Profit growth is measured by the percentage increase in net profits over time.    5. The amount of value a firm creates is measured by the difference between its costs of production and the price that it charges for its products.    6. A firm has high profits when it creates more value for its customers and does so at a lower cost.    7. A strategy that focuses primarily on increasing the attractiveness of a product is known as a low-cost strategy.    8. 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.    9. For a firm, all positions on the efficiency frontier are viable.    10. The strategy, operations and organization of a firm must all be consistent with each other if the firm is to attain a competitive advantage and achieve superior profitability.    11. Support activities include the design, creation and delivery of a product.    12. R&D, production, marketing and sales and customer service are all examples of primary activities.    13. Support activities are always less important than the primary activities in achieving a competitive advantage.    14. Global expansion offers companies the opportunity to generate greater profits than companies that focus strictly on the domestic market.    15. The success of many MNEs is based not just upon the goods or services that they sell in foreign nations, but also upon the core competencies that underlie the development, production and marketing of those goods or services.    16. The skills within the firm that competitor can easily match or imitate are known as core competencies.    17. Core competencies are by definition the source of a firm's competitive advantage.    18. Economies that arise from performing a value creation activity in the optimal location are known as location economies.    19. When a firm creates a global web of value creation activities, the company disperses different stages of the value chain to those locations in the world where perceived value is maximized or where the costs of value creation are minimized.    20. Systematic increase in sales that have been observed to occur over the life of the product are referred to as the experience curve.    21. Costs saving that come from learning by doing are known as economies of scale.    22. Economies of scale are reductions in unit costs achieved by producing a large volume of a product.    23. Moving down the experience curve allows a firm to reduce its cost of creating value and increase its profitability.    24. Once a firm has established a low cost position, it can act as a barrier to new competition.    25. Skills in an MNE are always generated at the headquarters location and are then dispersed to the rest of the organization.    26. A company can create value by leveraging the skills created at the subsidiary level and applying them to other operations with the organization.    27. Most international managers recognize that the best ideas are generated at the headquarters location.    28. To leverage subsidiary skills, companies should establish incentive systems that encourage local employees to acquire new skills.    29. To create value, managers should have a process for identifying when valuable new skills have been created at a subsidiary and then act as a facilitator to transfer the new skills within the firm.    30. Two types of competitive pressure that affect the ability of MNEs to compete in the global marketplace are pressure for cost reductions and pressure for local responsiveness.    31. Pressures for cost reductions and pressures to be locally responsive place similar demands on a firm.    32. Universal needs exist when the tastes and preferences of consumers in different nations are similar if not identical.    33. Pressures for cost reduction are minimal 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.    34. When consumer tastes and preferences differ significantly between countries, there is low pressure for local responsiveness.    35. A global standardization strategy focuses on increasing profitability and profit growth by customizing product offerings and marketing strategy to local conditions.    36. A global standardization strategy is appropriate when a firm is facing low pressures for cost reduction and low pressure for local responsiveness.    37. When a firm focuses on increasing profitability by customizing the product or service so that they provide a good match to tastes and preferences in different national markets the firm is following a localization strategy.    38. When a firm simultaneously faces low pressure for cost reduction and low pressure for local responsiveness, a transnational strategy may be appropriate.    39. Changing a firm's strategic posture to build an organization capable of supporting a transnational strategy is a complex and challenging task.    40. As competition intensifies, global standardization strategies and transnational strategies tend to become less viable and managers need to orientate their companies toward either a international strategy or a localization strategy.      Multiple Choice Questions   41. _____ can be defined as the rate of return that the firm makes on its invested capital, which is calculated by dividing the net profits of the firm by total invested capital.  A. Profitability B. Performance C. Cash flow D. Efficiency   42. The percentage increase in net profits over time measures  A. Capital return B. Profitability C. Net profits D. Profit growth   43. Which of the following statements is not ?  A. The way to increase the profitability of a firm is to create more value B. The amount of value a firm creates is measured by the difference between its costs of production and the value that consumers perceive in its products C. The more value customers place on a firm's products, the lower the price the firm is able to charge for those products D. The price a firm charges for a good or service is typically less than the value the customer places on that good or service   44. The amount of value a firm creates is best measured by the difference between  A. Its costs of production and the net profit generated B. Its costs of production and the value that consumers perceive in its products C. The quality of the products and the total income generated through sales D. Its operating profits and the sum of the sunk costs and bad debts   45. The value of a product to an average consumer is V; and the average price that the firm can charge a consumer for that product is P. Here, V - P can be termed as:  A. Consumer surplus per unit B. Producer surplus per unit C. Profit growth D. Profit per unit sold   46. A consumer surplus can be best described as  A. What the consumer has "left-over" after a purchase B. How much extra a consumer has to pay for a product C. The amount a consumer benefits, by buying a product for lesser price than what he/she would be willing to pay D. The higher price the consumer must pay for getting a quality product   47. A strategy that focuses on lowering production costs is referred to as a  A. Differentiation strategy B. Economies of scale strategy C. Low cost strategy D. Efficiency strategy   48. A strategy that focuses on increasing the attractiveness of a product is referred to as a(n)  A. Differentiation strategy B. Low cost strategy C. Effectiveness strategy D. Efficiency strategy   49. The _____ shows all of the different positions a firm can adopt with regard to adding value to the product and low cost assuming the firm's internal operations are configured efficiently to support a particular position.  A. Strategic choice curve B. Strategy convex C. Efficiency frontier D. Experience curve   50. _____ 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.  A. Efficiency matrixes B. Diminishing returns C. Cost plus curves D. Strategy convex curves   51. The basic strategy paradigm suggests that to maximize its profitability, a firm should do all of the following, except  A. Choose, according to strategy, any position on the efficiency frontier as all positions are viable B. Pick a position on the efficiency frontier that is viable in the sense that there is enough demand to support that choice C. Configure its internal operations so that they support the position on the efficiency frontier D. Make sure that the right organization structure is in place to execute the strategy   52. The _____ activities are basically concerned with creating the product, marketing and delivering the product to buyers and providing support and after-sales service.  A. Support B. Subordinate C. Ancillary D. Primary   53. Which of the following is an example of a primary activity in a firm's value chain?  A. Information systems B. Research and development C. Logistics D. Human relations   54. Which of the following is an example of a support activity in a firm's value chain?  A. R&D B. Customer service C. Human resources D. Marketing and sales   55. The marketing and sales functions of a firm can help to create value through all of the following ways, except  A. Creating goods and services B. Brand positioning C. Advertising D. Communicating consumer needs to R&D   56. _____ activities of the value chain provide inputs that allow the primary activities to occur  A. Complementary B. Basic C. Support D. Core   57. The _____ function creates value by ensuring the company has the right mix of people to perform activities effectively.  A. Information systems B. Company infrastructure C. Human resources D. Logistics   58. Global expansion allows firms to achieve all of the following, except  A. Standardize their product offering, marketing strategy and business strategy for all national conditions B. Realize location economies by dispersing value creation activities to the optimal location C. Realize cost economies from experience effects generated by serving a larger market from a central location D. Expand the market for their domestic product offerings by selling those products in international markets   59. What best describes the skills within the firm that competitors cannot easily match or imitate?  A. Organizational advantage B. Core competence C. Competitive gains D. Technical skill set   60. Economies that arise from performing a value creation activity in the optimal place for that activity are referred to as  A. Factor economies B. Production economies C. Location economies D. Value creation economies   61. When companies disperse different stages of the value chain to those locations around the world where perceived value is maximized or where the costs of value creation are minimized, companies create  A. A differentiated organization B. A location economy curve C. Economies of scale D. A global web of value creation activities   62. It has been observed that a product's production costs decline by some quantity about each time  A. Cumulative output increases by twenty five percent B. Cumulative output quadruples C. Cumulative output doubles D. Cumulative output triples   63. _____ refer(s) to systematic reductions in production costs that have been observed to occur over the life of a product.  A. Experience curve B. Economies of scale C. Location economies D. Production possibility   64. When individuals gain knowledge of the most efficient ways to perform particular tasks, they are saving costs through  A. Location economies B. Value creation effects C. Experience curve effects D. Learning effects   65. Learning effects  A. Tend to be less significant when a technologically complex task is repeated B. Will be less significant in an assembly process involving 1,000 complex steps than in one of only 100 simple steps C. Typically disappear after a while D. Are more significant after two or three years of the introduction of a new process   66. Economies of scale arise from all of the following sources, except  A. Increasing fixed costs by limiting them to small volumes B. Serving domestic and international markets from the same production facilities C. Serving global markets D. Bargaining with suppliers to bring down the cost of key inputs   67. Moving down the experience curve  A. Increases the cost of a firm's raw material B. Allows a firm to reduce its cost of creating value C. Decreases a firm's profitability D. Increases the R & D expenditure of a firm   68. Firms usually respond to pressures for cost reduction by trying to  A. Lower the costs of value creation B. Be locally responsive C. Undertaking product differentiation D. Diversifying product lines   69. Responding to pressure for _____ requires that a firm differentiate its product offering and marketing strategy from country to country in an effort to respond to differences in consumers tastes and preferences, business practices, distribution channels, competitive conditions and government policies.  A. Cost reductions B. Experience effects C. Lowering the costs of value creation D. Being locally responsive   70. _____ exist when the tastes and preferences of consumers in different nations are similar if not identical.  A. Universal needs B. Homogenous needs C. Basic needs D. Bundled needs   71. Which of the following is less likely to add to the pressure for a firm to be locally responsive?  A. National differences in consumer tastes and preferences B. Differences in infrastructure and traditional practices C. Switching costs for consumers D. Host-government demands   72. A firm will face intense pressure for cost reduction in all of the following cases, except  A. When competitors are based in low-cost locations B. Where there is persistent excess capacity C. Where industries produce commodity-type products D. Where consumers have low switching costs   73. When a firm has a strategic goal of pursuing a low cost strategy on a worldwide scale, the firm should follow a(n)  A. Global standardization strategy B. Localization strategy C. International strategy D. Customization strategy   74. Which of the following is not associated with firms following the global standardization strategy?  A. Low pressures for local responsiveness B. Use cost advantage to support aggressive pricing in world markets C. High pressures for cost reductions D. Customize product offering and marketing strategy to local conditions   75. Which strategy makes most sense when there are strong pressures for cost reductions and minimal demands for local responsiveness?  A. Global standardization strategy B. Transnational strategy C. Localization strategy D. International strategy   76. A firm facing low pressures for cost reductions and low pressures for local responsiveness is most likely to follow a (n)  A. Global standardization strategy B. Localization strategy C. International strategy D. Transnational strategy   77. _____ strategy 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.  A. Localization B. Transnational C. Global standardization D. International   78. Which strategy focuses on increasing profitability by customizing the firm's goods or services so they provide a good match to tastes and preferences in different national markets?  A. Global standardization strategy B. Transnational strategy C. Localization strategy D. International strategy   79. Which of the following is a disadvantage of the localization strategy?  A. Decrease in the value of the product in the local market B. Duplication of functions C. Inability to accommodate varying tastes and preferences in different markets D. Reduced customization   80. A firm that is facing both strong cost pressures and strong pressures for local responsiveness should follow a _____ strategy.  A. Localization B. Global standardization C. International D. Transnational   81. A(n) _____ strategy makes most sense when demands for local responsiveness are high, but cost pressures are moderate or low.  A. Global standardization B. International C. Localization D. Transnational   82. A firm that is pursuing a(n) _____ strategy is simultaneously trying to achieve low costs through location economies, economies of scale and learning effects and trying to differentiate its product offering across geographic markets.  A. Global customization B. International C. Localization D. Transnational   83. Firms that pursue a transnational strategy are trying to simultaneously do all of the following except  A. Achieve low costs through location economies B. Standardize their product offering for the global market C. Foster a multidirectional flow of skills between different subsidiaries D. Achieve low costs through economies of scale and learning effects   84. For firms that are selling a product that serves universal needs and that do not face significant competition, a (n) _____ strategy makes sense.  A. Localization B. Transnational C. International D. Global standardization   85. Which of the following is of the international strategy?  A. Product development tends to be highly decentralized B. Manufacturing and marketing are typically located in the headquarters location C. Extensive production customization is common D. The strategy is not viable in the long-run     Essay Questions   86. What is strategy? How does strategy relate to a firm's profitability?  A firm's strategy can be defined as the actions that managers take to attain the goals of the firm. For most firms, the key goal is to maximize the value of the firm for its owners. To maximize the value of the firm, managers must pursue strategies that increase profitability or rate of return the firm makes on its invested capital. Managers can increase profitability by pursuing strategies that lower costs and strategies that add value to the firm's products.   87. What is the difference between profitability and profit growth?  Profitability can be defined as the rate of return that the firm makes on its invested capital which is calculated by dividing the net profits of the firm by total invested capital. The percentage increase in net profits over time is profit growth. In general, the value of the firm will increase when both profitability and profit growth are high.   88. How can a firm increase its profitability?  A firm that wants to increase profitability or the rate of return on invested capital, needs to create more value. The difference between a firm's cost of production and the value that customers place on a firm's products is equal to the amount of value the firm creates. Therefore, a firm has high profits when it creates more value for its customers and does so at a lower cost.   89. Discuss Michael Porter's interpretation of value creation and competitive advantage.  According to Michael Porter, low cost and differentiation are two basic strategies for creating value and attaining a competitive advantage in an industry. Porter argues that those firms that create superior value will achieve superior profitability. Porter notes that it is not necessary for a firm to have the lowest cost structure or create the most valuable product; rather it is only important that the gap between value and the cost of production be greater than that of competitors.   90. Discuss strategic positioning. How does strategic positioning relate to the efficiency frontier?  The efficiency frontier shows all of the different positions that a firm can adopt with regard to adding value to the product and low cost assuming that its internal operations are configured efficiently to support a particular position. It is important that managers decide where a firm should be positioned with regard to value and cost, configure operations accordingly and manage them efficiently to ensure the firm is operating on the efficiency frontier.   91. Consider the firm in terms of a value chain. What is the difference between primary activities and support activities? Provide examples of each.  The operations of a firm can be thought of as a value chain composed of a series of distinct value creation activities. Primary activities have to do with the design, creation and delivery of the product; its marketing; and its after-sale-service. Normally, primary activities are divided into R&D, production, marketing and sales and customer service. The support activities of the value chain provide inputs that allow the primary activities to occur. Support activities include information systems, company infrastructure, logistics and human resources.   92. How can the marketing and sales functions of a firm create value?  There are several ways the marketing and sales functions of a firm can help create value. The marketing function can create value through brand positioning and advertising. If the firm can create a favorable impression of the firm's product in the minds of consumers, it can increase the price that can be charged. Marketing and sales can also create value by identifying consumer needs and passing that information along to the R&D department. Resolving customer's problems and supporting customers after they have purchased the product can also create the perception of superior value.   93. Describe the benefits of global expansion for firms.  Global expansion allows firm to capture many opportunities not open to firms that remain focused purely on the domestic market. Firms that operate globally have the opportunity to sell their product in a much larger marketplace. Location economies can be realized through global expansion by dispersing value creation activities to the optimal location in the world. International expansion allows a firm to realize greater cost economies from experience effects. Finally, global expansion provides firms with the opportunity to earn a greater return by leveraging any skills developed in foreign operations and transferring them within the organization.   94. What is a core competence? Why is it essential to the success of the firm?  A core competence 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. Core competencies are the bedrock of a company's competitive advantage. In fact, the success of many MNEs that expand globally is dependent not just on the goods or services they sell, but also on core competencies that underlie the development, production and marketing of the goods or services.   95. Explain the concept of location economies.  Location economies are the economies that arise form performing a value creation activity in the optimal location for that activity, wherever in the world that might be. For a firm that is trying to survive in a competitive global market, basing each value creation activity it performs at that location where economic, political and cultural conditions are most conducive to the performance of that activity will provide benefits to the firm. As firms pursue location economies, they may also be in the process of creating a global web of value creation activities, with different stages of the value chain being dispersed to those locations around the globe where perceived value is maximized or the costs of value creation are minimized.   96. How can firms successfully leverage the skills developed at the subsidiary level?  Firms can successfully leverage skills developed at the subsidiary level by doing four things. First, managers must have the humility to recognize that valuable skills that lead to competencies can arise anywhere within the firm's global network, not just at the corporate center. Second, the firm must establish an incentive system that encourages local employees to acquire new skills. Third, managers must have a process for identifying when valuable new skills have been created in a subsidiary. Finally, managers must act as facilitators helping to transfer valuables skills within the firm.   97. What are the two types of competitive pressures that firms competing in the global marketplace face? How do firms respond to these pressures?  Firms that compete in the global marketplace typically face two types of competitive pressure that affect their ability to realize location economies and experience effects, to leverage products and transfer competencies and skills within the enterprise. They face pressures for cost reductions and pressures to be locally responsive. These competitive pressures place conflicting demands on a firm. Responding to pressures for cost reductions requires that a firm try to minimize its unit costs. Responding to pressures to be locally responsive requires that a firm differentiate its product offering and marketing strategy from country to country in an effort to accommodate the diverse demands arising from national differences in consumer tastes and preferences, business practices, distribution channels, competitive conditions and government policies.   98. Using examples, describe the situations where pressure for cost reduction is especially intense.  Pressure for cost reduction can be particularly intense in industries producing commodity-type products where meaningful differentiation on non-price factors is difficult and price is the main competitive weapon. These conditions are of products that serve universal needs such as bulk chemicals, petroleum, steel and sugar. Pressure for cost reductions is also 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.   99. Discuss the factors that lead to pressure for local responsiveness.  There are many factors that contribute to the need for local responsiveness. When consumer tastes and preferences differ significantly between countries, a firm's products and marketing message must be customized to the local market. Differences in infrastructure and traditional practices among countries may require the firm to delegate manufacturing and production facilities to foreign subsidiaries. A firm's marketing strategies may have to be responsive to differences in distribution channels among countries. Finally, economic and political demands imposed by host country governments may require local responsiveness.   100. What are the four basic strategies that firms use to compete in international markets? Under what conditions is each strategy most appropriate?  The four basic strategies that firms use to compete in international markets are the international strategy, the global standardization strategy, the localization strategy and the transnational strategy. The international strategy is most appropriate when there is low pressure for local responsiveness and low pressure for cost reduction. When there is high pressure for cost reduction, but low pressure for local responsiveness the global standardization strategy makes sense. A localization strategy is appropriate when pressure for local responsiveness is high, but pressure for cost reduction is low. Finally, when pressure for both cost reduction and local responsiveness is high, the transnational strategy is best.   101. Explain why a firm would choose a global standardization strategy.  Firms that pursue a global standardization strategy focus on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects and location economies. The strategic goal of firms following a global standardization strategy is to pursue a low cost strategy and a global scale. This strategy makes most sense in those cases where there are strong pressures for cost reductions and where demands for local responsiveness are minimal.   102. Describe localization strategy. What type of firm is likely to follow a localization strategy?  A 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 is most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences. MTV is an example of a company that has successfully expanded internationally using a localization strategy. Localization was imperative for MTV if the company was to gain market share from local competitors. However, the firm also had to be aware of the costs involved in developing local programming.   103. Consider a transnational strategy. Why would a firm choose this strategic alternative? What are the disadvantages of this strategy?  Firms that are pursuing a transnational strategy are 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. Because this strategy puts conflicting demands on the company, it is difficult to achieve. Building an organization that is capable of supporting a transnational strategic posture is complex and difficult. In essence, a transnational strategy requires a firm to simultaneously achieve cost efficiencies, global learning and local responsiveness. This strategy makes sense when a firm faces high pressures for cost reductions and high pressures for local responsiveness.   104. What is an international strategy? When is this type of strategy appropriate?  When a firm is facing low cost pressures and low pressures for local responsiveness, an international strategy whereby the firm takes products initially developed for the domestic market and sells them internationally with only minimal local customization, may be appropriate. Firms in this position generally sell a product that serves universal needs, but does not face significant competition. Firms that pursue an international strategy try to create value by transferring valuable skills and products to foreign markets where indigenous competitors lack those skills and products. These firms tend to centralize product development functions at home and establish manufacturing and marketing functions in each major country in which they do business. An international strategy makes sense if a firm has a valuable core competence that indigenous competitors in foreign markets lack and if the firm faces relatively weak pressures for local responsiveness and cost reductions. Typically, local responsiveness is fairly modest.   105. Discuss the evolution of strategy. How does cost become important in the long-term?  An international strategy is typically not considered to be a sustainable long-term strategy. Over time, more efficient competitors emerge, forcing firms to make cost reductions or risk losing significant market share. To survive, companies following an international strategy need to move toward a global standardization strategy or a transnational strategy prior to the emergence of competition. Similarly, a localization strategy is not considered a long-term strategy. Instead, companies following a localization strategy need to reduce their cost structures and the only way to achieve that are to move toward a transnational strategy.