Strategy of International Business

Part 1 Semi- Finals

Basic Principles of strategy

 Strategy can be defined as the actions that managers take to attain the goals of a firm. For most firms, the prominent
goal is to maximize the value of the firm of its owners, and its shareholders.
How to maximize the value of the firm?
Managers must pursue strategies that increase the profitability of the enterprise and its rate of profit growth overtime.
 Profitability – can be measured in a number of ways, but for its consistency, the rate of return that the firm makes on
its invested capital (ROIC)-return of invested capital, which is calculated by dividing the net profits of the firm by total
invested capital.
 Profit Growth – is measured by the percentage increase in net profits over time.
How managers can increase the profitability of the firm?
- By pursuing strategies that lower costs or by pursuing strategies that add value to the firms product which enable the
firms to raise prices. With strategies, they can sell more products in existing markets and or strategies to enter new
markets.
Determinants of Enterprise Value.
Enterprise Value ------- Profitability ---- Reduce cost and Add Value and Raise Prices
----- Profit Growth - Sell more products to existing markets and Enter New Market
Value Creation
The way to increase the profitability of a firm is to create more value.
The amount of value a firms creates is measured by the difference between its costs of production and the value that customer
perceives in its products.
In general, the more value customers place on firms products, the higher the price the firm can change for those products.
However, the price a firm charges for a good or service is typically less than the value placed on the firm of what economist call
consumer surplus.
A company can create more value either by lowering production cost, or by making product more attractive through superior
design, styling, functionality, features and reliability, so that consumer place a greater value on it and consequently are willing to
pay a higher price.
“ A firm has high profits when it creates more value for its customer and does so at a lower cost”
These two are basic strategies for creating value and attaining competitive advantage in the industry.
 Low cost strategy – this is a strategy that primarily focuses on lowering production costs.
 Differentiation strategy – strategy that primarily focuses on increasing the attractiveness of a product.

Global Expansion, Profitability and Profit Growth

Expanding globally allows firms to increase their profitability and the rate of profit growth in ways not available to purely
domestic enterprises. Firms that operate internationally are able to:
 Expand the market for their domestic product offerings by selling those products in international markets.
e.g. increase growth rate by taking goods or services developed at home country and selling internationally like
Pampers disposable diapers and Ivory soap.
 Realize location economies by dispersing individual value creation activities to those locations around the globe where
they can perform most efficiently and effectively. eg. differences in factor costs. Japan might excel in the production
of automobiles and consumer electronics, U.S . computer software, pharmaceuticals, biotechnology products and
financial services, Switzerland in the production of precision instrument and pharmaceuticals, South Korea in the
production of semi – conductors, China in the production of apparel.
 Realize greater cost economies from experience effects by serving an expanded global market from a central location,
thereby reducing the cost of value creation. eg. Learning Effects – refers to cost savings that come from learning by
doing like labor learns repittion how to carry out a task such as assembling most efficiently.
 Earn a greater return by leveraging any valuable skills developed in foreign operations and transferring them to other
entities within the firm’s global network of operations. eg. Mc Donalds in France - franchisee .