Two basic conditions determine a firm's profits: the amount of value customers place on the firm's goods or services and the firm's costs of production. In general, the more value customers place on a firm's products, the higher the price the firm can charge for those products. Note, however, that the price a firm charges for a good and service is typically less then the value placed on that good or service by the customer. This is so because the customer captures some of that value in the form of what economists call a consumer surplus.
The value creation by a firm is measured by the difference between the amount of value customers place on the firm's goods or services (V) and firm's cost of production. Michael porter has argued that low cost and differentiation are two basic strategies for creating value and attaining a competitive adv in an industry.
Porter also notes that it is important for a firm to be explicit about its choice of strategic emphasis with regard to differentiation and low cost, and to configure its internal operations to support that strategic emphasis. 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.
In sum, porter emphasizes that it is very important for mgt to decide where the company wants to be positioned with regard to value and cost, to configure operations accordingly, and to manage them efficiently to make sure the firm is operating on the efficiency frontier. A firm must also choose a strategic position that is viable.
Strategy in international business
Many international markets are now extremely competitive due to the liberalization of the world trade and investment environment. In industry after industry, capable competitors confront each other around the globe. To be profitable in such an environment, a firm must make clear and viable strategic choice with regard to its position on the efficiency frontier,...