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, and take actions at the operational and strategic level that support this position. Thus, strategy is often concerned with identifying and taking actions that will lower the costs of value creation and/or will differentiate the firm's product offering through superior design, quality, service, functionality and so on. The firm's objective at this point was to lower production costs by locating value creation activities at an appropriate location.
Advantages of global expansion
The theory of international trade also teaches us that due differences in factor costs, certain countries have a comparative adv in the production of certain products. Japan-automobiles, US-computer software, drugs, etc. Trade barriers and transportation costs permitting, the firm will benefit by basing each value creation activity it performs at that location where economic, political and cultural conditions, including relative factor costs, are most conducive to the performance of that activity.
Firms that pursue such a strategy can realize what we refer to as location economies, the economies that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be. Locating a value creation activity in the optimal location for that activity can have one or two effects. It can lower the costs of value creation and help the firm to achieve a low cost position, and/or it can enable a firm to differentiate its product offering from those of competitors.
Clear vision moved its manufacturing operations out of US to HK then to China to lower the labor costs and costs of value creation. At the same time, clear vision shifted some design operations from US to france and italy - specialized designer to increase the perceived value. In turn, differentiation should allow clear vision to charge a premium price for its product offering.
Introducing transportation costs and trade barriers...