Strategy and the Firm
Strategy-A firm’s strategy can be defined as the actions that the managers take to attain goals of the firm. For most firms the preeminent 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 the profitability of the enterprise and rate of profit growth over time.
Managers can increase the profitability by choosing strategies lower costs or those that add value to the firm’s products. Both enable a firm to raise its prices. Managers can either sell in existing markets or enter new markets to maximize profits.
In order to increase profitability a firm must keep on creating value. Value is measured by the difference in its cost of production and the value that consumers give to the products. The more value, the higher the price. Value is hard to attain because (1) It is competing with others in the market so it has to charge a lower price to stay in the business. (2)It is impossible to charge every customer a different price according to the value he/she may assume of the product.
A firm has high profits when it creates more value and does so at a lower cost.
Low cost strategy- Strategy which focuses mainly on lowering production costs.
Differentiation strategy- Strategy that primarily focuses on increasing the attractiveness of a product.
Superior profits go to those firms that create superior value. Either drive down the cost structure or differentiate products in some way so that consumers value them more and pay a premium price.
Operations: The Firm As A Value Chain
The operations of a firm can be thought of as a value chain composed of a series of distinct value creation activities such as production, marketing, R&D etc. If a firm is to implement a strategy efficiently it must manage these activities efficiently and in a manner that is consistent with its strategy.
Primary Activities- Design, creation, marketing and after sales service.
a) R&D- Through superior product design it can increase the functionality of products which make them more attractive or result in efficient production which drives down costs.
b) Production- Perform activities efficiently to drive down costs or produce higher quality products.
c) Marketing- Through advertising it can increase the value of that consumers perceive of the product. Thus higher prices can be charged.
d) After sales service- This can create superior value in the eye of the customers by solving customer problems and supporting customers after they have purchased the product.
Support Activities- These activities provide inputs that allow the primary activities to occur. Information systems, Logistics, human resource, company infrastructure.
Firms that operate internationally are able to:
Expand the market for their domestic products by selling those products in the international markets.
Realize location economies by dispersing individual value creation activities to those locations where they can be performed most efficiently and effectively.
Realize greater cost economies from experience effects by serving a global market from a central location reducing cost of value creation.
Earn a greater return by transferring any valuable skills developed in foreign operations and transferring them to other parts of the firm’s global network.
Expanding The Market: Leveraging Products And Competences
The success of many multinational companies that expand is based not just upon the goods or services but also on the core competences that underlie the development, production and marketing of those items.
Core Competences- Skills within the firm that competitors cannot easily match or imitate. These skills may exist in any of the firm’s value creation activities. Such skills are expressed in product offerings that other firms find...