11.2: Global Expansion, Profitability, and Profit Growth. Flashcards
What are the four ways in which firms can increase their profitability and rate of profit growth by expanding globally?
- Expanding the market for their domestic product offerings internationally.
- Realizing location economies by dispersing activities to the most efficient global locations.
- Gaining cost economies from experience effects by serving a larger market.
- Earning greater returns by transferring valuable skills developed in foreign operations to other parts of the firm’s global network.
What is meant by “location economies” in the context of global business expansion?
Location economies refer to the efficiencies and effectiveness gained by dispersing different value creation activities to locations around the globe where they can be performed most efficiently and effectively.
How do experience effects contribute to a firm’s global expansion and profitability?
Experience effects lead to reduced costs of value creation due to serving an expanded global market from a central location, thereby increasing efficiency and reducing overall costs.
What is a core competence, and why is it important in global business expansion?
A core competence is a skill within a firm that competitors cannot easily match or imitate, often residing in the firm’s value creation activities.
It is the foundation of a firm’s competitive advantage, enabling it to reduce costs or create perceived value for premium pricing.
What is the significance of customizing product offerings, marketing strategies, and business strategies to local conditions in global expansion?
Customizing to local conditions, or localization, is crucial because it addresses the unique needs and preferences of different national or regional markets, which is essential for the success and acceptance of a firm’s products or services in those markets.
What are location economies in the context of international business?
Location economies are the benefits that arise from performing a value creation activity in the optimal location for that activity, considering economic, political, and cultural conditions, including relative factor costs.
How can location economies affect a firm’s cost structure and product differentiation?
Location economies can lower the costs of value creation, helping a firm achieve a low-cost position, and/or enable a firm to differentiate its product offering from competitors, potentially supporting higher pricing.
What factors should a firm consider when deciding the location for its value creation activities?
A firm should consider the economic, political, and cultural conditions, including the availability of skilled labor, cost of labor, quality of infrastructure, political stability, and local market characteristics.
How do location economies contribute to a firm’s competitive advantage in the global market?
By strategically choosing locations for various activities based on cost efficiencies, skill availability, and other factors, firms can optimize their cost structures and enhance product differentiation, thereby gaining a competitive edge in the global market.
What is a global web of value creation?
A global web of value creation refers to the dispersion of a company’s value creation activities to various global locations where the perceived value is maximized or the costs of value creation are minimized.
What is the experience curve?
The experience curve represents systematic reductions in production costs over the life of a product, where costs decline by some quantity each time cumulative output doubles. This is due to learning effects and economies of scale.
What are learning effects?
Learning effects refer to cost savings that result from “learning by doing.” They are significant when a task is technologically complex and are most impactful during the start-up period of a new process.
What are economies of scale?
Economies of scale are reductions in unit cost achieved by producing a large volume of a product, allowing a firm to spread fixed costs over a large volume, thereby lowering average unit costs and increasing profitability.
What is the strategic significance of the experience curve?
Moving down the experience curve allows a firm to reduce its cost of creating value, thus increasing its profitability and competitive advantage. Firms further down the curve can price more aggressively while maintaining profitability.
How does the experience curve act as a barrier to new competition?
A firm well down the experience curve can price its products in a way that maintains profitability while new entrants, higher up the curve, may suffer losses. This cost advantage can deter new competitors.
