all right let's talk strategy so the firm's goal is to grow profit and to to demonstrate profit growth over time and oftentimes that means you have exhausted high growth opportunities within your home country so it's time to look at a a globalization strategy and we've seen many many firms move in that direction so when we look at um creating value for the firm for profitability to to gain profits we typically reduce costs or add value that will cause our prices to increase for profit growth we typically need to sell more in the existing market or enter new markets so we have both profitability and profit growth leave to increase enterprise value and you can see why we look at globalization as a strategy from a profitability standpoint reducing cost by producing your product in a lower cost region um and then for profit growth uh enter new markets so both are large drivers for enterprise value so Michael um Porter Porter's model he has two different u focuses on how you create uh value creation strategies and one is differentiation so be able to sell your product at a higher price because it's it's unique and others don't have the same features as your product does you can sell it at a premium or be the lowcost provider just crank out volume at low cost and and make your money based on selling volume so here's his the value creation graph so this the the brighter pink C that's the cost of producing your your product and the P minus C is the price minus the cost of production what we're looking at is the value minus the the price per unit so how do we create value we we sell our product at a higher price um so our price is high and our cost of production is low this is where the orange is where we see value creation um now determining where how you're going to create value uh depends on on your operation and and what your your value drivers are so we look to typically to operations and what products do you produce um how efficiently are you producing what's your R&D what what's your differentiator for your organization and when we look at this um we have what we call the the value graph and so uh we differentiate between the high value differentiation and low cost and so you ideally want to be on this arc so the Four Seasons Hotel if we're looking at the hotel industry um relatively high cost but it's differentiated it's a good experience for people are willing to pay more for the experience Marriott on the other hand is lower cost but um but a reasonably good experience so it is an appropriate um cost given the experience this ging look at this one at this point it it is given its value it should either be up here and have higher differentiation which is often hard to do or it should be over here on um and charge less and so where it's situated now is an opportunity for it to to go into bankruptcy because there will be if if you see this situation exist where they're making more than they should given um given the value that they're creating you're going to see somebody come in who will be right here and that will put Jing Jang out of business because they don't create enough value at the price they're currently charging so when we talk about the value chain how firms create value is one is by their primary activities the products they produce their production facilities their R&D their transportation strategies and then to help drive that value they have support activities we often talk about cost centers and your information systems your company's inf infrastructure logistics your human resources those all tend to be just um uh supporting activities so this upper line is supporting activities that help drive research and development that leads to production we need marketing and sales to sell our product and then we need customer service those are all part of the value chain that are um creating value and they create value because they're supported by this information system logistics human resources those cost centers so firms that operate internationally have to decide how they're going to go into a local market are they going to take their product that they produce at home and just just sell it the same product there or are they going to create some kind of differentiation for their product and and make the product different to attract the local market um oftentimes the you can experience reduced costs in these new markets but there are often transportation costs that that cause a runup or a growth so when we expand into a new market we're looking to see what we do well and how do we how do we leverage those core competences in order to sell our product into a new market um we always are looking to reduce costs because um that is often a a way to increase our profitability and um and we also want to um presume that we can uh price our product higher than um at a premium so because the product is a a better quality product and those are sources of competitive advantage lower costs or premium pricing because of of perceived value of the product so when we talk about location economies uh so there's often are advantages to produce our product in particular reasons um there are advantages to this um because we're able to lower our costs and sometimes it allows us to differentiate our product from our competitors multinationals look to um to produce this their product and the value chain in different different parts of the world so it could be that your home office is in um Cincinnati Ohio and all of the research and development is done there you want to contain R&D in one facility keep all of those researchers working together and um bouncing ideas off of each other and keeping um R&D more tightly controlled however production could happen in a variety of places around the world ordinarily marketing and sales are are local specific because the way you market in different parts of the world um changes so so when you're looking at doing a global expansion some portions of your value chain may stay close to headquarters and other parts may be uh differentiated by moving out into into the market so you have to decide where the value is going to be how do you maximize the value of your value chain chain the one thing you have to keep in in in mind is the transportation costs of uh of moving your product to where the consumers are located so if it's one thing to go into a new market and you're selling into that market it's a whole another story if you're going into a market to produce the product to export to other parts of the world then you have to most definitely take into into consideration the transportation costs you also have to keep in mind the political risks um and economic risk in a given given society uh is there a chance that the uh political climate can be such that your operations can be stopped or seized those are those are always serious risks and then we have an experience curve that this is the this is the system that over time as you produce more product you get better at it and you're able to do it more efficiently so in general your your production costs decline every time you double your output that's that's the theory anyway so you're able to reduce cost because you get better at doing it and you come up with new methods to uh uh to produce your product that through the experience of having done so and the other is the learning effects that um as you learn how to do something you get better at it and as labor becomes more skilled it becomes better at producing the product and so there therefore it's more efficient and there's some cost savings as well here's the experience curve and you'll see um for company B uh the their costs are higher because their output's not high as they're as they continue to produce product what we would expect them to see is move down this uh experience curve and have a lower cost as they're able to produce more product all right um so there are some economies of scale over time as you move down that experience curve um so once you get to that lowcost position here if you become company A it becomes very difficult for other employees to or other companies uh competitors to move into the market because they're going to start back up here and and so they're going to be selling at a higher price and not be able to produce much you're already down here and there's not much left in that curve for anybody to to surpass you so the the first mover advantage is real and um selling volume tends to limit uh competition's ability to enter the market all right sometimes you can think about subsidiaries as a way to create uh systems to um uh to enhance your your competitive advantage so you you have systems where you incent people to uh create new ways of producing the product more efficiently or at at a cost savings and um a and once that's done the skills that they learn in one location can be transferred to other locations really that's the way that we create uh cost incentives to uh reduce our overall costs and increase our profitability through uh through cost containment all right so firms that expand internationally can increase their profitability by entering new markets um uh creating location economies by operating in areas with lower costs um exploit your experience curve so as you get better and better and you're manufacturing more uh you'll be able to manufacture at lower price and then and then taking those skills that you learn and transferring them back to other portions of your your organization so that those cost savings can be implemented systemwide not just in the the the host country where you're operating all right nowadays there is there is a lot of pressures on firms to continue to drive up share price if they're publicly traded and one of the ways they look to do that is to reduce their costs and uh when you push to reduce costs um there there is uh the there it becomes your ability to lower the price of your product becomes greater and um when that happens that c you may be able to lock in customers particularly if the cost of switching from your product to another product is high uh think about components within an automobile if everyone is expecting the uh um the dashboard to have a certain color knobs and um and that's what your company produces and nobody else does that means that uh the switching costs for uh Toyota to switch to a different manufacturer of knobs is high because the the product won't be seen as identical to what that model is supposed to have so when we look at the pre pressure pressure for cost reduction we have to balance it about against the responsiveness of the local local uh market and so sometimes there's really not a whole lot of pressure for cost reductions and there's not a lot of pressure from um the local market to for us to be responsive that doesn't happen very often the challenge is when we're up here firm C when we have high pressure for cost reduction and an expectation of a lot of responsiveness that's expensive that's more customization and that becomes like a transatlantic strategy um that is more challenging if we're over here at firm A and um we have really no need for local responsiveness but high pressure for cost respons cost reduction that's not so hard to manage because we don't have to customize anything we just want to crank out that product and keep our costs as low as possible firm B on the other hand everyone wants a lot a local product that reflects the needs of the local community but there's not big cost pressures that's not a bad situation to be in either the challenging one is when you're a firm C and you're trying to develop a product um that is lowcost and locally responsive that's where um that's where we see a lot of pressure and when we look at local responsiveness what drives it it's typically based on consumer tastes and preferences and especially when you're working internationally you can see some real um real different views on on how a product should look and uh and feel and taste uh so there can be some real regional differences and um how you actually produce the product uh can vary as well so there could be some traditional ways of producing something that is valued in the local economy and uh pressure to manufacture that way which is not as costefficient could be challenging if the infrastructure in the area like there's not good roles and there's not good transportation um opportunities for your product that can hurt your um your ability to keep costs low distribution channels um if uh if you don't have adequate distribution for local markets that's uh that's a challenge government of course and then and then regionalism so when consumer tastes vary they're looking for more um local responsiveness and um uh when when there are differences in infrastructure um then we see the need for more customization too and that's sort of electrical systems uh there electrical systems are different in all regions of the world and so you have to customize to the the needs of that given local um so the rise of regionalism uh we we've seen some convergence so that we have sort of a a series of regions that it's not necessarily that you need to customize for every country within the EU but the EU is sort of a region that you you customize for that region north America you look at NAFTA and the the trade agreement and you customize for North America Canada Mexico Latin America and then sort of the Asian region the Middle East and then the Russian and former and some of the still communist Eastern block countries so when we look at that graph of um low cost um versus high cost and um low customization versus high customization we we each of those four quadrants is represents one of these four uh strategies in global markets global c standardization localizations transnational and international so when you have low pressure for local response and low um pressure for cost reduction you can do an international strategy you produce your product in one location and you ship it worldwide and and people will purchase it on the other hand if you still have low um expectation for uh local responsiveness but you have high costs for um uh for uh reducing your overall costs then you're looking at global standardization one product that's shipped everywhere and uh uh and then the the other one this localization strategy is where you have they don't really care much about the cost but they want products specific to their region then we have localization strategy you typically will produce the product in that region to the specifications and if you looked at the same product in another region of the world it would be completely different i I always joke when I buy Kit Kats i like Kit Kats in the US but I love Kit Kats in Europe because there's a different um cocoa mix in in the Kit Kat so when you're in international markets sometimes when you're in Asia you can get a Kit Kat that's good too because it will uh have it will be um exported from uh from Europe and so uh so I don't care about paying a little bit more the the candy bar is a whole lot better if it comes from Europe and so uh so that's an example of this localization strategy produce Kit Kats in Europe that are specific to the taste of Europe and the costs are going to be a little higher but they're the consumer isn't going to care much the challenge is this transnational strategy when you have high um pressure to reduce your costs and high pressure for standardization this is really tricky for organizations to deal with um there I'll go into a little bit more tail detail in a couple of couple of slides whoops okay so if we've got global standardization we're trying to increase profitability and reduce costs um at the same time that we're we're also trying to uh keep consumers happy and they don't care about customization so much um the the real pressure here is for cost redu reduction and some responsiveness to the local market but really not much the other localization strategy is when we have um we're trying to increase our profit by customizing um but the the costs are not such a concern then we typically will produce the product in the local market to the specifications of the local market it's that transnational that's such a ch such a challenge uh um so what we're trying to do is lower our costs um and we typically do that by moving product and producing product closer to where our market is located or by producing in lowcost areas and um exporting the product back to the home country um but at the same time we're trying to differentiate the product to be acceptable to different geographic markets and so we typically need a multi-directional flow of skills um from different subsidiaries so we may produce part of the pro product in uh Mexico because it's cheap there and part of it in uh in Vietnam and then export those components to Brazil where we where we put the unit together and then our marketing team in each region will um will then sell the product and so we can customize because we could produce um one component in Vietnam that is for the EU and the a different component the same component that is differentiated um that will be for the Asian market and so it's it is challenging to do it's a complex strategy but it it can be done and then the international strategy taking products that you produce in your domestic market and sell them internationally with minimum customization this works when you have um low cost excuse me um lowc cost pressure and and not much responsiveness local i I view these as sort of commodity items you know who cares what your spatulas look like or um u your mixing bowls or um um gosh you know books that you're looking to the bindings for books that you're looking to sell uh they can be they're they can be pretty standard anywhere in the world so strategy often moves over time your customers may be um fine with little lo little lo um little specialization and over time that changes um as competition moves in you typically have to move more towards a transnational strategy because you can be low cost low customization and a competitor comes in and does high customization and so then your customers are going to want more customization too and when you move there your competitor lowers its price and so you so you've got some pricing pressures on there so you need to shift your your strategy as time goes along as the market shifts so here we have um we have uh a company that's starting at the international strategy low cost um low cost reduction low uh local responsiveness and as competitors come in they can either move up here if uh um if there's still not a requirement for local responsiveness or they can move over to transnational if they need to and same thing with the localization strategy it may need to move into a transnational strategy you have to respond to competitors when they're coming in or prepare for competitors to come in by um by evolving uh how you how you think about your product and using that value chain to make sure your sales team is ready your marketing is strong to to um lock in loyalty for your brand that's that's the goal when you're looking at competitors moving in all right sometimes we have things like um trade barriers that can influence the macroeconomic um uh environment um so then we might see some regionalization when you when you look at trade barriers or trade restrictions or um large tariffs that can change the macroeconomic environment and the ability for products to flow freely across the the world and then there's always shocks that can impact the market and when when we move to globalization shocks are even more um are more problematic certainly when we saw the war start in Ukraine uh the Palestinian war um terrorism attacks effects of climate change and then we see things like um COVID we all remember how the supply chain was disrupted through through COVID so um our supply chains become more vulnerable as we become more global because there's more opportunity for a breakdown when we're not just producing our product locally for local customers there are there are huge opportunities in being able to produce your product for a market that's global but there's also costs and risks attached to it too and that is it on globalization strategy