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INTRODUCTION TO STRATEGY
I. What is Strategy?
A firms strategy can be defined as the strategies that managers take to attain the goals of the firm.
For most of the firms, the preeminent goal is to maximize long-term profitability. A firm makes a
profit if the price it can charge for its output is greater than its costs of producing that output.
Profit is thus defined as the difference between total revenues and total costs.

= TR-TC
TR= P x Q (Where P=Price and Q= Number of units sold by the firm)
TC=C x Q (Where C=Cost per unit and Q=The number of units sold)
Profitability is the rate of return concept. A simple example would be the rate of return on sales
(ROS), which is defined as profit over total revenues:
ROS = /TR
Thus a firm might operate with the goal of maximizing the profitability, as defined by its return
on sales, and its strategy would be the actions that its managers take to attain that goal. A more
common goal is to maximize the firms return on investment, or ROI, which is defined as
ROI=/I where I represents the total capital that has been invested by the firm.

Value creation
Two basic conditions determine a firms profits: the amount of value customers place on the
firms goods or services (sometimes referred to as the perceived value) and the firms costs of
production. In general, the more value customers place on a firms product, the higher the price
the firm can charge for those products. Note, however, that the price a firm charge for a good or
service is typically less than 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 consumer surplus is able to do this because the firm is competing with other firms
for the customers business, so the firm must charge a lower price than it could were it a
monopoly supplier. Also, it is normally impossible to segment the market to such a degree that the
firm can charge each customer a price that reflects that individuals assessment of the value of a
product, which economists refre4r to as customers reservation price. For these reasons, the price
that gets charged tends to be less than the value placed on the product by many customers.

V-P
P-C

V-C

P
C

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V = Consumer Value
P = Market Price
C = Cost of Production
V-P = Consumer
Surplus
P-C = Profit Margin
V-C = Value Added

The Value created by the firm is measured by the difference between V and C; a company creates
value by converting inputs that cost C into a product on which consumers place a value of V. A
company can create more value for its customers either by lowering production costs, C, or by
making the product more attractive through superior design, functionality, quality, and the like, so
that consumers place a greater value on it, and consequently, are willing to pay a high price. . This
suggests that a firm has high profits when it creates more value for its customers and does so at a
lower cost. This strategy that focuses on lowering production costs is referred to as Low cost
strategy. The strategy that focuses on increasing the attractiveness of a product is called a
Differentiation strategy.
II. THE STRATEGIC PLANNING PROCESS

1.
2.
3.
4.
5.
6.
7.

Define objectives and values

Evaluation of Environmental Threats and Opportunities
Appraisal of Internal Strengths and Weaknesses
Generation and Evaluation of Viable Strategic Alternatives
Choice of Strategy
Implementation Through Creation of Tactical and Operating Plans
Monitoring and Control

Note that this sequence is not unidirectional. Backtracking and feedback may be required if
insurmountable difficulties are encountered at any particular point in the sequence.

III. How companies are profiting from global expansion?

Expanding globally allows firms to increase their profitability in ways not available to purely
domestic firms. Firms that operate internationally are able to:
1. Realize location economies by dispersing individual value creation activities to those
locations around the world where they can be performed most effectively and efficiently.
2. Realize greater cost economies from experience effects by serving an expanded global
market from a central location, thereby reducing the costs of value creation.
3. Earn a greater return from the firms distinctive skills or core competencies by leveraging
those skills and applying them to new geographic markets.
4. Earn a greater return by leveraging any valuable skills developed in foreign operations and
transferring them to other entities within the firms global network of operations.
However, a firms ability to increase its profitability by pursuing these strategies is to some extent
constrained by the need to customize its product offering, marketing strategy, and business
strategy to differing national conditions, that is, by the imperative of localization.
Firms that compete in the global marketplace typically face two types of competitive pressures.
1. Pressures for cost reduction
2. Pressures to be locally responsive
(i) Pressures for cost reduction
- Greater international competition
- Availability of mass production technology
- Increasing similarity in customer needs/tastes
- Lower trade barriers ! Location economies available
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- Lower transportation costs Etc

(ii) Pressures for local responsiveness
- Differences in consumer preferences
- More sophisticated consumers
- Differences in market structures
- Differences in infrastructure
- Host government demands Etc
These competitive pressures place conflicting demands on a firm. Responding to pressures for
cost reductions requires that a firm try to minimize its unit costs. Attaining such a goal may
necessitate that a firm base its productive activities at the most favorable low-cost location, where
in the world that might be. It may also necessitate that a firm offer a standardized product to the
global marketplace. Offering a standardized product also enables the firm to attain other scale
economies and ride down the experience curve as quickly as possible.
In contrast, responding to pressures to be locally responsive requires that a firm differentiate its
product offering and marketing strategy from country to country in an attempt to accommodate
the diverse demands that arise from national differences in consumer tastes and preferences,
business practices, distribution channels, competitive conditions, and government policies,.
Because customizing product offerings to different national requirements can involve significant
duplication and a lack of product standardization, the result may be to raise costs.

Strategic Choices
Multinational companies formulate strategies depending on the necessities of cost reduction and
local responsiveness. The four basic strategies used by firms to enter and compete in the
international environment are:
- Multidomestic strategy
- International strategy
- Global strategy
- Transnational strategy
Figure:. Four typical strategies

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(1) Multidomestic strategy

Maximize local responsiveness
- Customize the product and marketing strategy to national demands.
- Differentiation strategy
One time transfer of most of value-chain activities to foreign subsidiaries
- HQ: strategic planning, financial management, etc.
- Subsidiaries: R&D, production, marketing, HRM, etc
- Foreign operations are regarded as a portfolio of independent businesses
Integration mechanisms
- Highly decentralized
- HQ has little control over foreign subsidiaries (except financial controls)
- People-based integration
(2) International strategy
Go overseas where local firms do not have competitive advantages
- Limited adaptation to local markets
Continuous transfer of some value-chain activities to foreign markets
- HQ: Strategic planning, financial management, R&D, marketing etc.
- Subsidiaries: production, sales, etc.
- Foreign operations are regarded as appendages to a central domestic corporation.
Integration mechanisms
- A little bit decentralized
- HQ has administrative control over foreign subsidiaries
(3) Global strategy
Maximize scale economies and/or learning economies
- Little local customization
- Standardized products
- Low-cost strategy
Little transfer of resources to foreign markets
- HQ: strategic planning, financial management, HRM, etc.
- R&D, production, marketing in a few favorable locations.
- Foreign operations are regarded as delivery pipelines to a unified global market
Integration mechanisms
- Highly centralized
- HQ has a very tight control over foreign subsidiaries
(4) Transnational strategy
Achieve both cost reduction and local responsiveness simultaneously
- Global scale
- Global learning
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 Dispersed, specialized resources for foreign units.

- Place each activity, product lines, and business at the best location.
- Large flows of components, products, resources, people
- Differentiated contributions by national units
Integration mechanism
- Mixed centralized and decentralized
- Highly centralized for some operations
- Highly decentralized for other operations
- Very complex process of coordination and cooperation
- In a highly interdependent network of shared decision-making and shared values.

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