INTB Study Guide
1. What’s a firm’s strategy?
Actions managers take to attain the firm’s goals. For most firms, the preeminent
goal is to maximize the value of the firm for its owners, its shareholders as long as it’s
1.AWhat does a firm need to do to maximize the value of a firm?
To maximize the value of a firm managers must pursue strategies that increase the
profitability of the enterprise and its rate of profit growth over time.
2. What is profitability?
Aratio or rate of return concept. The rate of return that the firm makes on its
invested capital (ROIC) can be calculated by diving the net profits of the firm by total
3. What if Profit Growth?
“The percentage increase in net profits over time.”
The higher profitability and a higher rate of profit growth will increase the value
of an enterprise and thus the returns garnered by its owners, the shareholders.
4. How can Managers increase the profitability of a firm?
Managers can increase the profitability of the firm by pursuing strategies that
lower costs or by pursuing strategies that add value to the firm’s products, which enables
the firm to raise prices.
5. How Managers increase the rate of profit growth of a firm?
Managers can increase the rate at which the firm’s profits grow over time by
pursuing strategies to sell more products in existing markets or by pursing strategies to
enter new markets.
6. How do you add value to a product?
The amount of value a firm creates is measured by the difference between its cost
of production and the value that consumers perceive in its products. 2
The more value consumers place on a firm’s products, the higher the price the
firm can charge for those products.
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. Consumer capture some of that value in
the form of what economists call a consumer surplus.
It is impossible to charge customers a price that reflects the value of a product;
economists call this customer’s reservation price.
The consumer surplus per unit is equal to V (the value of a product on average)-P
(the average price a firm can charge a consumer for a product); the greater the consumer
surplus the greater the value for their money the consumer gets.
7. What is Value Creation?
“Performing activities that increase the value of good or services to consumers”
Afirm’s Value Creation is measured by the difference between V and C (the unit
cost of production) (V-C).
Acompany creates value by converting inputs that cost C into a product on which
consumers place a value of V.
Acompany can create more value either by lowering production cost, C, or by
making the product more attractive through superior design, styling, functionality,
features, reliability, after-sale service, and etc.All of these things make costumers place a
greater value on a firm’s product.
8. What is strategy focused primarily on lowering costs called?
9. What is a strategy that focuses on primarily increasing value called?
Superior value creation relative to rivals does not necessarily require a firm to
have the lowest cost structure in an in industry, or to create the most valuable product in
the eyes of consumers. However, it does require that the gap between value and cost of
production be greater than the gap attained by competitors.
10. What are the two basic strategies needed to create value and attain a competitive
advantage in an industry? 3
Michal Porter has argued that low cost and differentiation are two basic strategies for
creating value and attaining a competitive advantage in an industry.
According to Porter a firm has to configure its internal operations to support its strategic
emphasis (differentiation or low cost).
11. What is the Efficiency Frontier?
The efficiency Frontier shows all the different positions that a firm can adopt with
regard to adding value to the product and low cost assuming that its international
operations are configured efficiently to support a particular position.
12. Why is the Efficiency Frontier downward slopping?
Because of the law of increasing opportunity cost. Diminishing returns imply that
when a firm already has significant value built into its product offering, increasing value
by relatively small amount requires significant additional costs.
13. What three things does a firm have to do to maximize its profitability?
1. Pick a position on the Efficiency Frontier that is viable in the sense that there is
enough demand to support that choice.
2. Configure its internal operations, such as manufacturing, marketing, logistics,
information systems, human resources, and so on, so that they support that
3. Make sure that the firm has the right organizational structure in place to execute is
14. What do operations mean in this context?
The various value creation activities a firm undertakes.
15. What’s another way of looking at operations?
The Operations of a firm can be though of as a value chain composed of a series of
distinct value creation activities, including:
2. Marketing and sales
3. Materials management
4. R&D (Research and Development)
5. Human Resources
6. Information Systems 4
7. And the firm infrastructure
These activities can be categorized as support and primary activities.
16. What are support activities?
1. Information Systems: When coupled with the communications feature of the
Internet, can alter the efficiency and effectiveness with which affirm manages its
other value creating activities.
2. Logistics: Controls the transmission of physical material through the value chain,
from procurement through production and into distribution. The efficiency with
which this is carried out can significantly reduce cost.
3. Human Resources: The HR function can help create more value by:
a. Ensuring that the company has the right mix of skilled people to perform
its value creating activities effectively.
b. Ensures ppl are trained, motivated, compensated to perform their value
4. Infrastructure (Top Management is part of this): The context within which all
the other value creation activities occur. The infrastructure includes:
a. The organizational structure
b. Control systems, and
c. Culture of the firm.
17. What are PrimaryActivities?
1. R&D: Concerned with the design of products and production processes. Many
service companies also undertake R&D. Through superior product design, R&D
can increase the functionality of products, which make them more attractive to
consumers raising value.
2. Production: Creates value by performing its activities efficiently so lower cost
result (lower C) and/or by performing them in such a way that a higher –quality
product is produce (which results in higher v).
3. Marketing and Sales: Through brand positioning and advertising, the marketing
function can increase the value that consumers perceive to be contained in a firms’
product, If these create a favorable impressions of the firm’s product in the minds
of consumers, they increase the price that can be charged for the firm’s product.
Marketing and sales can also create value by discovering consumer needs and
communicating them back to the R&D function of the company.
4. Customer Service: Provide after-sale service and support. This function can
create a perception of superior value in the minds of consumers by solving
problems and supporting customers after they have purchased the product.
18. What do primary activities have to do with?
Primary activities have to do with the design, creation, and delivery of the
product; its marketing, and its support and after-sale service. 5
Organization: The implementation of Strategy
19. How is a firm’s strategy implemented?
Afirms’strategy is implemented through its organization:
20. What does the term OrganizationalArchitecture mean?
“The totality of a firm’s organization, including:
1. Formal organizational structure:
a. These means three things:
i. The formal division of the organization into subunits such as
product divisions, national operations, and functions
ii. The location of decision-making responsibilities within that
iii. The activities and subunits including cross-functional teams and
or pan –regional committees.
2. Control systems and (In book controls and Incentives is one category): “The
metrics used to measure the performance of subunits and make judgments about
how well managers are running those subunits”.
3. Incentives: “The devices used to reward appropriate managerial behavior”
4. Organizational culture: “The values and norms shared among an organization’s
5. Processes, and: “The manner in which decisions are made an work is performed
within any organization”.
6. People: Not just employees of the organization, but also the strategy used to
recruit, compensate, and retain those individuals and the type of people that they
are in terms of their skills, values, and orientation.
View figure 12.5 to look at OrganizationArchitecture (page 341).
21. If a firm want to maximize its profitability, what most it do?
If a firm want to maximize its profitability it must pay close attention to achieving
internal consistency among the various components of its architecture, and the
architecture must support the strategy and operations of that firm.
22. What happens if a firm’s strategy no longer fits the market?
In such circumstances, the firm must change its strategy, operations, and
organization to fit the new reality-which can be an extraordinary difficult challenge. 6
Global Expansion, Profitability, and Profit Growth:
23. What does a firm have to consider when pursuing strategies to increase its
profitability and profit growth?
Such strategies are 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.
24. What is one thing a company can do to increase its growth rate?
Acompany can increase its growth rate by taking goods or services developed at
home and selling them internationally.
The returns from such a strategy are likely greater if indigenous competitors in the
nations that a company enters lack comparable products.
25. What are firms that operate internationally able to do?
Look at page 343.
26. What else besides the goods or services that a firm sells in a foreign market matters
when talking about expanding the market by taking goods or services developed at home
and selling them internationally?
The success of many multinational companies also depends upon the core
competencies that underlie the development, production, and marketing of those good or
services. The term Core Competence refers to skills within the firm that competitors
cannot easily match or imitate.
27. What do services based companies have to do to succeed when expanding their
Expanding the market for their services often means replicating their business
model in foreign nations (with some changes to account for local differences)
28. What can firms that pursue an expanding market strategy realize?
Firms that pursue an expanding market strategy can realize what we refer to as
location economies, which are the economies (cost advantages) that arise form
performing a value creation activity in the optimal location for that activity, wherever in
the world that might be.
29. What is one possible outcome of realizing location economies? 7
One of this kind of thinking is the creation of a global web of value creation
activities, with different stages of the value chain being dispersed to those locations
around the globe where perceived value is maximized or where the cost of value creation
30. What things (caveats) complicate the picture of Location Economies?
Transportation cost and trade barriers complicate this picture.Another thing
(caveat) concerns the importance of assessing political and economic risks when making
location decisions. If a country’s gov is unstable or totalitarian, the firm might be advised
not to base production there. If the gov appears to be pursuing inappropriate economic
policies that could lead to foreign exchange risk, that might be another reason to not base
production in that country.
31. What is the experience curve?
“Systematic production cost reductions that occur over the life of a product.”A
number of studies have observed that a product’s production costs decline by some
quantity about each time cumulative out doubles.
32. What does an experience curve graphs show?
It shows the relationship between unit production costs and cumulative output
(the relationship is for cumulative output over time, and not output in any one period,
such as a year).
33. What are Learning Effects?
“Cost saving form learning by doing”. Learning effects tend to be more
significant when a technologically complex task is repeated. No matter how complex the
task, learning effects typically disappear after a while. It has been suggested that they are
important only during the start-up period of new processes and that they cease after two
or three years.”
34 What are Economies of Scale and what are its sources?
“Cost advantages associated with large-scale production”. Sources:
1. Fixed cost: Costs required to set up a production facility, develop a new product,
and the like. The only way to recoup such high fixed costs may be to sell the
product worldwide, which reduces average unit costs by spreading fixed costs
over a larger volume.
2. Afirm many not be able to attain an efficient scale of production unless it serves
global markets. By serving domestic and international markets form its
production facilities, a firm may be able to utilize those facili