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Resources-Based Strategic Options - Cost Reduction

2014-05-21T09:14:00.003+08:00

Resources-Based Strategic Options - Cost Reduction

Introduction

With emergent of economy, strategic options are not longer focusing on just key options on expansion, sustaining competitive advantages, capabilities and core –competencies. Cost reduction of current operation activities must not be overlooked and neglect, as it form part of the agent in the key success of the company. With extensive pressure from new threat of entrant to the industry, it quite possible for organization to purchase raw material from less developed countries, engaged low wages foreign workers and even shift their whole production plant to third world countries, to reduce their current cost and maximise their financial benefit.

There are a few main routes of cost reduction to be discussed:

1) Design

In some industries, large cost reductions come not from activity in the production plant, but before the product ever reach the factory. By carefully designing the product –for instances, so that it has fewer parts or is simpler to manufacture-real reductions in cost can be achieved. In large organization, before a product is launched a through market research were conducted, buyer needs and wants, the market trends and consumer buying pattern are recorded, with this relevant information, R&D department could design more practical products. This lead to time and cost reduction in material wastage and chances of failure product launched.

2) Supplier Relationship

Due to increasing supply consolidation, a company’s overall performance and efficiency is more and more dependent on the capabilities of its suppliers. An organization benefits greatly when key suppliers dramatically reduce costs, introduce new services designed to address the organization’s needs, expand their footprint to provide seamless coverage in multiple regions, and work with the organization to streamline joint processes.

Benefit to Organization:

-Develops new services and products that can drive competitive advantage

-Closes capability and performance gaps

-Creates a reliable and long-term source of supply

-Provides access to new ideas and opportunities for improvement

-Prioritizes capability development and supplier investment

Benefit to Supplier:

-Creates additional revenue generation opportunities

-Enables the development of a long-term relationship

-Creates opportunities for joint investments

-Provides opportunity for supplier to advance to next tier

-Gives insight into customer organization’s business needs

3) Economic of Scale & Scope

When it is possible to perform an operation more efficiently or differently at large volumes, then the increased efficiency may result in lower costs .Economics of scale can lead to lower costs- for example in major petrochemical plants and in pulp and paper production. Whereas economic of scope occur when costs savings are available as a result of providing two distinct products from the same company compared with providing them from separate companies. An example might be those products that share the same retail outlet and can be delivered by the same transport. However with lack of production flexibility and the depersonalized nature of the work may be significant drawbacks on both economic of scale & scope.

Economic of scale are also available in areas outside production. They may occur in areas such as

1) Research and development: On some occasions, only a large scale operation can justify special services or items of testing equipment.

2) Marketing: Really large companies are able to aggregate separate advertising budgets into one massive fund and negotiate extra media discounts that are simply not available to smaller companies.

3)Distribution: Loads can be grouped and selected to maximise the use of carrying capacity on transport vehicles traveling between fixed destinations.

4) Using the experience curve effect

It suggests that significant reductions in costs are achieved as companies and the whole industry produce more product. The cost reductions relate to the cumulative production ever achieved, not just in one year.

The cost experience concept can be seen at both the company level and the industry level.

-at the company level, the market leader will, by definition, have produced cumulatively more product than any other company. The leader should have the lowest costs and other companies should be at a disadvantage.

-at the industry level, costs should fall as the industry overall produces more .Every company should benefit from knowledge that is circulated within it industrial.

Even within an industry, there are ways of overcoming experience curve effects, the most obvious being by new technology. Another way would be to entice an employee of a more experienced company to join the organization, there are real limits to the benefit of the experience curve as per follow,

1) Market demand in market segments for a special product change or variation cannot easily be met: to achieve scale, production flexibility may have to be sacrificed.

2) Technical innovation can overtake learning in a more fundamental way: a new invention may radically alter the cost profile of an existing operation.

3) Demand needs to double for every significant proportionate cost reduction. In markets where growth is still present but slowing down, this is only possible if an ever-larger market share is obtained. As market share becomes larger, this becomes progressively more difficult and expensive to achieve.

5) Capacity Utilisation

This is an important consideration into cost reduction. Capacity utilization is a concept in economics which refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between potential output 'could' be produced and actual output that 'is' produced with installed equipment.

There are a number of reasons why a firm might be experiencing low capacity utilisation, including the following:

Fall in market demand due to changes in consumer tastes or fashion
Unsuccessful marketing – one or more aspect of the marketing mix may simply mean that the firm is not successful
Seasonal demand – this is especially apparent in the tourist industry where firms like hotels and leisure parks are full in the summer but see much lower utilisation at other times of the year
New competitors taking market share or causing over-supply in the market

Problems arising from low capacity utilisation

Staff can become bored and demoralised if they don’t have as much to do, especially if they fear losing their jobs
Higher fixed costs per unit mean reduced profitability; if prices were raised to cover these costs, this would probably lead to reduced sales unless the product was price inelastic
Spare capacity can portray a negative image, particularly in a business where it can be seen that it is no longer busy – such as a shop or a health club - signifying loss of popularity

Benefits of low capacity utilisation

Low capacity utilisation is unlikely to be desirable in the long term as the higher unit costs will make it difficult to compete. However it is not all bad news and possible short term benefits include:

There may be less stress for employees than if they were working at full capacity
The firm can cope with new orders; firms in expanding markets may expect to have low utilisation whilst they build their sales
A firm may have more time for maintenance and repairs and for staff training, to prepare for an upturn in trade

6) Synergistic effects

In exploring cost cutting options, it is possible to develop a model which examine this in a structural and cross functional way. Overall, the model does not pretend to be comprehensive but rather to show the options that are possible, their logical flow and the interconnections between the various elements.

The synergistic effects also create the opportunity of a combined corporate entity to reduce or eliminate expenses associated with running a business. Cost synergies are realized by eliminating positions that are viewed as duplicate within the merged entity. Examples include the head quarters office of one of the predecessor companies, certain executives, the human resources department, or other employees of the predecessor companies.

Conclusion

In conclusion, on above factors that contribute to cost reduction, I will like to further add on, for cost reduction strategy to be successful implemented. Company must have proper management planning before proceed, this proper management planning will reduce the risk of failure and prevent any interruption of work process.

Different levels of diversification

2014-05-21T09:08:00.000+08:00

Different levels of diversification

Levels of diversification

The nature of diversification in groups of companies takes on many forms. Some diversified group have little connection across parts of the group. For example is Samsung, it has construction and electronics businesses.

For the purposes of strategy development, 3 main levels of diversification are identified.

1) Close-related diversification

The different companies within the group may have different products or services but have some form of close affinity such as common customers, common suppliers or common overheads.

For example, the Unilever group includes separate companies in such businesses as Magnum ice cream and Knorr soups. Each of these company shares similar supermarket customers, some common suppliers and common competitors. It makes commercial sense for such companies to seek out the benefits of co-operation where appropriate.

2) Distant-related diversification

The different companies in the group are more diversified with quite different products or services using wholly different technologies. However, they may share the same underpinning core competencies or some other area technology or services that would benefit from co-ordination by a central headquarters.

For example, 3M has many diversified businesses but it underpinning core competencies in adhesives and coatings are widely used throughout the group.

Another example is the Japanese company, Canon whose underpinning core competencies in optics are used in a range of applications from cameras to photocopies.

3) Unrelated Diversification

The different companies in the group have little in common with regard to products, customers or technologies. However, they benefit from the resources of the headquarters with regard to the availability of lower-cost finance, quality of management direction and other related matters.

The examples are Samsung

Benefits of a corporate-level strategy

Corporate level strategy is the value added contribution of the central headquarters of a group of diversified businesses with its own strategy. It is delivered by the headquarters’ decisions on the selection of businesses to be in group, their management in the group and the resources allocated by the centre to individual companies. Corporate purpose is the maximisation of value added and the additional competitive advantage contributed by the central headquarters of the group of companies.

The diversified group should earn above average profits by the special contribution of group’s headquarters over and above the contribution of the individual companies.

Benefits of diversification are delivered in 3 main areas

1) Internal to the group

a) Economies of scope (For closed related diversified group)

It refers to cost savings developed by a group when its shares activities or transfers capabilities and competences from one part of a group to another

For example, 2 different companies might share a common sales team or share similar technologies

b) Core competencies (For closed related and distant-related groups)

It refers to transferring core competencies between companies internally within the group.

c) Shared activities (For distant-related groups)

For example, companies might share purchasing activities because they have similar raw materials or distribution activities because they have same customers. Such activities occur regularly in many consumer products companies such as Unilever where sugar and supermarkets apply respectively.

2) External to group

a) Vertical integration

This occurs when a company chooses to backward integration or forward integration. It creates cost savings such as not having to pay distributors or market power through direct access to customers.

For example, cosmetics retail shop chain Body Shop produces its own products and sells them in its own stores. There is more control over special products and is able to respond to the market trend without having to negotiate with other retailer to stock its products.

b) Market power

Close related diversified firms in a group co-operates to gain external benefits in terms of increasing negotiating power with customers or lower costs with regard to distribution. Market power exists when a company has lower costs or a superior competitive position as a result of such co-operation.

c) Competitor blocking

The blocking of competitive activity through providing a wider range of products within a closely related diversified group will result in market power. This affects the competitors from offering products as the products are being offered at a much lower price.

3) Financial benefits (Often used in unrelated diversification)

a) Lower cost of capital

The central headquarters able to use its greater negotiating power to obtain finance for individual companies than they would obtain independently of the group

b) Business restructuring

The central HQ may be able to facilitate and finance essential restructuring of a business in the face of competitive pressure beyond the resources of an individual company.

c) Efficient capital allocation

The central HQ can allocate finance across the group more efficient as a result of its central viewpoint of the needs and returns of individual companies

Conclusion

The corporate purpose is the purpose and contribution of the central headquarters of diversified group of companies. Diversified groups brings advantages such as lower risk of overall failure, mutual technical support, strength core competencies and building up company’s resources. Thus, the role of the group headquarters is to identify and manage the financial and other capital resources of the firm to realise these advantages.

Organisation's purpose shaped by vision, leadership and ethics

2014-05-21T09:02:00.002+08:00

Organisation's purpose shaped by vision, leadership and ethics

Introduction

The corporate strategy is only a means to the purpose of the organisation. It is impossible to develop strategy if the purpose remains unclear and purpose remains unique to each organisation. The definition of purpose is complex and multifaceted; Michael Porter simplified the term purpose as ‘profit maximisation’ while Professor Oliver Williamson defined purpose as ‘survival’.

Shaping of the purpose of the organisation

The complexity of developing purpose is overcome by shaping the purpose of the organisation which is a process by identifying and concentrating on essentials on the organisation. The shaping of the purpose of the organisation involves examination of strategic vision, roles of leadership and ethical considerations.

Purpose shaped by ethical considerations

The ethical considerations are standards and conduct that the organisation sets itself in its dealing within the organisation and outside with its environment.

Ethical issues: 4 prime considerations in the ethical conduct of organisations

The ethical issues are to identify what is morally correct behaviour for the organisation. There are 4 main reasons for considering the ethical conduct of organisations.

1) In every society, such considerations are sometimes inescapable. For example, legal limits on conduct.

2) They may be important to conduct in that society. For example, respect for ‘green issues’ in the environment that go beyond legal limits.

3) A consideration of ethics is part of the professionalism of business. For example, the treatment of workers and ethics groups.

4) The self-interest of organisations is often best served by developing attitudes to ethical issues before they come acute. For example, bad publicity as a result of accusations of incorrect behaviour.

Types of issues in developing business ethics

They are 3 basic areas that need to be explored in the context of purpose and strategy development which are:

1) The extent of ethical considerations

It states the extent of organisation to consider the ethical issues that could arise in its conduct of business beyond legal minimum. It may involve in every area or lay down some basic principles and the leave parts or individuals to conduct themselves appropriately.

2) The cost of such considerations

Some actions will have a cost to the organisation and many of the real conflicts arise here because if they were without cost then they would be easily undertaken. There are no abstract rules but each organisation will need to consider this area.

3) The recipient of responsibility

It concerns the organisation’s responsibility to the state, local community or individual. For example, McDonalds’ continuous efforts in children welfare through raising funds.

Ethical issues that might impact on purpose

1) Espionage

The sources that company acquire from to find out about competition and the reasonable enquiry finish and aggressive search for additional data.

2) Tyrannical regimes

The ethical issues arise whether companies selling products a country that is run by tyrannical regimes is justified.

3) Bribery and corruption

The line is undefined whether organisations should engage in such activity in every circumstance so that jobs may be saved and contracts won for only limited sums to all number of people.

4) Telling half-truths and operating misleading negotiation tactics.

The truth is not presented fully and might mislead into negotiating tactics. For example, unethical financial planners may hide some hidden clauses of the particular financial product which will affect their closing of customers, customers sees it lucrative and decides to buy.

Ethical considerations and corporate strategy

Ethical considerations may influence corporate strategy at a number of levels. The values of the organisation will need to be reflected in its purpose and mission statements. Such matters may reflect the role that the organisation sees itself playing in society and the responsibilities.

1) The national and international level

The role of the organisation in society and the country.

Political, economic and social issues will impact.

Laissez faire vs. Dirigiste.

The role and power of trade blocks and closer economic union.

The organisation is entitled to have a view on these matters and seek to influence society.

2) The corporate level

Ethical and corporate issues over which the organisation has some direct control. Such matters as the preservation of the environment, contributions to political parties, and representations to the country’s legislative parliament are all examples of direct corporate activities that need to be resolved.

3) The individual manager and employee level

The standards of behaviour which the organisations wish to set for individual managers and workers. Some of these matters may not be strategic in nature in the sense that they are unlikely to affect the future direction of the organisation overall but rather the future of individuals. However, there may be some general policies on, for example, religion, ethnic and equality issues that involve both the individual and fundamental matters relating to the direction of the organisation. These general matters of policy deserve to be treated at the highest possible level and therefore come within ambit of corporate strategy.

PESTEL analysis

2014-05-20T16:21:00.002+08:00

Introduction

A PESTEL analysis is study of the political, economic, socio-cultural, technological, environment and legal factors. It provides a useful starting point to any analysis of the general environment surrounding an organisation.

Political

The political environment consists of laws, government agencies, and pressure groups that influence and limit various organizations and individuals in a given society. For example is the corporate tax.

Economic

The economic environment consists of factors that affect consumer purchasing power and spending patterns. With the generation moving into its prime wage-earning and the number of small families headed by dual-career couples continue to increase, organisation must pay attention to consumer expenditure and disposable income as consumers continue to demand for quality products and better service. Nations also vary greatly in their levels and distribution of income e.g. GNP trend. Constant monitoring of inflation, currency fluctuations and exchange rates is necessary so that the organisation would not be caught short in a boom e.g. A country’s economic slowdown that leads to retrenchment hence unemployment. With adequate warning, organisations can take advantage of changes in the economic environment.

Cultural

The cultural environment is made up of institutions and other forces that affect a society’s basic values, perceptions, preferences and behaviour. People in a given society hold many beliefs and values. Although core values are fairly persistent, cultural swings do take place. Organisations predict cultural shifts in order to spot opportunities or threats. People also vary in their emphasis on serving themselves versus serving others. Some people seek personal pleasure while others seek self-realization hence organisations must take into concern people attitudes to work and leisure. Organisations must pay attention to income distribution as well as average income. With the more educated workforce, lifestyle changes for the demand for quality products etc.

Technological

The technological environment is the most dramatic force shaping our destiny. The technological environment changes rapidly and it creates new markets and opportunities. New technology replaces old technology hence organisations should watch the technological environment closely before their products turn obsolete. Today’s research is usually carried out by research teams heavily subsidise by government on their focus on technology. In some situations, developments in nominally unrelated industries may be applicable in the organisation.

Environment

The natural environment involves the natural resources that are needed as inputs that affect the strategies. Such environmental trends are the increasing pollution and carbon emissions. For example is the disposal of chemical and nuclear wastes. Government intervention in natural resources management is their concern and efforts to promote a clean environment. For example, For example, tyres manufacture in china and India, it includes an anti-dumping law. Concern for the natural environment has spawned the so-called green movement that organisations are responding to consumer demands with ecological safer products and more energy-efficient operations. For example is that 3M runs a pollution prevention pays program that has led to a substantial reduction in pollution and costs.

Legal

It refers to regulations and legislation enforced to such as developing public policy to guide commerce, well-conceived regulation can encourage competition and ensure fair markets for goods and services. New laws and their enforcement will continue or increase and organisations must watch these developments when planning their strategy.

Importance of PESTEL analysis

It is important to study the environment surrounding the organisation for three main reasons.

1) Most organisations compete against each other, so a study of the environment will provide information on the nature of competition as a step to developing sustainable competitive advantage.

2) Most organisations will perceive opportunities that might be explored and threats that need to be continued. Opportunities and threats may come from government decisions, changes in technology and social developments and many other factors, hence not just from competitors.

3) There are opportunities for networks and other linkages, which lead to sustainable co-operation. Such linkages with others may strengthen an organisation in its environment by providing mutual support.

Considerations

Before exploring specific aspects of the environmental analysis, it is important to consider the basic conditions surrounding the organisation. Special attention needs to be directed to the nature and strength of the forces driving strategic change such as the dynamics of the environment. Secondly in consideration of the factors surrounding the organisation, PESTEL analysis can be used to explore the general environment. It is useful to draw a distinction between the proactive outcomes and reactive outcomes when analysing the environment.

Limitations

There are three difficulties in determining the connection between the organisation corporate strategy and its environment.

Firstly is the prescriptive versus emergent debate. Interpretations in the corporate strategy process imply a different status for the same basic topic hence the difficulty to which the analysis is put to use.

Secondly is the uncertainty. Corporate strategists regard the environment as uncertain.

Thirdly is the range of influences as every element of an organisation’s environment influence corporate strategy hence the ability of an organisation to cope with the existing situation.

Conclusion

To the prescriptive strategists, although the items in a PESTEL analysis rely on past events and experience, the analysis can be used as a forecast of the future. The past is history and corporate strategy is concerned with future action, but the best evidence about the future may derive from the past. Prescriptive strategists would suggest that it is worth attempting the task because major new investments make this hidden assumption anyway.

The emergent corporate strategists may well comment that the future is so uncertain that prediction is useless. If this view is held, a PESTEL analysis will fulfil a different role in interpreting past events and their interrelationships. In practice, some emergent strategists may give words of caution but still be tempted to predict the future. Overall, when used wisely, the PESTEL analysis has a role in corporate strategy.

Using Organizational Buying Process, have B2B marketing strategies become more relationship oriented?

2014-03-20T10:14:00.000+08:00

Business markets consist of individuals and organizations that buy goods for purposes of further production, resale, or redistribution. Business (including government and nonprofit organizations) are a market for raw and manufactured materials and parts, installations, accessory equipment, and supplies and services. The variables impact the business buyer are similar to those of the consumer buyer in some ways but very different in others. In general, the business buyer is generally much more technical, price-oriented, educated for the job, and risk adverse than the consumer.

In certain business markets purchase decisions hinge on the outcome of a bidding process between competitors offering similar products & services. In these cases the decision to buy is often whittled down to one concern — who has the lowest price. However, in many other ways business buying is much more complicated. For instance, the demand by businesses for products & services is affected by consumer purchases (called derived demand) & because so many organizations may have a part in creating consumer purchases, a small swing in consumer demand can create big changes in business purchasing. For business to business marketers the size of individual orders, along with a smaller number of buyers, makes person to person contact by sales representatives a more effective means of promotion.

The business market is much more geographically concentrated than the consumer market. Certain industries locate in particular areas to be close to consumers. Firms may choose to locate sales offices & distribution centers in these areas to provide more attentive service. In addition to geographical concentration, the business market features a limited number of buyers. Marketers can draw from a wealth of statistical information to estimate the sizes & characteristics of business markets. Many buyers in limited buyer markets are large organization.

A significant percentage of business buying, especially within larger organizations, requires the input of many. In marketing literature those associated with the purchase decision are known to be part of a Buying Center, which consists of individuals within an organization that perform one or more of the following roles:

1) Buyer - responsible for dealing with suppliers & placing orders (e.g. purchasing agent)

2) Decider - has the power to make the final purchase decision (e.g. CEO)

3) Influencer - has the ability to affect what is ordered such as setting order specifications (e.g. Engineers, researchers, product managers)

4) User — those who will actually use the product when it is received (e.g. Office staff)

5) Initiator — any buying center member who is first to determine that a need exists.

6) Gatekeeper — anyone who controls access to other buying center members (e.g. Administrative assistant)

For marketers confronting a Buying Center it is important to first identify who plays what role. Once identified the marketer must address the needs of each member, which may differ significantly. For instance, the Decider, who may be the company president wants to make sure the purchase will not negatively affect the company's bottom line while the Buyer wants to be assured the product will be delivered on time. Thus, the way each Buying Center member is approached and marketed to requires careful planning in order to address the unique needs of each member.

Industrial buyers make decisions that vary with the buying situation or buy class. Buy classes comprise three types:

1) Straight Re-Purchase - These purchase situations involve routine ordering. In most cases buyers simply reorder the same products or services that were previously purchased. In fact, many larger companies have programmed re-purchases into an automated ordering system that initiates electronic orders when inventory falls below a certain pre-determined level. For the supplier benefiting from the re-purchase this situation is ideal since the purchaser is not looking to evaluate other products. For competitors who are not getting the order it may require extensive marketing efforts to persuade the buyer to consider other product or service options.

2) Modified Re-Purchase — these purchases occur when products or services previously considered a straight re-purchase are for some reason now under a re-evaluation process. There are many reasons why a product is moved to the status of a modified re-purchase. Some of these reasons include: end of purchase contract period, change in who is involved in making the purchase, supplier is removed from an approved suppliers list, mandate from top level of organization to re-evaluate all purchasing, or strong marketing effort by competitors. In this circumstance the incumbent supplier faces the same challenges they may have faced when they initially convinced the buyer to make the purchase. For competitors the door is now open and they must work hard to make sure their message is heard by those in charge of the purchase decision.

3) New Task Purchase — as the name suggests, these purchases are ones the buyer has never or rarely made before. In some ways new task purchases can be considered as either minor or major depending on the total cost or overall importance of the purchase. In either case the buyer will spend considerably more time evaluating alternatives. For example, if faced with a major new task purchase, which often involves complex items, such as computer systems, buildings, robotic assembly lines, etc., the purchase cycle from first recognizing the need to placement of the order may be months or even years.

Businesses must understand the dynamics of the organizational purchase process. Suppliers who serve business to business markets must work with multiple buyers, especially when selling to larger customers. Suppliers must evaluate customer needs & develop proposals that meet technical requirements & specifications.

A primary goal of business to business relationships is to provide advantages that no other vendor can provide-for instance lower price, quicker delivery, better quality & reliability, customized products features or more favorable financing terms. Hence requiring superior communications among the organization personnel. Providing these advantages means expanding the company's external relationship which include suppliers, distributors & other organizational partners.

In conclusion, close co-operations whether through informal contacts such as the business dinner or under terms specified in contractual partnerships & strategic alliances enable companies to meet buyers' needs for quality products & customer service.

SWOT Analysis

2014-03-20T10:00:00.000+08:00

SWOT analysis in strategic planning and the interactions among the key factors in the application of this analytical tool.

Marketing audit is a systematic examination of key factors such as market environment, strategy, organisation, marketing system, productivity and function. These key factors affect an organisation’s marketing activities at a specific time.

First is the market environment audit refers to the macro environment such as technology and the tasks of competitors.

Second is the market strategy audit examines whether the strategy is in line with the business mission.

Third is the market organisation audit, which refers to the structure and functional efficiency such as interface efficiency.

Fourth is the market system audit examines the planning and control.

Fifth is the market productivity audit refers to profitability analysis and cost effectiveness analysis. Lastly, the market function audit refers to the marketing mix elements.

SWOT analysis is part of marketing audit, which is a tool for auditing an organization and its environment. SWOT is used to assess an organisation’s strengths, weaknesses, opportunities, and threats.

The example to better illustrate SWOT is XYZ Company. XYZ Company is a tyre manufacturing company.

Strength refers to the competitive advantages or core competencies that gives the firm an advantage in meeting the needs of its target markets. Examples for XYZ Company’s strengths are patents, robust reputation, a wide range of products to cater to consumers needs and wants, shortening of lead time, good marketing integrated system and providing value-added services such as after sales services. XYZ Company exercised its strength by producing consistency in meeting the needs of the target markets.

Weakness refers to any limitation that a company faces in developing or implementing a marketing strategy. Examples of XYZ Company’s weakness are high cost structure and insufficient supply to meet the huge demand. In order to reduce these weakness, XYZ Company implements cost saving strategies to reduce high cost structure and offers alternatives to the huge demand.

Thus, strengths and weaknesses are internal factors, which influences an organisation’s ability to satisfy its target market and are controllable by the organisation. Both strengths and weakness should be examined from a customer perspective because they are only meaningful only when they help or hinder the firm in meeting customer.

Opportunities refer to favourable conditions in the environment that could produce rewards for the organisation if acted upon properly. Examples of XYZ Company’s opportunities are arrival of new tyre moulding technologies and free trade agreements. In order exploit such opportunities, XYZ Company utilises new technology to achieve economies of scale and scope. XYZ Company devised business expansion plans to new regional markets by maximizing the usage of free trade agreements.

Threats refer to conditions or barriers that may prevent the firm from reaching its objectives. Example of XYZ Company’s threat is the escalating cost of raw materials. In order to minimise this threat, XYZ Company is signing long-term exclusive contracts with rubber suppliers to get rubber on a more favourable term.

Thus, opportunities and threats are external factors, which exists independently of the firm and represent issues to be considered by all organisations.

In essence, an organisation matches internal strengths to external opportunities; it creates competitive advantages in meeting the needs of it customers. An addition, organisation should also act to convert internal weakness into strengths and external threats into opportunities

Next, XYZ Company, which is a tyre manufacturing company, is used to illustrate the interactions among the key factors in the application of SWOT analysis.

First is the interaction between strength and opportunity. XYZ Company’s strength is a wide range of products to cater and XYZ Company opportunities are the arrival of new tyre moulding technologies and free trade agreements. With the utilisation of new technology, XYZ Company achieves economies of scale and scope by producing large quantities and better quality products to customers. Furthermore, XYZ Company can target not just the local market but also expand its businesses to new regional markets by maximizing the usage of free trade agreements. This is the key success factor for XYZ Company as the strength facilitates the organisation in its efforts to exploit opportunities.

Second is the interaction between strength and threats. XYZ Company’s threat is cut throat competition as competitors lower their price, the customers will be attracted to such offers and switch to their competitors, as these are savings. However, XYZ Company has strengths such as value added service, call centre, after sales services and a comprehensive marketing information system. Furthermore, It has a good track record of prompt delivery of goods. Customers will think twice as the switching cost is high. Therefore, XYZ Company has demonstrated these strengths overcome the threats that encompasses.

Third is the interaction between weakness and opportunity. XYZ Company’s weakness is the insufficient supply to meet the huge demand. For example, Off-The-Road (OTR) tyres are relatively large tyres, which are facing shortages worldwide, but the demand is huge. Therefore, the opportunity for expansion to regional markets with high demand is comprised. The next weakness is that XYZ Company’s tyres do not have Euro 4 and Dot certification. Huge capital is involved in applying these certifications and it is a liability. In order to counter this weakness, XYZ Company get loans from financial institutions.

Fourth is the interaction between weakness and threat. In this instance, the fact is clear that weakness impair the organisation ability to cope with threats. The threat that XYZ Company faces is perfect competition. There is no barrier to entrance and exit to market. There will be potential entrants or competitors to compete away the profits. Moreover, the weakness that XYZ Company’s brand is still not robust to contend with established brands. In order counter, XYZ Company devise plans to build strong branding in their products through marketing mix. So, as to gain customer’s confidences, owning the product generic recognition and setting the bench mark of quality tyres.

In conclusion, through exploring the interactions between factors with the SWOT analysis, it identifies the key internal strengths and weakness matched with external factors to indicate the organisation’s ability abilities to respond to key factors in the business environment

Conduct a competitor and industry analysis. Explain how this would affect the implementation of your marketing strategy

2014-03-20T09:46:00.000+08:00

A company is planning an important investment in a market and a competitor and industry analysis is requested. How this would affect the implementation of your marketing strategy?

It is imperative for a company to have a detailed knowledge of their competitors in order to position itself and distinguish it from its counterparts. As fierce competition erodes the competitive advantage, company must create more economic values than competitors to obtain or maintain a sustainable competitive advantage. The company must have the capabilities to adapt in the fast-changing environment and react quickly, else it would not be able to keep up with the market and maintain the sustainable competitive advantage and profitability. This is particularly true when competitors have changed their market positioning strategies, marketing mix strategies or introduction of new products which directly affect or neutralise the company’s competitive advantage. Thus, company needs to perform competitor analysis to identify the threats, opportunities, or strategic uncertainties created by emerging or potential competitor moves, weaknesses or strengths, which will influence the product-market investment decision.

Competitor analysis is an important phase of external analysis and it starts with identifying current and potential competitors. There are 4 key issues to investigate.

First is to identify the competitors.

Second is to identify the most intense competitors and the less intense but still serious competitors.

Third is to identify the makers of substitute products.

Fourth is to classify competitors into strategic groups on the basis of their assets, competencies and strategies.

Fifth is identifying the potential competitive entrants.

After the competitors are identified, the focus shifts to attempting to understand them and their strategies. Marketers would then again need to investigate the following key issues on competitors:

Mission Statement

By investigating competitors’ mission statements, marketers could study their main objectives and vision, which depicts long-term strategies. Marketers could then identify threats and opportunities from their strategies and make adjustments to its marketing strategies to counter or overwhelm competitor’s strategies.

Market Targeting

Through understanding of competitor’s market segmentation, marketers could identify which groups of the market the competitor attempts to target. It would then provide opportunities for marketer to explore and target a new market which competitors have not targeted.

Image and Market Positioning Strategy

Marketers need to understand how competitors position themselves in the market and the strength of their market positioning strategies on consumers. It could be analysed by using perceptual mapping, which attempts to visually display the perceptions of customers or potential customers. Typically the position of a product, product line, brand, or company is displayed relative to their competition. Competitors that are positioned closely together are close competitors and form a competitive grouping. Hence, marketers should consider the introduction of a new product in an area on the map that is free from competitors.

The level of entry and exit barriers

Marketers need to identify the level of entry and exit barriers to the market. If the level of barriers for entry and exit to the market are low, it means that lesser resources and capabilities are required to enter into the market. However, the company could face more competition and might dissipate market share and profitability.

Marketing Mix Strategy

Marketers need to identify what are the marketing mix strategies that are adopted by the competitors. Particularly, what are the products they are offering, how they promote their products, how they priced their products and what are the distribution channels used for the products, which ultimately influences the product-market decision makings.

Assessing Strengths and Weaknesses

Marketers need to identify competitors’ strengths and weaknesses. By analysing competitor strengths and weaknesses, company could identify opportunities and threats they should pay attention to, and develop marketing strategies to create more economic values.

Porter's 5 forces analysis is a framework for industry analysis and business strategy development, it helps to understand both the strength of the company competitive position, and the strength of a position the company is advancing to. Conventionally, the tool can be used to identify whether new products, services or businesses have the potential to be profitable.

The bargaining power of suppliers

It defines how easy it is for the suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one another to another. Thus, the fewer the supplier choices, the more the company need for suppliers’ help, the more powerful the suppliers are.

The bargaining power of buyers

It is driven by the number of buyers, the importance of each individual buyer to the company, the cost to them of switching from the company products and services to competitors. If the company is dealing with few, powerful buyers, the buyers would have higher bargaining power.

The intensity of competitive rivalry

It is driven by the number and capability of competitor. If the company has many competitors, and they offer equally attractive products and services, then the company would most likely have little power in the situation.

The threat of substitute products

It is affected by the ability of the customers to find a product that can be substituted with the company’s product. If substitution is easy and substitution is viable, then this would weaken the company’s power.

The threat of the entry of new competitors

Power is also affected by the ability of firms to enter the market. If it costs little in time or money to enter the market and compete effectively, if there are few economies of scale in place, or if there is little protection for company’s key technologies, then new competitors can quickly enter the market and weaken the position. If the company have strong and durable barriers to entry, then the company can preserve a favourable position and take fair advantage of it.

As the level of barriers to entry into the market is low, new competitors could replicate the key technologies and produce similar product design and functionality at a lower price. Just like in the case of hundreds over imitation brands of portable media players at a lower price in the market. A company needs to educate and convince the consumer in differentiating and demonstrate the desired benefits of its products respectively.

Conclusion

In conclusion, it is important for company to have detailed knowledge of competitor, so as to identify the opportunities and threats, which would influence the product-market investment decision. Marketer needs to evaluate its powers on whether it is worth the investment to enter into the market using the Porter’s five forces analysis. Ultimately, it is essential for the company to diversify and expand product lines, differentiating its products and increase brand loyalty in order to survive in portable media player industry.

Key Success Factors

2014-02-25T12:12:00.002+08:00

Introduction

Key success factors are resources, skills and attributes of an organisation that are essential to deliver success in the market place. They are related to the industry and are unlikely to provide differentiation between organisations in the industry. Key success factors can be used to identify elements of the environment that are particularly worth exploring.

Key success factors are common to all the major organisations in the industry and do not differentiate one company from another. For example, factors such as low labour cost, a range of specialised steel products are common to many steel companies. Such factors will vary from one industry to another. For example, by contrast, in the perfume and cosmetics industry the factors will include branding, product distribution and product performance, but they are unlikely to include low labour costs.

Identifying Key factors of success in the industry

Key factors concern not only the resources of organisations in the industry but also the competitive environment in which the organisation operates. There are 3 principal areas that need to be analysed which are customers, competition and corporation

Customers

It refers to who is your present and potential customers, segmentations and who they purchase from are examined.

1) Price – market segmented by high, medium and economy pricing.

2) Service – customer value the service more than the purchase of a product.

3) Product or service reliability – customer views product performance and reliability more important than other factors.

4) Quality – customers willingly to pay higher prices for actual or perceived quality differences.

5) Technical specifications – technical details providing major attractions to some customers.

6) Branding – Customer is more into branding.

Competition

It refers to the main competitors, main factors in the market that influence competition, the intensity of competition, achieving market superiority and resources required.

1) Cost comparison – which companies have the lowest cost.

2) Price comparison – which companies have high prices.

3) Quality issues – Which, why and how companies have the highest quality?

4) Market dominance – Which companies dominate in the market.

5) Service – Companies offering superior service levels.

6) Distributors – Companies having the best distribution networks, lowest costs and fastest delivery.

Corporation

It refers to examining concentration of industry costs, the organisation and competitors’ resources.

1) Low cost operations

2) Economies of scale

3) Labour costs

4) Production output levels

5) Quality operations

6) Innovative ability

7) Labour/management relations

8) Technologies and copyright

9) Skills

Limitations

There are 4 issues

1) Identification

Difficult to pick out the important factors

2) Causality of relationships

The causality of relationship has been identified, it may not be clear how they operate or interact.

3) Dangers of generalising

The competitive advantage of a single organisation by definition cannot be obtained by seeking what is commonly accepted as bringing success to all organisations in an industry.

4) Disregard of emergent perspectives

Success may come from change in an industry rather than the identification of the current key factors for success.

Conclusion

In a strategic analysis of the environment, there is an immense range of issues that can potentially be explored, creating a problem for most organisations, which have neither the time nor resources to cope with such an open-ended task. The analysis can be narrowed down by identifying the key factors of success in the industry and then using these to focus the analysis on particularly important environmental matters.

The key factors of success are consistent with Porter’s view that there are factors that determine the relative competitive positions of companies within an industry. Thus, it is important to identify the KFS for a particular industry as there are many elements relate not only to the environment but also to the resources of organisations in the industry. The limitations suggest that key factors for success should be explored with caution as it is a starting point in strategy analysis. In order to make KFS effective, it requires a thorough exploration of the resources and skills of an industry before they can be applied to the environment.

REDS ACID TEST

2014-02-24T17:08:00.000+08:00

Introduction

REDS²ACID test provides a means by which the framework may be operationalised and the development of the test is the result of its application in situations that highlighted by the model and provided direction for subsequent refinement.

Case Study: ABC Pte Ltd

ABC Pte Ltd (ABC) is a local company and the core business is carpark systems.

REDS ACID Test Model involves:

A) Revealing the Identities

B) Examining the Interfaces

C) Diagnosing the Problem

D) Select a suitable Strategy and their implications

A) Revealing the Identities

Identities	Definitions and case study examples
Actual Identity	What the organisation is. ABC owns 80% of cark park system in private sectors ABC owns 10% of cark park system in public sectors
Communicated Identity	How the organisation communicates its identity internally and externally. Uncontrollable: Word of mouth and referrals Controllable: Personal Selling and Direct Marketing
Conceived Identity	How the organisation is perceived externally and internally As a result of both its actions and communications. Market leader in private sector Well known in private sector but not in the public sector
Ideal Identity:	The optimum positioning of the organisation in its market or markets taking cognisance of its strengths and abilities in addition to environmental considerations ABC’s ideal identity is to be a market leader in public sectors as well.
Desired Identity	The identity which the chief executive and management board wishes to acquire. ABC’s desired identity is to be market leader in all sectors.

B) Examining the Interfaces

It provides clear guidance on how to analyse the interfaces, directing the researcher towards constructing a multidimensional comprehension of the corporate identity while promoting an understanding of the inter-relatedness of the four constructs. There are ten interfaces and each interface may or may not revealed significant gaps between the 5 identities.

C) Diagnosing the Problem

A gap analysis revealed companies’ flaws demonstrated in a degree of mis-alignment between the identities or non-alignment of between identities, which may result in serious implications for managing the corporate image and reputation. The nature of these gaps tended to fall into three areas of focus, which are corporate culture, management processes and communications.

1) Actual – Communicated

Gap: Although strong private sectors, public remains weak. There is no effort in the shown in the public sectors.

2) Actual – Ideal

Gap: ABC placed more weightage in the private sectors due to better ROI. Thus, ABC’s profitable orientation strategy did not work well in public sectors tenders.

3) Actual – Desired

Gap: ABC’s vision to be the market leader in all sectors is far as all efforts are directed to the private sectors and neglected the market opportunities in public sectors.

4) Actual – Conceived

Gap: Personal selling and word of mouth are 2 essential locomotives for ABC’’s success in the private sectors. But for the public sectors, these 2 strategies did not work well as “WSN” and “SCP” are the 2 companies have already entrenched them in the public sector markets.

5) Communicated – Conceived

Gap: Communication efforts in the public sectors are paltry and ABC suffers “identity alienation” as it is not known to the public.

6) Communication – Desired

Gap: In the controllable communication, the budget set for private sector is more than public sector and private sectors commands better returns

7) Communication – Ideal

Gap: Little effort from sales forces and direct marketing initiatives to penetrate into public sectors

8) Ideal – Conceived

Gap: Only well known in the private sectors but not in the public sectors.

9) Ideal – Desired

Gap: Owns 80% in the private sectors and 10% in the public sectors. ABC is far from company’s vision.

10) Desired – Conceived

Gap: Gap: Only well known in the private sectors but not in the public sectors.

D) Select a suitable Strategy and their implications

Select Strategies to align and to close the gaps

1) Actual – Communicated

Gap: Although strong private sectors, public remains weak. There is no effort in the shown in the public sectors.

Strategies to align: Increase effort in personal selling and direct marketing in public sectors

2) Actual – Ideal

Gap: ABC placed more weightage in the private sectors due to better ROI. Thus, ABC’s profitable orientation strategy did not work well in public sectors tenders.

Strategies to align: Joint venture

3) Actual – Desired

Gap: ABC’s vision to be the market leader in all sectors is far as all efforts are directed to the private sectors and neglected the market opportunities in public sectors.

Strategies to align: Revisit IMC tools such as marketing research for public sectors

4) Actual – Conceived

Strategies to align: Deploy an additional set of IMC tools for public sector such as PR

5) Communicated – Conceived

Gap: Communication efforts in the public sectors are paltry and ABC suffers “identity alienation” as it is not known to the public.

Strategies to align: increase efforts in personal selling and direct marketing in the public sectors

6) Communication – Desired

Gap: In the controllable communication, the budget set for private sector is more than public sector and private sectors commands better returns

Strategies to align: Deploy an additional set of IMC tools for public sector such as PR

7) Communication – Ideal

Gap: Little effort from sales forces and direct marketing initiatives to penetrate into public sectors.

Strategies to align: Using PR tools such as lobbying and get into public sectors’ good books

8) Ideal – Conceived

Gap: Only well known in the private sectors but not in the public sectors.

Strategies to align: re-position ABC’s proposition in the public sectors

9) Ideal – Desired

Gap: Owns 80% in the private sectors and 10% in the public sectors. ABC is far from company’s vision.

Strategies to align: Increase all possible efforts in public sectors and continue to uphold robust reputation in the private sectors.

10) Desired – Conceived

Gap: Gap: Only well known in the private sectors but not in the public sectors.

Strategies to align: re-position ABC’s proposition in the public sectors

Usefulness of REDS ACID Test Model to managers

From a communication perspective, the concepts surrounding the revelation of identities and their inter-relation with each other were easily grasped by managers and personnel involved in the study. This suggests that the format is both simple and memorable in terms of justifying the methodology employed and communicating the concepts of corporate identity management to research subjects.

The REDS ACID Test model focused managers’ attention on the gaps between the identities, a style that has come to be consistent with many other strategic management analysis techniques, and emphasized the requirement for identity management and the need for corrective action in situations of non-alignment.

These experiences are consistent with other positive reactions to the model in most commercial contexts highlighted, which reveals that the REDS ACID Test approach has been well received by the major organisations in which it has been used.

Conclusion

The development of the REDS ACID Test of Corporate identity Management and its evolution through the use of case study examples of applying the test in a research situation is an iterative one and requires many more applications in order to refine and develop the process into one that is universally applicable. Future research in the area of the REDS AC2ID Test needs to address the development of specific tools that can be utilised within the framework to reveal aspects of identity. In addition, repeated application of the test in research situations will help to build and refine the model through the use of empirical evidence of the impact of the five constructs and the ten interfaces.

Entry Strategy and Strategic Alliances

2013-05-18T11:20:00.002+08:00

Entry Strategy and Strategic Alliances

Firms expand internationally must decide at the initial

1) Which markets to enter

2) When to enter them and on what scale

3) Which entry mode to use

a) Exporting

b) Licensing or franchising to a company in the host nation

c) Establishing a joint venture with a local company

d) Establishing a new wholly owned subsidiary

e) Acquiring an established enterprise

Factors affecting the choice of entry mode

1) Transport costs

2) Trade barriers

3) Political risks

4) Economic risks

5) Costs

6) Firm strategy

7) Environment

8) Core competencies

The optimal mode varies by situation and the company to decide what is the appropriate entry mode. One company’s entry mode may not be appropriate to another company. External variables play a part in the initial decision, denotes which to go, when to go and how to go.

Basic entry decisions (External variables: company need to identify)

Firms entering foreign market make three decisions which are

1) Which markets to enter

The choice of foreign markets will depend on their long run profit potential. Favourable markets are politically stable developed and developing nations with free market systems and relatively low inflation rates and private sector debt. The less favourable markets are politically unstable developing nations with mixed or command economies, or developing nations with excessive levels of borrowing. Markets are more attractive when the product in question is not widely available and satisfies an unmet need.

It is based on the benefit, cost and risk analysis. When external factors are taken in consideration, the political economies of a country need to be identified to access the risk. The higher the benefit, the higher the risk can be taken. The culture of the country is identified to understand the impact of doing business. Trade barriers need to be taken in consideration.

2) When to enter those markets

Once attractive markets are identified, the firm must consider the timing of entry. Entry is early when the firm enters a foreign market before other foreign firms. Entry is late when the firm enters the market after firms have already established themselves in the market.

This is where companies utilize and handle resources and capabilities in a competent manner.

First mover advantages are the advantages associated with entering a market early.

The first mover advantages include:

a) The ability to pre-empt rivals and capture demand by establishing a strong brand name.

b) The ability to build up sales volume in that country and ride down the experience curve ahead of rivals and gain a cost advantage over late entrants.

c) The ability to create switching costs that tie customers into products or services making it difficult for later entrants to win business.

The first mover disadvantages are disadvantages associated with entering a foreign market before other international business.

The first mover disadvantages include:

a) Pioneering costs which arise when the foreign business system is so different from that in a firm’s home market that the firm must devote considerable time, effort and expense to learning the rule of the game.

The pioneering costs include:

a) The costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes.

b) The costs of promoting and establishing a product offering including the cost of educating customers.

3) On what scale to enter those markets – small scale basis is to export and large scale is to FDI

Firms need to decide on the scale of the market entry after deciding which market to enter and the timing of entry.

Entering a foreign market on a significant scale is a major strategic commitment that changes the competitive playing field.

Firms that enter a market on a significant scale make a strategic commitment to the market which decision has a long term impact and is difficult to reserve.

Small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm’s exposure to that market.

Companies chooses which entry mode is eventually influenced by internal variables, because the internal variable plays a much more important roles than external variables. It would also depend on the resources and capabilities of the company. It also depends on the companies’ products. For example is Nokia which has a flexibility then Motorola in products.

Core competences and Entry mode (Internal variables: what Influence the choice of entry mode)

The optimal entry mode depends to some degree on the nature of a firm’s core competencies.

1) Technology know-how

When competitive advantage is based on proprietary technology know-how, the firm should avoid licensing and joint venture arrangements unless it believes that its technology advantage is only transitory or that it can establish its technology as the dominant design in the industry.

When competitive advantage is critical based on proprietary technology know-how, the firm should undertake wholly owned subsidiaries as there is no risk of losing proprietary technology know-how but the cost and risks are high.

When competitive advantage is based on proprietary technology know-how which is not critical, the firm can using joint venture as the 2^nd choice as there are some forms of contractual control over technology know-how as the risk and cost is shared. When competitive advantage is based on proprietary technology know-how which is no longer critical, licensing is available.

2) Management know how

When competitive advantage is based on management know-how, the risk of losing control over the management skills is not high and the benefits from getting greater use of brand names is significant.

The entry mode applicable is franchising because franchising controls everything but the disadvantage is that is does not exploit the market completely as royalty are collected only. In addition, Stephen Hymer and John Dunning say that firms cannot license management skills. For example is McDonald’s. However, if competitive advantage is based on management know-how is critical and companies wants exploit the market, the wholly owned subsidiaries or joint venture will be ideal entry modes.

3) Pressures for cost reductions and entry mode

When pressure for cost reductions is high, firms are more likely to pursue wholly owned subsidiaries to enter the market and uses exporting to serve the market. This will allow the firm to achieve location and scale economies as well as retain some degree of control over its worldwide product manufacturing and distribution.

Firms pursing global standardization or transnational strategies prefer wholly owned subsidiaries. After which, firms use exporting to serve the markets where EOS increases and costs decreases to counter high fixed cost of wholly owned subsidiaries. Thus, it is a dual entry strategy.

Entry modes

There are six different ways to enter a foreign market

1) Exporting

Exporting is a common first step in the international expansion process for many manufacturing firms. It is popular and quickest to enter and exit.

Exporting is attractive because it avoids the costs of establishing local manufacturing operations. It helps firm to achieve experience curve and location economies.

Exporting is unattractive because there may be lower-cost manufacturing locations, high transport costs and tariffs which can make export uneconomical, agents in a foreign country may not act in exporter’s best interest.

2) Turnkey projects

In Turnkey projects, the contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel. At the completion of a contract, the foreign client is handed the key to a plant that is ready for full operations. Turnkey projects are common in the chemical, pharmaceutical, petroleum refining and metal finishing industries.

Turnkey projects are attractive because they are the best way of earning economic returns from the know-how required to assemble and run a technologically complex process. They can be less risky than conventional FDI.

Turnkey projects are unattractive because the firm that enters into a turkey deal will have no long term interest in the foreign country or create a competitor. If the firm process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling the competitive advantage to potential and/or actual competitors.

3) Licensing

Licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity (Licensee who are people who want to buy the knowledge) for a specified time period and in return the licensor receives a royalty from the licensee. For example is the brand name Davidoff.

The intangible property includes patents, inventions, formulas, processes designs, copyrights and trademarks.

Licensing is attractive because the firm does not have to bear the development costs and risks associated with the opening a foreign market, the firm also avoids barriers to investment and firms with intangible property that might have business applications can capitalize on market opportunities without developing those applications itself.

Licensing is unattractive because the firm does not have tight control over manufacturing, marketing and strategy required for realizing experience curve and location economies, and it limits the firm’s ability to co-ordinate strategic moves across countries by using profits earned in one country to support competitive attacks in another. Importantly, proprietary information may be lost.

One way of reducing risk is to cross licensing agreements where a firm might license intangible property to a foreign partner but requests that the foreign partner license some form of its valuable know-how to be the firm in addition to a royalty payment.

4) Franchising

Franchising is basically a specialized form of licensing in which the franchisor not only sells intangible property to franchisee but also insists that the franchisee agree to abide by strict rules as to how it does business. Franchising is primarily done by service firms.

Franchising is attractive because firm avoids many costs and risks of opening up a foreign market and quickly build a global presence

Franchising is unattractive because it may inhibit the firm’s ability to take profits out of one country to support competitive attacks in another and the geographical distance of the firm from its foreign franchisees can make poor quality difficult for the franchisor to detect.

5) Establishing Joint ventures with host country firm

Joint venture is the establishment of a firm that is jointly owned by 2 or more otherwise independent firms

Joint venture is attractive because they allow firm to benefit from a local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems and business systems. The costs and risks of opening a foreign market are shared with the partner. Lastly, political considerations make joint ventures the only feasible entry mode.

Joint ventures are unattractive because the firm’s risks giving control of its technology to its partner. Secondly, the firm may not have the tight control over subsidiaries need to realize experience curve or location economies. Lastly is the shared ownership can lead to conflicts and battles for control if goals and objectives differ or change over time.

6) Setting up a new wholly owned subsidiary in the host country

In wholly owned subsidiary, the firm owns 100% of the stock. Firms can set up wholly owned subsidiary in a foreign market by setting up a new operation or acquiring an established firm in the host country.

Wholly owned subsidiaries are attractive because they reduce risk of losing control over core competencies. Secondly, they give firms the tight control over operations in different countries that are necessary for engaging in global strategic co-ordination. Lastly, they may be required in order to realize location and experience curve economies

Wholly owned subsidiaries are attractive because the firms bear the full cost and risk of setting up overseas operations.

a) Management contract

b) Non equity partner and joint venture

Selecting an Entry mode

All entry modes have advantages and disadvantages. However, the optimal choice of entry mode involves tradeoffs.

Entry mode	Advantages	Disadvantages
Exporting	Ability to realise experience curve and location economies	High transportation cost Trade barriers Problems with local marketing agents
Turnkey	Ability to earn returns from process technology skills in countries where FDI is restricted	Creating efficient competitors Lack of long term market presence
Licensing	Low development costs and risks	Lack of control over technology Inability to realize location economies and experience curve Inability to engage in global strategic co-ordination
Franchising	Low development costs and risks	Lack of control over technology Inability to engage in global strategic co-ordination
Joint Venture	Access to partner knowledge Sharing development costs and risks Politically acceptable	Lack of control over technology Inability to realize location economies and experience curve Inability to engage in global strategic co-ordination
Wholly owned subsidiaries	Protection of technology Ability to engage in global strategic co-ordination Ability to realize location economies and experience curve	High cost and risks

Wholly Owned Subsidiaries (Greenfield Ventures or Acquisitions)

There are 2 forms of Wholly Owned Subsidiaries which are Greenfield Ventures or Acquisitions.

Acquisitions are attractive because

1) They are quick to response

2) They enable firms to preempt their competitors

3) Acquisitions may be less risky than Greenfield ventures.

Acquisitions fail when

1) The acquiring firm overpays for the required firm which is being overvalued.

2) The cultures of acquiring and acquired firm clash

3) Attempts to realize synergies run into roadblocks and take much longer than forecast

4) There is an inadequate pre-acquisition screening

In order to avoid these problems, firms should screen carefully of the firm be acquired and move rapidly once the firm is acquired to implement an integration plan.

Greenfield Ventures are attractive because

1) It gives firm a greater ability to build the kind of subsidiary company that it wants.

Greenfield Ventures are unattractive because

1) Green ventures are slower to establish

2) Green ventures are risky

Decision on Greenfield or acquisition

It depends on the situation confronting the firm.

Acquisition may be better when the market already has well-established competitors or global competitors are interested in building market presence.

Greenfield ventures may be better when the firm needs to transfer organizationally embedded competencies, skills, routines and culture

The advantages of Strategic Alliances

1) Facilitate entry into a foreign market

2) Allows firms to share the fixed costs and associated risks of developing new products or processes

3) Bring together complementary skills and assets that neither partner could easily develop on its own

4) Can help a firm establish technological standards for the industry that will benefit the firm

The disadvantage of Strategic alliances

Strategic Alliances can give competitors low cost routes to new technology and markets, but unless a firm is careful, it can give away more than it receives.

The key problems why partnership fails

Clash of organisation culture

Clash of objectives

Clash of terms and references

Opportunism which is stealing partner knowledge and turn it against their partner

Making Alliances work

The success of an alliance is a function of Partner Selection, Alliance Structure and the manner in which the alliance is managed.

1) Partner Selection

Partner selection can minimize problems of clash of organisation culture, clash of objectives and clash of terms and references. Firstly is look for partner with the same organisation culture to reduce any form of mismatch in organization culture. Secondly, identify partners which objectives can be met which means similar objectives are followed. Thirdly is to identify partners with common terms and references which are aligned to the resources and capabilities, back ground and competencies.

The advantages are good partners help firms to achieve strategic goals and has the capabilities the firm lacks and that it values, shares the firm’s vision for the purpose of the alliance and unlikely to try to opportunistically exploit the alliance for its own ends, that it expropriate the firms technological knowhow while giving away little in return.

2) Alliance Structure

Once the partner is selected, the alliance should be structured to minimize the risk of opportunism by an alliance partner. Firstly is to make it difficult to transfer technology not meant to be transferred. Secondly is to contractual safeguards written into the alliance agreement to guard against the risk of opportunism by a partner. Thirdly is to allow for skills and technology swaps with equitable gains. Both partners are interdependent

3) Alliance must be managed

Successfully managing an alliance requires managers from both companies to build interpersonal relationship. The ability to learn from its alliance partners is a major determinant of how much a company gains from an alliance. Lastly, research has shown that trust has played a primarily important role in successful partnership.

Location Economies - Location decision for Manufacturing – Concentrate or Decentralise

2013-05-18T11:11:00.001+08:00

Location Economies

Location decision for Manufacturing – Concentrate or Decentralise

Whether the manufacturing company wants to concentrate or decentralize depends on 3 factors which are country factors, technology factors and product factors.

Country factors

Firms locate manufacturing activities in those locations where the political, economic, legal, cultural environment and relative factors costs are most conducive to performances of that activity and impact on business.

Labour skills and supporting industries are referred as externalities.

Decentralise. If the impact is high which required customisation

Concentrate. If the impact is low which does not required to customisation

Concentrate. If it is rare, unique or found a few places in the world

Decentralise. If it is common

Decentralise. Volatility Foreign exchange

Concentrate. Stability Foreign exchange

Decentralise. Formal and informal trade barriers high

Concentrate. Formal and informal trade barriers low

Technology factors

The 3 characteristics of manufacturing technology are fixed cost, minimum efficient scale and flexibility of technology

Fixed costs

The level of fixed cost of setting up a manufacturing plant is high, it is appropriate to serve the world market from a single location or from a few location. When fixed caost are low, multiple production plants may be possible, multiple location production allows firms to responds to local markets and reduces dependency on a single location. The type of technology used can affect the location decisions.

Concentrate. Operating on high fixed cost

Decentralise. Operating on low fixed cost

Minimum Efficient scale

The larger the MES of a plant, the more concentrate production in a single location

The low MES allows the firm to respond to local market demands and hedge against currency risk by operating in multiple locations.

Concentrate. Minimum efficient scale high which requires less location to produce

Decentralise. Minimum efficient scale low which requires more location to produce

The flexibility of technology

It is referred to reduce set up times for complex equipment, increase the utilisation of individual machines through better scheduling and improving quality control at all stages of the manufacturing process.

Concentrate. High Flexible technology which could mass customise more

Decentralise. Low Flexible technology which could mass customise less

Flexible manufacturing technologies can produce a wide variety of end products at a unit cost that at one time could be achieved through the mass production of a standardised output.

Mass customisation implies that a firm may be able to customise its product range to meet the demands of local markets yet still control costs

Flexible machine cells allow firms to increase efficiency by improving capacity utilisation and reducing work in progress.

Concentration production at few choices locations makes sense when fixed costs are substantial, MES is high and Flexibility technologies are available

Product factors

The 2 product factors that impact location decision

The product’s value to weight ratio

Concentrate. Product’s value to weight ratio is high – export – (Electronics goods)

Decentralise. Product’s value to weight ratio is low – manufacture – (FMCG)

Products serve universal need

Concentrate. Products can serve universal needs, local responsiveness falls

Decentralise. Products cannot serve universal needs, Local responsiveness increase

In Academic Argument

CONCENTRATE location decision is preferred when:

Political stability exists

Economic environment does not play a big role

Cultural environment does not impact

Foreign exchange is stable

Skills and labour is rare

Related supporting industries is unique

Formal and informal trade barriers are low

Fixed cost is high

Minimum efficiency scale is high

High flexible technology

High value to weigh ratio

Serve universal needs

In reality, companies faced environment and market imperfection. (OLI and Market imperfection) This means that for example, if the technology and product factors direct them to concentrate but the environment factors direct them to decentralise. Companies must decentralise as environment factors are uncontrollable. For example is when the value to weight ratio is high or serve universal needs or high fixed cost, companies cannot export if the informal and formal trade barriers are distorted Thus, concentration becomes a difficulty.

Automotive and electronic industries are faced these problems. Pharmaceutical industries are supposedly to concentrate, but because of high trade barriers which makes it impossible concentrate. Trade offs are present when deciding to concentrate or decentralise.

The final decision when benefits outweigh cost

Manufacturing has 4 objectives

1) Low cost

Firms disperse production to those locations where activities can be performed most efficiently and managed global supply chain efficiently to better match supply and demand

2) High quality

Firms eliminate defective products from the supply chain and the manufacturing process and improved quality reduced costs.

3) Able to response to local differences

4) Flexible to shift when global demand shifts

All four objectives must be met.

Horizontal Boundaries of a Firm

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Horizontal Boundaries of a Firm

Some important questions that any manager/firm operator must ask are:

1) How do we define our firm?

2) What activities do we do?

3) What are our firm’s boundaries?

The horizontal boundaries of the firm refer to the size (how much of the total product market will the firm serve) and scope (what variety of products and services does the firm produce). The horizontal boundaries of a firm depend critically on economies of scale and scope.

Economies of scale and scope are present whenever large-scale production, distribution, or retail processes provide a cost advantage over small processes.

Economies of scale exist whenever the average cost per unit of output falls as the volume of output increases.

Economies of scope exist whenever the total cost of producing two different products or services is lower when a single firm instead of two separate firms produces them. In essences, cost savings associated with increasing the variety of activities in goods produced.

In general, capital intensive production processes are more likely to display economies of scale and scope than are labor or materials intensive processes. By offering cost advantages, economies of scale and scope not only affect the sizes of firms and the structure of markets, they also shape critical business strategy decisions, such as whether independent firms should merge and whether a firm can achieve long-term cost advantages in the market through expansion.

Economies of SCALE & SCOPE come from 4 major sources

1) Indivisibility & Spreading of fixed costs

Input cannot be scaled down below a certain size.

Shipping 100 or 1000 lbs by rail requires some inputs.

2) Productivity of variable inputs (specialization).

Specialisation in a task.

3) Inventories

Stock out costs vs. costs of carrying inventory.

4) Cube square rule

Production capacity is proportional to the volume of production vessel, whereas TC is proportional to surface area. Thus, As capacity rises, AC of production capacity goes down because the ratio of Surface area to volume decreases.

Advantages of Economies of Scale & Scope

It gives large firms the advantage.

Firms can expand in a number of ways.

Internal Expansion strategies depend upon: retained earnings, equity and debt.

External Strategies depend upon: formalizing relationships with other firms MERGERS

Market structure refers to: the number and size distribution of firms.

Some Definitions:

Product-Level Economies of Scale: reductions in unit cost attributable to producing more of a given product in a given plant.

Short-run Economies of Scale: reductions in unit cost attributable to spreading fixed costs for a plant of a given size. These arise because of increased utilization of a plant of a given capacity.

Long-run Economies of Scale: reductions in unit costs attributable to a firm switching from a low fixed/high variable cost plant to a high fixed/low variable cost plant. These arise due to adoption of technologies or larger plants that have higher fixed costs but lower variable costs. The distinction between long and short-run scale is very important---mistaking short-run economies of scale for long-run economies could lead a firm to the false conclusion that its unit costs will continue to fall if it expands capacity once its existing capacity is full.

Product-Level Economies of Scope: reductions in unit cost attributable to a firm’s diversification into several products produced in the same plant. Examples include any process in which there are chemical by-products from the same reaction such as crop rotation and oil refining. Another example is a product that shares a key component or set of components whose production is characterized by economies of scale, such as digital watches and electronic calculators. A final example is a firm that utilizes off peak capacity such as ski resorts, garden stores, and sporting goods stores.

Plant-Level Economies of Scope: reductions in unit cost attributable to a firm’s diversification into several products produced in different plants. Examples include airline hub-and-spoke systems.

Purchasing Economies: reductions in unit cost attributable to volume discounts. Large volume buyers may be able to achieve quantity discounts that are not available to smaller-volume buyers. Examples include hospital and hardware store purchasing groups. E.G Buying in bulk.

R&D Economies: reductions in unit cost due to spreading R&D expenses. For example, R&D labs require a minimum number of scientists and researchers whose labor is indivisible. As the output of the lab expands, R&D costs per unit may fall. In essences, the use nature of R&D suggests a minimum feasible size for an R&D Dept. E.G - spill overs: R& D in one area leads to a new product in a different area.

Marketing Economies:

1) Economies of scale due to spreading advertising expenditures over larger markets

2) Economies of scope due to building a reputation of one product in the product line benefiting other products as well. For example, Budweiser’s cost per effective message is lower than Anchor Steam’s since Bud is widely available and its ads would thus have a higher impact.

3) Reputation effects what you have in one product is implied for other.

4) Spreading Advertising Costs over larger markets.

Horizontal Boundaries: related to the variety of related products or services the firm sells.

Fixed Costs: costs that do not vary with output.

Indivisibility: some inputs cannot be scaled down below a certain minimum size, even as output shrinks to zero. Examples include railroad and airline service.

Learning Curve: reductions in unit costs that result from the accumulation of know-how and experience.

Core Competency: the collective know-how within an organization about how to work with particular technologies or particular types of product functionality (e.g. 3M in coatings and adhesives and Canon in precision mechanics, fine optics, and microelectronics).

Horizontal Boundaries

Horizontal boundaries are those that define how much of the total product market the firm serves (size) and what variety of related products the firm offers (scope). The basic question is: “What strategic advantages are conferred on a firm by being large or by having a broad scope of products?” Size/scope can represent an advantage for three reasons.

· Size = Market Power. Larger/diversified firms may be able to exercise monopoly power or set the terms of competition for other firms in the industry.

· Size = Entry Barriers. Once a firm owns a large position in the market, it may be very difficult to dislodge it. That is, potential entrants and existing firms may be deterred from attacking this firm’s core business. A good example of this is brand proliferation in breakfast cereals.

· Size = Lower Unit Costs. A large firm may be able to produce at a lower cost per unit than a small firm may.

Learning Curve

The difference between economies of scale and the learning curve relates to cumulative output, not levels of output. For example, Lockheed pursued a learning curve strategy in building its L10-11 class of aircraft. The firm anticipated that it would lose money by producing a lot of aircraft, gain experience, and finally achieve cost competitiveness in the industry. The firm initially priced below its average cost and eventually cost fell to below price. Lockheed was hard hit then with a “cheap to produce” aircraft when oil prices rose dramatically. This particular firm lost this gamble because it banked on demand remaining high; the OPEC oil embargo changed the environment significantly enough so that they couldn’t benefit from their cost advantage.

Diseconomies

There are certainly limits to how big a firm can be and still produce efficiently. For example, labour costs increase as firms get bigger (unionization, employees are less satisfied with their jobs, commuting time increases as the firm gets bigger because it draws from further away). Smaller firms sometimes have an easier time motivating employees; moreover, rewards are much more closely linked to profits. The trick is for the big firm to create the right motivations for workers. Finally the source of your advantage may not be “spreadable.” That is, a patent is not spreadable nor personal services such as in restaurants.

Sources of Diseconomies of Scale

Rising Labor Costs: - Larger firms, usually pay higher wages

Incentive & Bureaucracy Effects: - It is difficult for large firms to motivate workers.

Spreading Specialized Resources: - Too thin, Of a specialized input is the source of the firm's advantage, if the firm tries to expand without duplicating that resource, that resource becomes overburden.

Example: Chief is big success in first restaurant, but fails as he tries to open others. It was his cooking ability that was the key.

Vertical Boundaries of a firm

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Vertical Boundaries of a firm

The vertical boundaries of the firm illustrate which activities the firm would perform itself and which it would leave to the market.

Vertical Boundaries of a Firm

The production of any good or service usually requires a wide range of activities organized in a vertical chain. Production activities are said to flow from upstream suppliers of raw inputs to downstream manufacturers, distributors and retailers.

Activities in the chain include processing and handling activities, which are associated directly with the processing and distribution of inputs and outputs, and professional support activities, such as accounting and planning. Another set of questions that may arise when managers/firm operators attempt to define their firm is to ask: What activities do we do? What do we leave to the market? This is known as the “make-or-buy” problem.

Most Common Make-or-buy Fallacies

1. Buy to avoid the costs of making. This argument ignores the fact that the firm it buys from will have to incur these costs and will charge accordingly. That is, whoever manufactures the product bears the risk of fluctuating volumes; if it's costly for you, then it is probably costly for others as well. Moreover, an outside firm may be able to have a greater number of suppliers for its product or it may simply be more efficient than your firm.

Example: Intel licenses production to outside firms. Does this avoid cost? Only if the outside firms offer some advantage. In this case, the outside firms can better handle capacity due to scope economies.

2. Make to avoid paying profits to others. It is useful to consider where profits are coming from: 1) Profit may be the normal risk adjusted return to the “maker.” That is, profits may represent the return necessary to attract investments and would be required of the firm that makes internally just as they are required of independent firms; or 2) Profit may come from monopoly power. If a supplier charges $300,000 for a product that costs $200,000 to produce, why doesn't someone else enter the market? Without an answer to this question, you can't be so sure of the savings of making yourself.

3. Assure supply and avoid fluctuating prices during peak demand or short supply. If you start to manufacture, you actually start to play the role of commodity speculator.

Reasons to Buy

1. A market specialist sells to many buyers and can better take advantage of economies of scale and scope than an in-house department could if it produced only for its own needs. If there are economies of scale then, the make-or-buy decision can be resolved by determining whether the firm or its independent suppliers are better able to achieve them. Economies of scale are present whenever costs fall as volume increases. These economies are usually associated with fixed investments.

· If Q > Minimum Efficient Scale (MES), then make. This situation can be seen in Campbell's decision to backward integrate into soup can production.

· If Q < MES, then buy. Costs can be decreased if there is additional production. Who is more likely to take on added production, the firm or its partner? We generally observe that it is easier and more likely for the independent partner to grow.

The importance of economies of scale in defining the boundaries of the firm also extend to individual activities (The division of labor is limited). Adam Smith wrote about a pin factory in which some workers only made straight parts, some made the crowns, and some put them together. This process made sense because 1) Economies of Scale--routinization of two factors improved the productivity of the specialists, and 2) Large Demand--there was enough demand for pins that each worker could be kept busy doing just one task. Smith described this division of labor as natural in any market as volume increases enough to justify specialists.

2. Efficiency and Incentives. Independent firms may have more incentive to innovate than a division within a firm because departments can never be sure if they are making /losing money. That is, the owner of an independent firm faces stern discipline from the market and keeps every dollar he makes. Conversely, it is harder to match pay to performance for individual managers of internal divisions. Efficiency and incentive concerns include:

· Transfer pricing--it is hard to determine the appropriate prices to charge internal divisions. For example, how should we charge for IT in each division?

· Equity concerns

· Influence costs--lobbying for resources may lead to biased information and destructive competition within the firm; internal divisions may lobby each other, raising the cost of production. Using independent firms allows you to keep these issues distinct.

3. Culture. Consolidation of independent firms can also create legendary culture clashes.

In summary, the market is a powerful force for technical efficiency and independence/autonomy is a powerful motivator. These forces must be weighed against those that favor integration (outlined below).

Reasons to Make

1. Coordination Costs. The steps in the vertical chain must fit together. Fit can be along any number of dimensions:

· Time: movies should be released to theaters at same time as advertising

· Size: O rings on space shuttle, stamped parts for automobiles

· Color: Bennetton's spring line-up

· Sequence: Curriculum within a university

Fit can be attained through either doing tasks in-house or through contract. Contracts often stipulate bonuses for performance exceeding expectations or penalties for failing to meet specified criteria.

· Highway construction on Chicago's Dan Ryan Expressway: bonuses were given to construction firms to finish the job early

· Silicon chip production: tolerance penalties assessed

Alternatives to Make-or-buy

There are alternatives to either making or buying. One such alternative is long-term contracting. This option eliminates some flexibility that is especially important in declining economies (where you may not know if the firm will be around in the long-term). Such flexibility is not as critical in growing economies where all the players are expected to continue to do well (Japanese Keiretsu).

The Value Chain

Michael Porter introduced the concept of the value chain in 1985. His scheme takes the vertical chain and puts dollar values to it. This helps to identify those steps in the vertical chain where the most value is added. The value chain is critical to the concept of positioning (how the firm chooses to create value/differentiate itself for customers). The value chain is a tool that portrays the firm as being made up of a set of value-creating activities. The value of a good as it moves through the value chain is equal to the price it can be sold for in the market. When the chain consists of independent firms, these prices are easily identified. When the chain consists of consecutive steps done within the same firm, these prices may or may not be identified. These are called transfer prices--a price that tries to measure what a fair market price would be for a good passed through an internal market. These prices are often based on comparisons with similar goods sold in the outside market.

Porter's chain has five primary activities:

Purchasing/inventory handling

Production

Distribution

Sales/marketing

Customer service

Three support activities:

Human resources management

Research and development/design

Corporate infrastructure

Decision Making Process

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Using relevant examples from your personal experience, deliberate on the types, styles and issues concerning decision making in your household.

Decision-making process

Research suggests that customers go through a five-stage decision-making process in any purchase. This is summarised in the diagram below

This model is important for anyone making marketing decisions. It forces the marketer to considerthe whole buying process rather than just the purchase decision (when it may be too late for a business to influence the choice)

The model implies that customers pass through all stages in every purchase. However, in more routine purchases, customers often skip or reverse some of the stages.

For example, a student buying a favourite hamburger would recognise the need (hunger) and go right to the purchase decision, skipping information search and evaluation. However, the model is very useful when it comes to understanding any purchase that requires some thought and deliberation.

Need Recognition

The buying process starts with need recognition. At this stage, the buyer recognises a problem or need (e.g. I am hungry, we need a new sofa, I have a headache) or responds to a marketing stimulus (e.g. you pass Starbucks and are attracted by the aroma of coffee and chocolate muffins).

Internal Stimuli – Hunger or thirst

External Stimuli – New hobby e.g. Taking photography as a new hobby

Information Search

If the consumer’s drive is strong and a satisfying product is near at hand, the consumer is likely to buy it. If not, the consumer may store the need in the memory to undertake an information search related to the need. At one level, the consumer may simply enter heightened attention, such as paying attention to advertisement, information from or conversation to friends.

An “aroused” customer then needs to decide how much information (if any) is required. If the need is strong and there is a product or service that meets the need close to hand, then a purchase decision is likely to be made there and then. If not, then the process of information search begins.

A customer can obtain information from several sources:

• Personal sources: family, friends, neighbours etc

• Commercial sources: advertising; salespeople; retailers; dealers; packaging; point-of-sale displays

• Public sources: newspapers, radio, television, consumer organisations; specialist magazines

• Experiential sources: handling, examining, using the product

The relative influence of these information sources varies with the product and the buyer. Generally, the consumer receives the most information about a product from commercial sources, which are controlled by marketer. The most effective sources tend to be personal.

The usefulness and influence of these sources of information will vary by product and by customer. Research suggests that customer’s value and respect personal sources more than commercial sources (the influence of “word of mouth”). The challenge for the marketing team is to identify which information sources are most influential in their target markets.

Evaluation of Alternatives

In the evaluation stage, the customer must choose between the alternative brands, products and services. Unfortunately, consumers do not use a simple and single evaluation process in all buying situations. Instead, several evaluation processes are at work. Consumers go about evaluating purchase alternatives depend on the individual consumer and the specific buying decision. In some cases, consumers use careful calculations and logical thinking. At other times, the same consumers do little or no evaluating; instead they buy on impulse and rely on intuition.

An important determinant of the extent of evaluation is whether the customer feels “involved” in the product. By involvement, we mean the degree of perceived relevance and personal importance that accompanies the choice.

Where a purchase is “highly involving”, the customer is likely to carry out extensive evaluation.

High-involvement purchases include those involving high expenditure or personal risk – for example buying a house, a car or making investments.

Low involvement purchases (e.g. buying a soft drink, choosing some breakfast cereals in the supermarket) have very simple evaluation processes.

Purchase Decision

In the evaluation stage, the consumer ranks brands and forms purchase intentions. Generally, the consumer purchase decision is to buy the most preferred brand, but two factors may come in between the purchase intention and purchase decision. They are attitude of others and unexpected situational factors.

Purchase intention is based on factors such as expected income, price and product benefits. Unexpected events may change the purchase intention. Thus, preferences and even purchase intentions do not always result in actual purchase choice.

Post-purchase evaluation - Cognitive Dissonance

The final stage is the post-purchase evaluation of the decision. It is common for customers to experience concerns after making a purchase decision. This arises from a concept that is known as “cognitive dissonance”. The customer, having bought a product, may feel that an alternative would have been preferable. In these circumstances that customer will not repurchase immediately, but is likely to switch brands next time.

It reflects on the relationship between the consumer’s expectations and the product’s perceived performance. If the product’s perceived performance falls short of consumer’s expectations. The consumer is therefore disappointed.

To manage the post-purchase stage, it is the job of the marketing team to persuade the potential customer that the product will satisfy his or her needs. Then after having made a purchase, the customer should be encouraged that he or she has made the right decision.

Using relevant examples from your personal experience, deliberate on the types, styles and issues concerning decision making in your household.

Household decision making are often based on altruism and kinship, which is more moral than economic decisions. The institutionalized kinship ties help to create resource sharing, altruism and mutual accommodation in purchase and consumption. Household decision can be based on fairness or equity, which depends on the culture, social class and ethnicity in the particular country. These criterions affect individuals’ attitudes concerning lifestyle norms, gender norms and age-role norms.

Case Study: (From personal experience)

I am married with three children, dual income earners, and middle-income family. We take example of purchasing weekly groceries together with children.

Types of decision-making:

1) Syncretic or joint – decisions made by a group or coalition in the house hold

2) Autonomic – decisions made by a single household member, usually the husband or the wife

3) Decisions made with one spouse dominant in the process

Based on my experience, my wife and I usually make the decision in purchasing groceries. The type of the decision making is 1) syncretic or joint decision. The reasons of this syncretic or joint decision making is to bring the family bond closer, understanding family members better and spending quality time my family.

Styles of decision-making:

1) Socio-orientated communication – favour adherence to conventional norms of authority and preservation of the domestic status quo

2) Concept-orientated communication – egalitarian and favours a flow of information between all household members

3) Conflict management strategies – conflict-avoidance or conflict-resolution techniques that may affect decision making, purchase decisions, and satisfaction

The styles of decision making we adopt is 2) concept-oriented communication. Our children play influencing roles in democratic and permissive household. We discuss together what our children like, the communication evolves an egalitarian approach and we prefer our children to make constructive comments and views of the product they like and dislike. This promotes a healthy and valuable interaction between parents and children. Secondly, children have a step ahead in making views appropriate and wise decision in choices. As for couples, like us, concept oriented communication is the most appropriate for us. We discuss what is best and appropriate for us. Our main goal is to keep our marriage going and also for our children future, this concept-oriented communication is one of the concrete paths to reach our goal.

Issues of decision-making:

1) Role specialisation

Helps households cope simultaneously with individual interest and potential disagreements in purchase and consumption decisions

2) Role Overload

Situation in which competing demands on the consumer’s time and energy become overwhelming

3) Gender-role orientation

Behaviour standards and cultural norms that define appropriate behaviour for men and women in their society

In any household decision making, there are bound to be issues relating to decision making. Sometimes, I do face simultaneously with individual interest from my children and potential disagreements with my wife in purchase and consumption decisions. In this case, 1) role specialisation is the solution. Role specialisation denotes that in certain product or service domains, household members agree that they may make autonomic decision without consulting other household members.

For example, my three children preferred to have their desired brand of ice cream, (Hagen Daas, Ben and Jerry, Baskin Robins). It is unwise to buy all three types of ice cream and it will be a waste of money if we are unable to consume all in a week’s time. For this case, my children and I agree to let my wife make the decision without consulting other household members. She will buy Hagen Daas for this week; Ben and Jerry for next week and subsequent week will be Baskin Robins.

Another issue is inadequate time and energy. Due to work commitments, I may to work overtime till late hours. This is 2) role overload. For this instance, I have to pass the purchase decisions to my wife.

Being in an egalitarian gender role orientation society, we respect each other decision making. Our family shared these primary goals of to concern affiliation, security and trust. In maintaining long-term relationship, solutions are fair and unbiased. We uses “second choice” solution. If household member cannot agree on the first choice, we may settle for each other’s second choice. The underlying logic is that our family chooses the product alternative that perturbs individual preferences the least.

Critically examine the various models how consumers make choices, and how these are leveraged to market products and services

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Critically examine the various models how consumers make choices, and how these are leveraged to market products and services.

There are many choice models and strategies as there are consumers. It is very much dependent on consumers’ goals, alternative available and criteria they consider meaningful, and how they combine cognitions and feelings to make decisions. There are three common choice models which are economic, cognition and affective.

Economic models are describe as Utility-maximizing View where consumer decisions made based on realizing the largest net benefit in terms of the exchange resources at issue.

Under the economic models, there are four theories, which are

Expected Utility Theory

Expected Utility Theory assumes decision makers are rational and have complete information; consumers are assumed to have complete information about the probabilities and consequences attached to each alternative course of action.

Utility Functions

Utility Functions refers to the amount of happiness that a consumer derives from a product or from a product attribute. It is useful in consumer behaviour research because they can be estimated with a method called conjoint analysis. Individual maximizer theory is a weak strategy to adopt in marketing to members of interdependent cultures. Therefore, buyers seek more social information and more likely to be interested in outcomes that produce or reinforce trust and relationships between buyers and sellers

Prospect Theory

Prospect Theory examines how consumers value potential gains and losses that result from making choices.

The individual’s value function reflects consumers’ anticipation of the pleasure/pain associated with a specific decision outcome. The gains and losses are calculated with respect to some reference point. The value function for gains is quite different than that for losses.

The consumers resist giving up things that they already own which is the endowment effect.

The decision framing which is the manner in which the task is defined or represented.

Importantly, the risk averse versus risk seekers

Satisficing theory

Consumers try to make acceptable rather than optimal decisions. For example, the consumers may choose an alternative that satisfies their most important goals. Other goals might be sacrificed. Satisficing theory is more descriptive of how consumers actually make choices.

Cognitive Model

Cognitive models describe consumers as combining items of information about attributes to reach a decision. It emphasizes beliefs, rather than emotions or behaviours, as the key determinant of attitudes and behaviours and they assume that consumers make a decision in a thoughtful and systematic way. It is classified as either:

Compensatory: a negative evaluation on one attribute or feature can be offset by a positive evaluation on another feature

Non-compensatory: a negative attribute rating can eliminate a brand from consideration

Affective Model

Consumers make decisions in a more embodied, holistic way than suggested by the cognitive models. A decision “feels right” or the decision maker has a “gut feeling” about the right choice.

A particular decision seems to “fit like a glove,” or a purchase is triggered by an embodied evaluation of an object—“this is really me.”

The emotions summarize and capture important aspects of attitudes and behaviors that are hard to put in words but central to making a fulfilling choice. Also, emotions reflect deeply rooted cultural models about what’s appropriate or moral, or may embody feeling we have for other people.

The various choice models can be leveraged to market products and services by:

Brand loyalty

Brand familiarity

Country of origin

Price-related strategies

Avoiding regret

Marketing and its importance of discovering and satisfying consumer needs and wants.

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Marketing and its importance of discovering and satisfying consumer needs and wants.

Marketing is a process by which individuals and groups obtain what they need and want through creating and exchanging products and value with others. Importantly, marketing is the delivery of customer satisfaction at a profit.

Marketing is an ongoing activity that does not stop, continuously obtaining needs that defines a state of felt deprivation and wants that defines what is need. It involves transaction in terms price, place, product and promotion. At the end of this exchange, the most important result most desired is customer satisfaction.

The discovering of needs and wants is the first journey of relative importance as it involves marketing research, market segmentation, prices, distribution and roles of technology.

Marketing research aid us in discovering the needs and wants, creating a desire. Therefore, we are able to develop the right product. In the real world, besides developing the right product. We need transactions that involve place, price and promotion. This constitutes the entire marketing effort to achieve customer satisfaction and value at a profit. Value refers to customer satisfaction, where value denotes benefits more than cost. Benefits can derive from tangibles such as savings and intangibles such as psychological. Marketing Research leads us to a lot of avenues such as customers’ perceptions of your brand, product & service. The probability of current customers becoming repeat purchasers, the customers’ views of your competition and the customers’ future needs & wants.

Let us move on to market segmentation, which is a part of discovering needs and wants. At this stage, we are able to filter out and speculate consumer’s individual characteristic through age, sex, lifestyle and purchasing behaviour. With that, marketers are able to target what is deemed appropriate and suitable to the desired needs and wants.

Next, we can discover the needs and wants through prices. Prices are the sum of all the values that consumers exchange for the benefits of having or using the product or service. Price is the only important element in the marketing mix that produces revenue and it is the one of the most flexible elements of marketing.

We should reflect the discovery of needs and wants through distribution. Distribution is a set of interdependent organization involved in the process of making a product or services available for the use of consumption by the consumer or business user. The distribution channel moves goods & services from producers to consumers. It overcomes the major time, place, & possession gaps that separate goods & services from those who would use them through direct marketing or indirect marketing channel. Thus, in achieving close relationship with the consumer is essential.

Lastly, the roles of technology have made a repertoire of customer service tools. They range from support websites & the ability to have live chats with technical staff to databases tracking individual customers’ preferences, pattern of buying, payment methods etc, & tailoring product & service reponses based on this advanced data. Specialist software that is designed for the tracking of services levels & for helping recognize areas for improvement are often integrated into our enterprise operational software such as ERP (Enterprice resource planning) software.

The satisfying consumer needs and wants is the second journey which involves focus on what the customer benefit is and what is learnt from the past. It also involves target market whereby selecting the target market consumers and the steps taken to satisfy their needs and wants.

The marketing mix must be in continuum and well co-ordinated in order to satisfy their needs and wants.

In the product phase, we must provide a good service or idea to satisfy the consumers’ needs by service strategy or customer-friendly systems.

The price phase connotes what is exchanged for the product.

The promotion phase indicate the means of communication between the seller & buyer.

Lastly, the place explains the means of getting the product into the consumers’ needs.

Economies of scale and Economies of scope

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Economies of scale and Economies of scope

Economies of scale are situations where the cost of producing one unit of a good or services decreases as the volume of production increases. Economies of scale tend to occur in industries with high capital costs in which those costs can be distributed across a large number of units of production. It can be applied to efficiencies assorted with increasing or decreasing scale of production changes in the output of a single product type and supply of side changes such as level of production.

Economies of scope are conceptually similar to economies of scale. However, it refers to efficiencies assorted with increasing or decreasing the scope of marketing or distribution, changes in the number of different types of products and demand of side changes such as marketing and distribution.

An example is when the number of products promoted is increased and broader media used, more people can be reached with each dollar spent. However, diseconomies will occur as these efficiencies do not last and at some point additional advertising expenditure on new products will start to be less effective.

Advantages of economies of scale and scope occurs if a sales force is selling several products they can often do so efficiently than if they are selling only one product. The cost of their travel time is distributed over a greater revenue base, so cost efficiency improves. There can also be synergies between products such that offering a complete range of products gives the consumer a more desirable product offering than a single product would. It can also operate through distribution efficiencies and can be more efficient to ship a range of products to any given location than to ship a single type of product to that location. Sources of economies of scale and scope include:

Indivisibilities and spreading of fixed cost

For indivisibilities, input cannot be scaled down below a certain minimum size even when the output is very small neither will it increase as the output increases. This means it remains constant throughout no matter what the output is.

As for spreading of fixed costs, fixed costs are expenses that remains constant and do not vary with the level of output. This expenditure is shared among the departments of the organization. The greater the firm’s output, the more their overheads have to be spread. Like the concept of divisibility, fixed costs are “burdens” to the organization and they aim to keep them low. For the budget airlines, an alternative to keep their cost low is to sell air tickets on-line. This reduces cost by having lesser number of overheads and also increases the efficiency of the purchasing process as well as creating transparency in the pricing system.

Organizational Economies

Through merger and acquisitions, the organization gains advantages of having more talents and knowledge workers. Savings can be made through rationalizing whereby production will be reorganized so as to cut down on waste and duplication and its aim to cut down on cost.

In order to keep the number of costly management pilots to a minimum, some airlines management introduced some retired pilots positions and hired non-flying simulators instructors. These savings will then be used to fund the increase in additional staff to provide better administrative support for the pilots. With the improved organizational structure and staffing, flight operation division is able to strengthen its safety management program, mount new initiatives and improve in communication with the pilots and implement programmed to enhance training and development.

R & D Economies

Research and development that are financed by big organizations will not only benefit itself but also others in the industry. By looking outside its own walls to stretch its research dollars, hotel management may spent about $1 Million a year (less than 1% of their IT budget) exploring on technologies like retinal scanners; finger prints readers as an alternative to the traditional key card for access to rooms. They are also experimenting on various wireless devices that connect to their reservation system. This handheld tool can be used to assist guests who have difficulties with the check-in-counters.

Inventories

Carrying inventories creates economies of scale because firms doing a high volume of business can usually maintain a lower ratio of inventory to sales while achieving a similar level of stockouts.

Specialization and division of labor

Specialization is the separation of tasks within a system. The specialization and concentration of the workers on their single subtasks often leads to greater skill and greater productivity on their particular subtasks than would be achieved by the same number of workers each carrying out the original broad task. Individual workers’ specialization is important as it enables the accomplishment of otherwise unatainable goals. Division of labor represents a qualitative increase in productivity. The advantages of division of labor are: it increases in skills & dexterity, time saving, individual aptitudes (can do what they are best at), use of machinery and managerial control. While disadvantages include: interdependency, dislocalisation (strike in one causes big losses), unemployment and alienation (no job satisfaction). Increasing specialization may also lead to workers with poorer overall skills and a lack of enthusiasm for their work. The workers become more and more specialized and work repetitious would eventually lead to boredom and complete alienation. As a result of division of labor, the worker is "reduced to the condition of a machine

Multi-stage Production

It incorporates the material flow functions of receiving raw material or sub assemblies, manufacturing, distributing and delivering. It has many information processing and decisionmaking functions, reflected in the many information flow lines. And it includes funds handling functions because working capital in the form of payables and receivables are just as important as working capital in the form of inventory and equipment.

Financial economies

Financial economies arise because the interest rate for getting a loan is higher for smaller firm that for larger one. This is because large firms have large assets and bank trusts them more. It is also relatively easier for large firms to raise their share-capital by issuing shares.

Purchasing Economies

Purchasing in bulks offers benefits in discounted price such as less costly for a seller to sell to a single buyer, lower contract and negotiation costs, bulk buyers tend to be more price sensitive and sellers fear disruption if they lose the buyer. It can place small buyers at a disadvantage unless they cooperate. The larger the firm, the bigger chance of it being able to buy in bulk. This is the main factor associated with economies of scale. It occurs when large firms place consistently large orders with suppliers and so leaves them in control when negotiating terms.

Marketing economies

They are available both in purchases of raw material and in selling of the product. A large firm may have a bulk discount when purchasing raw materials. In terms of promotion, to large firms the average cost is smaller, because the prices of advertisements are the same for all firms.

Demand and Supply Analysis (Example: Housing issue in A COUNTRY)

2013-04-25T22:49:00.001+08:00

Demand and Supply Analysis (Example: Housing issue in A COUNTRY)

Using the demand and supply analysis, we will now attempt to evaluate the future of the property market for the various flatted residences. Houses come in various denominations such as studio apartments, 3-bedroom up to 5-bedroom flats and executive condominiums.

The future the more extravagant 5-bedroom flats and executive condominiums will most likely foresee the greatest growth in demand leaving the relatively lower range of houses to decrease in its demands.

The increasing demand in these flats can be linked to the shift the lifestyle of A COUNTRY in general. The change in the population lifestyle, population’s tastes, income pattern and consumer confidence are strong influences pushing the demand of the more luxurious houses.

The executive condominiums, while targeted at the young professionals whom are more status conscious and perceives these houses as more glamorous that the standard flatted houses also appeal to many of those who wish to own a property with the facilities of many private apartments without the exorbitant price tag.

A COUNTRY’s population is more educated in comparison to their forefathers, earning them capabilities of higher paying jobs. On top of that, there is also a demographic shift for A COUNTRY’s families with dual incomes, where both the parents are working. All these in turn will increase the buying power of the populations in general.

Consumer confidence is also another important factor for the every housing market, as the forecasts of the A COUNTRY economy is expected to have at least a 6% increase in the coming year, the population will be more confident that their jobs are more secure, directly affecting their financial security. All these factors discussed above will cause an incremental shift in demand on the executive condominiums in A COUNTRY.

Leadership Theories

2011-06-12T11:39:00.000+08:00

The term ‘leadership’ has a repertoire of definitions coined by researchers. One of them is John Kotter who said that leadership is about coping with change. In modern context, organisation faces complexity and unpredictable flux in market forces. The leaders must be ready to cope with such evolution by establishing direction, communication and overcome hurdles. Buchanan and Huczynski also iterates that leadership whereby the leader exercise interpersonal influences over others. According to Drucker, leadership is the “ lifting of a man’s vision to higher spirits, the raising of a man’s performance to higher standard, the building of a man’s personality beyond its normal limitations.” We can sum it nicely that leadership is a process by which the leader inspires, stimulates, arouses and influence others towards achievement of goals. Leadership is also a dynamic process where one individual influences the other to contribute voluntarily to the achievement of group tasks in a given situation. We see that leaders are different from managers as the prominent distinguishing factor is that manager exercise authority but leaders have followers.
One of the many theories leadership we can examine through is the traits theory founded by P. Slogan Jr. This traits theory considers personality, social, physical or intellectual traits to differentiate leaders from non-leaders. The main focus is on the qualities and the characteristics the leader has. It also observes the personality of leaders such as internal locus of control, high mach and high self-esteem. The assumption is that the leaders were born and not made. The common personality traits will taken into consideration and compare it with the well-known leaders. The traits are classified into three categories. Firstly, drive, energy and appearances are examples under physical traits. Secondly, self-confidence and enthusiasm are under the personality traits. Lastly, the socials traits describe co-operation, tact and courtesy. Some of the examples related to this trait theory are Germany’s Hitler in the 1930s; Jack Welch and Steve Jobs in modern context.

I feel that traits theory is subjective and refers to what a leader is, but not what a leader does. There are 4 limitations of trait theories and we must first consider before applying it. Firstly, there are no universal traits that can predict in all situations. Secondly, the traits predict behaviour better in the ‘weak’ than strong situation. The strong situation refers to strong behaviour norms, strong incentives for specific type of behaviour and clear expectations. Such strong norms create less opportunity for leaders to express their inherent dispositional tendencies. Thirdly, the evidence is unclear in separating cause from effect. Lastly, traits do a better job at predicting the appearance of leadership than in actually distinguishing between effective and ineffective leaders. The researchers have looked into other avenues to overcome the limitations of traits theory.

The behavioural theory was discovered to overcome the limitations of traits theory and the implications are different from traits approach. The behavioural theories propose that specific behaviours differentiate leaders from non-leaders. It distinctively says that leadership traits can be taught and what a leader does.

There are many contributors to the behaviour approach and one of them is Blake and Mouton. They have discovered the managerial grid, which is based on two fundamental ingredients of managerial behaviour concern for production and people. The best style is the 9,9 team management style. Rensis Likert who coined the four styles of leadership as he describes the systems of management. He classifies into 4 systems, which are the exploitative-authoritative, the benevolent-authoritative, the consultative and the participative group. On the basis of his research, Likert argues that managers’ adopting system 4, which is the participative group, are consistently effective in setting goals and achieving them. The advantages are economic rewards, mutual communications, joint decisions and higher productivity achieved. The catalyst that holds the group together is the ‘linking pin.’ But, researchers, White and lippitt in the handicraft experiment found out that the most successful style unlike authoritarian and laissez-faire is democratic. The democratic style emphasizes on the personal friendly group and steady work. There are a lot individual differences but a strong and cohesive group.

However, the behaviour style has also limitations as leaders might fail if they subscribe permanently to only one style. There is also a point to take note that if the leader did not changed the style depending on situation; it will make any leader ineffective. Therefore, a leader needs to be flexible and change his style reflective of the situation. The behaviour theories ignore the fact that leaders need to have certain traits or attributes to become effective leaders. Lastly, the behaviour theories fail to obtain consistent results.

The situation or contingency theory overcomes the severe limitation of the style or behavioural theory by ensuring that leader becomes flexible. There are many writers who have put forth their theories of leadership. One of the well-known theories is Fiedler’s contingency model. The model dictates that leadership style depends on three situations, which are leader-members relations, task structure and position power. The leader should base on these three situations to change his style. If the situation requires the leader to be task-oriented, the leader should be psychologically distant. Nevertheless, if the situation requires the leader to be relationship-oriented, the leader needs to be psychologically close. This theory of leadership has been particularly influential and offers systematic way of analyzing situations and prescribing the most effective leadership response to that particular situation so as to achieve optimum performances and effectiveness. There are other writers such as Hershey and Blanchard who have commented that leadership style depends on follower’s readiness on the job and the maturity of subordinate on job. The style in which the leader may use are therefore be telling, selling, participative and delegating. Before determining the appropriate leadership style, the leader should first determine the maturity level of their followers in relation to the specific tasks given. As the follower’s maturity increases, the leaders should reduce their task behaviour and increase relationship behaviour until the followers reach a moderate level of maturity. As the follower’s reached an above average maturity, the leader should decrease the task behaviour and relationship behaviour. But, the well-accepted theory of leadership is Robert House's Path Goal theory. The leader could adopt 4 styles, which are classified into directive, supportive, participative and achievement-oriented styles depending on the situation. The effective leaders clarify the path to assist their followers achieve their goals and make their journey along the path easier. The leader makes their subordinates need satisfaction contingent on effective performance. The leader must also provide the necessary coaching, guidance, support and rewards for effective performances.

Although, we realize that the do overcomes the limitations of behavioural theories. But, it has also limitations. Even though, leaders have the skills and attributes but they may not be effective leaders given in certain situations. Moreover, the constant change of styles may in any way insult their subordinates or making followers feel redundant. Some subordinates prefer the leaders to adhere to one style.

In modern business context, there are emerging theories of leadership to overcome the limitations of situational or contingency theories. One of them is the attribution theory. It claims that leaders must possess traits. For example, Ronald Reagan or Lee Iaccoca who has exceptional traits that made them successful leaders. While, there are other writers who claim that leaders must have charisma to influence followers. For example, Gandhi and minister mentor Lee Kuan Yew. We also bring in transformational leaders like Jack Welch of GE have great impact on the performance of subordinates and organisations. These are recent trends, which tend to slant towards the recent theories to predict what makes an effective leader.

We would also like to see the different types of leadership applied in the public and private sectors. Firstly, the public sector has mechanistic structure, which is more towards bureaucratic management. It has a standardisation of procedures with routine work and thee the environment is stable. The individual behaviour may be external locus of control, introvert and cautious. The style of leadership applied in the public sector may be of tasked-oriented coined by Fiedler, we can also apply Robert House’s path goal theory, where we use the supportive style due to routine work. Furthermore, we can use Charles Handy’s best-fit approach where we utilise tight leadership style in the public sector.

As for the private sector, the business environment is unstable. It is normally an organic structure with the usage of high technology. The individual behaviour may be of high mach and internal locus of control. The style of leadership applied in the private sector may be of relationship-oriented coined by Fiedler, we can also apply team based approach by Blake and Mouton or we can draw on Rensis Likert’s system 4 which is the participative style with “linking pin.” We can use delegating style, which is put forth by Hersey and Blanchard.

Nowadays, there is not distinction between public sector or private sector organisations. All organisations must be treated as business organisations, which is coined by Needle. I think the emphasis should weight more on democratic and humane approach will be relevant. For example, the theory Y assumptions made by Douglas McGregor.

In conclusion, we have examined the various theories of leadership that have been concurred by researchers. The theories plays a central part in understanding group behaviors and provides a direction towards goal achievement. Furthermore, it facilitates a more accurate predicative capability in improving performances of individuals and the organisation.

International Business Strategies - Challenges

2011-05-31T11:47:00.000+08:00

Prior embarking on strategies, it is imperative to understand the 3 rules of consistencies and pressures for cost reduction and pressure for local responsiveness

Consistencies

It is important for companies to embark the 3 rules of consistencies

1) Organisation structure must be consistent internally

2) Structure must be consistent with strategy

3) Strategy must be consistent with environment

In order to achieve consistencies, evaluate the environment first because no organisation structure or strategy can control environment. But, organisation structure can learn to be consistent with the environment and strategies can be devised to be consistent with the environment which is known as strategic fit.

There is no single company in this world that strategies can be parked. It is because of the 3 rules of consistencies which show that academic aspects of the discussions do not exists any more. For example is General Electric, it is impossible park them in any one of the strategies because they are highly diversified. When the environment dictates and companies are highly diversified, companies’ involvement is mostly controlled by the environment.

Pressures for cost reduction and pressure for local responsiveness needs to be connected with advantages, optimisation and maximisation profits to devise International Business strategies. When cost is kept minimum, local responsiveness is comprised and vice-versa. Thus, this two objectives need to be met from a theory point of view where these pressures place conflicting demands on the firm.

Pressure for cost reductions forces firm to lower unit costs and the pressure is the greatest in industries producing mass products, major competitors having low cost locations, affluent consumers and low switching costs and excess capacities.

Pressures for local responsiveness require a firm to adopt its product to meet local demands in each market which will raise cost eventually. The pressure for local responsiveness arise when there are differences in consumer tastes and preferences, traditional practices and infrastructure, distribution channels where the marketing strategies need to be responsive to the differences in distribution channels between countries. Lastly, when host government demands where the economic and political demands imposed by host country governments may necessitate a degree of local responsiveness

Multi domestic or localisation strategy

Although the multi domestic or localisation strategy is the weakest of all strategies, it is still heavily practiced by many industries where customisation is a crucial factor. For example is bank, where customisation is needed for individual customers in their wealth protection and portfolio. As a result, bank such as DBS rarely has a choice but to customise. Many service providers around the world do not have a choice but to customise and fragment their operations. Hotel industries such as Swisshotel cannot integrate on a global platform but to focus operation based on local differences and requirements. An important argument to this is that services cannot be exported and operations must be based on the country requirements. The food and beverage industries Coca Cola utilises dual strategies which is the integration on the global platform and licensing. As a result, once licensing takes place, localisation follows. For security reasons, logistics companies such as DHL are left with little choices but to local many of their operations.

All the above mentioned industries are profitable, acquired market growth and on the global platform. They operate on a highly fragmented perspective.

International strategy

In theory, international strategy did not address the pressure for cost and local responsiveness. But, in reality, McDonald’s is global company which is profitable and their brand is worth about US$ 50 billion. However, in this fast food industry, it is important to control the know-how and knowledge, they are under little pressure to customise and they profitable as well.

Companies must be consistently achieving profitability and growth.

But apparently, Global companies are using weaker strategies but they are profitable and acquired high market growth. In strategies, the rules of consistencies must be applied and any organisation that select any one of these strategies must position themselves consistently in that market. The pressure for cost reduction and pressure for local responsiveness is dictated by the environment. As a result, strategies are the outcome of the aspects of the environment that needs to be met.

Conclusion

Theories on strategies are merely descriptive but importantly it is the reality of the world where the companies are bounded by environment.

Globalisation - A key to the next higher echelon of economy?

2011-05-31T11:22:00.000+08:00

Globalisation is the shift from isolation to integrated and interdependent world economy.

Two key drivers: Markets and Production

Markets

The globalisation of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. The declining trade barriers of free flow of goods, services and capital, and the role of technology such as the World Wide Web are the 2 important drivers supporting the markets. For example is CNN.

1) Opportunities

Markets have lead to globalisation the way it is on the basis over the last 70 years. The world has seen the biggest amount of wealth and countries around the world have the opportunities to re-direct attention, efforts, investment in information building. Many countries have been focusing on the developing of countries’ intellectual properties and developing people.

2) Literacy and affluence rates

This developing of people has lead to a greatest level of literacy and affluence rates. With greater literacy and affluence rates, it increases greater levels of purchasing power. Globalisation nurtures global learning and albeit tacit knowledge and greater learning curve through MNC. People have becomes more skilled as a result of knowledge imparted by MNC, this increases countries’ literacy rates and affluence rates. For example is Hewlett Packard Company in Singapore where the knowledge, research and development of HP printers is parked in Singapore and make Singapore the HQ.

3) Global pressures

With high levels of literacy and affluence rates, many companies which are under great amount of pressures in the domestic markets have realised that global market has given them greater opportunities. For example, the top 5000 companies reported that of 80% of their markets share or profitability comes from outside their countries.

4) Single market

Markets are no longer limited to domestic markets. For companies, market is now on worldwide basis. The global platform has become a single market opportunity because of education levels and affluence rates have integrated to an extent to the people. As a result, people are now more willingly to spend and buy. Importantly, people are willingly to consume many of this products or service in a more standardised manner.

5) Role of technology

Market has inevitably created opportunities for companies to expand their operation around the world and technology especially the World Wide Web has played a supporting role. The Internet has created a huge role in integrating their operation to support their global markets. That explain companies globalising, that extends to organisation globalising their products or services on the global platform. As a result, many organisations no longer domestic orientated and moving towards globally orientated.

Production

The globalisation of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production. For example is Dell.

1) Opportunities and emergences of new companies

With the increasing market opportunities, greater market potential and market shares for companies to capture. This means that there are greater market competitions where stability has lead to many companies to emerge from many different countries as well. Until the 1970’s, companies were primarily from the triad nations which are US, Europe and Japan. Today, it is no longer being limited to triad nations, companies have emerged and competition from all over the world.

2) Competition

The level of competition is intensive. 30 years ago, there are a total of estimated 40,000 multi-national companies in the world. From the latest report, now there are total of estimated 88,000 multi-national companies in the world. This figures means that the level of competition is intensive.

3) Pressure to reduce cost

When the level of competition is intensive, the profitability is severely affected. As a result, companies are under huge pressure to reduce their cost not just in their domestic market and also on the global platform. In order to reduce their cost, they have to find a way to position or move their operations around the world where their cost of economies greatest to their advantage. Companies cannot depend on a single country for operation but they have to internalise their location economies in which they could reduce their cost. As a result companies have already begun to breaking up their value chain into smaller components, matching these components to the other countries’ benefits where they can reduce their costs of value chain activities on a global platform. For example is China which is renowned for its low cost production. In essence, this expansion of production and investment which is foreign direct investment on a global platform has begun to integrate countries’ economies and played a big role in globalisation.

Production and Markets

Eventually, the production and markets began to integrate through major players in the world. Countries’ economies and companies operation began to integrate. This level of presence in the global platform is supported by technology such as telecommunication and transportation have allows companies to cope and fulfil their objectives of profitability and growth

Future outlook? - Sustainable competitive advantage

Companies and countries gain sustainable competitive advantage through expanding their strengths, exploring new opportunities, reducing their weakness and avoiding threats. For example is the automotive industry in India was opened to the global platform which saw major automotive manufacturers and suppliers in the world to park their investments in India. Thus, the countries saw an increase in employment rates and consumer purchasing power. While companies saw an increase in profitability and cost maximisation through effectiveness and efficiency respectively.

Expatriation Failure

2011-05-31T10:55:00.000+08:00

Expatriation failure is the premature return of an expatriate manager to his or her home country. Research has shown that the Multi-national companies experienced a minimum failure in expatriation at estimated 32% and the maximum failure in expatriation at estimated 40%. Expatriation failure can be costly and the direct cost of monetary and indirect cost of efficiency and effectiveness are greatly affected

The reasons for expatriate failure are:

One of the reasons is the inability of manager’s spouse to adjust to a new environment. The presence of culture shock was not tackled promptly, emotional problems, family-related reasons and spouses can not adjust to the environment. Thus, render inefficiency to managers and eventually leave prematurely

The inability to cope with larger overseas responsibilities is also one the reasons cited. Managers who are technically incapable and less competence find themselves unable to cope or handle tasks on a much wider scale and complexities. At the end, they leave prematurely

Overseas managers in the world have identified that performance appraisal was against them, many of them was appraised unfairly as the appraisal have not taken account that they are in another country.

The repatriation was not made clear to the managers. Many managers have no clue to what is going to happen at the end of the contract such as a position back home or forced to leave the company as there were no available positions. These uncertainties arise and stir demotivation which causes manager to leave prematurely.

Solutions

Firms can reduce expatriate failure through improved selection procedures of managers

It has been cited that successful managers possessed all 4 key attributes

1) Self-orientation

It refers to the expatriate self confidence, self esteem and mental well-being.

Managers with high level of confidence and self esteem will not lose their confidence in the face of trouble and challenges as they are able to handle their emotions well. However, the problems of egotism may arise which will lead to ethnocentrism.

2) Others-orientation

It is the ability to interact effectively with host-country nationals. The willingness to communicate increases the level of tolerance and adaptation of a manager.

3) Perpetual ability

It refers to the ability to understand the behaviour of people from other country. Managers go beyond the willingness to understand have higher levels of tolerance and acquired greater adaptability to new situation. Managers equipped with empathiness achieves efficiencies and effectiveness.

4) Cultural toughness

It refers to the ability to adjust to the posting. This where managers can manage greater diversification in culture and adapt well

While the selection of manager procedures is important, it is also important to instill global mindset to global managers. This fundamental attribute can be acquired early from the culture exposed or the foreign languages.

Training and management development

The continuous training and management development play important key roles. Training focuses upon preparing the manager for a specific job. The management development is concerned with developing the right skills of the manager over their career with the firm. But training will place more emphasize than management development as training create awareness of culture and language. The cultural training seeks to foster an appreciation for host country’s culture, the language training renders managers the ability to communication with host country nationals and practical training helps manager and family members ease themselves to understand and experience the countries culture. Also, firms have also sent managers to the country first to let them adapt prior to station them for long years.

Also, the development managers' competence and technical capability are important because managers with greater technical capability and competences can cope wider and biggest complexities

Another area to reduce repatriation is that the performance appraisal needs to be done in a less bias manner. Firms should be impartial and take consideration that expatriates are at a different country. Comparisons should be avoided and ensure that fair level grounds of appraisals are present. This could greatly reduced frustration and de-motivation of expatriates. In order to reduce bias, firms can place more weight on site managers’ appraisal than off site managers’ appraisals. Firms can seek information from former expatriate to reduce bias. Firms can take in consideration of foreign on site managers’ evaluation of the expatriate manager. All these will constitute a 360 degree approach to appraisal a manager.

Lastly, the repatriation programs should be clearly prepared and developed for expatriate managers to re-enter into their home country. The well developed programs for re-integrating expatriates back into work life within home country organisation clarifies uncertainty of roles and increases the level of transparency of repatriation. Companies who do not plan repatriation loses knowledgeable workers and increases competition as the expatriate manager leaves the company and join competitors

Conclusion

In order to reduce expatriation rates, firms should understand expatriates better from many different perspectives. “Penny wise, pound foolish” solutions are short term of reducing cost but the long term benefits are the primarily important aspects that a firm should examine and it outweighs the short term. Also, understanding how expatriates go through in a foreign country is important. The elation when expatriates leave home country to undertake higher roles, the honeymoon experienced when expatriate steps into a foreign country, the depression experience to stay or leave, the adaptation of the country culture and the elation felt when the expatriate has served the contract. At different junctures, firms can devise strategies to assist expatriate cope with internal and external factors of foreign countries better. As a result, the expatriates gains and firm gain even more which is tacit knowledge and learning curve.