McGraw Hill Irwin Copyright 2009 by The McGraw Hill Companies Inc All Chapter 2 The Context of Strategic Management Learning Objectives After reading this chapter you should have a good understanding of The effects of globalization and business ethics on today s organizations and on the nature of competition The sources of national advantage that is why an industry in a given country is more or less successful than the same industry in another country The potential benefits and risks of international expansion The vital role of corporate governance and stakeholder management as well as how symbiosis can be achieved among an organization s stakeholders The importance of social responsibility including environmental sustainability 2 3 The Global Economy A Brief Overview Opportunities and risks when firms diversify abroad Trade across nations will exceed trade within nations Rise of market capitalism around the world Transfer of money from rich to poor countries Equity Bond Investments Commercial loans 2 4 The Global Economy A Brief Overview Why do some countries enjoy the fruits of global capitalism while others are mired in poverty Need of governments to have track records of business friendly policies Invest in modern technology Nurture local suppliers Must manage broader economic factors Interest rates inflation unemployment 2 5 Factors Affecting a Nation s Competitiveness Factor conditions Nation s position in factors of production Skilled labor Infrastructure Demand conditions Nature of home market demand Industry s product Industry s service 2 6 Factors Affecting a Nation s Competitiveness Related and supporting industries Presence or absence in the nation of internationally competitive Supplier industries Other related industries Firm strategy structure and rivalry Conditions in the nation governing how companies are Created Organized and Managed Nature of domestic rivalry 2 7 Factor Conditions To achieve competitive advantage factors of production must be created Industry specific Firm specific Pool of resources at a firm s or country s disposal is less important than the speed and efficiency with which the resources are deployed 2 8 Demand Conditions Demands that consumers place on an industry for goods and services Demanding consumers push firms to move ahead of companies from other nations Demanding consumers drive firms in a country to Meet high standards Upgrade existing products and services Create innovative products and services 2 9 Example The demand for gasoline in the United States has generally not fallen despite surges in gasoline prices When gas prices rose to 4 gallon Americans FINALLY did chose to use less An increased supply has eased the price of gasoline for consumers recently There are still several risks that could affect the demand conditions for gasoline The high price of Ethanol Volatility in the oil market Source Business Week June 5 2006 2 10 Related and Supporting Industries Enable firms to manage inputs more effectively Strong supplier base adds efficiency to downstream activities Competitive supplier base lets a firm obtain inputs using cost effective timely methods Allow joint efforts among firms Create the probability that new entrants will enter the market 2 11 Firm Strategy Structure and Rivalry Rivalry is intense in nations with conditions of Strong consumer demand Strong supplier bases High new entrant potential from related industries Competitive rivalry increases the efficiency with which firms develop market and distribute products and services within the home country 2 12 Firm Strategy Structure and Rivalry Competitive rivalry increases the efficiency with which firms Develop within the home country Market within the home country Distribute products and services within the home country 2 13 Firm Strategy Structure and Rivalry Domestic rivalry provides a strong impetus for firms to Innovate Find new sources of competitive advantage Domestic rivalry forces firms to look beyond national borders for new markets 2 14 Question Firms that succeeded in had first succeeded in intensely competitive a b c d home markets global markets global markets home markets national markets global markets regional markets global markets 2 15 A Company s Motivation for International Expansion Increase the size of potential markets World population exceeds 6 5 billion U S represents 5 of world population China and India increased middle class Attain economies of scale Larger revenue and asset base Advantage is spreading fixed costs over larger volume of production 2 16 A Company s Motivation for International Expansion 2 17 A Company s Motivation for International Expansion Reducing the costs of R D as well as operating costs Attainment of greater purchasing power by pooling purchases Extend the life cycle of a product Four stages introduction growth maturity decline Optimize the physical location for every activity in its value chain Performance enhancement Cost reduction Risk reduction 2 18 Potential Risks of International Expansion Political and economic risk Social unrest Military turmoil Demonstrations Violent conflicts and terrorism Laws and their enforcement 2 19 Example 2006 CPI Corruption Perceptions Index Reveals the most corrupt countries in the world The five most corrupt countries in 2006 were 1 2 3 4 5 Haiti CPI Score 1 8 Myanmar CPI Score 1 9 Iraq CPI Score 1 9 Guinea CPI Score 1 9 Sudan CPI Score 2 0 Source Transparency International 2006 www transparency org 2 20 Risk Rankings 2 21 Potential Risks of International Expansion Currency risks Must constantly monitor exchange rate between its own currency and host country Currency exchange fluctuations Appreciation of the U S dollar Exchange rates can significantly affect production costs or net profit 2 22 Potential Risks of International Expansion Management risks Culture Customs Language Symbols Income levels Customer preferences Distribution system Recent trend Dispersion of value chains of multinational corporations across different countries 2 23 Question When a firm decides to shift an activity that they were previously performing in a domestic location to a foreign location it is called a b c d outsourcing contracting offshoring exporting 2 24 Outsourcing and Offshoring Outsourcing occurs when a firm decides to utilize other firms to perform value creating activities that were previously performed in house Offshoring takes place when a firm decides to shift an activity that they were