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International Business
notes z Extend the product life cycle-older products can be sold in lesser developed
countries
z Operational flexibility-shift production as costs, exchange rates, etc. change over
time
l z Strategic
z First mover advantage and only provider of a product to a market
z Cross subsidization between countries
z Transfer price
l z Risk
z Diversify macroeconomic risks (business cycles not perfectly correlated among
countries)
z Diversify operational risks (labor problems, earthquakes, wars)
l z Learning
z Broaden learning opportunities due to diversity of operating environments
l z Reputation
z Crossover customers between markets- reputation and brand identification
15.3 value creation
A firm’s strategy can be defined as the actions that managers take to adopt the goals of the firm
for most firms the goal is to maximize long term profitability. A firm makes a profit if the price it
can charge for its output is greater that the cost of producing that output, profit (II) is defined as
the difference between total revenue (TR) and total cost (TC) or
II = TR – TC
Total Revenue (TR) are equal to price (P) times the number of units sold by the firm (Q)
Or TR = P * Q
Total cost (TC) are equal to cost per unit (C) times the number of units sold or
LTC = C*Q
Total profit (II) is equal to profit per unit (II) times the number of units sold or
II = II * Q
Profitability is a ratio or a rate of return concept. A simple example would be rate of return on
sales (ROS) which is defined as profit (II) over Total Revenue (TR) or
ROS = II / TR
Thus a firm might operate with a goal of maximizing its profitability as defined by its return on
sales (ROS) and its strategy would be the actions that its managers take to attain this goal. A more
common goal is to maximize the firms return on investment (ROI) which is defined as ROI = II /
I where I represents the total capital invested in the firm.
Two basic conditions determine firms profit (II):
1. The value customers place on the firms goods or services and
2. The firms cost of production
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