U. Washington, Geog. 349: Strategic
Management
University
of Washington
Geography
349, Geography of International Business
Professor
Harrington
Strategic Management
There is a common thread
that I want to reinforce here: strategic
action to maximize returns on corporate
assets. In addition, this
is a good juncture to compare explicitly
frameworks of industrial location and
international trade.
Contents:
STRATEGIC
MANAGEMENT
A widely used framework for business planning
is to identify the firm's unique (or relatively
unique) advantages: in more formal terms,
to identify the assets on which the firm can
earn economic rents.
CORPORATE STRATEGY
In the complex, multi-divisional corporation, this
analysis and the consequent actions can be pursued
at different levels. At
the corporate level, the key question is "What lines
of business would allow our assets to earn
the maximum economic rents?"
A hotelier might ask
whether its success at buying valuable real
estate during market depressions makes
it as much a real-estate investment
company as a hotelier. A positive
answer might lead it into other forms of real
estate investment and management, and perhaps
out of direct management of the hotels.
Another hotelier might recognize that its
worldwide name recognition and reservations
system are its key assets, to be best
exploited by owning few properties and managing
many, and perhaps branching out into other
forms
of
tourist or business travel arrangements.
Note that the environment
influences these decisions: the
time may be right, or not so right, to profit
substantially from real-estate divestment or
investment.
A clothing company may
recognize its strongest asset as its production
capacity and skill, its trademark,
its design, or its distribution
network (company-owned warehouses,
retail outlets, marketing lists, and
information systems). Greater profit per
unit of investment may be had through directly
"renting" its production capability to
other firms, licensing its trademark
to selected products made by others, designing
for others, or including others'
products in in its distribution system.
Granted, it could
maximize its size by doing it all. But
the usual goal is increasing ROI.
Either of these cases suggests types of the
corporate actions:
- vertical integration or disintegration
(taking on more or less of the production and
marketing chain) and
- horizontal integration or disintegration
(taking on more or less of the total
market).
Each can be achieved by
- acquisition or sale of
existing operations, or by
- starting up new operations or shutting
down old operations.
Acquisition or shut down generally make more
sense when entering or exiting an sector or
country that faces over-capacity.
Often, vertical or
horizontal integration or disintegration has international
manifestations for the firm. For
most large firms, the fundamental question
should be what strategic action needs to be
taken to increase returns on corporate
assets. The particular action and the
particular international manifestation should
follow.
BUSINESS STRATEGY
(a.k.a. COMPETITIVE
STRATEGY OF THE FIRM)
Business strategy
takes the line of business as a given, and
then asks how the firm should compete
within the line of business, given its
specific assets.
(Therefore, each strategic business unit within
a corporation would develop its own competitive
strategy, though potential synergies among the
strategies need to be realized through actions
at the corporate level).
Typical competitive strategies include
- low-cost production and pricing
- high-quality (often relatively customized)
production
- market segmentation (producing different
products for different sub-markets, and
pricing accordingly)
- geographic market specialization or
segmentation.
Each of these strategies can have geographic
manifestations.
- Low-cost production can lead to "offshore"
production in mon-market-oriented settings
that are low-cost export platforms because of
labor wages, environmental regulation, tax
rates, etc.
- Customized production once meant production
near the customer: new technologies for
"flexible production" are reducing this
requirement. The text mentions that BMW
decided on a U.S. rather than Mexican location
for its first North American production
operation, in part because of the importance
of national origin to the perception of its
targeted market segment.
- Finally, a national market may be chosen
explicitly because of the size (growth) of the
most relevant market segment in a given
market, or because of the competitive
structure of the producers for that
market. (An example of the latter:
the movement of a large, low-cost, vertically
integrated retailer into a market dominated by
small, fragmented, high-cost retailers).
How does a company select a country for
its low-cost, customized, or market-entry
strategy?
The text presents several rationales:
- logistical ease (with respect to home or
other operations)
- linguistic and cultural similarity
- market size and growth
An additional strategic consideration has been
termed ologopolistic reaction: the
tendency for large, ologopolistic firms to match
each other's major strategic moves (such as FDI
into a particular country). This tendency is
motivated by the concern that a close competitor
might gain an important advantage from its new
production or market stronghold. It is not
always a wise policy. The relative advantage
of the competitor needs to be assessed before its
movement is followed.
OPERATIONAL STRATEGY (a.k.a. FUNCTIONAL
STRATEGY)
Each operational
element of an organization (product
development; procurement; production
and production location; marketing,
including pricing, promotion, and distribution)
should reflect and support the organization's
explicit choice of business (or comptitive)
strategy.
- How might the product development,
procurement, production, location, and
marketing decisions of a clothing company vary
according to the company's business
strategy?
- What about the decisions of a public
institution of higher education, based on its
competitive strategy -- the role it wishes to
play in higher education, compared to other
institutions?
Study my notes
on
international marketing as an example of how
operational (or functional) decisions should be
aligned with one another and with the overall
competitive strategy of the corganization.
METHODS OF
COUNTRY ASSESSMENT
The text mentions several methods of gathering
and assessing information regarding
international opportunities. Three things
are key:
Assessment of risk:
- market risk (is the market large and
sustained? what's the likelihood of
additional competition, e.g., because of
ologopolistic reaction?)
- monetary risk
- political risk (described at some detail in
the text)
Assessment of return:
- expected return equals the sum of:
each potential level of ROI, multiplied by the
probability of that level of ROI (such that
the sum of the probabilities equals 1.0) --
see Table 13.1 of D&R text.
Relationship between risk and return:
- Greater risk
needs to be matched by greater and
faster expected return.
TRADE
THEORY AND LOCATION
THEORY
The first half of our
course focused on models of international
trade. These were, loosely,
general-equilibrium models, concerned for the
interaction of entire economies.
At the core of our analyses and frameworks was
the understanding that each country has
resources that need to be used as
productively as possible: our
analytic question was how these resources
should be used, for what products and
potential exports, and with what effects on
wages (both nominal wages and wages after
changes in cost of living after cheaper
imports).
Our current frameworks
for international investment by particular
companies are very different.
We're not concerned with the
general-equilibrium impacts of FDI on national
wages, employment levels, and global
output. Rather, we're concerned about
maximizing the return to one company for its
deployment of its limited resources -- which
don't have to be deployed in any one
country. Location theory typically
doesn't concern itself with the effects of
production location on economic
aggregates; it takes wage levels,
resource locations, and markets as given and
seeks to optimize microeconomic returns from a
location decision.
Companies are in
competition with each other; countries
aren't. Countries are in competition for
inward FDI from particular companies;
the aggregate of FDI and other
investment flows into and within a country
should follow the comparative advantage of the
country as suggested by trade theories.
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