AE5 FINALS The Bottom Line
● The world economies have become more intertwined through
MEASURING GLOBAL BUSINESS ACTIVITIES. globalization and international trade is a major part of most
International Trade Activity economies.
[Link] ● It provides consumers with a variety of options and increases
competition so that businesses must produce cost-efficient
International trade and high-quality goods, benefiting these consumers.
● is the purchase and sale of goods and services by companies
in different countries. Consumer goods, raw materials, food, ● Nations also benefit through international trade, focusing on
and machinery all are bought and sold in the international producing the goods they have a comparative advantage in.
marketplace. Though some countries limit international trade through tariffs
and quotas to protect domestic businesses, international
● Allows countries to expand their markets and access goods trade has been shown to benefit economies as a whole.
and services that otherwise may not have been available
domestically. As a result of international trade, the market is BASES FOR THE NATION’S PRODUCTION AND DISTRIBUTION
more competitive. OF GOODS AND SERVICES
[Link]
● This can ultimately result in more competitive pricing and Economic systems
cheaper products. Some countries engage in national What is an economic system?
treatment of imported goods, treating them as equivalent to - An economic system is a way of producing, consuming, and
those same products produced domestically. distributing goods and services.
- This includes the relationships between different institutions
Key Takeaways and agents and defines the economic and social structure of a
● International trade allows consumers and countries to be society.
exposed to goods and services that are not available in their
own countries, or that are more expensive domestically.
● The importance of international trade was recognized early on ● Coordination mechanisms: they determine the use of the
by political economists such as Adam Smith and David factors of production (labor, capital, land, and technology) and
Ricardo. who makes the decisions (central authority or private agents).
● Critics argue that international trade can be harmful to
● Property rights: who owns and controls the means of
smaller nations, putting them at a disadvantage on the world
stage. production.
● The barriers to international trade are policies that
governments implement to prevent international trade and Incentive system:
protect domestic markets. These include subsidies, tariffs, ● mechanisms that encourage economic agents to participate in
quotas, import and export licenses, and standardization. the economic activity. They may be material or moral
rewards.
economy while the communist or socialist system is with
the planned or mixed economy.
❖ Economic systems emerge as a response to the problem of
SCARCITY, the fundamental economic challenge all societies There are four economic systems: market economy, planned
throughout history face as a consequence of the seemingly economy, mixed economy, and traditional economy.
unlimited human needs in a world of finite resources.
Market economy
❖ Faced with this problem, each society develops different - In the market economy system, also called “laissez-faire
economic systems. The solution lies in one fundamental capitalism”, economic decisions are made by individuals.
question: - They are free to make their economic decisions (investments,
● What is the role of the state or central authority in savings, workload, consumption, production, etc.) based on
the economy? their own interests. In a pure market economy, there is no
● What is more important, liberty or justice? central authority influencing the economic decisions made by
individual agents.
command economy
- is an old economic system like the traditional one. Also, the means of production are owned by private individuals and
- Under this structure, a central authority controls the economy all goods and services are privately provided. Supply and demand
and decides how to use the factors of production and how to determine the prices, there are no fixed prices. The relationships
distribute the goods produced. between individuals and firms in the market regulate the allocation
- There are regulations in prices, wages, production, of factors of production and the distribution of goods.
consumption, etc.
Advantages and disadvantages of the market economy
❖ The supply of goods and services in the market is determined In market economies, people are freer and there are more
by exogenous variables ignoring the market forces. opportunities for social mobility, but there is more inequality among
people with disadvantages or simply with bad luck. Also, there are
❖ Some examples of planned economies are Communist Russia, fewer rules in production and work and there is no redistribution of
China, and Cuba. goods.
Economic system: Mixed economy The United States in the nineteenth century was the closest to a
market economy. Today, most economies are considered to be
TYPES OF ECONOMIC SYSTEMS market economies but are influenced by traditions and a central
authority.
● Usually, production systems are identified as capitalism,
socialism, or communism. Economic system: Command economy
● But in the academy, they are named differently. The This economic system combines elements of the market and
capitalist system is associated with the market or mixed command economic system. Most economic decisions are made
autonomously by individuals, but the central authority can create in the importance they give to freedom and justice. For the
policies that influence these decisions. promoters of the market economy, freedom is the most important;
while in the planned economy, justice comes first.
Governments can create new laws or regulations that shift
production levels, can restrict the distribution of goods, incentivize Theoretically, in a market economy markets are efficient (ignoring
the buying of services, restrict exhortations, etc. market failures) and people have the freedom to choose (what, how
much, and how to produce, whether to buy or not, selling price,
Today, most economies operate under this economic system and etc.). But the outcome is not always fair. Most likely some
for many this is what they refer to when they talk about the individuals will have a lot and others will have very little. Although it
capitalist economic system. Example: Mexico’s economic system would still be efficient and free.
Economic system: Traditional economy In a planned economy, the state makes the economic decisions of
the society. There is no market, the central authority tries to do a
The traditional system of production depends on family and fair distribution of goods among people at the expense of efficiency
community relations. The decisions of production, consumption, and and freedom.
distribution are consequences of long-standing beliefs and customs,
that is, the economy runs according to established patterns. The In a mixed economy, the state seeks a fairer distribution of goods
main problem of this economic system is its static nature. A society while maintaining freedoms.
based on traditions to regulate economic affairs discourages large-
scale social and economic changes. Best economic system
There is no consensus about which is the best economic system.
In the past, this was the predominant economic system. Some However, through the mixed economy system; many countries have
examples of this system are medieval European kingdoms and developed immensely and reached greater levels of economic
ancient empires. Adam Smith wrote about Ancient Egypt: “Every prosperity. This would have been impossible without the freedom of
man is bound by a religious principle to follow his father’s economic agents to make economic decisions and the correct
occupation and to change his activity would be the most terrible regulation from the government.
sacrilege”. Nowadays this type of economy can be found between
Australian Aborigines and some indigenous Amazon tribes. International Business Strategy
[Link]
Some traditions survive this system of production. This heritage
determines many economic relations; Such as the differences Due to increasing globalisation the past decades, even smaller
between men’s and women’s wages, tips to waiters, and children’s companies have been able to cross national borders and do
allowance. business abroad. Consequently, many terms have been given to
companies operating in multiple countries: multinationals, global
Market economy vs. Command economy businesses, transnational companies, international firms et
The system of market economy and planned economy are quite cetera. The aim of this article is to clearly define these different
opposite. The main difference between both forms of production lies terms and see how they differ from each other, because they do
differ! An often used framework to distinguish multiple forms of 2. Global: High Integration and Low Responsiveness
internationally operating businesses is the Bartlett & Ghoshal Matrix Pfizer | Medische Informatie | NetherlandsGlobal companies are the
(1989). opposite of multidomestic companies. They offer a standarized
product worldwide and have the goal to maximize efficiencies in
Bartlett and Ghoshal clustered these businesses based on two order to reduce costs as much as possible. Global companies are
criteria: highly centralized and subsidiaries are often very dependent on the
1. global integration and HQ. Their main role is to implement the parent company’s decisions
2. local responsiveness. and to act as pipelines of products and strategies. This model is also
known as the hub-and-spoke model. Pharmaceutical companies
Businesses that are highly globally integrated have the objective to such as Pfizer can be considered global companies.
reduce costs as much as possible by creating economies of scale
through a more standardized product offering worldwide. 3. Transnational: High Integration and High Responsiveness
Business that are highly locally responsive have as extra objective The transnational company has characteristics of both the global
to adapt products and services to specific local needs. It seems that and multidomestic firm. Its aim is to maximize local responsiveness
these strategic options are mutually exclusive, but there are but also to gain benefits from global integration. Even though this
companies trying to be both globally integrated and locally seems impossible, it is actually perfectly doable when taking the
responsive as can be seen in some examples below. whole value chain into considerations. Transnational companies
often try to create economies of scale more upstream in the value
Together these two factors generate four types of strategies that chain and be more flexible and locally adaptive in downstream
internationally operating businesses can pursue: Multidomestic, activities such as marketing and sales. In terms of organizational
Global, Transnational and International strategies. design, a transnational company is characterised by an integrated
and interdependent network of subsidiaries all over the world.
1. Multidomestic: Low Integration and High Responsiveness These subsidiaries have strategic roles and act as centres of
Companies with a multidomestic strategy have as aim to meet the excellence. Due to efficient knowledge and expertise exchange
needs and requirements of the local markets worldwide by between subsidiaries, the company in general is able to meet both
customizing and tailoring their products and services extensively. In strategic objectives. A great example of a transnational company is
addition, they have little pressure for global integration. Unilever.
Consequently, multidomestic firms often have a very decentralized
and loosely coupled structure where subsidiaries worldwide are 4. International: Low Integration and Low Responsiveness
operating relatively autonomously and independent from the
headquarter. A great example of a multidomestic company is Bartlett and Ghoshal originally didn’t include this type in their
Nestlé. Nestlé uses a unique marketing and sales approach for each typologies. Other authors on the other hand have attributed the
of the markets in which it operates. Furthermore, it adapts its name to the lower left corner of the matrix. An international
products to local tastes by offering different products in different company therefore has little need for local adaption and global
markets. integration. The majority of the value chain activities will be
maintained at the headquarter. This strategy is also often referred
to as an exporting strategy. Products are produced in the policies will be needed to carry out those goals” ([Link]) and the “…
company’s home country and send to customers all over the world. combination of the ends (goals) for which the firm is striving and the
Subsidiaries, if any, are functioning in this case more like local means (policies) by which it is seeking to get there” ([Link]). He
channels through which the products are being sold to the end- emphasized three basic principles of firm strategy: (i) creating a
consumer. Large wine producers from countries such as France and unique and valuable position in the market; (ii) creating balance
Italy are great examples of international companies. through the choice of “not-to-do things”; and (iii) achieving general
“suitability” by suitably organizing and coordinating activities within
STRATEGY AND THE FIRM the firm to support the strategy chosen.
Definition And Goal
[Link] Mintzberg (1994) affirms that human use “strategy” by different
characteristics/#:~:text=Firm%20Strategy%3A%20Definition%2C methods. According to him, there are four main strategic
%20Nature%20and%20Characteristics%201%201.,goals. approaches, including: (i) strategy is a plan, a “how”, a means of
%20...%203%203.%20Characteristics%20of%20firm%20strategy getting from here to there; (ii) strategy is a pattern in actions over
time; for example, a company that regularly markets very
1. Definition of firm strategy expensive products is using a “high end” strategy; (iii) strategy is
From experimental approach, Alfred Sloan (manager at General position; that is, it reflects decisions to offer particular products or
Motors from 1923 to 1946) states that strategy is established on the services in particular markets; and (iv) strategy is perspective, that
basis of strengths and weaknesses. According to Chandler, is, vision and direction.
“strategy is the determination of the basic long-term goals of an
enterprise, and the adoption of courses of action and the allocation 2. Nature of firm strategy
of resources necessary for carrying out these goals” (1962). In general, strategy represents the desirable goals of the firm and
Andrews (1980) defines: “Corporate strategy is the pattern of its actions taken to achieve those goals. In nature, firm strategy
decisions in a company that determines and reveals its objectives, often focuses on the long-term orientations of the firm, related to
purposes, or goals, produces the principal policies and plans for development trends and customer needs, competition, positioning
achieving those goals, and defines the range of business the in the future; thereby enabling the firm to establish suitable
company is to pursue, the kind of economic and human organizational system and to gradually develop the business by
organization it is or in-tends to be, and the nature of the economic improving its performance. Firm strategy also involves strategic
and non-economic contribution it intends to make to its decisions relating to the daily activities such as business
shareholders, employees, customers, and communities”. functioning, building and developing internal and external
relationships …, and also to policies with employees, management,
Porter (1985) defined strategy, in terms of competitive strategy, “… supervision, leading the firm …
is the search for a favorable competitive position in an industry, the
fundamental arena in which competition occurs. Competitive So, a strategy should base on firm’s competitive advantage (in
strategy aims to establish a profitable and sustainable position terms of products, geographical location, scale, services …), that is
against the forces that determine industry competition”. Also, Porter a crucial factor that makes firm different by improving its
(1980) specified strategy as the “… broad formula for how a positioning in the market. Therefore, firm must possess at least one
business is going to compete, what its goals should be, and what
sustainable competitive advantage in long-term in assuring its [Link]
survival and development in the future.
Value creation is more than a business strategy; it’s a fundamental
Strategy can be considered as a practical tool for assessing and approach that shapes the direction of organizations and defines
adjusting the fitness of firm’s business activities and strategic their business purpose. It’s the synergy of innovative thinking,
orientations with the environment. It can also be seen as an unwavering commitment, and an acute understanding of the
opportunity for the business innovation. Firm strategy not only diverse stakeholders in today’s interconnected world. From the
depends on environmental factors, but also expected values of boardroom to the digital frontier, value creation is the compass
internal partners (shareholders, managers, employees) and external guiding businesses.
stakeholders (business partners, customers, community,
government). Thus, strategy is both future orientations and At Digital Leadership, we specialize in digital strategy and execution
motivations for firm to achieve the target strategic goals. and use emerging technologies and innovative business models to
serve customers better. Our Business Model Strategy service is
3. Characteristics of firm strategy designed to help organizations create and nurture value for
In these perspectives, strategy has the following characteristics everyone involved. Taking the first step toward innovative thinking,
(Johnson et al., 2005): we offer an Innovation Blueprint, enabling businesses to assess and
align their current innovation practices with specific needs and
objectives.
● Strategy refers to long-term orientations of the firm;
Value creation involves turning resources into something valuable
● Strategy often aims at responding and adapting to business
through hard work, it’s a comprehensive concept encompassing the
environment. This requires firm to be flexible and responsive creation of tangible products and services. It refers to the process of
to environmental changes. Achieving a strategic positioning in generating additional value for stakeholders, going beyond the
the market is especially important for firm, it means that its initial investment or input.
products and services are in line with market needs;
● Strategy can also aim to creating opportunities and new It also involves investments in capital goods and intellectual
property assets. In essence, value creation is about making more
business environment on the basis of generating new
out of what you have, and it’s central to the success of any
resources and capacities in firm;
organization.
● A strategy is influenced not only by environmental forces and It’s important to highlight that the concept of value creation
strategic capabilities of the firm, but also values and extends beyond just seeking profit. It encompasses a wider range of
expectations of people in power and influential stakeholders aspects, such as improving products and services, fostering
related. stronger customer relationships, driving innovation, and making
positive contributions to both the community and the environment.
VALUE CREATION
At its core, grasping the meaning of value creation is closely tied to
sustainability. Businesses need to continuously innovate and adapt
to changing market conditions. This entails streamlining operations,
refining products, and promoting a culture of excellence.
Organizations must consistently aim to enhance their value creation
strategies.
Moreover, Value creation involves aligning with the digital
landscape, where data-driven insights, technology integration, and
agile decision-making are pivotal. To truly excel in understanding
the meaning of value creation, businesses must remain agile and
responsive to the evolving needs and expectations of their
stakeholders.
What Is Value Creation In Business?
Value creation in business involves a multifaceted strategy for
attaining enduring success. It goes beyond mere financial aspects,
weaving together stakeholder relationships, innovation, efficiency,
and distinctiveness. To thrive in the value creation process,
businesses should embrace a comprehensive approach that
emphasizes crucial strategies and practices, ensuring their
continued competitiveness and relevance in a swiftly changing
environment
