Velocity publishes regular 'model answers to practice questions' to help you revise. This question and answer is for P5.
To answer it, you first need to read the article Integrated Management (PDF 117KB), from the study notes section of the May 2008 Financial Management magazine.
This article was written by Alan Marsden, associate lecturer at Manchester Metropolitan University and technical assessor for P5 (Integrated Management).
Global convergence and strategy
Question
The W Company has been producing speciality meat sausages in its home country for generations. Over the years, it has had considerable success in selling its products in European markets.
Recently, it has received orders from other parts of the world including the Far East. This success has led the production director A to suggest that the company locate some of its production capacity in a low cost country in South-East Asia and adopt a global strategy.
His case rests on the assumption that globalisation is producing a convergence of tastes and preferences across the world and that this presents W Company with a great opportunity for growth.
The marketing director B however, has urged the board to be cautious about changing its strategy in the direction suggested by A because cultural differences still persist between countries. B argues that a multi-domestic strategy is probably the best strategy to pursue if W Company wants to expand into other markets. This is because religious and other cultural norms preclude the eating of some meats and/or require preparation of the meat according to certain prescribed rules.
Requirement
Q1 (a) Taking the role of production director A, prepare a paper for the board setting out more fully the advantages of adopting the strategy A has outlined in the scenario.
(15 marks)
Answer outline
The answer could begin by outlining the argument for globalisation and its consequences for the convergence of preferences and tastes.
In particular, the causes of globalisation - such as developments in transport and communications and the reduction of trade barriers - should be mentioned. The answer should make clear how these changes could impact on the demand for W Company's products in other countries and in particular how the new technology could enable the company to market its sausages to other countries relatively easily.
The answer should then go on to detail the cost advantages of producing on a larger scale and how costs could be reduced even more by using cheaper means of production available in other parts of the world.
The paper might also remind the board that the technology of chilling meats and developments in transportation allows movement of its products quickly and efficiently to markets in most geographical locations with relative ease.
Reference might also be made to how improvements in communication via the internet allows firms to manage their businesses at a distance far more effectively than in the past. So locating production facilities nearer to their regional markets abroad need not cause any significant managerial or logistical problems.
Candidates might draw on examples of how other well known companies such as Dell manage their global operations using the new technology available to produce, market and sell their products on an international scale.
Requirement
Q1 (b) Explain why the multi-domestic strategy referred to by marketing director B might be a safer way for Company W to expand its sales around the world. (10 marks)
Answer outline
The answer could begin by explaining the nature of a multi domestic strategy, perhaps using an example to illustrate how this type of strategy can be used to gain competitive advantage.
It will be useful in this part of the answer to make clear that globalisation does not appear to have produced homogenous wants across the world and that there are still significant differences between the cultures of different countries.
Examples of how cultural differences affect the preferences of people in different countries could be detailed, especially how religious belief in some societies proscribes the consumption of some meats and how others require that meat be prepared according to strict rules and procedures.
The answer could then show how a process of customisation could be used to cater for different cultural groups. This might detail how market research could be undertaken to tease out just what the particular tastes and preferences of people were in different markets - and how the company's products and marketing could then be tailored to meet the particular needs of customers in such markets.
The extra costs of customisation should be noted but the advantages of satisfying the needs of customers should be pointed out. M Porter's generic strategy of differentiation might be called upon to help explain and justify how such a strategy could work to Company W's advantage.
Other theories that could be drawn upon include the resource-based view. This could be used to argue that the core competences built up in catering to its customers in the home country could be usefully called upon and exploited to advantage in its overseas operations.
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