Evaluation of the merits and drawbacks of the use of the internal rate of return as an investment criterion…

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Technically, IRR is a discount rate: the rate at which the present value of an investment is equal to the present value of the returns on this investment. The aim with IRR is to answer the question: ‘What level of interest will this project be able to withstand?’ Once we know this, the risk of changing interest rate conditions can effectively be minimised.
 
The internal rate of return (IRR) on a project is the rate of return where the cash inflows (net cash flows) equal the cash outflows (net investment) IRR thus is the discount rate which when applied to the cash flows yields a NPV = 0. The higher the IRR, the better; higher IRR means that the company earns a greater interest rate on the investment, when the firm have a pre-specified IRR target, if investment IRR > target IRR, then the decision is obviously positive. In all cases of fluctuations the firms IRR requirements are always less than IRR of the investment.
 
The Net Present Value rule, the first of the investment appraisal rules, states that managers increase shareholders’ wealth by accepting all projects that are worth more than they cost. Therefore they should accept all projects with a positive NPV. In fact NPV presents the value of cash flows minus investment.
 
Assumptions are crucial in the consideration of the investments since they may impact direct the results of the investment criteria and bias a decision. Before any financial analysis can be performed, the assumptions used in the analysis must be documented and understood. In addition, the analysis must allow for the assumptions to be easily changed and the new results of the analysis immediately available. The easy changing of assumptions allows for valuable what-if analyses. In any case since assumptions may never be guaranteed they only help to derive clues of plausible scenarios that help in decisions and they never stand as the definite outcome of a speculation.
 
The NPV method is a way of evaluating a project by recognizing that the dollar received immediately is preferable to a dollar received at some future date. The NPV discounts the cash flow to take into the account the time value of money. This approach finds the present value of expected net cash flows of an investment, discounted at cost of capital and subtract from it the initial cash outlay of the project. In case the present value is positive, the project will be accepted; if negative, it should be rejected. If the projects under consideration are mutually exclusive the one with the highest net present value should be chosen.
 
IRR is directly linked with the NPV rate and their relation may be summarized as:
1) When the IRR = the firm’s hurdle rate, NPV = 0
2) When the IRR < the firm’s hurdle rate, NPV < 0
3) When the IRR > the firm’s hurdle rate, NPV > 0

Advantages 
• IRR compares what an investment is likely to earn to the firm’s “benchmark” and measures profitability in percentage terms, which is preferred by managers.
• Considers all cash flows
• Considers time value of money
• Comparable with hurdle rate

Disadvantages
• Not applied consistently over all investment proposals, as NPV is
• Does not show dollar improvement in value of firm if project is accepted (not many people always understand what a % ratio indicates)
• IRR can be affected by the scale (size) of the project
• Possible existence of multiple IRR’ s
• In multiple changes in the sign of the cash flows, the IRR rule does not work
 
When using the IRR and NVP rates:
• mutually exclusive projects are always ranked the same
• direct estimates of the increase or decrease in shareholder value can be obtained
• the time value of money is taken into account
• accounting measures of profit are considered
 
Possible decision conflicts among NPV and IRR
An accept/reject “conflict” occurs when NPV says “accept” and IRR says “reject” or NPV says “reject” and IRR says “accept”. When projects are independent, no accept/reject conflict will arise.

A ranking conflict occurs when one project has a higher NPV than another while the lower NPV project has a higher IRR. Ranking conflicts are unusual but can occur. These conflicts are relevant only when there are multiple acceptable mutually exclusive projects.

Ranking conflicts arise because of:
• Timing differences in incremental cash flows
• Magnitude differences in incremental cash flows 

The Marketing Function and the Programming Service Role in Television…

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There are two kinds of customers with which the marketing function in a TV station has to be concerned: the media audiences (B2C) and the advertisers (B2B). The main variables that define a TV station’s performance and therefore its profitability are TV Ratings and Share. The TV Rating point is defined as the number of people viewing television (or a station or a program) on an average minute over the total number of population.

It should be noted that rating points vary during the day as more television sets are turned on or off. Share on the other hand is calculated from the percentage of televisions turned on at any particular time and the number of viewers that are watching a particular station. Share must not be confused with rating. e.g. a program may only have 1 rating point yet 60% share. A channel’s primary objective is to maximise its viewership across the whole day therefore measuring the audience flow is very important. The gains or losses in viewers during a program or from program to program, indicate viewer loyalty and whether or not a particular scheduling strategy is effective.

Television, as media mean, contributes in three main aspects of human life: Information, Entertainment and Education. Its offering, exists to satisfy these three specific customer needs. The station’s programming mix (offering), by typology is composed by: News -Information, Series, Films, Light Entertainment, Children programs, Arts and Culture, Sports and Other Programs. Like a distribution channel, programming department is to decide what types of programmes are to distribute in the 24-hour schedule. Its main functions are: how programs will be sourced and, what the best time to broadcast those programs is. The day is divided into the following parts: Daytime television, Early Fringe, Prime time and Late Night.

Media industry is a very complex industry with many intermediaries. TV stations are the “meeting point” of consumers and producers. The marketing network, where a television station operates, consists of the company and the supporting stakeholders: customers, employees, suppliers, distributors, retailers, advertising agencies and others. The flow of the relation among them could be explained as follows: The audience has needs for information, entertainment and education. A TV station as a media service company, offers for free to the audience, its program, in order to meet the needs of its customers. This is the TV customer market.

The audience by viewing the broadcasted program is creating ratings. These ratings create value for the station, as they conduct its share in the market. Audience composition of a channel is an extremely important quantifier as it estimates the numbers of people viewing a particular program by category (age, sex, income, tastes etc.). Product and service companies need to communicate to customers, the attributes of their products and services. Television, offers to those companies, the opportunity to contact, in a very effective way, with their current and potential customers. In order to make this contact true, they are willing to buy Air – Time, which is the “product” that the broadcaster offers to this business market. However due to the significance that this purchase has, companies use Advertisers, which are companies specialized in buying Air-Time from TV stations and selling it to their clients.

The sales and marketing department, together with the programming department, obtains television audience ratings data on a daily basis. The data are analysed and compared by the research department, with audience ratings of competitors, to determine the appropriate strategy for scheduling advertising slots, in order to reach most effectively the profile audience desired by advertising clients. In addition, the sales and marketing department conducts a wide range of market analysis, focusing on various sectors of the economy and target audiences. To ensure that advertising slots are broadcast to meet client specifications, concerning context and timing, the sales and marketing department is also responsible for quality control of the advertisements that are being broadcasted.

Technology & Marketing in Home Entertainment…

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The advancement from analogue to digital changes the face of home entertainment. New devices, new services, as well as broadband and WIMAX ways to access content give a boost to the home entertainment market. As Internet penetration levelled off in most markets, broadband development has come at the expense of narrowband.

Personal video recorders and content jukeboxes, new means of accessing content signify that consumers can now be entertained watching TV on the Internet, they can download movies to their TV device or carry in small devices their entire discography collection in their pocket. All these effects in the customer side – the end user interface eventually- has turned the entire broadcasting value chain on its head.

Broadband access

The explosion of consumer broadband demand and the technological advancement of wireless home networks seed the market in which consumers – end users – wish to be able to continuously exchange digital media content. This new consumer’s practice combined with the peer to peer (P2P) exchange has created a big disruption in media and video industries which follow behind to respond in the dynamics of their customer direct free exchange paths.

Consumers share content initially to their devices and secondly with other users through P2P connections making use of networks reaching their household in many low cost bundled marketing packages. Rights and content owners try to respond in this free exchange employing copy protection systems.

Pay-TV

Pay-TV, in the shade of the new disruptive technologies, continues to develop. Digital operators, clearly targeting to increase their ARPU (Average Revenue per User) as well as new subscribers growth, are increasingly implementing new strategies. To achieve this, they make offerings more attractive by reducing the operational costs involved in providing a compelling service.

Video-on-demand (VOD)

Video on demand (VOD) is the self programming service offering of digital TV (DTV) operators. This way they try to enable access to a range of content, they own or license to the “couch potato viewer”, from the comfort of his living-room whenever the customer desires. 

Digital TV

Digital transmission allows the broadcast of up to eight channels in the space needed for one analogue channel. The efficient use of bandwidth led to cost savings and offered the potential to a number of channels to be delivered in the TV set. That was the first evidence that digital technologies transformed the services, the business models they can exploit as well as the context of the value chain.

High-definition (HD) TV

Since the wide acceptance and up take of colour TVs in the 1970s, manufacturers have advanced very little in the TV sets technology. The average age of a television in a household in Europe is 10 years, and although regular digital TV signals did show improved quality, most consumers simply bought a STB which converts the digital signal to analogue and kept their old analogue TV. But HD TV has an opportunity to lead a step-ahead in technology that requires an upgrade cycle.

IP (Internet Protocol) TV

There is a fourth platform for DTV services that emerge with the proliferation of broadband networks which competes digital cable, digital terrestrial television (DTT) and satellite services. As broadband technology improves, DSL providers and Telecom operators seek to build business models to capitalize on their high-speed network upgrades. To achieve that they add video-based services in bundled offers in order either to increase ARPU or sustain low churn rate as a response to the competition.

Wi-MAX broadband

It is useful to describe also the most contemporary evolution in broadband which may reinforce the already emerging market, namely WiMAx. WiMAX is defined as Worldwide Interoperability for Microwave Access by the WiMAX Forum. The Forum describes WiMAX as “a standards-based technology enabling the delivery of last mile wireless broadband access as an alternative to cable and DSL.

There is commonly held misconception though that WiMAX will deliver 70 Mbit/s, over 70 km. Each of these may be true individually, given ideal circumstances, but they are not simultaneously true. WiMAX has some similarities to DSL in this respect, where one can either have high bandwidth or long reach, but not both simultaneously. The other feature to consider with WiMAX is that the bandwidth is shared between users in a given radio sector, so if there are many active users in a single sector, each will get reduced bandwidth.  The challenge, for both the telecoms industry as well as entertainment businesses, is when this technology reaches the simultaneous operation of high bandwidth over long reach within a multicast radio sector. (not sharing the bandwidth among users)

TV Broadcasting Revenue Models…

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Television has undergone three distinct periods of development since it replaced radio as the major entertainment media of the household in the 1950’s:

• The first period was characterized by viewer passiveness inasmuch as the market was dominated by few players, as in the case of the USA and Australia, or was generally dominated by publicly funded broadcasters and only a few private players, as was the case in Europe. Viewers simply consumed what was broadcasted on the screen and stood up to change channels if the option existed.

• The proliferation of private TV, the introduction of the remote control and the beginnings of subscriber TV heralded the first boom in television broadcasting. From the late 80’s onwards viewers find themselves having a multitude of choices to choose from. In the USA, pay cable TV offered 100’s channels, the free network television domination at that time begun its slow but definitive erosion. In Europe private broadcasting boomed and publicly funded channels find themselves in crises. Pay TV eventually is also introduced in Europe. Zapping and the use of the remote control fragmented the audience shares.

• The conversion and management of media into digital assets together with the automation of scheduling, traffic management and play out, is the new millennium evolution that dominates a change to the back end of the broadcasting value chain introducing a front end user interface to the media products consumers. The time where the media consumers participate in the media production and programming is emerging (Big Brother reality formats, live voting interactive systems)

Respectively to each era the technology, the distribution and the business models were altered fitting to the new environment every time.

Traditional television is a “one-to-many” approach that reaches a passive viewer who has no immediate means of responding. The strategy is based on brand building and emotional appeal to a variety of audience segments. The most steady TV audience though, the heavy viewers that sustain the audience share base of TV channels and troubles the measurements, have been characterized as “The coach potato viewers”. (As wikipedia suggest couch potato is (originally U.S.) slang for a person who spends most or much of his time sitting or lying on a couch, or perhaps an armchair or recliner, watching television in his underwear and often drinking beer)

In this environment the advertiser asks from the advertising agency to create the campaign; the agency defines target and creative concept, based on advertiser’s strategy; the media planner plans the campaign throughout the media landscape; and the sales representative firm (internal/external) sells advertising on behalf of their clients’ strategy. The tool of these transactions is the airtime sales, which practically capitalizes the produced by the television program GRP’s (Gross rating point = Reach x Frequency x 100)

Due to media fragmentation and proliferation, reaching target audiences with television, advertising is becoming increasingly difficult and expensive. While channel counts have increased dramatically, TV advertising effectiveness is actually dropping and advertisers are demanding greater accountability and ROI. Ad budgets are being reallocated into direct marketing campaigns and other more “measurable” media.

The evolution of the revenue models from advertisement to subscription fee based continuous with new ones such as: pay per view, e-commerce, value added services, commissioned content, commissioned transactions, etc. that represent only parts of the fragmented audience (B2C) and customers (B2B) markets. The interactivity that the digital back end of the new broadcasting landscape introduces is perhaps the most promising carrier for new revenue models even though it never matured enough in the digital satellite broadcasting business cases.

Digitilization of the broadcasting value chain and the consumer/viewer…

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Fast and cheap broadband connections operated by easy to use low cost devices, modular content, and shared computing resources that provide mobility are having a deep impact on the global economy and its social structure. Customers becoming end users, increasingly take cues from one another rather than from institutional sources like corporations, media outlets, religions, and political bodies.

To prosper in an era where communities and individuals absorb technological evolution a broadcasting organisation should flirt with the idea of abandoning top-down management and communication tactics, enrol communities into its programming, enhance employees and partners as marketers, and become part of a living foundation of brand loyalists. To achieve though this contemporary future it basically needs to proceed with the first step of infrustructure upgrade and content digitalization.

There is no unique strategy though that succeeds for all organizations in all situations. Thinking strategically about any business many factors must be considered: the extent of product diversity and geographic coverage, the technologies at hand, the number of market segments served, the distribution and the marketing channels used, the role of branding, the level of marketing effort, and the role of quality.

It is also necessary to consider the organization’s approach to new product development in particular, as a technology leader or follower, the extent of innovation, the organization’s cost position and pricing policy, and its relationship to customers, competitors, suppliers and partners.

In today’s reality, change is occurring at an accelerating rate and under this perspective all companies will have to consider three new realities:
• Globalization will continue to affect businesses
• Technology will continue to advance and amaze people
• There will be a continuing push for deregulation of the economic sector

These forces have created new behaviours and challenges:
• Customers demand higher quality of service and some customization
• Brand manufacturers are facing intense competition from domestic and foreign brands
• Store-based retailers are suffering from an over saturation of retailing

Most economic turnarounds remarkably correlate with commercialization of innovations that connect economic growth. This happened with the servicization of operations back in 70’s and this is happening today with the proliferation of broadband networking and the introduction of digital asset systems in the media, telecoms and entertainment markets. When economies are interconnected value is multiplied, bringing people, goods, regions and societies together. Interconnection also provides equality; it is mass-consumed and available to all, impacting every strata of the society, providing ubiquitous (always-on-always-available) communications and transfer of valuable knowledge.

The concept of nationally detached markets is no longer relevant, except where strong differences in consumer tastes and cultural preferences exist and as a consequence, competition amongst suppliers is intensifying. Industry deregulation and the creation of the single European market have served to speed up and promote this trend.

In many sectors, market maturity has been reached, characterized by overcapacity and exacerbated by current recessionary forces. Margins are being driven down, calling for greater operational efficiencies and “value for money”. Under such conditions, the importance rests as much on retaining the customer as on attracting new customers. It also presents a new challenge, how to create and stimulate new demand to the marketplace, rather than be satisfied simply by competing purely on a market-share basis.

The concept of a value chain, defined as the coordinated series of activities leading to the creation and delivery of any product or service, is deeply embedded in the collective wisdom of today’s business leaders. This concept has shaped a generation of business models and enormous efficiencies have been gained by organizing and managing value chains. However, the next round of efficiencies will come from new processes companies’ institute. In other words, a greater emphasis will be put on how firms organize and manage the production, delivery, and use of the information on which value chains are built. Business processes no longer belong to a single business.

The modern value chain is far more complex than those of even a decade ago. New levels of connectivity, a relentless focus on cost-cutting and core competency, and market demand for innovation have created complex interactions between enterprises. Even Michael Porter, who first coined the term “value chain,” has said, “Organizational structure in most firms’ works against achieving interrelationships.” It should be added further that many repositories of information on which value chains rely work against interrelationships not only within, but among enterprises.

The challenge, however, is that information and the technology applications that host it have become fragmented over time. The usual result is a limited free flow of activity among employees, partners, suppliers, and customers. The problem is often that the systems and infrastructure needed to support this partnering are home-grown, proprietary, fragile, extremely difficult and costly to support, or simply unable to keep pace with shifting demands (especially in a global context, where transactions often lack high levels of standardization and predictability).

Asset management, once limited to managing archives, has evolved significantly to the point where it now plays an integral role in the broadcast-delivery chain, a process that involves the acquisition, production, and distribution of content. The factors behind this evolution are two-fold.

First, advances in technology are reducing the costs and improving the capabilities and performance associated with how assets can be stored, accessed, and processed. Secondly, business needs are forcing the administrations to find new ways to unlock the hidden value of the company’s assets through new and alternative distribution.

To do so, an organisation should consider implementing a more systemic approach of managing assets throughout the broadcast-delivery chain. A simple consideration is to design an interoperability layer which will become the driver of this migration.

And it’s not that simple to integrate technologies from different manufacturers to achieve a systemic approach of managing assets; therefore open standards become essential for the migration to advance. Broadcasters have unique needs: compound integration with networks, equipment and devices and complex workflows. They need help to break down the process of “going digital” into phases that can be approached systematically. They may also need assurances of supplier longevity to support multi-year implementations.

Of equal importance to the systemic approach of migrating to digital, and offering opportunities for both savings and improved revenue, are the traffic systems that handle inventory management, scheduling, and accounts receivable. The traffic system is the only system that touches a station’s entire revenue stream all the way from order entry to scheduling to invoicing. And this leads to the centralcasting discussion that revolves around master control operations and technology including automation, spot insertion, program playback, and networking. This is due to the fact that the consolidation of engineering operations offers the greatest opportunities for controlling expenses and achieving economies of scale.

In the centralcasting environment, sales operations are being removed from the central business and administrative functions. This will necessitate though some form of sales force automation. If a firm decides to integrate such a system to streamline the sales process, a sales force automation package should be integrated to the centrlcasting environment.

Framing the customers’ perspective it is useful to notice that the exponential growth of processing power and storage capacity they administrate puts unprecedented power into their hands. With this power, not only can individuals do more for themselves, they can also do more to support one another. This has a direct impact to the entertainment markets; sharing resources via file exchanges and content networks allow nodes of individuals in the network to sustain one another and rely less on institutional support. (P2P media assets exchange, create big losses in music and video industries)

A direct outgrowth of the technology explosion in information handling and communications has been the switch out of a single-product approach to business, to systems thinking. The shift from selling ready-made, tangible products to selling by reputation and on capability to manufacture according to exact client specifications, on an “as needed” basis, is one of the most fundamental challenges facing businesses today. It promotes the importance of forging longer term relationships with customers and being more customers committed.

Customers therefore, have both latent needs — which lead to disruptive innovation — and explicit needs, leading to sustained innovation. This limbo creates fickle consumer taste and faster product cycles. As analysts suggests media firm’s new products fail within the first three years. But if more media firms, had continuous discussions with communities and influencers, sharing online prototypes or previews, they would feel the pulse of the market and increase their hit rate. Production will incur less waste as they better predict product demand — using Web site interactions as a proxy for planning or analyzing data from Web intermediaries.

From the brand equity perspective the landscape may also be blurring. Since 2000, consumers are increasingly likely to say that price is more important than brand, and are less likely to stick with a brand, even one they like. This data does not say that brand is unimportant. It simply indicates that brands have to meet higher standards in order to ensure customer loyalty.

In a foreseeable future as researchers predict, empowered communities may not wait for the right proposition, instead they will be setting their own criteria and sort out brands that don’t meet them. In this future – Kotelr argues that major marketing developments can be grouped under the theme of “Connecting” – online “vertical communities” connected to the networks will be approached to agree on standards for sustainable growth and post these as requests for proposals to manufacturers. The result: Brands will be defined by the communities they serve.

Porter’s literature… review

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Porter’s Basic Concepts

The concept of “industry”, as it has been recorded in all of Porters writings, is the field where different factors, forces and dimensions influence and shape competition. Porter strongly believes and supports that the structures of industry and the forces of competition drive the wins or losses of the firm. Defining hence the firm’s goals in the industry environment he is equally committed to the concept of “strategy” with a firm’s strategy based on the creation of competitive advantage. As his aim is to devise company strategies and as the ways in which firms create and sustain competitive advantages provide the necessary foundation for the role of the home nation, his understanding of the concept of a firm is critical. Porter does not discuss explicitly the objective of the firm rather he assumes that this is the maximization of long-term return on investments where the exact profit does not represent the firm’s goals in a micro economic manner. His main concern though, is how does the company create and sustain competitive advantage. His understanding of the goal of a firm is that of “profit orientation”.

According to Porter the organization of the firm is viewed as nine generic activities comprising the “value chain” where those activities form an interdependent system with linkages among them. The performance of one activity influences the performance of the others in a dynamic situation. A major managerial task aroused by this situation is that the connected activities have to be coordinated in content, over time and space. Competitive advantage thus is gained by carrying out the activities at lower cost, better value and superior coordination.

Porter identified the “value chain” as a means of analyzing an organization’s strategically relevant activities in order to understand the behaviour of costs. Competitive advantage comes from carrying out those activities in a more cost-effective way than ones competitors, an achievement which becomes a challenging managerial task where innovation takes the place of the key concept. Porter defines innovation in a way to include both product and process innovations and innovations in relation to all nine generic activities. According to Porter, competition is determined by five competitive forces making up the structure of the industry where the profit potential and the strategy of the firm are determined by them. Five forces looks at five key areas namely the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry.

Following the overall determination of the competitiveness of an industry, Porter has developed a tool to analyze the rivalry among the firms of the industry. By means of the concept “strategic group”, the firms within the industry are sub-divided into groups pursuing the same strategy. A competitive strategy furthermore, according to Porter, is seen as a broad formula for how a business is going to compete which is defined by “three generic strategies” for achieving above average performance in an industry. Those strategies are: cost leadership, differentiation, and focus.Following the overall determination of the competitiveness of an industry, Porter has developed a tool to analyze the rivalry among the firms of the industry. By means of the concept “strategic group”, the firms within the industry are sub-divided into groups pursuing the same strategy. A competitive strategy furthermore, according to Porter, is seen as a broad formula for how a business is going to compete which is defined by “three generic strategies” for achieving above average performance in an industry. Those strategies are: cost leadership, differentiation, and focus.
Porter’s International Strategy model

The central point in Porter’s International Strategy is the value chain: the nine generic activities and their manipulation from a company, country, or person to thrive in the international and domestic economies. Competition for Porter is the key to excellence. The major question thus is what happens to the nine activities in the course of internationalization and how these provide the necessary competitive advantage? Conceptualizing international competition Porter provides a useful two dimensional framework (Figure 3) in which he categorizes internationalization as involving:

configuration: where and at what scale are primary activities (Inbound logistics, Operations, Outbound logistics, Marketing and Sales and Services) conducted, and
coordination: to what extent and how are activities coordinated
Configuration issues concern where in the world each activity in the value chain is performed, and in how many places each activity is performed. Coordination issues concern the coordination of each activity when it is done in more than one place. For example, if the company has three plants: in the US, Finland and Taiwan, how do the activity at each plant relate to each other? Thinking in Porter’s terms of configuration and coordination, companies will try to configure and coordinate their operations in a way that is most efficient cost-wise and quality-wise. For example, they may centralize large-scale production of products to achieve economies of scale. The use of this configuration/ coordination matrix identifies both geographic positioning and the integration of value activities as determinants of competitive advantage in global industries.

According to the figure, there could be many different kinds of global strategies, depending on a firm’s choice about these dimensions throughout the value added chain. Porter identifies four broad combinations of configuration and coordination and hence four variations in international strategy:

The “export-based” strategy revolves around a geographically concentrated configuration with low coordination of activities. Under this perspective a company is attempting to gain benefits in the upstream activities (Inbound logistics, Operations, Outbound logistics) by focusing them on a single or limited number of sites and also a significant part of value creation takes place in the downstream  (Marketing & Sales and Services) section of the value chain (usually decentralised marketing).

The “country-centred” strategy has few coordinated activities and geographically dispersed configuration. In this case a reduced size replica of the parent company operates as though it was a local firm, but without the necessary autonomy. Significant diversity is possible within the miniature facsimile class, so it is further subdivided into adopters, adapters and innovators.

Combining high levels of co-ordination with geographically dispersed activities results in a strategy that Porter terms “high foreign investment” with extensive co-ordination among subsidiaries. High levels of coordination between different sites are expensive.

Geographically concentrated activities combined with high co-ordination of activities describes the “purest global” strategy. This term refers to a range rather than a single strategy, it characterises a company seeking to gain competitive advantage from its international presence both by concentrating its configuration and having a high level of co-ordination of international activities. Such a strategy is likely to involve a chain where most of the value is created in upstream activities, with downstream operations being co-ordinated for cost effectiveness.
Real cases in relation to Porter’s model

The Carrefour case

Founded in France in 1960, Carrefour is the largest retail company in France and seventh in the world. Carrefour operates in a variety of retail formats such as mini-markets, automotive centres, supermarkets, and warehouse stores. However, its main emphasis is hypermarkets which sell various goods including food, clothing, consumer goods and household appliances. These stores have a large open marketplace atmosphere and provide excellent prices. This formula has proved to be a successful format; however, Carrefour’s domestic expansion was restricted by French legislature. The limitation on hypermarket development led to Carrefour’s international expansion through profitable joint ventures.

Carrefour has strong experience and capabilities in operating on a global level as a high degree of profits are internationally generated. Also, they have the ability to operate on low profit margins. Historically, they have differentiated themselves in the hypermarket sector by focusing on cost leadership, multi-specialisation and private labels. Carrefour has 119 stores in France, 96 stores across the world and a number of regional distribution centres (physical resources). The company’s philosophy has been one of decentralisation, while the human resources department has acquired a vast amount of knowledge, experience and skills in operating within international markets, in strategic alliances and operating on low profits. Carrefour has a number of intangible resources including a good corporate image and a strong private label. The value chain analysis (Figure 4) assesses Carrefour’s competencies through the examination of its primary and support activities.

This analysis concentrates on inbound and outbound logistics, the marketing and sales of the company. In terms of procurement or inbound logistics, Carrefour concentrates on host country purchasing. This can benefit the company as purchases will be made in the same currency as sales allowing the company to meet local government regulations or standards. However, it may prove to be a disadvantage to the company if raw materials may be acquired at a cheaper price from outside the country. Regional distribution centres facilitate the gathering and distribution of merchandise to the stores. The centres facilitate inbound and outbound logistics. As it pertains to marketing and sales, Carrefour operates and is experienced using heavy promotion in international markets. This indicates experience with marketing products within different countries and cultures.

The MLN case

MLN is a privately owned Indonesian garment manufacturer that produces various styles of ladies wear, from fairly plain casual wear to high fashion dresses with a lot of accessories (embroidery and sequins). Their customers range from independent shops or boutiques in Germany, Japan or USA to Italian fashion houses such as Gucci or La Ricci. As is common practice in this type of industry, MLN starts its operations every year by generating ideas and making samples of products for the next summer season. The whole design process is conducted by the company. When samples of product are ready, wholesaler then screen the samples and organize an exhibition where potential customers (agents for boutiques, shops or fashion houses) can see the company’s latest creation. As soon as the potential customers see the samples, MLN starts to forecast the amount of materials needed for the production.

The company’s principal material is cloth or fabric, which they buy in the grey state from their suppliers in China. Following the sample and exhibition period customers will usually place firm orders, which start the production process. The production stages, which include cutting, sewing, putting on accessories and finishing, are labour intensive. In each stage of production a quality check is conducted. However, in most cases the customer will do another quality check. Finished garments (unlabelled) from MLN are shipped by the wholesaler’s logistics company and after putting on their own labels wholesaler sell them to end customers via shops and boutiques. For the MLN supply chain, the other members in the chain are wholesalers that act as their direct customers, and agents – which distribute the products to the end customers. Sometimes, agents can deal directly with MLN without the presence of wholesaler.

Assessing MLN from the perspective of Porters model of internationalization, it seems that the advantage to be gained by doing international business is low labour cost. None of the company’s products are targeted principally at the local market and the labour content in its operations is relatively high.  MLN appears to deal directly with the planning, procurement, and production stages in the supply chain, while the intensity of coordination increases greatly. The supply chain of MLN, coordination between the company and their customers take place only in the sampling process. In addition, customers may also order certain types of materials and therefore co-ordination is necessary in procuring the right materials.

When an order has been placed and material is agreed, the customer does not tend to get involved in production. The customer however will do a second quality check on the finished garments.  Considering the above two cases it seems that the coordination, no matter on the geographic dispersion, also is the distinctive feature of global strategy. If a firm is to sell in Mexico, it must be close to buyers, and have downstream activities (offices, showrooms, stock, sales and repair teams) in Mexico; while it may also have production facilities in Mexico. Downstream activities create country-specific advantages, like the firm’s reputation (Carrefour good corporate image and a strong private label), brand name (KFC), trademark (Sheffield silver) or service network (IBM). Upstream activities can be decoupled from buyers or wholesalers (MLN), and they create competitive advantages which can be utilized in many different countries.

References – Bibliography

ER, M., MACCARTHY, B., Configuration and coordination in international supply chains: Preliminary Findings from International Manufacturing Companies in Indonesia University of Nottingham NG7 2RD UK

MORRISON, A., ROTH, K., 1993, “Relating Porter’s configuration/coordination framework to competitive strategy and structural mechanisms: analysis and implications”, Journal of Management, Winter1993; 19: 797-818

PORTER, M.E., 1986, “Changing patterns of international competition”, California Management Review, Vol. 28 No. 2, 1986, pp. 9-40.

PORTER, M.E., 1986, Competition in Global Industries (1986). Boston, Mass.: Harvard BusinessSchool Press.

PORTER, M.E., 1990, The Competitive Advantaqe of Nations (1990). London : The MacMillan Press.

ROTH, K.,. (1992), International Configuration and Co-ordination Archetypes for Medium-Sized Firms in Global Industries, Journal of International Business Studies, Third Quarter, 1992, pp. 533-549

SYLVERBERG, T, 2004 The internationalization process of the firm – a case study, Linköping, 2004, http://www.ep.liu.se/exjobb/eki/2004/iep/026/, accessed 10th June 2005

Sørensen, O, 1994 The Porter Approach, Aalborg Univeristy Centre for International Studies January 1994, http://www.business.aau.dk/ivo/publications/study/sms6.pdf , 10th June 2005

Bekkhus, R., 1993, Carrefour: Opportunities in Mexico, http://www.business.no/artikkel_final_strategic.htm, 10th June 2005

Lagging in technology creates opportunities…

https://www.openbc.com/hp/Apostolos_Tsorakis/ 

 

We have heard a lot about next generation TV, and next generation TV viewer which, fingers crossed, will become online consumer of the programmes that he misses over his seven days routine, creating a market for movies on demand, real-time movies on demand etc. Interactive services under this perspective are going to be very much part of this vision too and according to the more optimists they will make a real difference because they will take advantage of the real-time capability and the always on connection.

Nice visions for nice technological advanced nations with up to date technological infrastructure. What is happening though to a country like Greece with low technological advancement in both telecommunications and broadcasting industries?

Even though Greece is lagging behind Europe in telecommunications technologies, that drive the business development in media and telecommunications industries globally, it is inevitable that the era of convergence among the industries and respectively the businesses will eventually affect the small Greek market. Analysts suggest that globalization affects primarily the small nations that fulfil their gaps by shifting faster to the most contemporary technologies lowering the CAPEX of initial investments.

The broadcasting industry in Greece contrary to the technological gaps, the size of the market and all kind of negative research predictions for the viability of the firms is flourishing. Since the liberalization of the broadcasting sector in Greece in 1989, ten TV channels with nationwide license and hundreds of local station transmit programs covering 100% of TV viewing.

Telecommunication investments in Greece though, as all international bodies has given evidence against, will continue to be slow even though, the 2004 Olympic Games have helped the state owned telecom organisation to upgrade its services and telecoms infrastructure.In such an environment of fierce competition and technological turbulence, the advertisement expenditure, from which private owned TV stations survive of, seems to be insufficient to fulfil the expectations of the broadcasting organisations stakeholders, which apart the presumable media power they enjoy, they seek to improve their investments.   In the rest of the West Civilized world that Greece belongs, the facts are totally opposite and technology, in the broadcasting as well as in the telecommunications industries, gallopades converging and dragging the requisite business models generating new markets and new trends.  Media Asset and Digital Asset management systems emerge by the migration from analogue to digital production and broadcasting. Telecom Broadband and Wireless Broadband technologies connect businesses with customers and customers among them. In such environments innovation and opportunities flourish.