1. THE INTERNATIONAL STAGE
Formulating Strategy
THE INTERNATIONAL STAGE
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2. Opening Profile: Global Companies Take Advantage of Opportunities in South Africa
Acer Africa
Alcatel
General Electric
Global companies with a presence in South Africa all cite numerous advantages for setting up shop in the country, from low labor costs to excellent infrastructure – and a base to export products internationally. According to South Africa’s Chamber of Commerce, nearly 50% of the chamber’s members are Fortune 500 companies, and that over 90% operate beyond South Africa’s borders into southern Africa, sub-Saharan Africa and across the continent.
Businesses are taking advantage of opportunities because of the legal protection of property, labor productivity, low tax rates, reasonable regulation, a low-level of corruption and good access to credit, which were seen as factors contributing to the country’s investment climate. Threats include the low level of skills and education of workers, labor regulation, exchange rate instability, and crime. Nevertheless, the business climate is favorable.
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3. Strategic Planning and Strategy
The process by which a firm’s managers evaluate the future prospects of the firm and decide on appropriate strategies to achieve long-term objectives
Strategy
The basic means by which the firm competes
Strategy includes a company’s choice of business or businesses in which to operate and the ways in which it differentiates itself from competitors.
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4. Reasons for Going International
Reactive/Defensive
Proactive/Aggressive
Globalization of competitors
Trade barriers
Regulations and restrictions
Customer demands
Economies of scale
Growth opportunities
Resource access and cost savings
Incentives
If organizations allow their competitors to become entrenched in foreign markets, it becomes increasingly difficult to enter those markets at a later date. Additionally, the advantages competitors realize overseas may also translate into advantages at home.
Tariffs, quotas, buy-local policies, and other restrictive trade practices can make exports to foreign markets too expensive and impractical to be competitive.
Similarly, restrictions by a firm’s home government may become so expensive that companies seek out less foreign operating environments.
Some foreign customers may demand that their supplying company operate in their local region so that they have better control over their supplies. For example, McDonald’s asks it domestic suppliers to follow it to foreign ventures.
Achieving world-scale volume to make the fullest use of modern capital-intensive manufacturing equipment and to amortize research and development costs when facing brief product life cycles.
Companies in mature markets in developed countries can grow by seeking opportunities in emerging markets. For example, FedEx has been able to grow in Asia because it entered the markets long before its competitors. The text also uses McDonald’s and Avon as examples.
Labor and other resource costs can be much lower in foreign locations than they are at home.
Governments wishing to attract new capital, technology, and know-how often provide incentives such as tax exemptions, tax holidays, subsidies, loans, and the use of property. These incentives decrease risk and increase profits for foreign firms.
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5. Management Focus: Mexico’s Cemex
Is aggressively growing via worldwide acquisitions
Bid $12.8 billion in 2006 for the Rinker Group of Australia
Has operations on five continents with 2005 sales of $15.3 billion
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6. Strategic Formulation Process
EXHIBIT The Strategic Management Process
The global formulation process parallels the domestic process, but it is more complex because of the greater difficulty in gaining accurate and timely information, the diversity of geographic locations, and the differences in political, legal, cultural, market, and financial processes. The strategic planning process identifies potential opportunities for (1) appropriate market expansion, (2) increased profitability, and (3) new ventures for exploiting strategic advantages.
This figure demonstrates the process is comprised of two primary phases: planning and implementation.
In reality, the stages depicted in this slide are rarely so linear. Instead, the process in continuous and intertwined.
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7. Steps in Developing International and Global Strategies
Mission and Objectives
Environmental Assessment and Scanning
Internal and Competitive Analysis
Global Integrative and Entry Strategy alternatives
Strategic Choice, Implementation, Feedback, andControl
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8. Mission and Objectives
Marketing
Worldwide, regional, national market share
Production
Production volume
Economies of scale
Finance
Tax burden
Capital structure
The mission for an organization defines the company’s function in society. It determines the company’s direction and provides a basis for strategic decision making. Objectives flow from the mission.
This slide summarizes Exhibit 6-3. As illustrated, a firm’s global objectives usually fall into the areas of marketing, profitability, finance, production, and research and development. Because of the greater risk involved, market volume and profitability goals are usually set higher for international operations than for domestic operations.
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9. Mission and Objectives
Profitability
R & D
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10. Environmental Assessment
Environmental Scanning
National Level
Regional Level
Global Level
The process of gathering information and forecasting trends, competitive actions, and circumstances that will affect operations
Environmental assessment includes environmental scanning and continuous monitoring to keep abreast of variables around the world that may pose opportunities or threats. Environmental scanning should take place at three levels: global, regional, and national.
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11. Environmental Scanning Variables
Political Instability
Currency Instability
Nationalism
International Competition
Scanning should cover these major variables. Perhaps the most important of these is conducting an international competitor analysis, which entails answering questions such as: Will the infrastructure support new companies in that industry? Is there room for additional competition? What is the relative supply and demand for the proposed product or service? What are your competitors’ positions, their goals and strategies, and their strengths and weaknesses, relative to those of our firm?
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12. Institutional Effects on International Competition
The extent to which countries have institutions to promote the rule of law to outside investors
Attractiveness of Overseas Markets
Creating barriers to entry in certain industries and making those industries more attractive (profitable) for incumbent firms
Entry Barriers and Industry Attractiveness
Various institutions can create opportunities or constrains for firms considering entry into specific global markets.
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13. Institutional Effects on International Competition
Liberalization of the economy and legal and regulatory reforms would create a more open and competitive atmosphere.
Competitiveness of Other Firms
The current U.S. antidumping laws place a foreign entrant at a disadvantage if accused of “dumping”.
Antidumping as an Entry Barrier
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14. Sources of Environmental Information
Internal Analysis
Competitive Analysis
Key Success Factors:
Technological capability: Microsoft
Distribution channels: Wal-Mart
Promotion capabilities: Disney
Distinctive competencies
SWOT analysis
Comparative advantage
There are a variety of public information sources available to provide information to organizations. Company’s also use clipping services. However, internal sources of information are usually preferable because they help eliminate unreliable information from secondary sources. Mitsubishi Trading Company employees more than 60,000 market analysts worldwide who gather, analyze, and feed market information to the parent company.
Internal analysis involves weighing the company’s options relative to its strengths and weaknesses. Company’s must identify their key success factors and determine how they can help the firm exploit foreign opportunities. This slide shows several examples of key success factors for well-known companies.
All companies have strengths and weaknesses, the challenge is to identify both and take appropriate action.
At this point executives must assess the firm’s capabilities and key success factors compared to those of its competitors. This process enables strategic planners to determine where the firm has distinctive competencies that might lead to sustainable competitive advantage. Most companies develop their strategies around these distinctive competencies, or key strengths. They are usually difficult for competitors to imitate.
This strategic formulation is often called SWOT analysis.
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15. Strategic Decision-Making Models
EXHIBIT A Hierarchical Model of Strategic Decision Making
This figure summarizes three leading strategic models.
Global, regional, and country factors and risks are part of the considerations in an institution-based theory of existing and potential risks and influences on the host area.
The firm’s competitive position in its industry can be reviewed using Porter’s industry-based five-forces model. The five forces are (1) the level of competition already in the industry, (2) ease of entry into the field, (3) how much power suppliers in the industry have, (4) how much power buyers in the industry have, and (5) the extent of substitute products available.
The resource based-view entails considering the unique value of the firm’s competencies and that of its products or services.
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16. Global and International Strategic Alternatives
Alternative Strategies
Global
Regionalization/Localization
Global Integrative
The strategic planning process involves considering the advantages (and disadvantages) of various strategic alternatives in the light of the competitive analysis. While weighing alternatives, managers must take into account the goals of their firms and the competitive status of other firms in the industry.
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17. Global Strategy
Treating the world as an undifferentiated worldwide marketplace
The impetus:
Regional trading blocks
Declining tariffs
Information technology explosion
Depending on the size of the firm, managers must consider two levels of strategic alternatives. The first is global strategic alternatives, which determine the overall approach to the global marketplace a firm wishes to take. This level primarily applies to MNCs. The second level is entry strategy alternatives.
Global strategies or globalization refer to the establishment of worldwide operations and the development of standardized products and marketing. The rationale is to compete by establishing worldwide economies of scale, offshore manufacturing, and international cash flows.
The impetus for globalization usually includes (1) increasing competitive clout resulting from regional trading blocs, (2) declining tariffs, which encourage trading across borders and open up new markets, and (3) the information technology explosion, which makes the coordination of worldwide operations easier and increases the commonality of consumer tastes.
There are, however, challenges associated with a global strategy. It makes the firm more vulnerable to environmental risk, it is difficult to manage, companies often lose some of their original identities through denationalization, and there can be a lack of flexibility and responsiveness at the local level.
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18. Regionalization/Localization
Local markets are linked together within a region, allowing local responsiveness.
The impetus:
Unique consumer preferences
Domestic subsidies
New production technologies
When competitiveness is determined on a country-by-country basis rather than on a global basis, regional strategies are more appropriate than globalization. In the regionalization or multidomestic strategy top managers within each region decide on their own investment locations, product mixes, and competitive positioning. They run their subsidiaries as quasi-independent organizations. Pressures for regionalization include (1) unique consumer preferences resulting from cultural or national differences, (2) domestic subsidies, and (3) technologies that facilitate low cost product variation.
Firms can fall anywhere along the continuum between global and regional or local. Some companies try to be “glocal” by taking advantage of the best aspects of each strategy.
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19. Global Integrative Strategies
Full vertical and horizontal integration
Example: Dell
Factories in Ireland, Brazil, China, and so on
Assembly and delivery system from 47 locations around the world
Little inventory, ability to change operations quickly
Many MNCs have developed their global operations to the point of full integration, including suppliers, productive facilities, marketing and distribution outlets, and contractors around the world. Dell is an example of a fully integrated company.
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20. E-Business for Global Expansion
EXHIBIT Benefits of B2B
E-business can facilitate rapid entrance into new geographic markets. However, it also is a strategy with several challenges, including cultural differences, varying business models, and questions over which country has jurisdiction and responsibility for cross-border electronic transactions. E-business is really a new industry, with a different pool of competitors and new sets of environmental issues.
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21. E-Global or E-Local? Trade is global in scope.
E-Global When:
E-Local When:
Trade is global in scope.
Business does not involve delivering orders.
When the business model can be easily hijacked by local competitors.
Production and consumption are regional in scope.
Customer behavior and market structures differ across regions, but are similar within a region.
Supply-chain management is very important to success.
Although the internet is a global medium, companies still face decisions regarding how much products and services can be globalized versus how much they must be localized to regional and national markets.
An e-global strategy is likely to work well for global B2B markets in steel, plastics, and electronic components.
E-local strategies are suited to consumer retailing and financial services.
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22. Entry Strategy Alternatives
Exporting
Licensing
Franchising
Contract Manufacturing
Offshoring
Service Sector Outsourcing
Turnkey Operations
Management Contracts
International Joint Ventures
Wholly Owned Subsidiaries
As a relatively low-risk alternative, many small firms seldom go beyond exporting, and large firms use this avenue for many of their products. Experienced firms may establish an export department or hire an export management company. When setting up an export system, particular care must be given to choosing a distributor, as many countries have regulations that make it difficult to remove an inefficient distributor. Jordan Toothbrush is a small toothbrush manufacturer in Norway.
Licensing grants the rights to a firm in the host country to either produce or sell a product, or both. The agreement involves the transfer of rights to patents, trademarks, or technology for a specified period of time in return for a fee paid by the licensee. Anheuser-Busch has licensees in England, Japan, Australia, and Israel. Licensing is relatively low risk because it requires little investment. It makes sense in countries where entry by other means is prohibited and for products in the mature phase of the life-cycle—when competition is intense, margins decline, and production is relatively standardized. It also is useful for firms with rapidly changing technologies, diverse product lines, and small firms with few financial and managerial resources for direct investment abroad.
With franchising, a franchisor licenses a company’s trademark, products and services, and operating principles to the franchisee for an initial fee and ongoing royalties. Franchising also is relatively low risk and is ideal for small businesses.
Contract manufacturing involves contracting for the production of finished goods or component parts. These goods are then imported to the home or other countries for assembly or sale, or they are sold in the host country. Nike is an example of a company that uses contract manufacturing.
Offshoring is when a company moves one or all of its factories to another country. Offshoring provides access to foreign markets and lower production costs, while avoiding trade barriers. According to the US Commerce Department, about 90% of the outcomes from US-owned offshore factories is sold to foreign consumers.
Service sector outsourcing is outsourcing “white-collar” jobs. The text lists several examples companies outsourcing white collar jobs. Historically, India has been a primary location for IT outsourcing. However, as wages in India are beginning to rise, many companies are beginning to outsource to the Philippines, South Africa, Hungary, and the Czech Republic.
Turnkey operations entail designing and constructing a facility abroad (e.g., a chemical plant), training local personnel, and turning the keys over to local management for a fee. The text provides the example of a Fiat company constructed in the former Soviet Union.
With management contracts, a contract gives a foreign company the rights to manage the daily operations of a business but not to make decisions regarding ownership, financing, or strategic and policy changes. Usually, management contracts are enacted in combination with other agreements, such as joint ventures.
International joint ventures are agreements between two or more companies to produce a product or service together. Whereas they offer considerable opportunities, joint ventures also are more risky than most of the strategies discussed thus far. Joint ventures facilitate rapid entry into new markets, are a means to overcome trade barriers, help achieve economies of scale, can help secure access to additional raw materials, help acquire managerial and technological skills, and can spread the risk associated with operating in a foreign environment.
Wholly owned subsidiaries entail starting a product or service from scratch or acquiring an existing firm in the host country. Acquisitions allow for rapid entry in markets with established products and distribution networks. Wholly owned subsidiaries represent the highest risk entry strategy, but the company has full control over the operation.
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23. Comparative Management in Focus: Strategic Planning for the EU Market
The European countries dominate in 2009–2010 Global Competitiveness Index (GCI) rankings of the World Economic Forum
EU include:
27-nation unified market
400 million people
Great business opportunities
The expanded EU provides opportunities for small and medium sized enterprises to gain access to the EU market.
Developing an appropriate strategy in Europe can be challenging because, even though the euro and common standards financially homogenized Europe, people remain varied in their cultures and tastes. UPS discovered this when French drivers were told they could not have wine with lunch, when British drivers resented not being allowed to take their dogs with them on deliveries, and when they realized their brown trucks looked like hearses in Spain.
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24. Comparative Management in Focus: Strategic Planning for the EU Market
In 2004 and 2007 the EU added 12 new countries.
The euro eliminates currency risk, but cultures and tastes remain varied.
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25. Comparative Management in Focus: Strategic Planning for the EU Market
Some believe the EU will adversely affect U.S. organizations by limiting access and/or demanding reciprocal access to the United States.
Others feel the EU provides considerable opportunity and many U.S. companies are well-established in Europe.
People disagree regarding whether the EU’s unified market helps or hurts US organizations. Outside companies interested in doing business in the EU need to be aware that the EU carefully controls mergers and competition. For example, the EU Commission knocked down the GE-Honeywell merger.
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26. Comparative Management in Focus: Strategic Planning for the EU Market
Many companies use joint ventures to deal with the EU strategic dilemma.
Nonetheless, operating in Western Europe can be cost prohibitive.
Many firms are opting for joint ventures with European partners in order to gain entry to the EU, but this strategy can be problematic as well. The average Western European earns more, works fewer hours, takes longer vacations, and receives more social entitlements and job protection than workers in Asia and North America.
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27. The Influence of Culture on Strategic Choice and Timing Entry
China and Japan have longer-term time horizons than the United States.
High uncertainty avoidance cultures (e.g., Latin American, African countries) prefer non-equity modes of entry.
High power distance cultures (e.g., Arab countries and Japan) tend to use more equity modes of entry abroad.
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