Chapter 6 Formulating Strategy © 2006 Prentice Hall

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 is called strategic planning. The basic means by which the company competes – its choice of business or businesses in which to operate and the ways in which it differentiates itself from its competitors – is its strategy. © 2006 Prentice Hall

Reasons for Going International AOL Europe is emerging as an upbeat counterpoint to AOL’s sagging business in the United States. Partly a matter of timing, as Europe follows the United States online … but also reflecting differences in strategy and execution. AOL Europe lobbied hard … to establish rules guaranteeing AOL Europe equal access to telecommunications networks. - www.nytimes.com, September 8, 2003 © 2006 Prentice Hall

Reasons for Going International Reactive or defensive Proactive or aggressive The threat of decreased competitiveness is the overriding reason many large companies adopt a strategy of aggressive globalization Companies decide to go global for a number of reasons. This slide highlights the two broad categories as well as the main reason. © 2006 Prentice Hall

Strategic Formulation Process The global strategic formulation process, as part of overall corporate strategic management, parallels the process followed in domestic companies. However, the variables, and therefore the process itself, are far 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. These factors introduce a greater level of risk in strategic decisions. However, for firms that have not yet engaged in international operations (as well as for those that do), an ongoing strategic planning process with a global orientation identifies potential opportunities for (1) appropriate market expansion, (2) increased profitability, and (3) new ventures by which the firm can exploit its strategic advantages. Even in the absence of immediate opportunities, monitoring the global environment for trends and competition is important for domestic planning. © 2006 Prentice Hall

Strategic Formulation Process First phase is the planning phase – company establishes (or clarifies) its mission and overall objective Second part is the implementation phase – requires the establishment of the structure, systems, processes suitable to make the strategy work © 2006 Prentice Hall

Mission and Objective Mission of an organization is its overall raison d’etre or the function it performs in society Objectives flow from mission and guide the formulation of international strategy This slide offers definitions and sample objectives. Return © 2006 Prentice Hall

Environmental Assessment Gathering information and forecasting relevant trends, competitive actions and circumstances that will affect operations in a geographic area; should include: Political instability Currency instability Nationalism International competition Environmental scanning Return © 2006 Prentice Hall

Internal Analysis Internal analysis determines which areas of the firm’s operations represent strengths or weaknesses (currently or potentially) compared to competitors, so that the firm may use that information to its strategic advantage It focuses on the company’s resources and operations, and global synergies Strengths and weaknesses of the firm’s financial and managerial expertise and functional capabilities are evaluated to determine the key success factors All companies have strengths and weaknesses. Management’s challenge is to identify both and take appropriate action. Many diagnostic tools are available for conducting an internal resource audit. Financial ratios, for example, may reveal an inefficient use of assets that is restricting profitability; a sales-force analysis may reveal that the sales force is an area of distinct competence for the firm. If a company is conducting this audit to determine whether to start international ventures or to improve its ongoing operations abroad, certain operational issues must be taken into account. These issues include (1) the difficulty of obtaining marketing information in many countries, (2) the often poorly developed financial markets, and (3) the complexities of exchange rates and government controls. © 2006 Prentice Hall

Competitive Analysis Assess the firm’s capabilities and key success factors compared to those of its competitors Enables strategic planners to determine where the firm has distinctive competencies that will give it an advantage Most companies develop strategies around key strengths or core competencies This stage is often called a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis © 2006 Prentice Hall

Global/International Strategic Alternatives Global Strategic Alternatives determines the overall approach to the global marketplace Entry Strategy Alternatives determine what specific entry strategy is appropriate for each country the firm plans to operate in © 2006 Prentice Hall

Approaches to World Markets Globalization is a term that refers to the establishment of worldwide operations and the development of standardized products and marketing. Regionalization (or multi-local) is where local markets are linked together within a region, allowing more local responsiveness and specialization. © 2006 Prentice Hall

Integrative Strategies Multinational Corporations will develop their operations to the point of being fully integrated Both vertical and horizontal Includes suppliers, productive facilities, marketing and distribution outlets, and contractors Some move quickly to the stage of integration through acquisition Other companies use a variety of strategies and enter the country in stages © 2006 Prentice Hall

Entry Strategies © 2006 Prentice Hall This figure illustrates the integrated, concurrent strategies used in the global network of the Helicopter Division of France’s Société Nationale Industrielle Aerospatiale. The corporation employs a complex pattern of entry strategies and alliances among plants around the world, involving exporting, licensing, joint ventures, importing, and subassembly and maintenance facilities. © 2006 Prentice Hall

Using E-business for expansion The real story is the profound impact this medium will have on corporate strategy, organization and business models. Our research reveals that the Internet is driving global marketplace transformation and paradigm shift in how companies get things done, how they compete and how they serve their customers.” - www.IBM.com While the benefits of e-business are many, including rapid entrance into new geographic markets, less touted are the many challenges inherent in a global B2B or B2C strategy.These include cultural differences and varying business models, governmental wrangling and border conflicts, in particular the question over which country has jurisdiction and responsibility over disputes regarding cross-border electronic transactions. © 2006 Prentice Hall

Global B2B/B2C Strategy To assess the potential competitive position of the company, managers must ask themselves the following questions with respect to B2B/B2C: Does the exchange provide a technology solution that helps industry-trading partners to do business more efficiently? Is the exchange known to be among the top 3-5 within its vertical industry? Does the exchange offer industry-specific technology and expertise that gives it an advantage over generic exchange-builders? © 2006 Prentice Hall

Conditions Favoring E-Global “The global beachhead strategy makes sense when trade is global in scope; when the business does not involve delivering orders; and when the business model can be hijacked relatively easily by local competitors.” M. Sawhney and S. Mandal © 2006 Prentice Hall

Conditions Favoring E-Local “[The e-local/regional approach] is preferable under three conditions: when production and consumption are regional rather than global in scope; when customer behavior and market structures differ across regions but are relatively similar within a region; and when supply-chain management is very important to success.” Sawhney and Mandal © 2006 Prentice Hall

Entry Strategy Alternatives © 2006 Prentice Hall

Comparative Management in Focus: Planning for the EU Market As of May 2004 the European Union is: A 25-nation unified market A market of more than 400 million people With the addition of Central and Eastern European countries companies have access to: The EU Cheaper wages, lower corporate taxes, and educated workforces Eliminated currency risk for Europe © 2006 Prentice Hall

Comparative Management in Focus: Planning for the EU Market The EU has developed a protectionist wall Tariffs, quotas, local content laws and competitive tactics Designed to keep the US and Japan out The EU has created opportunities for nonmembers as well European harmonized standards, while seeking to eliminate trade barriers within Europe, serve to limit access to EU markets by outside companies through the standardized specifications of products allowed to be sold in Europe. The harmonization laws set minimum standards for exports and imports that are EU-wide. However, those standards also frequently hinder European companies from efficient sourcing of raw materials or component parts from “foreign” companies. © 2006 Prentice Hall

Strategic Choice The strategic choice of one or more of the entry strategies will depend on a critical evaluation of the advantages (and disadvantages of each in relation to the firm’s capabilities, the critical environmental factors the contribution that each choice would make to the overall mission and objectives of the company. © 2006 Prentice Hall

Reactive Globalization of competitors Trade barriers Regulations and restrictions Customer demands Return © 2006 Prentice Hall

—Susan Kropf, President,Avon Products,January 12, 2004. Proactive Economies of scale Growth opportunities Resource access and cost savings Incentives From rain forests to remote Chinese villages, the queen of cosmetics (Avon) is cleaning up across the globe. China is our single biggest growth opportunity. [Now] we have beauty boutiques, with 5,000 store representatives in every province including Tibet. A corollary on the [WTO] bill said that China would reestablish the legitimacy of direct selling in the marketplace. It could be in the next couple of years. —Susan Kropf, President,Avon Products,January 12, 2004. Return © 2006 Prentice Hall

Globalization Increasing competitive clout resulting from regional trading blocs Declining tariffs, which encourage trading across borders and open up new markets The information technology explosion, which makes the coordination of far-flung operations easier and also increases the commonality of consumer tastes Return © 2006 Prentice Hall

Regionalization Unique consumer preferences resulting from cultural or national differences Domestic subsidies New production technologies that facilitate product variation for less cost than before. Return © 2006 Prentice Hall