Prentice Hall 2003Chapter 61 Formulating Strategy Chapter 6

Prentice Hall 2003Chapter 62 Chapter 6 - Overview  Reasons for going international  Strategic formulation process  Steps in developing international and global strategies

Prentice Hall 2003Chapter 63 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.

Prentice Hall 2003Chapter 64 Reasons for Going International  Reactive Reasons Globalization of competitors Trade barriers Regulations and restrictions Customer demands

Prentice Hall 2003Chapter 65 Reasons for Going International (contd.)  Proactive Reasons Economies of scale Growth opportunities Resource access and cost savings Incentives

Prentice Hall 2003Chapter 66 The Strategic Management Process (Exhibit 6-1) Define/clarify mission and objectives Assess environment for threats, opportunities Assess internal strengths and weaknesses Consider alternative strategies using competitive analysis Choose strategy Strategic Planning Process

Prentice Hall 2003Chapter 67 The Strategic Management Process (contd.) Implement strategy through complementary structure, systems, and operational processes Set up control and evaluation systems to ensure success, feedback to planning Implementation Process

Prentice Hall 2003Chapter 68 Steps in Developing International and Global Strategies  Mission and objectives  Environmental assessment  Internal analysis  Competitive analysis  Global and international strategic alternatives  Approaches to world markets  Global Integrative strategies  Using e-business for global expansion  E-global or e-local  Entry strategy alternatives  Strategic choice

Prentice Hall 2003Chapter 69 Environmental Scanning  It is the process of gathering information and forecasting relevant trends, competitive actions, and circumstances that will affect operations in geographic areas of potential interest.

Prentice Hall 2003Chapter 610 Major Variables Covered in Environmental Scanning  Political instability  Currency instability  Nationalism  International competition

Prentice Hall 2003Chapter 611 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

Prentice Hall 2003Chapter 612 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 multilocal) is where local markets are linked together within a region, allowing more local responsiveness and specialization.

Prentice Hall 2003Chapter 613 Pressures to Globalize  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.

Prentice Hall 2003Chapter 614 Pressures to Regionalize  Unique consumer preferences resulting from cultural or national differences  Domestic subsidies  New production technologies that facilitate product variation for less cost than before.

Prentice Hall 2003Chapter 615 Using E-Business for Global 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.”

Prentice Hall 2003Chapter 616 Benefits of B2B (Exhibit 6-6)

Prentice Hall 2003Chapter 617 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?

Prentice Hall 2003Chapter 618 Conditions Favoring Going 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

Prentice Hall 2003Chapter 619 Conditions Favoring Going 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

Prentice Hall 2003Chapter 620 Entry Strategy Alternatives (In order of ascending risk)  Exporting  Licensing  Franchising  Contract manufacturing  Turnkey operations  Management contracts  International joint ventures (IJVs)  Fully owned subsidiaries

Prentice Hall 2003Chapter 621 International Entry Strategies: Advantages and Critical Success Factors (Exhibit 6-7) StrategyAdvantagesCritical Success Factors ExportingLow riskChoice of distributor No long-term assetsTransportation costs Easy market access and exitTariffs and quotas LicensingNo asset ownership riskQuality and trustworthiness of licensee Fast market accessAppropriability of intellectual property Avoids regulations and tariffsHost-country royalty limits FranchisingLittle investment or riskQuality control of franchisee and franchise operations Fast market access Small business expansion

Prentice Hall 2003Chapter 622 International Entry Strategies: Advantages and Critical Success Factors (contd.) StrategyAdvantagesCritical Success Factors Contract Limited cost and riskReliability and quality of manufacturing local contractor Short-term commitmentOperational control and human rights issues Turnkey operationsRevenue from skills andReliable infrastructure technology where FDISufficient local supplies and labor restrictedRepatriable profits Reliability of any govt. partner Management Low-risk access to furtherOpportunity gain longer-term contracts strategies position

Prentice Hall 2003Chapter 623 International Entry Strategies: Advantages and Critical Success Factors (contd.) StrategyAdvantagesCritical Success Factors Joint venturesInsider access to marketsStrategic fit and complementarity Share costs and risk of partner, markets, products Leverage partner’s skill base,Ability to protect technology technology, local contactsCompetitive advantage Ability to share control Cultural adaptability of partners Wholly ownedRealize all revenues and Ability to access and control subsidiaries control economic, political and currency Global economies of scale risk Strategic coordinationAbility to get local acceptance Protect technology andRepatriability of profits skill base Acquisition provides rapid entry into established market

Prentice Hall 2003Chapter 624 Factors Affecting Choice of International Entry Mode (Exhibit 6-8) Factor Category Firm Factors Examples  International experience  Core competencies  Core capabilities  National culture of home country  Corporate culture  Firm strategy, goals, and motivation

Prentice Hall 2003Chapter 625 Factors Affecting Choice of International Entry Mode (contd.)  Industry Factors  Location Factors  Industry globalization  Industry growth rate  Technical intensity of industry  Extent of scale and location economies  Country risk  Cultural distance  Knowledge of local market  Potential of local market  Competition in local market

Prentice Hall 2003Chapter 626 Factors Affecting Choice of International Entry Mode (contd.)  Venture-specific Factors  Value of firm – assets risked in foreign location  Extent to which know-how involved in venture is informal (tacit)  Costs of making or enforcing contracts with local partners  Size of planned foreign venture  Intent to conduct research and development with local partners

Prentice Hall 2003Chapter 627 Strategic Choice The strategic choice of one or more of the entry strategies will depend on 1)a critical evaluation of the advantages (and disadvantages of each in relation to the firm’s capabilities, 2)the critical environmental factors, and 3)the contribution that each choice would make to the overall mission and objectives of the company.

Prentice Hall 2003Chapter 628 Alliance-based Entry Modes Alliance-based entry modes are more suitable under the following conditions: Physical, linguistic, and cultural distance between the home and host countries is high The subsidiary would have low operational integration with the rest of the multinational operations The risk of asymmetric learning by the partner is low The company is short of capital Government regulations require local equity participation