Formulating Strategy Chapter 6

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.

Reasons for Going International Reactive Reasons Globalization of competitors Trade barriers Regulations and restrictions Customer demands

Reasons for Going International (contd.) Proactive Reasons Economies of scale Growth opportunities Resource access and cost savings Incentives

The Strategic Management Process (Exhibit 6-2) Define/clarify mission and objectives Assess environment for threats, opportunities Strategic Planning Process Assess internal strengths and weaknesses Consider alternative strategies using competitive analysis Choose strategy

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

Global Corporate Objective Dimensions Profitability Marketing Production Finance Research & Development

Physical and Societal Influences on Strategic Formulation Process

Competitive Environment Influences on Strategic Formulation Process

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

SWOT Analysis Strengths Weaknesses Opportunities Threats

SWOT Matrix for Strategy Formulation

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.

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.

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.

The Usual Pattern of Internationalization

Pattern of Internationalization Passive to active expansion * Most new companies are established for domestic needs. * They response foreign opportunity passively at first. * After experiencing success, they search opportunities actively.

Pattern of Internationalization External to internal handing of operations * The use of intermediaries during early stages. * Successful experiences make companies more likely to handle the operations with their own staff.

Pattern of Internationalization Deepening mode of commitment * Limited foreign functions, usually export and import * Limited foreign production and multiple functions * Extensive production abroad with FDI and all functions.

Pattern of Internationalization Geographic diversification * Doing business in one or very few countries at the beginning * Tending to go to the locations that are geographically close and with similarity * Moving to more distant countries with less similarities.

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

International Entry Strategies: Advantages and Critical Success Factors (Exhibit 6-8) Strategy Advantages Critical Success Factors Exporting Low risk Choice of distributor No long-term assets Transportation costs Easy market access and exit Tariffs and quotas Licensing No asset ownership risk Quality and trustworthiness of licensee Fast market access Appropriability of intellectual property Avoids regulations and tariffs Host-country royalty limits Franchising Little investment or risk Quality control of franchisee and franchise operations Fast market access Small business expansion

International Entry Strategies: Advantages and Critical Success Factors (contd.) Strategy Advantages Critical Success Factors Contract Limited cost and risk Reliability and quality of manufacturing local contractor Short-term commitment Operational control and human rights issues Turnkey operations Revenue from skills and Reliable infrastructure technology where FDI Sufficient local supplies and labor restricted Repatriable profits Reliability of any govt. partner Management Low-risk access to further Opportunity gain longer-term contracts strategies position

International Entry Strategies: Advantages and Critical Success Factors (contd.) Strategy Advantages Critical Success Factors Joint ventures Insider access to markets Strategic fit and complementarity Share costs and risk of partner, markets, products Leverage partner’s skill base, Ability to protect technology technology, local contacts Competitive advantage Ability to share control Cultural adaptability of partners Wholly owned Realize all revenues and Ability to access and control subsidiaries control economic, political and currency Global economies of scale risk Strategic coordination Ability to get local acceptance Protect technology and Repatriability of profits skill base Acquisition provides rapid entry into established market

Factors Affecting Choice of International Entry Mode (Exhibit 6-9) Factor Category Firm Factors Examples International experience Core competencies Core capabilities National culture of home country Corporate culture Firm strategy, goals, and motivation

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

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

Flow Chart for Choosing Where to Operate

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, and the contribution that each choice would make to the overall mission and objectives of the company.

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