1. Chapter 6 Formulating Strategy
PowerPoint by
Kristopher Blanchard
North Central University
© 2006 Prentice Hall

2. 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.
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3. Process takes on added dimensions when companies go international
Strategic planning
Process of determining an organization’s basic mission and long-term objectives, then implementing a plan of action for attaining these goals
Process takes on added dimensions when companies go international
Growing Need for Strategic Planning
MNC must keep track of diversified operations
Continually changing international environment
FDI has grown faster than both trade and world gross domestic product
Benefits of Strategic Planning
Evidence is mixed
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4. Approaches to Formulating and Implementing Strategy
Economic Imperative
Worldwide strategy based on cost leadership, differentiation, and segmentation
Political Imperative
Strategic formulation and implementation utilizing strategies that are country-responsive and designed to protect local market niches
Quality Imperative
Strategic formulation and implementation utilizing strategies of total quality management to meet or exceed customers’ expectations and continuously improve products and/or services
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5. Approaches to Formulating and Implementing Strategy (cont.)
Administrative Coordination
Strategic formulation and implementation in which the MNC makes strategic decisions based on the merits of the individual situation rather than using a predetermined economically or politically driven strategy
Large MNCs try to combine the economic, political, quality, and administrative approaches to strategic planning
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6. Strategic Predispositions Ethnocentric predisposition
Nationalistic philosophy of management whereby the values of the parent company guide the strategic decisions
Polycentric predisposition
Philosophy of management whereby strategic decisions are tailored to the cultures of the countries where the MNC operates
Regiocentric predisposition
Philosophy of management whereby the firm tries to blend its own interests with those of its subsidiaries on a regional basis
Geocentric predisposition
Philosophy of management whereby the company tries to integrate a global systems approach to decision making
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7. 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.
- September 8, 2003
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8. Reasons for Going International
Reactive or defensive
-Globalization, Trade Barriers, Regulations & Restrictions, Customer Demands (McDonald’s supplies)
The threat of decreased competitiveness is the overriding reason many large companies adopt a strategy of aggressive globalization
Proactive or aggressive: Economies of Scale, Growth Opportunities, Resource Access & Cost Savings, Incentives (tax exemptions, tax holidays -Poland
Companies decide to go global for a number of reasons. This slide highlights the two broad categories as well as the main reason.
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9. 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.
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10. Basic Elements of Strategic Planning for International Management
External Environmental Scanning
for MNC Opportunities and Threats
Internal Resource Analysis of
MNC strengths and weaknesses
Strategic Planning
GOALS
IMPLEMENTATION
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11. 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.
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12. 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
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13. 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.
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14. 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 –home govern. Policies: import duties, protectionism
International competition (conducting a global competitor analysis – industry structure)
Environmental scanning –who are current competitors?: positions, goals, strategies
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15. Basic Steps in Formulating Strategy
Environmental Scanning (see Exh 6.4, GESP p 239)
Process of providing management with accurate forecasts of trends related to external changes in geographic areas where the firm currently is doing business and/or is considering setting up operations
Internal Resource Analysis
Helps a firm to evaluate its current managerial, technical, material, and financial strengths and weaknesses- Mitsubishi Trading Co. employs >6,000 market analysts worldwide to gather, feed & analyse market info to parent co.
KS)
Factor necessary to effectively compete in a market niche
Must have people and resources to develop and sustain the necessary KFSs
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16. 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.
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17. 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
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18. 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
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19. Strategy Implementation
Process of providing goods and services in accord with a plan of action
Location Consideration for Implementation
The Country
Industrialized countries are the recipients of most investments by MNCs
Offer the largest markets for goods and services
May have legal restrictions on imports that encourage a local presence
Local Issues
Access to markets
Proximity to competitors
Availability of transportation and utilities
Nature of of the workforce
Cost of doing business
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20. Strategy Implementation-cont..
Ownership and Entry Consideration for Implementation
Wholly Owned Subsidiary
Overseas operation that is totally owned and controlled by an MNC
Increasingly acquiring subsidiaries through merger or acquisition
Provides MNC with complete control
Joint Venture
Agreement in which two or more partners own and control an overseas business
Nonequity venture - one group provides service to another
Equity joint venture - involves financial investment
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21. 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.
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22. 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
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23. Regionalization Unique consumer preferences resulting from cultural or national differences: whitening cream as make ups for Asian women Domestic subsidies: tax exemptions New production technologies that facilitate product variation for less cost than before.
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24. 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
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25. 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.
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26. Ownership and Entry Consideration for Implementation (cont.)
Licensing
Agreement that allows one party to use an industrial property right in exchange for payment to the other party
Used under a number of common conditions
Franchising
Business arrangement under which one party (the franchisor) allows another (the franchisee) to operate an enterprise using its trademark, logo, product line, and methods of operation in return for a fee
Export/Import
Useful for firms wanting to begin international expansion with a minimum investment
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27. Advantages of Joint Ventures
Improvement
of efficiency
Access to
knowledge
Joint
Ventures
Political
factors
Collusion or
restriction of
competition
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28. Role of the Functional Areas in Implementation
Marketing
Strategy implementation must be determined on a country-by-country basis
Built around the “four Ps”
Product, price, promotion and place
Usually dominates strategy implementation
Production
Consideration of worldwide production is important
Multidomestic company
Firm that operates production plants in different countries but makes no attempt to integrate overall operations
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29. Role of the Functional Areas in Implementation (cont.)
Finance
Strategy implementation developed at the home office and carried out by the overseas affiliates
Transferring funds from one place to another, or borrowing funds in the international money markets, often is less expensive than relying on local sources
Must be concerned about volatile monetary exchange rates
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30. 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.” -
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.
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31. 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? Horizontal industry helping many small businesses do their exchanges.
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32. 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
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33. 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
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34. Entry Strategy Alternatives
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35. 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
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36. 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.
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37. 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.
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38. Looking Ahead Chapter 7 – Global Alliances and Strategy Implementation
Strategic Alliances
Strategic Implementation
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39. Reactive Globalization of competitors Trade barriers
Regulations and restrictions
Customer demands
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40. Proactive Economies of scale Growth opportunities
Resource access and cost savings
Incentives
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41. Globalization
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42. Regionalization
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