Prentice Hall 2003 Chapter 6 1

Formulating Strategy

Chapter 6

Prentice Hall 2003 Chapter 6 2

Chapter 6 - Overview

Reasons for going international Strategic formulation process Steps in developing international and global

strategies

Prentice Hall 2003 Chapter 6 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 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 2003 Chapter 6 4

Reasons for Going International

Reactive Reasons• Globalization of competitors• Trade barriers• Regulations and restrictions• Customer demands

Prentice Hall 2003 Chapter 6 5

Reasons for Going International(contd.)

Proactive Reasons• Economies of scale• Growth opportunities• Resource access and cost savings• Incentives

Prentice Hall 2003 Chapter 6 6

The Strategic Management Process(Exhibit 6-1)

Define/clarify missionand objectives

Assess environment forthreats, opportunities

Assess internal strengthsand weaknesses

Consider alternative strategiesusing competitive analysis

Choose strategy

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Prentice Hall 2003 Chapter 6 7

The Strategic Management Process(contd.)

Implement strategy throughcomplementary structure, systems,

and operational processes

Set up control and evaluationsystems to ensure success,

feedback to planning

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Prentice Hall 2003 Chapter 6 8

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 2003 Chapter 6 9

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 2003 Chapter 6 10

Major Variables Covered in Environmental Scanning

Political instability Currency instability Nationalism International competition

Prentice Hall 2003 Chapter 6 11

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 2003 Chapter 6 12

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 2003 Chapter 6 13

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 2003 Chapter 6 14

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 2003 Chapter 6 15

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.”

www.IBM.com

Prentice Hall 2003 Chapter 6 16

Benefits of B2B(Exhibit 6-6)

0 10 20 30 40 50 60 70

Better relationships with distributors/channels

Improved customer loyalty

Rapid entrance into new geographical markets

Better customer service

Lower operational costs

Expanded sales channel

Prentice Hall 2003 Chapter 6 17

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 2003 Chapter 6 18

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 2003 Chapter 6 19

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 2003 Chapter 6 20

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 2003 Chapter 6 21

International Entry Strategies: Advantages and Critical Success Factors

(Exhibit 6-7)Strategy Advantages Critical Success Factors

Exporting Low risk Choice of distributorNo long-term assets Transportation costsEasy 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 accessSmall business expansion

Prentice Hall 2003 Chapter 6 22

International Entry Strategies: Advantages and Critical Success Factors

(contd.)Strategy Advantages Critical Success Factors

Contract Limited cost and risk Reliability and quality ofmanufacturing 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-termcontracts strategies position

Prentice Hall 2003 Chapter 6 23

International Entry Strategies: Advantages and Critical Success Factors

(contd.)

Strategy Advantages Critical Success Factors

Joint ventures Insider access to markets Strategic fit and complementarityShare costs and risk of partner, markets, productsLeverage partner’s skill base, Ability to protect technology technology, local contacts Competitive advantage

Ability to share controlCultural adaptability of partners

Wholly owned Realize all revenues and Ability to access and controlsubsidiaries control economic, political and currency

Global economies of scale riskStrategic coordination Ability to get local acceptanceProtect technology and Repatriability of profits skill baseAcquisition provides rapid entry into established market

Prentice Hall 2003 Chapter 6 24

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 2003 Chapter 6 25

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 2003 Chapter 6 26

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 2003 Chapter 6 27

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 2003 Chapter 6 28

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