Formulating Strategy

1
Formulating Strategy
Chapter 6
2
Chapter 6 - Overview

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

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Strategic Planning and Strategy

• The process by which a firms 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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Reasons for Going International

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

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Reasons for Going International(contd.)

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

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The Strategic Management Process(Exhibit 6-1)
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
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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
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

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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.

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Major Variables Covered in Environmental Scanning

• Political instability
• Currency instability
• Nationalism
• International competition

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Internal Analysis

• Internal analysis determines which areas of the
  firms 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 companys resources and
  operations, and global synergies

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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.

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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.

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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.

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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

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Benefits of B2B(Exhibit 6-6)
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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?

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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

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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

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Entry Strategy Alternatives(In order of
ascending risk)

• Exporting
• Licensing
• Franchising
• Contract manufacturing
• Turnkey operations
• Management contracts
• International joint ventures (IJVs)
• Fully owned subsidiaries

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International Entry Strategies Advantages and
Critical Success Factors(Exhibit 6-7)
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
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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
23
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 partners 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
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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

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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

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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

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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 firms
  capabilities,
• the critical environmental factors, and
• the contribution that each choice would make to
  the overall mission and objectives of the company.

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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