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 missionand objectives

Assess environment forthreats, opportunities

Assess internal strengthsand weaknesses

Consider alternative strategiesusing competitive analysis

Choose strategy

Str

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ing

Pro

cess

The Strategic Management Process(contd.)

Implement strategy throughcomplementary structure, systems,

and operational processes

Set up control and evaluationsystems to ensure success,

feedback to planning

Impl

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ss

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

StrengthsWeaknessesOpportunitiesThreats

SWOT Matrix for Strategy Formulation

Internal FactorsExternalFactors

Strengths (S) Weaknesses(W)

Opportunities(O)

SO strategyMaxi-Maxi

WO strategyMini-Maxi

Threats (T) ST strategyMaxi-Mini

WT strategyMini-Mini

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 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

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

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

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

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.

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