Formulating Strategy

Chapter 6

Prentice Hall 2003 Chapter 6 1

 Chapter 6 - Overview

 Reasons for going international

 Strategic formulation process
 Steps in developing international and global
strategies

Prentice Hall 2003 Chapter 6 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.
Prentice Hall 2003 Chapter 6 3
 Reasons for Going International

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

Prentice Hall 2003 Chapter 6 4

 Reasons for Going International
(contd.)

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

Prentice Hall 2003 Chapter 6 5

 The Strategic Management Process
(Exhibit 6-1)

Define/clarify mission
and objectives

Strategic Planning Process Assess environment for

threats, opportunities

Assess internal strengths

and weaknesses

Consider alternative strategies

using competitive analysis

Choose strategy

Prentice Hall 2003 Chapter 6 6

 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

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 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 8

 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

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

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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)

Better relationships with distributors/channels

Improved customer loyalty

Rapid entrance into new geographical markets

Better customer service

Lower operational costs

Expanded sales channel

0 10 20 30 40 50 60 70

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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

Prentice Hall 2003 Chapter 6 18

 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 exitTariffs 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

Prentice Hall 2003 Chapter 6 22

 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
Prentice Hall 2003 Chapter 6 23
 Factors Affecting Choice of International
Entry Mode
(Exhibit 6-8)

Examples
Factor Category
 International
Firm Factors 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
Industryglobalization
Factors
 Industry growth rate
 Technical intensity of industry


 Location Factors
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.)


 Value of firm – assets
Venture-specific risked in foreign location
Factors
 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
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 27

 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

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