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Formulating Strategy

Chapter 6

Prentice Hall 2003

Chapter 6

Chapter 6 - Overview
Reasons for going international Strategic formulation process Steps in developing international and global strategies

Prentice Hall 2003

Chapter 6

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 Strategic Planning Process Assess environment for threats, opportunities

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

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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
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Prentice Hall 2003

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)

Better relationships with distributors/channels Improved customer loyalty Rapid entrance into new geographical markets Better customer service Lower operational costs Expanded sales channel

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

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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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Prentice Hall 2003

International Entry Strategies: Advantages and Critical Success Factors


Strategy
Exporting

(Exhibit 6-7) Advantages


Low risk No long-term assets Easy market access and exit

Critical Success Factors


Choice of distributor Transportation costs Tariffs and quotas

Licensing

No asset ownership risk


Fast market access Avoids regulations and tariffs

Quality and trustworthiness of licensee Appropriability of intellectual property Host-country royalty limits Quality control of franchisee and franchise operations

Franchising

Little investment or risk


Fast market access Small business expansion

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International Entry Strategies: Advantages and Critical Success Factors


(contd.) Strategy
Contract manufacturing

Advantages
Limited cost and risk Short-term commitment

Critical Success Factors


Reliability and quality of local contractor Operational control and human rights issues Reliable infrastructure Sufficient local supplies and labor Repatriable profits Reliability of any govt. partner

Turnkey operations

Revenue from skills and technology where FDI restricted

Management contracts

Low-risk access to further strategies

Opportunity gain longer-term position

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International Entry Strategies: Advantages and Critical Success Factors


(contd.) Strategy
Joint ventures

Advantages
Insider access to markets Share costs and risk Leverage partners skill base, technology, local contacts

Critical Success Factors


Strategic fit and complementarity of partner, markets, products Ability to protect technology Competitive advantage Ability to share control Cultural adaptability of partners Ability to access and control economic, political and currency risk Ability to get local acceptance Repatriability of profits

Wholly owned subsidiaries

Realize all revenues and control Global economies of scale Strategic coordination Protect technology and 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

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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Location Factors

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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
1) 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.

2) 3)

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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
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