Chapter 6 Formulating Strategy

PowerPoint by Kristopher Blanchard North Central University

2006 Prentice Hall

6-1

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.

2006 Prentice Hall

6-2

Strategic planning Process of determining an organizations basic mission and long-term objectives, then implementing a plan of action for attaining these goals Process takes on added dimensions when companies go international Growing Need for Strategic Planning MNC must keep track of diversified operations Continually changing international environment FDI has grown faster than both trade and world gross domestic product Benefits of Strategic Planning Evidence is mixed

2006 Prentice Hall

6-3

Approaches to Formulating and Implementing Strategy

Economic Imperative
Worldwide strategy based on cost leadership, differentiation, and segmentation

Political Imperative
Strategic formulation and implementation utilizing strategies that are country-responsive and designed to protect local market niches

Quality Imperative
Strategic formulation and implementation utilizing strategies of total quality management to meet or exceed customers expectations and continuously improve products and/or services
2006 Prentice Hall 6-4

Approaches to Formulating and Implementing Strategy (cont.)

Administrative Coordination Strategic formulation and implementation in which the MNC makes strategic decisions based on the merits of the individual situation rather than using a predetermined economically or politically driven strategy Large MNCs try to combine the economic, political, quality, and administrative approaches to strategic planning

2006 Prentice Hall

6-5

Strategic Predispositions Ethnocentric predisposition

Nationalistic philosophy of management whereby the values of the parent company guide the strategic decisions

Polycentric predisposition
Philosophy of management whereby strategic decisions are tailored to the cultures of the countries where the MNC operates

Regiocentric predisposition
Philosophy of management whereby the firm tries to blend its own interests with those of its subsidiaries on a regional basis

Geocentric predisposition
Philosophy of management whereby the company tries to integrate a global systems approach to decision making

2006 Prentice Hall

6-6

Reasons for Going International

AOL Europe is emerging as an upbeat counterpoint to AOLs sagging business in the United States. Partly a matter of timing, as Europe follows the United States online but also reflecting differences in strategy and execution. AOL Europe lobbied hard to establish rules guaranteeing AOL Europe equal access to telecommunications networks. - www.nytimes.com, September 8, 2003
2006 Prentice Hall 6-7

Reasons for Going International

Reactive or defensive -Globalization, Trade Barriers, Regulations & Restrictions, Customer Demands (McDonalds supplies)
The threat of decreased competitiveness is the overriding reason many large companies adopt a strategy of aggressive globalization Proactive or aggressive: Economies of Scale, Growth Opportunities, Resource Access & Cost Savings, Incentives (tax exemptions, tax holidays Poland
2006 Prentice Hall 6-8

From rain forests to remote Chinese villages, the queen of cosmetics (Avon) is cleaning up across the globe. China is our single biggest growth opportunity. [Now] we have beauty boutiques, with 5,000 store representatives in every province including Tibet. A corollary on the [WTO] bill said that China would reestablish the legitimacy of direct selling in the marketplace. It could be in the next couple of years. Susan Kropf, President,Avon Products,January 12, 2004.
2006 Prentice Hall 6-9

Basic Elements of Strategic Planning for International Management

External Environmental Scanning for MNC Opportunities and Threats

Internal Resource Analysis of MNC strengths and weaknesses

Strategic Planning GOALS

IMPLEMENTATION

2006 Prentice Hall

6-10

Strategic Formulation Process

2006 Prentice Hall

6-11

Strategic Formulation Process

First phase is the planning phase company establishes (or clarifies) its mission and overall objective Second part is the implementation phase requires the establishment of the structure, systems, processes suitable to make the strategy work

2006 Prentice Hall

6-12

Mission and Objective

Mission of an organization is its overall raison detre or the function it performs in society Objectives flow from mission and guide the formulation of international strategy
Return
2006 Prentice Hall 6-13

Environmental Assessment
Gathering information and forecasting relevant trends, competitive actions and circumstances that will affect operations in a geographic area; should include:
Political instability Currency instability Nationalism home govern. Policies: import duties, protectionism International competition (conducting a global competitor analysis industry structure) Environmental scanning who are current competitors?: positions, goals, strategies
Return
2006 Prentice Hall 6-14

Basic Steps in Formulating Strategy

Environmental Scanning (see Exh 6.4, GESP p 239)
Process of providing management with accurate forecasts of trends related to external changes in geographic areas where the firm currently is doing business and/or is considering setting up operations

Internal Resource Analysis

Helps a firm to evaluate its current managerial, technical, material, and financial strengths and weaknesses- Mitsubishi Trading Co. employs >6,000 market analysts worldwide to gather, feed & analyse market info to parent co. KS)
Factor necessary to effectively compete in a market niche Must have people and resources to develop and sustain the necessary KFSs
2006 Prentice Hall 6-15

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 Strengths and weaknesses of the firms financial and managerial expertise and functional capabilities are evaluated to determine the key success factors
2006 Prentice Hall 6-16

Competitive Analysis
Assess the firms capabilities and key success factors compared to those of its competitors Enables strategic planners to determine where the firm has distinctive competencies that will give it an advantage Most companies develop strategies around key strengths or core competencies This stage is often called a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis

2006 Prentice Hall

6-17

Global/International Strategic Alternatives

Global Strategic Alternatives determines the overall approach to the global marketplace Entry Strategy Alternatives determine what specific entry strategy is appropriate for each country the firm plans to operate in

2006 Prentice Hall

6-18

Strategy Implementation Process of providing goods and services in accord with a plan of action Location Consideration for Implementation
The Country
Industrialized countries are the recipients of most investments by MNCs
Offer the largest markets for goods and services May have legal restrictions on imports that encourage a local presence

Local Issues
Access to markets Proximity to competitors Availability of transportation and utilities Nature of of the workforce Cost of doing business
6-19

2006 Prentice Hall

Strategy Implementation-cont..
Ownership and Entry Consideration for Implementation
Wholly Owned Subsidiary
Overseas operation that is totally owned and controlled by an MNC Increasingly acquiring subsidiaries through merger or acquisition Provides MNC with complete control

Joint Venture
Agreement in which two or more partners own and control an overseas business Nonequity venture - one group provides service to another Equity joint venture - involves financial investment

2006 Prentice Hall

6-20

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 multi-local) is where local markets are linked together within a region, allowing more local responsiveness and specialization.

2006 Prentice Hall

6-21

GLOBALIZATION 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 farflung operations easier and also increases the commonality of consumer tastes
2006 Prentice Hall 6-22

Regionalization Unique consumer preferences resulting from cultural or national differences: whitening cream as make ups for Asian women Domestic subsidies: tax exemptions New production technologies that facilitate product variation for less cost than before.
2006 Prentice Hall 6-23

Integrative Strategies
Multinational Corporations will develop their operations to the point of being fully integrated
Both vertical and horizontal Includes suppliers, productive facilities, marketing and distribution outlets, and contractors

Some move quickly to the stage of integration through acquisition Other companies use a variety of strategies and enter the country in stages
2006 Prentice Hall 6-24

Entry Strategies

2006 Prentice Hall

6-25

Ownership and Entry Consideration for Implementation (cont.)

Licensing
Agreement that allows one party to use an industrial property right in exchange for payment to the other party Used under a number of common conditions

Franchising
Business arrangement under which one party (the franchisor) allows another (the franchisee) to operate an enterprise using its trademark, logo, product line, and methods of operation in return for a fee

Export/Import
Useful for firms wanting to begin international expansion with a minimum investment

2006 Prentice Hall

6-26

Advantages of Joint Ventures

Improvement of efficiency Access to knowledge

Joint Ventures

Political factors

Collusion or restriction of competition

6-27

2006 Prentice Hall

Role of the Functional Areas in Implementation

Marketing
Strategy implementation must be determined on a country-by-country basis Built around the four Ps
Product, price, promotion and place

Usually dominates strategy implementation

Production
Consideration of worldwide production is important Multidomestic company
Firm that operates production plants in different countries but makes no attempt to integrate overall operations

2006 Prentice Hall

6-28

Role of the Functional Areas in Implementation (cont.)

Finance Strategy implementation developed at the home office and carried out by the overseas affiliates Transferring funds from one place to another, or borrowing funds in the international money markets, often is less expensive than relying on local sources Must be concerned about volatile monetary exchange rates

2006 Prentice Hall

6-29

Using E-business for 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

2006 Prentice Hall

6-30

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 exchangebuilders? Horizontal industry helping many small businesses do their exchanges.

2006 Prentice Hall

6-31

Conditions Favoring 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

2006 Prentice Hall

6-32

Conditions Favoring 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
2006 Prentice Hall 6-33

Entry Strategy Alternatives

2006 Prentice Hall

6-34

Comparative Management in Focus: Planning for the EU Market

As of May 2004 the European Union is:
A 25-nation unified market A market of more than 400 million people

With the addition of Central and Eastern European countries companies have access to:
The EU Cheaper wages, lower corporate taxes, and educated workforces Eliminated currency risk for Europe

2006 Prentice Hall

6-35

Comparative Management in Focus: Planning for the EU Market

The EU has developed a protectionist wall
Tariffs, quotas, local content laws and competitive tactics Designed to keep the US and Japan out

The EU has created opportunities for nonmembers as well

2006 Prentice Hall

6-36

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 the contribution that each choice would make to the overall mission and objectives of the company.

2006 Prentice Hall

6-37

Looking Ahead
Chapter 7 Global Alliances and Strategy Implementation
Strategic Alliances Strategic Implementation

2006 Prentice Hall

6-38

Reactive
Globalization of competitors Trade barriers Regulations and restrictions Customer demands

Return
2006 Prentice Hall 6-39

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

Return
2006 Prentice Hall 6-40