Chapter 6 Formulating Strategy

1. Chapter 6Formulating Strategy PowerPoint by Kristopher Blanchard North Central University

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.

3. Strategic planning • Process of determining an organization’s 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

4. 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

5. 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

6. 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

7. Reasons for Going International AOL Europe is emerging as an upbeat counterpoint to AOL’s 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

8. Reasons for Going International • Reactive or defensive • Proactive or aggressive • The threat of decreased competitiveness is the overriding reason many large companies adopt a strategy of aggressive globalization

9. External Environmental Scanning for MNC Opportunities and Threats Internal Resource Analysis of MNC strengths and weaknesses Strategic Planning GOALS IMPLEMENTATION Basic Elements of Strategic Planning for International Management

10. Strategic Formulation Process

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

12. Mission and Objective • Mission of an organization is its overall raison d’etre or the function it performs in society • Objectives flow from mission and guide the formulation of international strategy Return

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 • International competition • Environmental scanning Return

14. Basic Steps in Formulating Strategy • Environmental Scanning • 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 • Key factor for success (KFS) • Factor necessary to effectively compete in a market niche • Must have people and resources to develop and sustain the necessary KFSs

15. 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 • Strengths and weaknesses of the firm’s financial and managerial expertise and functional capabilities are evaluated to determine the key success factors

16. Competitive Analysis • Assess the firm’s 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

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

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

19. 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

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.

21. 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

22. Entry Strategies

23. 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

24. Advantages of Joint Ventures Improvement of efficiency Access to knowledge Joint Ventures Political factors Collusion or restriction of competition

25. 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

26. 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

27. 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

28. 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?

29. 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

30. 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

31. Entry Strategy Alternatives

32. 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

33. 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

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

35. Looking Ahead • Chapter 7 – Global Alliances and Strategy Implementation • Strategic Alliances • Strategic Implementation

36. Reactive • Globalization of competitors • Trade barriers • Regulations and restrictions • Customer demands Return

37. Proactive • Economies of scale • Growth opportunities • Resource access and cost savings • Incentives 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. Return

38. 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 far-flung operations easier and also increases the commonality of consumer tastes Return

39. 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. Return