International Management

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Chapter 6:

Formulating Strategy

Chapter Learning Goals

Understand why companies engage in international business.

Learn the steps in global strategic planning and the models available to direct the analysis and decision making involved.

Appreciate the techniques of environmental assessment, internal and competitive analysis, and how those results can be used to judge the relative opportunities and threats to be considered in international strategic plans.

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Chapter Learning Goals

Profile the types of strategies available to international managers—both on a global level and on the level of specific entry strategies for different markets.

Gain insight into the issues managers face when strategic planning for the emerging market.

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Opening Profile: Global Companies Take Advantage of Opportunities in South Africa

Businesses are taking advantage of opportunities because of the legal protection of property, labor productivity, low tax rates, reasonable regulation, a low-level of corruption and good access to credit, as factors contributing to the country’s investment climate.

threats include the low level of skills and education of workers, labor regulation, exchange rate instability, and crime. Nevertheless, the business climate is favorable.

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Opening Profile: Global Companies Take Advantage of Opportunities in South Africa

global companies with a presence in South Africa all cite numerous advantages for setting up shop in the country, from low labor costs to excellent infrastructure – and a base to export products internatioally .

According to South Africa’s Chamber of Commerce, nearly 50% of the chamber’s members are Fortune 500 companies, and that over 90% operate beyond South Africa’s borders into southern Africa, sub-Saharan Africa and across the continent.

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Chapter Learning Goals

Understand why companies engage in international business.

Strategic Planning and Strategy

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Strategic Planning

More complex than domestic strategic planning because of more complex variables

Strategy

The basic means by which the firm competes

Reasons for Going International

Reactive/Defensive

Proactive/Aggressive

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Globalization of competitors

Trade barriers

Regulations and restrictions

customer demands

Economies of scale

Growth opportunities

Resource access and cost savings

incentives

Management in Action: Mexico’s Cemex

Until 2009, aggressively grew through acquisitions; Rinker Group in Australia, RMC in Britain

From expansion  cost-cutting and retrenchment

Selling assets, negotiating with creditors, cutting workforce

As of August 2011, Cemex had secured a $15 billion restructuring deal and cut 11% of its workforce worldwide

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Strategic Management Process

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The global formulation process parallels the domestic process, but it is more complex because of the greater difficulty in gaining accurate and timely information, the diversity of geographic locations, and the differences in political, legal, cultural, market, and financial processes.

The strategic planning process identifies potential opportunities for (1) appropriate market expansion, (2) increased profitability, and (3) new ventures for exploiting strategic advantages .

Strategic Management Process

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EXHIBIT 6-1 The Strategic Management Process

This figure demonstrates the process is comprised of two primary phases: planning and implementation .

In reality, the stages depicted in this slide are rarely so linear. Instead, the process in continuous and intertwined .

Steps in Developing International and Global Strategies

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Let’s Look

Mission and Objectives

Environmental Assessment and Scanning

Internal and Competitive Analysis

Global Integrative and Entry Strategy Alternatives

Strategic Choice, Implementation, Feedback, and Control

Step 1: Establish Mission and Objectives

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The mission for an organization defines the company’s function in society. It determines the company’s direction and provides a basis for strategic decision making. Objectives flow from the mission .

Marketing

Worldwide, regional, national market share

Production

Production volume

Finance

Tax burden

Economies of scale

Capital structure

Step 1: Establish Mission and Objectives

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profitability

ROA

R & D

Global patents

ROE

ROI

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Step 2: Assess External Environment

There are multiple variables and multiple levels to assess.

Environmental Scanning Variables

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scanning should cover these major variables. Perhaps the most important of these is conducting an international competitor analysis, which entails answering questions such as: Will the infrastructure support new companies in that industry? Is there room for additional competition? What is the relative supply and demand for the proposed product or service? What are your competitors’ positions, their goals and strategies, and their strengths and weaknesses, relative to those of our firm?

International Competition

Nationalism

Technological, Legal, Physical Restraints

Political and Economic Risk

Institutional Effects on International Competition

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Attractiveness of Overseas Markets

The extent to which countries have institutions to promote the rule of law to outside investors

Entry Barriers and Industry Attractiveness

Creating barriers to entry in certain industries and making those industries more attractive (profitable) for incumbent firms

Institutional Effects on International Competition

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Antidumping as an Entry Barrier

The current U.S. antidumping laws place a foreign entrant at a disadvantage if accused of “dumping ”.

Step 3: Analyze Internal Factors

Internal Analysis

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Key Success Factors:

Technological capability: Apple

Distribution channels: Wal-Mart

Promotion capabilities: Disney

Internal analysis involves weighing the company’s options relative to its strengths and weaknesses .

Company’s must identify their key success factors and determine how they can help the firm exploit foreign opportunities.

Step 3: Analyze Internal Factors

Competitive Analysis

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Distinctive competencies

SWOT analysis

Comparative advantage

E-Business

Executives assess the firm’s capabilities and key success factors compared to those of its competitors .

This process enables strategic planners to determine where the firm has distinctive competencies that might lead to sustainable competitive advantage.

Most companies develop their strategies around these distinctive competencies, or key strengths. They are usually difficult for competitors to imitate .

Strategic Decision-Making Models

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global, regional, and country factors and risks are part of the considerations in an institution-based theory of existing and potential risks and influences on the host area.

The firm’s competitive position in its industry can be reviewed using Porter’s industry-based five-forces model. The five forces are (1) the level of competition already in the industry, (2) ease of entry into the field, (3) how much power suppliers in the industry have, (4) how much power buyers in the industry have, and (5) the extent of substitute products available.

Strategic Decision-Making Models

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EXHIBIT 6-6 A Hierarchical Model of Strategic Decision Making

This resource based-view entails considering the unique value of the firm’s competencies and that of its products or services.

Step 4: Evaluate Global and International Strategic Alternatives

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The strategic planning process involves considering the advantages (and disadvantages) of strategic alternatives.

While weighing alternatives, managers take into account the goals of their firms and the competitive status of other firms in the industry .

Alternative Strategies

Global

Regionalization/Localization

Global Integrative

Pressures to Globalize

Increasing competitive clout resulting from regional trading blocs

Declining tariffs

Information technology explosion

Companies work to increase global economies of scale by standardizing products, offshoring manufacturing, and international cash flows.

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Regionalization/Localization

When competitiveness is determined on a country-by-country basis rather than on a global basis, regional strategies are more appropriate than globalization.

Local markets are linked together within a region, allowing local responsiveness.

The impetus:

Unique consumer preferences

Domestic subsidies

New production technologies

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Cage Distances Between Countries

cultural Distance

Administrative Distance

Geographical distance

Economic Distance

Global Integrative Strategies

Many MNCs have developed their global operations to the point of full integration, including suppliers, productive facilities, marketing and distribution outlets, and contractors around the world .

Example: Dell

Factories in Ireland, Brazil, China, and so on

Assembly and delivery system from 47 locations around the world

Little inventory, ability to change operations quickly

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E-Business for Global Expansion Can facilitate rapid expansion.

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See EXHIBIT 6-7 Benefits of B2B

However, it also is a strategy with several challenges, including cultural differences, varying business models, and questions over which country has jurisdiction and responsibility for cross-border electronic transactions.

E-business is really a new industry, with a different pool of competitors and new sets of environmental issues.

E-Global or E-Local?

E-Global When:

E-Local When:

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Trade is global in scope.

Business does not involve delivering orders.

When the business model can be easily hijacked by local competitors .

Production and consumption are regional in scope.

customer behavior and market structures differ across regions, but are similar within a region .

Supply-chain management is very important to success.

Step 5: Evaluate Entry Strategy Alternatives

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Let’s Look

Exporting

Licensing

Franchising

Contract Manufacturing

Offshoring

Service Sector Outsourcing

Turnkey Operations

Management Contracts

International Joint Ventures

Fully Owned Subsidiaries

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Foreign Market Options: Entry without Ownership

Exporting

direct

Sales directly to customers

Indirect

Sales through agent or distributor

intercorporate transfer

Sales to affiliated unit

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Exporting

Pluses

Fairly inexpensive

Easy foreign access

No ownership risks

Minuses

Missed location economics

logistical difficulties

Transportation

Communication

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Foreign Market Options: Entry without Ownership (cont’d)

licensing

Selling the rights to use brand names, technology, or other intellectual property

franchising

Contractual right to use methods, procedures, trademarks, market strategies

management contracts

Specific services for established fee

turnkey projects

Contract to design and build facility

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Licensing

Pluses

Fairly inexpensive

Useful where trade barriers/tariffs preclude exporting

Leverages local economics without ownership risk

Minuses

Risky where intellectual property protection weak

Control ceded to licensee may inhibit coordination

May create new competitors

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Franchising

Pluses

low cost, low risk

Offers more control than licensing

Builds presence fast

Minuses

Control still an issue

franchise may not be motivated to adhere to franchiser's standards

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Management Contracts

Pluses

Very inexpensive

Low-risk revenue

Minuses

No long-term presence

May create competitors

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Turnkey Projects

Pluses

An option if direct investment is out

Lowers risk if long-term instability exists

Minuses

No long-term presence

May create competitors

Vulnerable to political and legislative changes

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Foreign Market Options: Entry with Ownership (cont’d)

Greenfield Approach

wholly owned subsidiary starting from scratch

Acquisition Approach

Wholly owned subsidiary through purchase

Joint ventures

Joint creation of separate legal entity (split varies)

Other Strategic Alliances

Production, research and development, financial, marketing

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Greenfield Subsidiaries

Pluses

Allows high control

Offers location economics

Can pick own site, workers, technology

Minuses

Very expensive

Time-consuming setup

Requires international expertise

Ownership risk

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Acquired Subsidiaries

Pluses

Allows high control

rapid market entry

Offers location economics

Minuses

Risky due to ownership

cultural differences may be formidable

Potential buying problems

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Joint Ventures

Pluses

Less financial risk than subsidiary

Leverages partner’s resources , know-how

Minuses

Risks giving some control or technology to partner

Still some ownership risk

Comparative Management in Focus: Strategic Planning for Emerging Markets

Increasing business opportunities for companies wanting to set up operations in or export to emerging markets

Different countries are at different levels of development and have different risk/return profiles

Usually entails higher risk

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Emerging Market Attractiveness for Retail Strategies

Brazil 1 5

Uruguay 2 8

Chile 3 6

India 4 3

Kuwait 5 2

China 6 1

Saudi Arabia 7 4

Peru 8 9

U.A.E. 9 7

Turkey 10 18

Russia 14 10

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Country 2011Rank 2010 Rank

Comparative Management in Focus: Strategic Planning for Emerging Markets

One size does not fit all: different infrastructure, socio-economic and regulatory challenges, different environmental and geographic constraints

Potential for innoation , not just new customers

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Top Three Strategic Objectives

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Operating Model for Emerging Markets

The Influence of Culture on Strategic Choice and Timing Entry

China and Japan have longer-term time horizons than the United States.

High uncertainty avoidance cultures (e.g., Latin American, African countries) prefer non-equity modes of entry.

High power distance cultures (e.g., Arab countries and Japan) tend to use more equity modes of entry abroad .

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Conclusion

Proactive and reactive reasons for going international

Rational planning; mission and objectives; threats and opportunities; internal strengths and weaknesses; entry strategies

Competitive analysis

Globalization vs. regionalization

E-business