Week 3 MGX5181
• Strategy formation and the international
environment
• Tools for assessment:
This week
• Country attractiveness
– environmental scanning
Next week
• Scenario Planning
• Game theory
• Conceptual mapping
• Options and other tools of assessment
Objectives
• To identify fundamental terms of strategy
• To recognise some of the tools to strategic
planning available to an organisation
• To be able to understand the process of
country attractiveness assessment
• To be able to undertake a country risk
assessment
Vision
• A vision should answer the basic question: “what
do we want to become”.
• The vision is concerned with the strategic intent
of the organisation (Hamel and Prahalad
1989,1994)
• Hamel and Prahalad argued that the vision of the
organisation must relate to its core competences
and to its future environment.
• A international vision is an essential prerequisite
to international strategy and a global vision
essential prerequisite for a global or transnational
strategy
Vision
• Global vision means the whole word is
treated as a potential market, competition
viewed as global, activities configured to
exploit global advantages , activities
globally coordinated and the organisation
has a global philosophy, ethos and outlook.
Mission • Mission answers the question
“What business are we in”.
Rarick and Vitton (1995) found firms with formalised
mission statements have twice the average return on
shareholders’ equity than those without a formalised
mission statement.
According to Dess, Lumpkin & Eisner (2007) effective
mission statement:
• Incorporate the concept of stakeholder management ie meeting
the needs of all stakeholders eg customers, employees,
suppliers, owners etc.
• Reflect an organisations overarching strategic priorities and
competitive positioning.
• Can vary in length and specificity
Strategy Styles • Evolution
Change is a long-term process
• Cognition of what is happening in the world around us
helps in the development of strategy
• Impacted on by culture, dominant strategic logics and
embedded successful recipes (making change hard)
Challenges to change in business (Henderson, Founder BCG)
• Some organisations are seen as too big to fail by
Government and are protected from evolution
• Evolution is a functional narrative – we like to celebrate
those around that are successful even if the reasons for their
success might no longer apply
• Evolution seen as a positive move to a higher form of life
e.g. better than before (but is it?).
Strategy Styles
• Revolution (Gary Hamel, 1996)
Suggested strategy is revolution, everything else is just
tactics. He came up with 10 principles of revolutionary
strategy:
• Strategic planning may be planning but it is not strategic
– Sees strategizing as exploring potentials for revolution
• Strategic planning must be subversive
– Must question the way business is currently done
• The bottleneck is at the top of the bottle
– Top hierarchy may rely on past experience which may be an
obstacle to tomorrow’s success
• Revolutionaries exist in every company
– These can be at any level
Strategy Styles
• Change is not the problem, engagement is
– Engage people to discuss the future and gain their commitment
• Strategy-making must be democratic
– Involve people of all ages, positions and abilities (including
outsiders) not just top level
• Anyone can be a strategy activist
– Revolutionaries are never at the top of the organisation
• Perspective is worth 50 IQ points
– A new perspective enables new opportunities to become visible
• Top down and bottom up are not the alternatives
– Communication must be effective
• You cannot see the end from the beginning
– Open-ended strategy leads to surprises and hard to predict
Global Strategy
• Lasserre (2007) states a global strategy is the way a company defines its long term objectives for the world market. A company must have:: A global ambition
A global strategic position
A global business system
A global organisation
• Perlmutter (1969) argued that the value system of the company, its history and development, its methods and practices, its vision and corporate culture will shape managerial outlook towards global strategy. The EPRG matrix can be used to categorize organisational philosophy:
Global Philosophy
• An ethnocentric philosophy
Predisposition towards home country (based on belief
that home country industry is superior)
• A polycentric philosophy
Orientation orientated towards the host country which
emphasizes adaptation to local conditions in foreign
locations.
• A regiocentric philosophy
An approach that emphasizes an orientation towards a
regional grouping of countries eg Europe, Asia, North
America.
• A geocentric philosophy
Implies a global approach to business.
Global Philosophy
• Each philosophy has implications on likely
strategy of the business adopting it:
Ethnocentric – foreign markets are seen as inferior so
strategy is the same as at home with the same product
offering.
Polycentric – a multidomestic strategy adapting fully
to the requirements of each national market
Regiocentric – regional co-ordination of strategy but
not global.
Geocentric – strategy developed on a global basis and
is not determined by home or host country factors.
Assessing Country
Attractiveness
• In order to decide:
Which countries to enter,
When to enter each market, and
What form of operation to set up
you need to assess country attractiveness.
• Method
Environmental Scanning
13
The drivers of profitability
Industry and
Country
Attractiveness
Demand
Competitive
Forces
Risks
Customer
Value
Innovation
Company Competitive Advantages
Sustainable Differentiation
Costs
Advantages
Sociological
Factors
Demographic
Factors
Public Policy
Factors
Economic
Growth
Economic
Value
14
Cost of
Creating Value
Economic value
Competitive
Forces
Customer
Value Value Kept
by
Customer
Internal Costs
Purchased Supplies
and Services
>
Value for Shareholders,
Community (Taxes) ,
Employees (Bonuses)
Price
> Costs
Technology
and
Management
Volume
15
COUNTRY
RISK
Political
Business
Practices
Administrative
Practices
Economics
COUNTRY MARKET
and INDUSTRY
OPPORTUNITIES
Market
Competition
Resources Incentives
Assessing attractiveness
16
COUNTRY MARKET and
INDUSTRY OPPORTUNITIES
MARKET
How important is the
demand in this country?
•Growth?
•Size
•Customer’s quality? RESOURCES
• Is the country
a critical source of:
•Skilled personnel
•Raw materials?
•Components?
•Labor
•Technological
innovation?
•Learning
Is the business
•Profitable short term ?
•Profitable long term ?
Does a presence in this
country increase
competitiveness?
COMPETITION
Quality of infrastructure
and supporting services
Location
• Intensity of rivalry
• Entry barriers
• Bargaining power of
suppliers and customers
INCENTIVES
•Taxes
•Subsidies
•Infrastructures
•Government contracts
Framework
Lasserre Fig 6.2, p.165
17
Country attractiveness
How good is the business?
Is there demand? Is the business profitable? Is the business risky?
• Size
• Growth
• Quality
• Segments
• Intensity of competition
• Price wars
• Pressures on margins
• Variability
• Discontinuities
Context Drivers ?
18
Quality of markets
• Price sensitive
• Low switching costs
• Standard needs
Commodities
• Price premium
• Value added
• Customer loyalty
High end
Cost/volume
speed
Well established
brand
relationships
Strong technological
advantage
Differentiation:
Image
Service
Technology
Speed
Innovation
Cost/volume
scale/scope
economies
Demand
Growth
of
markets
Sociological
Factors
Demographic
Factors
Public Policy
Factors
Economic
Growth
High Growth
Low Growth
19
Developing World Segmentation
• Huge low-end commodity market
• Rising middle class but still relatively small
• Tiny highly wealthy segment
Lower End
Higher Low End
Miiddle Class
Top End Generic Segmentation
High End:
• Differentiated products
• Functionalities and performances
• Less price sensitive
Low End:
• Undifferentiated products
• Mass production and distribution
• Price sensitive
Top End
Lower High End
Lower End
Higher Low End
Industrialized Countries Segmentation
Higher Low End
Top End Lower Top End
Higher End
Lower High End
Lower End
• Diverse segmentation
• Middle Class markets dominate
Demand
Lasserre Fig 6.7, p.170
20
Low End
Low Income Groups
Middle Class
Elites
Cosmopolites
Consumers Segments Business-to-Business Segments
Non exporting domestic firms
The majority of SMEs
Demand quality
• Differentiated products/services
• Functionalities and performances
• Less price sensitive
• More loyalty
•Standardised
Products/services
• Mass production
and distribution
• Price sensitive
High End Large
Corporations
Multinationals
Exporting Medium
Sized Firms
Higher margin
Lower volume
Lower margin
Higher volume
Lower Middle Class
21
Country life cycles
• Developing countries
India, Pakistan, Nigeria & Bangladesh
• Emerging countries
China, Malaysia & Thailand
• Newly industrialised countries
Korea, Taiwan, Hong Kong & Singapore
• Industrialised countries
North America, Western Europe & Japan
22
Characteristics of demand
according to countries’ life cycle
Demand
Characteristics
Developing
Countries
Emerging
Countries
Newly
Industrialized
Economies
Industrialized
Countries
Growth Low High High Low
Size Small Small to High Small to High High
Segmentation - Dominant
subsistence
sector
- Large low end
segment
- Fast growing
middle class
- Large Low
End segment
- Established
middle class
- Increased
Diversity of
segments
- Established
middle class
- Diverse and
sophisticated
segmentation
Customer Value
Curve
- Price
- Availability
- Price
- Distribution
- Emerging
Advertising
- Product
functionality
- Performances
- Services
- Product
functionality
- Performances
- Services
Distribution - Push logistics
- Push logistics
- Beginning of
pull
- Pull
- Beginning of
mass retailing
- Diversity
- Mass Retail
important
Competition - Regulated
- Beginning of
de-regulation
- New entrants
- Deregulated
- Active
- Diverse
- Deregulated
- Active
- Diverse
Lasserre: Table 6.3, p.171
23
Middle class effect in
emerging countries %
Poor Middle Class Rich Very Poor
Increase in GDP per capita
+ 20%
Increase in
middle class
+ 66%
Average GDP per capita
Lasserre Fig 6.5, p.169
Distribution
%
24
Global competitiveness index
Source: World Economic Forum, 2006
25
Lasserre
POLITICAL RISKS
ECONOMIC
RISKS
COMPETITIVE COUNTRY
RISK
ANALYSIS RISKS
OPERATIONAL RISKS
SHAREHOLDERS'S EXPOSURE
• Assets destruction (war, riots..)
• Assets spoliation (expropriation)
• Assets immobility (transfer, freeze)
EMPLOYEES’S EXPOSURE
• Kidnapping
• Gangsterism
• Harassment
OPERATIONAL EXPOSURE
• Market disruption
• Labour unrest
• Racketing
• Supplies shortage
BUSINESS LOGICS:
• Corruption
• Cartels
• Networks
INFRASTRUCTURE
• Power, Telecommunication, Transport
• Suppliers
REGULATIONS
• Nationalistic preferences
• Constraints on local capital, local content, local employment
• Taxes
• Economic growth
• Variability
• Inflation
• Costs of inputs
• Exchange rates
Lasserre Fig 6.12, p.178
Framework for
country risk analysis
26
Political Risks
Economical
Risks
Source: World Market Research Centre, 2006
Country risk
1 1.5 2 2.5 3 3.5 4 4.5 5
1
5
Somalia
Slovenia
France Singapore
Finland
USA
Hungary
Japan
Germany
UK
China Russia
Korea
Indonesia
Vietnam
Malaysia
Mexico
South Africa
Brazil
Philippines
Thailand
India
Angola
N Korea
Bosnia
1.5
2
2.5
3
3.5
4
4.5
Luxembourg
Iran
Myanmar
Nepal
DR Congo
Sudan
Israel
Cuba
Cameroon
Nigeria
Niger
Rwanda
Ubekistan
Pakistan
Algeria Sri Lanka
Macedonia Argentina
Egypt
Croatia
Saudi Arabia
Romania
Morocco
Bulgaria
Turkey
Australia Switzerland
Norway
Canada
Taiwan
Poland
Chile
HongKong
Portugal
27
Country risk and FDI
2000-2004
Source: UNCTAD, World Investment report, 2005 and World Market Research Centre, 2005
Country Risk (Political + Economical)
FDI
(2000-2004
Bil $)
-50
0
50
100
150
200
250
300
350
400
1 1.5 2 2.5 3 3.5 4 4.5 5
UK
Russia China
Spain
USA
France
Brazil
Mexico
Lux Nl
Australia
Italy
Slovenia
Singapore
28
²
Type of Incentive
Nature of the Incentive
Fiscal Incentives:
Tax Reduction Tax holiday for a certain period
Ability to write-off losses against profits after the end of the tax holiday period.
Reduced tax rate
Accelerated depreciation
Reduction in social security contributions
Special deductions of taxable incomes based on certain types of activities (R&D)
Exemption of property taxes or others special taxes
Reduction of taxes base on local content or employment levels
Income tax exemption or reduction for expatriate personnel
Imports and Exports Exemption of import duties and value added taxes for raw material, capital
equipments and parts
Exemption of export duties
Tax credits on domestic sales based on export performance
Financial Incentives Subsidies of all kinds
Sweet loans
Guaranteed loans
Export credits
Equity participation
Risks insurance (Exports, Exchange rates)
Competitive Incentives Protection against imports
Capacity regulation
Monopolistic position
Preferential purchases
Operational incentives Preferential rates rents, lands, power telecommunication, etc.
Assistance for market studies
Utilization of public services or government agencies for companies operations
Detachment of personnel
Major types of incentives for
foreign investments
Lasserre Table 6.5, p.177
29
Country risk analysis and
assessments
• Methods:
Grand Tour
Banks
Consultants
Trade Commissions
Ratings
Intelligence building
30
Country risk analysis and
assessments
• Issues:
Availability of data
Reliability of data
Bias
Cultures
31 31
International environment
• Environmental scanning
Key factors to scan:
• Economic forces
• Political and legal forces
• Socio-cultural and environmental factors
• Technical factors
• Competitive forces
32 32
Economic forces
• Some of the issues you could monitor:
Availability of credit
Disposable income
Propensity of people to spend
Interest rates
Inflation rates
Money market rates
Govt budgets
GDP
33 33
Economic forces
• Some of the issues you could monitor:
Consumption rates
Unemployment trends
Worker productivity levels
Value of currency in world market
Stock market trends
Regional differences in income
Price fluctuations
Monetary and fiscal policies
Tax rates
34 34
Socio-cultural and
environmental factors
• Some of the issues you could monitor:
Special interest groups
Number of births, deaths, marriages, divorces
Immigration and emigration rates
Social security programs
Life expectancy rate
Per capita income
Attitude towards business
Lifestyles
35 35
Socio-cultural and
environmental factors
• Some of the issues you could monitor: Traffic congestion
Attitude towards government work
Buying habits
Ethical concerns
Attitudes towards work
Sex roles
Attitude towards saving and investment
Racial equality
36
Socio-cultural and
environmental factors
• Some of the issues you could monitor:
Use of birth control
Level of education
Government regulation
Attitude toward retirement, leisure, product
quality, customer service
37 37
Socio-cultural and
environmental factors • Some of the issues you could monitor:
Attitude towards foreigners
Social programs
Role of religion and range of religious groups
Social responsibility
Attitude towards careers
Population changes by race, sex, age and level of affluence
Attitude towards authority
Population changes by city, country, state and country
38 38
Socio-cultural and
environmental factors
• Some of the issues you could monitor:
Number of women and minority workers
Number of secondary and tertiary graduates
Recycling
Waste management, Energy conservation
Air pollution, water pollution, ozone depletion,
pollution controls
Endangered species
39 39
Political and legal
environment • Some issues to monitor:
Govt regulations/deregulations
Tax laws
Tariffs and subsidies
Political systems – voter rights, voter participation
Political protests and upheaval
Number of patents and patent law
Environmental protection laws
Defence expenditure, role of army in Govt
Equal opportunity legislation
40 40
Political and legal
environment
• Some issues to monitor:
Monopoly/competition legislation
Treaties and relationships between foreign Govts
Import-export regulations
Govt fiscal and monetary policy changes
Political conditions in countries
Local, state and federal laws
Size of Government budgets
Terrorist activities
41 41
Technological
environment
• Some issues to consider include:
Communication systems – phone systems, fax, internet
Computer acceptance – home/office
Spending on R&D
Infrastructure – ports, airports, roads, rail
Robotics
Acceptance of new technology
Sources of power and reliability:
• gas, nuclear, coal, wind, water
42 42
Competitor
environment
• Some issues to consider include:
Major competitors’ strengths & weaknesses
Major competitors’ objectives and strategies
Major competitors’ likely response to changes in economic, political, legal, socio-cultural and technical environments.
How vulnerable are they to our alternative strategies relative to major competitors?
43
Competitor
environment
• Some issues to consider include:
How vulnerable are our alternative strategies to
counterattack by major competitors?
How are our products and services positioned
44 44
Competitor
environment
• Some issues to consider include:
To what extent are new firms entering and old firms exiting our industry?
How have sales and profits of competitors changes in recent years? Why?
What are the supplier and distributor relationships like in this industry?
To what extent could substitute products be a threat to competitors in this industry?
45
Country risk analysis and
assessments
• Lessons:
Don’t rely on one single source
Don’t delegate the interpretation to third parties
Invest in intelligence
Look at operational issues
• The final issue is one of consolidation