Implementing Strategy : Formulating Strategy

• Introduction
• REASONS FOR GOING INTERNATIONAL
• Reactive Reasons
• Trade Barriers
• Regulations and Restrictions
• Customer Demands
• Economies of Scale
• Incentives

Governments in countries such as Poland seeking new infusions of capital, technology, and know-how willingly provide incentives: tax exemptions, tax holidays, subsidies, loans, and the use of property16 Because they both decrease risk and increase profits, these incentives are attractive to foreign companies. One study surveyed 1.03 experienced managers concerning the relative attractiveness of various incentives for expansion into the Caribbean region (primarily Mexico, Venezuela, Colombia, Dominican Republic, and Guatemala). The results indicate the opinion of those managers about which incentives are most important; however, the most desirable mix would depend on the nature of the particular company and its operations. The first two issues reflect managers' concerns about limiting foreign exchange risk, where restrictions often change overnight and limit the ability of the firm to repatriate profits. Other concerns are those of political instability in countries such as Haiti and Nicaragua, the possibility of expropriation, and those of tax concessions.

Careful, long-term strategic planning encourages firms to go international for proactive reasons. One pressing reason for many large firms to expand overseas is to seek economies of scale - that is, to achieve world-scale volume to make the fullest use of modern capital-intensive manufacturing equipment and to amortize staggering research and development costs when facing brief product life cycles.'0 Otis Elevator, for example, developed the Elevonic 411 by means of six research centers in five countries; this international cooperation saved over $10 million in design costs and cut the development cycle from four years to two.

Operations in foreign countries frequently start as a response to customer demands or as a solution to logistical problems. Certain foreign customers, for example, may demand that their supplying company operate in their local region so that they have better control over their supplies, forcing the supplier to comply or lose the business. McDonald's is one company that asks its domestic suppliers to follow it to foreign ventures. Meat supplier OSI Industries does just that, with joint ventures in 17 countries, such as Bavaria, so that it can work with local companies making McDonald's hamburgers

Similarly, regulations and restrictions by a firm's home government may become so expensive that companies will seek out less restrictive foreign operating environments. Avoiding such regulations prompted U.S. pharmaceutical maker SmithKline and Britain's Beecham to merge. Both thereby guaranteed that they would avoid licensing and regulatory hassles in their largest markets - Western Europe and the United States- The merged company is now an insider in both

Europe and America.

Restrictive trade barriers are another reactive reason why companies often switch from exporting to overseas manufacturing. Barriers such as tariffs, quotas, buy- local policies, and other restrictive trade practices can make exports to foreign markets too expensive and too impractical to be competitive. Many firms, for example, want to gain a foothold in Europe - to be regarded as an insider - to counteract trade barriers and restrictions on non-EU firms (discussed further in the Comparative Management in Focus at the end of this chapter). In part, this fear of “Fortress Europe” is caused by actions such as the EU's block exemption for the franchise industry. This exemption prohibits a franchisor, say McDonald's, from contracting with a single cQmpany, say Coca-Cola, to supply all its franchisees, as it does in the United States.

One of the most common reactive reasons that prompt a company to go overseas is global competition. If left unchallenged, competitors who already have overseas operations or investments may get so entrenched in foreign markets that it becomes difficult for other companies to enter at a later time. In addition, the lower costs and market power available to these competitors operating globally may also give them an advantage domestically.

Companies “go international” for different reasons, some reactive (or defensive) and some proactive (or aggressive). The threat of their own decreased competitiveness is the overriding reason many large companies adopt a strategy of aggressive globalization. To remain competitive, these companies want to move fast to build strong positions in key world markets with products tailored to the common needs of 650 million customers in Europe, Latin America, and Japan.6 Building on their past success, companies such as IBM and Digital Equipment are plowing profits back into operations overseas. Europe is now attracting much new investment capital because of both the European Union (EU) and the opening of extensive new markets in Eastern Europe.

As the Opening Profile on FedEx illustrates, companies around the world are spending increasing amounts of money and time on global expansion in search of profitable new markets, acquisitions, and affiances - but often spending those resources on very different strategies. Experts predict that those companies with operations in major overseas markets (North America, Europe, and Asia) are far more likely to prosper in the twenty-first century than those without such operations. Because these new international opportunities are far more complex than those in domestic markets, managers must plan carefully - that is, strategically - to benefit from them.

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. Almost all successful companies engage in long-range strategic planning, and those with a global orientation position themselves to take full advantage of worldwide trends and opportunities. MNCs, in particular, report that strategic planning is essential to contend with increasing global competition and to coordinate their far-flung operations.

In reality, though, that rational strategic planning is often tempered, or changed at some point, by a more incremental, sometimes messy, process of y strategic decision making by some managers. When a new CEO is hired, for ex-sample, she will often call for a radical change in strategy. That is why new lead-

• ers are very carefully chosen, on the basis of what they are expected to do. So, while we discuss the rational strategic planning process here, because it is usually the ideal, inclusive, method of determining long-term plans, we need to rememb .er that, throughout, there are people making decisions, and their own personal judgment, experiences, and motivations, will shape the ultimate strategic direction.