STRATEGIC FORMULATION PROCESS : Formulating Strategy

• Introduction
• Growth Opportunities
• 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.

Economies of scale in production are achieved when higher levels of output spread fixed costs over more units, thus lowering the per-unit cost. Gerrit Jeelof,

of Holland's Philips Group, contends that 'only with a global market can a company afford the large development costs necessary to keep up with advancing technology.

Growth Opportunities

Companies in mature markets in developed countries experience a growth imperative to look for new opportunities in emerging markets. When expansion opportunities become limited at home, firms such as McDonald's are often driven to seek expansion through new international markets. A mature product or service with restricted growth in its domestic market often has 'new life' in another country, where it will be at an earlier stage of its life cycle. Avon Products Inc., for example, has seen a decline in its U.S. market since its traditional sales and marketing strategy of 'Avon calling' (house-to-house sales) now meets with empty houses, due to the spiralling number of women who now work outside the home- To make up for this loss, Avon pushed overseas to 26 emerging markets, such as Mexico, Poland, China, India, South Africa, and Vietnam In Brazil, for instance, Josina Reis Teixeira carries her sample kit to the wooden shacks in the tiny village of Registro, just outside of S Paulo. In some markets Avon adapts to cultural influences, such as in China, where consumers are suspicious of door-to-door salespeople. There, Avon sets up showrooms in its branch offices in major cities so that women can consult cosmeticians and sample products.

In addition, new markets abroad provide a place to invest surplus profits as well as employ underutilized resources in management, technology, and machinery. When entirely new markets open up, such as in Eastern Europe, both experienced firms and those new to international competition usually rush to take advantage of awaiting opportunities. Such was the case with the proactive stance that Unisys took in preparing for and jumping on the newly opened market opportunity in Vietnam

Resource Access and Cost Savings

Further, resource access and cost savings entice many companies to operate from overseas bases. The availability of raw materials and other resources offers both greater control over inputs and lower transportation cost& Lower labor costs (for production, service, and technical personnel), another major consideration, enable lower unit costs and have proved a vital ingredient to competitiveness for many companies.

Sometimes just the prospect of shifting production overseas improves competitiveness at home. When Xerox Corporation started moving copier rebuilding operations to Mexico, the union agreed to needed changes in work style and productivity to keep the jobs at home. Lower operational costs in other areas - power, transportation, and financing - frequently prove attractive. Trinidad, for example, offers abundant inexpensive energy, a skilled and well-educated work- force with labor rates at about one-fourth of U.S. levels, and government incentives for export-oriented ventures that generate foreign exchange.

Typically, the strategic formulation process is necessary both at the headquarters of the corporation and at each of the subsidiaries. One study reported, for example, that 70 percent of 56 American MNC subsidiaries in Latin America and the Far East operated on planning cycles of five or more years-18

The, global strategic formulation process, as part of overall corporate strategic management, parallels the process followed in domestic companies. However, the variables, and therefore the process itself, are far 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. These factors introduce a greater level of risk in strategic decision& However, for firms that have not yet engaged in international operations (as well as for those that do), an ongoing strategic planning process with a global orientation identifies potential opportunities for (1. appropriate market expansion, (2. increased profitability, and (3. new ventures by which the firm can exploit its strategic advantages. Even in the absence of immediate opportunities, monitoring the global environment for trends and competition is important for domestic planning.

The strategic formulation process is part of the strategic management process in which most firms engage, either formally or informally. The planning modes range from a proactive, long-range format to a reactive, more seat-of-the-pants method, whereby the day-by-day decisions of key managers, in particular owner- managers, accumulate to what can be discerned retroactively as the new strategic directioni9 The stages in the strategic management process described here are shown in Exhibit 6-1. In reality these stages seldom follow such a linear format. Rather, the process is continuous and intertwined, with data and results from earlier stages providing information for the next stage.

The first phase of the strategic management process

- the planning phase

- starts with the company establishing (or clarifying) its mission and its overall