Factors Affecting Business Strategy Formulation

Table of ContentsIntroduction...........................................................................................................................................2

Anticipating Foreign Competitions........................................................................................................3

1. The Strength of Globalisation Pressures: External Analysis......................................................3

PESTEL Analysis..........................................................................................................................3

Porter’s Five Forces That Shapes Competition..............................................................................7

2. Understanding Asset Transferability: Organisational Analysis................................................11

Strength.......................................................................................................................................11

Opportunities...............................................................................................................................12

Weaknesses.................................................................................................................................12

Threats.........................................................................................................................................12

Conclusion...........................................................................................................................................13

References...........................................................................................................................................15

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IntroductionThe trend of globalisation has significant influence on how a domestic business shape

their strategy to compete with foreign forces. Government policies and regulations that

attracts foreign investments as well as abolishment of trade barriers encourages the flow of

business investments and penetrations into emerging markets.

Due to increasing inflow of foreign forces into emerging markets, domestic players

will definitely face threats from Multi-National Enterprises (MNEs). Although MNEs are big

and strong companies, domestic players are still capable of surviving the competition. By

making strategic decisions that counters the effect of competition from foreign forces, a

domestic player will be able to survive the competition.

In this article, we will examine the factors that influences the choice of strategy made

by domestic businesses in the presence of foreign competitions. The factors will be examined

using frameworks, PESTEL Analysis, Porter’s 5 Forces, as well as SWOT Analysis. Other

than that, this research also includes additional factors to enhance understanding of

globalisation and international competitions. The outcome of these analysis will bring us to

what decisions made by domestic players and how they position themselves that enables

them to succeed in a globalised market.

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Anticipating Foreign CompetitionsBasically, there are two fundamental concepts in making strategic decisions when

competing with foreign forces. First, the company needs to determine the pressure of

globalisation in the operating market. Second, find out the degree of transferability of the

company’s assets. (Cavusgil et al. 2002)

1. The Strength of Globalisation Pressures: External Analysis The current trend in global business is very much due to the liberalization of industries in

many parts of the world, for example, the trading blocs like NAFTA, EU and ASEAN. This

increases the flow of businesses from one part of the world to another. Hence, induces the

pressure for internationalisation of an industry in an emerging market. However, not all

industry and every country has the same level of pressure to globalise, it doesn’t mean the

end for domestic businesses either (Dawar & Frost 1999). With different degrees of

globalisation pressure comes different opportunities and strategic choices for domestic

managers to lead their businesses to prosper.

PESTEL Analysis

One of the form of external analysis that help shaping strategies is the PESTEL

framework. This framework categorizes strategies formation factors into 6 categories:

Political Factors, Economic Factors, Societal Factors, Technological Factors, Environmental

Factors, and Legal Factors. Through the understanding of the macro-environment a business

operates in, it provides a summary of questions to ask about key forces at work (Johnson and

Scholes 2002, p102).

Categories Factors Shaping Strategic Decisions

Political Changes in the government such as a new prime minister or the changes in

governing policies affects how a foreign force position itself in a market.

For example, President of USA, Barack Obama signed the Medic Bill,

which results in lowering liability of performing medical procedure on high

risk procedures and increases the insurance premium of health insurance.

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Under the proposal, medical practitioners has lower liability to perform

surgeries, hence, increasing job appetite for physicians. Indirectly, it creates

competition among physicians in the market.

Similarly, government policies may also helps decreasing competition in a

domestic market. For instance, Malaysian government is very protective of

their automobile industry, by imposing high tax on imported automobile and

pricing local produced automobile slightly lower than the others helps the

industry to growth.

All in all, political factors affects competition in emerging markets,

governments tends to liberalize industries to attract foreign investment.

Domestic players have to be prepared and anticipate foreign competition.

Understanding the macro-environment is important before making strategic

choices.

Economic Economic factors that affects the market may include the spending

behaviour of consumers, interest or exchange rates, as well as climate of

business investment. A stable market economies contributes to the

incremental business investments. For instance, the Chinese government had

been reluctant to float its currency in accordance to market value. This is

due to the reason of lower currency rate attracts investor to invest. Lower

currency rate yields low capital investments and low labour costs.

On the other hand, the climate of business investments is another factor to

consider. When the global economic crisis occurred throughout 2007-2009,

business around the world had been going slow and business investors hold

back investments due to uncertainty of whether the economy will recover.

During this period, domestic players are less likely to face foreign entry

threats.

Thirdly, consumer spending power have positive relations with market

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competition. The higher consumer spending is, the stronger competition it is

in the market. As buyers are willing to spend more to satisfy their own

demand, businesses have to compete with more reputable foreign companies

to fulfil consumer needs.

Societal Social factors such as buying behaviour, lifestyle improvements,

demographic changes, and culture of the society in the market. These factors

have to be paid attention to as it can be used to form strategic positioning to

capture niche markets based on different consumer preference.

One of the significant example of positioning businesses basing on societal

factors is the computer manufacturing company from Russia, Vist (Harvard

Business Review March-April 1999). The Russian computer market was

still on early stage, and Russians needed more information and reassurance

of the computer they are buying. Vist’s approach satisfies consumers need,

by providing lengthy warranties and local language manuals.

The ability to understand cultural and what Russian electronics consumers

demand has given Vist competitive advantages over its multinational rivals.

Technological Technological advancement means more extensive line of product variety, a

new approach to research and development activity. Companies that has

proprietary technology will have an edge over other rivals.

For example, Kyocera, a Korean electronics company that produce a wide

range of electronics from chips to mobile phones. Over years of research,

they gain technological advantage by becoming an industry leader in the

Solar Energy sector. They have been the main provider of solar panels for

Toyota (FarEastGizmo.com 2010). They also promote eco-awareness to

reduce carbon footprint through the use of solar energy. Since then Kyocera

had been focusing on their solar panel business it is there core competence,

and it allows them to remain a substantial force in the Korean market.

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This shows that technological factors and its application can help a company

in becoming more efficient and sustaining competitive advantage in the

market.

Environmenta

l

Nowadays, rising awareness of eco-knowledge had move the global trend in

business operation towards minimising pollution and the effects of climate

change. The implication of environmental factors causes many global

businesses to adopt “Green Policies”.

Environmental concerns not only domestically, the entire global is affected

by pollution. With the forming of Corporate Social Responsibility

watchdog, companies cannot get away with their exploitations of the

environment. For instance, BP oil spill at Gulf of Mexico had been a major

discussion for environmentalists angered by the incident. “BP wasted no

time preparing for oil spill lawsuits, a legal fight that may embroil hundreds

of attorney, span five states and last more than a decade” (Nation AP 2010).

There is no doubt that companies will face repercussions for causing harm

to the environment. Companies might have to hire laboratories scientist or

large amount of capital to work with environmental restore activities. All in

all, domestic players should incorporate environmental factors into their

decisions making. This will not only captures the rising niche market of

environmental friendly consumers, it also prepares a company for

globalisation.

Legal Lastly, the legal factors may include new legislation such as product

licensing, new business contract agreement terms, and new contraband

items.

Companies has no other choice than to adhere strictly to the legislation made

by local government in the market they operates in. Companies may face

risks of conviction and in some cases the retraction of operating licence in

the market if they goes beyond the legislations.

Legal factor may be an advantage for domestic players as they understand

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the legislation of the market better than any foreign companies.

Porter’s Five Forces That Shapes Competition

Understanding the five forces in the industry help a company to position itself in a

position that is less vulnerable and more profitable in compare to other rivals (Porter, 2008).

The five forces mentioned are: (1) Threats of New Entrants, (2) Threats of Substitute

Products or Services, (3) Bargaining Powers of Suppliers, (4) Bargaining Power of Buyers,

and (5) Rivalry Among Existing Competitors.

This framework can be applied into determining the severity of globalisation pressure

in an industry, one of the two fundamental concept of competing with multinational giants.

The following is a diagram of the Porter’s 5 Forces framework and it is explained in co-

relation to the factors of strategic decision making.

[Adapted from: Harvard Business Review January 2008, Michael E. Porter, The Five

Competitive Forces That Shape Strategy.]

Threat of Entry

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First of all, when foreign forces enters an emerging market, they aim to fight for more

market share and the also increases the capacity in the market. All of these enhances pressure

on an already intense competition in terms of prices, costs, and investments in the emerging

market. For example, when Pepsi enter the bottled water business, when Microsoft ventures

into internet browser provider, and Apple entered the music distribution business.

Barriers of entry for foreign companies are listed as follows:

Supply side economies of scale- when new entrant has to come into the industry either

in large scale or accept a cost disadvantage

Demand side benefits of scale- willingness of consumer to buy from new entrant

Customer switching cost- costs arise from switching vendor/ supplier

Capital requirements- financial resources needed to enter a market

Access to distribution channel- the ability of new entrant to secure distribution for its

products or services

Restrictive government policy- government interventions amplifying trade barriers

Domestic businesses face higher threat of new entry if entry barriers are low, lower

threat of entry means higher pressure to globalise for domestic businesses; and vice versa.

When pressure of globalisation in the industry is low, domestic players can choose to either

defend their business or to extend their business. On the other hand, if pressure to globalise is

high, domestic players have the option of dodging the competition or to compete with MNEs.

Each of the mentioned strategies will be further elaborated on the conclusion part of this

paper.

Threat of Substitute Products/ Services

The advancement of technologies and communications had created opportunities and

new ways of doing business, not only it opens up markets to globalisations, substitute

products or services are also constantly being added into the market. An example of

substitution of product is plastic being substitution for aluminium; while for services, E-mail

had been a substitute for express mail.

When product substitution threat is low in the market, it forms an encouragement for

foreign forces to penetrate the market because of higher profitability rather than to constantly

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compete with a new substitute product. Hence, low substitution threat increases globalisation

pressure and vice versa.

Bargaining Power of Suppliers

The more powerful suppliers in an industry, the less likely domestic players will face

pressure of globalisation. As powerful suppliers charge higher price for labour and raw

materials, it causes the erosion of profitability. Microsoft, for instance, robs industrial

computer makers of profits by raising prices on their operating systems. In the end, foreign

investors will be reluctant to invest in the market.

Strong supplier powers may seem as an advantage for domestic players to fend off

foreign forces, but it may also pose threat to them if profit margin becomes lower. Domestic

players will be forced to go global in order to source for lower cost supplies.

Bargaining Power of Buyers

Another factor that affects domestic businesses in presence of foreign players is the

bargaining power of buyers. Consumers plays industry players against each other by

demanding better quality or more service, thereby, driving up costs. Generally, multinational

giants have more financial resources compares to small domestic business, therefore, small

companies might be obsolete in such environment. For instance, after the open of eastern

Europe markets, Skoda were sold to Volkswagen as they are unable to compete with their

inferior automobile products and inefficient operation (Dawar & Frost 1999)

Although foreign forces are strong, domestic players also have their own competitive

advantage in order to prosper in the competition of globalisation. Take the case of Bajaj, an

motorcycle manufacturer that face the competition from Honda, a multinational giant. They

exploit the customer preference for a rugged motorcycle with services shops widely

available. From this strategic decision made by Bajaj, it becomes the number one choice for

consumers in India, driving Honda out of the market.

Rivalry Among Existing Competitors

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The intensity of rivalry affect profitability of industry players. It would be destructive

for profitability of industry participants if rivalry is based upon price wars. The result is the

transfer of profitability from industry players towards consumers. Other than price

competitions, rivalry may also be in the form of service improvements, advertising, and new

product introductions.

An example of rivalry in Malaysia is the competition in telecommunications industry.

DiGi, a Swedish company that deploys price wars against Maxis and Celcom (Malaysian

companies) because they have the efficiency. However, Maxis and Celcom competes by

introducing new products, Apple iPhones and Blackberry into their subscription plan. This

enables them to compete and retain profitability in the industry.

Industry Structure: The Factors Shaping Strategic Decisions

As shown above, Porter’s 5 Forces helps analyses industry factors and determines

how profitable an industry is in the long-run (Porter 2008). When combining all of the five

forces, strategist can decide if the industry is attractive to foreign forces or not. If the industry

attracts high amount of new entrant, it is a sign of high globalisation pressure. On the other

hand, if the market is saturated, domestics player have to consider internationalisation to

search for new profitable markets. In terms of supplier and consumer power variables, the

more power they have, the higher pressure it is on domestic business to globalise in order to

source competitive suppliers and products that satisfies consumer demands.

All in all, Porter’s framework helps strategists indentifies globalisation pressure level

before making decisions. It is the first fundamental concept of competing with international

companies.

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2. Understanding Asset Transferability: Organisational Analysis

The second major factor to be considered when competing with foreign forces is the

transferability of company assets. In order to determine what is the assets of the company,

SWOT Analysis will be used to point out the performance of the company. The analysis

measures on the strength, weakness, opportunities, and the threats faced by the company

(Managerial Auditing Journal, August 2000).

High transferability assets are good for a local company when facing globalisation as

they can transfer and penetrate their business into new markets. To have high transferability

assets, the company must be strong at something that, foreign forces do not have or

inefficient at. Being strong in a market brings opportunities to the company, and being weak

in the market may cause threat. Small local players has to determine their core competences

and use it to compete with foreign forces.

StrengthThe strength of a company is their competence in one or many area of their business

operation. It may be form internally through efficient operation or externally through loyal

customer base.

For instance, an already presence company in an emerging market may have a huge

resources of distribution network compared to a penetrating foreign company which still

struggling to set up its distribution network in the market. This help the local player to

respond to its customer more quickly than others. Hence, they may exploit on this strength

when responsive time is important in an industry. This shows that in order for one company

to go international, not only it must have its own strength, it must also have higher assets

transferability in order to compete with local already established companies.

The importance of having core competencies and strength is to counter the

competition threat of foreign forces which has huge capital financing. The strength of a

company gives it opportunities to expand.

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OpportunitiesOnce strengths is determined, companies will be able to explore the external factors

that may allows the continual growth of business in its marketplace. Opportunities can be

related to PESTEL framework because opportunities arise from the changes in the

environment.

An example of opportunities is operating in markets with similar cultural and spoken

language. Televisa, Mexico’s largest media demonstrates this well, they produce Spanish

entertainments media and targets Spanish-speaking communities outside Mexico (Dawar and

Frost 1999). This method is known as operating in analogous market, where company reach

out to similar niche market outside of their own domestic market.

Grabbing every opportunities out there allows small domestic player to compete in

directly and globally with big foreign companies.

WeaknessesMost companies had failed to acknowledge their own weaknesses. It is no doubt that

it’s not easy to identify a company’s own weaknesses because they lack outsider perspective.

Therefore, it is important to combine the view of customers and the company’s own

perspective when determining weaknesses.

Decision makers needs to deal with their company’s weakness quick and accurately.

If things are done correctly, it can reduce the risks or being attacked by competitors. Less

weakness means less prone to threats.

ThreatsOther than weakness, threats is the external factors of an environment that could

affect how a domestic player positions itself in a globalised market. Threats, the opposite of

opportunities can also be related to the PESTEL Analysis.

External factors such as industry liberalization and demand fluctuations affects market

standing of local companies among global competition. Strategist have to look far into the

future to anticipate changes that threatens the company when competing with global giants.

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ConclusionTo conclude, this paper had covered the factors affecting decision making for

domestic company in a globalised market. However, the factors are ever-changing and it’s

also subjective to the market and industry a company operates in. Business managers must

take into account of the extensive factors based on two dimensions: (1) Pressure to globalise

and (2) Transferability of assets when making decisions.

The following Matrix can be used as a guide for decision makers when their market is

opened up for foreign competitions.

[Adapted from: Harvard Business Review March-April 1999, Competing With Giants by

Niraj Dawar and Tony Frost]

Based on the analysis in this paper, Porter’s 5 Forces and PESTEL framework can be

used to determine pressures to globalise in a market, while SWOT analysis will be

appropriate for determining transferability of competitive assets.

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When the pressure to globalise is high, local business can either be a dodger or a

contender towards foreign competitions. Dodger avoids competition by giving up production

and focus on core competencies because they lack of transferable assets. For example, a local

manufacturer whom already have a distribution network focus on distribution for foreign

giants whom has more efficient production in the local market. On the other hand, a

contender will complete directly with foreign forces because they have extra capacity to

improve their operation. They might have chance in winning the competition, and they must

have transferable assets in order to be a contender.

In terms of low pressure to globalise, companies may adopt the extender and defender

approach in positioning their company. Defender, being lack of transferable assets have to

stay in the market and fight for market leadership. Unlike extender that has sufficient

transferable assets can extend into new markets to enhance business opportunities, hence,

lowering competition through diversified markets.

All in all, the dynamics affecting strategic decisions is will is too broad to be listed

and explained thoroughly based on a single framework. Future researchers are encouraged to

use additional methods such as Ansoff Matrix and BCG Analysis for a better strategic

decision making.

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