Week 3 MGX5181 - Method Environmental ... Pakistan, Nigeria & Bangladesh •Emerging countries ... x Accelerated depreciation x Reduction in social security contributions

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


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


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


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


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


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


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


• 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



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



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


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


How vulnerable are our alternative strategies to

counterattack by major competitors?

How are our products and services positioned

44 44

Competitor

environment


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


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

Week 3 MGX5181 - Method Environmental ... Pakistan, Nigeria & Bangladesh •Emerging countries ... x Accelerated depreciation x Reduction in social security contributions

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