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Factors Affecting Business Strategy Formulation

Factors Affecting Business Strategy Formulation

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Factors Affecting Business Strategies
Factors Affecting Business Strategies

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Table of Contents

Introduction ................................ ................................ ................................ ................................ ....... 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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Introduction
The 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 Competitions
Basically, 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 Political Factors Shaping Strategic Decisions 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 competition. The higher consumer spending is, the stronger competition it is

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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.

Environmental 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 ³Green 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. ³BP 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
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in the market if they goes beyond the legislations.

Legal factor may be an advantage for domestic players as they understand 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 corelation to the factors of strategic decision making.

[Adapted from:

Harvard Business Review January 2008, Michael E. Porter, The Five

Competitive Forces That Shape Strategy.]
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Threat of Entry 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:
y

Supply side economies of scale- when new entrant has to come into the industry either in large scale or accept a cost disadvantage

y y y y

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

y

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.

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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 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.

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Rivalry Among Existing Competitors 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.

Strength The 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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Opportunities Once 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.

Weaknesses Most 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.

Threats Other 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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Conclusion
To 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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References
CAVUSGIL S.Tamer, et al. (2002). Doing Business in Emerging Markets. 1st ed. Thousand Oaks. Sage Publications. ESPOSITO, Louis and ESPOSITO, Frances F. (1971). ³The Review of Economic and Statistics´ The MIT Press. [Online]. 53, 4, p.343-353. Article from JStor last accessed 4 July 2010 http://www.jstor.org.lcproxy.shu.ac.uk/action/showArticleInfo?suffix=1928735&seq=1 EVANS, Carl and RICHARDSON, Mark (2007). ³Strategy in Action´. British Journal of Administrative Management. [Online]. Assessing The Environment. Article from Business Source Premier last accessed 4 July 2010 at: http://web.ebscohost.com.lcproxy.shu.ac.uk/ehost/pdfviewer/pdfviewer?vid=2&hid=11&sid= 07ebd5f8-250c-4b82-a02a-78bc00096dc8%40sessionmgr10 LANE, Christel and PROBERT, Jocelyn (2003). Globalisation and Its Impoact on Competitiveness: The Case of The British and German Pharmaceutical Industry. Cambridge. Working Paper Series. NATION AP. (2010) ³BP Wasted No Time Preparing for Oil Spill Lawsuits.´ [Online]. Last accessed on 4 July 2010 at: http://www.miamiherald.com/2010/07/03/1714530/bp-wastedno-time-preparing-for.html PORTER, Michael (2008). ³The Five Competitive Force That Shape Strategy´. Harvard Business Review. [Online]. 86, 1, p78-93. Article from Business Source Premier last accessed 4 July 2010 at: http://search.ebscohost.com.lcproxy.shu.ac.uk/login.aspx?direct=true&db=buh&AN=280001 38&site=ehost-live PORTER, Michael (2008). On Competition. Updated and expanded ed. Harvard Business Press. RHYS, Andrews, et. al (2005) ³External Constraints on Local Service Standards: The Case of Comprehensive Performance Assessment in English Local Government.´ Public Administration. [Online]. 83, 3, p639-656. Article from Business Source Premier last accessed 4 July 2010 at: http://web.ebscohost.com.lcproxy.shu.ac.uk/ehost/detail?vid=1&hid=11&sid=3cf91ae1-874f4303-ad0cPage 15 of 16

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