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Lecture 6

GEO 334 Lecture Notes - Lecture 6: Market Power, Strategic Management, Nearshoring

Course Code
GEO 334
michael lecky

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Chapter 6: Formulating Strategy
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 competesits choice of business or businesses in
which to operate and the ways in which it differentiates itself from its competitorsis its
Companies of all sizes go international for different reasonssome reactive (or defensive), and
some proactive (or aggressive). The threat of their own decreased competitiveness is the
overriding reason many large companies adopt an aggressive global strategy.
Reactive Reasons
-Globalization of Competitors
One of the most common reactive reasons that prompts a company to go overseas is global
-In addition, the lower costs and market power available to these competitors operating
globally may also give them an advantage domestically.
-Competitors who have already went overseas can become so successful that its hard
for new companies to enter
-Trade Barriers

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Some countries’ restrictive trade barriers do provide another reactive reason for companies
often switching 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.
-In May 2011, ZTE—China’s second largest telecom equipment maker and a state-
controlled company listed in Hong Kongmoved to Brazil; the purpose was to avoid that
country’s high import tariffs, even though it is cheaper to manufacture in China.
-Toyota has manufacturing plants in the US to avoid import quotas
-Regulations and Restrictions
A firm’s home government’s regulations and restrictions can become so expensive that
companies will seek out less restrictive foreign operating environments.
-Customer Demands
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 their
supplying company to operate in their local region so that they have better control over their
supplies, forcing the supplier to comply or lose the business
-ex. Mcdonalds- 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 Germany, so that it can
work with local companies making McDonald’s hamburgers.
Proactive Reasons
-Economies of Scale
Economies of scalethat 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
-Companies like Merck and Pfizer who already spent so much, need global sales to
increase profits
Growth Opportunities

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As domestic growth declines because of slow-growth economies, opportunities abroad look
more attractive, in particular since the Internet now greatly facilitates the ability to link to
contacts in other countries quickly.
-New start-ups in Europe, for example, feeling the weight of the continent’s continuing
debt crisis, realize that they must go global from the beginning to establish sufficient
market size to be viable.
Resource Access and Cost Savings
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 costs. Lower labor costs (for production, service, and technical
personnel) another major considerationlead to lower unit costs and have proved a vital
ingredient to competitiveness for many companies.
Governments in countries such as Poland seeking new infusions of capital, technology, and
know-how willingly provide incentivesincluding tax exemptions, tax holidays, subsidies, loans,
and the use of property. Because they both decrease risk and increase profits, these incentives
are attractive to foreign companies.
Strategic Formulation Process
The first phase of the strategic management processthe planning phasestarts with the
company establishing (or clarifying) its mission and its overall objectives.
The next two steps comprise an assessment of the external environment that the firm faces
in the future and an analysis of the firm’s relative capabilities to deal successfully with that
Strategic alternatives are then considered, and plans are made based on the strategic choice.
These five steps constitute the planning phase, which will be further explained in this chapter.
The second part of the strategic management process is the implementation phase.
Successful implementation requires the establishment of the structure, systems, and processes
suitable to make the strategy work.
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