How To Make
Strategic Alliances Work
Developing a dedicated
alliance function is key to
building the expertise needed
for competitive advantage.
Jeffrey H. Dyer,
Prashant Kale and
Harbir Singh
Strategic alliances — a fast and flexible
way to access complementary resources
and skills that reside in other companies
— have become an important tool for
achieving sustainable competitive advan-
tage. Indeed, the past decade has witnessed
an extraordinary increase in alliances.'
Currently, the top 500 global businesses have an average of 60
major strategic alliances each.
Yet alliances are fraught with risks, and almost half fail.
Hence the ability to form and manage them more effectively
than competitors can become an important source of compet-
Jeffrey H. Dyer is a professor of international strategy at Brigham
Young University's Marriott School in Provo. Utah. Prashant Kale is
an assistant professor at University of Michigan Business School.
Harbir Singh is a professor of management at the Wharton School
of the University of Pennsylvania. Contact the authors at
[email protected][email protected] and [email protected]
itivc advantage. We conducted an in-depth study of 200 cor-
porations and their 1,572 alliances. We found that a company's
stock price jumped roughly 1% with each announcement ofa
new alliance, which translated into an increase in market value
of $54 million per alliance.^ And although all companies
seemed to create some value through alliances, certain compa-
nies — for example, Hewlett-Packard, Oracle, Eli Lilly & Co.
and Parke-Davis (a division of Pfizer Inc.) — showed them-
selves capable of systematically generating more alliance value
than others. (See "A Dedicated Function Improves the Success
of Strategic AUiances, 1993-1997.")
How do they do it? By building a dedicated strategic-
: CTeaWo OMerfSIS SUMMER 2001 MIT SLOAN MANAGEMENT REVIEW 37
alliance function. The companies and others like them appoint
a vice president or director of strategic alliances with his or her
own statf and resources. The dedicated function coordinates all
alliance-related activity within the organization and is charged
with institutionalizing processes and systems to teach, share and
leverage prior alliance-management experience and know-how
throughout the company. And it is effective. Enterprises with a
dedicated function achieved a 25% higher long-term success
rate with their alliances than those without such a function —
and generated almost four times the market wealth whenever
they announced the formation of a new alliance. (See "Research
Design and Methodology.")
How a Dedicated Alliance Functian Creates Value
An eftcctivc dedicated strategic-ii Ilia nee function performs four
key roles: U improves knowledge-management efforts, increases
external visibility, provides internal coordination, and eliminates
both accountability problems and intervention problems. {See
"The Role of the Alliance Function and How It Creates Value.")
...
Science 7 - LAND and SEA BREEZE and its Characteristics
How To MakeStrategic Alliances WorkDeveloping a dedicate.docx
1. How To Make
Strategic Alliances Work
Developing a dedicated
alliance function is key to
building the expertise needed
for competitive advantage.
Jeffrey H. Dyer,
Prashant Kale and
Harbir Singh
Strategic alliances — a fast and flexible
way to access complementary resources
and skills that reside in other companies
— have become an important tool for
achieving sustainable competitive advan-
tage. Indeed, the past decade has witnessed
an extraordinary increase in alliances.'
Currently, the top 500 global businesses have an average of 60
major strategic alliances each.
Yet alliances are fraught with risks, and almost half fail.
Hence the ability to form and manage them more effectively
than competitors can become an important source of compet-
Jeffrey H. Dyer is a professor of international strategy at
2. Brigham
Young University's Marriott School in Provo. Utah. Prashant
Kale is
an assistant professor at University of Michigan Business
School.
Harbir Singh is a professor of management at the Wharton
School
of the University of Pennsylvania. Contact the authors at
[email protected][email protected] and [email protected]
itivc advantage. We conducted an in-depth study of 200 cor-
porations and their 1,572 alliances. We found that a company's
stock price jumped roughly 1% with each announcement ofa
new alliance, which translated into an increase in market value
of $54 million per alliance.^ And although all companies
seemed to create some value through alliances, certain compa-
nies — for example, Hewlett-Packard, Oracle, Eli Lilly & Co.
and Parke-Davis (a division of Pfizer Inc.) — showed them-
selves capable of systematically generating more alliance value
than others. (See "A Dedicated Function Improves the Success
of Strategic AUiances, 1993-1997.")
How do they do it? By building a dedicated strategic-
: CTeaWo OMerfSIS SUMMER 2001 MIT SLOAN
MANAGEMENT REVIEW 37
alliance function. The companies and others like them appoint
a vice president or director of strategic alliances with his or her
own statf and resources. The dedicated function coordinates all
alliance-related activity within the organization and is charged
with institutionalizing processes and systems to teach, share and
leverage prior alliance-management experience and know-how
throughout the company. And it is effective. Enterprises with a
dedicated function achieved a 25% higher long-term success
3. rate with their alliances than those without such a function —
and generated almost four times the market wealth whenever
they announced the formation of a new alliance. (See "Research
Design and Methodology.")
How a Dedicated Alliance Functian Creates Value
An eftcctivc dedicated strategic-ii Ilia nee function performs
four
key roles: U improves knowledge-management efforts, increases
external visibility, provides internal coordination, and
eliminates
both accountability problems and intervention problems. {See
"The Role of the Alliance Function and How It Creates Value.")
Improving Knowledge Management A dedicated function acts as
a
focal point for learning and tor leveraging lessons and feedback
from prior and ongoing alliances. It systematically establishes a
series of routine processes to articulate, document, codify and
share alliance know-how about the key phases of the alliance
life cycle. There are five key phases, and companies that have
been successful with alliances have tools and templates to man-
age each. {See "Tools To Use Across the Alliance Life Cycle.")
Many companies with dedicated alliance functions have codi-
fied explicit alliance-management knowledge by creating guide-
lines and manuals to help them manage specific aspects of the
alUance life cycle, such as partner selection and alliance
negotia-
Research Design and Methodology
We conducted two types of
4. research. From 1996 to 2000. we
interviewed at companies such as
Hewlett-Packard, Warner-Lambert
(now part of Pfizer), Oracle,
Corning, Lilly, ClaxoSmithKMne and
others that were reputed to have
effective alliance capabilities. We
also interviewed executives at com-
panies that did not have a dedi-
cated strategic-alliance function,
many of which have had relatively
poor success with alliances. We con-
ducted a survey-based study of 203
companies (from a variety of indus-
tries) with average revenues of
S3.05 billion in 1998. The analysis
of alliance success and stock-market
gain from alliance announcements
is based on data from 1,572
alliances formed by the companies
between 1993 and 1997.
To assess the long-term success
of the alliances, we collected sur-
vey data on the primary reasons
that each of the alliances was
formed. We then asked managers
to evaluate each alliance on the
following dimensions:
• the extent to which the alliance
met its stated objectives;
• the extent to which the alliance
enhanced the competitive posi-
5. tion of the parent company;
• the extent to which the alliance
enabled each parent company to
learn some critical skills from the
alliance partner; and
• the level of harmony the partners
involved in the alliance exhibited.
Managers used a standard 1-7
{1 = low and 7 = high) survey scaie.
Alliances that received an above-
average score on the four dimen-
sions were rated "successes," and
those that received scores below
average were rated "failures."
Assessments of alliance success
and failure then were used to cal-
culate an overall alliance success
rate for each company. The
alliance success rate is essentially a
ratio of each company's "success-
ful" alliances to all its alliances
during the study period.
In recent years, academics
have begun using a market-based
measure of alliance value creation
and success based on abnormal
stock-market gains. To estimate
incremental value creation for
each company, we built a model
to predict stock price based on
daily firm stock prices for 180 days
6. before an alliance announcement.
The model also includes daily
market returns on the value-
weighted S&P 500. Abnormal
stock-market gains reflect the daily
unanticipated movements in the
stock price for each firm after an
alliance announcement.
38 MIT SLOAN MANAGEMENT REVIEW SUMMER 2001
STOCK-MARKET GAINS
AFTER A L L I A N C E
ANNOUNCEMENTS
(millions of dollars)
80
60 -
40
20
75
20
tion and contracting. For example,
Lotus Corp. created what it calls its
"35 rules of thumb" to manage
each phase of an alliance, from for-
mation to termination. Hewlett-
7. Packard developed 60 different
tools and templates, included in a
300-page manual for guiding deci-
sion making in specific alliance sit-
uations. The manual included
such tools as a template for making
the business case for an alliance, a
partner-evaluation form, a negoti-
ations template outlining the roles
and responsibilities of different
departments, a list of ways to mea-
sure alliance performance and an
alliance-termination checklist.
Other companies, too, have
found that creating tools, tem-
plates and processes is valuable.
For example, using the Spatial
Paradigm for Information Retriev-
al and Exploration, or SPiRE,
database (www.pnl.gov/infoviz/
spire/spire.html), Dow Chemical
developed a process for identify-
ing potential alliance partners.
The company was able to create a
topographical map pinpointing
the overlap between its patent
domains and the patent domains
of possible alliance partners. With
this tool, the company discovered
the potential for an alliance with
Lucent Technologies in the area of
optical communications. The
companies subsequently formed a
broad-based alliance between three Dow businesses and three
8. Lucent businesses that had complementary technologies.
After identifying potential partners, companies need to assess
whether or not they will be able to work together effectively.
Lilly
developed a process of sending a due-diligence team to the
potential alliance partner to evaluate the partner's resources and
capabilities and to assess its culture. The team looks at such
things as the partner's financial condition, information technol*
ogy, research capabilities, and health and safety record. Of par-
ticular importance is tbe evaluation ofthe partner's culture. In
A Dedicated Function Improves the Success of Strategic
Alliances. 1993-1997
ALLIANCE
SUCCESS RATE
(based on results of survey
of alliance managers)
AVERAGE NO.
OF ALLIANCES
AVERAGE ABNORMAL
STOCK GAINS
(when alliance Is
announced)
80%
63%
40%
20%
10. inowledge Management.
.earning
DEDICATED
ALLIANCE
FUNCTION
External Visibility.
Support
Internal Coordination,
legitimacy
illiance Assessment,
intervention To Fix Problems
THE VALUE
Greater Alliance Success Rate
From Improved Practices
Greater Abnormal
Stock-Market Gains
•3-
Ability To Form More Alliances
and To Attract Belter Partners
Lilly's experience, culture clashes are one of the main reasons
alliances fail. During the cultural assessment, the team
examines
the potential partner's corporate values and expectations, orga-
nizational structure, reward systems and incentives, leadership
styles, decision-making processes, patterns of human interac-
tion, work practices, history of partnerships, and human-
11. resources practices. Nelson M. Sims, Lilly's executive director
of
alliance management, states that the evaluation is used both as a
screening mechanism and as a tool to assist Lilly in organizing,
staffing and governing the alliance. , i •
SUMMER 2001 MIT SLOAN MANACEMEMT REVIEW 3 9
Tools To Use Across the Alliance Life Cycle
•Value-chain
analysis form
•Needs-analysis
checklist
'Manufacturing-
vs.-partnering
analysis
ALLIANCE
iusiNESs CASE
'Partner screening
form
'Technology and
patent-domain
maps
•Cultural-fit
evaluation form
'Due-diligence
12. team
PARTNER 1
ASSESSMENT AND
SELECTION
Negotiations matrix
Needs-vs.-wants
checklist
Alliance-contract
template
Alliance-structure
guidelines
Alliance-metrics
framework
^ ALLIANCE ' V ^
NEGOTIATION A N D ^
GOVERNANCE
•Problem-tracking
template
• Trust-building work
sheet
• Alliance-contact list
•Alliance-
communication
infrastructure
r ALLIANCE ^
' MANAGEMENT -
13. •Relationship-
evaluation form
•Yearly status
report
•Termination
checklist
•Termination-
planning work
sheet
ASSESSMENT A N D ^
TERMINATION '
Dedicated alliance functions also facilitate the sharing of
tacit knowledge through training programs and internal net-
works of alliance managers. For example, HP developed a two-
day course on alliance management that it offered three times a
year. The company also provided short three-hour courses on
alliance management and made its alliance materials available
on the iiKernal HP alliance Web site. HP also created opportu-
nities for internal networking among managers through inter-
nal training programs, companywide alliance summits and
"virtual meetings" with executives involved in managing
alliances. And the company regularly sent its alliance managers
to alliance-management programs at business schools to help
its managers develop external networks of contacts.
Formal training programs are one route; informal programs
are another. Many companies with alliance functions have cre-
ated roundtables with opportunities for alliance managers to
get together and informally share their alliance experience. To
that end, Nortel initiated a three-day workshop and networking
initiative for alliance managers. BellSouth and Motorola have
14. conducted similar two-day workshops for people to meet and
loam from one another.
Increasing External Visibility A dedicated alliance function can
play an iinptirtant role in keeping the market apprised of both
[lew alliances and successful events in ongoing alliances. Such
external visibility can enhance the reputation ofthe company
in the marketplace and support the perception that alliances
are adding value. The creation of a dedicated alliance function
sends a signal to the marketplace and to potential partners
that the company is committed hoth to its alliances and to
managing them effectively. And when a potential partner
wants to contact a company about establishing an alliance, a
dedicated function offers an easy, highly visible point of con-
tact. In essence, it provides a place to screen potential partners
and bring in the appropriate internal parties if a partnership
looks attractive.
For instance, Oracle put the partnering process on the Web
with Alliance Online (now Oracle Partners Program) and
offered terms and conditions of different "tiers" of partnership
(http;//alliance.oracle.com/join/2join_pr2_l.htm). Potential
partners could choose the level that fit them best. At the tier I
level (mostly resellers, integrators and application developers),
companies could sign up for a specific type of agreement online
and not have to talk with someone in Oracle's strategic-alliance
function. Oracle also used its Web site to gather information on
its partners' products and services, thereby developing detailed
partner profiles. Accessing those profiles, customers easily
matched the products and services they desired with those pro-
vided by Oracle partners. The Web site allowed the company to
enhance its external visibility, and it emerged as the primary
means of recruiting and developing partnerships with more
than 7,000 tier I partners. It also allowed Oracle's strategic-
alliance function to focus the majority of its human resources
15. on its higher-profile, more strategically important partners.
Providing Internal Coordination One reason that alliances fail is
the
inability' of one partner or another to mobilize internal
resources to
support the initiative. Visionary alliance leaders may lack the
orga-
nizational authority to access key resources necessary to ensure
alliance success. An alliance executive at a company without
such a
function observed: "We have a difficult time supporting our
alliance
initiatives, because many times the various resources and skills
needed to support a particular alliance are located in different
func-
tions around the company. Unless it is a very high-profile
alliance,
no one person has the power to make sure the company's full
resources are utilized to help the alliance succeed. You have to
go
begging to each unit and hope that they will support you. But
that's
time-consuming, and we don't always get the support we
should."
40 MIT SLOAN MANAGEMENT REVIEW SUMMER 2001
A dedicated alliance function helps solve that problem in two
ways. First, it has the organizational legitimacy to reach across
divisions and functions and request the resources necessary to
support the company's alliance initiatives. When particular
func-
tions are not responsive, it can quickly elevate the issue through
16. the organization's hierarchy and ask the appropriate executives
to
make a decision on whether a particular function or division
should support an alliance initiative. Second, over time,
individ-
uals within the alliance fUnction develop networks of contacts
throughout the organization. They come to know where to find
useful resources within the organization. Such networks also
help
develop trust between alliance managers and employees
through-
out the organization — and thereby lead to reciprocal
exchanges.
A dedicated alliance function also can provide internal coor-
dination for the organization's strategic priorities. Some studies
suggest that one of the main reasons alliances fail is that the
partnership's objectives no longer match one or both partners'
strategic priorities.^ As one alliance executive complained, "We
will sometimes get far along in an alliance, only to fmd that
another company initiative is in conflict with the alhance. For
example, in one case, an internal group started to develop a sim-
ilar technology that our partner already had developed. Should
they have developed it? I don't know. But we needed some
process for cotnmunicating internally the strategic priorities of
our alliances and how they fit with our overall strategy."
Companies need to have a mechanism for communicating
which alliance initiatives are most important to achieving the
overall strategy — as well as which alliance partners are the
most important. The alliance function ensures that such issues
are constantly addressed in the company's stralegy-making ses-
sions and then are communicated throughout the organization.
Facilitating intervention and Accauntability A 1999 survey by
17. Anderson Consulting (now Accenture) found that only 51% of
companies that form alliances had any kind of formal metrics in
place to assess alliance performance.'' Of those, only about 20%
believed that the metrics they had in place were really the
appropriate ones to use. In our research, we found that 76% of
companies with a dedicated alliance function had implemented
formal alliance metrics. In contrast, only 30% of the companies
without a dedicated function had done so.
Many executives we interviewed indicated that an impor-
tant benefit of creating an alliance function was that it com-
pelled the company to develop alliance metrics and to evaluate
the performance of its alliances systematically. Moreover, doing
so compelled senior managers to intervene when an alliance
was struggling. Lilly established a yearly "health check"
process
for each of its key alliances, using surveys of both Lilly
employ-
ees and the partner's alliance managers. After the survey, an
alliance manager from the dedicated function could sit down
with the leader of a particular alliance to discuss the results and
offer recommendations. In some cases, Lilly's dedicated strate-
gic-alliance group found that it needed to replace the leader of
a particular Lilly alliance.
Hewlett-Packard Alliance Structure for Key Aiiiance Partners
'ice President
Business Unit A
(e.g.. printers}
lice President
Business Unit B
[e.g.. computers)
18. Executive-level
alignment
between partners
at CEO/VP level
anager Manager
Alliance wittil'
Microsoft
Microsoft Alliances
Manager
(Coordinator)
Cisco Alliances
Manager
pe/AOL
ces Manager
Programs Manager
SUMMER 2001 MIT SLOAN MANAGEMENT REVIEW 4 1
Dedicated alliance functions offer internal legitimacy to
alliances, assist in setting strategic
priorities and draw on resources across the company. That is
why the function cannot he buried
within a particular division or be relegated to low-level support
within husiness development.
When serious conflicts arise, the alliance function can help
19. resolve them. One executive commented, "Sometimes an
alliance
has lived beyond its useful life. You need someone to step in
and
either pull the plug or push it in new directions." Alliance
failure
is the culmination ofa chain of events. Not surprisingly, signs of
distress are often visible early on, and with monitoring, the
alliance function can step in and intervene appropriately.
How To Organize an Effective Strategic-Alliance Function
One of the major challenges of creating an alliance function is
knowing how to organize it. It is possible to organize the func-
tion around key partners, industries, business units, geographic
areas or a combination of all four. How an alliance function is
organized influences its strategy and effectiveness. For
instance,
if the alliance function is organized by business unit, then the
function will reflect the idiosyncrasies of each business unit and
the industry in which it operates. If the alliance function is
organized geographically, then knowledge about partners and
coordination mechanisms, for example, will be accumulated
primarily with a geographic focus.
Identify Key Strategic Parameters and Organize Aroand Them
Organizing around key strategic parameters enhances the prob-
ability of alliance success. For example, a company with a large
number of alliances and a few central players may identify
partner-speciflc knowledge and partner-specific strategic
priorities
as critical. As a result, it may decide to organize the dedicated
alliance function around central alliance partners.
Hewlett-Packard is a good example of a company that cre-
ated processes to share knowledge on how to work with a spe-
cific alliance partner. (See "Hewlett-Packard Alliance Structure
20. for Key Alliance Partners.") It identified a few key strategic
part-
ners with which it had numerous alliances, such as Microsoft,
Cisco, Oracle and America Online and Netscape (now part of
AOL Time Warner) among others. HP created a partner-level
alliance-manager position to oversee all its alliances with each
partner. The strategic-partner-level alliance managers had the
responsibility of working with the managers and teams of the
individual alliances to ensure that each of the partner's alliances
would be as successful as possible. Because HP had numerous
marketing and technical alliances with partners such as
Microsoft, it also assigned some marketing and technical pro-
gram managers to the alliance function. The managers sup-
ported the individual alliance managers and teams on specific
marketing and technical issues relevant to their respective
alliances. Thus HP became good at sharing partner-specific
experiences and developing partner-specific priorities.
Citicorp developed a different approach. Rather than organize
around key partners, the company organized its alliance
function
around business units and geographic areas. In some divisions,
the company also used an alliance board — similar to a board of
directors — to oversee many alliances. The corporate alliance
fijnction was assigned a research-and-development and
coordinat-
ing role for the alliance functions that resided in each division.
For instance, the e-business-solutions division engaged in
alliances that were typically different from those of the retail-
banking division; therefore, the alliance function needed to
create
alliance-management knowledge relevant to that specific
division.
Furthermore, to respond to differences among geographic
regions, each of Citicorp's divisions created an alliance function
21. within each region. For example, the e-business-solutions
alliance group in Latin America would oversee all Citicorp's
Latin
American alliances in the e-business sector. The e-business
divi-
sion's Latin American alliance board would review potential
Latin American alliances — and approve or reject them.
Organize Ta Facilitate the Exchange of Knowledge on Specific
Topics
The strategic-alliance funciion should bt.' organized to make it
easy for individuals throughout the organization to locate cod-
ified or tacit knowledge on a particular issue, type of alliance or
phase of the alliance life cycle. In other words, in addition to
developing partner-specific, business-specific or geography-
specific knowledge, companies should charge certain individ-
uals with responsibility for developing topic-specific
knowledge.
For example, when people within the organization want to
know the best way to negotiate a strategic-alliance agreement,
what contractual provisions and governance arrangements are
most appropriate, which metrics should be used, or the most
effective way to resolve disagreements with partners, they
should be able to access that information easily through the
strategic-alliance function. In most cases, someone within the
alliance function acts as the internal expert and is assigned the
4 2 MIT SLOAN MANAGEMENT REVIEW SUMMER 2001
responsibility of developing and acquiring knowledge on a par-
ticular element of the alliance life cycle. For some companies, it
may be important to develop expertise on specific types of
alliances — for example, those tied to research and develop-
22. ment, marketing and cobranding, manufacturing, standard set-
ting, consolidation joint ventures or new joint ventures. The
issues involved in setting up such alliances can be very
different.
For example, whenever the success of an alliance depends on
the exchange of knowledge — as is the case in R&D alliances
—
equity-sharing governance arrangements are preferable because
they give both parties the incentives necessary for them to bring
all relevant knowledge to the table. But when each party brings
to the alliance an "easy to value" resource — as with most mar-
keting and cobranding alliances — contractual governance
arrangements tend to be more suitable.
Locate the Function at on Appropriate Level of the Organization
When done properly, dedicated alliance functions offer internal
legitimacy to alliances, assist in setting strategic priorities and
draw on resources across the company. That is why the function
cannot be buried within a particular division or be relegated to
low-level support within business development. It is critical
that the director or vice president of the strategic-alliance func-
tion report to the COO or president of the company. Because
alliances play an increasingly important role in overall corpo-
rate strategy, the person in charge of alliances should
participate
in the strategy-making processes at the highest level of the com-
pany. Moreover, if the alliance function's director reports to the
company president or COO, the function will have the visibility
and reach to cut across boundaries and draw on the company's
resources in support of its alliance initiatives.
A Critical Competence
Companies with a dedicated alliance function have been more
successful than their counterparts at fmding ways to solve prob-
lems regarding knowledge management, external visibility,
internal coordination, and accountability — the underpinnings
23. of an alliance-management capability.
But although a dedicated alliance function can create value,
success does not come without challenges. First, setting up such
a
function requires a serious investment of the company's
resources and its people's time. Businesses must be large
enough
or enter into enough alliances to cover that investment. Second,
deciding where to locate the function in the organization — and
how to get line managers to appreciate the role of such a
function
and recognize its vaiue — can be difficult. Finally, establishing
codified and consistent procedures may mean inappropriately
emphasizing process over speed in decision making.
Such challenges exist. But the company that surmounts them
and builds a successful dedicated strategic alliance function will
reap substantial rewards. Companies with a well-developed
alliance function generate greater stock-market wealth through
their alliances and better long-term strategic-alliance success
rates. Over time, investment in an alliance-management capa-
bility enhances the reputation ofa company as a preferred part-
ner. Hence an alliance-management capability can be thought
of as a competence in itself, one that can reap rich rewards for
the organization that knows its worth.
ACKNOWLEDGMENTS
This research greatly benefited from the support of the Wharton
Emerging
Technologies Management Research Program, Mack Center for
Managing
Technological Innovation.
ADDITIONAL RESOURCES
24. A helpful resource is John Harbison and Peter Pekar's "Smart
Alliances:
A Practical Guide to Repeatable Success." published in 2000.
For a
more scholarly development of ideas in the article, we
recommend:
Y, Doz and G. Hamel's 1998 book from Harvard Business
School
Press, "The Alliance Advantage: The Art of Creating Value
Through
Partnering"; J. Dyer and H. Singh's 1998 "The Relational View"
in
Academy of Management Review; R, Gulati's "Alliances and
Networks,"
which appeared in Strategic Management Journal in 1998;
"Building
Alliance Capability: A Knowledge-Based Approach" from the
1999
Academy of Management Best Paper Proceedings and "Alliance
Capability. Stock Market Response and Long-Term Alliance
Success"
from the 2000 Academy of Management Proceedings, both by P.
Kale
and H. Singh. Also of interest are J. Koh and N. Venkatraman's
"Joint
Venture Formations and Stock Market Reactions," which
appeared in
1991 in Academy of Management Journal: M. Lyies' "Learning
Among
Joint-Venture Sophisticated Companies" in a 1998 Management
International Review special issue, and Bernard Simonin's 1997
article.
"The Importance of Collaborative Know-How" in Academy ot
Management Journal.
26. and enables it to identify, analyze, and monitor the political,
economic, social, technology, legal, and environmental factors
that may impact its operations (Frue, 2017). PESTEL analyses
are used in industry and business to determine organizational
situation, direction, and potential; as well as strategic planning
(Lin, 2013).
Political Factors
What is the government's involvement in the business
environment, and the degree of that involvement? Some
examples of political factors are labor laws, taxation policies,
tariff and nontariff barriers, and environmental regulations.
Political factors may also include the services and goods that a
government provides. Changes in the priorities of government
spending may have a profound impact on policy, strategy,
management, and process issues (Halik, 2012; Lin, 2013;
Thomas, 2007).
Economic Factors
Economic factors include the general economic climate, fiscal
and monetary policies, economic trends, economic growth,
employment levels, government funding, and consumer
confidence, and so forth (Halik, 2012; Lin, 2013; Thomas,
2007).
Social Factors
Social factors relate to demographics such as age and
population growth, behavior, lifestyle changes, diversity,
education, and career attitudes, among others. Trends in social
factors may influence the demand for a company's products and
services, and may also affect how that company operates and
adapts (Halik, 2012; Lin, 2013; Thomas, 2007).
Technological Factors
Technological factors include advances in technology,
communications, and information technology, as well as
innovation and research and development (R&D). These factors
may impact how knowledge is shared and distributed, and the
speed at which this knowledge is disseminated. In addition,
advances in technology and communication may influence how
27. people communicate and socialize (Chao, Peng, & Nunes, 2007;
Halik, 2012; Lin, 2013; Thomas, 2007).
Environmenal Factors
Environmental factors include all those that impact, or are
influenced by, the surrounding environment. Environmental
factors play a crucial role in certain industries, such as
agriculture, tourism, and recreation. These factors include
geographical location, weather, climate, global climate change,
and environmental offsets (PESTLE Analysis, 2017).
Legal Factors
Legal factors have both external and internal aspects. Certain
laws and regulations may impact the business environment in a
country, while corporate policies may influence how a company
operates. Legal analysis takes into account both of these
aspects, and then lays out the strategies accordingly. Examples
of laws and regulations include labor laws, safety standards, and
consumer laws (PESTLE Analysis, 2017).
References
Chao, G., Peng, A., & Nunes, M.B. (2007). Using PEST
analysis as a tool for the refining and focusing contexts for
information systems research. Proceedings of the 6th European
Conference on Research Methodology for Business and
Management Studies.
Frue, K. (2017). Why do PEST analysis for your business?
Retrieved from http://pestleanalysis.com/
Halik, J. (2012). The application of PEST analysis based on
EBRD and IBRD methodology. Central European Review, 1(3).
14-21
Lin, H. (2013). Going to college online? A PEST analysis of
MOOCs. Journal of Educational Technology Systems, 42(4),
369-382.
Thomas, H. (2007). An analysis of the environment and
competitive dynamics of management education. Journal of
Management Development, 26(1), 9-21
PESTLE Analysis (2017). What is PESTLE analysis? A tool for
business analysis. Retrieved from www.
28. pestleanalysis.com/Learning ResourceSWOT and
PESTELProfessionals in the Field
What Are SWOT and PESTEL?
SWOT and PESTEL are analytical tools that help identify the
key external and internal factors that should be taken into
account in order to achieve success in a project or initiative.
They are usually used together, and are applied in a group
setting to support effective strategic planning, decision making
and action planning. SWOT and PESTEL are cost- and time-
efficient means for highlighting key issues relating to the
context of a project or initiative which, if not identified and
addressed, could critically affect the chances of success. They
also offer the benefit of framing these issues in a way that is
easy for participants to understand and discuss.;
Requirements for SWOT
· experienced facilitator
· rapporteur
· flip chart with plenty of paper and marker pens
· optional: Laptop and projector
· 8 to 12 participants representing diverse relevant roles and
ideally including decision- makers. (Alternatively, up to 40
participants if using subgroups; see Variations below.)
· one hour for quick SWOT; two hours for normal SWOT; up to
a half-day SWOT workshop for major initiatives; plus
preparation time.
Additional Requirements, if Adding PESTEL
· 1 to 6 people with good research and analysis skills to conduct
initial research on the six PESTEL domains before the meeting
and also participate at the meeting. (They do count against the
suggested limit of 12 participants.)
· one to two hours to review, expand, and rank PESTEL inputs
from research, before continuing with SWOTWhen and Why to
UseSWOT: Turning Around the Order for Better Results
29. The term SWOT refers to strengths, weaknesses, opportunities,
and threats. Strengths and weaknesses are internal factors: they
exist inside the organization (or within the partnership, if
relevant to the project being analysed). Opportunities and
threats are external: they exist outside the organization. SWOT
is a widely used and fairly well-known tool. The method
described here incorporates a couple of changes from the
ordinary SWOT, intended to produce the strongest possible
results.
SWOT has often been done in the order implied by the name:
first examining strengths, then weaknesses, opportunities, and
finally threats. However, it is recommended instead to first
examine the external factors—opportunities and threats—and
then proceed to the internal ones. This method helps keep a
stronger focus on results and helps you identify which threats
are “critical threats” (i.e., those compounded by corresponding
weaknesses) and which opportunities are “promising
opportunities” (i.e., those that are matched by corresponding
strengths). Those who have changed the order of work in
SWOT, by examining opportunities and threats first, often
report being amazed at the improvement in the value of the
SWOT process (see Watkins, 2007).
Any project or initiative that is to be assessed using SWOT
must have clearly defined objectives that are well understood by
participants. Clear objectives are a kind of lens, through which
the various external and internal factors relevant to your project
can be identified as strengths or weaknesses, opportunities or
threats. If the objectives seem to be unclear, then have them
clarified and agreed before embarking on a SWOT.
The SWOT framework can be thought of as a matrix. Here it is
presented with external factors first.
SWOT Framework
Favourable for achieving the objectives
Unfavourable for achieving the objectives
External origin
30. Opportunities
Threats
Internal origin
Strengths
WeaknessesPESTEL: A Powerful Complement to SWOT
PESTEL, a complementary tool to SWOT, expands on the
analysis of external context by looking in detail at specific
types of issues that frequently have an impact on
implementation of projects or initiatives. The term PESTEL
refers to the domains it considers: political, economic, social,
technological, environmental, and legal. PESTEL involves
identifying the factors in each of these six domains that are
relevant for the project being considered. A special focus of
PESTEL is identifying trends. Thus it is helpful for thinking
proactively and anticipating change, rather than being overtaken
by it.
It is recommended to use PESTEL and SWOT together. PESTEL
complements SWOT by identifying specific relevant factors
(such as economic trends, social attitudes, technological
developments, etc.) that are significant for the project being
considered, and SWOT then classifies them as either
opportunities or threats. The more complex your context or
operating environment is, the more value PESTEL can offer, by
identifying factors that would be missed by SWOT alone.
Applying PESTEL is fairly simple; of the nine steps to do a
SWOT described below, only steps 2 and 5 are done differently
when using PESTEL. An extensive set of PESTEL questions is
provided in Annex 2 (see below), to help participants identify
more quickly and easily the relevant factors in each of its six
domains. If you’re short of time, you can just do a SWOT. But
if time permits, then applying PESTEL and SWOT together
results in a stronger analysis, a better understanding of the
current situation, and the potential for improved decision
making.Applications and Benefits
SWOT (and, where possible, PESTEL) can be applied for the
following purposes:
31. · Creating, or helping create, a strategic plan or an action plan
when launching a project or initiative. This is perhaps the most
common application of SWOT.
· Weighing the pros and cons of major decisions. For example,
use them to help decide whether to create or join in a new
initiative, to establish a significant new partnership, to
implement new methods or tools (technological or non-
technological), to help plan a reorganization, to assess use of
resources, to decide on how to improve operational efficiency,
etc.
· Reviewing positioning on an ongoing project or initiative at a
key moments of reflection, identifying needed change in the
approach or methods being used, and making adjustments.
SWOT and PESTEL are flexible; they can be applied for
planning or decision making concerning an entire project or
initiative, or alternatively they can be used to focus on specific
stages or components of a project. For example, if you are
working on an immunization campaign, you could address all
the various programmatic aspects (supply and cold chain, any
needed training of health workers, collaboration with
government and partners, public communication, etc.) in a
single SWOT, or you could break out the public communication
aspect and deal with that separately from the other aspects.
Similarly, SWOT and PESTEL can be applied to large or small
(but significant) projects or decisions. If time is very limited, or
for small projects, do a quick SWOT in an hour (remembering
to identify the opportunities and threats first, and then the
strengths and weaknesses). With more time, or for projects and
decisions with larger implications, do a full SWOT and PESTEL
in about three hours, plus preparation time. With even more
time, or for very significant projects, expand the time
accordingly, up to a full day workshop.
For a simple issue or question, SWOT and PESTEL may provide
sufficient basis for making final decisions or creating an action
plan. For complex questions, SWOT and PESTEL will at least
lay a solid foundation, at low cost, for any further in-depth
32. research and analysis that may be required. Prioritization of the
issues in a PESTEL and SWOT is typically quick and may need
to be refined when dealing with a really complex challenge.
SWOT and PESTEL are group processes that also offer the
following benefits:
· The breadth of perspectives in the group will make the
analysis broader and deeper than what an individual could
produce in the same time, and will help overcome individual
bias and limited viewpoints.
· The process will help get a team onto the same page by
creating a shared understanding of the project context and key
external and internal factors. SWOT participants often report
being surprised by the views of others on even simple issues
and challenges. It is best to surface those surprises early before
they can impede effective action.
· The process will also start the key conversations that are
needed to achieve project success. The connections and
conversations can continue as needed after the SWOT
concludes, throughout the duration of the project.
How to Apply
The following are the steps for a SWOT. The more time you
have for the SWOT, the more time you should spend on the
analysis and discussion steps (steps 5 through 9 below). If you
are doing PESTEL, a little additional preparatory research will
be needed before the session.Prepare in Advance
1. Prepare a clear, brief draft statement of the project objectives
or the decision to be analysed in the SWOT. The statement
should consist of only a few sentences. If you already have a
project plan or proposal that is longer than one page, shorten it
for purposes of the SWOT. You don’t need to capture every
detail: include only the essence of the project objectives and
expected outcomes or of the decision that is under
consideration.
2. Invite participants (about 8 to 12 for a normal SWOT) who
will be directly involved in the project, or in the
implementation of the decision. Share with them, in advance,
33. the draft statement of the objectives and outcomes. Help the
participants prepare for the SWOT in one of the two following
ways:
· Assign some or all participants to conduct PESTEL research
and to share their findings with you a few days before the event.
Assign responsibility for surveying factors in each of the six
PESTEL domains: give each of the domains to one person, split
them among two to three people, or assign one person who is
very familiar with the context to cover them all. The output of
the PESTEL research is, for each domain, a simple list of the
key factors with just enough information to clearly define each
of them. This could be a sentence, or a brief paragraph. PESTEL
research for a single domain could run anywhere from half a
page to a few pages.
· Simply ask participants to think about threats, opportunities,
strengths, and weaknesses before the event. Although not as
powerful as PESTEL, this will still help the SWOT to be more
relevant.When You Are Ready to Start
3. Convene the meeting and briefly describe the method. Ensure
the rapporteurs are ready; their notes will complement the flip
chart sheets that you will write during the meeting.
4. Confirm the group’s understanding of the objectives and
outcomes to be analyzed in the SWOT, and which team
(organization, partnership) would take action to implement
them.
5. Brainstorm the external categories (threats and
opportunities):
· If you used PESTEL, then its results should be the starting
point. Share the lists of PESTEL factors identified by those who
carried out the PESTEL analysis (political, economic, social,
etc.) by posting them all at once on flip chart sheets for all to
see, or displaying them on PowerPoint slides. Ask other
participants to complement the PESTEL research by suggesting
additional factors, which helps take advantage of different
knowledge bases among participants. Next, brainstorm about
what opportunities each PESTEL factor offers and what threats
34. it carries. Record the results on flip chart sheets. At this stage
you are looking for lots of relevant ideas. Once all the PESTEL
inputs have been discussed, ask the group whether they can
identify any additional Threats, and then additional
Opportunities; you can prompt them using the questions in
Annex 1 below.
· If you did not use PESTEL, simply brainstorm the threats and
opportunities, prompting participants using the relevant
questions in Annex 1 below. Look for lots of ideas; don’t filter
for importance yet. Use a sheet of flip chart paper (or even more
than one) for each category
6. Next, brainstorm the internal categories (weaknesses and
strengths), using the corresponding questions in Annex 1 as
prompts, and looking for lots of relevant ideas.
7. Rank the factors (O, T, S, and W) by importance. Remind
participants that the importance is linked to the potential impact
of the factor on the objectives and outcomes of the project or
decision, and to the likelihood of such impact. Once all the
categories have been brainstormed, you will have four separate
lists. Post all sheets so that participants can see them. Then
discuss them to rank the ideas by importance and mark each
idea with symbols to indicate the group’s overall opinion (e.g.,
++ for very important factors, + for ones with some importance,
or 0 for unimportant factors). Keep the discussion informal; you
can ask for a show of hands, but don’t take written ballots for
ranking. Or give all participants sticky dots with three different
colors and have them assign their ratings to each of the ideas.
8. Discuss how the highly rated items in the categories relate to
each other. For example, a certain strength may relate to a
certain opportunity, or a certain threat may be made more
significant because of a certain weakness. This is easier if you
have used PESTEL and discussed threats and opportunities first
because those factors will make the impact of various strengths
and weaknesses more clear.
9. Optional but recommended: At the end of the session, if your
group has decision-making power, outline a short action plan
35. based on your analysis and on the objectives of the project or
decision. If your group is acting only in an advisory capacity,
suggest a few plausible options for action. Or if your objective
was to make a yes or no decision, summarize your
recommendation and reasons. Your action plan or
recommendation should:
· pursue opportunities
· overcome, prevent or avoid threats
· use or capitalize on strengths
· overcome, minimize or compensate for weaknessesFollow-Up
10. After the SWOT, prepare a written summary with decisions
and recommendations based on the flip chart sheets and notes
from the notetaker, and distribute it to participants, decision
makers and other relevant recipients.
Tips for SuccessSWOT
· Don’t make the subject of a SWOT too broad; for example,
don’t try to assess every aspect of an office’s or division’s
work. Instead focus on specific, significant projects and
decisions, and conduct separate analyses for each, as time
permits.
· Ensure you have diversity among participants in a SWOT. A
group composed of participants with diverse backgrounds and
different perspectives can identify more of the critical factors,
more quickly, than can a homogeneous group.
· For every project, some opportunities and threats are obvious,
but others are hard to see because they are still developing and
will have their full impact in the future. The latter kind of
opportunities and threats are more difficult to identify and
properly assess, but are potentially the most significant of all.
· Although SWOT is an analytical exercise, its success depends
on a flow of ideas from participants. Therefore try to establish a
relaxed and participatory tone; consider using an icebreaker if
team members don’t know each other well (see the Variations
section below).
· During the discussion, keep the focus on the objectives and
expected outcomes of the project/decision, and how the various
36. factors relate to the objectives.
· If you are doing a quick SWOT (less than one hour), then it is
OK for the statements of external factors and internal strengths
and weaknesses to be somewhat general (though they should
always be accurate), and for the final ranking of the factors
(step 7 above) to be done quickly and somewhat informally.
· If you are doing an in-depth SWOT (three hours or more,
including PESTEL) then get multiple perspectives by involving
participants from diverse, relevant backgrounds. Involve team
leaders and decision makers in the SWOT; without them, you
will run the risk of your analysis and recommendations being
ignored. Try to ensure that the statements of external factors
and internal strengths and weaknesses are both precise and
verifiable. Do the ranking exercise (step 7) thoroughly, so that
the most significant factors emerge clearly.PESTEL
· When assigning persons to do PESTEL research before the
SWOT session, try to match the PESTEL domains with persons
who have knowledge of those domains. (See Annex 1 for details
of all six domains.) Thus a media expert would be strongest in
the social domain, a lawyer or someone with legal background
in the legal domain, etc. Those who do the PESTEL analysis
should also participate at the SWOT so that they can explain
and support their choice of factors.
· To help identify PESTEL factors and trends, make use of any
relevant and high-quality analyses that already exist from
internal or external sources.
· Give weight to the factors identified in PESTEL according to
your objectives; for example, if your objective involves
increasing birth registration, then legal factors are obviously of
prime importance; if your objective is community mobilization
for sanitation, then social factors are critical, and so forth.
Variations Subgroups on the Same Issue
If your group is large (more than 10 people):
1. Convene the meeting as usual and confirm the understanding
of the objectives and expected outcomes. Then divide the group
into two to four subgroups of up to 8 to 10 people, each with a
37. facilitator, a notetaker, and a flip chart.
2. Have each group brainstorm each category (O, T, S, and W)
for the objective or decision being discussed, in parallel.
Encourage the small groups to be very informal and to generate
as many ideas as possible. Ensure that each subgroup uses the
same methods for recording the discussions (e.g., a flip chart,
computer-based notetaking, group members writing on cards,
etc.) This will greatly facilitate aggregating and/or comparing
the outputs of the various groups.
3. Reconvene in plenary and gather all ideas from all groups,
one group at a time for each of O, T, S and W. Through
discussion, rank the items in each category, discuss how they
related to each other, and if possible prepare an action plan or
recommendation.Subgroups on Related Issues and Challenges
The following variations may be used for approaching several
related issues or challenges:
· Parallel SWOTs—If you have a few related key objectives,
you can do parallel SWOTs on each of them, followed by a
plenary session to summarize the key thinking from each. The
plenary session may identify commonalities across objectives—
actions relevant for each objective, threats to each, weaknesses
or strengths important for each, etc.—which can then be
priorities for action as a result of their cross-cutting
significance.
· Icebreaker SWOT—The simple and quick variant can be used
as an icebreaker among people who will be working together in
a planning session, but who may not know each other well. It is
also suitable for kicking off a strategic discussion that will
continue later, for example in other sessions of a longer event.
Do not mistake an icebreaker SWOT for a full analysis; it is at
most a very quick introduction to the issues. To implement it,
begin by simply introducing the objective under consideration
in one sentence at the event (no advance preparation required).
Brainstorm and discuss only briefly—perhaps only for 5 to 10
minutes each—the relevant threats, opportunities, strengths, and
weaknesses. To close the exercise, choose the top one to three
38. items in each category by group vote.
· Expanded PESTEL—You can amplify the power of the
PESTEL exercise in several ways:
· Assign additional persons to conduct research and identify the
relevant factors. You may even engage consultants to do such
work, if the project or initiative being considered is a major
organizational priority.
· Add an additional group work session dedicated only to
discussing and expanding on the PESTEL factors. This should
take place before the SWOT analysis, so that it can feed in to
the identification of threats and opportunities.
· Online SWOT—If your participants have adequate internet
connections, you can convene a SWOT in a web conferencing
tool (e.g. Skype for Business, Adobe Connect, GoToMeeting,
etc.). Use audio, not text chat, to gather inputs, but prefer no
video unless all participants have excellent bandwidth. Do not
exceed 10 to 12 participants. Check periodically with the
rapporteur to ensure that the discussions are being captured.
Online SWOTs are more challenging than the in-person version
but may sometimes be the only option.
Annex 1: Factors to Consider in PESTEL
These lists of factors are intended to help inspire and guide
your PESTEL analysis in each of the six domains: political,
economic, social, technological, environmental, and legal. Share
them with those who will be conducting the analysis, and ask
them to identify specific relevant examples in the operational
context of the project or initiative that you are considering.
Remember, all PESTEL factors have relevance only in the
specific operational context. Therefore, identify the ones that
could impact your project and focus your analysis on
them.Political
· government policies (national, state/provincial, local, other)
· government resource allocations
· stakeholder needs or demands
· lobbying/campaigning by interest groups (local, national,
39. international) and influence or pressure from international
actors (e.g., other governments, international organizations,
etc.)
· armed conflicts
· changes in power, influence, connectedness of key relevant
actors/groups
· expected direction of future political change: future policy
prospects; upcoming elections and possible change in
government (local, state, national) and its consequences; other
relevant political trendsEconomic
· economic situation: local, national, regional, global
· economic situation of specific relevant communities or
population groups (including employment, taxation, mobility,
etc.)
· economic situation and prospects of any relevant industries
· infrastructure (local, national, other)
· financial situation of key partners or other relevant entities
· availability of private-sector resources relevant for the
project/initiative
· expected direction of economic change: prevailing economic
trends, trade and market cycles; expected economic
interventions by governments and their consequences; other
relevant economic trendsSocial
· demographics and population trends
· health among populations
· education levels
· access to essential services
· public perceptions (of an issue, an initiative, an organization
or other actor)
· relevant customs, traditional beliefs, attitudes (e.g. towards
children, adolescents, gender, etc.)
· media views
· role models, celebrities, spokespersons
· knowledge, attitudes and practices of a particular population
group (with regard to a relevant issue)
· potential for knowledge exchange
40. · migration (which also has political, economic and legal
dimensions)
· major relevant events (upcoming or already happening) and
cultural trends
· history, to the extent that it affects social attitudes and
perceptions
· factors in social identity, e.g. religious, socio-ethnic, cultural,
etc.
· dynamics of how social change happens in the given context
· management style, staff attitudes, organizational culture
(within a major relevant organization)
· expected direction of social change: broad trends in change of
social attitudes (e.g. towards a relevant issue); other relevant
social trends
· credibility of information sources or communication channels
(e.g. media outlets, well-known individuals, etc.) among a
target population; reach of information sources/communication
channels among a target populationTechnological
· population groups’ access to technologies
· patterns of use of existing technologies (which may be
changing; e.g., evolving use of mobile phones)
· new technologies that could impact the context significantly,
or that could be used to achieve objectives
· technologies and related infrastructure/manufacturing /
importing requirements for an initiative to succeed
· possible replacement/alternative technologies
· potential for innovation
· technology transfer, access, licensing issues, other issues
related to intellectual property rights
· foreseeable technological trends: economic and social impact
of adoption of existing technologies; rate of technological
change; other technological trendsEnvironmental
· contextually relevant environmental issues: global (e.g.,
climate change), regional (e.g., flooding, droughts, etc.) or local
(e.g., contamination of water supplies)
· relevant environmental regulations or requirements (e.g., for
41. assessing potential climate change impacts of specific activities,
conforming to national or international environmental regimes,
etc.)
· environmental impacts of planned or ongoing activities
· climate, seasonality, potential impacts of weather
· trends or expected future developments in the environment
· geographical locationLegal
· human rights (including but not limited to child rights and
gender rights)
· existing legislation having an impact on any relevant factors
(economic, social, technological, environmental or other factors
relevant to the issue), or affecting population groups relevant to
the issue, or impacting the work of the organization or its
partnerships
· pending or future legislation
· international treaties/agreements, either existing or in
preparation
· standards, oversight, regulation and regulatory bodies, and
expected changes in these
· ethical issues
Annex 2: Factors to Consider in SWOT
These lists of factors are intended to help inspire and guide
your SWOT discussion in each of the four categories:
opportunities, threats, strengths, and weaknesses. Share them
with participants at your SWOT session, and brainstorm for
examples relevant to the project or initiative you are
considering.
If you used PESTEL, then the review of the PESTEL outputs
will provide your first inputs into SWOT; in that case the lists
of SWOT factors given here are supplementary, and should be
used after the review of the PESTEL factors, to help identify
any SWOT factors that were not captured through PESTEL.
Opportunities
Opportunities are external factors: They are found in the
operational context within which the project, initiative, or
42. decision will be implemented.
· events or trends that offer opportunities: Political (government
policies, favorable changes in power/influence of relevant
actors, political agendas), economic (rising prosperity, new
economic opportunities or other favourable economic change),
social (behaviour patterns, demographic change), technological
(innovations, changes in technology use), environmental
(favourable climate/weather), legal (upcoming legislation or
treaties/international agreements)
· relationships or partnerships that can be applied or drawn
upon
· other actors that will likely play a role in the initiative/project
under consideration; if they could support you, they represent
potential opportunities
· new information that has become available
· practices adopted by other organizations/actors in addressing
similar challenges, which suggest opportunities
· potential funding sources
· possible efficiency gains from reallocation of resources
· other initiatives, actions, projects or products that relate to the
project/initiative under consideration
· include under opportunities the advantages, benefits or
probable results that are offered by the project/initiative that is
being considered in the SWOTThreats
Just like opportunities, threats are external factors in the
operating context for the project, initiative, or decision.
· events or trends that could threaten the project/initiative or
that put progress at risk: political, economic, social,
technological, environmental, legal
· risks and disadvantages that would be incurred by a given
initiative/action under consideration: risks to staff and/or
partners, to populations, reputational risk, financial risk,
political risk, costs, additional responsibilities, etc. A complete
risk analysis cannot usually be completed in a SWOT, but basic
risks can be identified, or risks identified in a separate pre-
existing risk analysis can be mentioned. Alternatively a more
43. complete risk analysis could be called for at a later stage
· time, including disappearing opportunities, deadlines,
unrealistic timelines
· other actors (harmful competition, contrary interests)
· opportunities that would be foregone if a given
initiative/action is undertaken
· other obstaclesStrengths
Strengths are internal to the organization. Strengths include any
kinds of capabilities or resources that the organization (and
potentially any partners involved, and any stakeholders who are
active participants in a development effort) can bring to bear, in
order to achieve the desired result of the project, initiative,
proposal, etc.
· political (power, influence, connectedness, image and
reputation)
· access (to governments, partners, populations, etc.), reach,
awareness
· presence on the ground
· economic/financial resources
· capital assets, infrastructure, equipment
· cost/competitiveness advantages
· skills, experience, knowledge (including academic or
theoretical, and also know-how, i.e. practical or applied
knowledge)
· qualifications, accreditation
· data, especially if it is unique or hard-to-replicate
· allies, contacts
· dedication, leadership and drive
· cultural strengths
· geographical advantages (presence; other)
· comparative advantages (with regard to other actors in the
same context) in systems, processes, operational efficiency,
flexibility, quality standards, other areas
· things your team/organization/partnership does well
· other noteworthy capabilities (technical, scientific,
management, leadership, other) which the organization can
44. apply
Remember to take your operating context into account when
identifying strengths and weaknesses. A strength in one context
may be worth much less, or may even be a weakness, in another
context. For example, available budget at the beginning of a
budget cycle is worth more than the same amount of available
budget near the end of a cycle.Weaknesses
Similar to strengths, weaknesses are internal factors within the
organization (or partnership) that would undertake the project
or initiative.
· existing gaps in capabilities or resources in the implementing
organizations; refer to the list given above under Strengths and
note anything both relevant and lacking
· weaknesses that will take effect in the future (e.g., departure
of key staff, expiry of funds, etc.)
· known vulnerabilities (i.e., things which the organization does
not do well or struggles with; every organization has such
vulnerabilities; the idea is to be aware of them during the
planning process)
· other competing priorities (which may be core activities),
pressures and internally imposed timelines that detract from
available capacity
· relevant areas where a need for improvement has been
identified (by management, by an audit, by an external
evaluation, etc.)
References
Watkins, M. (2007, March 27). From SWOT to TOWS:
Answering a reader’s strategy question. Harvard Business
Review. Retrieved from https://hbr.org/2007/03/from-swot-to-
towsanswering-a-readers-strategy-question/
GOING INTERNATIONAL: A PRACTICAL,
45. COMPREHENSIVE TEMPLATE FOR
ESTABLISHING A FOOTPRINT IN FOREIGN MARKETS
by Qamar Rizvi
Global Business | May / June 2010
Executives, entrepreneurs and managers who want to expand to
international markets, but are hesitant,
should be able to move forward and abroad after reading this
article. It contains a detailed, dynamic blueprint
that informs, educates and convinces leaders that they can
expand to and succeed in international markets.
The success abroad of companies like Research In Motion,
Magna International and McCain Foods is a
convincing argument that Canadian companies can indeed go
global. Widely recognized brands such as Roots
and Lululemon have also established footprints in foreign
markets. Yet, there are still too many Canadian
companies content to stay at home, or at best, to do nothing
further than eye expansion to the United States.
The implications are significant. In its study, Profile of Growth
Firms, Industry Canada found that while exporters
accounted for just 5.5 percent of the total firms surveyed, they
created 47 percent of jobs. The report also found
that, in addition to being extraordinary job creators, exporters
were more likely to be hyper or strong growth firms.
It’s hardly a secret that going global tops the list of great
business opportunities today. The most dramatic
exhibition that I have witnessed of globalization’s sweeping
effect on an economy is the city of Dubai, in the
United Arab Emirates. A micro-city much smaller than Toronto
and, by comparison, which just a couple of
decades ago was a village, is today the world’s third-largest re-
export center, after Singapore and Hong Kong.
46. The next several decades will see one billion people in Brazil,
Russia, India and China (the BRIC countries)
become part of the middle class. These one billion consumers
will have tremendous spending power and a deep hunger for
western labels, tastes and
concepts. Canada must capitalize on this opportunity. For
businesses, it provides the solution to one of their most pressing
needs. It delivers growth.
For government, it addresses what lies at the heart of our
economic recovery. It creates jobs.
However, given the small number of Canadian firms that
compete and are known around the world, it’s reasonable to ask
what is holding Canadian
business back. As a long-time practitioner in international
markets, and one who regularly counsels Canadian executives, I
have found that there is a
fear of failure that makes management think twice about
expanding abroad. This is understandable. Having spent much
of their lives in North America,
many Canadian leaders can find that doing business in foreign
countries is out of their comfort zone. Countries like India and
China, for example, offer
a unique set of challenges that they are not equipped to handle.
The reality is that an enormous knowledge gap exists that
paralyzes management,
builds resistance to change and promotes inertia. Nevertheless, I
sense that Canadian leaders believe that they are missing out on
a once-in-a-lifetime
opportunity. There exists a pent up demand in management
suites to tap new markets. I am convinced that these same
executives would seize the
opportunity, if only they knew how.
This article will describe a practical, comprehensive framework
47. that I believe will equip Canadian leaders with the know-how
they need to establish a
footprint in foreign markets. Equally crucial, it will equip
leaders with the discipline that will enable them to produce a
measured, yet expedient response
to the international opportunity. I call the framework
iSMARTE™, or Informed and Structured Market Acquisition
Route to Transcontinental Expansion.
Five years in making, the framework was conceived after
retracing my own experience in international markets, which
has taken me to thirty-plus
countries, across three continents.
The iSMARTE™ Framework for going international
Venturing abroad offers a compelling growth proposition, but
only if it’s done right. And the key to getting it right is know-
how, not knowledge. The
distinction is appreciable. Knowledge is a higher order of
awareness that tells you why. Know-how is a higher order of
knowledge that tells you
how…how the international opportunity applies to you, and how
you can capitalize on it.
iSMARTE™ creates this know-how. It provides lessons that are
simplified, customized and real world, so that they can be
applied, and it ensures that
the decision to expand internationally is an educated and
informed one.
» View Chart 1: The iSMARTE Framework
What makes it different?
iSMARTE™ was conceived to enable experiential learning and
produce real, tangible results. The structured framework wires
48. businesses with four
categories of cognizance that help them bridge the knowledge
divide comprehensively, in four stages and ten systematic steps.
If followed carefully,
success in a foreign market can be achieved in 12-20 months.
How it works
Businesses are paired with a veteran international coach who
administers the four-stage framework on company premises,
working shoulder to
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shoulder with the CEO and his senior team. A full-time team
member, the coach tackles international complexities by
providing a turnkey, customized
solution; he or she establishes the approach, crafts a vision,
maps out strategy and navigates the execution speed bumps. As
49. well, the coach provides
a deep reservoir of investor and professional contacts.
The four stages of expansion are Conceptualize, Embrace,
Construct, and Commercialize.
Stage One (three steps): Conceptualize international business
The first stage, arguably, is the most consequential. It shows
how the international opportunity applies to you and helps
conceptualize international
business development by providing fundamental knowledge in
an uncomplicated way. This is crucial, as it establishes a
positive mindset. And mindset
shapes approach, which in turn determines results. Simply
stated, if transcontinental expansion is undertaken with a
conservative predisposition, it will
most likely yield a modest outcome. Conversely, if international
plans are pursued with drive, it is likely to produce meaningful,
extraordinary results, as
we have seen with the likes of Research in Motion, McCain
Foods and others.
Steps 1 to 3 help develop the right approach:
Business size-up: Venturing abroad starts at home. Companies
must first determine their core competence, as all successful
international
initiatives are built on exporting expertise, not products. The
majority stumbles on this first step by developing international
strategies that are
divorced from their core business. Besides competence, all
other aspects of business, such as goals, products, positioning
and others need to be
adapted to local market needs. Gillette’s core competence was
delivering a quality shave, which it ably exported to markets
like China, India and
50. Mexico. But it also tailored its product line to income levels
and shaving requirements of those markets by marketing
double-edge and disposable
razors at a lower price point.
1.
Define international business: Albert Einstein said that the most
incomprehensible thing about the world is that it is
comprehensible. The same
applies to international business. Below are ten facts that define
international business in a comprehensible way.
Globalization is reality. McKinsey and Company estimates that
global trade could account for 80 percent of all trading activity
in the next
two decades, up from just 20 percent in the 1970′s. The late
economist, Paul Erdman, paraphrased it best when he asserted
that, “What we
are experiencing today is a process of globalization that is as
irreversible as it is inevitable. That we now live in an age when
goods, capital,
technology, people are free, and able to move from continent to
continent on a scale and at a speed unimaginable just a couple
of decades
ago. It is those who take advantage of these realities who will
be the prime producers of wealth in the 21st century.”
a.
Globalization is an entree to growing markets. Emerging
markets are expanding at impressive levels, but many still don’t
realize the
magnitude and speed at which growth is occurring. Kishore
Mahbubani, a prominent writer and thinker, helps provide
51. perspective. “Today,
Asia is experiencing what the West did in its Industrial
Revolution. Back then, Western societies enjoyed an impressive
improvement in living
standards of 50 percent in a lifetime. Larry Summers has
calculated that the comparable figure for Asia today is 10,000
percent. This one
statistic illustrates how dramatic Asia’s growth is.”
b.
Globalization is access to eager consumers. Good times have
created wealth in emerging economies, unlike in developed
nations, where
it has created debt. This has sparked an apparently insatiable
desire for and consumption of foreign merchandise, from Pepsi
cans to
Porsche cars. China is set to become Porsche’s second-biggest
car market in the world by 2012, surpassing Germany.
c.
Globalization makes strategic sense. The test of any good
strategy is its ability to deliver growth. Globalization achieves
this in magnitude
and in speed, especially when combined with innovation. Apple
has skillfully demonstrated how companies can pursue this
balanced
approach. It continues to crank up sales by introducing new
products (iPhone), entering new segments (servers, digital
music sales) and
venturing into new markets (international sales comprise nearly
60 percent of revenues). It’s a question worth pondering: If it
had been sold
just in the United States, would the iPhone have enjoyed such
success? Without new markets, the success of new product
52. innovations is
severely limited.
d.
Globalization makes financial sense. Substantial anecdotal
evidence suggests this to be true. Gillette doubled razor
shipments to 2 million
units in only 4 years upon undertaking international expansion.
Coca-Cola more than quadrupled servings to 6 million per day
in just 6 years,
and Research in Motion tripled revenues in three years, helped
by its push into new countries. Of the 25 worlds’ largest
companies listed by
Forbes, all have crossed borders.
e.
Globalization makes operational sense. Trade and investment
barriers are coming down, making globalization more
achievable today than
ever before. In 1950 there were 50 regional trade agreements.
By 2005 there were 250. In its Top Trends To Watch report,
McKinsey noted
that, “Perhaps for the first time in history, geography is not the
primary constraint on the limits of social and economic
organization.”
f.
Globalization is getting local. To get global, one needs to get
local. Winning international strategies transcend the barriers of
distance,
culture and language. In China, Kentucky Fried Chicken has
transformed its menu to suit local tastes. People visit the
American chain,
53. famous for its fried chicken, to eat fish, porridge and egg tarts,
three or four times a week.
g.
Globalization is big (visionary) thinking. CEO’s need to provide
the energy and vision to get global. Globalization is an
executive decision,
not a managerial one. No one illustrated this better than JFK,
who in 1961, famously declared, “I believe that this nation
should commit itself
h.
2.
to achieving the goal, before this decade is out, of landing a
man on the moon and returning him safely to earth.” His vision
inspired a
generation and opened new avenues for an entire nation.
Globalization is smart planning. Nothing significant was ever
achieved without it. I have been fortunate to witness smart
planning at its
best. In 1997, Gillette unveiled its MACH3 razor to thirty-plus
countries around the globe, simultaneously, in one year. Within
18 months,
sales of the razor topped one billion dollars. I realized then that
smart planning in international business doesn’t require genius.
It requires
discipline. The iSMARTE™ framework is modeled on this
discipline.
i.
54. Globalization is effective implementation. Colin Powell has
said that planning without execution is hallucination. Though
this is a universally
accepted fact, it is astonishing to see how so many companies
fail to build a capacity to execute. The most common mistake
companies
make, time and again, is to under-estimate the importance of
putting a local, on-the-ground team – the most crucial link that
delivers the
intended strategy – in place.
j.
I have found that the ten facts above, when customized to
company needs, create a new level of reckoning of the
international opportunity.
However, I have also found that misunderstandings run very
deep. One needs to take this newly found appreciation one notch
higher. This is the
raison d’être for step 3.
De-mystify international business: Einstein believed that
education is what remains after one has forgotten everything he
learned in school. If
international education is to happen, executives will need to rid
themselves of the mental barriers and stereotypes developed
over time, and that
just aren’t true. Let’s examine a few.
Myth 1: International markets are risky. This is the biggest
myth of all. If we can get to see international markets the way
they actually are,
and not the way we think they are, we will realize that new
markets actually offer a favorable risk-reward ratio to new
products, a popular
management calling for delivering growth. It seems that
55. misconceptions are coloring the decision-making
process.Consider that it costs on
average of (U.S.) $50 million to introduce a new product (or in
MACH3′s case, one billion dollars). By comparison, new-
market investments,
which often are shared in a joint venture or partnership, can run
substantially lower, at around 10 percent of that amount. Matter
of fact, it is
possible to achieve foreign expansion for under one million
dollars. Recently, we helped a large Canadian food client
establish a Middle East
beachhead in Dubai for a total investment of (U.S.) $750,000.
For this, our client, through its JV partner, got a dedicated
sales-
and-management team, technical service staff, office and
warehouse space, and a nationwide distribution-and-logistics
setup. Furthermore,
its first two orders totaled more than (U.S.) $500,000,
producing quick results on the investment outlay.Expanding by
investing in new
markets compared to introducing new products requires not just
a considerably smaller investment but a considerably less
financial leap of
faith, as investments can be staggered and tied to revenues. This
makes it easier to assess and react to unforeseen market
developments.
Companies can cut losses and save part of the investment if a
new-market experiment fails. New products, however, require
the entire
commitment upfront, forcing businesses to take on significantly
more risk, even before the first dollar in sales has been
generated.New-
market investments, unlike new products, can be self-financing
as well. As already seen, it is not uncommon to recover part of
an investment
in the initial orders. And often, one can turn a bigger profit on
56. overseas orders than on local ones. To its surprise, one client
found that it
could market its product for double the price than it could at
home, in Canada. There are many reasons why this can happen.
One reason is
that emerging markets, though developing fast, can still have
fewer quality players as compared to developed ones, thus
making the former
a suppliers’ market.Perhaps the most potent argument in favor
of expanding to new markets is that they provide companies
with a unique
opportunity to build a customer base incrementally. New
products, on the other hand, can cannibalize existing sales. As a
result, new market
return-on-investment projections are not burdened by the need
to compensate for cannibalization with higher product margins
and/or
competitive user migration.In addition to providing an accretive
impact on a business, new markets can also provide access to a
sizable
customer base, especially in Asia, with its large population.
This is an important factor, as it helps build size and creates
economies of scale
– the Holy Grail of business that enables cost effectiveness and
improves margins. This is a competitive edge China always
seems to
have.Finally, new-market investment models produce a lifelong
revenue stream that compounds exponentially. In stark contrast,
new
products produce a cash-flow stream that is limited to the
lifecycle of the product, usually five to seven years.I hasten to
add that the
underlying assumption in all the arguments above is that new-
market expansion needs to be done right, as is, of course, the
case with new
products. All things being equal, a careful analysis reveals that
57. new markets indeed can offer companies a better risk-reward
ratio than new
products. This does not mean companies should not focus on
new product development, just to say they need to follow a
more balanced
approach.
a.
Myth 2: International expansion requires size. Though size
helps, it certainly is not a pre-requisite for going overseas. In
fact, in some
cases it can hinder progress, as large companies can be less
agile and more set in their ways, making it harder to react and
adapt. McCain
Foods, based in Florenceville, New Brunswick, expanded to the
U.K., France, Australia, Netherlands and the U.S. in 1965,
while its sales
were still modest. Today it’s the number one French Fry
manufacturer in the world, with sales of over (U.S.) $8 billion
and operations in over
110 countries. The food giant ventured abroad early, while it
was still young. Today, it processes over one million pounds of
French Fries
and other potato products per hour!
b.
Myth 3: You become international one market at a time.
Nothing could be further from the truth. Just as innovative
companies have
several products in the pipeline in any given year, successful
international businesses make it a point to expand to multiple
geographies
simultaneously. McDonalds ventured into 11 countries in five
years in the 1970′s. Research in Motion introduced its
58. Blackberry in more than
20 markets in just four years, Second Cup has built a foreign
presence in 11 markets in five years, and Tim Hortons has just
announced that
it is considering expanding to 3-5 foreign markets.
c.
3.
Stage Two (two steps): Embrace new markets
By this time, companies usually have acquired a firm
understanding of how the international opportunity applies to
them. They are now ready to learn
how that understanding applies to the international opportunity.
Or put another way, how they can make a meaningful difference
if they can successfully
export their core competence to new international markets. This
serves as a defining moment that helps them embrace new
markets.
In this stage, market intelligence is provided in a manner that
brings countries and consumers from afar, up-close, ably
figured out, according to the
domain of company. This creates an international awakening of
sorts. In the 1930s, Robert Woodruff, Coca Cola’s Business
Hall of Fame leader, and
the architect of its geographic expansion, realized how his syrup
could “provide that simple moment of pleasure” to billions in
every corner of the globe.
This realization sparked a vision, or big thinking, that was
essential in building Coke as a global brand, and Woodruff into
a Coke legend.
Steps 4 and 5 are designed to generate visionary thinking:
59. Assess the international opportunity. This step involves ranking
a hierarchy of needs against a set of market offerings to
determine if there are4.
any needs currently going un-served. Hence, a marketplace gap.
However, this is not enough, as not every gap is an opportunity.
The mark of a
savvy international operator is to assess if the gap identified is
synergistic with the firm’s core competence. If it is, then the
gap represents a
viable opportunity. This is a fine assessment many fail to make.
It ensures that the company is not chasing after opportunities in
which it doesn’t
have expertise. Ratan Tata envisioned the opportunity for the
Nano, the world’s cheapest car, once he discerned that there
was an unmet need of
millions of Indian motorcycle owners who yearned to own a car
and wanted to take part in the boom of urban prosperity. This
market gap fit nicely
with the company’s core competence, as it already was the low-
cost vehicle manufacturer in India. Launched in India, the Nano
will be available in
the U.K. in 2011 and in the U.S. in three years.
Outline the international opportunity: Once an opportunity has
been identified and further qualified, it is then articulated in a
vision statement and
communicated throughout the organization. It is worth noting
that this is not just a feel-good statement, but a clear,
purposeful expression of,
‘What could be.’ For the Nano, the vision was, “To be the
world’s first peoples’ car.” Microsoft had a similar vision in the
1980s, “To have a
computer in every home, running Microsoft software.” More
than ambitious statements, these visions helped create
60. organizational readiness,
fuelled a relentless pursuit to seize the opportunity and achieve
a lofty goal. As well, the visions provided management with a
framework for
strategic planning, decision-making and resource allocation.
5.
Stage Three (two steps): Construct the plan
By now companies are several months into the process and have
overcome their biggest barrier in going international, a
paralyzing uneasiness. At this
stage, management is in an eager, go-get-’em state of readiness.
They have an informed opinion of how the international
opportunity applies to them
and how they relate to it. The task now becomes one of
constructing a plan.
At this point, the international coach delivers analytical
expertise that is visible and tangible, as well as insights and
experiences that are deep-rooted
and harder to pin down. The task at hand is to construct a 5-year
International Strategic Business Plan (ISBP) that delivers on a
key measure —
achieve market penetration, not just market presence. The plan
is built with a purpose — to dominate and make a meaningful
contribution to corporate
performance.
Steps 6 and 7 enable smart planning:
Lay out strategic principles. Einstein said, “I want to know
God’s thoughts; the rest are just details.” Well, within the
confines of international
business, the principles shared herewith can certainly be taken
as gospel. These are the absolute must-haves of planning.
61. Focus and prioritize: The world is a big place. Which markets
does one enter first? This is an important question that needs to
be
addressed upfront. Many factors are taken into consideration
here; industry trends, competitive landscape, management
preferences and
the likes. An equally important factor is economic growth.
Emerging markets are in the midst of an economic expansion,
the likes of which
have never been seen before. But which emerging markets
should one focus on first? Brazil? China?
Adopting a bird’s eye view helps here. Scanning
the six major regions of the globe — North and South America,
Europe, Australia, Africa and Asia (which comprises the Middle
East, China
and Far East, Indian subcontinent and Russia) — Asia’s growth
immediately stands out. As does the fact it has size (60 percent
of the
world’s population), wealth (50 million people entering middle
class every day – yes every day!) and productivity (40 percent
of the world
economy, humming at 5.6 percent annually). Every business
must have an Asia plan. The region is the growth engine of the
world economy.
a.
Classify markets: Size, wealth and productivity are useful
benchmarks that can be used to understand countries, as well to
classify them
into three groups; opportunistic, emerging and mature. As can
be seen in the chart below, opportunistic countries are the ones
on the left
that currently are lacking wealth and productivity, but may have
62. size. Pakistan or Bangladesh, for instance. At the opposite end
of the
spectrum, situated on the right, are mature markets that have
wealth and/or size, but are wanting in productivity. United
States and many
European countries fall into this category. Emerging markets,
sitting in the middle, which once were opportunistic, are the
ones that usually
have all three; size, wealth and productivity. India and China
are the most notable examples.
b.
6.
Define the strategic approach: Where a country sits on the
classification grid dictates its strategic approach. For
opportunistic markets,
where consumer needs tend to be basic, the recommended
strategy is one of germination. The objective is to seed market
presence and
reap the rewards as the country develops. KFC first moved into
China in 1987, when it was still an opportunistic market. Since
then, Yum
(the parent company) has become the biggest restaurant chain
there, with $2-plus billion in annual sales and over 2,500 KFC
and Pizza Hut
stores. In mature markets, the strategic exercise
revolves around creating differentiation, as most customer
needs are already being met, and not by one but by multiple
competitors. These
are what I like to refer as “fortress markets,” for their high
entry barriers. To compete effectively, companies must make
63. use of sophisticated
segmentation analysis that identifies profitable market niches
that are not being addressed. The objective is to break through
competitive
clutter and gain share of mind. IKEA has done this artfully by
entering a crowded Canadian retail space and emphasizing its
Swedish origin
and design. Tim Hortons is refining its U.S. consumer
proposition to achieve competitive separation as a café and bake
shop.When it
comes to emerging markets, business stratagems must focus on
gaining share as fast as possible. This is because,
comparatively, these
markets are not as densely populated by competitors and are
still accessible. Nigel Travis, Chief Executive of Dunkin’
Brands is expanding
into Russia, deeming that, “The market has a relative lack of
competition.” Invariably, consumer choices in developing
economies remain
limited as customer needs continue to evolve. For example, in
China, Diet Coke is still not widely available.The company that
is the first to
garner a lion’s share of emerging markets will enjoy a huge
competitive advantage for years to come. In the 1940’s, as
Unilever entered
India, it moved aggressively to establish a grass roots level
reach. Today, it has 40 factories, 2,000 suppliers, a distribution
network of
4,000 agents, covers 6.3 million retail outlets, reaches the entire
urban population and about 250 million rural consumers. The
company
moved swiftly to establish an enviable leadership position, one
which even a formidable competitor like Procter & Gamble is
finding hard to
contest.
64. c.
Anchor your strategy: So how does one attain deep market
penetration? Anchor your strategy with three essential
components; reach,
affordability and conversion. As we have seen in Unilever’s
case in India, establishing reach is crucially important. Birla
Sun Life, Canada’s
largest company in India, has 130,000 agents spread across the
nation. Coca Cola in China is available to more than 80 percent
of the
population. Tim Hortons’ accessibility has helped it become an
icon in Canada.The second important element of strategy is
affordability.
For consumer goods, this can be defined as providing customers
a chance to enjoy your offering over and over, not just once. In
emerging
markets, a good rule of thumb to keep in mind is to divide price
points by at least half or a third. This is because customer visits
can often
happen in groups, such as a family, where one person pays for
four or five. As such, smaller portions that make group
purchasing possible
and keep the cash ring manageable are advisable. For instance,
in India, Brazil and Mexico, Unilever serves products in
affordable sachets,
better suited for consumers in developing economies, as
opposed to bulky goods designed for consumers in North
America, Western
Europe or Japan. The aspect of affordability is equally
applicable to non-durables and even luxury items. Marketers of
high-end merchandise
can often discover a significant hidden demand, even with a
slight downward maneuver in price. Perhaps Porsche has
conducted this
demand sensitivity as it heavily advertises its price reduction
65. and Canadian currency credits.If you have reach and
affordability, chances are
you have trial, but not necessarily conversion. Conversion,
which can be defined as capturing customers, only happens if
your product is
satisfying an unmet marketplace need. For instance, in
developing markets, there continues to be a need to associate
with the West. This is
an area where foreign companies enjoy a natural, competitive
advantage, especially Canadian firms, which have a strong
image abroad
d.
The Author:
Qamar Rizvi
Qamar Rizvi is the founder and president of aQmen Inc., a
company that provides clients with a turnkey
solution for international expansion. He previously held senior
management positions with The Gillette
Company where he was Regional Director for 13 Asia-Mid East
markets oversaw 3 company divisions
compared to our U.S. and European counterparts. This is
important as it translates directly into dollars and cents and
makes it easier to
charge a premium, while not compromising consumer
conversion. In Russia, there is a long waiting list for higher-
priced General Motors
cars, while the locally produced Lada sits on dealers’ lots. In
China, shoppers are shelling out money for higher-priced Levis
jeans compared
66. to less expensive local options.A text book example of a
company that has achieved reach, affordability and conversion
is Tim Hortons in
Canada. Its restaurants are accessible from anywhere, its
reasonable pricing enables repeat purchases and its promise of
consistent
service and quality, flawlessly served in every cup captures
customers and builds loyalty.
Differentiate markets vs. beachheads: The final principle to
keep in mind when constructing an international plan is to
distinguish between
markets and beachheads. The former is a geographic location,
while the latter is the geographic headquarters that serves as the
company’s
command post in that region. Many factors go into the selection
of a beachhead, such as political stability, safety for staff,
living standards,
schooling for children, and the likes. For instance, before the
opening up of China, Singapore and Hong Kong often served as
beachheads
for regional expansion to neighboring Pacific-Rim countries.
e.
Design the architecture. Everything should be made as simple as
possible, but not simpler, said Einstein. It seems that many
international
players today have not heeded this advice. It’s amazing how
many plans I come across that are built on “me-too” strategies.
‘Me-too’ strategies in
fact are not strategies at all. It’s a situation where the planning
process has not only been overly simplified, but I reckon,
completely ignored. I will
refrain from providing specific examples, but there are many.
The world is not short of McDonalds and Starbucks wannabes,
who derive a
67. fraction of their revenues from abroad. As explained earlier,
these are the companies that have achieved market presence, not
penetration.To be
effective, international plans need not be complex or over-
engineered, just well thought-out. With the principles above as
guidelines, there are six
areas of the plan that need careful consideration; business goals,
product and/or segment focus, core activities and markets,
competitive
positioning, target market and core competence. The first five,
as alluded to earlier in this article, must be tailored to local
market requirements.
Core competence on the other hand, needs to be exported, as it’s
the one attribute that provides the company its unique
competitive edge.
7.
Stage Four (three steps): Commercialize the international
opportunity
This is the final stage, and personally speaking, the most
exciting, as the moment of reckoning has arrived. Having
installed the right approach,
specified a guiding vision and crafted a smart plan, businesses
are now poised to reap the real, tangible benefits of their
planning. Here, companies
learn how they can commercialize the international opportunity.
The aim is to nail down effective implementation, providing
management with operative
nuts-and-bolts know-how to avoid costly mistakes and cut time
to market that otherwise would not be possible.
Steps 8 through 10 enable effective implementation:
Get local: To execute on an international scale companies will
need to invest in getting local. This means addressing three core
68. organizational
areas; people, process and structure. Of the three, “people” is
the most important. After all, it’s the people who get things
done and translate
strategies into operational realities. I have always struggled to
understand why so many companies have a problem with this.
On countless
occasions I have witnessed companies hesitate to make the
required investment for an effective grounding of operations
abroad. Hence, this
step can become quite decisive in determining success. Without
proper international bench strength, companies can never fulfill
their vision of
getting global. It is vital to develop and deploy top-level talent
on international assignments. Today, this remains a key source
of competitive
advantage for companies such as Coca Cola, Nestle and Procter
& GambHaving the right processes in place is also critical.
Processes such as
long-range plans, annual budgets and quarterly forecasts must
be developed and aligned in order to achieve the desired
strategy across multiple
markets. The Market Entry Plan, covered below, is a key aspect
in this process.Organizational structure is the third aspect. As
businesses begin
to add more and more markets to their operational mix, a new
structure to coordinate and communicate becomes essential.
There are many ways
this can be done. A matrix structure, where product line and
geographic responsibilities are shared across a cross-section of
staff, is one method
that has gained popularity.At its core, successful localization
hinges on the three core factors mentioned above. It’s fair to
say that companies
often have struggled with all three.