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From "eurosclerosis" to "eurostrategy:" preparing for EC1992 and beyond.

From "Eurosclerosis" to "Eurostrategy:" Preparing for EC1992 and Beyond

A preoccupation with the Pacific Rim countries may have led us to overlook one of the most important developments in Europe. The European Community Program 1992 (EC 1992) aims to unify its 12 member nations into a single market with 320 million people with no or few bureaucratic, fiscal, and technical barriers to trade. This $4 trillion market, the largest in the industrialized world, requires that U.S. managers understand the implications of EC 1992 and develop strategies to exploit opportunities and to cope with the threats. Indeed, the EC 1992 program is to a great extent a response to non-European competition, especially from East Asian companies. The purpose of this article is to give an overview of the EC 1992 program and to introduce a model that will help U.S. companies formulate a European strategy. Figure 1, the framework for this article, shows the various elements of the strategic process. Each part of the model will be discussed in detail.

The 12-member European Community includes Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom. Turkey applied for membership in 1987, but was rejected by the EC Commission as late as December 1989. The year 1992 is only a symbolic goal. The changes associated with 1992 have already begun and will continue into the 21st century. Although some experts believe the changes initiated by the EC 1992 program are being hampered by disagreements among the member nations, the process toward a more unified Europe is irreversible. The recent developments in Eastern Bloc countries and German unification may have slowed the process toward a unified European community, but they have not stopped it.

One of the primary goals of the Single European Act (SEA) is to improve Europe's overall competitiveness. How can non-EC companies prepare for the impact of the 1992 program and benefit from it? The move toward European unification has compelled companies such as 3M, IBM, Ford Motor Company, Heinz, and Apple Computers to strengthen their position in Europe. Japanese companies, consolidated through MITI's trade association, have not been idle. They have already positioned themselves to take advantage of the new European opportunities. Indeed, the future may be characterized not by economic relationships between individual countries, but by three trading blocks: East Asia with Japan as the dominant force, North America, and the European Community.

The discussion of strategy formulation for a great variety of companies has to be general. Still, the concepts can be adopted for individual companies.

In this article, strategy is used as the determination of the basic mission of an enterprise and the selection of courses of action and allocation of resources, based on the analysis of internal strengths and weakness and matched with external opportunities and threats.

The specific steps in the strategic planning process may vary. Yet the process shown in figure 1 provides a general framework for strategy formulation:

* Identifying the various organizational inputs, such as people,

capital, managerial skills, technical skills; and the goal inputs of

stakeholders, such as stockholders, employees, suppliers,

communities, governments, and, of course, customers.

* Preparing the enterprise profile.

* Clarifying the orientation of managers, especially top


* Determining the purpose and major objectives of the enter


* Identifying the present and future external environment. This

requires an analysis of the enterprise's threats and opportunities.

* Preparing a resource audit with the focus on the company's

internal weaknesses and strengths.

* Developing alternate strategies, tactics, and other actions.

* Evaluating the various strategies and making strategic choices.

* Testing the strategy at various stages for consistency.

* Preparing contingency plans.

* Although not directly a part of the formulation of the strategy,

preparing medium- and short-range plans and providing for

implementation and control are also essential.

Strategic planning requires a careful analysis of the inputs. Since they will be discussed only briefly, they are shown as the darkly shaded areas in Figure 1. People of the EC's member nations differ greatly in languages, cultures, economic levels, and governmental orientation. Similarly, the availability of capital is different in the various countries. However, the unification of Europe will greatly affect these financial markets, making resources and funds more readily available to them.

Managerial skills and approaches also differ considerably among the EC countries. An American managing in Europe must recognize that the German cultural environment favors reliance on authority in directing the work force. Often, benevolent authoritarianism characterizes the superior-subordinate relationships. On the other hand, labor is actively involved in managing large organizations through the codetermination law. In France, authoritarianism also plays a part in the work force. French managers have been greatly aided in their own planning by governmental planning on the national level. National plans, generally revised every five years, assist in obtaining price stability, a reasonable balance of payments, employment stability, and a reasonable economic growth. It is no surprise, then, that France has concerns about an European Community without restrictions. In fact, the French government wants to maintain certain controls.

Technical skills are crucial for any kind of organization, but especially for high-technology companies. American and Japanese high-technology companies are urged by Europeans to conduct more research and development in Europe so that indigenous companies can learn from and catch up with non-EC competitors.

Various groups have legitimate claims to the business organization. Employees, for example, want higher pay, more benefits, and job security. Enterprises in the different countries have different wage rates and benefits provisions. In Germany, pay, benefits, and job security are high. German labor unions naturally, want to protect their accomplishments. On the other hand, Spain, with lower labor costs, becomes very attractive for companies that want to relocate to low-cost countries.

Consumers want safe, reliable products at reasonable prices, but varying country standards have increased the cost of products. The 1992 program attempts to unify the technical standards, in health and safety first and in other areas later. The new Europe will benefit from lower costs of products that meet the unified standards.

American and European suppliers want assurances that their products are being purchased. Companies, on the other hand, want reliable suppliers providing essential products at reasonable prices. It is already quite common for European manufacturers to obtain their components from other EC countries. German automobile manufacturers, for example, have access to efficient suppliers in other EC countries. The elimination of the border regulations will certainly facilitate the cooperation between manufacturers and suppliers.

Stockholders also have an important claim to the business organization. They want both a high return on their investments and security of their money. In Europe, stockholders are not always individuals. Indeed, many large enterprises, such as Renault in France and Volkswagen in Germany, are partly owned by the respective governments--a fact that influences policies.

Governments depend on taxes paid by individuals and enterprises, and tax structures now vary greatly among countries. A BMW car, for example, costs about three times as much in Greece as in Germany. It is doubtful that 1992 will completely eliminate tax differences among the countries, but they will be more streamlined.

Even local communities make legitimate demands on enterprises, wanting them to be "good citizens." For example, companies are expected to provide stable job opportunities and control amounts of pollutants. A company not familiar with the European regulations will soon learn that it may not close a plant simply because it is inefficient. In such a decision, community input needs to be considered, and a company may be forced to keep the plant operating, even though it cannot be justified on economic grounds.

Other stakeholders with legitimate claims may include financial institutions because even competitors have a legitimate right to fair play in the marketplace. Whether competitors from non-EC countries will have the privilege of equal and fair treatment remains to be seen.

It is evident that the divergent goals of the stakeholders may be at cross purposes with each other. It is the manager's task to integrate these legitimate claims and minimize the friction--a job that is especially difficult when companies from different countries are involved. This kind of goal integration, however, will be facilitated by the EC program.

In Europe, labor unions as well as industries are involved in the process of developing a single market. Unions, for instance, are represented through the European Trade Union Congress (ETUC), while industry is represented by the Union des Industries de la Communaute Europeene (UNICE). The views of both sides are heard during the EC's legislative process. For example, when a directive is proposed, labor as well as industry is consulted by either the EC Parliament or the EC Commission.

A starting point for developing an enterprise profile is to analyze the way the company has operated in the past and how it operates now. The next step is determining the future direction of the company. Thus, top executives must wrestle with fundamental questions such as: What is really our business? Who are our customers? What do our customers want? What should our business be?

The answers to these and similar questions determine the basic nature of the company--its geographic domain, the competitiveness of its products and services, its top-management orientation and values, and its purpose or major objectives.

In determining the company's sphere of operation, it must answer questions such as: Where are our customers? Where are those who should be our customers, but who are not at the present?

Companies also need to develop a profile of their geographic market. While some companies may restrict their operations to the United States, companies are increasingly adopting a global view. The EC, with its 320 million people, will become the largest market in the industrialized world, larger than the Japanese and even the U.S. market, and cannot be ignored. With the 1989 and 1990 political and economic changes in Eastern Bloc countries, even more opportunities will develop.

Businesses generally do not have an exclusive market; instead, they compete with other companies. In the past, these competitors may have been other domestic companies, but increasingly, companies from around the world compete in the global market. Indeed, one of the principal objectives of the EC is to increase the productivity of its companies so that they can compete effectively around the world. Increased productivity would also help them combat escalating competition among European, U.S., and Japanese companies in such industries as automobile manufacturing and information technology.

Competition consists of many factors. Market share alone is insufficient; there are other competitive items such as price, cost, quality, innovation, service, distribution systems, facilities, and locations. Both U.S. and European companies will benefit from a single market. Ford, an American company, takes a European perspective in developing its strategy, and it has a global outlook. While companies such as Volkswagen in Germany, Fiat in Italy, and Peugeot and Renault have a strong market positions in their own countries, they do not so far have a truly European strategy.

Although a competitive analysis will be aided by greater uniformity of the EC market, strategists must also recognize the differences among EC countries. This requires identifying key success factors in the respective regions. For example, the relative wealth of the various countries must be carefully considered. The gross domestic product per capita varies widely, ranging from $3,900 in Portugal to $20,400 in Denmark. Similarly, consumer needs and cultural differences must be taken into account.

The direction of the company is shaped especially by top executives. Their perception of the EC 1992, therefore, is extremely important. A study by KPMG Peat Marwick found that top U.S. managers see opportunities in the single market, but do not have great concern about its effect on the U.S. market. The study, conducted in March 1989, was based on 872 usable responses by top U.S. executives from large companies in manufacturing, high technology, merchandising, and transportation. A large majority of these executives are monitoring EC 1992 events. Over half of the responding companies have plans for the EC, but only 17 percent have implemented their plans. About 90 percent of the respondents recognize the need for strategic alliances between U.S. and European companies and 80 percent see the need for increasing manufacturing in Europe.

American executives' perception of EC 1992 has been changing. It began with a disinterest in the EC market, changed to great interest, and has enthusiastic advocates proclaiming the "Europportunities."

The purpose and the major objectives of the company are established in conjunction with the development of the enterprise profile. A clear statement of purpose gives the company direction. Objectives need to be set in major key result areas, in respect to market standing, products and services, productivity, financial and physical resources, human resources, social responsiveness, and surplus value or profitability.

In the analysis of the external environment, many factors need to be considered. For some U.S. companies, EC 1992 certainly provides opportunities, while others see the new directives and regulations as threats. For the latter, "Fortress Europe" is more than a slogan, it is a perceived danger.

The external factors, which can be either threats or opportunities, can be grouped into the following categories: economic, social, and political factors, products and technology, markets and competition, demographic factors, and others.

Economic Factors. The general state of the economy certainly must be taken into account by the strategists. The goal of the EC is for companies to cut costs and increase productivity. The estimate is that the market integration may increase the gross domestic product by five percent. With the United States as the biggest commercial partner, opportunities for some U.S. companies abound. For example, the fall of the trade barriers opens opportunities for direct marketing, an area in which U.S. companies have distinct strengths. Similarly, delivery services, such as those provided by Federal Express and United Parcel Service (UPS), may benefit from the free movement of goods. In short, the EC 1992 program will not only benefit European companies, but will also generate opportunities for U.S. companies.

American companies, especially those not yet established in the European market, are concerned about barriers for outsiders. These barriers may be disguised by terms such as "nurturing industries" (providing special regulations for certain European industries) or "transitional rules" to soften fierce competition from non-EC companies. There is concern that U.S. and Japanese companies in certain industries may benefit most from the single-market concept. France saw its car market protected by a three-percent market share quota on Japanese cars. In Italy, the quota on Japanese cars is one percent. Outsiders are concerned that barriers will limit the entry of foreign cars even after 1992. They also worry that economic opportunities for U.S. and other non-EC countries will be offset by the threats.

Social and Political Factors. Social and cultural influences also must be considered by the strategist. Cultural distinctions will not be eliminated by the single market. Therefore, companies that recognize these differences among the EC countries, and then market products and services suitable for the local taste, will have a competitive advantage over those companies that assume incorrectly that the needs of all Europeans are alike. Colgate-Palmolive, Proctor & Gamble, and Apple Computers are among the companies that modified their sales and marketing efforts to better serve the social needs of geographic regions.

Some see a unified Europe as a bridge to the Soviet Union and other Eastern Bloc countries, which in turn, could open trade opportunities for European and non-European companies. But, still others view the EC as a power wedge between Eastern countries and the United States. This could mean a greater European independence from the United States and less control over the export of Western technologies to the Soviet Bloc. Economic power is accompanied by political power, and the way this power is wielded can be either a threat or an opportunity for countries outside the European Community.

Products and Technology. The development of new products often requires huge investments in research and development. The pooling of resources in a 320-million consumer market should result in cost reductions and greater efficiencies. Caterpillar, with five European factories, will benefit greatly from the single market. Instead of producing products with country-specific standards, the adoption of common standards in the new EC market will result in greater efficiencies through large batch production. These opportunities, however, must be seen in the proper perspective. Competitors, such as the Japanese company Komatsu, also benefit from uniform standards and specifications and, in turn, pose a threat to Caterpillar.

Non-EC companies are currently subject to pressures and concessions. For example, U.S. and Japanese computer companies are urged to conduct more research in Europe, in an effort to help European companies catch up in a field where they are lagging. In the field of telecommunication, non-EC companies may face restrictions from European governments that want to protect their national markets. Other EC industries arguing for protection from competition are public works, the media, consumer electronics, textiles, footwear, agriculture, fisheries, and steel. It is evident that the new environment created by the EC 1992 program will be much more competitive and efficient.

Markets and Competition. In order to survive in the competitive new market, companies must address the following questions in formulating their strategies:

* Who are our competitors (EC and non-EC


* How does our company compare with

the competition?

* What are the strengths and weaknesses

of our competitors?

* How do we best compete?

The answers to these questions, of course, will depend on the character of the company and the industry in which it competes. Ford predicts greater growth in Europe than in the United States. This optimism is based not only on the EC 1992 program, but also by the 1989 and 1990 events in Eastern Europe that may result in Eastern Bloc countries moving toward a free-market economy. In fact, Ford is considering setting up either an assembly plant or a component factory in Eastern Europe. Ford is already well established in Europe, manufacturing cars in Britain, Germany, Belgium, and Spain, and the company recently entered the luxury car market through the acquisition of the British Jaguar company.

Demographic Factors. Demographic shifts significantly affect the company's strategy. EC 1992 stipulates a free movement of people among the member countries. This provision is not widely embraced by all member countries, and the British government especially objects to this stipulation. However, the emigration of East Germans to West Germany has provided a valuable addition to the labor force, as well-trained and educated young people helped alleviate the problems caused by the shrinking West German population. Even before the reunification, East Germans could automatically obtain West German citizenship, and in doing this, they may have taken some jobs which would have gone to people from other countries. Although the number of emigrants from the East is still relatively small, their movement to the West demands that companies examine the effects German reunification has had on them. Other EC countries, in particular, must consider the economic challenges and threats the united country poses toward them.

Other Factors. There are, of course, many additional factors that might have a bearing on the strategy formulation of a particular company. The infrastructure in a particular country or the transportation system may greatly influence the plant location. Before Spain joined the EC in 1986, it had an image of backwardness. Since then, however, the country has had the fastest growth in GDP among EC members. Domestic and foreign investment has greatly increased, and Spain has become a favorite choice for companies to locate their operations. Indeed, it is estimated that Spain and Portugal may benefit most from the single market.

Although the focus has been on the European Community, one must not ignore the recent changes in Eastern Bloc countries. Communist governments, toppling at such a rapid pace, raise concern that the economic goals of EC 1992 may take a lower priority than the political events. Yet, the opening of the Berlin Wall and the tearing apart of the Iron Curtain have opened new opportunities. The combined GNP of Czechoslovakia, East Germany, and Hungary is larger than that of China. These countries could develop into European tigers.

Trade with Eastern Bloc countries is not new, but opening the borders has greatly improved opportunities. The Italian automaker Fiat had shared technology with the Poles since the early 1920s, but the state-owned Polish FSM now will be exporting the Fiat Mickros to Western countries. General Electric recently bought over 50 percent of the Hungarian Tungsram lighting company. This enables GE to enter the European market, which has been dominated by the Dutch company Philips and the German company Siemens. Similarly, Eastman Kodak has had a joint venture with a Hungarian partner since 1987. Clearly, American companies may benefit from Mikhail Gorbachev's encouragement of openness in Eastern Bloc countries. However, the biggest European winners of the recent political and economic developments in Eastern Europe may be companies from West Germany, Italy, France, and from the non-EC countries of Austria and Finland.

There is concern that a united Germany with 80 million people and a $1.4 trillion economy would be too powerful in relation to other European nations, with it being nearly twice as strong as the next most powerful country--France. However, the immediate task for Eastern Bloc countries such as Hungary, Poland, and Czechoslovakia, is to develop products that will be able to compete in the West in order to earn foreign currencies. In the area that was formerly East Germany, one of the early tasks is to reform the 130 national Kombinates, which are large, vertically integrated combines. It has been estimated that productivity in East Germany is 20-30 percent below that of companies in West Germany, and the need for skilled managers in Eastern Bloc countries remains enormous.

The other alternative of Eastern Bloc countries is to invite Western European companies to set up plants in the East. European companies such as Hoechst (chemicals), Siemens (electronics), Trumpf (machinery), Imperial Chemical Industries PLC, Saint-Gobain, the French glassmaker, and many other companies are eager to expand in the East. Similarly, these opportunities are also exist for American companies, especially for those with subsidiaries already in Europe. Compaq Computer Corp., with an office in Munich, is ready to take advantage of the opening of the iron curtain. Many other U.S. companies, though, do not seem to have a strategy to take advantage of the new opportunities in Eastern Europe. One such opportunity could be the lower labor costs in Eastern Bloc countries, which may provide U.S. and EC country companies the chance to compete effectively with cheap-labor Asian companies.

Only about one-third of the 300 EC directives have been approved. This means that strategic planners must constantly monitor developments in a variety of areas, including the workings of the EC government. Here is an overview of some major governing bodies:

* The EC Commission, located in Brussels, initiates legislation. It also administers the European Community. The mandate of its 17 commissioners, who are appointed by the EC member states, is to give priority to EC interests over national interests.

* The EC Council is the primary lawmaker of the community. However, the Council of Ministers, as this body is also known, has to await proposals from the commission. The presidency of the council changes every six months.

* The European Council consists of the heads of member governments and other top officials. It meets at least twice a year to provide strategic direction for the European Community.

* The European Parliament consists of 518 members. Membership depends on the size of the population of the countries. The Parliament advises the EC Council on proposals and prepares the EC budget.

* The European Court of Justice consists of 13 judges and six advocates. All are appointed by member states and their task is to interpret EC law.

American strategists need to stay informed about EC developments as well as the competitive situation. Information about legislative actions can be obtained from the Commission of the European Community in Washington, D.C. and the office in San Francisco. American business publications such as Business Week, Fortune, and the Wall Street Journal contain articles on EC developments. A more focused journal, published in Washington, D.C., is Europe--Magazine of the European Community. Member states also publish EC-related articles, usually in their respective country's language. Still other information can be obtained from trade journals, business associates, consulting companies, or from special seminars or conferences.

The opportunities and threats in the external environment must be matched with the strengths and weaknesses of organizations. Enterprises differ greatly on these dimensions. They can be, however, conveniently categorized into management and organization, operations, finance, marketing, products, and services; and other factors.

Management and Organization. The strategic planner must assess the company's strengths and weaknesses with respect to its managerial talent and the availability and skills of the work force. This evaluation also includes labor relations, personnel policies, performance appraisal, selection, training, and development of the work force. The planning and control system as well as the organization structure and the organizational climate are also important. General Motors, which lacked a cohesive strategy for its European operation, reorganized in 1986 and created its European headquarters in Zurich with the aim of improving planning and controlling its operations.

American companies planning to operate in the European Community will find that the European work force is quite skilled and well educated. Apprenticeship training helps young people to develop technical skills in a variety of fields. In fact, Professor Gary Becker at the University of Chicago suggests that the German system of vocational training may provide a useful model for the United States.

On the other hand, insufficient managerial training is frequently mentioned as a weakness of European companies. European managers have been criticized for not possessing the knowledge and skills needed for successful global managing. Specifically, today's demands on managers, reinforced by the EC 1992 program, are global thinking, understanding the mentalities of managers in other EC and non-EC countries, managerial experience abroad, and the proficiency of speaking at least two foreign languages.

Operations. Strategists need to analyze carefully the strengths and weakness of the operation. If a U.S. company does not have the ability to operate effectively and efficiently in Europe, it may want to evaluate potential partners for a strategic alliance. This assessment should consider research and development, manufacturing facilities, marketing, product distribution channels, brand name protection, licensing, competitive pricing, proper customer identification, service, and the company's image. Ford, for example, integrated its British and German operations to establish a common manufacturing base and overcome the weaknesses that had prevailed in the two units. Apple overcame the need for export from the United States by expanding its plant in Ireland.

Finance. A company considering operating in the European market must also analyze its strengths and weaknesses, or those of the potential partner with which it may want to form a strategic alliance. The financial analysis should include the capital structure, financing, profitability, the company's tax situation, as well as its accounting and financial planning system. Financial planning requires not only a focus on the present, but also on the future. It demands an analysis of short- and long-term planning and an evaluation of whether financial plans are congruent with the company's objectives and plans.

Marketing, Products, and Services. Globalization in marketing--that is, viewing the world as a huge, homogenous market--can result in regional differences being ignored. Triadization, which focuses on the markets of the United States, Europe, and the area around Japan, draws attention to market characteristics of three important regions; however, it still is insufficient for an effective marketing analysis. The objectives of EC 1992 are aimed at forming a single market, but the differences among the 12 member nations must be taken into account in marketing. The four marketing Ps of product/service, price, promotion, and place (distribution) need to be adapted to the needs of consumers in a particular market.

The enterprise needs to assess its strengths and weaknesses in areas such as:

* Product line, in terms of

diversification or specialization.

* Product and services leadership.

* Pricing of products and services.

* The kind of customers and their


* Sales promotion.

* Services after completion of the

product or project.

Within the European Community, customers demand products or services that satisfy their particular needs. German drivers, for example, prefer cars with a solid ride rather than cars with soft suspension systems. Additionally, the income level among consumers in the 12 member countries differs greatly, being rather high in the Nordic countries, and low in Southern European countries such as Greece and Portugal. Successful marketing requires identifying countries where there is a demand for the company's products or services and serving the customers with the appropriate marketing mix. Finally, a company must at least attempt to answer the question of whether the market can be maintained over a long period of time.

Other Internal Factors. There are, of course, factors other than management, organization, operations, finance, and marketing that need to be taken into account in developing a strategy for EC 1992. These factors--patents, the company's image, location, or size--may be unique to an enterprise. Small businesses, for example, tend to be more flexible, adaptable, and creative than bigger ones. This can result in ease of entry to or exit from a country. Moreover, since smaller businesses pose less of a threat to local companies, they tend to receive less attention from government regulators.

So far, the analysis has focused on the external opportunities and threats as well as the internal strengths and weaknesses. These factors play an important role in developing alternate courses of actions and strategies.

The variety of such possible strategies may be expressed by sayings such as "Get into the EC before the barriers go up," "Let's wait and see," and "I don't care what happens in 1992; it won't affect me." The latter strategy certainly lacks a clear understanding of the effects of the EC 1992 program. Even if a company has no plans to enter the European market, it very likely will be affected, even if it operates only in North America, as more productive European companies will expand in the U.S. market and become fierce competitors. European banks, for example, have shown a growing interest in entering or expanding in the American market. One may ignore EC 1992, but one cannot escape its consequences.

Various strategic alternatives exist for companies either already in Europe or planning to enter the EC market. An American company, for example, may begin marketing its products in the large unified market, or if a company is already operating in Europe, it may expand its marketing efforts. Another strategy is to expand or change the distribution channels in the 12 member nations. As another option, companies may increase the European content of their products in order to become less vulnerable to restrictions; in fact, more on-site manufacturing may become necessary. Forming strategic alliances with an European partner is another viable option and would allow the company to build on the experience of its partner. This kind of strategic alliance is often the alternative chosen by small and medium-sized companies with limited resources who are concerned that, after 1992, they may have more difficulty entering the European market.

One way to view U.S. business strategies is to group them into four clusters: the movers, the information gatherers, the spectators, and the disinterested observers.

The movers, primarily large multinational corporations, are the companies most active in Europe. They consider implementing strategies such as expanding their production capacity, combining existing operations, or making other structural changes in their already existing operations. The H.J. Heinz Company, for example, plans to spend up to $1 billion on plant revitalization, marketing, and acquisitions. This will strengthen the company's position in soups, beans, ketchup, and baby food. Similarly, Caterpillar expects to benefit from the ongoing tunneling project under the English Channel. Future road-building projects in Spain, Portugal, and France will also provide good opportunities for Caterpillar.

The information gatherers are mostly smaller companies who consider strategies that involve expanding their marketing efforts or rearranging their distribution network. In general, they are concerned about protectionism and want to be prepared for the 1992 environment.

The spectators see opportunities in the single market, but feel they have limited ability to take full advantage of the changes. However, they may see marketing, mergers and acquisitions, or joint ventures as some possible strategies.

The final group consists of disinterested observers. They lack a definite strategy to cope with the threats or to take advantage of the opportunities created by EC 1992.

Many companies, especially smaller ones, choose strategic alliances to cope with the competitive pressure of the larger market created by the EC 1992 program. Scandinavian Airlines System (SAS) provides a good example.

A keystone in SAS's global strategy is the formation of strategic alliances. In fact, SAS sought partners before it became popular to do so. However, its first attempts at creating alliances were unsuccessful. The proposed 1986 merger with Belgian World Airlines, Sabena, failed because of legal complexities, and its attempt to take over British Caledonian Airways Ltd. was blocked by British Airways PLC. Another attempt by SAS at an airline takeover, this time with Aerolineas Argentinas as the target, was blocked by the Peronist party of Argentina.

Undeterred by early failures, Jan Carlzon, SAS's CEO, pursued his alliances strategy to be competitive with larger U.S. and European airlines such as German Lufthansa, British Airways, and Dutch KLM. Carlzon realized that in the larger EC 1992 environment (Sweden is not a member of the European Community), SAS needs to forge alliances. One such arrangement was made with Thai Airways International in 1987 to coordinate services in Bangkok, Copenhagen, and Stockholm. Similarly, the 1988 agreement with Texas Air, the parent company of Continental Airlines, gave SAS access to the Newark, New Jersey airport in the United States. In 1988, SAS also bought a stake in the Airlines of Britain Holdings, and an agreement to exchange equities with Swissair was reached in 1989. In the same year, alliances were made with All Nippon Airways, Lan-Chile, Canadian Airlines International, and Finnair to gain access to airline hubs in Tokyo, Latin America, Toronto, and Helsinki.

Clearly, the EC 1992 program will find formidable competitors not only in Europe, but around the world. An agreement reached by EC Ministers gives European airlines more freedom to set their air fares and expand their routes. U.S. strategists must also recognize that many companies, as exemplified by the airlines, now compete against both other large companies and against smaller ones strengthened through their strategic alliances.

Certain countries are preferred for U.S investments. Most often considered are the U.K, Germany, France, Italy, and Spain. While the United Kingdom is often preferred by many U.S. companies, Spain is often cited for its dramatic economic changes since it joined the European Community. This country had the fastest gross domestic growth rate in Europe from 1986 to 1988. Foreign investment increased 81 percent in 1987 and continued to grow in 1988. Predictions are that Spain will continue to show the fastest growth among the EC countries.

Strategists must carefully evaluate the opportunities and threats created by EC 1992 and match them with each company's capabilities. Environments are not static; they are dynamic. This is especially true for the European market, where about two-thirds of the 1992 directives still need to be finalized and approved. Certainly, many changes in these regulations may occur, and the effects of these possible changes are difficult to estimate.

Making strategic choices involves risks. A company may not want to, or be able to, take on the risks involved in a new venture. On the other hand, a company may have little choice but to take calculated risks. Federal Express may serve as an illustration. As the U.S. market became saturated, Frederick Smith, the CEO and founder of Federal Express, saw an opportunity to expand its express delivery service to Europe and become a dominant international force. But competing with entrenched European competitors and complying with the many foreign regulations caused unexpected problems resulting in considerable losses for the corporation. Additionally, because of Europe's multiple political and cultural environments as well as local regulations, Federal Express was forced to acquire local companies. Yet, the heavy investments on the continent have not been accompanied by a similar increase in sales. Smith, however, defended his strategic move into Europe. "You have to put the network in place before you can offer the product," he said.

Timing is another critical element in deciding on a strategy. Some companies cannot afford the risk of being first in the market. On the other hand, many executives are concerned that after 1992 it may be more difficult to enter the European market. This concern, in part, accounts for many mergers or acquisitions by U.S. companies.

Counteractions by competitors are generally difficult to predict in time. Yet, certain trends can be noted as illustrated by Japanese automakers. Originally, they entered Europe by exporting their products, but the threat of European protectionism changed their strategy, and England became the main focus for their investments. Toyota, Honda, and Nissan all have plants or are setting up manufacturing facilities in England, which encourages Japanese investments. General Motors' subsidiary Vauxhaul, in turn, tried to counteract the Japanese challenge by making heavy investments in an attempt to improve productivity and to remain competitive.

During all stages of the strategic planning process, shown in figure 1, consistency tests must be made. For example, strategies must be consistent with the basic claims of the stakeholders, top management orientation, the enterprise profile, and the purpose and major objectives of the enterprise. Strategies to exploit opportunities and threats must also be consistent with the capabilities of the company.

While strategies give direction to the company, they also are the basis for medium and short-range plans (darkly shaded boxes in the figure). Strategy implementation considerations, such as the required organization structure, must also receive attention.

The future of the European environment cannot be predicted with any great certainty. Plans have to be made based on different assumptions. Some companies fear that with the implementation of EC 1992, Europe will become such a fortress that entering into the European market will become increasingly difficult. However, others are assuming that Europe will place no or only a few restrictions on non-EC countries. Clearly, either assumption will result in different strategies. Other premises focus on the impact EC 1992 will have on productivity improvement and the gross domestic product. Although not all contingencies can be taken into account, plans need to be made based on some critical assumptions such as the impact of the 300 directives for the EC 1992 program.

The "Eurosclerosis" of the past has been superseded by a great deal of renewed business activities, leading in some cases to "Europhoria." This article suggests a realistic approach which may be called "Eurostrategy." EC 1992 is a symbolic goal. In certain ways, the EC program is already in effect, but in other ways, it will extend well beyond the year 2000. Many American companies, whether or not they operate in Europe, will be affected. To prepare for EC 1992, companies must develop strategies. This demands a re-evaluation of the stakeholders' goals, top management orientation, the purpose and major objectives of the enterprise, and the analysis of the enterprise profile. The assessment of the opportunities and threats in the external environment, must be matched with the internal strengths and weaknesses. This situational analysis becomes the basis for the formulation, evaluation, and choice of strategies. Since no one can foresee the future with complete confidence, contingency plans must be prepared for the evolving opportunities and challenges.

Heinz Weihrich has written more than 30 books and 80 articles published in the United States and overseas. Dr. Weihrich is active in consulting and in executive and organizational development in the United States, Europe, Africa, and Asia, and he is currently professor of management at the University of San Francisco. Dr. Weihrich has taught at Arizona State University, the University of California at Los Angeles, and in France and Austria.
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Title Annotation:European Free Trade Agreement, 1992
Author:Weihrich, Heinz
Publication:Industrial Management
Date:Mar 1, 1991
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