Prentice Hall 2003 Chapter 6 1

Formulating Strategy
Chapter 6
Prentice Hall 2003 Chapter 6 2
Chapter 6 - Overview
Reasons for going international
Strategic formulation process
Steps in developing international and global
strategies
Prentice Hall 2003 Chapter 6 3
Strategic Planning and Strategy
The process by which a firms managers evaluate
the future prospects of the firm and decide on
appropriate strategies to achieve long-term
objectives is called strategic planning.
The basic means by which the company
competes its choice of business or businesses in
which to operate and the ways in which it
differentiates itself from its competitors is its
strategy.


Prentice Hall 2003 Chapter 6 4
Reasons for Going International
Reactive Reasons
Globalization of competitors
Trade barriers
Regulations and restrictions
Customer demands
Prentice Hall 2003 Chapter 6 5
Reasons for Going International
(contd.)
Proactive Reasons
Economies of scale
Growth opportunities
Resource access and cost savings
Incentives
Prentice Hall 2003 Chapter 6 6
The Strategic Management Process
(Exhibit 6-1)
Define/clarify mission
and objectives
Assess environment for
threats, opportunities
Assess internal strengths
and weaknesses
Consider alternative strategies
using competitive analysis
Choose strategy
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Prentice Hall 2003 Chapter 6 7
The Strategic Management Process
(contd.)
Implement strategy through
complementary structure, systems,
and operational processes
Set up control and evaluation
systems to ensure success,
feedback to planning
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Prentice Hall 2003 Chapter 6 8
Steps in Developing International and
Global Strategies
Mission and objectives
Environmental assessment
Internal analysis
Competitive analysis
Global and international strategic alternatives
Approaches to world markets
Global Integrative strategies
Using e-business for global expansion
E-global or e-local
Entry strategy alternatives
Strategic choice
Prentice Hall 2003 Chapter 6 9
Environmental Scanning
It is the process of gathering information and
forecasting relevant trends, competitive actions,
and circumstances that will affect operations in
geographic areas of potential interest.
Prentice Hall 2003 Chapter 6 10
Major Variables Covered in Environmental
Scanning
Political instability
Currency instability
Nationalism
International competition
Prentice Hall 2003 Chapter 6 11
Internal Analysis
Internal analysis determines which areas of the
firms operations represent strengths or
weaknesses (currently or potentially) compared
to competitors, so that the firm may use that
information to its strategic advantage
It focuses on the companys resources and
operations, and global synergies
Prentice Hall 2003 Chapter 6 12
Approaches to World Markets
Globalization is a term that refers to the
establishment of worldwide operations and the
development of standardized products and
marketing.
Regionalization (or multilocal) is where local
markets are linked together within a region,
allowing more local responsiveness and
specialization.
Prentice Hall 2003 Chapter 6 13
Pressures to Globalize
Increasing competitive clout resulting from
regional trading blocs
Declining tariffs, which encourage trading across
borders and open up new markets
The information technology explosion, which
makes the coordination of far-flung operations
easier and also increases the commonality of
consumer tastes.
Prentice Hall 2003 Chapter 6 14
Pressures to Regionalize
Unique consumer preferences resulting from
cultural or national differences
Domestic subsidies
New production technologies that facilitate
product variation for less cost than before.
Prentice Hall 2003 Chapter 6 15
Using E-Business for Global Expansion
The real story is the profound impact this
medium will have on corporate strategy,
organization and business models. Our research
reveals that the Internet is driving global
marketplace transformation and paradigm shift in
how companies get things done, how they
compete and how they serve their customers.

www.IBM.com
Prentice Hall 2003 Chapter 6 16
Benefits of B2B
(Exhibit 6-6)
0 10 20 30 40 50 60 70
Better relationships with distributors/channels
Improved customer loyalty
Rapid entrance into new geographical markets
Better customer service
Lower operational costs
Expanded sales channel
Prentice Hall 2003 Chapter 6 17
Global B2B/B2C Strategy
To assess the potential competitive position of the
company, managers must ask themselves the following
questions with respect to B2B/B2C:
Does the exchange provide a technology solution that
helps industry-trading partners to do business more
efficiently?
Is the exchange known to be among the top 3-5 within its
vertical industry?
Does the exchange offer industry-specific technology and
expertise that gives it an advantage over generic
exchange-builders?

Prentice Hall 2003 Chapter 6 18
Conditions Favoring Going E-Global
The global beachhead strategy makes sense
when trade is global in scope; when the business
does not involve delivering orders; and when the
business model can be hijacked relatively easily
by local competitors.

M. Sawhney and S. Mandal
Prentice Hall 2003 Chapter 6 19
Conditions Favoring Going E-Local
[The e-local/regional approach] is preferable
under three conditions: when production and
consumption are regional rather than global in
scope; when customer behavior and market
structures differ across regions but are relatively
similar within a region; and when supply-chain
management is very important to success.

Sawhney and Mandal
Prentice Hall 2003 Chapter 6 20
Entry Strategy Alternatives
(In order of ascending risk)
Exporting
Licensing
Franchising
Contract manufacturing
Turnkey operations
Management contracts
International joint ventures (IJVs)
Fully owned subsidiaries
Prentice Hall 2003 Chapter 6 21
International Entry Strategies: Advantages
and Critical Success Factors
(Exhibit 6-7)
Strategy Advantages Critical Success Factors
Exporting Low risk Choice of distributor
No long-term assets Transportation costs
Easy market access and exit Tariffs and quotas

Licensing No asset ownership risk Quality and trustworthiness
of licensee
Fast market access Appropriability of intellectual
property
Avoids regulations and tariffs Host-country royalty limits

Franchising Little investment or risk Quality control of franchisee
and franchise operations
Fast market access
Small business expansion
Prentice Hall 2003 Chapter 6 22
International Entry Strategies: Advantages
and Critical Success Factors
(contd.)
Strategy Advantages Critical Success Factors
Contract Limited cost and risk Reliability and quality of
manufacturing local contractor
Short-term commitment Operational control and
human rights issues

Turnkey operations Revenue from skills and Reliable infrastructure
technology where FDI Sufficient local supplies and labor
restricted Repatriable profits
Reliability of any govt. partner

Management Low-risk access to further Opportunity gain longer-term
contracts strategies position
Prentice Hall 2003 Chapter 6 23
International Entry Strategies: Advantages
and Critical Success Factors
(contd.)
Strategy Advantages Critical Success Factors
Joint ventures Insider access to markets Strategic fit and complementarity
Share costs and risk of partner, markets, products
Leverage partners skill base, Ability to protect technology
technology, local contacts Competitive advantage
Ability to share control
Cultural adaptability of partners

Wholly owned Realize all revenues and Ability to access and control
subsidiaries control economic, political and currency
Global economies of scale risk
Strategic coordination Ability to get local acceptance
Protect technology and Repatriability of profits
skill base
Acquisition provides rapid
entry into established
market
Prentice Hall 2003 Chapter 6 24
Factors Affecting Choice of International
Entry Mode
(Exhibit 6-8)
Factor Category
Firm Factors
Examples
International experience
Core competencies
Core capabilities
National culture of home
country
Corporate culture
Firm strategy, goals, and
motivation
Prentice Hall 2003 Chapter 6 25
Factors Affecting Choice of International
Entry Mode
(contd.)
Industry Factors


Location Factors
Industry globalization
Industry growth rate
Technical intensity of industry

Extent of scale and location
economies
Country risk
Cultural distance
Knowledge of local market
Potential of local market
Competition in local market
Prentice Hall 2003 Chapter 6 26
Factors Affecting Choice of International
Entry Mode
(contd.)
Venture-specific Factors
Value of firm assets risked in
foreign location
Extent to which know-how
involved in venture is informal
(tacit)
Costs of making or enforcing
contracts with local partners
Size of planned foreign venture
Intent to conduct research and
development with local
partners
Prentice Hall 2003 Chapter 6 27
Strategic Choice
The strategic choice of one or more of the entry
strategies will depend on
1) a critical evaluation of the advantages (and
disadvantages of each in relation to the firms
capabilities,
2) the critical environmental factors, and
3) the contribution that each choice would make to the
overall mission and objectives of the company.
Prentice Hall 2003 Chapter 6 28
Alliance-based Entry Modes
Alliance-based entry modes are more suitable
under the following conditions:
Physical, linguistic, and cultural distance between the
home and host countries is high
The subsidiary would have low operational integration
with the rest of the multinational operations
The risk of asymmetric learning by the partner is low
The company is short of capital
Government regulations require local equity participation