Chapter 6

FORMULATING STRATEGY

reactive (or defensive) and some proactive (or aggressive). The threat of
their own decreased competitiveness is the overriding reason many large
companies adopt a strategy of aggressive globalization.
Reactive reasons

Opening Profile: Global Companies Take Advantage of

Opportunities in South Africa

Global competition: if left unchallenged, competitors who already have

overseas operations or investments may get so entrenched in foreign
Many foreign companies have set up successful operations in South
markets that it becomes difficult for other companies to enter at a later
Africa taking advantage of favorable conditions such as legal protection time.
of property, labor productivity, low tax rates, reasonable regulation, a
Trade barriers: barriers such as tariffs, quotas, buy-local policies, and other
low level of corruption, and good access to credit. In spite of the low
restrictive trade practices can make exports to foreign markets too
level of skills and education among the workers, exchange rate
expensive.
instability, and crime, companies such as Acer, Alcatel, and GE are
successful and profitable.
Regulations and restrictions by home country government: regulations and
restrictions by a firms home government may become so expensive that
However it is important to remember that as companies are going
international many of them are also carefully considering downsizing companies will seek out less restrictive foreign operating environments.
as part of their future strategy. As the economic slowdown sends
reverberations across the globe some companies are retrenching instead Customer demands: certain foreign companies may demand that their
of expanding in order to conserve cash flow. Many firms such as GM supplying company operate in their local region so that they have better
control over their suppliers.
are announcing lay-offs, closing plants, and closing divisions as
Proactive reasons
retrenchment becomes a very real strategy.
At the same time MNCs from China, India, Brazil, and Russia are
coming on strong and taking advantage of three forces spurred by the
Internet: mobility of talent, mobility of capital, and mobility of
knowledge.

Economies of scale: One pressing reason for many large firms to expand
overseas is to seek economies of scale. These are achieved when higher
levels of output result in spreading fixed costs over more units, thus
lowering the per-unit cost.

Reasons for Going International

Companies of all sizes go international for different reasons, some

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of its life cycle.

Growth opportunities: When expansion opportunities become limited at
home, firms are often driven to seek new international markets. A
Resource access and cost savings: Resource access and cost savings
mature product or service with restricted growth in its domestic market entice many companies to operate from overseas bases. Sometimes the
often has new life in another country where it will be in an earlier stage prospect of shifting production overseas improves competitiveness at

home.
Incentives: governments in countries seeking new infusions of capital
and technological know-how often provide incentives to attract
multinational corporations, being an additional proactive reason for
them to expand.

had happened, he said, I had to hide my true feelings, you have to be

brave and appear brave . . . It was a terrible time. Although this admission
is contrary to Mexican culture for a leader, it did signal a change of
direction within the company.

Strategic Formulation Process

Management in Action: Global Economic Downturn Causes

Mexicos Cemex to Retrench

The strategy formulation process is necessary both at the headquarters

of a corporation and at each of its subsidiaries.

Mr. Zambrano has been a risk-taker. As the C.E.O. of the Mexican

cement company, Cemex, he aggressively moved the company into the
global marketplace. In 2006 Cemex continued its global expansion by
making an unsolicited bid for the Rinker Group of Australia, giving
Cemex a stronger position in the U.S. housing market, especially in
Florida and Arizona. The acquisition was the largest ever by a Mexican
company.

Global strategic planning is more complex than domestic strategic

planning because of the incidence of more complex variables, such as
difficulty in gaining timely information, diversity of geographic
locations, and differences in environmental factors (political, legal,
cultural, market, and financial processes).

For firms that have not yet engaged in international operations, an

ongoing strategic planning process with a global orientation identifies
However, with rising costs for crucial raw materials such as coal, heavy potential opportunities for (1) appropriate market expansion, (2)
oil, and gas, the focus for Cemex in 2009 changed from expansion and increased profitability, and (3) new ventures by which the firm can
acquisitions to cost-cutting and retrenchment. The company announced exploit its strategic advantages.
that it would cut costs and jobs in its attempt to absorb the effects of the
The strategic formulation process is part of the strategic management
U.S. housing crisis, global market volatility, and the weakness of the
peso. In a rapid reversal of fortune, the company known for relentless process in which most firms engage, either formally or informally.
expansion was forced into selling assets, negotiating with creditors, and Strategic planning modes range from a proactive long-range format to a
reactive, more seat-of-the-pants method. Exhibit 6-1 displays the
cutting its work force and spending.
strategic management process.
Update: As of August 2011, Cemex had secured a $15 billion restructuring
deal, had cut 11 percent of its workforce worldwide, and halved it in Spain,
and Mr. Zambrano was becoming more optimistic. Reflecting on all that 2
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implementation phase, which requires the establishment of the structure

as well as systems and procedures suitable to make the strategy work.

The first phase of the strategic management processthe planning

phasestarts with the company establishing (or clarifying) its mission
and the overall objectives of the firm.
Steps in Developing International Strategy
Step One: Establish Mission and Objectives
The second part of the strategic management process is the

The mission of an organization is its overall raison dtre, or the

forecasting relevant trends, competitive actions, and circumstances that
function it performs in society. This mission charts the direction of the will affect operations in geographic areas of potential interest. This
company and provides a basis for strategic decision making.
activity should be conducted on three levelsglobal, regional, and
national.
A firms global objectives usually fall into the areas of marketing,
profitability, finance, production, and research and development (as noted a. Scanning should cover such topics as:
in Exhibit 6-2).
Political and Economic Risks
Technological, legal, physical restraints
Goals for market volume and profitability are usually set higher for
Nationalism
international than for domestic operations because of the allowance for International competition
greater risk involved. In addition, financial objectives must consider
different tax regulations in other countries and exchange rate
International competitor analysis is the most important area for
fluctuations.
environmental assessment and strategy formulation. The first step in
analyzing the competition is to assess the relevant industry structures as
Step Two: Assess External Environment
they influence the competitive arena in the particular country (or region)
being considered. For example, will the infrastructure support new
After clarifying the corporate mission and objectives, the first major
companies in that industry? Is there room for additional competition?
step in weighing international strategic options is the environmental
What is the relative supply and demand for the proposed product or
assessment. This assessment includes environmental scanning and
service? The ultimate profit potential in an industry in a given location
continuous monitoring to keep abreast of variables around the world
will be determined by these kinds of factors.
that are pertinent to the firm and that have the potential to shape its
future by posing new opportunities (or threats). Firms must adapt to
Companies can assess the environment of their competitors by looking
their environment to survive. How to adapt is the focus of strategic
into the goals, strategies, strengths, and weaknesses of the competitors.
planning.
Environmental scanning is the process of information gathering and

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The firm can also choose varying levels of environmental scanning. The
firm should conduct global environmental analysis: multinational,
This process of environmental scanning, from the broad global level
regional, and national. The multinational-level of analysis provides a
down to the local specifics of entry planning, is illustrated in Exhibit 6-4
broad assessment of significant worldwide trends through identification, The first broad scan of all potential world markets results in the firm
forecasting, and monitoring activities. At the regional level, the analysis being able to eliminate from its list those markets that are closed or
focuses in detail on critical environmental factors to identify
insignificant or do not have reasonable entry conditions. The second
opportunities and risks for marketing the companys products, services, scan of remaining regions, and then countries, is done in greater detail
or technology. The national level of analysis focuses on the size and
perhaps eliminating some based on political instability, for example.
nature of the market, along with any possible operational problems, in Remaining countries are then assessed for competitor strengths,
order to consider new entry strategy options.
suitability of products, and so on.

was easier to operate in the country a year ago than it is today, the CEO
Another important factor that must be considered in the environmental of General Electrics Indian unit told Bloomberg. It is frustrating to
assessment at all levels is how institutions might affect potential
look at unresolved issues and know that theyre resolvable if you can
opportunities to compete.
get some leader- ship and orientation around them. In addition, in early
2012 investors were postponing new plans for business in India while
Under the Lens: India Says No to Foreign Ownership of
they awaited the budgetary decisions regarding a number of proposed
Supermarkets
new taxes on foreign investment.
On Wednesday, Finance Minister Pranab Mukherjee said the decision to Various institutions can create opportunities or constraints for firms
allow 51% foreign direct investment in multi-brand retail, as its called considering entry into specific global markets. Specific ways in which
here, was suspended pending consultations among various
formal institutions affect international competition are:
stakeholders.
Attractiveness of overseas markets: institutions provide a broad
Mumbai (MarketWatch), December 7, 2011.
framework of liberty and democracy as well as human rights
protections, property rights laws, and so forth.
The decision followed fierce opposition to a proposal granting to
foreign big-box supermarkets, such as WalMart Stores, Inc.,
unfettered access to Indias $450 billion retail consumer market. The
fear among foreign retailers is that it is becoming harder for outside
companies to enter into India, one of the most promising emerging
consumer markets in the world. Starbucks and Dunkin Brands are
4
forming alliances in order to open outlets in the populous country. It
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Sources of environmental information

Entry barriers and industry attractiveness: institutions can create barriers
to entry in certain industries and hence make those industries more
The success of environmental scanning depends on the ability of
attractive for incumbent firms.
managers to take an international perspective and to ensure that their
sources of information and business intelligence are global. In the
Antidumping as an entry barrier: laws can place a foreign company at a United States alone, over two thousand business information services
disadvantage if accused of dumping.
are available on computer database, tailored to specific industries and
regions; other resources include corporate clipping services and
In India for example, greater emphasis on higher education and reforms
information packages. However, internal sources of information are
that liberalized the economy created a more open and competitive
usually preferableespecially alert field personnel who, with first-hand
atmosphere which fostered domestic and international competition. In
observations, can provide up-to-date and relevant information for the
China, guanxi, or interpersonal connections, functions as a substitute for firm.
the weak formal institutions.
Step Three: Analyze Internal Factors

After the environmental assessment, the second major step in weighing The firms managers assess its capabilities and key success factors
international strategic options is the internal analysis. This analysis
compared to those of its competitors. They must judge the relative
determines which areas of the firms operations represent strengths or current and potential competitive position of firms in that market and
weaknesses (currently or potentially) compared to competitors so that locationwhether that is a global position or that for a specific country
the firm may use that information to its strategic advantage. The internal or region.
analysis focuses on the companys resources, operations, and global
synergies. The strengths and weaknesses of the firms financial and
This stage of strategic formulation is often called a SWOT analysis (an
managerial expertise and functional capabilities are evaluated to
acronym for Strengths, Weaknesses, Opportunities, and Threats), in
determine what key success factors (KSFs) the company has and how which the firms capabilities relative to its competitors is assessed as
well they can help the firm exploit foreign opportunities.
pertinent to the opportunities and threats in the environment for those
firms. It is important to consider comparative advantages in entering a
All companies have strengths and weaknesses. Managements challenge is foreign market.
to identify both and to take appropriate action. Many diagnostic tools are
available for conducting an internal resource audit. Financial ratios may
Most companies develop their strategy around key strengths, or distinctive
reveal an inefficient use
competencies. Core competencies represent important corporate resources
because, as Prahalad and Hamel explain, they are the collective learning
of assets that is restricting profitability; a sales-force analysis may
in the organization,
reveal that the sales force is an area of distinct competence for the firm.
Competitive analysis

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firms unique niche or competitive advantage.

especially how to coordinate diverse production skills and to integrate
multiple streams of technologies. Managers must also assess their firms Step Four: Evaluate Global and International Strategic Alternatives
weaknesses. Of course, the subjective perceptions, motivations,
capabilities, and goals of the managers involved in such diagnoses
The fourth major step in the strategic planning process is for managers to
frequently cloud the decision-making process.
consider the advantages of various strategic alternatives in light of the
competitive analysis. There are two levels of strategic alternatives that a
Strategic decision-making models
firm must consider: global and national.
The international manager has a choice of strategic models to guide
Approaches to world markets
decision making. The roles and interactions of the models are
conceptualized in Exhibit 6-6. The institution-based theory looks at Globalization refers to the integration of worldwide operations and the
existing and potential risks and influences in the host area. Porters
development of standardized products and marketing.
industry-based model examines five forces which determine the
dynamics within the industry. The resource-based approach identifies a The rationale behind globalization is to compete by establishing

worldwide economies of scale, offshore manufacturing, and

international cash flows.

linked together within a region and a strategy is formulated for each

region, allowing more local responsiveness and specialization.

The pressures to globalize include increasing competitive clout resulting The strategic choice as to where a company should position itself along
from regional trading blocs; declining tariffs that encourage trading
the globalization-regionalization continuum is contingent upon the
across borders and open up new markets; the information technology nature of the industry, the type of company, its goals and strengths, and
explosion that makes coordinating a far-flung operation easier.
the nature of its subsidiaries. In addition, each companys strategic
approach should be unique in adapting to its own environment. Many
One of the quickest and cheapest ways to develop a global strategy is firms may try to Go Global, Act Local to trade off the best advantages
through strategic alliances (for example the 2009 Chrysler-Fiat JV).
of each strategy.
Globalization is inherently more vulnerable to environmental risk than a Ghemawats analysisreferred to as CAGE distance frameworkof
regionalization strategy. Global organizations are more difficult to
Google has shown why the company has had problems with their one
manage because doing so requires the coordination of broadly divergent size fits all strategy:
national cultures. Globalization treats all countries similarly regardless
of their differences in cultures and systems: firms must lose some of
Cultural distance: Googles biggest problem in Russia seems to have
their home country loyalties and replace them with common corporate been associated with a relatively difficult language.
values and loyalties.
Regionalization (or multi-local) is a strategy in which local markets are 6
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Administrative distance: Googles difficulties in dealing with Chinese

censorship reflect the difference between Chinese administrative and
policy frameworks and those in its home country, the United States.
Geographic distance: Although Googles products can be digitized, it
had trouble adapting to Russia from afar and has had to set up offices
there.

being fully integratedoften both vertically and horizontally, including

suppliers, productive facilities, marketing and distribution outlets, and
contractors around the world. Although some companies move very
quickly to the stage of global integration often through merger or
acquisitionmany companies evolve into multinational corporations by
going through the entry strategies in stages, taking varying lengths of
time between stages.

Whereas Proctor and Gamble took 100 years to fully go global, more
Economic distance: The underdevelopment of the payment
recently many companies are born globalthat is they start out with a
infrastructure in Russia has been another handicap for Google relative to global reach, typically by using the Internet capabilities and also
local rivals.
through hiring people with international experience and contacts around
the world.
Global integrative strategies
HBR: Standing conventional theory on its head, start-ups now do
Many MNCs have developed their global operations to the point of
business in many countries before dominating their home markets.

Using e-business for Global Expansion

Companies of all sizes are increasingly looking to the Internet as a
means to expand their global operations. The benefits of a global B2B
strategy are many, as shown in Exhibit 6-7. On the other hand, there are
many challenges inherent in the B2B strategy, such as cultural
differences, varying business models, governmental wrangling, and
border conflicts.
Potential problem areas that managers must assess in their global
environmental analysis include conflicting consumer protection,
intellectual property and tax laws, increasing isolationism among
democracies, language barriers, and a lack of tech-savvy legislators
worldwide.

complete with a different pool of competitors, and whole new sets of

environmental issues. To assess the potential competitive position of the
company, managers must ask themselves:
Does the exchange provide a technology solution that helps industrytrading partners to do business more efficiently?
Is the exchange known to be among the top three to five within its
vertical industry?
Does the exchange offer industry-specific technology and expertise that
gives it an advantage over generic exchange-builders?
E-Global or E-Local?

Global managers must realize that e-business cannot be regarded as just

an extension of current businesses. It is a whole new industry in itself, 7
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operations, management contracts, joint ventures, and fully owned

Although the Internet itself is global, companies pursuing global
subsidiaries set up by the firm and e-business. These alternatives are not
markets using the Internet must still consider local cultural expectations, mutually exclusive; several may be employed at the same time.
differences in privacy laws, government regulations, taxes, and payment
infrastructure. The e-global strategy is best for global B2B markets in Exporting is a relatively low-risk way to begin international expansion
steel, plastics, and electronics. The e-local strategy is more suited to
or to test out an overseas market. An experienced firm may want to
consumer retailing and financial services. It is best for situations in
handle its exporting functions by appointing a manager or establishing
which production and consumption are regional in scope, when
an export department. Alternatively, an export management company
behavior differs across regions, and when supply-chain management is (EMC) may be retained to take over some or all exporting functions,
important for success.
including: dealing with host country regulations, tariffs, duties,
documentation, letters of credit, currency conversion, and so forth.
Step 5: Evaluate Entry Strategy Alternatives
Licensing: International licensing agreements grant rights to a firm in
For a multinational corporation, a more specific set of strategic
the host country to either produce or sell a product, or both. Licensing is
alternatives focuses on different ways to enter a foreign market. This
especially suitable for the mature phases of the product life cycle.
section examines the various entry and ownership strategies available to
firms, including exporting, licensing, franchising, contract
Franchising: Franchising involves relatively little risk. The franchiser
manufacturing, offshoring, service-sector outsourcing, turnkey
licenses its trademark, products, services, and operating principles for

an initial fee and ongoing royalties. Franchising can be an ideal strategy employees.
for small businesses, because outlets require little investment in capital
or human resources.
Turnkey Operations: in a turnkey operation, a company designs and
constructs a facility abroad, trains local personnel, and then turns the
Contract Manufacturing: a common means of utilizing cheaper labor key over to local management for a fee.
overseas is to contract for production of finished goods or component
parts, a process called contract manufacturing.
Management Contracts: a management contract gives the rights to a
foreign company to manage the daily operations of a business, but not to
Offshoring: when a company moves one or all of its factories from the make decisions regarding ownership, financing, or strategic and policy
home country to another country to avoid trade barriers or take
changes.
advantage of lower costs of production.
Service Sector Outsourcing: the process of setting up overseas offices,
call centers, and research labs to low-wage countries such as India, the 8
Philippines, and China in order to reduce the cost of white-collar
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International Joint Ventures (IJVs): A joint venture involves an

agreement by two or more companies to produce a product or service
jointly. Ownership is shared, typically by an MNC and a local partner.
This strategy facilitates rapid entry into new markets by means of an
already established partner who has local contacts and familiarity with
local operations.
IJVs are a common strategy for corporate growth around the world; they
are also a means to overcome trade barriers, to achieve significant
economics of scale for development of a strong competitive position, to
secure access to additional raw materials, to acquire managerial and
technological skills, and to spread the risk associated with operating in a
foreign environment. The IJV also reduces the risks of expropriation and
harassment by the host country. Many countries, like Mexico and Japan,
stipulate proportions of local ownership and participation. International
joint ventures are one of many forms of strategic global alliances further
discussed in the
next chapter.

is permitted, an MNC that wants total control of its operations can start
its own product or service business from scratch or it may acquire an
existing firm in the host country. This represents the highest level of risk
for a firm.
E-Business: E-business is an entry strategy at the local level; as such the
failure risk of entry depends greatly on the country or region, even
though risk is generally low globally.
Exhibit 6-9 summarizes the advantages and critical success factors of
these entry strategies.
Comparative Management in Focus: Strategic Planning for
Emerging Markets

As shown in Table 6-2 there continue to be many indicators of the

increasing business opportunities available for companies wanting to set
up operations in or export to the emerging markets, in particular in light
of the slowdown in growth in many developed economies brought about
by economic problems. Different countries are at different levels of
Fully Owned Subsidiaries: In countries where a fully owned subsidiary development however and have different risk/return profiles, which

require retailers to tailor their approaches accordingly and assemble a entails considerably higher levels of risk than they are familiar within
portfolio of markets to balance short-term risk with long-term growth particular those risks of political turmoil, corruption, and contract
aspirations. The World Economic Forum report also cautions that
enforcement. However, avoiding emerging markets will, over time,
emerging markets are not a single homogenous group: They develop make firms less competitive than those who invest there in some form.
differently, have different infrastructural, socio-economic and regulatory
challenges, face different environmental and geographical constraints, In their research, Washburn and Hunsaker have found that forwardand, to a certain extent, afford different opportunities for business. We thinking global managers
argue that the lack of adequate development in the areas of trade
(they call them bridgers) have identified and developed innovations in
facilitation and trade logistics can curtail the growth for these markets emerging markets
and the world.
In jumping on the bandwagon, firms of all sizes, in particular small
9
businesses, must realize that investing in developing economies usually
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(often with the insight of the local managers) and been able to integrate
In fact, more than two-thirds of companies think its equally important
those ideas and improvements into their companies product lines.
to cost savings.
Innovations percolating from emerging market companies already indicate
the potential, such as Tatas $2,500 Nano car in India.
Similarly, 55 percent of manufacturing companies reported that they
establish operations in emerging markets to improve their speed to
A study by Deloitte involving interviews with several executives and a market.
survey of 247 executives from consumer and industrial product
companies with presence in emerging markets revealed that companies Forward-thinking companies are beginning to realize that future returns
are increasingly making emerging geographic markets a centerpiece of will depend on emulating global business models in emerging markets.
their global business model. Over the next three years, upwards of 88 In recent years, the rate of IJV (international joint venture) formation
percent of companies plan to expand their presence in emerging
has continued to increase steadily, especially among emerging markets
markets. In fact, nearly half of these organizations expect 20 percent or in Asia, Eastern Europe, and Latin America. These emerging markets
more of their global revenues to have their origins in emerging markets. account for about 70 percent of all IJV entries by multinational
Furthermore, a third of these companies plan to place more than 20
corporations.
percent of their investments in these regions. None of these figures
suggest an imminent end to offshoring as we know it, but rather a
The type of business activities, market opportunities, country
renewed interest in its pursuit. While cost savings is still a key motivator regulations, tax advantages, and experience in emerging markets are the
for nearly three-quarters of manufacturing companies, its no longer the key determinants of operating model (see Exhibit 6-13). Thirty-eight
sole reason to set up shop abroad.
percent of manufacturing companies in our study reported that they
currently use wholly owned subsidiaries in emerging markets. As they
Almost seventy percent of the manufacturers in our study consider
build complete product lines and develop new products, companies
market expansion an important factor (see Exhibit 6-10).
require a significant level of control over strategic business activities.

The choice of one or more entry strategies will depend on (1) a critical
In many cases, market opportunities also drive the choice of operating evaluation of the advantages and disadvantages of each in relation to the
models in emerging markets. Multinational companies that struggle to firms capabilities; (2) the critical environmental factors; and (3) the
stay competitive and innovative sometimes find emerging market
contribution that each choice would make to the overall mission and
companies with a new line of products that has potential to add
objectives of the company. When it comes down to a choice of entry
significant cash flow. In such cases, the choice of operating model
strategy or strategies for a particular company, there are more specific
depends on size of investment, risk appetite, competition and expected factors relating to that firms situation that must be taken into account.
return on the investment. Companies should choose between joint
ventures and acquisitions only after thorough due diligence, depending These include: factors relating to the firm itself, the industry in which it
on how these factors play out.
operates, location factors, and venture-specific factors.
Step 6: Decide on Strategy
10
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After consideration of these factors, some entry strategies will no longer

be appropriate. Managers will decide between equity and non-equity
based alternatives. Equity modes may be wholly-owned operations or
equity joint ventures. Non-equity modes may be contractual agreements
and export.
Gupta and Govindarajan propose a hierarchy of decision factors but
consider two initial choice levels. The first is the extent to which the
firm will export or produce locally. The second is the extent of
ownership control over activities that will be performed locally. There
are many choice combinations available.
International strategic formulation requires a long-term perspective.
Entry strategies, therefore, need to be conceived as part of a welldesigned, overall plan. In addition, strategic choices at various levels
often are influenced by cultural factors, such as a long-term versus a
short-term perspective. Hofstede found that most people in countries
such as China and Japan generally had a longer-term horizon than those
in Canada and the United States.

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