CHAPTER 8

STRATEGIC ACTIONS: STRATEGY FORMULATION

Strategy Abroad
Strategic Management Management of Strategy
Competitiveness and Globalization: Concepts Seventh Concepts and Cases and Casesedition
Michael A. Hitt R. Duane Ireland Robert E. Hoskisson

PowerPoint Presentation by Charlie Cook The University of West Alabama 2007 Thomson/South-Western. All rights reserved.

KNOWLEDGE OBJECTIVES Studying this chapter should provide you with the strategic management knowledge needed to:

1. Explain traditional and emerging motives for firms to pursue international diversification.
2. Explore the four factors that lead to a basis for international business-level strategies. 3. Define the three international corporate-level strategies: multidomestic, global, and transnational. 4. Discuss the environmental trends affecting international strategy, especially liability of foreignness and regionalization.

2007 Thomson/South-Western. All rights reserved.

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KNOWLEDGE OBJECTIVES (contd) Studying this chapter should provide you with the strategic management knowledge needed to:

6. Name and describe the five alternative modes for entering international markets.
7. Explain the effects of international diversification on firm returns and innovation. 8. Name and describe two major risks of international diversification. 9. Explain why the positive outcomes from international expansion are limited.

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FIGURE

8.1

Opportunities and Outcomes of International Strategy

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Identifying International Opportunities

International Strategy
A strategy through which the firm sells its goods or services outside its domestic market.

Reasons to having an international strategy

International markets yield potential new opportunities.
New market expansion extends product life cycle. Needed resources can be secured. Greater potential product demand.

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Classic Rationale for International Diversification: Extend a Products Life Cycle

Product Demand Develops and Firm Exports Products
Foreign Competition Begins Production

Firm Introduces Innovation in Domestic Market

Firm Begins Production Abroad

Production is standardized and relocated to low cost countries.

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International Strategy Benefits

Increased Market Size
Domestic market may lack the size to support efficient scale manufacturing facilities.

Return on Investment
Large investment projects may require global markets to justify the capital outlays. Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators.

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International Strategy Benefits (contd)

Economies of Scale (or Learning)
Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R&D or distribution. Can spread costs over a larger sales base.

Can increase profit per unit.

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International Strategy Benefits (contd)

Location Advantages
Low cost markets aid in developing competitive advantage by providing access to: Raw materials Transportation Lower costs for labor Key customers

Energy

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FIGURE

8.2

Determinants of National Advantage

Source: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage of Nations, by Michael E. Porter, p. 72. Copyright 1990, 1998 by Michael E. Porter. 2007 Thomson/South-Western. All rights reserved.

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Determinants of National Advantage

Factors of production
The inputs necessary to compete in any industry
Labor Land Natural resources Capital Infrastructure

Basic factors
Natural and labor resources

Advanced factors
Digital communication systems and an educated workforce

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Determinants of National Advantage (contd)

Demand Conditions
Characterized by the nature and size of buyers needs in the home market for the industrys goods or services.
Size of the market segment can lead to scale-efficient facilities. Efficiency can lead to domination of the industry in other countries. Specialized demand may create opportunities beyond national boundaries.

2007 Thomson/South-Western. All rights reserved.

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Determinants of National Advantage (contd)

Related and Supporting Industries
Supporting services, facilities, suppliers and so on.
Support in design Support in distribution Related industries as suppliers and buyers

Firm Strategy, Structure and Rivalry

The pattern of strategy, structure, and rivalry among firms.
Common technical training Methodological product and process improvement Cooperative and competitive systems

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Selecting an International Corporate-Level Strategy

The type of corporate strategy selected will have an impact on the selection and implementation of the business-level strategies.
Some strategies provide individual country units with the flexibility to choose their own strategies. Other strategies dictate business-level strategies from the home office and coordinate resource sharing across units.

2007 Thomson/South-Western. All rights reserved.

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International Corporate-Level Strategy

Focuses on the scope of operations:
Product diversification Geographic diversification

Required when the firm operates in:

Multiple industries, and Multiple countries or regions

Headquarters unit guides the strategy

But business or country-level managers can have substantial strategic input.
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FIGURE

8.3

International Corporate-Level Strategies

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Multidomestic Strategy
Multidomestic strategy Strategy and operating decisions are decentralized to strategic business units (SBU) in each country. Products and services are tailored to local markets. Business units in one country are independent of each other. Assumes markets differ by country or regions. Focus on competition in each market. Prominent strategy among European firms due to broad variety of cultures and markets in Europe.

2007 Thomson/South-Western. All rights reserved.

817

Global Strategy
Global strategy

Products are standardized across national markets. Business-level strategic decisions are centralized in the home office. Strategic business units (SBU) are assumed to be interdependent. Emphasizes economies of scale. Often lacks responsiveness to local markets. Requires resource sharing and coordination across borders (hard to manage).
818

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Transnational Strategy
Transnational strategy

Seeks to achieve both global efficiency and local responsiveness.

Difficult to achieve because of simultaneous requirements:

Strong central control and coordination to achieve efficiency

Decentralization to achieve local market responsiveness

Firm must pursue organizational learning to achieve competitive advantage.

2007 Thomson/South-Western. All rights reserved.

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Environmental Trends
Liability of Foreignness
Legitimate concerns about the relative attractiveness of global strategies Global strategies not as prevalent as once thought Difficulty in implementing global strategies

Regionalization
Focusing on particular region(s) rather than on global markets

Better understanding of the cultures, legal and social norms

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TABLE

8.1

Global Market Entry: Choice of Entry

Type of Entry
Exporting

Characteristics
High cost, low control

Licensing
Strategic alliances

Low cost, low risk, little control, low returns

Shared costs, shared resources, shared risks, problems of integration (e.g., two corporate cultures)

Acquisition

Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations
Complex, often costly, time consuming, high risk, maximum control, potential above-average returns

New wholly owned subsidiary

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Dynamics of Mode of Entry

Whats the best solution?
Situation
The firm has no foreign manufacturing expertise and requires investment only in distribution.

Optimal Solution
Export

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Dynamics of Mode of Entry (contd)

Whats the best solution?
Situation
The firm needs to facilitate the product improvements necessary to enter foreign markets.

Optimal Solution
Licensing

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Dynamics of Mode of Entry (contd)

Whats the best solution?
Situation
The firm needs to connect with an experienced partner already in the targeted market.

Optimal Solution
Strategic Alliance

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Dynamics of Mode of Entry (contd)

Whats the best solution?
Situation
The firm needs to reduce its risk through the sharing of costs.

Optimal Solution
Strategic Alliance

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Dynamics of Mode of Entry (contd)

Whats the best solution?
Situation
The firm is facing uncertain situations such as an emerging economy in its targeted market.

Optimal Solution
Strategic Alliance

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Dynamics of Mode of Entry (contd) Whats the best solution?

Situation
The firms intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high.

Optimal Solution
Wholly-owned Subsidiary

2007 Thomson/South-Western. All rights reserved.

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International Diversification and Returns

Expanding sales of goods or services across global regions and countries and into different geographic locations or markets:
May increase a firms returns (such firms usually achieve the most positive stock returns).

May achieve economies of scale and experience, location advantages, increased market size and opportunity to stabilize returns.

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International Diversification and Innovation

Expansion sales of goods or services across global regions and countries and into different geographic locations or markets:
May yield potentially greater returns on innovations (a larger market).

Can generate additional resources for investment in innovation.

Provides exposure to new products and processes in international markets; generates additional knowledge leading to innovations.

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Complexity of Managing Multinational Firms

Expansion into global operations in different geographic locations or markets:
Makes implementing international strategy increasingly complex.
Can produce greater uncertainty and risk.

May result in the firm becoming unmanageable

May cause the cost of managing the firm to exceed the benefits of expansion.

Exposes the firm to possible instability of some national governments.

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Risks in an International Environment

Political Risks
Instability in national governments War, both civil and international Potential nationalization of a firms resources

Economic Risks
Differences and fluctuations in the value of different currencies Differences in prevailing wage rates Difficulties in enforcing property rights Unemployment

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FIGURE

8.4

Risk in the International Environment

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Limits to International Expansion: Management Problems

Cost of coordination across diverse geographical business units Institutional and cultural barriers Understanding strategic intent of competitors The overall complexity of competition

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