1. Prentice Chapter 6 1
Formulating Strategy
Chapter 6

2. Prentice Chapter 6 2
Chapter 6 - Overview
 Reasons for going international
 Strategic formulation process
 Steps in developing international and global
strategies

3. Prentice Chapter 6 3
Strategic Planning and Strategy
 The process by which a firm’s 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.

4. Prentice Chapter 6 4
Reasons for Going International
 Reactive Reasons
• Globalization of competitors
• Trade barriers
• Regulations and restrictions
• Customer demands

5. Prentice Chapter 6 5
Reasons for Going International
(contd.)
 Proactive Reasons
• Economies of scale
• Growth opportunities
• Resource access and cost savings
• Incentives

6. Prentice 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
StrategicPlanningProcess

7. Prentice 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
ImplementationProcess

8. Prentice 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

9. Prentice 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.

10. Prentice Chapter 6 10
Major Variables Covered in Environmental
Scanning
 Political instability
 Currency instability
 Nationalism
 International competition

11. Prentice Chapter 6 11
Internal Analysis
 Internal analysis determines which areas of the
firm’s 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 company’s resources and
operations, and global synergies

12. Prentice 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.

13. Prentice 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.

14. Prentice 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.

15. Prentice 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

16. Prentice 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

17. Prentice 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?

18. Prentice 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

19. Prentice 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

20. Prentice 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

21. Prentice 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

22. Prentice 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

23. Prentice 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 partner’s 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

24. Prentice 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

25. Prentice 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

26. Prentice 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

27. Prentice 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 firm’s
capabilities,
2) the critical environmental factors, and
3) the contribution that each choice would make to the
overall mission and objectives of the company.

28. Prentice 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