CHAPTER 8

STRATEGIC
ACTIONS:
STRATEGY
FORMULATION

PowerPoint Presentation by Charlie Cook

The University of West Alabama

Strategy Abroad

Management
of Strategy
Concepts and Cases
Michael A. Hitt Robert E. Hoskisson R. Duane
Ireland

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.
82

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.

83

FIGURE

8.1

Opportunities and Outcomes of International

Strategy

84

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.
85

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.

86

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.

87

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.

88

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

89

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.
810

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

811

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.

812

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

813

Selecting an International CorporateLevel 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.

814

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.
815

FIGURE

8.3

International Corporate-Level Strategies

816

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.
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

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.

819

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
820

TABLE

8.1

Global Market Entry: Choice of Entry

Type of Entry

Characteristics

Exporting

High cost, low control

Licensing

Low cost, low risk, little control, low returns

Strategic alliances

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

New wholly owned subsidiary

Complex, often costly, time consuming,

high risk, maximum control, potential
above-average returns

821

Dynamics of Mode of Entry

Whats the best solution?
Situation

Optimal Solution

The
Thefirm
firm has
hasno
noforeign
foreign
manufacturing
manufacturingexpertise
expertise
and
andrequires
requiresinvestment
investment
only
onlyin
indistribution.
distribution.

Export
Export

822

Dynamics of Mode of Entry (contd)

Whats the best solution?
Situation

Optimal Solution

The
Thefirm
firmneeds
needsto
to
facilitate
facilitatethe
theproduct
product
improvements
improvements
necessary
necessaryto
toenter
enter
foreign
foreignmarkets.
markets.

Licensing
Licensing

823

Dynamics of Mode of Entry (contd)

Whats the best solution?
Situation

Optimal Solution

The
Thefirm
firmneeds
needsto
to
connect
connect with
withan
an
experienced
experiencedpartner
partner
already
alreadyin
inthe
thetargeted
targeted
market.
market.

Strategic
StrategicAlliance
Alliance

824

Dynamics of Mode of Entry (contd)

Whats the best solution?
Situation

Optimal Solution

The
Thefirm
firmneeds
needsto
to
reduce
reduceits
itsrisk
riskthrough
through
the
thesharing
sharingof
ofcosts.
costs.

Strategic
StrategicAlliance
Alliance

825

Dynamics of Mode of Entry (contd)

Whats the best solution?
Situation

Optimal Solution

The
Thefirm
firmis
isfacing
facing
uncertain
uncertainsituations
situations
such
suchas
asan
anemerging
emerging
economy
economyin
inits
its
targeted
targetedmarket.
market.

Strategic
StrategicAlliance
Alliance

826

Dynamics of Mode of Entry (contd)

Whats the best solution?
Situation

Optimal Solution

The
Thefirms
firmsintellectual
intellectual
property
propertyrights
rightsin
inan
an
emerging
emergingeconomy
economyare
are
not
notwell
well protected,
protected,the
the
number
numberof
offirms
firms in
inthe
the
industry
industryis
isgrowing
growing fast,
fast,
and
andthe
theneed
needfor
for global
global
integration
integrationis
ishigh.
high.

Wholly-owned
Wholly-owned
Subsidiary
Subsidiary

827

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.

828

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.

829

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.
830

Risks in an International Environment

Political Risks

Economic Risks

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

?
?

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

831

FIGURE

8.4

Risk in the International Environment

832

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

833