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Chapter 6
FORMULATING STRATEGY
LECTURE OUTLINE
General Outline
Opening Profile: Amazon, eBay, and Flipkart Bet Big on India
Reasons for Going International
Reactive Responses
Proactive Reasons
Comparative Management in Focus: Global Companies Take Advantage of Growth
Opportunities in South Africa
Strategic Formulation Process
Steps in Developing International and Global Strategies
Step 1. Establish Mission and Objectives
Step 2. Assess External Environment
Under the Lens: McDonald’s in Russia: A Political Pawn?
Under the Lens: Modern Mexico: Reshoring— Location and Young Workforce Prove
Attractive
Strategic Planning For Emerging Markets
Management in Action: Strategic Planning for Emerging Markets
Step 6. Decide on Strategy Timing
Chapter Learning Objectives (see slide 6-2)
6-1. To understand the reasons companies engage in international business.
Opening Profile: Amazon, eBay, and Flipkart Bet Big on India (see slide 6-3)
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In July 2014, Amazon, which had been in India since 2013, announced new investment there of
$2 billion, and Flipkart, India’s biggest e-retailer, announced it was injecting $1 billion of fresh
capital there. Flipkart, started in 2007 by two former Amazon employees, had 22 million
registered users, although it was losing money. Amazon is on a march to dominate the e-
retailing marketplace before Walmart expands its e-commerce venture there. Snapdeal, backed
Chapter Learning Goals & Strategic Planning and Strategy (see slides 6-4 & 6-5) is 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. Strategy is the choice of business or
businesses in which to operate and the ways in which a firm differentiates itself from its
competitors. Almost all successful companies engage in long-range strategic planning, and
those with a global orientation position themselves to take full advantage of worldwide trends
and opportunities.
I. Reasons for Going International (see slide 6-6)
A. Companies of all sizes “go international” for different reasons, some 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.
1. Reactive reasons
a. Global competition: if left unchallenged, competitors who already have overseas
operations or investments may get so entrenched in foreign markets that it
2. Proactive reasons
a. 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.
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3. Resource access and cost savings: Resource access and cost savings entice many
companies to operate from overseas bases. Sometimes the prospect of shifting
production overseas improves competitiveness at home.
4. 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.
Comparative Management in Focus: Global Companies Take Advantage of Growth
Opportunities in South Africa (see slides 6-7 & 6-8)
Many foreign companies have set up successful operations in South Africa taking advantage of
favorable conditions such as legal protection of property, labor productivity, low tax rates,
reasonable regulation, a low level of corruption, and good access to credit. In spite of the low
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.
II. Strategic Formulation Process
A. The strategy formulation process is necessary both at the headquarters of a corporation
and at each of its subsidiaries.
B. Global strategic planning is more complex than domestic strategic planning because of
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D. The strategic formulation process is part of the strategic management process in which
most firms engage, either formally or informally. Strategic planning modes range from a
proactive long-range format to a reactive, more seat-of-the-pants method. Exhibit 6-1
(see slide 6-9) displays the strategic management process.
1. The first phase of the strategic management process—the planning phase—starts
III. Chapter Learning Goals & Steps in Developing International and GlobalStrategy (see slides
6-10 & 6-11)
A. Step 1: Establish Mission and Objectives (see slide 6-12 & 6-13)
1. The mission of an organization is its overall raison d’être, or the function it performs
in society. This mission charts the direction of the company and provides a basis for
strategic decision making.
2. A firm’s global objectives usually fall into the areas of marketing, profitability,
finance, production, and research and development (as noted in Exhibit 6-2).
3. Goals for market volume and profitability are usually set higher for international
than for domestic operations because of the allowance for greater risk involved. In
addition, financial objectives must consider different tax regulations in other
countries and exchange rate fluctuations.
B. Step 2: Assess External Environment (see slide 6-14)
1. After clarifying the corporate mission and objectives, the first major step in
weighing international strategic options is the environmental assessment. This
assessment includes environmental scanning and continuous monitoring to keep
abreast of variables around the world 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 their environment to survive. How to adapt is the focus of strategic
planning.
Under the Lens: McDonald’s in Russia: A Political Pawn? (see slide 15)
On August 20, 2014, the Russian government closed down four McDonald’s restaurants in
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2. Environmental scanning variables (see slide 6-16) is the process of information
gathering and forecasting relevant trends, competitive actions, and circumstances
that will affect operations in geographic areas of potential interest. This activity
should be conducted on three levels—global, regional, and national.
a. Scanning should cover such topics as:
1. Political and Economic Risks
3. International competitor analysis is the most important area for environmental
assessment and strategy formulation. The first step in analyzing the competition is to
assess the relevant industry structures as they influence the competitive arena in the
4. Companies can assess the environment of their competitors by looking into the
goals, strategies, strengths, and weaknesses of the competitors.
The firm can also choose varying levels of environmental scanning. The firm should
conduct global environmental analysis: multinational, regional, and national. The
multinational-level of analysis provides a broad assessment of significant worldwide
conditions. The second scan of remaining regions, and then countries, is done in
greater detail—perhaps eliminating some based on political instability, for example.
Remaining countries are then assessed for competitor strengths, suitability of
products, and so on.
Another important factor that must be considered in the environmental assessment at
all levels is how institutions might affect potential opportunities to compete.
Various institutions can create opportunities or constraints for firms considering
entry into specific global markets. Specific ways in which formal institutions affect
international competition include (see slide 6-17):
a. Attractiveness of overseas markets: institutions provide a broad framework of
liberty and democracy as well as human rights protections, property rights laws,
and so forth.
C. Sources of environmental information
1. The success of environmental scanning depends on the ability of managers to take an
international perspective and to ensure that their sources of information and business
intelligence are global. In the United States alone, over two thousand business
D. Step 3: Analyze Internal Factors (see slide 6-19)
1. After the environmental assessment, the second major step in weighing international
strategic options is the internal analysis. This 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. The internal analysis focuses on the company’s resources, operations,
E. Competitive analysis
1. The firm’s managers assess its capabilities and key success factors compared to
those of its competitors. They must judge the relative current and potential
competitive position of firms in that market and location—whether that is a global
2. Most companies develop their strategy around key strengths, or distinctive
competencies. Core competencies represent important corporate resources because,
as Prahalad and Hamel explain, they are the “collective learning in the organization,
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F. Strategic Decision-Making Models (see slide 6-20)
1. The international manager has a choice of strategic models to guide decision-
making. The roles and interactions of the models are conceptualized in Exhibit 6-6.
The institution-based theory looks at existing and potential risks and influences in
the host area. Porter’s industry-based model examines five forces which determine
the dynamics within the industry. The resource-based approach identifies a firm’s
unique niche or competitive advantage.
G: Step 4: Evaluate Global and International Strategic Alternatives
The fourth major step in the strategic planning process is for managers to consider the
advantages of various strategic alternatives (see slide 6-21) in light of the competitive
analysis. There are two levels of strategic alternatives that a firm must consider: global
and national.
H. Approaches to world markets
1. Globalization refers to the integration of worldwide operations and the development
of standardized products and marketing.
2. The rationale behind globalization is to compete by establishing worldwide
6. Regionalization/Localization (or multi-local) is a strategy in which (see slide 6-23)
local markets are linked together within a region and a strategy is formulated for
each region, allowing more local responsiveness and specialization.
7. The strategic choice as to where a company should position itself along the
globalization-regionalization continuum is contingent upon the nature of the
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Ghemawat’s analysis—referred to as CAGE distance framework (see slide 24)—of
Google has shown why the company has had problems with their “one size fits all”
strategy:
1. Cultural distance: Google’s biggest problem in Russia seems to have been
associated with a relatively difficult language.
I. Global Integrative Strategies (see slide 6-25)
1. Many MNCs have developed their global operations to the point of being fully
integrated—often 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—
countries before dominating their home markets.”
J. E-Business for Global Expansion
1. 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 (see slide 6-27). 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.
2. 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.
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E-Global or E-Local? (see slide 6-28)
Teaching Tip: View Yahoo and eBay from around the world. Ask students to comment on the
different strategic focus found at these sites.
Step 5: Evaluate Entry Strategy Alternatives (see slide 6-29)
1. For a multinational corporation, a more specific set of strategic alternatives focuses
on different ways to enter a foreign market. This section examines the various entry
2. Exporting is a relatively low-risk way to begin international expansion or to test out
an overseas market. An experienced firm may want to handle its exporting functions
3. Licensing: International licensing agreements grant rights to a firm in the host
country to either produce or sell a product, or both. Licensing is especially suitable
for the mature phases of the product life cycle.
4. Franchising: Franchising involves relatively little risk. The franchiser licenses its
trademark, products, services, and operating principles for an initial fee and ongoing
Under the Lens: Modern Mexico: Reshoring— Location and Young Workforce Prove Attractive
(see slide 6-30)
Logistics won out. It was too cumbersome to keep its manufacturing base so far away. After
suffering an exodus of manufacturing companies to China from 2000-2010, Mexico is a
destination for US companies reshoring into the Americas. Servicing the US faster and cheaper
is an advantage. Mexico has a host of reshoring advantages besides location: a young and
increasingly skilled workforce; the right time zone for US companies; and successful industrial
clusters. The US has overtaken Mexico: now 42 per cent of companies say they would choose
the US, the survey found. The US may be more costly, but it can be more productive while
operations in Mexico can be fraught with bureaucracy and terrible security conditions. By some
estimates, North America could see a $120bn influx from reshoring by 2020.
8. Service Sector Outsourcing:(see slide 6-31) the process of setting up overseas
offices, call centers, and research labs to low-wage countries such as India, the
10. 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
10. Fully Owned Subsidiaries: In countries where a fully owned subsidiary 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.
11. 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.
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Management in Action: Strategic Planning for Emerging Markets
As shown in Table 6-2 (see slide 6-32) 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
A study revealed that companies are increasingly making emerging geographic markets a
centerpiece of their global business model. Nearly half of these organizations expect 20 percent
or more of their global revenues to have their origins in emerging markets. Furthermore, a third
of these companies plan to place more than 20 percent of their investments in these regions.
opportunities, country regulations, tax advantages, and experience in emerging markets are the
key determinants of the operating model in Exhibit 6-13 (see slide 6-37). In many cases,
market opportunities drive the choice of operating models in emerging markets. In addition to
choosing the right operating model, alignment to the global governance model is also a critical
success factor as in Exhibit 6-14 (see slide 6-38)
Step 6: Decide on Strategy (see slide 6-39)
1. The choice of one or more entry strategies will depend on (1) a critical evaluation of
the advantages and disadvantages of each in relation to the firm’s capabilities; (2)
2. 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.
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performed locally. There are many choice combinations available.
4. International strategic formulation requires a long-term perspective. Entry strategies,
therefore, need to be conceived as part of a well-designed, overall plan. In addition,
strategic choices at various levels often are influenced by cultural factors (see slide
6-40), 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.
Internet Resources
Chapter Discussion Questions
6-1. Discuss why companies go international, giving specific reactive and proactive
. reasons.
Learning Objective: 2; AACSB: Dynamics of the global economy
As a reactive response, companies go international in order to respond to challenges
from foreign competitors; to get around restrictive trade barriers; to do something about
. 6-2. What effects on company strategy have you observed because of the global
economic downturn?
Learning Objective: 1; AACSB: Analytic skills
. Companies such as Cemex are slowing down or reversing their international expansion;
. 6-3. Give examples of the impact of the Internet on small businesses.
Learning Objective: 1; AACSB: Use of information technology
As domestic growth declines because of slow-growth economies, opportunities abroad
.
. 6-4. Discuss the ways in which managers arrive at new strategic directions—formal and
informal. Which is the best?
Learning Objective: 2; AACSB: Analytic skills
. Formally, managers can use formal planning techniques like industry structure analysis
leading to a SWOT analysis of the firm. They can carefully screen countries and
. 6-5. Explain the process of environmental assessment. What are the major international
variables to consider in the scanning process? Discuss the levels of environmental
monitoring that should be conducted. How well do you think managers conduct
environmental assessment?
. Learning Objective: 3; AACSB: Dynamics of the global economy
Environmental scanning is the process of information gathering and forecasting relevant
trends, competitive actions, and circumstances that will affect operations in geographic
areas of potential interest. Major international variables that are considered in scanning
6-6. Discuss the impact of the rise of emerging-market countries on the strategic planning
of firms around the world.
Learning Objective: 3; AACSB: Dynamics of the global economy
The global economy is rebounding, led by developing economies including China and
India, with developed countries growing much more slowly. However different countries