Competitive

What is the strategic competitive analysis? What is the SWOT analysis? How does a company use the SWOT analysis to determine corporate competencies?

Herdesky, H. (2011). International management: Managing across the borders and cultures. (7 ed., pp. 202-203, 206-207-209). Upper Saddle River: The Pearson Education Company.

(Herdesky, 2011)

202 Part

. Formulating and Implernenting Strategy fbr International and Global Operations

Sometimes just the plospect of shifting production overseas improves competitiveness at
home. When Xerox Corporation started moving copier-rebuilding operations to Mexico, the”union
agreed to needed changes in work style and productivity to keep the jobs at home. Lower opera-
tional costs in other areas-power, transportation, and financing-frequently prove attractive.

INCENTIVES Covernments in countries such as Poland seeking new infusions of capital, technol-
ogy, and know-how willingly provide incentives-tax exemptions, tax holidays, subsidies, loans,
and the use of property. Because they both decrcase risk and increase profits, these incentives are
attractive to foreign companies. Russia, for example, has a number of special economic zones, both

for industrial production and for technical research, offering various tax concessions such as
exemption from property and land taxes for the first five years, as well as customs privileges.2a

In February 2009, for example, companies were rushing to conclude M&A deals in Brazil
while a tax break rvhich allows companies to deduct 34 percent of the premium paid in an acqui-
sition is still guaranteed, amid fears that it would be rescinded. This kind of tax incentive is rare,
so it attracts considerable interest from foreign investors. Coupled with the recent devaluation of
the Brazilian real, which made acquisitions cheaper for foreign bidders, tax deductions are cur-
rently one of the great attractions for acquisition deals in Brazil.2s

One study surveyed 103 experienced managers concerning the relative attractiveness of
various incentives for expansion into the Caribbean region (primarily Mexico, Venezuela,
Colomtria, Dominican Republic, and Guatemala). The results indicate the opinion of those man-

agers about which incentives are rrost important; however, the most desirable mix would depend
on the nature of the particular company and its operations. The first two issues reflect managers’
concerns about limiting foreign exchange risk, where restrictions often change overnight and
limit the abiiity of the firm to repatriate prolits. Other concerns are those of political instability
and the possibility of expropriation, and those of tax concessions.26 Nor att those incentives lim-
ited to emerging economies. The state of Alabama in the United States has spent hundrcds of
rnillions to attract the Honda, Hyundai, and Toyota plants.27

STRATEGIC FONMULATION PFSCESS

Typically, the strategic formulation process is necessary both at the headquarters of the corpora-

tion and at each of the subsidiaries. Most organizations operate on planning cycles of five or
more years, with intermediate reviews.

The global strategic formulation process, as part of overall corporate strategic management,
parallels the prccess followed in domestic companies. However, the variables, and therefore the
process itself, are far more complex because of the greater difficulty in gaining accurate and timely

information, the diversity of geographic locations, and the differences in political, legal, cultural,

market, and financial processes. These factors introduce a greater level of risk in strategic deci-

sions. However, for firms that have not yet engaged in international operations (as well as

for those

that do), an ongoing strategic planning process with a global orientation identifies potential oppor-

tunities for (1) appropriate market expansion, (2) increased profitability, and (3) new ventures

which the firm can exploit its sffategic advantages. Even in the absence of immediate oppoffunities,

monitoring rhe global environment for trends and competition is important for domestic planning.

The strategic formulation process is part of the strategic management process in which

most firms engage, either formally or informally. The planning modes range from a proactive,

Iong-range format to a reactive, more seat-of-the-pants method, whereby the day-by-day deci-

sions of key managers, in particular owner-managers, accumulate to what can be discerned
retroactively as the new strategic direction.28 The stages in the strategic management process are

shown in Exhibit 6-1. In reality, these stages seldom follow such a linear format. Rather, the
process is continuous and intertwined, with data and results from earlier stages providing infor-

mation for the next stage.
The first phase of the strategic management’process-the planning phase-sta

s with the

company establishing (or clarifying) its mission and its overall objectives. The next two steps

comprise an assessment of the extcrnal environment that the firm faces in the future and an
analysis of the firm’s relative capabilities to deal successfully with that environment. Strategic
alternatives are then considered, and plans are made based on the strategic choice’ These five

steps constitute the planning phase, which will be further explained in this $apter.
The second part of the strategic management process is the implementation phase,

Successful implementation requires the establishment of the structure’ systems, and processes

fi
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Chapter 6 . Formulating Strategl W

ExHtBlT 6-1 The Strategic Management Process

. . Define/dqrrty .,,,, .,.:.. ., .:.

Assess internol strengtls

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*

-suieb&r9^xraFe.rbe-.:s.egFv.,Ye

Mission and Objectives

The mission of an organization is its overall raison d’€tre or the function it performs in society.
This mission charts the direction of the company and provides a basis for strategic decision mak-
ing’ It also conveys the cultural values that are important to the company, as contrasted in the fol-
lowing two mission statements:

E
o
g8
lo
gE
ar&
o.
E

Assess environment br

Set up cqntrol ond groluotion

:”i.iiti;xi
Sanyo{,\,{,ep6p-.secompany)

. .ftlV-eW6pnilosophy: to make products qnd services indispensable for peo-
ple. all over thffiorld, offering a more enjoyable tife. Digital teittnologl. atd’care

i:&[ :-.:: -r ” Fonlulating and Implementing Strategy for Intemafion al and Globa] Operations

cotnpeten(:e (the source of our cornpetitivertess) generate joy’ e.tcitement, ctnd
inlpact, G nrore confrtrtctbte tife in harmony with the globctl env’ironnrcnt’Z9

Siemens (A German comPany)
Syccess clepentls oft success. of our custonrcrs. We provide experience cutd

solutions so thal can achieve their objectives fast cnd ffictivel1,. We turn our people’s

imagination and best practices in succes,sfu! technologies and products. This nakes

us a prerttiutrt investmentfor our shcrrclrclders. Our ideas, technologies and activities

lzelp create a better worlcl.3o

While both mission statements indicate a focus on customers, Sanyo ofTers them a more

enjoyabie lii’e, is more relationship-oriented, and emphasizes harmony and the environment,

inAicating a long-term focus, factors typical of Japanese culture. Siemens of}’ers efficiency to its

customerls and a premiurn return to its shareholders; this mission statelnent is explicit and deci-

sive, typical of Gemran communication; this compares with the more descriptive and implicit

stateme;t given by Sanyo.31
A company’s overall objectit,es flow from its mission, and both guide the formulation of

international corporate strategy. Because we ar€ focusing on issues of internaiional strategy, we

will assume that one of the overall ob.iectives of the corporation is some ibrm of international
operation (or expansion). The objectives of the firm’s intemationai affiliates should also be part

of the global colporate objectives. A firm’s global objectives usually lall into the areas of market-

ing, profitability, finance,-production, and research and development’ among others, as shown in

gi6iUt 6-2. Goals for maiket volume and for profitability are usually set higher lor internation-

al than for domestic operations because of the greater risk involved. In addition, financial objec-

tives on the global levil must take into account diff’ering tax regulations in various countries and

how to minimize overall losses liom exchange rate fluctuations’

SnvinsRrnenta ! Assessnlent

Afler clarifying the corporate mission and objectives, the lirst major step in weighing interna-

tional strategic options ii the environmental assessment. This assessment includes environmen-
tai scanning and continuous monitoring to keep abreast of variables around the world that are

EXFIIE$T 6-2 Global Corporate Objectives

Marketing
Total company market share*worldwide, regional, national

Annual percentage sales growth 1r .,:
Annual percentage market share growth ., :r;, .. ti,. .t t,,/
Coordination of regional markets for economies of scale

Prtduction ”

Economies of scale through global production integration

Quality and cost control
Introduction of cost-efficient production methods

Finance
Effective financing of overseas subsidiaries or allies

Thxation-globally minimizing tax burden
Optimum capital structure

Foreign-exchange management

Profrtability
Long-term profit growth
Return on investment, equity, and assets

Annual rate of Profit growth

Research and DeveloPment
Develop new products with global patents

Develop proprietary production technologies :itf#i€s#{‘.r
Worldwide research and development labs rj; ‘ ‘

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ChaPter 6

pertinent to the tirm and that have the potential to shape its future by posing new opportunities

ior threats). Firms must adapt to their environment to survive’
The focus of strategic planning

is how to adapt.
The process of gathering information and forecasting relevant trends, competitive actions’

and circumstances that will alfect operations in geographic areas of potential interest
is called

environmental scanning. This activiiy should be ionducted on ttree levels-global,
regional’ and

national (discussed in Oeiait later in this chapter). Scanning should focus on the t’uture
interests of

the firm and should cover the fbllowing major variables 1as discussed by Phatak32 and others):

, political ittstability. This variable represents a volatile and uncontrollabie risk to the multi-
national corporation, as illustrated by the upheaval in the Middle East in recent

years’

MNCs must carefully assess such risk because it may resuit in a loss of profitability or

even ownership.
, Cttrretrcy rnstiuitity. This variable represents another risk; inflation and fluctuations in the

exchange rates ofcunencies can dramatically affect profitability when operating overseas’

For example, both foreign and local firms got a painful reminder of this risk
when the

Mexican feso declinecl by about 30 percent against the U’S.
dollar in 2008.

. Nationalisnr. This variabje, representing the home government’s goals for independence
and economic improvement, o{len influences fbreign companies. The home

government

may impose restrictive policies-import controls, equity requirements, local content

,.quir”*”ntr, limitations on the repatriation of profits, and so forth. Japan, for example,

protects its home markets with these kinds of restrictive policies’ Other forms of national-

ir* *uy be exerted through the following: (1) pressu.e from national governments-
exemplified by the United States putting pi”ttutt on Japan to, curtail unfair competition;
(2) lax patent and trademark protection laws, such as those in China in recent

years, which

erode a fim’s proprietary technology through insufficient protection; and (3) the suitability

of infrastructure, such as roads and telecommunications’
, Irienmtional contpetitiorr. Conducting a global competitor analysis is perhaps the most

important task in environmental assessment and strategy formulatiol’ The first step in

analyzing the competition is to assess the relevant industry structures as they influence
the

competitive u.”nu in the particular country (or region) being considered. For example,
will

the infiastructure suppoi new companies in that industry? Is there room for additional

competition? What is ihe relative supply and demand for the proposed product or
service?

The ultimate profit potential in thelndustry in that location will be determined by these

kinds of factors.33
. Enttircnmental Scanning. Managers must also specifically assess their current competitors*

global and local-for the propoied market. They must ask some important questions: What

ir” ou. ro-petitors’ positi’ons, their goals and strategies, and their strengths and weaknesses’
relative to those of our. firm? What arc the likely competitor reactions to our strategic moves?

The firm can also choose varying levels of environmental scanning’ To
reduce risk and

investment, many trtms take on the role of the “follower,” meaning that
they limit their own in-

vestigations. Insiead, they simply watch their competitors’ moves and
go where they go’ assum-

ing that the competito6 t ru. Aon, their hornework’ Other firms go to considerable
lengths to

carelully gather data and examine options in the global arena’

Ideally, the fim should conduct global environmental analysis on three different levels:

multinational, regional, and national. Analysis on the multinational level
provides a broad

assessment of signi{icant worldwicle trends-through identihcation, forecasting,
and monitoring

activities. These trends would include the political and economic developments
of nations

around the world, as well as global technological progress’ From this
information’ managers can

choose certain appropriate rcgions of the world to consider further’

Next, at the regional lJvel, the analysis focuses in more detail on critical
environmental

factors to identify opportunities (and risks) for marketing the company’s
products’ services’ or

technology. For example, one such regional location ripe for investigation by
a lirrn seeking new

matkets is the EU.
Having zeroed in on one or more regions, the llrm must, as its next step, analyze

at the

national level. Such an analysis explores in depth specific countries within the desired
region for

economic, legal, political. and cultural factors significant to the company’ For
example’ the

:nalysis could focus on the size and nature af the market, along u’ith any possible operational

. Formulating Strategy 205

206 Part 3 . Formulating and Implementing Strategy for lntemational and Global Operations

problems, to consider how best to enter the market. In many volatile countries, continuous
monitoring of such environmental factors is a vital part of ongoing strategic planning. Other
important factors which must be considered in the environmental assessment at all levels is that
of how institutions might affect potentiai opportunities to compete.

tru5Tl’t’UTl$zu.&i- EFFECTS OIU INTERNATIONAL COMPFllT,8ru34 Various institutions can create
opportunities or constraints for firms considering entry into specific global markets. Recently,
researchers such as Peng have argued that ” . . . fum strategies and performance are, to a large degree,
determined by institutions popularly known as the ‘rules of the game’ in a society.”3s Institutions
include both those fotmal institutions that promulgate laws, regulations and rules, as well as informal
ones that exert influence thlough norms, cultures, and ethics (discussed elsewhere in this book.)36

Specific ways in which formal institutions affect international competition are (1) the attrac-
tiveness of overseas markets, (2) entry bamiers and industry attractiveness, (3) antidumping, and
(4) competitiveness of indian ITiBPO firms.37

Attractiveness of Overseas Markets The extent to which countries have institutions to
promote the rule of law affects the attractiveness of those economies to outside investors.
Specifically, institutions provide a broad fiamework of liberty and democracy, as well as
human rights protections. In addition, institutions contribute to a stable environment for firms
by creating specific laws such as those protecting property rights. Countries with more devel-
oped insdtutions are seen as more stable and attractive to foreign firms.3s

Intry Barriers and lndustry Attractiveness Institutions create barriers to entry in certain
industries and hertce make those industries more attractive (profitable) for incumbent firms. For
example, in the U.S. pharmaceutical industry, bariers are created by rhe U.S. Food and Drug
Administration in the form of sffingent drug approval requirements. Since new entrants (with
potentially cheaper drugs) are restricted, Americans pay double what Canadians and Europeans
pay for the same drugs produced in the United States. Americans spend about $240 billion a
year on drugs, more than Britain, Canada, France, Germany, Italy, and Japan combined. In turn,
U.S. firms in this industry earn above-ayerage profits as the institutional barriers restrict
entrants and reduce rivalry.3g

Antidumping as an Entry Earrier A second example of an entry ban’ier is illustrated by
culTent U.S. antidumping laws which place a foreign enlrant at a disadvantage if accused of
“dumping” (defined as selling a product below the cost of producing that product with the intent
to later raise prices). Where a dumping charge is filed by a domestic firm with the International
Trade Administration (a division of the U.S. Depafiment of Commerce) against a fbreign
competitor, that foreign competitor will frequently lose the case. Many accused foreign firms fail
to properly complete a questionnaire which is required as part of the legal proccedings. This
questionnaire is lengthy and requires the foreign firm to submit extensive and sometimes propri-
etary information about its costs. In contrast, if a similar practice occurs domestically (predatory
pricing), it is generally diffrcult to prove that the firm was selling below cost and engaging in
predatory pricing. As such, while antidumping laws are a frequent deterrent to foreign entrants,
the domestic equivalent strategy ofpredatory pricing is rarely a barrier for that new entrant. The
suggestion here is that U.S. antidumping laws strongly favor domestic firms and place interna-
tional firms at a disadvantage.ao

eompetitiveness of lndian lTlBPO Firms What explains the competitive advantages of the
Indian IT/BPO industry compared to U.S. competitors? One explanation is that institutional

changes in India, such as a greater emphasis on higher education, and legal and regulatory reforms

that liberalized the economy, created a more open and competitive atmosphere in which these

firms could flourish. These institutional changes have, however, created opportunities for Western

firms which began to locate subsidiaries in India to take advantage of skilled but less costly human

resources. This i1 turn forced the Indian IT/BPO companies to become more competitive to take

on the new entrants.4l
Clearly, there are many formal institutions affect international strategy. But, what explains

successes of’companies despite the failure or absence of rhese formal institutions? China is a

common illustration of where domestic firms have built competitive advantages despite poorly

Chapter 6

developed formal institutions. The ansu.er iies in the extensive use of informal institutions or
networks ofinterpersonal connections knou,n in Chinese as guanxi. These networks function as

substitutes for the weaknesses of the formal institutions. Research has shown that these infonnal
networks are common in a variety of ernerging markets with different cultural traditions and are

a response to transitions in many emerging markets where formal institutions are evolving.42
This process of environmental scanning, from the broad global level down to the local

specifics of entry planning, is illustrated in Exhibit 6-3. The first broad scan of all potential wolld
markets results in the firm being able to eliminate from its list those markets that are closed or
insignificant or do not have reasonable entry conditions. The second scan of remaining regions,
and then countries, is done in greater detail-perhaps eliminating some countries based on political
instability, for example. Remaining countries are then assessed for competitor strengths, suitability
of products, and so on. This analysis leads to serious entry planning in selected countries;
managers start to work on operational plans, such as negotiations and legal arrangements.

EXFIIBIT 6-3 Global Environmental Scanning and Strategic Decision-Making Process

Decision to Enler Globol Mqrkets

*
Select geogrophic regions to evoluoie

*
Eliminote regions nol suiioble {or product/service

Scon environmenk {or politicol ond economic risk;moior technologicol, legol, physicol

conslroints

V
Evqluote infrqstruciure constroints

Norrovr choice to suibble countries

*
fusess inveslment incentives qnd mqrket potentiol in those countries

,l
Nqrrow choice to select counlries

i
Evoluole locol mqrkets {or culiurql, sociol, technologicol suitobility

*
Conduci competitive onolysis (MNC ond locol firms)

*
Evoluqte morket otlrqctiveness ond competitive poteniiol

*
Selecl countries {or entry

i
Consider whether/how rnuch lo locq lize products,/services

*
Assess ond decide on entry stralegy/strotegies

f
Set limeloble for imphnenlalion: Negotiations wik allies, suWliea dislribulors, and so on.

f,
Lounch edry

*
Coniinue environmenbl sconning process

FormulatingStrategy 2O7

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‘W”- .,+.rw*wx*wr*wr**;
al and Global operations

, sl#es of Environsnental lnforrnatian

The success of envir.onmental scanning depends on the ability
of managers to take a global per-

spective and to ensure that theiru orrlru of it{ornwtion and business
intelligence are globa}’

A variety of public resources are available to provide information’
In the united states aione’

more than 2,000 business information services are available
on computer databases tailored to

specific industries and regions. Other resources include corporate
“clipping” services and infor-

mation packages. Ho*euer, internal sources of inlbrmation are
usually preferable-especialll

aler-t field personnel who, with firsthand observations, can
provide up-to-date and relevant infor-

mation tbr the firm. Extensively using its own internal resources,
Mitsubishi Trading Companl.

employs worldwide more than io,ooo peopte in 50 countries,
as of January 2009, many of whom

,”‘**.k”, analysts, whose job it is to gather, analyze, and feed market information to
the parent

“”*;;;.;ih;*ut
,our.”, of information help to eliminate unreliable information from

sec-

ondary sources, particuiarly in a”u”toping count.ies. As Garsombke
points out, the “official”

data frorr such countries can be misleading: “Census data can
be tampered with by government

officialsfbrpropagandapurposesoritmayberestricted…’lnSouthKorea,fbrinstance,even
officialfigurescanbeconflictingdependingonthesource.”–

lnternal AnalYsis

Atier the environmental assessment, the second major step
in weighing.international strategic

options is the internal analysis. This analysis determines which
areas of the flrm’s operations

represent strengths or *eaknesses (currently or potentially)
compared to competitors, so that the

firm may use that information to its strategic advantage’

The internal analysis focuses on the compuny;* r”rour”es
and operations and on global

synergies. The strengths and weaknesses of tne firm’s tinancial
and managerial expertise and

functional capabilities are evaluated to determine what
key success factors (KSFs) the company

hasandhowwell*,eycant,etpthefirmexpioitforeignopportunities..Thoset”*^.]”.’:.1-:11i1l
involve superior t”rtrnotogirui capability (as with Microsoft

and Intel), as well as other strateglc

ua”ur*g* such as effectivedisrlbution channels
(as with wal-Mart), superior promotion capa-

bilities (Disney), low-cost production and-sourcing
position (as with Tay’ota}, superior patent and

new producr pipeline (M*.;ti, and so on. Using such
operational sfengths,to advantage is

exem-

plified by Japanese “* *unriu”rurers’
Their ptoautUin quality and etficiency have

catapulted

them into world mzu’kets’

AllcompanieshaveStrengthsandweaknesses’Management’schallengeistoidentifybothand
take appropriate uction. ruany oiugnostic-tools

ur”
^uuituotr”tor

conducting an intemal resource audit’

Financial ratios, fbr **u*ptJ, *”i ,”*”r an ineffrcient use of assets
that is restricting profitability; a

sales-force analysis *uv .”*uiirru, the sales force
is an area of distinct competence for the fitm’

If a

company is conducring tt i, uuoiito determine
whether to start international ventures

or to improve its

ongoing operarions uurouol “otuin
operarional iszues must ue taten 1111.account’

These issues

include (i) the difficulry “i;;i”i”g
marketing information in many countries,

(2) the often poorly

developed financial **f.”r*llJfil’rfr”.o*pGxities
of exctrange 1?tes and government

controls’

eompetitive AnalYsis

At this point, the firm,s managers perform a.c.ompetitive
ana$sis.:

1-”-“”
the fir.m’s capabilities

and key success tacto.. ;;;;; io th-or” of its competirors.
They must ju

and potential “o*p”titio””fJrlii”” “r
firms in that ma’ket ancl location*whether

that is a global

position or that for u ,p”.ii,, “ountry
or region. ;ik”;.h*r- game’ the firm’s managers also

need

to consider the strategic ini”n, of competing
firms and wrrat migrrt be their future

tnoves (stlate-

gies). This process enabtes the strate;ic
prunn”r, to determine where the firm has

distinctive

competencies that will give it srrategi, uouuntulJ “r
*”n as lfat direction

might lead the firm

into a sustainable comp?titive advantag”-rt
ui’;r, one that will not be immediately eroded

emuration. The resulr “filff;;*iTi”r-”
n”rp to identity potential probiems that

can be cor-

rected or that may be significant enough
to eliminate further consideration

of certain strategles’

This stage of stiategic formuiation i;^;;;” calied a SWOT
analvsis (Strengths’

weaknesses, oppo*unirir,”und Threats),
in *t i.i,-u hrm’s capabilities relative to those

of its

competitors ur” urr”rr*J-u, pertin*nt to.tt.
oppo,iuniiies and thteats in lhe en’ironment

for those

firms. In comparing their company with
potential international competirOrs in

host markets’ it is

Chapter 6 . Formulating Strategy 209

EXH!ElT 6-4 Global Competitor A’nalysis

A U.S. Firm Compared with its International Competitors in Malaysian Marketa7 E
ABCOre Malaysian Firm)

(U.S. (Korean (Local (JaPanese
Comparison Criteria MNC) MNC) Malaysian Firm) MNC)

Marketing capability
Manufacturing capability
R&D capability
HRM capability
Financial capability
Future growth of resouroes

Quickness
Flexibility/adaptability
Sustainability

;

0
0

;
n

0
0

0
0
0

0
0

0
0
0
0
0

+
+
0

0
+

0
0

0
0
+
0

0
0
0
0
+
+

0
+

Key:

+ = firm is better relative to competition.
0 = firm is same as competition.

– – firm is poorer relative to competition.

useful for managers to draw up a competitive position matrix tbr each potential location. For
example, Exhibit 6-4 analyzes a U.S. specialty seafood firm’s competitive profile in Malaysia.
The U.S. firm has advantages in financial capability, future growth of rcsources, and sustain-

ability, but a disadvantage in quickness. It also is at a disadvantage compared to the Korean
MNC in important factols such as manul’acturing capability and flexibility and adaptability.
Because the other firms seem to have little comparative advantage, the major competitor is
likely to be the Korean firm. At this point, then, the U.S. firm can focus in more detail on assess-
ing the Korean firm’s relative strengths and weaknesses.

Most companies develop their strategies around key strengths, or distinctive competen-
cies. Distinctive-or “co1’e”-competencies represent important coryorate resources because, as
Prahalad and Hamel explain, they are the “collective learning in the organization, especially how

to coordinate diverse production skills and integrate multiple streams of technologies.’ds Core
competencies*iike Sony’s capacity to rniniaturize-are usually difficult for competitot’s to imi-
tate and represent a major focus for strategic development at the corporate level.46 Canon, for
example, has used its core competency in optics to its competitive advantage throughout its
diverse businesses: cameras, copicrs, and semiconductor’lithographic equipment.

Managers must also assess their firm’s weaknesses. A company already on shaky ground
financialiy, for example, wili not be able to consider an acquisition strategy, or perhaps any
growth strategy. Of course, the subjective perceptions, motivations, capabiiities, and goals of the

managers involved in such diagnoses frequently cloud the decision-making process. The result is

that because of poor judgment Lry key players sometimes firms embark on strategies that are
contraindicated by objective information.

StrateEic *ecisi*n-ffInking Mode$s

We can further explain and summarize the hierarchy of the strategic decision-making process
described here by means of three leading strategic models. Their roles and interactions are con-

ceptualized in Exhibit 6-5. At the broadest level are those global, regional, and country factors
and risks discussed above and in Chapter 1 that are part ofthose considerations in an institution’
based theory of existing and potential risks and influences in the host area.48 For example, firms
considering operating in Russia are realizing the potential vulnerability to a changing political
attitude to the narket reforms and openness from recent progress since President Putin’s actions
ro exert control over key industries. Secondly, or concurentiy, the firm’s competitive position in

iis industry can be reviewed using Michael Porter’s industry-based model of five fbrces that
examines the dynamics u’ithin an industry. The forces refer to the relative level of competition

210 part 3 ” Formulating and Implementing Strategy for International and Global Operations

already in the industry, the relative ease with which new competitors may or may not enter the
field, how much power the suppliers and also the buyers have within the industry, and the extent

ol substitutc producs or services that prevail.a9
These strategic models can provide the decision makers with a picture of the kinds of

opportunities and threats that the firm would face in a particular region or countl’y within its

industry. This assumes, of course, that the locations that are under consideration have already

been pinpointed as attractive and growing markets fbr the industry. However, that picturre would

be true for any firm within the particular industry. In other words, all firms within an industry
face the same environmental and industrial factors; the difference among firms’ performance is

as a result of each firm’s own resources, capabilities, and strategic decisions. The factors that
determine a firm’s unique niche or competitive advantage within that arena are a function of its
own capabilities (strengths and weaknesses) as relative to those opportunities and threats which

are perceived for that location; this is the resource-based view of the finn-w-hen considering
the unique value of the firm’s competencies and that of its products or services.50

While these models may indicate varying choices, this strategic decision-making process

should enable the managers to give an overall assessment of the strategic fit between the hrm and

the opportunities in that location and so result in a
o’go/no go” decision lbr that point in time.

Those managers may want to start the process again relative to a different location in order to

compare the relative levels of strategic fit. If it is determined that there is a good strategic fit and
a decision is made to enter that market/location, the next step, as indicated in Exhibit 6-5, is to

consider alternative entry strategies. A discussion of these entry strategies follows after we first

examine the broader picture of the overall strategic approach that a lum might take toward world

markets.

6lobal and lnternational Strategic Alternatives

The strategic planning process involves considering the advantages (and disadvantages) of vari-

ous strategic alternatives in light of the competitive analysis. While weighing alternatives, rnan-

ug”., *ur[ take into account the goals of their firms and the competitive status of other firms in
tie industry. Depending on the size of the firm, managers must consider two levels of strategic
alternativei. The firsr level, global strutegic alternatives (applicable primarily to MNCs), deter-

mines what overall approach to the global marketplace a firm wishes to take. The second level’

eiltry strategy alternatives, applies to firms of any size; these alternatives determine what
specific entry strategy is appropriate for each country in which the firm plans to operate’ Entry

sirategy alterinatives are discussed in a later section. The two main global strategic approaches to

world inarkets-global strategy and regional, or local, strategy-are presented in the following

subsections.

Approaches to World Markets

GLOBAL STRATEGY In the last decade, increasing competitive pressures have forced businesses

to consider global strategies-to treat the world as an unditTerentiated worldwide marketplace.

Such strategies are now ioosely referred to as glotralization-a term that refers to the
establishment of worldwide operations and the development of standardized products and mar-

keting. Many analysts, like Porter, have argued that globalization is a competitive imperative for

fignJin global industries: “In a global industry, a firm must, in some way, integrate its activities

on u *o.ld*ide basis to capture the linkages among c_ountries. This includes, but requircs more
than, transfening intangible assets among countries.”51 The rationale behind globalization is to

compete by establishing worldwide economies of scale, offshore manufacturing, and international

casirflows. The term globalization, therefore, is as applicable to organizational structure as it is

to strategy. (organizational structure is discussed further in chapter 8.)

The pressures to globalize include (l) increasing competitive clout resulting fi’om regional
trading blocs; (2) declining tariffs, which encourage trading across borders and open up new mar-

kets; and (3) the information technology explosion, which makes the coordination of far-flung

operations’easier and also increases the commonality of consumer tastes.52 Use of Web sites has

ailowed entrepreneurs, as well as established companies, to go global almost instantaneously

thlough e-commer€e-either B2B or 82C.53 Examples are eBay, Yahool, Lands’ End, and the

ill-fated E-Toys, which met its demise in 2001. In addition, the success of Japanese companies with

global strategies has set the competitive standard in many industries-most visibly in the automobile

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212 Part 3 ‘ Formulating and Implementing Strategy for International and Clobal Operations

industry. Other companies, such as Caterpillar, ICI, and Sony, have fared well with global strate-
gies. Another company bent on a global strategy is Lenovo, a Chinese computer-maker’which
became a global brand when it bought IBM’s PC business in 2005 for $1.75 billion. Says
Mr.Yang, Lenovo’s Chairman:

we are proud of our chine.se roors, but we no longer want to be positioned as a
Chinese compqny. We want to be a truty gtobat company.”s4

As a result, Lenovo has no headquarters and its senior managers rotate meetings around
the world. The company’s global marketing department is in Bangalore, and its development
teams comprise people in several centers around the world, often meeting virtually. Mr. Yang
himself moved his family to North Carolina in order to immerse himself in the culture and
language of global business.s-5

One of the quickest and cheapest ways to develop a global strategy is through strategic
alliances. Many firms are trying to go global faster by forming alliances with rivals, suppliers,
and customers. The rapidly developing information technologies are spawning cross-national
business alliances from short-term virtual corporations to long-term strategic partnerships.

Alliances are also somelimes fbrmed in difflcult times as a result of government interfer’-
ence. In April 2009, the U.S. government insisted that Chrysler accept the alliance with Fiat as a
precondition to government financial assistance to remain viable. The new company would be
set up with the best assets of Chrysler. Fiat of Italy would own 20 percent to 35 percent of the
new Chrysler, with the government also holding a stake. Some of the equity in the new company
would also be given to Chrysler’s creditors as repayment, after Chrysler emerged from bankuptcy
proceedings.s6 istrategic alliances are discussed further in Chapter 7.)

A global strategy is inherently more vulnerable to environmental risk, however, than a
regionalization (or “multi-local”) strategy. Global organizations are difficult to manage because
doing so requires the coordination of broadly divergent national cultures. It also means that firms
must lose some of their original identity-they must “denationalize operations and replace
home-country loyalties with a system of common corporate values and loyalties.”s7 In other
words, the global strategy necessarily treats all countries similarly, regardless of their dilTerences
in cultures and syslems. Problems often result, such as a lack of local flexibility and responsiveness
and a neglect of the need for differentiated products. Many companies now feel that regionalization/
localization is a more manageable and less risky approach, one that allows them to capitalize
on local competencies as long as the parent organization and each subsidiary retain a flexible
approach to each other. Wal-Mart is one global company that has learned the hard way that it
should have acted more o’local” in some regions of the world, including Germany and South
Korea, where it has had to abandon operations.

REG IONALIZATIONILOCALIZATION

Nokia, Nestle, Google, and Wal-Mctrt have failed to adjust to the tastes of South
Korean cofisturners. In contrast, the British rctailer Tesco is a rcmarkable case of
succeeding in localizing. Samsung Tesco is 89 percent atvned by the British retail
giant, but has relied heavily on local managersfrom Samsung. It is one of Tesco’s
biggest oversees st4ccess stories, genercting a third of its overseas sales.

Nn HoNc Seor,
Analyst in Seoul, South Korca, March B,2A06.sg

For those firms in multidomestic industries-those industries in which competitiveness is
determined on a country-by-country basis rather than a global basis-regional sfrategies are
more appropriate than globalization. The regionalization strategy [multidomestic (or multi-
local) strategyl is one in which local markets are linked together within a region, allowing more
local responsiveness and specialization. Top managers within each region decide on their own
investment locations, product mixes, and competitive positioning; in other words, they run their
subsidiaries as quasi-independent organizations.

While there are pressures to globalize*such as the need for econonries of scale to com-
pete on cost-there are opposing pressures to regionalize, especially for newly developed
economies (NDEs) and developing economies. These localization pressures include unique v

i
iii
:

ChaPter 6

consumer preferences resulting from cultural or national differences (perhaps something as sim-

ple as righi-hand-drive cars for Japan), domestic subsidies, and new production technologies that

iacilitate product variation for less cost than before.5e By “acting local,” firms can focus individ-

ually in each country or region on the locai market needs for product or service characteristics,

distribution, customer support, and so on.

Ghemawat argues that strategy cannot be decided either on a country-by-country basis or

on a one-size-fits-all-countries basis, but rather that both the differences and the similarities

between countries must be taken into account. He bases his perspectives on the cultural adminis-

trative, geographic, and economic (CAGE) distances between countries, He concludes:

A sertiglobalized perspective helps companies rcsist a variety of delusion’s derived

from visions of the gtobalization apocalypse: gtowth feve4 the nornt of enormity,
statelessness, ubiquity, and one- siry-fits-all.

Semiglobalization is what offers room for cross-border strategy to have
c o nte nt d i s t itrc t from s ing le – c o unt ry s t,ate 8y’

PlNra,l GHsulwar’
2007.64

As with any management f’unction, the strategic choice as to where a company should posi-

tion itself along ihe globalization-regionalization continuum is contingent on the nature of the

industry, the type of company, the company’s goals and strengths (or weaknesses), and the nature of

its subsidiaries, among many factors. In addition, each company’s strategic approach should be

unique in adapting to iis own environment. Many firms may try to “Go Global, Act Local” to trade

off the best advantages of each strategy. Matsushita, which grew to be Japan’s largest electronics

firm, and renamed itielf the Panasonic Corporation in October 2008, is one firm with considerable

expertise at being a “GLOCAL” firm (GLObal, LoCAL). Panasonic has operations in 60 coun-

tries and employs 305,828 people in its 556 domain companies; those companies follow policies

to develop tocai nAn to tailor products to markets, to let plants set their own rules, and to be a
good corporate citizen in every country.6l Toyota, cleady a globally successful Japanese company,

iaw the value of being “Glocal” from early on and adopted regionalization as the basis of its

strategy, subsequently passing General Motors as the world’s largest automaker in 2009.

boogle is another company that has had to step back from its ideal of being just “Global”

to adapting to local markets. Ghemawat explains why the company had problems with a “one-

size-fits-all-countries” strategy by using his CAGE distance framework, as follows:

Culturul distance: Google’s biggest problem in Russia seems to have been associated with

a relatively difficult language.
Adninistrative distance: Google’s 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 Coogle’s products can be digitized, and it had trouble

adapting to Russia fiom afar and has had to set up offices there’

Econottric distance: The underdevelopment of payment infrastructure in Russia has been

another handicap for Google relative to local rivals.62

Global lntegrative Strategies

Many MNCs have developed their global operations to the point of being fully integrated*of19n

both vertically and horizontalty, including iuppliers, productive facilities, marketing and
distrib-

ution outlets, and contractors around the world. Dell, for example, is a globally integrated
com-

pany, with worldwide sourcing and a fully integrated production and marketing system’ It has

ia.tcries in lreland, Brazil, Chinu, Malaysia, Tennessee, and Texas, and it has an assembly
and

delivery system from 47 locations around the world. At the same time, it has extreme flexibility’

Since Dell builds computers to each order, it carries very little inventory and, therefore’ can

change its operation* ut u *o*”nt’s notice. Thomas Friedman described the process that his
notebook computer went through when he ordered it from Dell:

The rtotebook was co-designed in Au,stin, Tex{ts, rud in Taiwan. . . . The total supply

chairt.for m1, comptfter, including suppliers of suppliers, int’olved about.four hundred

. Formulating SrategY 213

-]!rss”.rElgPJS::.3′..Yftk1-{g:119#1J9J.”1″?[1T.eJi’LT”
explored rl detail in the remaining qhapters on organizing, leading, and staffing. At this point,
however, it is i*gortant to notqlthat the strategic planning process by itself does not change the
posture.g{JLhe fifrn until. the plaps are implemented. In addition, feedback from the interim and
long-teffiults of suc$ implbmentation, along with continuous environmental monitoring,
flows diffily back into the planning process.
*’.

STEPS IN DEVELOPING INTERNATIONAL
IIND GLOBAT STRATEGIES
In the planning phase of strategic management-strategic formulation-managers need to care-
fully evaluate dynamic factors, as described in the stages that follow. However, as discussed ear-
Iier, managers seldom consecutively move through these phases; rather, changing events and
variables prompt them to combine and reconsider thek evaluations on an ongoing basis.
Mission and Objectives
The mission of an organization is its overall raison d’€tre or the function it performs in society.
This mission charts the direction of the company and provides a basis for strategic decision mak-
ing’ It also conveys the cultural values that are important to the company, as contrasted in the fol-
lowing two mission statements:
E
o
g8
lo
gE
ar&
o.
E
Assess environment br
Set up cqntrol ond groluotion
:”i.iiti;xi
Sanyo{,\,{,ep6p-.secompany)
. .ftlV-eW6pnilosophy: to make products qnd services indispensable for peo-
ple. all over thffiorld, offering a more enjoyable tife. Digital teittnologl. atd’care

i:&[ :-.:: -r ” Fonlulating and Implementing Strategy for Intemafion al and Globa] Operations
cotnpeten(:e (the source of our cornpetitivertess) generate joy’ e.tcitement, ctnd
inlpact, G nrore confrtrtctbte tife in harmony with the globctl env’ironnrcnt’Z9
Siemens (A German comPany)
Syccess clepentls oft success. of our custonrcrs. We provide experience cutd
solutions so thal can achieve their objectives fast cnd ffictivel1,. We turn our people’s
imagination and best practices in succes,sfu! technologies and products. This nakes
us a prerttiutrt investmentfor our shcrrclrclders. Our ideas, technologies and activities
lzelp create a better worlcl.3o
While both mission statements indicate a focus on customers, Sanyo ofTers them a more
enjoyabie lii’e, is more relationship-oriented, and emphasizes harmony and the environment,
inAicating a long-term focus, factors typical of Japanese culture. Siemens of}’ers efficiency to its
customerls and a premiurn return to its shareholders; this mission statelnent is explicit and deci-
sive, typical of Gemran communication; this compares with the more descriptive and implicit
stateme;t given by Sanyo.31
A company’s overall objectit,es flow from its mission, and both guide the formulation of
international corporate strategy. Because we ar€ focusing on issues of internaiional strategy, we
will assume that one of the overall ob.iectives of the corporation is some ibrm of international
operation (or expansion). The objectives of the firm’s intemationai affiliates should also be part
of the global colporate objectives. A firm’s global objectives usually lall into the areas of market-
ing, profitability, finance,-production, and research and development’ among others, as shown in
gi6iUt 6-2. Goals for maiket volume and for profitability are usually set higher lor internation-
al than for domestic operations because of the greater risk involved. In addition, financial objec-
tives on the global levil must take into account diff’ering tax regulations in various countries and
how to minimize overall losses liom exchange rate fluctuations’
SnvinsRrnenta ! Assessnlent
Afler clarifying the corporate mission and objectives, the lirst major step in weighing interna-
tional strategic options ii the environmental assessment. This assessment includes environmen-
tai scanning and continuous monitoring to keep abreast of variables around the world that are
EXFIIE$T 6-2 Global Corporate Objectives
Marketing
Total company market share*worldwide, regional, national
Annual percentage sales growth 1r .,:
Annual percentage market share growth ., :r;, .. ti,. .t t,,/
Coordination of regional markets for economies of scale
Prtduction ”$’:’
Relative foreign versus domestic production volume
Economies of scale through global production integration
Quality and cost control
Introduction of cost-efficient production methods
Finance
Effective financing of overseas subsidiaries or allies
Thxation-globally minimizing tax burden
Optimum capital structure
Foreign-exchange management
Profrtability
Long-term profit growth
Return on investment, equity, and assets
Annual rate of Profit growth
Research and DeveloPment
Develop new products with global patents
Develop proprietary production technologies :itf#i€s#{‘.r
Worldwide research and development labs rj; ‘ ‘
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ChaPter 6
pertinent to the tirm and that have the potential to shape its future by posing new opportunities
ior threats). Firms must adapt to their environment to survive’
The focus of strategic planning
is how to adapt.
The process of gathering information and forecasting relevant trends, competitive actions’
and circumstances that will alfect operations in geographic areas of potential interest
is called
environmental scanning. This activiiy should be ionducted on ttree levels-global,
regional’ and
national (discussed in Oeiait later in this chapter). Scanning should focus on the t’uture
interests of
the firm and should cover the fbllowing major variables 1as discussed by Phatak32 and others):
, political ittstability. This variable represents a volatile and uncontrollabie risk to the multi-
national corporation, as illustrated by the upheaval in the Middle East in recent
years’
MNCs must carefully assess such risk because it may resuit in a loss of profitability or
even ownership.
, Cttrretrcy rnstiuitity. This variable represents another risk; inflation and fluctuations in the
exchange rates ofcunencies can dramatically affect profitability when operating overseas’
For example, both foreign and local firms got a painful reminder of this risk
when the
Mexican feso declinecl by about 30 percent against the U’S.
dollar in 2008.
. Nationalisnr. This variabje, representing the home government’s goals for independence
and economic improvement, o{len influences fbreign companies. The home
government
may impose restrictive policies-import controls, equity requirements, local content
,.quir”*”ntr, limitations on the repatriation of profits, and so forth. Japan, for example,
protects its home markets with these kinds of restrictive policies’ Other forms of national-
ir* *uy be exerted through the following: (1) pressu.e from national governments-
exemplified by the United States putting pi”ttutt on Japan to, curtail unfair competition;
(2) lax patent and trademark protection laws, such as those in China in recent
years, which
erode a fim’s proprietary technology through insufficient protection; and (3) the suitability
of infrastructure, such as roads and telecommunications’
, Irienmtional contpetitiorr. Conducting a global competitor analysis is perhaps the most
important task in environmental assessment and strategy formulatiol’ The first step in
analyzing the competition is to assess the relevant industry structures as they influence
the
competitive u.”nu in the particular country (or region) being considered. For example,
will
the infiastructure suppoi new companies in that industry? Is there room for additional
competition? What is ihe relative supply and demand for the proposed product or
service?
The ultimate profit potential in thelndustry in that location will be determined by these
kinds of factors.33
. Enttircnmental Scanning. Managers must also specifically assess their current competitors*
global and local-for the propoied market. They must ask some important questions: What
ir” ou. ro-petitors’ positi’ons, their goals and strategies, and their strengths and weaknesses’
relative to those of our. firm? What arc the likely competitor reactions to our strategic moves?
The firm can also choose varying levels of environmental scanning’ To
reduce risk and
investment, many trtms take on the role of the “follower,” meaning that
they limit their own in-
vestigations. Insiead, they simply watch their competitors’ moves and
go where they go’ assum-
ing that the competito6 t ru. Aon, their hornework’ Other firms go to considerable
lengths to
carelully gather data and examine options in the global arena’
Ideally, the fim should conduct global environmental analysis on three different levels:
multinational, regional, and national. Analysis on the multinational level
provides a broad
assessment of signi{icant worldwicle trends-through identihcation, forecasting,
and monitoring
activities. These trends would include the political and economic developments
of nations
around the world, as well as global technological progress’ From this
information’ managers can
choose certain appropriate rcgions of the world to consider further’
Next, at the regional lJvel, the analysis focuses in more detail on critical
environmental
factors to identify opportunities (and risks) for marketing the company’s
products’ services’ or
technology. For example, one such regional location ripe for investigation by
a lirrn seeking new
matkets is the EU.
Having zeroed in on one or more regions, the llrm must, as its next step, analyze
at the
national level. Such an analysis explores in depth specific countries within the desired
region for
economic, legal, political. and cultural factors significant to the company’ For
example’ the
:nalysis could focus on the size and nature af the market, along u’ith any possible operational
. Formulating Strategy 205

206 Part 3 . Formulating and Implementing Strategy for lntemational and Global Operations
problems, to consider how best to enter the market. In many volatile countries, continuous
monitoring of such environmental factors is a vital part of ongoing strategic planning. Other
important factors which must be considered in the environmental assessment at all levels is that
of how institutions might affect potentiai opportunities to compete.
tru5Tl’t’UTl$zu.&i- EFFECTS OIU INTERNATIONAL COMPFllT,8ru34 Various institutions can create
opportunities or constraints for firms considering entry into specific global markets. Recently,
researchers such as Peng have argued that ” . . . fum strategies and performance are, to a large degree,
determined by institutions popularly known as the ‘rules of the game’ in a society.”3s Institutions
include both those fotmal institutions that promulgate laws, regulations and rules, as well as informal
ones that exert influence thlough norms, cultures, and ethics (discussed elsewhere in this book.)36
Specific ways in which formal institutions affect international competition are (1) the attrac-
tiveness of overseas markets, (2) entry bamiers and industry attractiveness, (3) antidumping, and
(4) competitiveness of indian ITiBPO firms.37
Attractiveness of Overseas Markets The extent to which countries have institutions to
promote the rule of law affects the attractiveness of those economies to outside investors.
Specifically, institutions provide a broad fiamework of liberty and democracy, as well as
human rights protections. In addition, institutions contribute to a stable environment for firms
by creating specific laws such as those protecting property rights. Countries with more devel-
oped insdtutions are seen as more stable and attractive to foreign firms.3s
Intry Barriers and lndustry Attractiveness Institutions create barriers to entry in certain
industries and hertce make those industries more attractive (profitable) for incumbent firms. For
example, in the U.S. pharmaceutical industry, bariers are created by rhe U.S. Food and Drug
Administration in the form of sffingent drug approval requirements. Since new entrants (with
potentially cheaper drugs) are restricted, Americans pay double what Canadians and Europeans
pay for the same drugs produced in the United States. Americans spend about $240 billion a
year on drugs, more than Britain, Canada, France, Germany, Italy, and Japan combined. In turn,
U.S. firms in this industry earn above-ayerage profits as the institutional barriers restrict
entrants and reduce rivalry.3g
Antidumping as an Entry Earrier A second example of an entry ban’ier is illustrated by
culTent U.S. antidumping laws which place a foreign enlrant at a disadvantage if accused of
“dumping” (defined as selling a product below the cost of producing that product with the intent
to later raise prices). Where a dumping charge is filed by a domestic firm with the International
Trade Administration (a division of the U.S. Depafiment of Commerce) against a fbreign
competitor, that foreign competitor will frequently lose the case. Many accused foreign firms fail
to properly complete a questionnaire which is required as part of the legal proccedings. This
questionnaire is lengthy and requires the foreign firm to submit extensive and sometimes propri-
etary information about its costs. In contrast, if a similar practice occurs domestically (predatory
pricing), it is generally diffrcult to prove that the firm was selling below cost and engaging in
predatory pricing. As such, while antidumping laws are a frequent deterrent to foreign entrants,
the domestic equivalent strategy ofpredatory pricing is rarely a barrier for that new entrant. The
suggestion here is that U.S. antidumping laws strongly favor domestic firms and place interna-
tional firms at a disadvantage.ao
eompetitiveness of lndian lTlBPO Firms What explains the competitive advantages of the
Indian IT/BPO industry compared to U.S. competitors? One explanation is that institutional
changes in India, such as a greater emphasis on higher education, and legal and regulatory reforms
that liberalized the economy, created a more open and competitive atmosphere in which these
firms could flourish. These institutional changes have, however, created opportunities for Western
firms which began to locate subsidiaries in India to take advantage of skilled but less costly human
resources. This i1 turn forced the Indian IT/BPO companies to become more competitive to take
on the new entrants.4l
Clearly, there are many formal institutions affect international strategy. But, what explains
successes of’companies despite the failure or absence of rhese formal institutions? China is a
common illustration of where domestic firms have built competitive advantages despite poorly

Chapter 6
developed formal institutions. The ansu.er iies in the extensive use of informal institutions or
networks ofinterpersonal connections knou,n in Chinese as guanxi. These networks function as
substitutes for the weaknesses of the formal institutions. Research has shown that these infonnal
networks are common in a variety of ernerging markets with different cultural traditions and are
a response to transitions in many emerging markets where formal institutions are evolving.42
This process of environmental scanning, from the broad global level down to the local
specifics of entry planning, is illustrated in Exhibit 6-3. The first broad scan of all potential wolld
markets results in the firm being able to eliminate from its list those markets that are closed or
insignificant or do not have reasonable entry conditions. The second scan of remaining regions,
and then countries, is done in greater detail-perhaps eliminating some countries based on political
instability, for example. Remaining countries are then assessed for competitor strengths, suitability
of products, and so on. This analysis leads to serious entry planning in selected countries;
managers start to work on operational plans, such as negotiations and legal arrangements.
EXFIIBIT 6-3 Global Environmental Scanning and Strategic Decision-Making Process
Decision to Enler Globol Mqrkets
*
Select geogrophic regions to evoluoie
*
Eliminote regions nol suiioble {or product/service
+
Scon environmenk {or politicol ond economic risk;moior technologicol, legol, physicol
conslroints
V
Evqluote infrqstruciure constroints
!
Y
Norrovr choice to suibble countries
*
fusess inveslment incentives qnd mqrket potentiol in those countries
,l
Nqrrow choice to select counlries
i
Evoluole locol mqrkets {or culiurql, sociol, technologicol suitobility
*
Conduci competitive onolysis (MNC ond locol firms)
*
Evoluqte morket otlrqctiveness ond competitive poteniiol
*
Selecl countries {or entry
i
Consider whether/how rnuch lo locq lize products,/services
*
Assess ond decide on entry stralegy/strotegies
f
Set limeloble for imphnenlalion: Negotiations wik allies, suWliea dislribulors, and so on.
f,
Lounch edry
*
Coniinue environmenbl sconning process
FormulatingStrategy 2O7
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‘W”- .,+.rw*wx*wr*wr**;
al and Global operations
, sl#es of Environsnental lnforrnatian
The success of envir.onmental scanning depends on the ability
of managers to take a global per-
spective and to ensure that theiru orrlru of it{ornwtion and business
intelligence are globa}’
A variety of public resources are available to provide information’
In the united states aione’
more than 2,000 business information services are available
on computer databases tailored to
specific industries and regions. Other resources include corporate
“clipping” services and infor-
mation packages. Ho*euer, internal sources of inlbrmation are
usually preferable-especialll
aler-t field personnel who, with firsthand observations, can
provide up-to-date and relevant infor-
mation tbr the firm. Extensively using its own internal resources,
Mitsubishi Trading Companl.
employs worldwide more than io,ooo peopte in 50 countries,
as of January 2009, many of whom
,”‘**.k”, analysts, whose job it is to gather, analyze, and feed market information to
the parent
“”*;;;.;ih;*ut
,our.”, of information help to eliminate unreliable information from
sec-
ondary sources, particuiarly in a”u”toping count.ies. As Garsombke
points out, the “official”
data frorr such countries can be misleading: “Census data can
be tampered with by government
officialsfbrpropagandapurposesoritmayberestricted…’lnSouthKorea,fbrinstance,even
officialfigurescanbeconflictingdependingonthesource.”–
lnternal AnalYsis
Atier the environmental assessment, the second major step
in weighing.international strategic
options is the internal analysis. This analysis determines which
areas of the flrm’s operations
represent strengths or *eaknesses (currently or potentially)
compared to competitors, so that the
firm may use that information to its strategic advantage’
The internal analysis focuses on the compuny;* r”rour”es
and operations and on global
synergies. The strengths and weaknesses of tne firm’s tinancial
and managerial expertise and
functional capabilities are evaluated to determine what
key success factors (KSFs) the company
hasandhowwell*,eycant,etpthefirmexpioitforeignopportunities..Thoset”*^.]”.’:.1-:11i1l
involve superior t”rtrnotogirui capability (as with Microsoft
and Intel), as well as other strateglc
ua”ur*g* such as effectivedisrlbution channels
(as with wal-Mart), superior promotion capa-
bilities (Disney), low-cost production and-sourcing
position (as with Tay’ota}, superior patent and
new producr pipeline (M*.;ti, and so on. Using such
operational sfengths,to advantage is
exem-
plified by Japanese “* *unriu”rurers’
Their ptoautUin quality and etficiency have
catapulted
them into world mzu’kets’
AllcompanieshaveStrengthsandweaknesses’Management’schallengeistoidentifybothand
take appropriate uction. ruany oiugnostic-tools
ur”
^uuituotr”tor
conducting an intemal resource audit’
Financial ratios, fbr **u*ptJ, *”i ,”*”r an ineffrcient use of assets
that is restricting profitability; a
sales-force analysis *uv .”*uiirru, the sales force
is an area of distinct competence for the fitm’
If a
company is conducring tt i, uuoiito determine
whether to start international ventures
or to improve its
ongoing operarions uurouol “otuin
operarional iszues must ue taten 1111.account’
These issues
include (i) the difficulry “i;;i”i”g
marketing information in many countries,
(2) the often poorly
developed financial **f.”r*llJfil’rfr”.o*pGxities
of exctrange 1?tes and government
controls’
eompetitive AnalYsis
At this point, the firm,s managers perform a.c.ompetitive
ana$sis.:
1-”-“”
the fir.m’s capabilities
and key success tacto.. ;;;;; io th-or” of its competirors.
They must juA
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fr
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6
3

212 Part 3 ‘ Formulating and Implementing Strategy for International and Clobal Operations
industry. Other companies, such as Caterpillar, ICI, and Sony, have fared well with global strate-
gies. Another company bent on a global strategy is Lenovo, a Chinese computer-maker’which
became a global brand when it bought IBM’s PC business in 2005 for $1.75 billion. Says
Mr.Yang, Lenovo’s Chairman:
we are proud of our chine.se roors, but we no longer want to be positioned as a
Chinese compqny. We want to be a truty gtobat company.”s4
As a result, Lenovo has no headquarters and its senior managers rotate meetings around
the world. The company’s global marketing department is in Bangalore, and its development
teams comprise people in several centers around the world, often meeting virtually. Mr. Yang
himself moved his family to North Carolina in order to immerse himself in the culture and
language of global business.s-5
One of the quickest and cheapest ways to develop a global strategy is through strategic
alliances. Many firms are trying to go global faster by forming alliances with rivals, suppliers,
and customers. The rapidly developing information technologies are spawning cross-national
business alliances from short-term virtual corporations to long-term strategic partnerships.
Alliances are also somelimes fbrmed in difflcult times as a result of government interfer’-
ence. In April 2009, the U.S. government insisted that Chrysler accept the alliance with Fiat as a
precondition to government financial assistance to remain viable. The new company would be
set up with the best assets of Chrysler. Fiat of Italy would own 20 percent to 35 percent of the
new Chrysler, with the government also holding a stake. Some of the equity in the new company
would also be given to Chrysler’s creditors as repayment, after Chrysler emerged from bankuptcy
proceedings.s6 istrategic alliances are discussed further in Chapter 7.)
A global strategy is inherently more vulnerable to environmental risk, however, than a
regionalization (or “multi-local”) strategy. Global organizations are difficult to manage because
doing so requires the coordination of broadly divergent national cultures. It also means that firms
must lose some of their original identity-they must “denationalize operations and replace
home-country loyalties with a system of common corporate values and loyalties.”s7 In other
words, the global strategy necessarily treats all countries similarly, regardless of their dilTerences
in cultures and syslems. Problems often result, such as a lack of local flexibility and responsiveness
and a neglect of the need for differentiated products. Many companies now feel that regionalization/
localization is a more manageable and less risky approach, one that allows them to capitalize
on local competencies as long as the parent organization and each subsidiary retain a flexible
approach to each other. Wal-Mart is one global company that has learned the hard way that it
should have acted more o’local” in some regions of the world, including Germany and South
Korea, where it has had to abandon operations.
REG IONALIZATIONILOCALIZATION
Nokia, Nestle, Google, and Wal-Mctrt have failed to adjust to the tastes of South
Korean cofisturners. In contrast, the British rctailer Tesco is a rcmarkable case of
succeeding in localizing. Samsung Tesco is 89 percent atvned by the British retail
giant, but has relied heavily on local managersfrom Samsung. It is one of Tesco’s
biggest oversees st4ccess stories, genercting a third of its overseas sales.
Nn HoNc Seor,
Analyst in Seoul, South Korca, March B,2A06.sg
For those firms in multidomestic industries-those industries in which competitiveness is
determined on a country-by-country basis rather than a global basis-regional sfrategies are
more appropriate than globalization. The regionalization strategy [multidomestic (or multi-
local) strategyl is one in which local markets are linked together within a region, allowing more
local responsiveness and specialization. Top managers within each region decide on their own
investment locations, product mixes, and competitive positioning; in other words, they run their
subsidiaries as quasi-independent organizations.
While there are pressures to globalize*such as the need for econonries of scale to com-
pete on cost-there are opposing pressures to regionalize, especially for newly developed
economies (NDEs) and developing economies. These localization pressures include unique v
i
iii
:

ChaPter 6
consumer preferences resulting from cultural or national differences (perhaps something as sim-
ple as righi-hand-drive cars for Japan), domestic subsidies, and new production technologies that
iacilitate product variation for less cost than before.5e By “acting local,” firms can focus individ-
ually in each country or region on the locai market needs for product or service characteristics,
distribution, customer support, and so on.
Ghemawat argues that strategy cannot be decided either on a country-by-country basis or
on a one-size-fits-all-countries basis, but rather that both the differences and the similarities
between countries must be taken into account. He bases his perspectives on the cultural adminis-
trative, geographic, and economic (CAGE) distances between countries, He concludes:
A sertiglobalized perspective helps companies rcsist a variety of delusion’s derived
from visions of the gtobalization apocalypse: gtowth feve4 the nornt of enormity,
statelessness, ubiquity, and one- siry-fits-all.
Semiglobalization is what offers room for cross-border strategy to have
c o nte nt d i s t itrc t from s ing le – c o unt ry s t,ate 8y’
PlNra,l GHsulwar’
2007.64
As with any management f’unction, the strategic choice as to where a company should posi-
tion itself along ihe globalization-regionalization continuum is contingent on the nature of the
industry, the type of company, the company’s goals and strengths (or weaknesses), and the nature of
its subsidiaries, among many factors. In addition, each company’s strategic approach should be
unique in adapting to iis own environment. Many firms may try to “Go Global, Act Local” to trade
off the best advantages of each strategy. Matsushita, which grew to be Japan’s largest electronics
firm, and renamed itielf the Panasonic Corporation in October 2008, is one firm with considerable
expertise at being a “GLOCAL” firm (GLObal, LoCAL). Panasonic has operations in 60 coun-
tries and employs 305,828 people in its 556 domain companies; those companies follow policies
to develop tocai nAn to tailor products to markets, to let plants set their own rules, and to be a
good corporate citizen in every country.6l Toyota, cleady a globally successful Japanese company,
iaw the value of being “Glocal” from early on and adopted regionalization as the basis of its
strategy, subsequently passing General Motors as the world’s largest automaker in 2009.
boogle is another company that has had to step back from its ideal of being just “Global”
to adapting to local markets. Ghemawat explains why the company had problems with a “one-
size-fits-all-countries” strategy by using his CAGE distance framework, as follows:
Culturul distance: Google’s biggest problem in Russia seems to have been associated with
a relatively difficult language.
Adninistrative distance: Google’s 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 Coogle’s products can be digitized, and it had trouble
adapting to Russia fiom afar and has had to set up offices there’
Econottric distance: The underdevelopment of payment infrastructure in Russia has been
another handicap for Google relative to local rivals.62
Global lntegrative Strategies
Many MNCs have developed their global operations to the point of being fully integrated*of19n
both vertically and horizontalty, including iuppliers, productive facilities, marketing and
distrib-
ution outlets, and contractors around the world. Dell, for example, is a globally integrated
com-
pany, with worldwide sourcing and a fully integrated production and marketing system’ It has
ia.tcries in lreland, Brazil, Chinu, Malaysia, Tennessee, and Texas, and it has an assembly
and
delivery system from 47 locations around the world. At the same time, it has extreme flexibility’
Since Dell builds computers to each order, it carries very little inventory and, therefore’ can
change its operation* ut u *o*”nt’s notice. Thomas Friedman described the process that his
notebook computer went through when he ordered it from Dell:
The rtotebook was co-designed in Au,stin, Tex{ts, rud in Taiwan. . . . The total supply
chairt.for m1, comptfter, including suppliers of suppliers, int’olved about.four hundred
. Formulating SrategY 213

:’
Relative foreign versus domestic production volume

Economies of scale through global production integration
Quality and cost control
Introduction of cost-efficient production methods
Finance
Effective financing of overseas subsidiaries or allies
Thxation-globally minimizing tax burden
Optimum capital structure
Foreign-exchange management
Profrtability
Long-term profit growth
Return on investment, equity, and assets
Annual rate of Profit growth
Research and DeveloPment
Develop new products with global patents
Develop proprietary production technologies :itf#i€s#{‘.r
Worldwide research and development labs rj; ‘ ‘
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