CHAPTER 8
STRATEGIC
ACTIONS:
STRATEGY
FORMULATION
PowerPoint Presentation by Charlie Cook
The University of West Alabama
© 2007 Thomson/South-Western.
All rights reserved.
International Strategy
Strategic Management
Competitiveness and Globalization:
Seventh edition
Concepts and Cases
Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson
KNOWLEDGE OBJECTIVES
Studying this chapter should provide you with the strategic
management knowledge needed to:
1. Explain traditional and emerging motives for firms to
pursue international diversification.
2. Explore the four factors that lead to a basis for
international business-level strategies.
3. Define the three international corporate-level strategies:
multidomestic, global, and transnational.
4. Discuss the environmental trends affecting international
strategy, especially liability of foreignness and
regionalization.
© 2007 Thomson/South-Western. All rights reserved.
8–2
KNOWLEDGE OBJECTIVES (cont’d)
Studying this chapter should provide you with the strategic
management knowledge needed to:
6. Name and describe the five alternative modes for
entering international markets.
7. Explain the effects of international diversification on
firm returns and innovation.
8. Name and describe two major risks of international
diversification.
9. Explain why the positive outcomes from international
expansion are limited.
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8–3
FIGURE
8.1
Opportunities and Outcomes of International Strategy
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8–4
Identifying International Opportunities
• International Strategy
 A strategy through which the firm sells its goods or
services outside its domestic market.
• Reasons to having an international strategy
 International markets yield potential new
opportunities.
 New market expansion extends product life cycle.
 Needed resources can be secured.
 Greater potential product demand.
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8–5
Classic Rationale for International Diversification:
Extend a Product’s Life Cycle
Product Demand
Develops and Firm
Exports Products
Foreign
Competition
Begins Production
Firm Introduces
Innovation in
Domestic Market
Firm Begins
Production Abroad
Production is standardized and
relocated to low cost countries.
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8–6
International Strategy Benefits
• Increased Market Size
 Domestic market may lack the size to support efficient
scale manufacturing facilities.
• Return on Investment
 Large investment projects may require global markets
to justify the capital outlays.
 Weak patent protection in some countries implies that
firms should expand overseas rapidly in order to
preempt imitators.
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8–7
International Strategy Benefits (cont’d)
• Economies of Scale (or Learning)
 Expanding size or scope of markets helps to achieve
economies of scale in manufacturing as well as
marketing, R&D or distribution.
 Can spread costs over a larger sales base.
 Can increase profit per unit.
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8–8
International Strategy Benefits (cont’d)
• Location Advantages
 Low cost markets aid in developing competitive
advantage by providing access to:
• Raw materials
• Transportation
• Lower costs for labor
• Key customers
• Energy
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8–9
FIGURE
8.2
Determinants of National Advantage
Source: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group,
from Competitive Advantage of Nations, by Michael E. Porter, p. 72. Copyright ©1990, 1998 by Michael E. Porter.
© 2007 Thomson/South-Western. All rights reserved.
8–10
Determinants of National Advantage
• Factors of production
 The inputs necessary to compete in any industry
• Labor
Land
Natural resources
• Capital Infrastructure
• Basic factors
 Natural and labor resources
• Advanced factors
 Digital communication systems and an educated
workforce
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8–11
Determinants of National Advantage (cont’d)
• Demand Conditions
 Characterized by the nature and size of buyers’ needs
in the home market for the industry’s goods or
services.
• Size of the market segment can lead to scale-efficient facilities.
• Efficiency can lead to domination of the industry in other
countries.
• Specialized demand may create opportunities beyond national
boundaries.
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8–12
Determinants of National Advantage (cont’d)
• Related and Supporting Industries
 Supporting services, facilities, suppliers and so on.
• Support in design
• Support in distribution
• Related industries as suppliers and buyers
• Firm Strategy, Structure and Rivalry
 The pattern of strategy, structure, and rivalry among
firms.
• Common technical training
• Methodological product and process improvement
• Cooperative and competitive systems
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8–13
Selecting an International Corporate-Level
Strategy
• The type of corporate strategy selected will have
an impact on the selection and implementation of
the business-level strategies.
 Some strategies provide individual country units with
the flexibility to choose their own strategies.
 Other strategies dictate business-level strategies from
the home office and coordinate resource sharing
across units.
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8–14
International Corporate-Level Strategy
• Focuses on the scope of operations:
 Product diversification
 Geographic diversification
• Required when the firm operates in:
 Multiple industries, and
 Multiple countries or regions
• Headquarters unit guides the strategy
 But business or country-level managers can have
substantial strategic input.
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8–15
FIGURE
8.3
International Corporate-Level Strategies
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8–16
Multidomestic Strategy
Multidomestic
strategy
• Strategy and operating decisions are
decentralized to strategic business units
(SBU) in each country.
• Products and services are tailored to local
markets.
• Business units in one country are
independent of each other.
• Assumes markets differ by country or
regions.
• Focus on competition in each market.
• Prominent strategy among European firms
due to broad variety of cultures and markets
in Europe.
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8–17
Global Strategy
Global
strategy
• Products are standardized across
national markets.
• Business-level strategic decisions
are centralized in the home office.
• Strategic business units (SBU) are
assumed to be interdependent.
• Emphasizes economies of scale.
• Often lacks responsiveness to local
markets.
• Requires resource sharing and
coordination across borders (hard to
manage).
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8–18
Transnational Strategy
Transnational
strategy
• Seeks to achieve both global
efficiency and local responsiveness.
• Difficult to achieve because of
simultaneous requirements:
 Strong central control and coordination to
achieve efficiency
 Decentralization to achieve local market
responsiveness
• Firm must pursue organizational
learning to achieve competitive
advantage.
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8–19
Environmental Trends
• Liability of Foreignness
 Legitimate concerns about the relative attractiveness
of global strategies
 Global strategies not as prevalent as once thought
 Difficulty in implementing global strategies
• Regionalization
 Focusing on particular region(s) rather than on global
markets
 Better understanding of the cultures, legal and social
norms
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8–20
TABLE
8.1
Global Market Entry: Choice of Entry
Type of Entry
Characteristics
Exporting
High cost, low control
Licensing
Low cost, low risk, little control, low returns
Strategic alliances
Shared costs, shared resources, shared
risks, problems of integration (e.g., two
corporate cultures)
Acquisition
Quick access to new market, high cost,
complex negotiations, problems of merging
with domestic operations
New wholly owned subsidiary
Complex, often costly, time consuming,
high risk, maximum control, potential
above-average returns
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8–21
Dynamics of Mode of Entry
What’s the best solution?
Situation
Optimal Solution
The firm has no foreign
manufacturing expertise
and requires investment
only in distribution.
Export
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8–22
Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm needs to
facilitate the product
improvements
necessary to enter
foreign markets.
Licensing
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8–23
Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm needs to
connect with an
experienced partner
already in the targeted
market.
Strategic Alliance
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8–24
Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm needs to
reduce its risk through
the sharing of costs.
Strategic Alliance
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8–25
Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm is facing
uncertain situations
such as an emerging
economy in its
targeted market.
Strategic Alliance
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8–26
Dynamics of Mode of Entry (cont’d)
What’s the best solution?
Situation
Optimal Solution
The firm’s intellectual
property rights in an
emerging economy are
not well protected, the
number of firms in the
industry is growing fast,
and the need for global
integration is high.
Wholly-owned
Subsidiary
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8–27
International Diversification and Returns
• Expanding sales of goods or services across
global regions and countries and into different
geographic locations or markets:
 May increase a firm’s returns (such firms usually
achieve the most positive stock returns).
 May achieve economies of scale and experience,
location advantages, increased market size and
opportunity to stabilize returns.
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8–28
International Diversification and Innovation
• Expansion sales of goods or services across
global regions and countries and into different
geographic locations or markets:
 May yield potentially greater returns on innovations (a
larger market).
 Can generate additional resources for investment in
innovation.
 Provides exposure to new products and processes in
international markets; generates additional knowledge
leading to innovations.
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8–29
Complexity of Managing Multinational Firms
• Expansion into global operations in different
geographic locations or markets:
 Makes implementing international strategy
increasingly complex.
 Can produce greater uncertainty and risk.
 May result in the firm becoming unmanageable
 May cause the cost of managing the firm to exceed
the benefits of expansion.
 Exposes the firm to possible instability of some
national governments.
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8–30
Risks in an International Environment
• Political Risks
• Economic Risks
 Instability in national
governments
 War, both civil and
international
 Potential nationalization of
a firm’s resources
?
 Differences and
fluctuations in the value of
different currencies
 Differences in prevailing
wage rates
 Difficulties in enforcing
property rights
 Unemployment
?
?
?
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8–31
FIGURE
8.4
Risk in the International Environment
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8–32
Limits to International Expansion:
Management Problems
• Cost of coordination across diverse geographical
business units
• Institutional and cultural barriers
• Understanding strategic intent of competitors
• The overall complexity of competition
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8–33