202 Part 3 . 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companies to deduct 34 percent of the premium paid in an acqui- sition is still guaranteed, amid fears that it would be rescinded.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 .

1. 202 Part 3 . 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,

2. 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.

3. 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 by
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,

4. 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
.t

5. $
$
:f,.,,f
*
Chapter 6 . Formulating Strategl W
ExHtBlT 6-1 The Strategic Management Process
. . Define/dqrrty .,,,, .,.:.. ., .:.
Assess internol strengtls
I
v
[email protected],
I
*
-suieb&r9^xraFe.rbe-.:s.egFv.,Ye$'-]!rss".rElgPJS::.3'..Yftk1-
{g:119#1J9J."1"?[1T.eJi'LT"
explored rl detail in the remaining qhapters on organizing,
leading, and staffing. At this point,
however, it is i*gortant to notqlthat the strategic planning
process by itself does not change the
posture.g{JLhe fifrn until. the plaps are implemented. In
addition, feedback from the interim and
long-teffiults of suc$ implbmentation, along with continuous
environmental monitoring,
flows diffily back into the planning process.

6. *'.
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

7. :"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

8. 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-

9. 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

10. 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; ' '
,s
#
'4!,&
€ir
ll!
;i
:.1
::.:.
Li
,il
rl:
11i
:,

11. .:i:
ii
::ri
,,,
3
j,,;
,_:i:
":,.i:
rlt
1!
i.;..
!1!
'.:j:-
r,
;i
:il
iir,
r!:
t
.fl
t
ni

12. 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'

13. 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,

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. f
Set limeloble for imphnenlalion: Negotiations wik allies,
suWliea dislribulors, and so on.
f,
Lounch edry
*
Coniinue environmenbl sconning process
FormulatingStrategy 2O7
lf
c
14
ii!
€
g
r?
.*
ii:
4
ie,{
!:a:.
liil
,!
il
,i

24. '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

25. ,"'**.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...'lnSouthKo
rea,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

26. 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'schallen
geistoidentifybothand
take appropriate uction. ruany oiugnostic-tools
ur"

27. ^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

28. ana$sis.:
1-''-"''
the fir.m's capabilities
and key success tacto.. ;;;;; io th-or" of its competirors.
They must ju<lge the relative cuffent
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

29. by
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

30. 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

31. 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.

32. 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

33. 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

34. 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

35. 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-

36. 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

37. 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

38. 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
,.2
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39. f;q
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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:

40. 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

41. 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

42. 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

43. 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

44. 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,

45. 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

46. 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

47. . Formulating SrategY 213