Strategy Formulation and Implementation Lecture-03 Strategy Formulation and Implementation

Strategy Formulation and Implementation The specific objectives of this chapter are to DISCUSS the meaning, needs, benefits, and approaches of the strategic planning process for today’s MNCs. UNDERSTAND the tension between pressures for global integration and national responsiveness and the four basic options for international strategy. IDENTIFY the basic steps in strategic planning, including environmental scanning, internal resource analysis of the MNC’s strengths and weaknesses, and goal formulation. DESCRIBE how an MNC implements the strategic plan, such as how it chooses a site for overseas operations. REVIEW the three major functions of marketing, production, and finance that are used in implementing a strategic plan. EXPLAIN specialized strategies appropriate for emerging markets and international new ventures.

Strategic Management Strategic Management The process of determining an organization’s basic mission and long-term objectives and then implementing a plan of action for pursuing the mission and attaining these objectives. Corporations need strategic management in order to keep track of their increasingly diversified operations in a continuously changing international environment.

Benefits of Strategic Planning According to one study, 70 percent of 56 U.S. MNC subsidiaries in Asia and Latin America had comprehensive 5- to 10-year plans. Evidence for effectiveness of planning is mixed. Strategic planning does not always result in higher profitability. The specifics of the situation will dictate the success of the process.

Approaches to Formulating and Implementing Strategy Economic Imperative Political Imperative Quality Imperative Administrative Coordination

Approaches to Formulating and Implementing Strategy Economic Imperative Worldwide strategy based on cost leadership, differentiation, and segmentation Often products sold by MNCs have a large portion of value added in upstream activities of the industry’s value chain. Research and development Manufacturing Distribution Strategy is also used when the product is regarded as generic and therefore does not have to be sold based on name brand or support service.

Approaches to Formulating and Implementing Strategy Political Imperative Strategy formulation and implementation utilizing strategies that are country-responsive and designed to protect local market niches. Success of product or service depends on: Marketing Sales Service These MNCs often use country-centered or multi-domestic strategy.

Approaches to Formulating and Implementing Strategy Quality Imperative Takes two interdependent paths: A change in attitudes and a raising of expectations for service quality The implementation of management practices designed to make quality improvement an ongoing process. TQM Total Quality Management

Total Quality Management TQM Cross-train personnel to do jobs of all members in work group Process re-engineering designed to help identify/eliminate redundant tasks and wasteful effort Reward system designed to reinforce quality performance TQM can be summarized: Quality is operationalized by meeting or exceeding customer expectations. Quality strategy is formulated at top management level and diffused throughout the organization. TQM techniques: traditional inspection and statistical quality control; cutting edge Human Resource Management techniques, such as self-managing teams and empowerment

Approaches to Formulating and Implementing Strategy Administrative Coordination MNC makes strategic decisions based on the merits of the individual situation rather than using a predetermined economic or political strategy. Used when rapid, flexible decision making is needed to close the sale Least common approach to formulation and implementation of strategy Many large MNCs work to combine all four of the approaches to strategic planning.

Global and Regional Strategies Fundamental Tension: The globalization vs. national (or regional or local) responsiveness conflict Global integration Production and distribution of products and services of a homogenous type and quality on a worldwide basis National responsiveness The need to understand different consumer tastes in segmented regional markets and respond to different national standards and regulations imposed by autonomous governments and agencies

Global Integration vs. National Responsiveness

Summary and Implications of the Four Basic Strategies Appropriateness of each strategy depends on pressures for cost reduction and local responsiveness in each country served International strategy make use of valuable core competencies that host-country competitors lack. Multi-domestic strategy is useful with high pressure for local responsiveness and low pressures for cost reductions. Global strategy is a low-cost strategy when attempting to benefit from scale economies in production, distribution, marketing. Transnational strategy is pursued when there are high cost pressures and high demand for local responsiveness.

Strategy around the World: Cost Reduction vs. Local Responsiveness Tailor product and service offerings to fit local consumer preferences and host-country requirements Higher cost Example: McDonald’s uses mutton in India Cost reduction: MNEs enter global marketplace with the intention to reduce operation cost Example: Toyota Prius INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text. It covers Learning Objective 10.4.

The Integration-Responsiveness Framework INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text. It covers Learning Objective 10.4.

Four Global Strategies International strategy Leveraging home-based core competencies Selling the same products or services in both domestic and foreign markets Example: Selling Starbucks coffee internationally Localization (product differentiation) strategy Maximize local responsiveness via a multi-domestic strategy Consumers will perceive them to be domestic companies Example: Nestlé’s customized product offerings in international markets

Four Global Strategies Global standardization (cost leadership) strategy Economies of scale and location economies Pursuing a global division of labor based on best-of-class capabilities reside at the lowest cost Example: Lenovo’s R&D in Beijing, Shanghai, and Raleigh; production center in Mexico, India, and China Transnational strategy Combination of localization strategy (high responsiveness) with global standardization strategy (lowest cost position attainable) Example: German multimedia conglomerate Bertelsmann : Caterpillar’s earth-moving equipment

Characteristics, Benefits, and Risks of Four Types of Global Strategy   Characteristics Benefits Risk • Often the first step in • Leveraging core • No or limited local internationalizing. competence. responsiveness. • Used by MNEs with relatively large • Economies of scale. • Highly affected domestic markets (e.g., MNEs from • Low-cost implementation by exchange rate U.S., Germany, Japan). through: fluctuations. International • Well-suited for high-end products • Exporting or licensing • IP embedded in product Strategy (such as machine tools) and luxury (for products) or service could be goods that can be shipped across • Franchising (for services) expropriated. the globe. • Licensing (for trademarks) • Products and services tend to have strong brands. • Main competitive strategy tends to be differentiation since exporting, licensing, and franchising add additional costs. • Used by MNEs to compete in • Highest-possible local • Duplication of key host countries with large and/or business functions lucrative but idiosyncratic domestic • Reduced exchange-rate in multiple countries Localization markets (e.g., Germany, Japan, exposure. leads to high cost of (Multidomestic) Saudi Arabia). implementation. • Often used in consumer products • Little or no economies of and food industries. scale. • Main competitive strategy is • Little or no learning across differentiation. different regions. • MNE wants to be perceived as local • Higher risk of IP company. Expropriation. INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text. It covers Learning Objective 10.4.

Characteristics, Benefits, and Risks of Four Types of Global Strategy • Used by MNEs that are offering • Location economies: • No local responsiveness. Standardization standardized products and services global division of labor • Little or no product Strategy (e.g., computer hardware or based on wherever best-of- differentiation.   business process outsourcing). class capabilities • Some exchange-rate • Main competitive strategy is price. reside at lowest cost. exposure. • Economies of scale. • “Race to the bottom” as wages increase. • Some risk of IP expropriation. Transnational • Used by MNEs that pursue an • Attempts to combine • Global matrix structure (Glocalization) integration strategy at the business benefits of localization and is costly and difficult to level by simultaneously focusing on standardization strategies implement, leading to high product differentiation and low cost. simultaneously by creating failure rate. • Mantra: Think globally, act locally. a global matrix structure. • Economies of scale, location, and learning. • Higher risk of IP expropriation. INSTRUCTOR: An Interactive activity is available online through McGraw-Hill Connect on this section of the text. It covers Learning Objective 10.4.

Basic Elements of Strategic Planning for International Management

Environmental Factors Affecting Organizations

Elements of Strategic Planning Environmental Scanning Provides management with accurate forecasts of trends relating to external changes in geographic areas where the firm is doing business or considering doing business. Changes relate to environment factors that can affect the company Industry or market Technology Regulations Economic aspects Social aspects Political aspects

Elements of Strategic Planning Internal Resource Analysis Internal resource analysis is used to evaluate MNC’s current managerial, technical, material, and financial resources and capabilities to assess its strengths and weaknesses. Assessment then used to determine ability to take advantage of international market opportunities Match external opportunities (gained in environmental scan) with internal capabilities (gained through internal resource analysis) Key question for MNC: Do we have the people and resources that can help us to develop and sustain the necessary Key Success Factors (KSF), or can we acquire them?

Elements of Strategic Planning Strategic Planning Goals Goal formulation often precedes first two steps (environmental scanning, internal analysis). More specific goals for strategic plan come from external scanning and internal analysis. Goals serve as an umbrella beneath which subsidiaries and other international groups operate. Profitability and marketing goals almost always dominate strategic plans. Once strategic goals are set, the MNC develops specific operational goals and controls, usually through a 2-way process at the subsidiary or affiliate level.

Areas for Formulation of MNC Goals

Strategy Implementation Provides goods and services in accord with plan of action Plan often will have overall philosophy or guidelines that direct the process. Considerations in selecting country Advanced industrialized countries offer largest markets for goods/services Amount of government control Restrictions on foreign investment Specific benefits offered by host countries

Strategy Implementation Location Considerations Two primary considerations The country The specific locale within the chosen country The Country Traditionally MNCs invest in highly industrialized countries that offer the largest markets for goods and services. Developing countries like Mexico are becoming more attractive. The amount of government control and restrictions is a factor. Specific benefits offered by host countries include low tax rates, low/no interest loans, subsidies, but this trend is changing.

Strategy Implementation Location Considerations Local Issues Once the country has been selected, the firm must choose a specific locale. Important factors that influence this choice Access to markets Proximity to competitors Availability of transportation and electric power Desirability of location for employees coming in from outside

Strategy Implementation Location Considerations Frontier Markets Also called pre-emerging markets; a unique subset of emerging economies Less correlated to ups and downs of global economy Offer potentially high rewards, but with high risk Often located in Africa and Asia Potential strategy: joint venture with a local company with cultural knowledge of the market

Strategy Implementation The Role of the Functional Areas Marketing What works in one market may not work in another Marketing may be dictated by the overall strategic plan Marketing strategy involves the four “Ps” Product Price Promotion Place

Strategy Implementation The Role of the Functional Areas Production When exporting goods to foreign markets, production has usually been handled through domestic operations. More recently MNCs have found that whether they export or produce goods locally in the host country, consideration of worldwide production is important. Recent trend has been away from a multi-domestic approach and toward a global coordination of operations. If product labor-intensive, the trend is to farm out the product to low-cost sites (e.g., Mexico).

Strategy Implementation The Role of the Functional Areas Finance Transferring funds from one place in the world to another, or borrowing funds in international money markets, is often less expensive than relying on local sources. Issues include Reevaluation of currencies Volatile monetary exchange rates

Specialized Strategies Some circumstances may require specialized strategies: Strategies for developing and emerging markets Strategies for international entrepreneurship and new ventures

Specialized Strategies Strategies for Emerging Markets Emerging markets will compose more than half of global economic output by midcentury. “BRIC” economies: Brazil, Russia, India, and China Emerging markets present exceptional risks due to political and economic volatility. These risks show up in: Corruption Failure to enforce contracts Red tape and bureaucratic costs General uncertainty in legal and political environment

Specialized Strategies Strategies for Emerging Markets First Mover Strategies Significant economies associated with early entry include learning effects, scale economies, opportunities for developing alliances, and advantages over competitors. There may be a narrow window of opportunity within which these opportunities can be best exploited.

Specialized Strategies Strategies for Emerging Markets Strategies for Base of Pyramid (BOP) 5+ billion potential customers around the globe heretofore have been ignored by global business. BOP forces global business to rethink their strategies. Must consider relationships with local governments, small entrepreneurs, and nonprofits rather than depend on established partners such as central governments and large local companies BOP strategies are challenging to implement Represents opportunity to incubate new, leapfrog technologies Successful BOP strategies can travel profitably to higher income markets Marketing at BOP forces consideration of smaller-scale strategies

The World Population and Income Pyramid

Specialized Strategies Entrepreneurship Strategy and New Ventures Increasingly small and medium size enterprises, often in the form of new ventures, are becoming involved in international management. The earlier in its existence an innovative firm internationalizes, the faster it is likely to grow both overall and in foreign markets. Venture performance (growth and ROE) is improved by technological learning gained from international environments.

Specialized Strategies International Entrepreneurship A combination of innovative, proactive, and risk-seeking behavior that crosses national borders and is intended to create value in organizations.

Specialized Strategies International New Ventures and “Born Global” Firms International New Ventures or Born-Global Firms Firms that engage in significant international activity a short time after being established Successful born-global firms leverage a distinctive mix of orientations and strategies: Global technological competence Unique product development Quality focus Leveraging of foreign distributor competencies Truly born-global firms tend to survive longer than other seemingly global companies.

Review and Discuss Of the four imperatives discussed in this chapter—economic, political, quality, and administration—which would be most important to IBM in its efforts to make inroads in the Pacific Rim market? Would this emphasis be the same as that in the United States, or would IBM be giving primary attention to one of the other imperatives? Explain. Define global integration as used in the context of strategic international management. In what way might globalization be a problem for a successful national organization that is intent on going international? In your answer, provide an example of the problem.

Review and Discuss Some international management experts contend that globalization and national responsiveness are diametrically opposed forces, and that to accommodate one, a multinational must relax its efforts in the other. In what way is this an accurate statement? In what way is it incomplete or inaccurate? Consider that both a retail chain and a manufacturing company want to expand overseas. What environmental factors would have the most impact on these companies? What ratio of environmental scanning to internal analysis should each employ? What key factors of success differentiate the two?

Review and Discuss Anheuser-Busch is attempting to expand in India, where beer is not widely consumed and liquor dominates the market. What areas should be targeted for strategic goals? What could be some marketing implications in the Indian market? What particular conditions that MNCs face in emerging markets may require specialized strategies? What strategies might be most appropriate in response? How might a company identify opportunities at the “base of the pyramid” (i.e., low-income markets)?

Review and Discuss What conditions have allowed some firms to be born global? What are some examples of born-global companies? Mercedes changed its U.S. strategy by announcing that it is developing cars for the $30,000 to $45,000 price range (as well as its typical upper-end cars). What might have accounted for this change in strategy? In your answer, include a discussion of the implications from the standpoints of marketing, production, and finance.