Strategy Formulation and Implementation chapter eight Strategy Formulation and Implementation McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

(8) Strategy Formulation and Implementation Chapter Objectives: DISCUSS meaning, needs, benefits, approaches of strategic planning process for MNCs UNDERSTAND tension between pressures for global integration and national responsiveness; 4 basic international strategy options IDENTIFY basic steps in strategic planning DESCRIBE how MNCs implement strategic plan REVIEW three major functions of marketing, production, finance used in strategic plan implementation EXPLAIN specialized strategies for emerging markets and international new ventures

Strategic Management Strategic Management: the process of determining an organization’s basic mission and long-term objectives, then implementing a plan of action for pursuing the mission and attaining objectives Growing need for strategic management related to increasingly diversified operations in continuously changing international environment

Benefits of Strategic Planning 70 percent of 56 U.S. MNC subsidiaries had comprehensive 5 to 10-year plans according to one study Evidence for effectiveness of planning is mixed. Strategic planning does not always result in higher profitability. Profits are affected by The quality of the plan The business environment How well the plan is implemented

Approaches to Strategic Planning Economic Imperative: keep costs low Political Imperative: get along with local governments. Quality Imperative Administrative Coordination: solve problems as they arise

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

Pressures for Cost Reductions The product is a commodity Differentiation on non-price factors is difficult. Price is the main competitive weapon Competitors are based in low-cost locations There is persistent excess capacity Customers have market power, and switching costs are low. Global competition and global trade

Pressures for National Responsiveness Differences in distribution channels Host government demands Different product standards Different customer needs and tastes Businesses or consumers prefer locally made products

Reasons for Global Strategy Economies of scale: cost savings that result from producing a high volume of goods in one location Location economies (location advantages): cost savings that result from low costs for doing a value chain activity in a particular location research and development manufacturing technical service or customer service low-cost financing

Global Strategy Produce standard products efficiently in large facilities, and use a standard marketing strategy Little or no national responsiveness This strategy seeks to benefit from economies of scale in production, distribution, marketing, and purchasing Requires close coordination with headquarters Production facilities are located where total costs of production, transportation, and tariffs are low (location economies)

Global Strategy (2) Used when The need for cost reduction is high AND The need for national responsiveness is low This strategy is used to compete on low prices. Some firms that use global strategies: Canon, Fuji, Texas Instruments Firms that make commodity products (industrial chemicals, paper, etc.) often use global strategies

International Strategy This strategy used by firms with products or core competencies that international competitors cannot match. The objective is to increase earnings by utilizing core competencies in foreign markets These firms usually compete on differentiation and use the same differentiation all over the world Used when The need for cost reduction is low AND The need for national responsiveness is low

International Strategy (2) Home office controls product development and marketing strategy. Limited customization of products and marketing strategy in different countries if necessary Production and a marketing department in each major country  more expensive than global strategy This strategy does not take advantage of economies of scale and location economies Firm that uses this strategy: Disney

Multidomestic Strategy A strategy that attempts to maximize national responsiveness Firm usually has product development, production, and marketing in each country This strategy does not take advantage of economies of scale and location economies Often used by companies that serve niche markets National responsiveness is more important than cost pressures. Often, distinctive competencies are not transferred from one market to another.

Multidomestic Strategy (2) Used when The need for cost reduction is low AND The need for national responsiveness is high Problems Lack of coordination among subsidiaries in different countries High costs

Transnational Strategy A strategy that seeks to Achieve low costs by using economies of scale and location economies Transfer core competencies within the firm Achieve a high degree of national responsiveness Used when The need for cost reduction is high AND The need for national responsiveness is high Some firms that use this strategy: Toyota, Caterpillar, John Deere, AT & T, IKEA

Transnational Strategy (2) Requirements for success: Transfer of knowledge throughout the company (global learning) Coordination of production, purchasing, and marketing throughout the company A corporate culture that encourages mutual trust, coordination, and knowledge sharing Hardest strategy to implement

Global Integration vs. National Responsiveness

Mission Statement Explains what business an organization is in. May describe what the company will provide for customers Example: Dell listens to customers and delivers technology they trust and value.

Strategic Planning for International Management Mission Statement

Elements of Strategic Planning: Environmental Scanning

Elements of Strategic Planning: Environmental Scanning Provides management with accurate forecasts of trends relating to external changes in geographic areas where firm is doing business or considering doing business Changes relate to economy, competition, political stability, technology, demographic and consumer data

Elements of Strategic Planning: Internal Resource Analysis Evaluate MNC’s current managerial, technical, material, and financial 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 develop and sustain necessary Key Success Factors, or can we acquire them?

Key Success Factors Important characteristics of a company or its product that lead to success in an industry Innovative technology or products Broad product line Effective distribution channels Price advantages Effective promotion of products Quality of customer service Superior physical facilities or skilled labor

Key Success Factors (2) Experience of firm in business Cost position for raw materials Cost position for production R&D quality Financial assets Product quality Quality of human resources

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 scan and internal analysis Goals serve as umbrella beneath which subsidiaries and other international groups operate Profitability and marketing goals almost always dominate strategic plans Once strategic goals are set, MNC develops specific operational goals and controls for subsidiary or affiliate level

Elements of Strategic Planning: Implementation Provides goods and services in accord with plan of action Plan often will have overall philosophy or guidelines to direct 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

Elements of Strategic Planning: Implementation (2) Local issues Once country has been decided, firm must choose a specific location Important factors influence this choice: Access to markets Availability of transportation and electric power Desirability of location for employees coming in from other countries

Implementing Strategy: Functional Areas of Business Marketing country-by-country basis vs. standardized approach to marketing build around the 4 P’s of marketing (product, price, place, promotion) Finance Transferring funds from one country another, or borrowing funds in international money markets, is often less expensive than relying on local sources Fluctuations in currency values affect costs, revenue, and profits

Implementing Strategy: Functional Areas of Business (2) Production Recent trend away from multi-domestic approach and toward global coordination of operations If the product is labor intensive, produce it in low-cost locations Firms that use a global or transnational strategy strive for economies of scale

Elements of Strategic Planning: Specialized Implementation Issues International new ventures and “born global” firms Strategic issues for emerging markets and the base of the pyramid (poor people)

International New Ventures and “Born Global” Firms 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. Truly born global firms tend to survive longer than other seemingly global companies Venture performance (growth and ROE) is improved by technological learning gained from international environments.

International New Ventures and “Born Global” Firms (2) 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

Strategies for Emerging Markets The big emerging markets: Mexico, Brazil, Argentina, South Africa, Poland, Turkey, India, Indonesia, China, South Korea These nations have captured the bulk of investment and business interest from MNCs and their managers in recent years. 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, and general uncertainty in legal and political environment. Some emerging markets are more stable and less corrupt than others.

The World Population and Income Pyramid

Two Important Strategies for Emerging Markets First Mover Strategies: Get the advantages associated with early entry and first-mover positioning Higher market share and revenue Higher market share may lead to economies of scale in production, distribution, and marketing Better market knowledge than competitors Opportunity to work with the best local business partners Privatization of government enterprises may create opportunities

Two Important Strategies for Emerging Markets (2) Strategies for the Base of the Pyramid (BOP): 4-5 billion potential customers around the globe previously ignored by global businesses BOP forces global business to rethink their strategies. Must consider relationships with local governments, small entrepreneurs, and nonprofits, rather than depending on established partners such as large companies and the central government.

Two Important Strategies for Emerging Markets (3) Strategies for the Base of the Pyramid (continued): BOP strategies are challenging to implement because of poor infrastructure, nonexistent distribution channels, corruption, communication issues Must provide affordable products and make them easily available to people who want them New technologies, such as mobile phones, do well if people want them and can pay for them. Successful BOP strategies can travel profitably to higher income markets. It is easier to add features to a basic product than to subtract them from a more advanced product