Strategy Formulation and ImplementationChapter EightMcGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All Rights Reserved.

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Strategy Formulationand Implementation The specific objectives of this chapter are to1. DISCUSS the meaning, needs, benefits, and approaches of the strategic planning process for MNCs.2. UNDERSTAND the tension between pressures for global integration and national responsiveness; and the four basic international strategy options. 3. IDENTIFY the basic steps in strategic planning.4. DESCRIBE how MNCs implement strategic plans.5. REVIEW the three major functions of marketing, production, finance that are used in strategic plan implementation.6. EXPLAIN specialized strategies appropriate for emerging markets and international new ventures.

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Strategic ManagementStrategic ManagementThe process of determining an organizations 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

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Benefits of Strategic Planning70 percent of 56 U.S. MNC subsidiaries had comprehensive 5 to 10-year plans according to one studyEvidence for effectiveness of planning is mixed. Strategic planning does not always result in higher profitability

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Approaches to Formulating and Implementing StrategyEconomic ImperativePolitical ImperativeQuality ImperativeAdministrative Coordination

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Approaches to Formulating and Implementing Strategy Economic ImperativeEconomic imperative Worldwide strategy based on cost leadership, differentiation, and segmentation.Strategy is also used when the product is regarded as generic and therefore is not sold on name brand or support serviceOften sell products for which large portion of value is added in upstream activities of industry value chainResearch and developmentManufacturingDistribution

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Approaches to Formulating and Implementing Strategy Political ImperativePolitical imperative Strategy formulation and implementation utilizing strategies that are country-responsive and designed to protect local market niches.These MNCs often use country-centered or multi-domestic strategySuccess of product or service depends heavily onMarketingSalesService

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Approaches to Formulating and Implementing Strategy Quality ImperativeQuality imperative Has two pathsChange 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

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Total Quality Management

Cross-train personnel to do jobs of all members in work groupProcess re-engineering designed to help identify/eliminate redundant tasksReward system designed to reinforce quality performanceQuality operationalized by meeting or exceeding customer expectationsQuality strategy formulated at top management level and diffused through organizationTQM techniques: traditional inspection and statistical quality control; cutting edge Human Resource Management techniques such as self-managing teams and empowerment

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Approaches to Formulating and Implementing Strategy Administrative CoordinationAdministrative coordinationMNC makes strategic decisions based on the merits of the individual situation rather than a predetermined economic or political strategy.Least common approach to formulation and implementation of strategy Many large MNCs work to combine all four of the approaches to strategic planning

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Global and Regional StrategiesFundamental Tension: The globalization vs. national responsiveness conflictGlobal integrationProduction and distribution of products and services of a homogenous type and quality on a worldwide basis.National responsivenessThe need to understand different consumer tastes in segmented regional markets and respond to different national standards and regulations imposed by autonomous governments and agencies.

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Global Integration vs. National Responsiveness

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Summary and Implications of the Four Basic StrategiesAppropriateness of each strategy depends on pressures for cost reduction and local responsiveness in each country servedGlobal strategy is low-cost strategy attempting to benefit from scale economies in production, distribution, marketingTransnational strategy is pursued when high cost pressures and high demand for local responsiveness exists

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Basic Elements of Strategic Planningfor International Management

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Environmental Factors Affecting Organizations

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Elements of Strategic Planning Environmental ScanningEnvironmental scanningProvides 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 economy, competition, political stability, technology, demographic and consumer data

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Elements of Strategic Planning Internal Resource Analysis Internal resource analysis is used to evaluate MNCs current managerial, technical, material, and financial strengths and weaknessesAssessment then used to determine ability to take advantage of international market opportunitiesMatch 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?

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Elements of Strategic PlanningStrategic 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 analysisGoals serve as umbrella beneath which subsidiaries and other international groups operateProfitability and marketing goals almost always dominate strategic plansOnce set strategic goals, MNC develops specific operational goals and controls for subsidiary or affiliate level

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Areas of Formulation of MNC Goals

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Strategy ImplementationStrategy implementationProvides goods and services in accord with plan of action.Plan often will have overall philosophy or guidelines to direct processConsiderations in selecting countryAdvanced industrialized countries offer largest markets for goods/servicesAmount of government controlRestrictions on foreign investmentSpecific benefits offered by host countries

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Strategy Implementation Location Considerations Two primary considerationsThe countryThe specific locale within the chosen countryThe CountryTraditionally MNCs invest in highly industrialized countries that offer the largest markets for goods and servicesDeveloping countries like Mexico becoming more attractiveThe amount of government control and restrictions is a factor Specific benefits offered by host countriesLow tax rates, low interest loans, subsidies , but this trend is changing

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Strategy Implementation Location Considerations Local IssuesOnce country has been decided, firm must choose specific localeImportant factors that influence this choiceAccess to marketsProximity to competitorsAvailability of transportation and electric powerDesirability of location for employees coming in from outside

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Strategy Implementation The Role of the Functional AreasMarketingWhat works in one market may not work in anotherMarketing may be dictated by the overall strategic planMarketing strategy involves the four Ps product, price, promotion, and place

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

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Strategy Implementation The Role of the Functional AreasFinanceTransfer funds from once place in the world to another, or borrowing funds in international money markets is often less expensive than relying on local sourcesIssues includeReevaluation of currenciesPrivatization

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

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Specialized Strategies Strategies for Emerging MarketsThe big emerging markets have captured the bulk of investment and business interest from MNCs and their managers in recent years Mexico, Brazil Argentina, South Africa, Poland, Turkey, India, Indonesia, China, South Korea 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

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Specialized Strategies Strategies for Emerging MarketsFirst Mover StrategiesSignificant economies associated with early entry and first-mover positioningMay be a narrow window of opportunity within which these opportunities can be best exploited

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Specialized StrategiesStrategies for Emerging MarketsStrategies for Base of Pyramid (BOP)4-5 billion potential customers around the globe heretofore ignored by global business BOP forces global business to rethink their strategiesMust consider relationships with local governments, small entrepreneurs, and nonprofits rather than depending on established partners such as central governmentBOP strategies are challenging to implementRepresents opportunity to incubate new, leapfrog technologiesSuccessful BOP strategies can travel profitably to higher income marketsMarketing at BOP forces consideration of smaller-scale strategies

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The World Population and Income Pyramid

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Specialized StrategiesEntrepreneurship Strategy and New VenturesIncreasingly 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

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

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Specialized Strategies International New Ventures and Born Global FirmsInternational new ventures or born global firmsFirms that engage in significant international activity a short time after being established.Successful born-global firms leverage a distinctive mix of orientations and strategiesGlobal technological competenceUnique product developmentQuality focusLeveraging of foreign distributor competenciesTruly born global firms tend to survive longer than other seemingly global companies

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Review and DiscussOf the four imperatives, which is most important to IBMs effort to enter the Pacific Rim Market?Define global integration as used in the context of international strategic management.Are globalization and national responsiveness diametrically opposed? Anheuser-Busch is attempting to enter India, where beer is hardly consumed and liquor dominates the market. What areas should be targeted for strategic goals? What are some marketing implications here?What conditions have allowed some firms to be born global?