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

3. (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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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)

12. 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

13. 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

14. 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

15. 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.

16. 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

17. 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

18. 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

19. Global Integration vs. National Responsiveness

20. 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.

21. Strategic Planning for International Management
Mission Statement

22. Elements of Strategic Planning: Environmental Scanning

23. 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

24. 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?

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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)

33. 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.

34. 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

35. 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.

36. The World Population and Income Pyramid

37. 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

38. 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.

39. 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