chapter 8

The needs, benefits, approaches, and predispositions of strategic planning serve as a point of departure for the basic steps in formulating strategy. In international management, strategic planning can be broken into the following steps:

scanning the external environment for opportunities and threats - Environmental scanning attempts to provide management with accurate forecasts of trends that relate to external changes in geographic areas where the firm is currently doing business or considering setting up operations. These changes relate to environmental factors that can affect the company and include the industry or market, technology, and regulatory, economic, social, and political aspects. - MN sees observe and evaluate an exorbitant amount of information, and while data are usually collected for all forms of environmental factors, the order in which they approach each factor and the extent to which they are studied depend on the industry and the goals of the MNC. One of the most important folk eye is the industry or the market. This includes the role of all potential competitors and the relationships surrounding those competitors, such as affiliation with one another or the connection between the company and its customers and suppliers. Monitoring changes in technology will also help keep the company modern and innovative. Some technological options managers may wish to follow are those that influence business efficiencies or changes in a production period from a competitor standpoint, it is a good idea to familiarize oneself with the rise of new products or services and the existing infrastructure. - The regulatory environment can also change at anytime, shifting laws or regulatory guidelines. Managers should be aware of ownership or property rights within an area and the kind of employment practices exhibited in a region. Minimum wage laws and tax rates should also be considered because they can affect the hiring process and the company finances. This is different from the economic environment, which mainly highlights rates such as rates of employment, exchange rates, inflation rates, and the level of GNP for a country. - Appropriate observation of these social environment can help the company. Awareness of demographic shifts, including age, education, and income, coupled with in depth knowledge of consumer attitudes, is imperative for a company to assess whether it's services would be welcomed within a region. Finally, the political environment can impact how a company runs operations. The different political systems that exist across the world, and an understanding of those systems, along with the current state of affairs, can alert MNC's to any warnings that may impede expansion. - After obtaining the information, MNC's then go through an analyzing process that gives rise to the relevant features of the external environment. By performing analyses, the company can discover the risks and opportunities involved in expanding to that region. Typically, managers communicate the results and then try to formulate the best strategy to take advantage of a ripening market. However, the external environment is not the only aspect to consider, and more information must be reviewed before those steps can be taken. - Environmental scanning is central to discovering if an MNC can survive in a particular region; However, it is only effective if it is done consistently. The environment changes very rapidly and in order for firms to continually adapt, they must assess the external dynamics that could bolster or hinder future productivity. Each country will have a different perspective as to which factors create the most roadblocks and therefore must be evaluated on a more consistent basis. conducting an internal source analysis of company strengths and weaknesses - When formulating strategy, some firms wait until they have completed their environmental scanning before conducting an internal resource analysis, which is a microeconomic aspect of activity. Others perform these two steps simultaneously. Internal resource analysis helps the firm evaluate its current managerial, technical, material, and financial resources and capabilities to better assess its strengths and weaknesses. The MNC then it uses this assessment to determine its ability to take advantage of international market opportunities. The primary thrust of this analysis is to match external opportunities gained through the environmental scan, with internal capabilities gained through the internal resource analysis. In other words, these evaluations should not be viewed as how the environment creates a barrier to entry but rather how companies can utilize their resources and capabilities to best take advantage of environmental opportunities. - An internal analysis identifies the key factors for success that will dictate how well the firm is likely to do. A key success factor (KSF), is a factor that is necessary for a firm to compete effectively in a market niche. For example, a KSF for an international airline is price. - The key question for the management of an MNC is, do we have the people and resources that can help us develop and sustain the necessary KSFs, or can we acquire them? If the answer is yes, the recommendation is to proceed. If the answer is no, management will begin looking at other markets where it has, or can develop, the necessary KSF. - The balance between environmental scanning and internal resource analysis can be quite delicate period managers do not want to spend too much time looking inward; Otherwise, they could miss changes in the environment that would alter the company's strengths and weaknesses based on that market. Conversely, managers do not want to appraise the outward view for too long, as they could take time away from improving internal systems and taking advantage of opportunities. formulating goals in light of the external scanning and internal analysis. - In practice, goal formulation often precedes the 1st 2 steps of environmental scanning and internal resource analysis. As used here, however, the more specific goals for the strategic plan comes out of external scanning and internal analysis. MNC's pursue a variety of such goals. These goals typically serve as an umbrella beneath which the subsidiaries and other international groups operate. - Profitability and marketing goals almost always dominate the strategic plans of today's MNC's. Profitability is so important because MNC's generally need higher profitability from their overseas operations than they do from their domestic operations. The reason is quite simple: setting up overseas operations involves greater risk and effort. In addition, a firm that has done well domestically with a product or service usually has done so because the competition is minimal or any effective. Firms with this advantage often find additional lucrative opportunities outside their borders. Moreover, the more successful a firm is domestically, the more difficult it is to increase market share without strong competitive response. International markets however, offer an ideal alternative to the desire for increased growth and profitability. - Another reason that profitability and marketing top list is that these tend to be more externally environmentally responsive, while production, finance, and personal functions tend to be more internally controlled. Thus, for strategic planning, profitability and marketing goals are given higher importance and warrant closer attention. - Once the strategic goals are set, the MNC will develop specific operational goals and controls, usually through a two way process at the subsidiary or affiliate level. Home Office management all set certain parameters, and the overseas group will operate within these guidelines. These guidelines are designed to ensure that the overseas groups activities support the goals and the strategic plan and that all units operate in a coordinated effort.

Sometimes refer to as pre emerging, frontier markets are a unique subset of emerging economies. While most traditional emerging markets are financially linked to the economies of their more developed counterparts, frontier markets are less or related to the ups and downs of the global economy period from an investment point of view, these markets offer potentially high rewards but with high risk. The most commonly cited frontier markets are located in Africa and Asia.

Business initiatives in frontier markets require careful strategic considerations. One potential approaches to joint venture with a local company that specializes in the cultural knowledge of the marketplace.

Once an MNC has selected the country in which to locate, the firm must choose the specific locale. A number of factors influence this choice., considerations include access to markets, proximity to competitors, availability of transportation and electric power, and desirability of the location for employees coming in from the outside.

One study found that in selecting US sites, both German and Japanese firms placed more important on Accessibility and desirability and less important on financial considerations. However, financial matters remained important: many countries attempt to lure MNC's to specific accounts by offering special financial packages. Another common consideration is the nature of the workforce. MNC's prefer to locate near sources of available labor that can be readily trained to do the work. A complementary consideration that often is unspoken is the presence and strength of organized labor. Japanese firms in particular tend to avoid heavily unionized areas. Still another consideration is the cost of doing business. Manufacturers often set up operations in rural areas, commonly called Greenfield locations, which are much less expensive and do not have the problems of urban areas. Conversely, banks often choose Metropolitan areas because they feel they must have a presence in the business district. Some MNC's opt for locales where the cost of running a small enterprise is significantly lower than that of running a large one period in this way, they spread the risk, setting up many small locations throughout the world rather than one or two large ones. Manufacturing firms are a good example. Some production firms feel that the economies of scale associated with a large scale plant are more than offset by potential problems that can result, should economic or political difficulties develop in the country. This firm's strategy is to spread the risk by opting for a series of small plants throughout a wide geographic region. This location strategy can also be beneficial for stockholders. Researchers found that MNC's with a presence in developing countries have significantly higher market values than MNC's that operate only in countries that have advanced economies.

To implement strategies, MNC's must tap the primary functional areas of marketing, production, and finance.

The implementation of strategy from a marketing perspective must be determined on a country by country basis. What works from the standpoint of marketing in one locale may not necessarily succeed in another. In addition, the specific steps of a marketing approach often are dictated by the overall strategic plan, which in turn is based heavily on market analysis. German auto firms in Japan are a good example of using marketing analysis to meet customer needs. The Japanese also provide an excellent example of how the marketing process works. In many cases, Japanese firms have followed a strategy of first building up their market share at home and driving out imported goods. Then, the firms move into newly developed countries, honing their marketing skills as they go along. Finally, the firms move into fully developed countries, ready to compete with the best available. This pattern of implementing strategy has been used in marketing autos, cameras, consumer electronics, home appliances, Petrochemicals, steel, and watches. For some products however, search as computers, the Japanese have moved from their home market directly into fully developed countries and then on to the newly developing nations. Finally, the Japanese have gone directly to developed countries to market products in some cases because the market in Japan was too small. Such products include color TV's, Blu Ray players, and a sewing machines. In general, once a firm agrees on the goods it wants to sell in the international marketplace, the specific marketing strategy is implemented. The implementation of marketing strategy in the international arena is built around the well known for PES of marketing, product, price, promotion, and place. Firms often develop and sell a product and local or peripheral markets before expanding to overseas major targets. If the product is designed specifically to meet an overseas demand, however, the process is more direct. Price largely as a function of market demand. For example, the Japanese have found that the US micro computer market is price sensitive; But introducing lower priced clones, the Japanese have been able to make headway, especially in the portable laptop market. The last two peas, promotion and place are dictated by local conditions and left in the hands of those running these subsidiary or affiliate. Local management may implement customer sales incentives, for example, or make arrangements with dealers and salespeople who are helping move the product locally. Mobile marketing usually dominates strategy implementation, the production function also plays a role. If a company is going to export goods to a foreign market, the production process traditionally has been handled through domestic operations. In recent years however, MNCs have found that whether they are exporting or producing the goods locally in the host country, consideration of worldwide production is important. For example, goods may be produced in foreign countries for export to other nations. Sometimes, a plant will specialize in a particular product and export all the way to all the MNC's markets; Other times, a plant will produce goods only for a specific locale, such as Western Europe or South America. Still other facilities will produce one or more components that are shipped to a larger network of assembly plants. The last option has been widely adopted by pharmaceutical firms and automakers. If the firm operates production plants in a different country but makes no attempt to integrate its overall operations, the company is known as multidomestic. A recent trend has been up away from this scattered approach and towards global coordination of operations. Finally, if the product is labor intensive, as in the case of micro computers, then the trend is to farm the product out to low cost sites such as Mexico or Brazil, where the cost of Labor is relatively low and the infrastructure such as electric power, communication systems, and transportation systems is sufficient to support production. Sometimes, multiple sources of individual components are used ; In other cases, one or two sources are sufficient. In any event, careful coordination of the production function is needed when implementing the strategy, and the result is a product that is truly global in nature. Use of the finance function is to implement strategy normally is developed at the Home Office and carry out by the overseas affiliate or branch. When a firm went international in the past, the overseas operation commonly relied on the local area for funds, with the rise of global financing has ended this practice period MNC's have learned that transferring funds from one place in the world to another, or borrowing funds in the international money markets, often is less expensive than relying on local sources. Unfortunately, there are problems in these transfers. Such a problem is representative of those faced by MNC's using the finance function to implement their strategies. One of the MNC's biggest recent headaches when implementing strategies in the financial dimension has been a revaluation of currencies. For example, in the late 1990s, the US dollar increased in value against the Japanese yen. American overseas subsidiaries that held yen found their profits in terms of dollars declining. The same was true for those subsidiaries that helped Mexican pesos and that government devalued the currency several years ago. When this happens, a subsidiary's profit will decline. After its initial introduction in 1999, the euro declined against the US dollar, but when the dollar subsequently came under pressure, the euro regained strength. One of the more recent examples of financial issues is the expansive U.S. trade deficit with China, where the potentially undervalued yuan has played a role. When dealing with the inherent risk of volatile monetary exchange rates, some MNC's have bought currency options that for a price guarantee convertibility at a specified rate. Others have developed counter trade strategies, whereby they receive products in exchange for currency.

In choosing a location, an MNC has two primary considerations: the country and the specific locale within the chosen country. Quite often, the first choice is easier than the second because there are many more alternatives from which to choose a specific locale.

Traditionally, MNC's have invested in highly industrialized countries, and research reveals that annual investments have been increasing substantially. In the case of Japan, MNC's are actively engaged in mergers and acquisitions. These purchases point to a new trend in Japan, the acquisition of small firms. However, many larger purchases have also been made. Foreign investors are also pouring into Mexico, although this investment activity has generated some political controversy in the United states. One reason is that it is a gateway to the American and Canadian markets. The second reason is that Mexico is a very cost effective place in which to manufacture goods. A third is that the declining value of the peso after mexico's economic crisis in 1994 and 1995 hit many Mexican businesses hard and left them vulnerable to mergers and acquisitions. More recently, acquisitions of Mexican companies have continued, although for more strategic reasons. MNC's often invest in advanced industrialized countries because they offer the largest market for goods and services. In addition, the established country or geographic locale may have legal restrictions related to imports, encouraging a local presence. Japanese firms for example, and complying with their voluntary export quotas of cars to the United states as well as responding to dissatisfaction in Washington regarding the continuing trade imbalance with the United states, have established US based assembly plants. In Europe, because of the EU regulations for outsiders, most US and Japanese embassies have operations in at least one European country, thus ensuring access to the European Community at large. In fact, the huge US MNC ITT, now operates in each of the original 12 EU countries. Another consideration in choosing a country is the amount of government control and restrictions on foreign investment period traditionally, MNC's from around the world resisted anything but very limited business in Eastern European countries with central planning economies. The recent relaxing of the trade rules and move forward of free market economies and the republics of the former Soviet Union and the other Eastern European nations, however, have encouraged MNCs to rethink their positions; More and more are making moves into this largely untapped part of the global market. The same is true in India, although the political climate can be volatile and MNC's must carefully weigh the risks of investing there. Restrictions on foreign investment also play a factor. Countries such as China and India have required that control of the operation be in the hands of local partners. MNC's that are reluctant to accept such conditions will not establish operations there. In addition to these considerations, MNC's examine the specific benefits offered by host countries, including low tax rates, rent free land and buildings, low interest or no interest loans, subsidized energy and transportation rates, and a well developed infrastructure that provides many of the services found back home such as good roads, communication systems, schools, healthcare, entertainment, and housing. These benefits will be weighed against any distance sent ifns or performance requirements that must be met by the MNC, such as job creation quotas, export minimums for generating foreign currency, limits on local market growth, labor regulations, wage and price controls, restrictions on profit repatriation, and controls on the transfer of technology.

4 common approaches to formulating and implementing strategy are:

focusing on the economic imperative - MNC's that focus on the economic imperative employ a worldwide strategy based on cost leadership, differentiation, and a segmentation. Middle managers are the key to stimulating profit growth within a company, so expanding those efforts on an international level is a necessary tool to learn for today's new managers. Many of these companies typically sell products for which a large portion of value is added in the upstream activities of the industry's value chain. By the time the product is ready to be sold, much of its value has already been created through research and development, manufacturing, and a distribution. Some of the industries in this group are automobiles, chemicals, heavy electrical systems, motorcycles, and steel. Because the product is basically homogeneous and requires no alteration to fit the needs of these specific country, management uses a worldwide strategy that is consistent on a country to country basis. - The strategy is also used when the product is regarded as a generic good and therefore does not have to be sold based on name brand or support service. A good example is the European computer market. Initially this market was dominated by such well known companies however, more recently clone manufacturers have begun to gain market share. This is because the most influential reasons for buying a computer have changed. A few years ago, the main reasons were brand name, service, and support. Today, price has emerged as a major input into the purchasing decision. Customers now are much more computer literate, and they realize that many computers offer identical quality performance. Therefore, it does not pay to purchase a high priced name brand when a lower priced clone will do the same things. As a result, the economic imperative dominates the strategic plans of computer manufacturers. This process has repeated in many industries as those products have become commoditized. - Another economic imperative concept that has gained prominence in recent years is global sourcing, which is proving very useful in formulating and implementing strategy. A good example is provided by the way in which manufacturers are reaching into the supply chain and shortening the buying circle. addressing the political imperative - MNC's using the political imperative approach to strategic planning or country responsive; Their approach is designed to protect local market niches. The product sold by MNC's often have a large portion of their value added and the downstream activities of the value chain. Industries such as insurance and Consumer Packaged Goods are examples, the success of the product or service generally depends heavily on marketing, sales, and service. Typically, these industries use a country centered or multi domestic strategy. emphasizing the quality imperative - A quality imperative takes 2 interdependent paths: a change in attitudes and a raising of expectation for service quality as well as the implementation of management practices that are designed to make quality improvement an ongoing process. Commonly called total quality management, or simply TQM, the approach takes many forms, including cross training personnel to do the jobs of all members in their work group, process reengineering designed to help identify and eliminate redundant tasks and wasteful effort, and reward systems designed to reinforce quality performance. - TQM covers the full gamut, from strategy formulation to implementation period TQM can be summarized as follows: (quality is operationalized by meeting or exceeding customer expectations. Customers include not only the buyer or external user of the product or service but also the support personnel both inside and outside the organization who are associated with the good or service), (The quality strategy is formulated at the top management level and is diffused throughout the organization period from top executives to hourly employees, everyone operates under a TQM strategy of delivering quality products or services to internal and external customers. Middle managers will better understand and implement these strategies if they are a part of the process), and TQM techniques range from traditional inspection and statistical quality control to cutting edge human resource management techniques, such as self managing teams and empowerment. - Many MNC's make quality a major part of their overall strategy because they have learned that this is the way to increase market share and profitability. The game console industry and the auto industry is a good point of reference. - A growing number of MNC's are finding that they must continually revise their strategies and make renewed commitment to the quality imperative because they are being vested by emerging market forces. implementing an administrative coordination strategy - An administrative coordination approach to formulation and implementation is 1 in which the MNC makes strategic decisions based on the merits of the individual situation rather than using a predetermined economic or political strategy. A good example is provided by Walmart , which has expanded rapidly into Latin America in recent years. - Many large MNC's work to combine the economic, political, quality, and administrative approaches to strategic planning. For example, IBM relies on the economic imperative when it has strong market power, especially in less developed countries, the political and quality imperatives when the market requires a calculated response such as European countries, and an administrative coordination strategy when rapid, flexible decision-making is needed to close the sale period of the four, however, the first three approaches are much more common because of the firm's desire to coordinate its strategy both regionally and globally.