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International Management

International Ninth Edition Luthans | Doh


Fred Luthans

Management Jonathan P. Doh


Ninth Edition

Chapter 8

Strategy Formulation
and Implementation
International Management Ninth Edition Luthans | Doh

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

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.
International Management Ninth Edition Luthans | Doh

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.
International Management Ninth Edition Luthans | Doh

Approaches to Formulating
and Implementing Strategy
1. Economic Imperative
2. Political Imperative
3. Quality Imperative
4. Administrative Coordination
International Management Ninth Edition Luthans | Doh

Approaches to Formulating
and Implementing Strategy
Economic Imperative
• 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.
International Management Ninth Edition Luthans | Doh

Approaches to Formulating
and Implementing Strategy
Political Imperative

• 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.
International Management Ninth Edition Luthans | Doh

Approaches to Formulating
and Implementing Strategy
Quality Imperative

• Quality imperative
• Takes two interdependent paths:
1. A change in attitudes and a raising of
expectations for service quality
2. The implementation of management practices
designed to make quality improvement an
ongoing process.
• TQM Total Quality Management
International Management Ninth Edition Luthans | Doh

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
International Management Ninth Edition Luthans | Doh

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.
International Management Ninth Edition Luthans | Doh

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
International Management Ninth Edition Luthans | Doh

Global Integration vs. National


Responsiveness
International Management Ninth Edition Luthans | Doh

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.
International Management Ninth Edition Luthans | Doh

Environmental Factors Affecting


Organizations
International Management Ninth Edition Luthans | Doh

Elements of Strategic Planning


Environmental Scanning
• 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
International Management Ninth Edition Luthans | Doh

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?
International Management Ninth Edition Luthans | Doh

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.
International Management Ninth Edition Luthans | Doh

Strategy Implementation
• 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
International Management Ninth Edition Luthans | Doh

Strategy Implementation
Location Considerations
• Two primary considerations
1. The country
2. 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.
International Management Ninth Edition Luthans | Doh

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
International Management Ninth Edition Luthans | Doh

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
International Management Ninth Edition Luthans | Doh

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
International Management Ninth Edition Luthans | Doh

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).
International Management Ninth Edition Luthans | Doh

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
International Management Ninth Edition Luthans | Doh

Specialized Strategies
• Some circumstances may require specialized
strategies:
– Strategies for developing and emerging markets
– Strategies for international entrepreneurship and
new ventures
International Management Ninth Edition Luthans | Doh

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
International Management Ninth Edition Luthans | Doh

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.
International Management Ninth Edition Luthans | Doh

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
International Management Ninth Edition Luthans | Doh

Specialized Strategies
International Entrepreneurship

• International Entrepreneurship
– A combination of innovative, proactive, and risk-
seeking behavior that crosses national borders
and is intended to create value in organizations.
International Management Ninth Edition Luthans | Doh

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.