Chp.8 Strategic Management

International Strategic Management: Strategy Formulation and Implementation

Strategic Management

  • Definition: Strategic management refers to the process of determining an organization's basic mission and long-term objectives, followed by implementing a plan of action to pursue the mission and attain the objectives.
      - Responsibility: Primarily set by the top management team, though increasingly, all levels of management are recognized as vital to the strategic process.
      - Importance in International Context: As organizations expand their operations internationally, strategic processes gain additional complexities.
      - Organizational Change: All stages of organizational change encompass levels of strategy from planning to implementation.
      - Necessity for MNCs: Multinational Corporations (MNCs) require strategic management to monitor their diversified operations in a rapidly evolving international environment.

Benefits of Strategic Planning

  • Importance in MNCs: Many MNCs perceive strategic planning as essential for their success.
      - Conduct of Strategic Planning: Conducted at both headquarters and subsidiary levels.
      - Profitability Evidence: No conclusive evidence that international strategic planning consistently results in higher profitability, particularly when home strategies are indiscriminately applied in diverse cultural contexts.
      - Planning Intensity Impact: Research indicates that higher planning intensity correlates with better performance, especially in companies with significant overseas sales. High-intensity planning is more effective than low-intensity strategies.

Approaches to Formulating and Implementing Strategy

  • Common Approaches:
      - Economic Imperative
      - Political Imperative
      - Quality Imperative
      - Administrative Coordination

Economic Imperative

  • MNCs pursuing an economic imperative adopt a worldwide strategy characterized by:
      - Cost Leadership and Differentiation: Focusing on keeping costs low while differentiating product offerings.
      - Value Addition: Products should have significant value added upstream in the industry’s value chain.
      - Industries: This is typical in sectors like automobiles, chemicals, heavy electrical systems, motorcycles, and steel where products are mostly homogeneous and don’t require modification for different markets.
      - Global Sourcing: A recent trend that enhances strategy formulation and implementation through global procurement practices.

Political Imperative

  • This strategic approach is responsive to local markets, focusing on:
      - Protection of Local Niches: Emphasizes protecting and catering to local market needs.
      - Value Addition Downstream: Mostly utilized by industries, such as insurance and consumer goods, where a significant part of value addition happens downstream.
      - Case Example: Coca-Cola's acquisition of Thums Up illustrates this approach. After initially trying to phase out the local brand, consumer preference led to a successful subsequent product launch with local adaptations.

Quality Imperative

  • The quality imperative involves:
      - Two Paths of Improvement: A shift in service quality expectations and ongoing management practices focused on quality improvement (Total Quality Management - TQM).
      - Customer Expectations: Quality is assessed by meeting or exceeding customer expectations, addressing both internal and external customers.
      - Strategic Distribution: Strategy should start from the top and permeate throughout the organization, utilizing techniques such as statistical quality control and empowering workforce structures.

Administrative Coordination

  • This method refers to:
      - Decisions Based on Situation Merits: Rather than adhering to a fixed strategy, adjustments are made according to specific circumstances.
      - Example: Walmart’s expansion challenges in Latin America required localized adaptations to satisfy local preferences and manage competition effectively.

Global and Regional Strategies

  • Global Integration: Involves producing and distributing identical products and services across the globe, with increasing acceptance of standardized yet tailored products such as automobiles.

  • National Responsiveness: Acknowledges and adapts to consumer preferences and regulatory requirements in various regions, ensuring products meet local demands.

Global Integration Matrix

  • Quadrants Overview:
      - Quadrant 1: Global strategy focuses on price competition due to high global integration and low responsiveness.
      - Quadrant 2: International strategy has low integration and responsiveness.
      - Quadrant 3: Transnational strategy emphasizes both global integration and local responsiveness.
      - Quadrant 4: Multi-domestic strategy focuses on local adaptation at the expense of global integration.

Strategy Summary and Implications

  • Each strategy's suitability is determined by the pressures for cost reduction and local responsiveness faced by the firm:
      - International Strategy: Suitable for firms with minimal local adaptation pressures.
      - Multi-Domestic Strategy: Optimal when local responsiveness is crucial.
      - Global Strategy: Adopted under high cost pressures to achieve economies of scale.
      - Transnational Strategy: Pursued in scenarios with both high cost pressures and demands for local responsiveness.

Basic Steps in Formulating Strategy

  1. External Environment Scanning: Identify opportunities and threats impacting the firm.

  2. Internal Resource Analysis: Assess strengths and weaknesses of the organization.

  3. Goal Formulation: Set strategic goals based on previous analyses.

Environmental Scanning

  • Purpose: To forecast changes in the external environment where a firm operates or plans to enter.
      - Key Areas to Monitor:
        - Industry Trends: Understand the market dynamics.
        - Technological Trends: Stay updated with innovations.
        - Regulatory Changes: Adapt to new laws impacting operations.
        - Social and Political Environments: These have critical implications for operational strategies.

  • Outcomes: Results are used to discover risks and opportunities leading to strategic adjustments.

Internal Resource Analysis

  • Definition: Helps evaluate current resources and capabilities to identify competitive advantages.

  • Key Success Factors (KSFs): Essential elements necessary for effective competition in a market niche.

  • Key Managerial Question: Do we possess the required human and capital resources to maintain the necessary KSFs, or can we procure them?

Goal Setting for Strategy Formulation

  • Goals shaped by external and internal analyses lead to the following categories:
      - Profitability Goals
      - Marketing Goals
      - Operations Goals
      - Financial Goals
      - Human Resource Goals

  • The goal structure enables subsidiaries to align with overall corporate direction, primarily focusing on profitability.

Strategy Implementation

  • Definition: The process of delivering goods and services according to the strategic plan.

  • Key Areas for Consideration:
      - Operational Location Decisions: Determining where to establish operations.
      - Entry and Ownership Strategies: Selecting the appropriate modes of market entry.
      - Functional Strategy Implementations: Applying strategies in marketing, production, and finance.

Location Considerations - The Country

  • MNCs increasingly invest in industrialized nations due to large markets.
      - Government Regulations: The level of governmental restrictions can impact investment decisions.
      - Benefits Assessment: Any incentives must be weighed against potential challenges.

Locale Issues

  • Once a country is chosen, specific locales must be evaluated based on:
      - Financial Incentives: Often provided by local governments to attract MNCs.
      - Workforce Quality: The nature and skill level of the available workforce is a significant factor.
      - Operational Costs: Overall cost implications of doing business in the locale.

Frontier Markets

  • Definition: Represent a distinct segment of emerging economies that are less susceptible to global economic fluctuations.

  • Potential and Risks: While they offer high reward opportunities, they also carry substantial risks.

  • Strategic Consideration for BOP Markets: Forming alliances with local firms can provide necessary cultural insights.

Combining Country and Firm-Specific Factors in International Strategy

  • Framework: Integrates country-specific advantages (CSAs) with firm-specific advantages (FSAs).
      - CSAs: Relate to local resources, labor, and educational skills.
      - FSAs: Unique capabilities that can give firms competitive advantages, e.g., specific technologies and managerial skills.

Global Integration vs. National Responsiveness Matrix

  • Firms in various quadrants express different strategic focal points:
      - Quadrant 1: Resource-based firms with emphasis on cost leadership.
      - Quadrant 2: Less efficient firms with minimal CSAs or FSAs.
      - Quadrant 3: Firms capable of implementing either cost-based or differentiation strategies.
      - Quadrant 4: Firms focused on differentiated products with strong marketing capabilities.

Role of Functional Areas in Implementation

  • Marketing strategy implementation is centered around the four Ps: product, price, promotion, and place.

  • Production Role: Goods may be manufactured in subsidiary locations for export.

  • Finance Function: Strategy execution driven by the home office, executed through overseas branches.

Strategies for Emerging Markets

  • Foreign Direct Investment (FDI): Measures the integration of developed and emerging economies with significant growth from $23.7 billion in 1990 to projected $671 billion in 2018.

  • Base of the Pyramid (BOP) Strategy: Identifies and serves low-income consumer segments, leveraging partnerships with NGOs for market entry.

Entrepreneurial Strategy and New Ventures

  • Definition: International entrepreneurship embodies innovative, proactive, and risk-taking behaviors across borders to create organizational value.

  • Born-Global Firms: Engage in international activities soon after establishment, with revenues from multiple regions.

  • Born-International Firms: Export goods to nearby markets, with revenues representing a lower fraction of total earnings than born-global firms.