Dr Zain Yusufzai

Multinational Strategy

Chapter # 8 (page214-240).

Introduction Strategic planning: The process of  evaluating the enterprise’s environment  its internal strengths  then identifying long-and- short range activities  implementing plan of action for attaining these goals  MNEs make adjustments in dealing with competitive situations  Either redirect effort, or exploit new areas of opportunities Strategic orientations Predispositions help determine the specific decisions the firm will implement; there are four predispositions 1. Ethnocentric predisposition: the tendency of a manager or multinational company to rely on the values and interests of the parent company in formulating and implementing the strategic plan 2. Polycentric predisposition: the tendency of a multinational to tailor its strategic plan to meet the needs of the local culture 3. Egocentric predisposition: the tendency of a multinational to use a strategy that addresses both local and regional needs 4. Geocentric predisposition: the tendency of a multinational to construct strategic plan with a global view of operations (Good Example) Arthur Andersen, accentor, and McKinsey Strategy formulation Strategy formulation: the process of evaluating the enterprise’s environment and its internal strengths External environmental assessment
International business Alan M. Rugman, Richard M. Hodgetts

1

Dr Zain Yusufzai

Multinational Strategy

Chapter # 8 (page214-240).

Involves two activities 1. Information gathering 2. information assessment These steps help to answer two questions 1. what is going on in the external environment 2. how will these developments affect our company Information gathering Four of the most common methods 1. asking experts in the industry to discuss industry trends and to make projection about the future : 2. using historical industry trends to forecast future developments; 3. asking knowledgeable managers to write scenarios describing what they foresee for the industry over the next two to three years; and 4. Using computers to simulate the industry environment and to generate likely future development. This information helps. MNEs to identify competitor strengths and weaknesses and to target areas for attack. Information assessment Having gathered information on to competition and the industry, MNEs will then evaluate the data. Make an overall assessment based on the five forces that determine industry, competitivenessbuyers, suppliers, and potential new entrants to the industry, the availability of substitute goods and services, and rivalry among the competitors. Competitive intelligence: the gathering of external information on competitors and the competitive environment as part of the decision-making process Bargaining power of buyers Examine the power of their buyers Bargaining power of suppliers An MNE will look at the industry’s suppliers to see if it can gain a competitive advantage here. Roe
International business Alan M. Rugman, Richard M. Hodgetts

2

Dr Zain Yusufzai

Multinational Strategy

Chapter # 8 (page214-240).

example, if there are a number of suppliers in the industry, the MNE may attempt to play them off against each other in to get a lower price. New entrants Examine the likelihood of new firms entering the industry and will try to determine the impact they might have on the MNE. Two typical ways that international MNEs attempt to reduce the threat of new entrants are by 1. keeping costs low and consumer loyalty high, and 2. Encouraging the government to limit foreign business activity though regulation such as duties, tariffs, quotas, and other protective measures. Threat of substitutes Look at the availability of substitute goods services and try to anticipate when such offerings will reach the market. Of steps that the company will take to offset this competitive force, including 1. lowering prices, 2. offering similar products, and 3. Increasing services to the customer. Rivalry Examine the rivalry that exists between itself and the competition and seek to anticipate future changes in this arrangement. Common strategies of maintaining and/or increasing market strength include 1. offering new goods and services, 2. increasing productivity and thus reducing overall costs, 3. working to differentiate current goods and services from those of the competition, 4. increasing overall quality of goods and changes. Internal environmental assessment Helps to pinpoint MNE strengths and weaknesses. Two specific areas 1. physical resources and personnel competencies, and

International business Alan M. Rugman, Richard M. Hodgetts

3

Dr Zain Yusufzai

Multinational Strategy

Chapter # 8 (page214-240).

2. The way in which value chain analysis can be used to bring these resources together in the most synergistic and profitable manner. Physical resources and personnel competencies The physical resources are the assets the assets that MNE will use to carry out the strategic plan many of these are reported on the balance sheet as reelected by the firm’s cash, inventory, machinery, and equipment accounts. Location can also affect cost. Another important consideration is the degree of integration that exists within the operating units of the MNE large companies, in particular, tend to be divided into strategic business units [SBUS]. SBUs are sometimes referred to as “business within the business”. Vertical integration, many large Japanese manufacturing firms, in particular, have moved toward vertical integration by purchasing controlling interest in their suppliers. The objective is to obtain control over the supply and thus ensure that the materials or goods are delivered as needed. Virtual integration, which is the ownership of the core technologies and manufacturing capabilities needed to produce outputs, while depending on outsourcers to provide all other needed inputs. Personnel competencies are the abilities and talents of the people. To examine these because they reflect many of the companies strengths and weakness. For example, if an MNE has an outstanding R&D department, it may be able to develop high-quality, state-of-the-art products. However, if the company has no sales arm, it will sell the output to a firm that can handle the marketing and distribution. Strategic business units (SBUS): operating units with their own strategic space; they produce and sell goods and services to a market segment and have a well-defined set of competitors Vertical integration: the ownership of assists involved in producing a good or service and delivering it to the final customer

International business Alan M. Rugman, Richard M. Hodgetts

4

Dr Zain Yusufzai

Multinational Strategy

Chapter # 8 (page214-240).

Virtual integration: a networking strategy based on cooperation within and across company company boundaries Value chain analysis The primary activities in this chain include 1. inbound logistics such as receiving, storing, materials handling, and warehouse activities; 2. operations in which inputs are put into final product form by performing activities such as machining, assembling, testing, and packaging, 3. outbound logistics, which involve distributing the finished product to the customer< 4. marketing and sales, which are used to encourage buyers to purchase the product: 5. Service for maintaining and enhancing the value of the product after the sale through activities such as repair, product adjustment, training, and parts supply. The support activities in the value chain consist of: 1. the firm’s infrastructure, which is made up of the company’s general management, planning, finance, accounting \,legal, government affairs, and quality management areas: 2. human resource management, which is made up of the selection, 3. technology in the form of knowledge, research and development, and procedures That can result in improved goods and services: 4. procurement, which involves the purchasing of raw materials, supplies, and similar goods. Determine the type of strategy that will be most effective. In all, there are three generic strategies: cost, differentiation, and focus.

International business Alan M. Rugman, Richard M. Hodgetts

5

Dr Zain Yusufzai

Multinational Strategy

Chapter # 8 (page214-240).

1. Value chain: the way in which primary and support activities are combined in providing goods and increasing profit margins 2. cost strategy: a strategy that relies on low price and is achieved though approaches such as vigorous pursuit of cost reduction and overhead-control, avoidance of marginal customer accounts, and cost mineralization in areas such as sales and advertising 3. Differentiation strategy: a strategy directed toward creating something that is perceived as being unique 4. Focus strategy: a strategy that concentrates on a reticular buyer group and segments that niche based on product line or geographic market Competitive scope: the breadth of a firm’s target market within an industry Overall success is found in their ability to manage the flow of new products, so that the offerings remain reasonably fresh without spending money on excessive investment in updates or redesign. That cannot get this aspect of the product cycle correct have been falling behind. Goal setting The external and internal environmental analyses will provide the MNE with the information needed for setting foals. There are two basic ways of examining the goals or objectives of international business operations. One is to review them based on operating performance or functional area. Some of the major goals will be related to profit ability, marketing, production, finance, and human resources. A second way is to examine theses goals by geographic area or on an SBU basis Then there will be accompanying functional goals for marketing, production, and finance. If the MNE has SBUs, each strategic business unit in these geographic locales will have it s own list of goals Cascading effect: The MNE start out by setting a profitability goal for the overall enterprise. Each geographic area or
International business Alan M. Rugman, Richard M. Hodgetts

6

Dr Zain Yusufzai

Multinational Strategy

Chapter # 8 (page214-240).

business unit will then be assigned a profitability goal, which, if attained, will result in the MNE reaching its overall desired profitability. The same approach will be used in other key areas such as marketing, production, and finance. Within each unit, these objectives will then be further subdivided so that every part of the organization understands its objectives and everyone is working toward the same overall goals Strategy implementation Strategy implementation: the process of attaining goals by using the organizational structure to execute the formulated strategy properly Many areas of focus in this process. Three of the most important are location, ownership decisions. In addition, functional area implementation. Location Important for a number of reasons  Local facilities often provide a cost advantage to the producer.  Particularly true when the raw materials , apart, or labor needed to produce the product can be inexpensively obtained close to the facility  Residents prefer locally produced products  Locations attractive because the local government is encouraging investments through various means such as low tax rates, free land, subsidized energy and transportation rates and low interest loans,  Imported goods are subjected to tariffs, quotas, or other governmental restrictions, making local manufacture more desirable Number of drawbacks associated with locating operations overseas  Unstable political climate , leave an MNE vulnerable to low profits and bureaucratic red tape  Possibility of revolution or armed conflict Ownership Many Americans belief that the increase in foreign owned businesses in the US is weakening the economy. People in other countries have similar feelings about US businesses there. In truth, they
International business Alan M. Rugman, Richard M. Hodgetts

7

Dr Zain Yusufzai

Multinational Strategy

Chapter # 8 (page214-240).

real issue of ownership is whether or not they company is contributing to the overall economic good of the country where it is doing business Countries that want to remain economically strong must be able to attract international investors who will provide jobs that allow their workers to increase their skills and build products that are demanded on the world market In accomplishing this objective, two approaches are now in vogue; international joint ventures and strategic alliances International joint venture (IJV) An agreement between two or more partners to own and control an overseas business IJVs in number of forms and number of opportunities, which helps to explain some of the reasons for rise in popularity of IJVs One reason is government encouragement and legislation that are designed to make it attractive for foreign investors to bring in local partners Second reason is the growing need for partners who know the local economy, the culture, and the political system and who can cut through red tape Third reason is the desire by outside investors to find local collaborates with whom they can team up effectively Failure: The major reason is the desire for MNEs to control the operation, which sometimes has resulted in poor decision making and/or conflict with the local partners. In general, joint ventures are difficult to manage and are frequently unstable Strategic alliance Strategic alliance or partnership: an agreement between two or more competitive multinational enterprises for serving a global market  Strategic partnerships are usually formed by firms in the same line of businesses. Functional strategies Used to coordinate operations and to ensure that the plan is carried out properly

International business Alan M. Rugman, Richard M. Hodgetts

8

Dr Zain Yusufzai

Multinational Strategy

Chapter # 8 (page214-240).

Falls into six major areas: 1. marketing 2. Manufacturing 3. Finance 4. Procurement 5. Technology 6. Human resources For purposes of analysis they can be examined in terms of three major considerations: marketing, manufacturing, and finance Marketing Manufacturing Finance Control and evaluation Strategy formulation and implementation processes are a prelude to control and evaluation. This process involves an examination of the MNEs performance for determining 1. how well the organization has done a 2. what actions should be taken in light of this performance Common methods of measurement Return on investment (ROL): a percentage determined by dividing net income before taxes by total assets Second measure lies in sales growth and / or market share Third measure is performance area is costs Forth measure is product development Finally management performance must be measured. Rating this type MNE will consider two types of measures; quantitative and qualitative

International business Alan M. Rugman, Richard M. Hodgetts

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