International Business Management

Unit III BA5301 - International Business Management Batch: 2018 - 2020
UNIT III INTERNATIONAL STRATEGIC MANAGEMENT

MULTINATIONAL ENTERPRISES
Definition: A multinational corporation (MNC) or multinational enterprise (MNE) is a

corporation that is registered in more than one country or that has operations in more than one
country. It is a large corporation which both produces and sells goods or services in various
countries. It can also be referred to as an international corporation.
CHARACTERISTICS OF MULTINATIONAL COMPANIES (MNES)
The distinctive features of multinational companies are as follows.
Large Size:
A multinational company is generally big in size. Some of the multinational companies own and
control assets worth billions of dollars. Their annual sales turnover is more than the gross
national product of many small countries.
2. Worldwide operations:
A multinational corporation carries on business in more than one country. Multinational

enterprises such as Coco cola have branches in as many as seventy countries around the world.
3. International management:
The management of multinational companies is international in character. It operates on the basis

of best possible alternative available anywhere in the world. Its local subsidiaries are managed
generally by the nationals of the host country. For example the management of Hindustan Lever
lies with Indians. The parent company Unilever is in The United States of America.
4. Mobility of resources:
The operation of multinational company involves the mobility of capital, technology,

entrepreneurship and other factors of production across the territories.
5. Integrated activities:
A multinational company is usually a complete organization comprising manufacturing,

marketing, research and development and other facilities.
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6. Several forms:
A multinational company may operate in host countries in several ways i.e., branches,
subsidiaries, franchise, joint ventures. Turn key projects.
Aims
Multinational enterprises make investments in different countries with the following aims.
 To take tax benefits in host countries;

 To exploit the natural resources of the host country;
 To take advantage of Government concessions in host country;
 To mitigate the impact of regulations in the home country;
 To reduce cost of production by making use of cheap labor and low transportation
expenses in the host country.
 To gain dominance in foreign markets;
 To expand activities vertically.
ADVANTAGES OF MNE IN HOST COUNTRY
 The investment level, employment level, and income level of the host country increases
due to the operation of MNE's.
 The industries of host country get latest technology from foreign countries through
MNE's.
 The host country's business also gets management expertise from MNE's.
 The domestic traders and market intermediaries of the host country gets increased
business from the operation of MNE's.
 MNE's break protectionalism, curb local monopolies, create competition among domestic
companies and thus enhance their competitiveness.
 Domestic industries can make use of R and D outcomes of MNE's.
 The host country can reduce imports and increase exports due to goods produced by
MNE's in the host country. This helps to improve balance of payment.
 Level of industrial and economic development increases due to the growth of MNE's in
the host country.
ADVANTAGES OF MNE IN HOME COUNTRY
 MNE's create opportunities for marketing the products produced in the home country
throughout the world.
 They create employment opportunities to the people of home country both at home and
abroad.
 It gives a boost to the industrial activities of home country.
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 MNE's help to maintain favourable balance of payment of the home country in the long
run.
 Home country can also get the benefit of foreign culture brought by MNE's.
DISADVANTAGES OF MNE IN HOST COUNTRY
 MNE's may transfer technology which has become outdated in the home country.
 As MNE's do not operate within the national autonomy, they may pose a threat to the
economic and political sovereignty of host countries.
 MNE's may kill the domestic industry by monopolizing the host country's market.
 In order to make profit, MNE's may use natural resources of the home country
indiscriminately and cause depletion of the resources.
 Large sums of money flows to foreign countries in terms of payments towards profits,
dividends and royalty.
DISADVANTAGES OF MNE IN HOME COUNTRY
 MNE's transfer the capital from the home country to various host countries causing
unfavourable balance of payment.
 MNE's may not create employment opportunities to the people of home country if it
adopts geocentric approach.
 As investments in foreign countries are more profitable, MNE's may neglect the home
countries industrial and economic development.
STRATEGIC COMPULSIONS
• Globalization is the major driver to go to global
• Companies want to survive in today’s competition must put their products in the global
market and win more customers, facing strategic competition
• Strategic management includes strategic planning, implementation and review/control of
the organisation
• The present and future development of the field of Strategic management is driven by
compulsions like contemporary developments in social and economic theory and recent
changes in nature of business and economic context.
AREAS OF STRATEGIC COMPULSIONS

→ Orientation of Globalization
o Global operations with MNC and other foreign business operations methods
o New orientations such as International HRM and international Finance are
emerging
→ Emerging E-commerce and Internet Culture
o Wide expansion of WWW and technology business has moved to e-commerce
o Online purchasing /Selling and Advertising
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→ Cut –Throat Competition

o Business has become hyper competitive where organizations can no longer
survive without executive proper competitive strategy
o General competitive intelligence to win the battle with competitors
→ Diversification
o Increased uncertainty and business risk has increased
o To diversity the risk the companies has the diversified operations
o Focus on more than one business than, specialized in one business
→ Active Pressure Groups
o Modern world has various pressure groups like environmental activism and
consumer protectionism
o Identify and hear about the pressure groups
→ Motive for Corporate Social Responsibility (CSR)
o Ethics to keep-up their corporate reputation
o Strategic Management should look into possible CSR and implement to the
expectation of the Society
PURSUING COMPETITIVE ADVANTAGE BY COMPETING MULTINATIONALLY
→ Achieving Locational Advantage
o Cost of the manufacturing or other activities are lower in geographical location
o Significant scale of economies
o Locations have superior resources, allow better coordination, offer other valuable
advantages
 Transferring Competencies and Capabilities across borders
o competing successfully in additional country markets and growing sales and profit
in process
o Helping a company to achieve dominating depth in some competitively valuable
area
→ Coordinating Cross border activities
o Companies that compete in multiple locations across the world can choose where
and how to challenge the rivals
o May decide to capture the greater market share by having any short term loss with
profit earned in other country markets
o Even the company can shift the production schedule can be coordinated world
wide
o Accumulated expertise can be transferred via the internet ( knowledge sharing)
STANDARDIZATION VS DIFFERENTIATION
→ Two sides of debate of globalization
→ Represent Local Marketing Versus Global Marketing
→ Standardized(Global)
→ Differentiated(Local)
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→ These are basically two distinguishable strategies applied in international marketing –

marketing standardization and differentiation
DIFFERENCES B/W STANDARDIZATION AND DIFFERENTIATION
STRATEGIC OPTIONS
 Strategic Option/Choice is the final step in the strategy formulation phase in the strategic
management
 It involves the selection of a strategy or set of strategies that helps in achieving
organizational objectives.
 To assess the strength and weakness of Internal environment and opportunities of
external environment
 Assessment presents a list of possible strategic alternatives
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PRESSURES ON LOCAL (vs) GLOBAL RESPONSIVENESS

(Integration-Responsiveness Framework)
The Integration-Responsiveness Framework summarizes two basic strategic needs: To integrate

value chain activities globally. To create products and processes those are responsive to local
market needs. The discussion about the pressures on the firm of achieving global integration and
local responsiveness is known as integration-responsiveness (IR) framework.
Global integration refers to coordination of the firm’s value-chain activities across countries to
achieve worldwide efficiency, synergy, and cross-fertilization in order to take maximum
advantage of similarities across countries. Two primary factors behind pressures for global
integration are:
 The globalization of markets

 The efficiency gains of standardization.
 The resulting economies of scale translate to :
o Lower prices
o Higher quality standardized goods
o More homogenization of consumer demand
Objectives of Global Integration:
 Global integration seeks economic efficiency on a worldwide scale, promoting learning

and cross-fertilization within the global network, and reducing redundancy.
 Headquarters personnel justify global integration by citing converging demand patterns,
spread of global brands, diffusion of uniform technology, availability of pan-regional
media, and the need to monitor competitors on a global basis.
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 Companies in such industries such as aircraft manufacturing, credit cards, and

pharmaceuticals are more likely to emphasize global integration
Pressures for Global Integration
 For Strategic Coordination

 Uniform service to global customers (Importance of multinational customers)
 Global competitors (Importance of multinational competitors)
 Investment Intensity (Capitalize on converging consumer trends and universal needs)
 Availability of media that reaches customers in multiple markets
 For Operating Integration Economies of Scale Pressure for cost reductions
 Global sourcing of raw materials, components, energy, and labor
 Homogeneous needs/tastes Technology
LOCAL RESPONSIVENESS
Local responsiveness refers to meeting the specific needs of buyers in individual countries. It
requires a firm to adapt to customer needs, the competitive environment, and the distribution
structure. Companies in such industries as food and beverages, retailing, and book publishing are
likely to be responsive to local differences.
Pressures for Local Responsiveness:
 Unique resources and capabilities available to the firm.

 Diversity of local customer needs.
 Differences in distribution channels.
 Local competition Cultural differences.
 Host government requirements and regulations
FOUR STRATEGIES EMERGING FROM THE IR FRAMEWORK
HOME REPLICATION STRATEGY (EXPORT STRATEGY OR INTERNATIONAL STRATEGY)
 The firm views international business as separate from, and secondary to, its domestic
business.
 Such a firm may view international business as an opportunity to generate incremental
sales for domestic product lines.
 Products are designed with domestic customers in mind, and international business is
sought as a way of extending the product lifecycle and replicating its home market
success.
 The firm expects little knowledge flows from foreign operations.
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MULTI-DOMESTIC STRATEGY (MULTI-LOCAL STRATEGY):
 Headquarters delegates considerable autonomy to each country manager allowing

him/her to operate independently and pursue local responsiveness.
 With this strategy, managers recognize and emphasize differences among national
markets.
 Country managers tend to be highly independent entrepreneurs, often nationals of the
host country.
 They function independently and have little incentive to share knowledge and
experiences with managers elsewhere.
 Products and services are carefully adapted to suit the unique needs of each country.
Advantages of Multi-Domestic Strategies
 If the foreign subsidiary includes a factory, locally produced goods and products can be
better adapted to local markets.
 The approach places minimal pressure on headquarters staff because management of
country operations is delegated to individual managers in each country.
 Firms with limited international experience often find multi-domestic strategy an easy
option as they can delegate many tasks to their country managers (or foreign distributors,
franchisees, or licensees, where they are used)
Disadvantages of Multi-Domestic Strategy
 The firm’s foreign managers tend to develop strategic vision, culture, and processes that
differ substantially from those of headquarters.
 Managers have little incentive to share knowledge and experience with those in other
countries, leading to duplication of activities and reduced economies of scale.
 Limited information sharing also reduces the possibility of developing knowledge-based
competitive advantage.
 Competition may escalate among the subsidiaries for the firm’s resources because
subsidiary managers do not share a common corporate vision.
 It leads to inefficient manufacturing, redundant operations, a proliferation of products
designed to meet local needs, and generally higher costs of international operations than
other strategies
GLOBAL STRATEGY
 With global strategy, the headquarters seeks substantial control over its country
operations in an effort to minimize redundancy, and achieve maximum efficiency,
learning, and integration worldwide.
 It favors greater central coordination and control than multi-domestic strategy, with
various product or business managers having worldwide responsibility.
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 Activities such as R&D and manufacturing are centralized at headquarters, and

management tends to view the world as one large marketplace.
Advantages of Global Strategy
 Global strategy provides management with a greater capability to respond to worldwide

opportunities.
 Increases opportunities for cross-national learning and cross-fertilization of the firm’s
knowledge base among all the subsidiaries.
 Creates economies of scale, which results in lower operational costs.
 Can also improve the quality of products and processes - primarily by simplifying
manufacturing and other processes.
 High-quality products promote global brand recognition and give rise to customer
preference and efficient international marketing programs
Limitations of Global Strategy
 It is challenging for management, particularly in highly centralized organizations, to

closely coordinate the activities of a large number of widely-dispersed international
operations.
 The firm must maintain ongoing communication between headquarters and the
subsidiaries, as well as among the subsidiaries.
 When carried to an extreme, global strategy results in a loss of responsiveness and
flexibility in local markets.
 Local managers who are stripped of autonomy over their country operations may become
demoralized, and lose their entrepreneurial spirit.
TRANSNATIONAL STRATEGY: A TUG OF WAR
 A coordinated approach to internationalization in which the firm strives to be more

responsive to local needs while retaining sufficient central control of operations to ensure
efficiency and learning.
 Transnational strategy combines the major advantages of multi-domestic and global
strategies, while minimizing their disadvantages.
 Transnational strategy implies a flexible approach: standardize where feasible; adapt
where appropriate.
What Transnational Strategy Implies?
 Exploiting scale economies by sourcing from a reduced set of global suppliers;

concentrating the production of offerings in relatively few locations where competitive
advantage can be maximized.
 Organizing production, marketing, and other value-chain activities on a global scale.
Optimizing local responsiveness and flexibility.
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 Facilitating global learning and knowledge transfer.

 Coordinating competitive moves - how the firm deals with its competitors, on a global,
integrated basis.
Difficulty of Implementing Transnational Strategy
 In the long run, almost all firms find that they need to include some elements of localized
decision-making.
 Few people in Japan want to buy a computer that includes an English-language keyboard.
While Dell can apply a mostly global strategy to Japan, it must incorporate some multi-
domestic elements as well.
 Even Coca-Cola, varies its ingredients slightly in different markets. While consumers in
the U.S. prefer a sweeter Coca-Cola, the Chinese want less sugar
FACTORS AFFECTING STRATEGIC OPTIONS

 External Constraints
o Survival prosperity of the firm depends upon interaction with its elements – its
owners (Shareholders), customers, suppliers, competitors, government and
community
 Intra-organizational forces and Managerial power relations
o Major decisions are often influenced by power play among different interest
groups
o Strategic decisions are no exception
o Strategic Choice made by lower Mgt/Strategic management by top management
 Values and preferences and Managerial attitudes towards risk
o Successful managers tend to prefer more pragmatic, dynamic, interactive and
achievement oriented values
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o Who are risk takers for high returns in high growth less stable markets, they
prefer to pioneers or innovators, seeking early entry into new high growth markets
 Impact of the past strategy
o Choice of the current strategy may be influenced by earlier strategy
o Usually the starting point in the formulation of new strategies
o Change of strategy may call for replacement of the existing
 Information constraints
o Choice of the strategy is the availability of information
o The degree of uncertainty and risk depends upon information
o Greater amount ↓ risk and lesser amount of information ↑ risk
 Competitor’s risk
o Weighing strategic choices
o Competitor adopt a counter strategy
o Management must take into account the likelihood of the reaction, the competitors
capability to react and its impact on the strategic choice
TIME CONSTRAINTS IN CHOICE OF STRATEGY

 Time Pressure
o Deadlines for making the decisions create time pressures
 Time frame
o A aspect may be time dimension , i.e. short term or long term
 Time horizon
o Period of commitment that goes with it
o involves immediate action and has a short gestation gap
GLOBAL PORTFOLIO MANAGEMENT (GPM)

GPM, International Portfolio Management, Foreign Portfolio Management means a grouping of
investment assets that focuses on securities form foreign markets rather than domestic ones.
Examples of portfolio management:

→ Purchase of shares in a foreign company
→ Purchase of bonds issued by a foreign government
→ Acquisition of assets in a foreign company
Factors affecting Global Portfolio Investment

• Tax rates on Interest or dividends:
 Investors prefer to invest in a country where taxes on the interest or dividend is lo
 Assess their potential after-tax earnings from investment in foreign securities
o Interest rates:
 Money tend to flow to countries with high interest rates as long as the local
currencies are not expected to weaken
o Exchange Rates:

 When investors invest in security in a foreign country, their return is affected by:
 The change in the value of security
 The change in the value of currency in which security is determined
 If a country’s home currency is expected to weaken, foreign investors may decide
to purchase securities in other countries.
MODES OF GLOBAL PORTFOLIO MANAGEMENT

Buying foreign securities or depository receipts directly from the domestic stock exchange
• Portfolio Equity
• Portfolio bonds
Approaching Global Mutual Funds
Investor buys the shares of internationally diversified mutual fund
There are many open ended mutual funds available
They prefer liquidity and try to allocate portfolio in proportion to the market
capitalization
Approaching close-end country
 Close end funds are different from open ended
 former makes and investment in internationals securities against the portfolio
Buying directly the securities of domestic companies having global operation
 Indirect way of participating in global economy
 Investor does not have ample scope for reaping diversification benefits, in so far as the
systematic risk cannot be reduced to that extent
Problems of Global Portfolio Management

Unfavorable Exchange rate movement
 Cannot ignore the possibility of exchange rate changes
 Changes influence the value of foreign portfolio as well as the earnings
 If the Indian rupee depreciates, the value of Indian securities in terms of U.S dollar will
be lower
Frictions in International Financial Market
Market frictions manifesting in Governmental control, varying tax laws and explicit and
implicit transaction costs.
 Governments try to administer international financial flows, through different forms of
control mechanisms such as taxes on international flows and restrictions on outflow of
funds.
Manipulation of Security Prices
 In real world, it is government and also the big brokers that influence the security prices.
 Government influence them through monetary and fiscal policy

 Public sector institutions and bank big chunk of securities traded on stock exchange
Unequal access to information
 Wide cross cultural differences that inhibit global portfolio investment
 It is difficult to collect the information by the international investor
 In the absence of desired information, it is difficult to act rationally
ORGANIZATIONAL ISSUES IN IB
Centralization versus Decentralization:
When designing its organization, an MNE must make a particularly crucial decision, one that
involves the level of autonomy, power, and control it desires to grant to its subsidiaries.
 Decentralization allows managers of subsidiaries to make decisions which serve host
country needs best, but overall interests of the firm are compromised.
 Centralization of decision-making helps the firms retain control at headquarters and
protect the overall interests of the company, but the ability of subsidiary managers to
respond quickly and effectively to changes in their local market conditions in curbed.
Use of subsidiary Board of Directors:
Subsidiary of any international firm, particularly fully owned, will have its own board of
directors to oversee the activities of the top level managers in that subsidiary.
Four major areas in which MNE’S use subsidiary boards have been identified:
 To advice, approve, and appraise local management
 To help the unit in responding to local conditions.
 To assist in strategic planning.
 To supervise the subsidiary’s ethical conduct.

Non-traditional organizational Arrangements:
In recent years, MNE’s have increasingly expanded their operations in ways that differ from
those used in the past. These include acquisitions and joint ventures.
Role of Information technology:

International businesses rely heavily on information technology because it lends competitive
advantage to them. In fact, it is the search for competitive advantage that is driving the rapid
development and adoption of IT. IT reduces the need for hierarchy and this helps bring down
bureaucratic cost.
Integrating Mechanism:
One of the issues relating to international business relates to the need for co-ordination among
different subsidiaries and all of them with the parent company. The need for co-ordination is not
felt much in multi-domestic companies as they are basically concerned with responding to local
needs. The firms look towards integrating mechanism, both formal and informal, to help achieve
co-ordination:
Formal integrating Mechanisms:
 Direct contact
 Liaison Roles
 Teams
 Matrix structures
Informal integrating mechanisms:

Many international firms also rely heavily on informal co-ordination mechanisms. Informal
management networks can be very effective.
Control system:
A major task of an MNC’s leadership is to control the various subsidiaries whether they are
defined on the basis of function, product division, or geographical area to ensure their actions are
consistent with the firm’s overall strategic and financial objectives.
 Distance
 Diversity
 Degree of uncertainty
 Differences in Approach
Culture in International Business:
Corporate culture is the set of shared values that defines for its members what the organization
stands for, how it functions, and what it considers important.
Managing Change in International business:

Change is common in any business, more so in overseas business. Change takes place because of
environmental changes and change in technology and cultural values and mores.
MNE ORGANIZATIONAL STRUCTURES
Organizational structure is the formal arrangement of roles, responsibilities, and relationships

within an organization and is a powerful tool with which to implement strategy. A company’s
choice of structure depends on many factors, including the configuration of a company’s value
chain in terms of the location and type of foreign facilities, as well as the impact of international
operations on total corporate performance.
INITIAL DIVISIONAL STRUCTURE
Initial Division Structures

 Subsidiary
◦ Common for financial and other service firms where main export is expertise
 Export Arrangements
◦ Common among manufacturing firms, especially those with technologically
advanced products
 On-site Manufacturing Operations
◦ Responds to local government pressures and competition
◦ Reduces transportation costs
INTERNATIONAL DIVISION STRUCTURE: An international division groups all

international activities into a single division within a firm. While this structure creates a critical
mass of international expertise, the relationship between the international and domestic divisions
is often complicated.

Description
 Handles all international operations out of a division created for this purpose
Advantages
 Takes burden off the CEO
 Receives top management attention
 Promotes overall unified approach
 Develops internationally experienced managers
Disadvantages
 Separating domestic and international managers may cause differing objectives
 Home office may not be able to allocate resources globally, thereby penalizing
growth
Product Division Structure: Product divisions are very popular among international companies
today because most companies’ businesses involve a variety of diverse products. This structure
is well suited for a global strategy and enhances a company’s ability to sell or spin off certain
product lines. There will, however, likely be some duplication of activities among product
divisions and knowledge transfer between divisions is minimal.

Advantages
 Helps to manage diversity
 Able to cater to local needs
 Marketing, production, and finance can be co-ordinated on a product-by-product
global basis
Disadvantages
 Duplication of facilities and staff personnel
 Managers may pursue attractive short-term sites instead of long-term sites
 Managers spend to much time trying to tap local instead of international markets
Geographic (Area) Division Structure: A geographic division groups activities on regional

basis and is used when a firm has extensive foreign operations that are not dominated by a single
country or area. The structure is useful when maximum economies of scale and scope can be
captured on a regional rather than a global basis.
Advantages
 Reduces cost per unit
 Caters to local markets
 Makes rapid decisions to accommodate environmental changes
Disadvantages
 Difficulty reconciling a product emphasis with geographic orientation
 Ignores new research and development by division groups
Global Functional Division

 Description
◦ Organizes worldwide operations primarily based on function and secondarily on
product
 Advantages

◦Emphasizes functional expertise, centralized control, and relatively lean

managerial staff
◦ Favored by firms that
 Need tight, centralized coordination and control of integrated production
processes
 Are involved in transporting products and raw materials between
geographic areas
 Disadvantages
◦ Approach not used except by extractive companies such as oil and mining firms
◦ Coordination of manufacturing and marketing often is difficult
◦ Managing multiple product lines can be very challenging because of the
separation of production and marketing into different departments
MATRIX STRUCTURE
A matrix structure is a two-tiered structure designed to give functional, product and/or

geographic groups a common focus. It is based on the theory that the groups will become
interdependent and thus will more readily exchange information and resources with each other.
However, the dual reporting/oversight responsibilities can also create conflicts across groups
with differing objectives.
Advantages
 Allows organization to create the specific type of design to meet its needs
Disadvantages
 Complexity increases
 Difficulty arises in co-ordinating personnel

MNE STRATEGIC PLANNING
It is the process of evaluating the enterprise’s environment and its internal strengths, identifying
long- and short-range objectives and implementing a plan of action for attaining these goals.
Why Strategic Planning?
 Forces a look into the future and therefore provides an opportunity to influence the
future, or assume a proactive posture.
 Provides better awareness of needs and of the facilities related issues and environment.
 Helps define the overall mission of the organization and focuses on the objectives.
 Provides a sense of direction, continuity, and effective staffing and leadership.
 Plugs everyone into the system and provides standards of accountability for people,
programs, and allocated resources.
Growing Need for Strategic Planning
o MNE must keep track of diversified operations

o Continually changing international environment
o FDI has grown faster than both trade and world gross domestic product
APPROACHES TO FORMULATING AND IMPLEMENTING STRATEGY
– Economic Imperative
• Worldwide strategy based on cost leadership, differentiation, and
segmentation
– Political Imperative
• Strategic formulation and implementation utilizing strategies that are
country-responsive and designed to protect local market niches
– Quality Imperative
• Strategic formulation and implementation utilizing strategies of total
quality management to meet or exceed customers’ expectations and
continuously improve products and/or services
– Administrative Coordination
• Strategic formulation and implementation in which the MNC makes
strategic decisions based on the merits of the individual situation rather
than using a predetermined economically or politically driven strategy
STRATEGIC ORIENTATIONS (Pre-Dispositions)
• 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.
• Polycentric predisposition: the tendency of a multinational to tailor its strategic plan to
meet the needs of the local culture.
• Regiocentric predisposition: the tendency of a multinational to use a strategy that
addresses both local and regional needs.
• Geocentric predisposition: the tendency of a multinational to construct its strategic plan
with a global view of operations.

MNE STRATEGIC FORMULATION
First phase is the planning phase – company establishes (or clarifies) its mission and
overall objective
Second part is the implementation phase – requires the establishment of the structure,
systems, processes suitable to make the strategy work
BASIC STEPS IN FORMULATING STRATEGY
Environmental Scanning
– Process of providing management with accurate forecasts of trends related to
external changes in geographic areas where the firm currently is doing business
and/or is considering setting up operations
Internal Resource Analysis
– Helps a firm to evaluate its current managerial, technical, material, and financial
strengths and weaknesses- Mitsubishi Trading Company employs >6,000
market analysts worldwide to gather, feed & analyze market information to
parent company.
• Factor necessary to effectively compete in a market niche

• Must have people and resources to develop and sustain the necessary
KFSs (Key Factor of Success)

Internal Analysis
Internal analysis determines which areas of the firm’s operations represent strengths or
weaknesses (currently or potentially) compared to competitors, so that the firm may use
that information to its strategic advantage
It focuses on the company’s resources and operations, and global synergies
Strengths and weaknesses of the firm’s financial and managerial expertise and functional
capabilities are evaluated to determine the key success factors
Internal environmental assessment helps to pinpoint MNE strengths and weaknesses.
There are two specific areas the MNE will examine in this assessment:
physical resources and personnel competitiveness;
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 MNE will use to carry out its strategic plan.
• The degree of integration that exists within the operating units of the MNE.
– Vertical integration: To obtain control over the supply and to reduce costs.
– Virtual integration: A networking strategy based on cooperation.
• Personnel competencies are the abilities and talents of the people.
VALUE CHAIN ANALYSIS
• Value chain: The way in which primary and support activities are combined.
– Primary activities: inbound logistics, operations, outbound logistics, marketing &
sales and service.
– Support activities: firm infrastructure, HRM, technology management and
procurement.
• Analysis of the value chain can also help a company to determine the type of strategy that
will be most effective.

EXAMINING THE FIVE FORCES THAT DETERMINE INDUSTRY

COMPETITIVENESS
• One of the most common approaches to make an overall evaluation is based on the five
forces that determine industry competitiveness:
– buyers
– suppliers
– potential new entrants to the industry
– the availability of substitute goods and services
– rivalry among the competitors.

Competitive Analysis
Assess the firm’s capabilities and key success factors compared to those of its
competitors
Enables strategic planners to determine where the firm has distinctive competencies that
will give it an advantage
Most companies develop strategies around key strengths or core competencies
This stage is often called a SWOT (Strengths, Weaknesses, Opportunities, and Threats)
analysis
Global/International Strategic Alternatives
Global Strategic Alternatives determines the overall approach to the global marketplace
Entry Strategy Alternatives determine what specific entry strategy is appropriate for each
country the firm plans to operate in.
Three generic strategies
• Cost strategy: A strategy that relies on low price through the pursuit of cost reductions
• Differentiation strategy: A strategy directed toward creating something that is perceived
as being unique
• Focus strategy: A strategy that concentrates on a particular buyer group and segments
MNE STRATEGY IMPLEMENTATION
Strategy implementation is the process of attaining goals by using the organizational structure
to execute the formulated strategy properly.
There are many areas of focus in this process, some of the most important are:
– Location Consideration for Implementation

 The Country
• Industrialized countries are the recipients of most investments by
MNCs
• Offer the largest markets for goods and services
• May have legal restrictions on imports that encourage a
local presence
 Local Issues
• Access to markets
• Proximity to competitors
• Availability of transportation and utilities
• Nature of the workforce
• Cost of doing business
 Ownership and Entry Consideration for Implementation
• Wholly Owned Subsidiary

• Overseas operation that is totally owned and controlled by

an MNE
• Increasingly acquiring subsidiaries through merger or
acquisition
• Provides MNE with complete control
• Joint Venture
• Agreement in which two or more partners own and control
an overseas business
• Non-equity venture - one group provides service to another
• Equity joint venture - involves financial investment
• Functional area implementation
• Marketing, manufacturing, finance, procurement,
technology and human resources.
CONTROLLING OF IB
• For achieving the goals predefined processes and instruments are required which
influences the performance of the organization
• Control is essentially concerned with regulating the activities within the organization so
that they are accord with the expectations established in policies , plans and practices.
• A major task of the firm’s leadership is to control on various basis of function, product,
geographical and overall strategic and financial objectives.
• Objectives of Control
• It supply data for top management for monitor, evaluate and adjust
• Provide the means for coordination of the units toward common objectives
• It provide the basis for evaluating the performance of the units and managers at each
level

Personal Controls:
- Personal contact with the subordinates
- Most widely used in the small firms, where direct supervision
- Also structures the relationships between managers at different levels in MNE
- CEO may use a deal of personal contact to influence the behaviour of his immediate
subordinates.
Bureaucratic Controls
• A System of rules and procedure that directs the actions of sub-units
• Capital spending rules require headquarters management to approve exceed certain limit
Output Controls
• It involves setting goals for subsidiaries to achieve the objectives
• Objectives criteria Productivity, Profitability, Growth, Market share and quality
Cultural Controls
• It exists when employees “buy into” the norms and value systems of the firm
• Employees tend to control their own behaviour which reduces need for direct supervision
• In a firm with strong culture, self control reduces the need for other control systems
MNE CONTROL AND EVALUATION
• The strategy formulation and implementation processes are a prelude to control and
evaluation.
• This process involves an examination of the MNE’s performance for the purpose of
determining:
– how well the organization has done;
– what actions should be taken in the light of this performance.
Systems are the framework of processes and procedures used to ensure that an organization can
fulfill all tasks required to achieve its objectives. MNEs use several coordination and control
tools to manage the strategic performance of their value chains.
COORDINATION SYSTEMS
Coordination systems link the various activities of a company to counteract the tendency of
different groups of managers and employees to develop different concerns and orientations based
on their location and immediate responsibilities. Managers tap several approaches to coordinate
the operations of interdependent units. They are:
COORDINATION BY STANDARDIZATION: Companies with widely dispersed operations

often standardize the ways that employees do their jobs and deal with customers.
Standardization sets universal rules and procedures that apply worldwide and enforces
consistency in performance of activities in geographically dispersed units. Rules and regulations
about how employees interact, also called formalization, aims to reduce workplace uncertainty

and simplify the exchange of ideas and resources. Standardization is undermined when frequent
exceptions to rules are made, and is best suited for strategies that champion constancy and
predictability in stable industries. Companies with an international or geocentric strategy are
inclined to emphasize standardization.
COORDINATION BY PLAN: This type of coordination requires interdependent units to meet

common deadlines and objectives. MNEs following a multi-domestic strategy may opt to
establish objectives and schedules that give interdependent units greater discretion in developing
coordination systems. This process is often complicated by the difficulties imposed by distance
and cultural differences. Greater expense, time, and possibility of error are inherent in planning
across national boundaries.
COORDINATION BY MUTUAL ADJUSTMENT: It requires managers to interact with

counterparts to enable flexible coordination mechanisms, largely informally. MNEs that opt to
encourage mutual adjustment also adopt a formal structure and install standardization and
planning systems, but they see great value in encouraging the use of informal mechanisms that
create more incentive for parties to talk to one another. Mutual adjustment can be a very
effective coordination tool when an MNE faces new problems that cannot be defined with
customary rules or procedures. The frequent discussion and feedback needed to make mutual
adjustment work, however, can be costly in terms of both time and money.
MNE CONTROL SYSTEMS
Every MNE must regulate what its employees can and cannot do in order to avoid spinning out
of control. Control systems must ensure that people are doing what they are supposed to do and
not doing what they are not supposed to do. There are three prevalent methods of control:
• Market control which uses external market mechanisms to establish objective

standards
• Bureaucratic control which emphasizes organizational authority and relies on rules
and regulations
• Clan control that uses shared values and ideals to moderate employee behavior
MNE CONTROL MECHANISMS

Reports: Decisions on how to allocate capital, personnel, and technology continue without
interruption, so reports must be timely, accurate and informative. Written reports are crucial for
international operations because subsidiary managers so often lack substantive personal contact
with corporate staff. To permit comparisons across operations, most MNEs use reports for
foreign subsidiaries that resemble those they use domestically. The primary emphasis of an
operations report is to evaluate a subsidiary’s performance; the evaluation of its management
should generally be of secondary importance.
Visits to Subsidiaries: Within many MNEs certain members of the corporate staff spend
considerable time visiting foreign subsidiaries in order to collect information and provide
direction.
Management Performance Evaluation: MNEs should evaluate a subsidiary manager

separately from the subsidiary’s performance so as not to penalize or reward managers for
conditions beyond their control. That said, precisely what is within their control is frequently a
matter for disagreement.
Cost and Accounting Comparability: Headquarters needs to use considerable discretion in

interpreting the data it uses to evaluate and change subsidiary performance, especially if it is
comparing a subsidiary’s performance with competitors from other countries whose currencies
and accounting methods are different from its own.
Evaluative Measurements: A system that relies on a combination of measurements is more

reliable than one that doesn’t. The most important criteria tend to be budget-compared-with-
profit and budget-compared-with-revenue. Other non-financial criteria such as market share,
quality control, and host government relations are also important.
Information Systems: With ever-expanding computer and global telecommunications links,

managers can share information more quickly and easily than ever before. In fact, information
technology can facilitate both the centralization and the decentralization of operations. The
primary problems associated with information systems concern the cost of information relative to
its value, its redundancy, and its irrelevance.
MNE ORGANIZATION IN SPECIAL SITUATIONS
ACQUISITIONS
An acquired company usually does not completely mesh with the existing organization and
requires changes in structures, control systems, and cultural values in order to integrate more
fully with the company’s other operations.
SHARED OWNERSHIP
Shared ownership usually makes control harder than it would be with wholly owned operations,
but there are mechanisms that can work, such as spreading the remaining ownership among

many shareholders, contract stipulations that board decisions require more than a majority,
dividing equity into voting and nonvoting stock, and side agreements on who will control
decision making.
DYNAMIC NATURE OF PERFORMANCE
As companies grow, and particularly as they expand internationally, organizational structure and
control demands evolve. Companies change their structures and control systems to meet the new
requirements that come with growth.
CONSTRAINTS IN CONTROL SYSTEM

• Distance
• Geographical distance and cultural disparities
• But advent of email and fax transmission has replaced the human in
communication
• Diversity
• Needs locally responsive – adjusting needs of the country in which operates –
Labour, cost, currency, factors, setting standards etc.
• Degree of Uncertainty
• Data relating to that are inaccurate and incomplete
• Control implies setting goals and developing plans to meet the goals
• Differences in approach
• Approaches are different in different countries
• They are not at par in the approaches to controls are concerned
PERFORMANCE MEASUREMENT OF GLOBAL BUSINESS

Establish Standard of Performance

• Standard of performance apply to many aspect of the orgn. Such as cost, quality, and
customer service
• Incorporate more than one standard since they reflect expected levels of Mfg.
performance such as process yields, product quality, overhead spending levels etc.
Measure Actual Performance

• Measures the actual results of the process
• Manual or Automated data collection system are requied to gather information
• Standard cost system includes labour hours, machine hours, material usage etc
Analyze the Performance and Compare it with standards

• Measures the actual results of the process
• Manual or Automated data collection system are requied to gather information
• Standard cost system includes labour hours, machine hours, material usage etc.
Construct and Implement an Action Plan

• Variance analysis will highlight potential problem areas
• Indentify the source of the problem and develop plans to correct or improve the situation
• Effectiveness of performance system depends upon management’s ability to act on the
information provided
Review and Revise Standards
• Modern organizations are in a constant state of change
• Update periodically to reflect these changes
• Standards are updated once in a year during the standard setting process
• However if the variances are significant, the performance standards should be revised
during the interim periods
• Effective Performance Measurement System
• Must be integrated with overall strategy of the business
• Be a system of regular feedback and review of actual results against original plan and
performance
• Must be comprehensive, needs t include the factors that contribute to the organizations
success such as competitive performance, quality of services and innovation
• Requires the range of financial and non-financial indicators
Effective Performance Measurement System

• Owned and supported throughout the organization, the implementation must be top-down
• Measures must be fair and achievable
• System and results reporting must be simple, clear and understandable
• Need to prioritize and focus so that only the key performance indicators for the business
in strategic terms are measured

Performance Evaluation System

• “The periodic review of operations to ensure that the objectives of the enterprise are
being accomplished”
• The MNC must have an accounting information to evaluate domestic and foreign
operations
• The proper measurement of the performance of an individual, a division, a subsidiary or
even a company as a whole is not simple
Objectives of Performance Evaluation

• To evaluate the economic performance of its international operations
• To evaluate the unit’s management performance
• To monitor progress toward corporate objectives including strategic goals
• To assist the efficient allocation of resources
Various Performance Indicators
Financial Measures
 ROI (Return on Investment)
o ROI = Division return(Segment Margin)
 Investment In division
Division Controllab le Re turn
o ROI =
Controllab le Investment
 Most common method to evaluate the return on investment
 Relation ship of profit to invested capital
 It encompasses all the important factors in a single measure
 Logical motivator of the managers since they are evaluated by ROI, they will act to
maximize the ROI of their units
• Budget as Success indicator
•
Budget as a accepted tool for controlling operations and forecasting future
operations
• Clearly set out objectives of the entity
• Budget gives the managers to set their own performance standards
• Headquarters must rely to greater extent on good local or regional budgets which
help facilitate the strategic planning process
Non Financial Measure
 Market Share
 Percentage of Sales
 Exchange Variations
 Quality Control
 Productivity Improvement

TYPES OF PERFORMANCE EVALUATION SYSTEM

Budget Programming
 Prepared for planning and financial control
 Easy to compute the variance
 To measure current performance in relation to comparable performance in the past
Management Audit
 Extended financial audit system
 Monitors the quality management decisions in financial operations
 It appraises and audits the functioning of the management
PERT(Programme Evaluation Review Technique)
 It is based on CPM(Critical Method)
 It delineates a given project or program into network of activities or sub-activities with a
view to optimize the time
 The performance is measured by comparing the scheduled time and cost inputs with the
actual time and cost inputs
Management Information System
 Ongoing information system designed to plan, operate, appraise, monitor, control and
redirects the total management towards the determined targets and goals
 MIS is all pervasive and encompass the financial, physical budgeting, management audit
and control systems of the PERT

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Unit III BA5301 - International Business Management Batch: 2018 - 2020

UNIT III INTERNATIONAL STRATEGIC MANAGEMENT

Definition: A multinational corporation (MNC) or multinational enterprise (MNE) is a

CHARACTERISTICS OF MULTINATIONAL COMPANIES (MNES)

The distinctive features of multinational companies are as follows.

A multinational corporation carries on business in more than one country. Multinational

The management of multinational companies is international in character. It operates on the basis

The operation of multinational company involves the mobility of capital, technology,

A multinational company is usually a complete organization comprising manufacturing,

III Semester Page 1

 To take tax benefits in host countries;

ADVANTAGES OF MNE IN HOST COUNTRY

ADVANTAGES OF MNE IN HOME COUNTRY

III Semester Page 2

DISADVANTAGES OF MNE IN HOST COUNTRY

DISADVANTAGES OF MNE IN HOME COUNTRY

AREAS OF STRATEGIC COMPULSIONS

→ Cut –Throat Competition

III Semester Page 4

→ These are basically two distinguishable strategies applied in international marketing –

DIFFERENCES B/W STANDARDIZATION AND DIFFERENTIATION

III Semester Page 5

PRESSURES ON LOCAL (vs) GLOBAL RESPONSIVENESS

The Integration-Responsiveness Framework summarizes two basic strategic needs: To integrate

 The globalization of markets

Objectives of Global Integration:

 Global integration seeks economic efficiency on a worldwide scale, promoting learning

III Semester Page 6

 Companies in such industries such as aircraft manufacturing, credit cards, and

Pressures for Global Integration

 For Strategic Coordination

Pressures for Local Responsiveness:

 Unique resources and capabilities available to the firm.

FOUR STRATEGIES EMERGING FROM THE IR FRAMEWORK

HOME REPLICATION STRATEGY (EXPORT STRATEGY OR INTERNATIONAL STRATEGY)

III Semester Page 7

MULTI-DOMESTIC STRATEGY (MULTI-LOCAL STRATEGY):

 Headquarters delegates considerable autonomy to each country manager allowing

Advantages of Multi-Domestic Strategies

Disadvantages of Multi-Domestic Strategy

III Semester Page 8

 Activities such as R&D and manufacturing are centralized at headquarters, and

Advantages of Global Strategy

 Global strategy provides management with a greater capability to respond to worldwide

Limitations of Global Strategy

 It is challenging for management, particularly in highly centralized organizations, to

TRANSNATIONAL STRATEGY: A TUG OF WAR

 A coordinated approach to internationalization in which the firm strives to be more

What Transnational Strategy Implies?

 Exploiting scale economies by sourcing from a reduced set of global suppliers;

III Semester Page 9

 Facilitating global learning and knowledge transfer.

Difficulty of Implementing Transnational Strategy

FACTORS AFFECTING STRATEGIC OPTIONS

III Semester Page 10

TIME CONSTRAINTS IN CHOICE OF STRATEGY

GLOBAL PORTFOLIO MANAGEMENT (GPM)

Examples of portfolio management:

Factors affecting Global Portfolio Investment

III Semester Page 11

MODES OF GLOBAL PORTFOLIO MANAGEMENT

Problems of Global Portfolio Management

III Semester Page 12