IBM

UNIT 8

International Planning and Strategy

(Adapted by Dorothy Pringle)

Getting Started: Vision and Mission

Strategy starts with a vision and a mission. Vision is the idealization of what an MNE firm wants
to be. It expresses, in broad terms, its ultimate goal.
The MNE’s mission defines its business, its objectives, and its approach to achieving them.

Rhetoric to Reality. Translating the lofty rhetoric of an MNE’s vision and mission into
relevant programs and realistic performance standards, one can imagine, is tough. Increasing the
challenge for the typical MNE is the fact that its vision and mission statements must work in
many businesses run by many different people operating in many different environments.

Moving Onward: Strategic Planning

Planning is a comprehensive process that determines how the firm can best achieve its goals.
Managers use various frameworks to organize strategic planning. Most frameworks follow a
similar logic and share common steps, typically cycling through some variation of the following
sequence:
(1) identify potential product markets and assess each for opportunities and threats;
(2) assess the preferences of targeted customer segments;
(3) analyze internal strengths and weaknesses relative to customers’ expectations and
competitors’ competencies;
(4) formulate a strategy;
(5) set clear and compelling objectives;
(6) formalize programs, policies, and tactics;
(7) acquire resources, create capabilities, and develop competencies; and
(8) monitor thresholds and adjust standards given change in performance, rivals, or markets.

MAKING SENSE TO MAKE STRATEGY

The complexity of the global business environment can easily overtax strategic planning.
Preempting analysis paralysis spurs managers to integrate sensemaking perspectives into
strategic planning. Sensemaking involves studying shifting markets, competitors’ initiatives, and
changing consumer behaviors in order to determine how economics, politics, culture, trade, and
industry influence the company’s plans. Managers apply a range of sensemaking perspectives.
One commonly sees variations of the Industrial Organization and the Great by Choice outlooks.
Industrial Organization (IO). The IO outlook sets the external environment as the primary
determinant of an MNE’s strategic plan. The IO model holds that markets tend toward perfect
competition. Strategic planning processes anchored in the IO sensemaking perspective assess
how an industry’s structural characteristics shape competitive dynamics that, in turn, determine
the profitability of different choices

Great by Choice Outlook. In reality, some industries are, and persistently remain, far from
perfectly competitive. In these settings, proprietary advantages, high entry barriers, or
oligopolistic dynamics, for instance, produce market imperfections. These sorts of situations
spotlight an alternative sensemaking perspective. That is, manager’s insight in terms of acquiring
resources, organizing capabilities, and developing competencies, rather than the structure of the
industry, fundamentally shapes strategic success. This view, generally referred to as Great by
Choice, highlights the power of bright managers and their keen sense of devising a strategy that
is difficult, if not impossible, to copy.

THE ROLE OF RESOURCES, CAPABILITIES, AND COMPETENCIES

The IO Model and the Great by Choice outlooks both speak to the importance of resources,
capabilities, and competencies in supporting a strategy that creates competitive
advantages. Resources are inputs into an MNE production process. A capability is the capacity
for resources to perform an activity in an integrated manner. Managers bundle resources and
capabilities to create a core competency.

0THE QUEST TO CREATE VALUE

We follow convention and define value in economic terms, specifying it as the difference
between the cost of making a product and the price that customers are willing to pay for it. In
broad terms, an MNE can create value by:
i. Perfecting processes and products in order to do things more efficiently than others,
thereby making products for lower costs than can competitors (the strategy of cost
leadership).
ii. Alternatively, MNE can create value by doing something no one else can do, and do it
effectively, thereby making products for which consumers pay a premium price (the
strategy of differentiation).
iii. In some situations, an MNE insightfully combines the two approaches (the strategy of
integrated cost leadership/differentiation).

a)The Cost Leadership Strategy. The cost leadership strategy aims to make a product at a
given level of quality for a cost below those of competitors.
Risk of the Cost Leadership Strategy. The cost leadership strategy has several risks, including
(1) disruptive technologies change efficiency standards; (2) customer’s needs change; and (3)
cheaper, and better products from rivals.

b)The Differentiation Strategy. The differentiation strategy champions developing products

that customers value and that rivals find hard, if not impossible, to match or copy. Products are
differentiated on a variety of tangible and intangible dimensions.
Risk of the Differentiation Strategy. The differentiation strategy has several risks, including (1)
customers’ expectations change; (2) customers no longer see sufficient value to justify the price
premium; (3) a rival introduces a newer, cooler, higher-performing alternative; (4) counterfeits
that offer a cheaper imitation.
c) The Integrated Cost Leadership/Differentiation Strategy. The differentiation strategy calls
for continual innovation, whereas cost leadership champions sustainable efficiency. The
integrated cost leadership/differentiation strategy aims to do both. The integrated cost
leadership/differentiation strategy provides customers with relatively lower-cost products that
also have differentiated features.
Risks of the Integrated Cost Leadership/Differentiation Strategy. The key threat to the
integrated cost leadership/differentiation strategy is getting “caught in the middle,” falling short
of optimizing production or sufficiently differentiating.

ORGANIZING VALUE CREATION: THE VALUE CHAIN

Just as strategic planning helps managers develop their strategy; value chain analysis helps them
assess how activities create value. Value-chain analysis helps managers understand the potential
and performance of resources and capabilities, thereby clarifying cost structures and value
creation. The value chain is the set of linked activities the company performs to design, make,
market, distribute, and support a product. A value chain dis-aggregates a firm into (1) primary
activities that design, make, sell, and deliver the product; and (2) support activities that
implement the primary activities.

Configuring the Value Chain

How an MNE distributes value activities around the world is the matter of configuration—
essentially, the task of deciding which activity to do where. Besides the option to sell in the 214
markets that compose the global business environment, the MNE has the option to install
operations in each. In theory, configuration ranges from concentrated (the MNE performs all
value chain activities in one location) to dispersed (the MNE performs different value-chain
activities in different locations).
Location Advantages. Differing environmental conditions, given differing
political, legal, and market features, means costs differ from country to country. The option to go
anywhere to do anything pushes MNEs to exploit location advantages.
 Economies of Scale. overcoming the liability of foreignness—namely, the additional
costs that an MNE operating outside its home country incurs above those experienced by
a local firm—requires achieving some offsetting efficiencies, no matter which strategy an
MNE chooses. Technically, an MNE captures economies of scale in terms of size,
output, or scale of operation. Increasing output lets it distribute fixed costs across a higher
number of units, thereby systematically decreasing per-unit cost.
 Experience and Learning Effects. Industry and firm conduct confirm that low costs
create strategic advantage. Hence, MNEs look to capitalize on the scale and scope of their
operations to exploit potential cost minimization via experience and learning effects.
The Risks of Configuration Choices. Configuration decisions face the risks of unpredictable
market change. Disruptions, such as a regime change, material shortages, labor unrest, or
currency instability, can quickly convert an efficient location into a costly one.

GLOBAL INTEGRATION VERSUS LOCAL RESPONSIVENESS

Competing in the global marketplace puts an MNE on the horns of a dilemma: should it single-
mindedly standardize products and processes and resolutely exploit location effects to maximize
the efficiency gains of global integration? Or, should it adapt products and processes to the
unique situations in each market in order to maximize the effectiveness benefits of local
responsiveness?

The Potential for Standardization

The convergence of national markets, standardization of business, and efficiency
imperatives push MNEs to integrate activities.

The Characteristics of Consumer Preferences

Differences in local consumers’ preferences endure due to cultural redisposition, historical
legacy, and latent nationalism. Responding to local customers’ preferences requires customizing
products and processes. Adaptation reduces the efficiencies of standardization, thereby
aggravating the liability of foreignness, inflating operational costs, and reducing value creation.

The Effect of Institutional Agents

Aspects of standardization endorse global integration whereas the issue of divergent consumer
behaviors endorses local responsiveness. A third factor, institutional agents and their policy
agendas, can, at different times, support either scenario. Various transnational institutions, such
as the IMF, WTO, and World Bank, build an increasingly seamless global business environment.
On the other hand, institutional agents, particularly host governments, often strongly encourage,
if not compel, local responsiveness.

Global Integration and Local Responsiveness: Mapping their Interaction

Operating internationally calls for configuring and coordinating operations in ways that reconcile
the competing demands of global integration and local responsiveness. The Integration-
Responsiveness (IR) Grid provides a straightforward framework to organize analysis (see
Figure 12.4). Procedurally, it positions an industry in the quadrant that represents its sensitivity
to the dual imperatives. As such, it provides executives a framework to interpret the challenge.
The IR Grid helps managers map their strategic options given prevailing pressures for
standardization and adaptation in their particular industry
INTERNATIONAL CORPORATE-LEVEL STRATEGIES
Corporate-level strategy determines the actions an MNE takes to gain a competitive advantage
by selecting and managing its business across a group of nations. A corporate-level strategy:
(1) articulates how managers plan to reconcile global integration and local responsiveness in
ways that support the MNE’s vision and mission,
(2) stipulates how managers will integrate the MNE’s various parts into a strategic whole, and
(3) specifies the decision-making role the headquarters and subsidiaries take doing so. The
international, localization, global standardization, and transnational strategies anchor
contemporary interpretation.
International Strategy. The international strategy emphasizes the transfer of core
competencies from the domestic operation to foreign subsidiaries. It allows for limited local
customization. Examples of companies using this strategy include Airbus, Apple, and Google.
Advantages. The international strategy works well when an MNE’s products or processes speak
to a universal customer preference.
Limitations. Headquarters’ confidence in the superior competitiveness of its competencies
discourages local adaptation. Initially, this outlook does not carry high risks. But, as an MNE
expands its global operations, a one-way view of the world may miss opportunities or misread
threats in foreign markets. Moreover, the international strategy sustains strong performance as
long as foreign rivals scramble futilely.
The Localization Strategy. The localization strategy encourages decentralized decision-
making so that local subsidiaries can adjust value activities to local circumstances.
Advantages. The localization strategy superbly speaks to the unique features of consumer
preferences, market situations, and environmental context found in a national market. It drives
MNEs to customize products and processes. The localization strategy gives the MNE’s local
units a distinctive advantage against in-country competitors who lack the benefits provided by
the parent company.
Limitations. The localization strategy, by encouraging operational overlap, increases overhead
expenses.
Global Strategy. A global strategy requires worldwide consistency and standardization in
order to be effective. Firms that choose the global strategy face strong pressures for cost
reductions but weak pressure for local responsiveness. Operationally, MNEs that adopt a global
strategy usually are or aim to become the low-cost player in their industry. This generally
requires global-scale production facilities in a few low-cost locations.
Advantages. The transnational strategy reconciles global integration and local responsiveness in
ways that leverage the MNE’s core competency throughout worldwide operations.
Limitations. The transnational strategy is difficult to implement in practice, given the challenges
of complicated agendas, high costs, and cognitive limits.

Transnational Strategy. The transnational strategy targets the efficiency of global

integration, the effectiveness of local responsiveness, and the systematic diffusion of
innovations.
Advantages. The global strategy exploits economies of scale, learning effects, and location
economies in order to translate the MNE’s resources and capabilities into core competences that
support cost leadership worldwide.
Limitations. The cost sensitivity of the global strategy leaves MNEs little latitude to customize
processes or products to local conditions; each change reduces efficiency. Hence, an MNE’s
success is a function of the validity of the ‘one type product fits all customers’ needs worldwide’
thesis.