International_Business_Practice

MGTAE2012 | International Business Practice | International Strategies | | Ryan Woodley-Mitchell-329606 | 5/12/2008 | Tutor: Christine Foulkes | Contents 1 Executive Summary 3 2 Introduction 3 3 Strategy Definitions 3 4 Development of a strategic plan 4 5 Choosing a Strategy 7 6 Conclusion 9 7 Case Studies 10 8 Bibliography 15 Executive Summary My coursework asks me to write a 2,000-2,500 word report which both explains and illustrates my findings on the well-formulated strategic plans of successful Multinational Enterprises (MNEs). In this report I need to consider how a MNE develops and implements a strategic plan, also, I have to support my ideas with at least 2 case studies which illustrate my understanding of the concepts associated with formulating a business strategy. Introduction This report gives a detailed and comprehensive analysis on the development and implementation of strategic plans for multinational enterprises. It is the result of in depth research on the subject and will showcase relevant case studies. With the information gathered I will analyse it and evaluate my findings to demonstrate a good understanding of strategy in the international market. The report will then demonstrate recommendations upon the findings and research. Strategy Definitions A company’s strategy can be defined as the actions taken by management to attain the goals of the company. The usual goals within a company are to maximise the value of the company for the owners and its shareholders. In order for management to achieve this they must pursue strategies that aim to achieve higher profitability and increase the company’s rate of growth over a period of time. This is achievable with a number of strategies, including: * Lower the production costs * Create value for the company’s product (value creation) * Sell more units in existing markets, and * Enter into new international markets. Value creation is a strategy adopted by a company with a strong brand name. The company knows that it can charge more than its competitors because they know that the consumer knows that it is a good product; they perceive value in the product. Lieberman and Montgomery (1988) explain ‘this is because the customer captures some of that value in the form of what economists call a consumer surplus.’ A company can lower the cost of production by increasing the margin between cost and value. This is called a Low-cost strategy. Alternatively they can make the product more attractive to the consumer by using superior design, features and making the product more reliable by offering an after sale service, e.g a warrantee period. This is called a differentiation strategy. Research and Development (R&D) can also create value within a company. Whether it’s R&D to develop the product to make it more attractive to the customer or whether it’s performed to create more efficient production processes, and cutting the cost of production, being either the production of a product available to a customer or production of a service to be delivered to a customer. You can create value by revising the production methods within the company, by reducing production costs or by producing a higher quality product. Another department within a company that can increase the value is the marketing and sales department. Marketing and sales functions can increase value through brand positioning and advertising, they can increase the value the customer perceive in the product. So if they can create a better opinion of their product in consumers’ minds, they can increase the value they put on their product. Development of a strategic plan SWOT Analysis To successfully develop a strategic plan a company has to implement extensive research. A good way of doing this is by performing a SWOT analysis of the markets that you are looking to enter. The SWOT analysis discriminates strengths and weaknesses and finds opportunities and tries to eliminate possible threats. It does this by tackling the following questions: * How can we use each strength' * How can we improve each weakness' * How can we exploit each opportunity' * How can we mitigate each threat' This form of analysis enables companies identify which direction to pursue. PEST Analysis This form of analysis identifies the political, economic, social and technological issues that arise when wanting to expand a domestic operating company into an international company. This highlights all problems with each international market that is analysed. It helps identify the best market to enter into and which market-entry strategy to adopt. Global Expansion Issues and increasing profitability This is about identifying and looking into the issues involved when considering international expansion. The issues that firms address when operating internationally or are considering international expansion are: * Expanding their market scope for their domestic product, by selling internationally * Realizing location economies for their product * Using experience picked up when operating in a foreign market and applying the skills elsewhere in the company network to reduce cost ect. The success of many MNE’s that expand in this manner is based not just on the goods and services that they sell in the international markets but also on the core competencies that underline development, production and marketing of these goods or services, Hammel and Prahalad (1994) defined that ‘The term core competence refers to skills within the firm that competitors cannot easily match or imitate.’ A few good examples of companies that have taken their domestically grown product or service and distributed it in foreign markets are Toyota, Starbucks, McDonalds and MTV. The core competencies that these companies have give them a competitive advantage making them the leaders of their particular markets around the world. In MTVs case Hill (2009) ‘is expanding rapidly outside the United States by taking the basic business model it developed at home and using that as a blueprint for establishing international operations. MTV has done the same thing, and now serves 140 nations.’ Location Strategies Nations around the world all have different conditions and circumstances that affect the marketplace. These include economic, political, legal and cultural and they all need considering when looking to enter into a new international market. The mentioned factors need considering because they can affect the cost of the market entry and the cost of doing business in the country. Now that the company is operating internationally or it is planning to expand internationally, the company should also consider where all the operations can be performed to optimise such operations. For example if you know that the design firms somewhere in the world is the best for your company’s product, as long as trade barriers and transportation costs permit you to do so, your company should base the design department in that country. Companies that do this are finding the optimal locations for particular activities within their organisational structure. This should be the case for all departments of the company in order for the company to compete globally. This is called creating a global web of value creation activities in order to maximise product quality and/or minimise production costs without compromising quality. Hill (2008) states that ‘In theory, a firm that realizes location economies by dispersing each of its value creation activities to its optimal location should have a competitive advantage vis-à-vis a firm that bases all its value creation activities at a single location. It should be able to better differentiate its product offering (thereby raising its perceived value, V) and lower its cost structure (C) than its single location competitor.’ Finding and Applying New Skills MNE’s can also learn after they have entered into a new international market. For example if a company moves production of a component to China (reduced production costs/cheap labour), after operating in China for some time they could discover a new way to do something that saves time and money. This is an advantage to operating globally. Companies doing this need to realise that new ideas can arise from anywhere within the company and can either reduce production costs or increase sales. Competitive Pressures There are two types of competitive pressure for companies that compete in a global marketplace to endure, these are: * Pressures for cost reductions * Pressures for local responsiveness For a company that feels the pressure to reduce costs they usually have to try and reduce the production costs in order to reduce the cost of the product or service for the consumer. It seems that the easiest way to do this is by outsourcing certain operations of the company to developing countries where labour is cheaper or to countries with the optimal location for production. Garten (2004) writes ‘a retailer such as Wal-Mart might push its suppliers (manufacturers) to do the same. (the pressure that Wal-Mart has placed on its suppliers to reduce prices has been cited as a major cause of trend among North America manufacturers to shift production to China.)’ There are many different factors of difference between nations that cause the pressure for local responsiveness. There are differences in consumer tastes, consumer preferences, business practices, distribution channels, competitive conditions and governmental policies and laws. In order for a MNE to be globally competitive they need to cater for these factors in all the nations they operate in. Responding to this pressure usually costs a significant amount. The MNE needs to localise advertising, marketing techniques, distribution channels and pricing techniques. MTV is a good example of getting this wrong and then re-thinking their international strategy and becoming successful. These competitive pressures make it harder for MNE’s to fulfil its strategic plan. Choosing a Strategy There are four types of strategy that can be adopted by a MNE: * Global standardisation strategy * Localisation strategy * Transnational strategy, and * International strategy Global Standardisation Strategy A MNE that pursues this strategy has a main focus on increasing profitability and profit growth overtime using economies of scale (producing more of the same product in order to reduce the cost of production per unit). The MNE that pursues this strategy wants to use this low cost form of production worldwide and not customise the product for each market it operates in. This Global standardisation of a product is not successful when pressures for localisation are high as MTV learnt in the Case study in this report. Localisation Strategy As the name suggests this is a strategy adopted by a MNE that increases profitability by customising its goods to match the tastes of consumers in different national markets. This Strategy is most successful when consumers from different markets have different tastes and preferences and the pressures of cost reduction are not as prevalent. The company that pursues this strategy usually cannot mass produce its product enough to achieve economies of scale, although, the company can make up the profit margin by pricing higher due to the customisation of the product for the local economy. MTV adopted this localisation strategy to cater for their international audiences. They did this when they realised local competitors had the advantages of focusing on local music scenes rather than global, Americanised music that is popular on MTV in the USA. MTV became successful once they localised a channel for each region or country and focused most of the programming on the local music scene. Companies that pursue this strategy must try to capture economies of scale where ever possible to further increase profitability. Companies cannot survive forever on this strategy eventually aggressive competitors are going to infiltrate the market and attempt to steal a share of the market, to prevent this the companies are going to have to react and adopt the global standardisation strategy or the transnational strategy (Evaluated in next paragraph) in order to compete. Transnational strategy Is a very difficult strategy to implement, in theory a company that pursues this strategy need to react to pressures of local responsiveness and pressures for cost reductions as well as realising that experience effects (defined previously) can be obtained from anywhere within the international structure of the company. Kolbasuk (1999) states that ‘They must try to realise location economies and experience effects, to leverage products internationally, to transfer core competencies and skills within the company, and to simultaneously pressures of local economies.’ The difficulty behind this strategy is found in the fact that this strategy places conflicting demands upon the company. International Strategy Companies following this strategy usually find themselves in a monopoly without any competitors, leading to low pressures in both local responsiveness and cost reduction. It is usually for companies that produce a product or service that caters for universal needs. This means that the companies pursuing this strategy can afford to duplicate production lines in each international market sector and they can localise the product to individual markets without any issues. There is a downside to this strategy, eventually competitors will emerge and they will adopt efficient strategies in marketing and production. This will mean that the companies that were sailing along with the international strategy without any pressures suddenly have the pressure of cost reduction to react to in order to remain competitive. Conclusion It has become apparent when investigating this subject that it is definitely impossible for two companies, no matter how similar to follow the same path when pursuing international expansion in order to become a successfully operating MNE. There are many factors that have been identified, which can affect the path to international expansion and the market pressures can be brought upon a MNE at any time during their time operating internationally. The skill is to be constantly aware of all activity in all the market-places you operate in, anticipate and react to threats that occur. The international arena is highly aggressive and many more factors obstruct success. This highlights the importance of correct strategic selection for Multi-National Enterprises. Case Studies Case Study One- MTV Networks MTV Networks has become a symbol of globalisation. Established in 1981, the US based music TV network has been expanding outside its North American base since 1987 when it opened MTV Europe. Today MTV Networks figures that every second of the day 2 million people are watching MTV around the world, the majority outside the USA. Despite its international success, MTV’s global expansion got off to a weak start. In the 1980’s it piped a single feed across Europe almost entirely composed of American programming with English-speaking vee-jay’s. Naively, the networks US managers thought that Europeans would flock to American programming. But while viewers shared a common interest in a handful of global superstars, their tastes turned out to be surprisingly local. What was popular in Germany might not be popular in the United Kingdom. Many staples of the American music scene left Europeans cold. MTV suffered as a result. Soon local copycat stations were springing up in Europe that focused on the music scene in individual countries. They took viewers and advertisers away from MTV. As Tom Freston, Chairman of MTV Networks, explained, “We were going for the most shallow layer of what united viewers and brought them together. It didn’t go too well.” MTV changed their strategy in the 1990’s. It broke its service into feeds aimed at national or regional markets, first in Europe, and then in the rest of the world. Thus today MTV offers local feeds for the United Kingdom and Ireland; another for Germany, Austria, and Switzerland; one for Scandinavia; one for Italy; one for France; one for Spain; one for Holland; and so on. In Asia MTV has an English-Hindi channel for India, separate Mandarin feeds for China and Taiwan, a Korean feed for South Korea, a Bahasa-language feed for Indonesia, Japanese feed for Japan and so on. Digital and Satellite technology has made the localisation of programming cheaper and easier. MTV Networks can now beam half a dozen feeds of one satellite transponder. While MTV exercises creative control over these different feeds, and while all the channels have the same familiar frenetic feel and look of MTV in the US, a significant share of the programming and content is now local. Moreover, an increasing share of programming is local in conception. Although a lot of programme ideas originate in the US, with equivalents of staples such as the real world in different countries, an increasing share of programming is local in conception. In Italy, MTV Kitchen combines cooking with a music countdown. Erotica, which features a panel of youngsters discussing sex, airs in Brazil. The Indian channel produces 21 home-grown shows hosted by local vee-jay’s who speak ‘Hinglish’, a city-bred cross between Hindi and English. And of course each features music videos by locally popular performers. This localisation push has produced big benefits for MTV, allowing the network to capture viewers back from local imitators. Case Study Two- Wal-Marts Global Expansion Established in Arkansas in 1962 by Sam Walton, over the last four decades Wal-Mart has grown rapidly to become the largest retailer in the world with sales of $330 billion, 1.8 million associates ( Wal-Mart’s term for employees), and almost 7,000 stores. Until 1991, Wal-Mart’s operations were confined to the USA. There it established a competitive advantage based upon a combination of efficient merchandising, buying power, and human relation policies. Among other things, Wal-Mart was the leader in implementing information systems to track product sales and inventory, developed one of the most efficient distribution systems in the world, and was one of the first companies to promote widespread stock ownership among employees. These practices led to high productivity that enabled Wal-Mart to drive down its operating costs, which it passed on to customers in the form of everyday low prices, a strategy that enabled the company to gain market share first in general merchandising, where it now dominates and later in food retailing, where it is taking market share from established supermarkets. By 1990, however, Wal-Mart realised that its opportunities for growth in the US were becoming limited. Management calculated that by the early 2000’s, domestic growth opportunities would be constrained due to market saturation. So the company decided to expand globally. Initially, the critics scoffed. Wal-Mart, they said, was too American a company. While its retailing practices were well suited in America, they would not work in other countries where infrastructure is different, customer tastes and preferences vary, and where established retailers are already dominant. Unperturbed, in 1991 Wal-Mart started to expand internationally with the first opening in Mexico. The Mexican operation was established as a joint venture with Cifera, the largest local retailer. Initially, Wal-Mart made a number of missteps that seemed to prove the critics right. Wal-Mart had problems replicating its efficient distribution system in Mexico. Poor Infrastructure, crowded roads, and a lack of leverage with local suppliers, many of which could not or would not deliver directly to Wal-Mart stores or distribution centres, resulted in stocking problems and raised costs and prices. Initially Wal-Mart in Mexico were some 20% above prices for comparable products in the company’s US stores, which limited Wal-Marts ability to gain market share. There were also problems with merchandise selection. Many of the stores in Mexico carried items that were popular in the US. These included ice skates, riding lawnmowers, leaf blowers, and fishing tackle. Not surprisingly these did not sell well in Mexico, so managers would slash prices to move inventory, only to find the company’s automated information systems would immediately order more inventory to replenish depleted stock. By the mid-1990’s, however, Wal-Mart had learned from its early mistakes and adapted its Mexican operations to match the local environment. A partnership with a Mexican trucking company dramatically improved the distribution system, while more careful stocking practices meant that the Mexican stores sold merchandise that appealed more to local tastes and preferences. As Wal-Mart’s presence grew, many of Wal-Mart’s suppliers built factories near Mexican distribution centres so that they found that they could better serve the company, which helped to further bring down inventory and logistics costs. Today, Mexico is leading light in Wal-Mart’s international operations. In 1998, Wal-Mart acquired a controlling interest in Cifera. By 2005, Wal-Mart was more than twice the size than its nearest rival in Mexico with some 700 stores and revenues of $12.5 billion. The Mexican experience proved to Wal-Mart that it could compete outside the US. It has subsequently expanded into 13 other countries. Wal-Mart entered Canada, Great Britain, Germany, Japan and South Korea, by acquiring existing retailers and transferring its information systems, logistics, and management expertise. In other nations Wal-Mart established its own stores. As a result of these moves, By mid-2006 Wal-Mart had over 2700 stores outside the US, employed some 500 000 associates, and generated more than $62 billion. In addition to greater growth, expanding internationally has brought Wal-Mart two other major benefits. First, Wal-Mart has been able to reap significant economies of scale from its global buying power. Many of Wal-Mart’s key suppliers have long been international companies; for example, GE (appliances), Unilever (food Products) are all major Wal-Mart suppliers that have long had their own global operations. By building international reach, Wal-Mart has used its enhanced size to demand deeper discounts from the local operations of its global suppliers, increasing the company’s ability to lower prices for its consumers, gain market share, and ultimately gain greater profits. Second, Wal-Mart has found that that it is benefitting from the flow of ideas from 14 countries it now competes. For example, a two-level store in New York State came about because of the success of multi-level stores in South Korea. Other Ideas, such as wine departments in its stores in Argentina, have now been integrated in to stores worldwide. Wal-Mart realised that if it didn’t expand internationally, other global retailers would beat it to the punch. Wal-Mart faces significant global competition from Carrefour in France, Ahold in Holland and Tesco in the UK. Carrefour, the world second largest retailer, is perhaps the most global of the lot. The pioneer of the hypermarket concept now operates in 26 different countries and generates more than 50% of its sales outside of France. Compared to this, Wal-Mart is laggard, with less that 20% of its sales in 2006 generated in international operations. However there is room for significant global expansion. The global retail market is still very fragmented. The top 25 retailers controlled less than 20% of worldwide retail sales in 2006, although forecasts the figures could reach 40% by 2010, with Latin America, South-East Asia, and Eastern Europe being the main battlegrounds. Bibliography Gunther. M, (2004). “MTV Passage to India,” Fortune,August 9, 2004, pp117-122 Samor. G, Rohwedder. C, Zimmerman. A, (2006). “Innocents Abroad'”, Wall Street Journal, May 16, 2006, p B1 Lieberman. M and Montgomery. D, (1988). “First Mover Advantages,” Strategic Management Journal 9 (special issue), pp41-58. Hamel.G and Prahalad. C. K, (1994). Competing for the Future, (Boston, Harvard Business School Press) Hill. C. W. L, (2009). International Business: Competing in the Global Marketplace, 7th Edition, (New York, McGraw Hill/Irwin), pp427 Hill. C. W. L, (2009). International Business: Competing in the Global Marketplace, 7th Edition, (New York, McGraw Hill/Irwin), pp429 Garten. J. E, (2004). “Wal-Mart Gives Globalisation a Bad Name”, Business Week, March 8, 2004, pp24 Kolbasuk. M, (1999). “P&G Jump-Starts Corporate Change” Information Week, November 1, 1999, pp30-34