As noted earlier, one of the characteristics of MNE affiliates is that they are linked by a stra- tegic plan. As a result, units that are geographically dispersed and/or have diverse product offerings all work in accord with a strategic vision. The formulation and implementation of strategy will be discussed in detail in Chapter 8. Here we will look at the basic nature of the strategic management process and how select MNEs use strategic planning in managing their far-flung enterprises.
Strategic management of MNEs: an introduction
The strategic management process involves four major functions: strategy formulation, strategy implementation, evaluation, and the control of operations. These functions en- compass a wide range of activities, beginning with an environmental analysis of external and internal conditions and an evaluation of organizational strengths and weaknesses.
These activities serve as the basis for a well-formulated strategic plan; and by carefully
✔ Active learning check
Review your answer to Active Learning Case question 3 and make any changes you like. Then compare your answer with the one below.
3 In what way did Euro Disney reflect the strategic philosophy of Walt Disney as a multinational enterprise?
One way in which Euro Disney reflects the strategic philosophy of the company as an MNE is that Disney is willing to modify the park to meet the preferences of local visitors by catering to their markets. Euro Disney is not identical to Disneyland in California. The focus on European roots and culture is now an integral part of the park. In addition, notice how the company used an international approach to funding the project. The monies were not all raised in France. The government helped, but so did banks, private investors, and Disney itself. And when the operation ran into trouble, the company was willing to reconfigure its arrangement and give up some ownership and some revenue in order to get things back on an even keel.
Figure 2.3 The strategic management process in action
Basic mission The reason that a firm is in existence
implementing and controlling this plan, the MNE is able to compete effectively in the international arena. Figure 2.3 illustrates the five specific steps in this overall process.
Steps in the strategic management process
Strategic planning typically begins with a review of the company’s basic mission, which is determined by answering the questions: What is the firm’s business? What is its reason for existence? By answering these questions, the company clearly determines the direction in which it wants to go. Shell Oil, BP Amoco, and Texaco, for example, see themselves as being in the energy business, not in the oil business, and this focus helps to direct their long- range thinking. AT&T, Sprint, and MCI view themselves as being in the communications business, not in the telephone business. Coca-Cola and PepsiCo see themselves in the food business, not in the soft-drink business. One of their strategic rivals is Nestlé.
In recent years a growing number of MNEs have revised their strategic plans because they realized that they had drifted too far away from their basic mission. Unilever, the giant Anglo-Dutch MNE, is a good example. After assessing its operations, the company con- cluded that it needed to adopt a “back to the core” strategy. As a result, it sold a wide range of peripheral operations, including transport, oil, milling, wallpaper, floor coverings, spe- cialty chemicals, and turkey breeding. Today Unilever confines its business to consumer products goods: food, health and wellness products, personal care, and home care. The firm’s strong research and development labs continue to develop new products in each of these areas, thus helping Unilever remain competitive in worldwide markets.14
After determining its mission, an MNE will evaluate the external and internal environ- ment. The goal of external environmental analysis is to identify opportunities and threats that will need to be addressed. Based on opportunity analysis, for example, a number of MNEs have been moving into the former East Germany. Adidas-Salomon now produces a large portion of its textiles in this part of Germany. Metro, a German retailer, now has a large presence in Hungary, Poland, the Czech Republic, and Russia.15These companies all see the region as having tremendous financial potential.
However, these expansion decisions were made only after the companies had analyzed the potential pitfalls, and there were many of them. One is that eastern Germans lived in a centrally-planned bureaucracy for almost a half century. Could they adapt to a free- market economy? Would they be able to accept individual responsibility in a country where the state was no longer the major provider? Would they be able to upgrade their inefficient factories and improve the quality of output? Many MNEs believed that, with an influx of capital, the country’s economy could be turned around. At the same time, their external environmental analysis showed that it would be necessary to increase worker productivity, improve the local infrastructure, and bring in qualified managers to run the operations until a local cadre could be developed.
The purpose of internal environmental analysis is to evaluate the company’s financial and personnel strengths and weaknesses. Examining its financial picture will help the MNE
decide what it can afford to do in terms of expansion and capital investment. Examining its financial picture will also help it to identify areas where cost cutting or divestment is in order. By making an evaluation of its personnel, an MNE will be able to determine how well its current workforce can meet the challenges of the future and what types of people will have to be hired or let go. In addition, the firm might like to include in its internal
Nestlé
With 230,000 employees, 6,000 brands, and factories spread around the world, Nestlé is the world’s largest food company.
Nescafé instant coffee, Perrier water, and KitKat chocolate are just some of the products that the company produces and markets around the world.
A significant portion of Nestlé’s revenues derives from devel- oping countries. In 2002, developing nations in Latin America, Africa, and the Middle East accounted for 33.7 per cent of all sales. Nestlé’s strategy in these nations consists of purchasing successful local brands, keeping their original names, and adding its own brand. In Peru, for instance, the company purchased ice cream and chocolate maker, D’Onofrio, and continued to market its products under the D’Onofrio brand, capitalizing on the reputation of this brand while adding the Nestlé logo as a parent brand to all packaging. Not a bad analogy to the entire Nestlé business where a “think local”
philosophy is meshed together at the multinational level.
Entering third-world countries can be risky and unrewarding.
For one thing, there is a currency risk. During 1998–2002, Nestlé’s volume sales in Brazil rose by 10 per cent but because of the devaluation of Brazil’s currency, revenues in Swiss francs fell by 30 per cent. Products must be adapted to the local tastes. In China, red bean and sesame-flavored chocolate ice cream cubes are two of the more than 100 flavors of ice cream that Nestlé markets in China alone. Political risk, in terms of expropriation or war, is also higher in developing countries.
Dealings with third-world countries may also affect a com- pany’s reputation in its large industrialized markets. In 2002, Nestlé demanded that the Ethiopian government deliver $6 million for a company that was expropriated in 1975 under a communist regime. Non-governmental organizations (NGOs) and concerned citizens were outraged. At the time, Ethiopia was undergoing a famine that threatened as many as 11 mil- lion citizens with starvation. The Ethiopian government of- fered $1 million, but Nestlé rejected the offer. Oxfam decried the company’s stance claiming that one of the richest com- panies in the world was trying to squeeze out as much as it could from one of the poorest countries in the world. A spokesperson for the World Bank, which was brokering the
deal, stated that the $1 million offer seemed reasonable and accused Nestlé of trying to get as much as it could. The back- lash led Nestlé to accept $1.5 million in compensation and to donate the entire amount for famine relief in the country.
Website: www.nestle.com.
Sources: www.nestle.com;“Nestlé in Ethiopia Compensation Row,”
BBC.co.uk, December 18, 2002; “Selling to the Developing World,”
Economist.com, December 11, 2003.
INTERNATIONAL BUSINESS STRATEGY IN ACTION
Source: Corbis/Swim Ink 2, LLC
environmental analysis the reputation of its products, the structure of its organization, and its relationship with suppliers.
Internal and external analyses will also help the MNE to identify both long-range goals (typically two to five years) and short-range goals (less than two years). The plan is then broken down into major parts, and each affiliate and department will be assigned goals and responsibilities. This begins the implementation process. Progress is then periodically evalu- ated and changes are made in the plan. For example, an MNE might realize that it must stop offering a particular good or service because the market is no longer profitable or it might create a new product in order to take advantage of an emerging demand. Figure 2.3 describes the strategic management process. External and internal environmental assess- ments are discussed in more detail in Chapter 8.
The box International Business Strategy in Action: Nestlé provides an example of some aspects of the strategic management process.
✔ Active learning check
Review your answer to Active Learning Case question 4 and make any changes you like. Then compare your answer with the one below.
4 Did Disney management conduct an external environmental analysis before going forward with Euro Disney? Explain.
The company conducted a thorough external environmental analysis. First, the location of the European popula- tion was examined to identify how far people would have to travel to visit the park. Second, the company exam- ined the cost of building the park and identified potential sources of funds. Third, the firm determined how the park was to be built and where it would find the necessary contractors. Fourth, the company made a forecast regarding the number of visitors to the park each year, how much they would spend, and what the firm’s profit would be on the venture.
However, the company failed in its examination of the cultural preferences of Europeans and the relative competitiveness of its European operation against its North American operation. In particular, Disney failed to take into consideration the effect of exchange rates on the affordability of traveling to France as opposed to Florida to visit its amusement park.