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Strategic planning, a necessary tool to aid in the strategic decision making process of a firm covering long range of time. The process involves managing resources efficiently and analyzing the environmental threats and opportunities as well as the strength and weaknesses of the firm (Lorange, 1978). This essay will explain and disagree with the statement that the only difference of strategic planning in domestic and international markets are the currency and language difference. For an MNC to be headquartered globally, its strategy has to take into account many other factors but the essay will discuss only about how the firm’s resources are allocated and the economical-cultural-political forces in the macro environment that affect them.
A firm has to deal with the allocation of resources internationally in order to exploit the opportunities and threats into its advantage. If the targeted market is saturated with potential new entrants, existing international competitors, and substitute players, fierce competition and low profits are to be expected. Resources are scarce and they are required to support and sustain attacks from competitors.
Furthermore, they have to monitor the country’s economic state such the consumption power including its interest rate which is critical to borrowing funds locally for investment. These factors are important when deciding whether to expand into foreign markets or not. For firms introducing their domestic matured product internationally, the product life cycle will be different from one country to another. Accordingly, investment can be modified and market share can be dominated more efficiently. Therefore, economically, strategies need to be low-risk, high value and sustainable.
Hamel and Prahalad, in their work, described the strategies used by foreign MNCs when competing against each other. When a global firm uses financial resources of one subsidy to fight a competitor in another subsidy, it is pursuing a cross-subsidization strategy. When a firm competes with a larger competitor, it is not enough that it is financially equipped. It needs to funnel resources globally back to the defending market or raise them locally if cross-border movements are hindered by exchange risk or regulations. However, caution is needed to ensure that the firm’s borrowing needs are not revealed as it can lose strategic competitive surprise.
One scenario was “thrust and parry” which uses cross-subsidization when an aggressive MNC attack another MNC in its domestic market, the defensive MNC retaliate by targeting a market where its aggressor is most vulnerable with least cash flow. For example, in international tire market Michelin used its strong European profit base to attack Goodyear’s American home market. Goodyear, retaliated back in European instead of in US market because Michelin would expose only a small amount of its worldwide business in US with very little to lose. Goodyear, on the other hand, would sacrifice margins in its largest market.
Firms have to choose between the cost effectiveness of off-shore sourcing their production and the competitive effectiveness based on the ability to retaliate in competitor’s key markets. The main concept here is not to sell at price lower than the market’s but rather to squeeze the competitor’s margins just enough to dry up its attacking strategy to force its expansion down. Price level difference may provide not only the means but also the motivation for cross-subsidization. Competitiveness due to labor cost and scale advantage itself is vulnerable since labor costs change due to development of economies or exchange rate fluctuate. Low cost manufacturing locations change, from Japan to Korea, Thailand to China as well as scale-based cost advantages change, particularly due to manufacturing technology.
Here, resources not only refer to monetary aspects but also human capital of the firm and its knowledge. Firms with enough skilled workforce and management skills can create transfer their learning effects from domestic to their international subsidiaries and if these skills are unique, they can become the firm’s competitive advantage. For example, America’s Silicon Valley host the top consumer electronics and technology research centers such as Apple and Intel, meaning the attractiveness of that location is its workforce’s innovative culture. While thinking of different strategies, there are external threats such as the culture shock where foreign entry are resisted due to the attitude of local employees and therefore, firms should consider quality of the workforce when strategizing new entries. In domestic market, there is no difference in culture or no ambiguity of the workforces’ average skill level. On a legal perspective, tough labor laws and union pressures may hinder the firm’s efficiency and different strategic human resource management will be needed to overcome this.
However, that’s not the complete picture. For example, some countries have restrictions concerning remittance of funds and some necessitates the production to be carried out domestically. So, country analysis need to be carried out to take into account factors such as corruption, political stability and the extent of tax grants before developing international strategy. Compared to domestic market, all these factors are known. Host and home country’s foreign policy may affect the strategy such as government support for threatened business if it has important interdependencies for example Mittal’s acquisition of world steel market share forced European countries’ steel manufacturers to team up and create a single brand called Arcelor. This concept of (protectionism) protecting infant industries who are not strong enough for global competition is used frequently.
For example, Sony and Mitsubishi’s entry into European market alerted respective governments of a possible industry takeover. So, these governments frustrated the Japanese firms by restricting offshore sourcing or worker layoffs or closing down manufacturing plants hindering their rational production and cost advantage. This helped European firms to close down the competition and cost advantage gap. However, the Japanese had a long-term strategy and they simply partnered with willing UK firms, thus entering and capturing the European market share. Their technique was low-risk, low-profile supplier strategy which assisted in their global brand dominance.
Other strategies to influence governments include information and financial incentives. Information strategy refers to lobbying the key officials to obtain special treatment or lifting entry barriers. By international trade organizations such as WTO to negotiate with foreign governments, firms can achieve their strategy more effectively. Another method is to induce policy makers through direct pressure by giving incentives. This can be regarded as unethical but in some government, this is viewed as gift giving or necessary to accelerate procedure. For example, in China, guangxi is practiced openly which means fulfilling someone’s (politicians’) needs and working alongside them in order to achieve something in return. Guangxi is not considered bribery in China as it is common and understood in the business culture.
As the statement has mentioned, currency exchange problems are present when transferring funds from domestic to international markets, especially when amount is large. It is plausible for only the two mentioned difference but under certain conditions. For example, a firm exporting steel products under license from home country without any localization of products to foreign market. Then, there can be only exchange rate uncertainty for revenue transfer and communication issues with the licensee. In this way, there is no control over assets such as human resource or capital but the exported product. But these simple assumptions will not apply if domestic scoped firms are challenged by foreign competitors. They will have to play by the rules of global competition to survive and that takes into account many factors as mentioned above.
In my opinion, today’s global environment is very diverse and uncertain. Strategies need to be long-sighted and the firm’s own vulnerability should be realized and taken into consideration during decision making process. Firms should expand globally and realize more market share, profits and economies of scale. Therefore, currency and language difference alone cannot prepare firms if they want to expand to international markets from domestic market.