MBADM571:

Topic 1 Overview

This module launches you into the first unit of the course, "Foundations of Strategy". The content will acquaint you with several core concepts that you need to know before you can begin to effectively analyze any organization’s strategy. Together, these concepts provide a solid footing for the practice of global strategic management. Without a robust foundation built on the basics, creating and executing a strategy becomes a house of cards. You cannot build a strong house on a weak foundation.

This module (Topic 1) requires you to read two chapters in the textbook, start to work with your team on the GSP project, and begin the CapsimGlobal simulation experience. The GSP project is a semester-long team project that has you develop a strategic plan for a real American company (chosen each semester from a set industry by the professor). More information is provided in the syllabus and the online Zoom sessions during the semester.

The CapsimGlobal simulation experience has you and your team working on implementing a global strategy for a simulated company. You will do this with your team during the semester and then alone for the "final test" that is called CompXM. As such, make sure you are actively participating during the semester so that you can do it alone when the time comes. More information is provided in the syllabus and the online Zoom sessions during the semester.

The readings for Topic 1 provide an overview of strategic management (the subject of Chapters 1 and 2).

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Readings and Activities

By the end of this module, make sure you have completed the readings and activities found in the Course Schedule.

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Chapters 1 and 2 Highlights

Strategy and Strategic Management, Defined

Strategic management is a process consisting of three sequential stages: formulation, implementation, and evaluation. In fact, most successful organizations recognize that process as an iterative cycle that really never ends.

The (many) definitions of strategic management usually illustrate the combination of science and art with science being the know why and art being the know how. As the course progresses, you will understand that strategy formulation and evaluation involve primarily science (or data and analytical functions) while implementation leans more toward art (relying more on intuition and practice). Strategic planning is most effective when it considers implementation and evaluation of integral parts of the process, rather than afterthoughts. That does not mean that strategy implementation (with its inherent difficulties in terms of change and resource allocation) and evaluation (requiring measurement and analysis) should constrain formulation, but it does mean that strategic planners should always have implementation and evaluation in mind.

Strategy represents the competitive moves and approaches that organizations devise and execute to produce successful business performance. You may think of strategy as management's game plan for the organization, or a road map to sustained, improved performance. It can creatively be seen as the raison d'etre for the firm—that is, why it exists (its function) and how will it thrive. (As such, one can thinking of strategy as the philosophy of a business!)

An all-inclusive definition is that strategy used in the text is “the logic that underlies the decisions and actions of the organization.” Strategic management as a university course can also be seen, as mentioned in the textbook, as the philosophy course of business because good strategy will tell us about the main reasons for the organization's existence. Yes, for most for-profit organizations this is to make money but most successful businesses that make "good" money do so because of a compelling philosophy behind its purpose. Think Apple, with its design initiatives where Steve Jobs once stated that company's main purpose was to "change the world" in terms of creativity, design and art in the computer industry. It has indeed changed the world and made lots of money doing so! (By the way, when companies "loss their way" they often tend to fail. Losing their way is equivalent of losing sight of the philosophy that created the success for the business in the first place.)

Competitive Advantage

A fundamental concept throughout strategic management is competitive advantage, which is some edge that an organization has over its rivals that translates into performance. As defined in the text it is "the result of some sort of strategic advantage that your company has and can be measured, or identified, when the company achieves above average economic returns." The edge can be low cost, superior quality, a broad product line, an extensive distribution network, and the like; the list is endless, but, when it comes down to it, competitive advantage is predicated on providing some measurable value to customers. Competitive advantage is also relative, not absolute and dynamic, not static. It can come and go and is unlikely to be sustained indefinitely, even with exceptional management.

The challenge for most organizations is to:

• achieve competitive advantage as quickly as possible,
• increase it as much as possible, and
• sustain it as long as possible.

Think about your own organization's competitive advantage. What is it based upon and what might threaten its sustainability? What do you need to do to protect it?

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The Strategic Management Process

The Strategic Management Process and Chapters of the Book, found in Figure 1 in the course textbook and below, describes the flow of topics in this course.

Each of the steps in the strategic management process will be the subject of a future module. There are four major units for the modules or Topics in Canvas that correspond to specific content in the textbook.

• Foundations are covered primarily in Chapters 1, 2, 4, 5 and 6—with important aspects of Innovation and Globalization covered in Chapters 3 and 14, respectively.
• Formulation revisits Topics in Chapters 4, 5, and 6, with major concepts introduced in Chapter 8, and with Corporate Strategy covered in Chapter 7.
• Implementation is covered primarily in Chapters 9, 10, and 12—with Risk Management and Strategic Changes covered in Chapter 13.
• Global Strategic Plan in Unit 4: Preparing a Global Strategic Plan brings all of the material together to help you and your team create an effective Global Strategic Plan for a real company that offers two major strategic initiatives with global implications.

Note on the Perspective of Strategy as An Iterative Cycle

If the results of a strategic evaluation indicate that performance meets expectations, then perhaps no action needs to be taken; that is, perhaps some minor implementation tweaks might suffice. On the other hand, if results differ significantly from expectations, then you might have to reassess your mission and vision, your environmental scanning (an input to your situation analysis), or internal factors that you might not have properly characterized. Alternatively, you might have to revisit your objectives, determining whether they were overly aggressive, or to amend your strategy. Note the feedback arrows from the evaluation steps (control and change) in the figure above; they can return to any of the previous steps. When corrective action to keep the strategy on track is triggered, it can be taken wherever is appropriate. The point is that if changes need to be made—that is, when expectations and results differ—they should be made where they are most appropriate. Don't assume that the mission or the strategy is faulty when implementation might be the culprit. (In fact, more often than not, it will be implementation that requires attention. Implementation is often the weak link in the strategic management process because so much is required in making the strategy a reality and so much can go wrong.)

A Note on Policy

A word of caution about policies as replacement for the strategic management process: They can imply that once a strategic choice has been made, it becomes set in stone. That is potentially dangerous. Policies like General Electric's, under former CEO Jack Welch, worked well in terms of corporate performance during his tenure, but those same policies later hindered the company. Policies can become a screen to hide behind when a fluid competitive situation calls for new action. Please be careful not to over-rely on policy. Indeed, policies should follow from strategy and not the other way around!

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Library Resources

Do students know who their librarian is or how to get help with library resources? Would it make sense to do a library guide for this course (see MBADM 531 library guide for an example). If so, and you can specify the resources (e.g., it may be fastest to highlight resources from the existing guides below), I can work with a librarian to get this created. Other existing guides that could be used include:

• International Business
• Corporate Innovation and Entrepreneurship
• Business & Economics (general)
• Fair Trade
• Green (Sustainable) Business Resources
• Keeping Current in Business

Two additional library resources that could be helpful to refer to might be:

• Citation and Writing Guide
• A to Z International Business database (from libraries home page > databases > A > top database listing)

From Course Announcements

Your TSS team would like to highlight the Library Resources available to you through Penn State as you continue your research in preparation for the next application exercise. These resources can give you the tools you need to deliver a well-researched and comprehensive Global Strategic Plan. Through these links, you can access company details & financials, perform industry research, and analyze the competitive landscape of an industry. While we suggest checking out all available resources, we wanted to call out several exceptional tools in particular:

MergentOnline (for publicly traded companies)
IBISWorld (for industry analytics)
You can find these databases on the main Penn State Library site. In the Search bar in the middle of the page titled "Find," select the "Databases" tab and search for the database you would like to use, e.g. "IBISWorld."

 

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Topic 2 Overview

This module continues the first unit of the course on the foundations of strategy. Most strategic journeys start with a goal. Thus, the importance of goal setting to strategic management. However, the question of what goals to pursue is both difficult and ultra-important. As argued previously, most for-profit businesses have a primary goal of making money. However, strategy is not only applicable to for-profits, it is important for any organization regardless of its major goal. Furthermore, as also noticed earlier, profit does not come without other more elusive goals being achieved. In order words, to make a profit what does your company need to do? Usually, this involves pleasing some important stakeholders and thus stakeholder management is imperative to the practice of goal setting.

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Readings and Activities

By the end of this module, make sure you have completed the readings and activities found in the Course Schedule.

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Chapter 4 Highlights

An organization’s mission and vision set the stage for strategy. However, good missions are predicated on examining the needs and concerns of essential stakeholders that the organization/company has. The textbook discusses this in detail.

Mission

An organization’s mission states the reason for its existence and how its main goals will be achieved, answering the question “Why does the organization exist and what does it do?” There are different types of missions- for example, customer-based or product-based, and so on. The textbook shows that nine components are seen as essential for most good missions. Many mission statements contain three major elements answering the following questions:

• What is the key market?
• What is the central contribution?
• What makes the organization distinct or unique?

Overly broad missions provide no useful information to guide organizational members or inform outsiders, while overly specific missions constrain the pursuit of opportunity, pigeonholing organizations. An example of an overly broad mission statement is:

(By the way, that is an actual mission statement from a company. If you can identify the company, what kind of company it is, or the industry that it is part of, you have amazing talents.)

A good mission statement serves as a calling card to the outside world, as well as to employees and other stakeholders.

Diversified companies (like GE) would naturally struggle to fit their mission into a single concise statement, so they often have mission statements for their respective divisions.

Vision

A vision is essentially a glimpse into the future, where things are better than they are today. Whereas mission is concerned with the here and now, vision is concerned with where an organization sees itself headed- what it aspires to be. It can often be a stretch goal for the organization. It is meant to communicate aspiration and inspiration (like Apple's "change the world" statement). Therefore, it is critically important that organizations clearly communicate their visions so that anyone can easily understand them. Otherwise, a shared vision will be difficult to embrace or inspire both for internal or external members. A shared vision can generate enthusiasm and galvanize action, which is the basis of crafting a strategy to advance the organization. 

How They Come Together

In essence, a strategy represents a comprehensive plan of action stating how an organization will achieve its mission, realize its vision, and accomplish its objectives. A few well-constructed objectives articulate the major outcomes that the organization aims to reach in support of its mission; in turn, they set the stage for more specific goals.

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Creating an Effective Strategic Stakeholder Mission (SSM)

Chapter 4 discusses how one can create an effective mission by revolving it around the most important stakeholders of the organization. We call this a Strategic Stakeholder Mission (SSM) because of this focus. As described in the textbook, the SSM utilizes the top 1 to 3 stakeholders taken from a Strategic Stakeholder Impact Analysis (SSIA). It then bases the mission on the needs of that particular set of stakeholders.

Operationalizing the Strategic Goals

Chapter 4 also discusses creating SMART c3 goals and financial and non-financial strategic objectives as ways to operationalize the strategic mission. This is important because this is the means by which you will be able to measure your progress towards meeting the mission requirements and know when you have ultimately been successful. These all follow a hierarchy of some sort whereby the objectives (with specific targets) flow from the goals (with general direction), which flow from the mission (with overarching direction), which ultimately flows from having to please some major stakeholder.

The strategic level objectives that organizations establish must support their missions and put them on the path to achieving their visions, which should be consistent with their values. Objectives tend to be relatively general and should be few in number; otherwise, they will not receive the attention that they deserve. For example, the executives of a major operating unit of a Fortune 500 company once proudly showed their nearly 30 strategic objectives to a stunned consultant! After a couple of hours' work, they managed to whittle that list down to a manageable set of six “real” objectives. 30 is just too many!

Objectives can be characterized as either strategic or financial, and that distinction can be important. Examples of strategic objectives include increasing market share, becoming an industry process-technology leader, and developing a new set of products. Examples of financial objectives include improving ROE, achieving earnings growth, and becoming more profitable. In general, strategic objectives are longer-term in duration, and financial objectives have a shorter-term focus. Both types of objectives are important, and organizations are best served when they develop a relatively balanced set.

From Objectives to Measures

• Once objectives are established, they can subsequently be broken down into a number of more specific and manageable measures and targets.
• Here is an example of how that works. Suppose that Penn State has a strategic goal of increasing its number of international undergraduate students by 25%. That might appear audacious, but adding some specificity might help tame it. So, let’s say that the goal is to increase the number of international undergraduate students by 25% in the next five years (without affecting present domestic intake). That answers the “when” question. Now we can move to the “how.” (Note the caveat (c)!)
• To accomplish this goal, the University might need to initiate recruiting in selected countries; for illustrative purposes, let’s say Mexico. That might require hiring an experienced academic marketing representative to market the University in Mexico, increasing the number of admissions specialists by two to handle inquiries and applications and requiring that at least one be fluent in Spanish. And so on. We can develop measures and targets for achieving these mini-goals that must be obtained to achieve the strategic objective.
• By developing a cascading set of sub-goals, amorphous strategic goals become measurable (25% growth, five years, in Mexico, one experienced marketer, two admissions specialists, one fluent in the language) and a process model becomes easy to apply. Of course, interim timelines need to be established, and specific responsibilities and a budget need to be attached to each sub-goal. What gets measured gets done, but not unless somebody’s name appears next to it and a deadline is set!

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Topic 3 Overview

This module introduces you to the importance of performing a comprehensive situation analysis, starting with the external environment. Only after a thorough environmental analysis can you begin to devise a credible competitive strategy.

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Readings and Activities

By the end of this module, make sure you have completed the readings and activities found in the Course Schedule.

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Chapter 5 Highlights

Assessing the Environment

Environmental scanning is a necessary start to the process of identifying possible strategic opportunities and threats. Organizations exist within a set of environmental factors that can be depicted as a set of concentric “rings”; starting from the outside, they are called the general, operating, and internal environments. (The next module will examine the internal environment.)

The general environment consists of societal and other factors and forces over which an organization has little to no control, and indirect influence at best. However, the general environment can have a long-term impact, so it needs to be monitored. Indeed all opportunities and threats emanate from the external environment. As pointed out in the textbook, trends in the general environment can be identified and categorized with an analysis of the PESTEL environmental forces.

The operating (or competitive) environment consists of factors and forces that have an immediate and direct impact on an organization; in essence, it encompasses all of the organization's stakeholders. The industry in which the organization exists is of particular concern to strategists, and Porter’s five forces model (found in the textbook) represents a convenient tool for determining industry attractiveness. By analyzing the force of suppliers, buyers, potential entrants, substitutes, industry rivals, and other relevant stakeholders, a strategist can determine how these forces—both individually and collectively—affect the industry. If the forces are collectively weak, that favors the industry, making it an attractive place to compete. High industry attractiveness means that profitability potential is also high. If the composite forces are powerful, that works against the industry, making it less attractive and reducing potential profitability. 

Forecasting is an important function for strategists, but keep in mind that forecasting is only as good as the validity of its underlying assumptions. Various forecasting methods are available, and you should be familiar with some of them from your previous courses in the program. Comprehensive forecasting includes an assessment of the forces that are driving an industry so that effective strategies can minimize impending threats and exploit emerging opportunities. Think about how your organization forecasts and how you could offer a better alternative process. Business analytics are sophisticated tools to mine data in support of executive decision making.

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The EFE Matrix

The external factor evaluation matrix (EFEM) is an excellent tool for you to use to synthesize your organization’s external assessment. The textbook provides a step-by-step process to follow to construct a comprehensive EFEM, along with examples. These are models for you to follow when you construct an EFE matrix for your GSP company. Some other examples may be provided in the online Zoom sessions.

Note that a completed EFEM displays the 10 most important environmental opportunities and threats for the organization and its industry and an informed judgment of the importance of each factor. Opportunities and threats are, for the most part, uncontrollable and affect all industry players. So... can an external factor be considered both an opportunity and a threat? Yes. Occasionally, it is appropriate to include a factor in both categories. New technologies, for instance, that your businesses can utilize to increase its competitive position might be either a threat or opportunity depending on how you respond to them.

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Competition and the Competitive Profile Matrix (CPM)

When creating the EFEM save your competitors (as threats) for the CPM! To complete an effective external assessment, strategists must consider their specific competitors so that they can devise strategies for confronting them. Competitors are a special group of threats that are conceptually distinct from environmental factors and are therefore not appropriate to include in an EFEM. Rather, the competitive profile matrix (CPM) is another useful instrument for you to have in your professional tool kit. A CPM requires the strategic analyst to identify key competitors, carefully assess the industry's critical success factors, weight them, rate them, and score them in a fashion similar to the EFEM. Again, the textbook provides a clear step-by-step procedure and depicts an example of a CPM. Please note that your GSP company itself should be included in the CPM, not just its rivals. One can think of this as a bench-marking exercise in which we are comparing ourselves to our closest rivals on a number of strategically relevant success factors.

Different industries have different critical success factors. For example, in the elevator industry, companies such as Otis recognize a set of critical success factors that include:

• reliability,
• service,
• capacity,
• acceleration/speed,
• comfort, and
• reputation. 

In the world of fast food, critical success factors include:

• speed of service,
• consistency,
• quality/taste,
• location/convenience,
• variety, and
• cleanliness.

You get the picture. This is at the industry level and the factors are indeed critical to the success of any company in that industry. What is important to keep in mind is that critical success factors are often "table stakes" that organizations must pay—like an ante in a poker game- just to compete and survive. Doing well on some or all of those factors is no guarantee of success; however, doing poorly on one or a few will almost certainly lead to failure!

Good competitive intelligence is critical to constructing an accurate CPM. To some extent, organizations implicitly perform competitive intelligence on a frequent basis; some have more formal and detailed procedures for gathering such intelligence. Solid competitive intelligence enables organizations to categorize specific competitors’ objectives and strategies, which in turn allows them to devise preemptive or counter-strategic moves. You should be aware that a number of blind spots hinder accurate competitor analysis, including misjudging industry boundaries and assuming that only established industry competitors pose a threat. Faulty assumptions are the bane of a strategist’s existence.

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Topic 4 Overview

This module concludes the concepts, frameworks, and tools from this first unit of the course on foundations of strategy and complements the material covered earlier. Focusing on the internal audit, we wrap up our examination of the importance of performing a comprehensive situation analysis. At the conclusion, you should have the knowledge and tools to be able to devise an effective competitive strategy for your organization.

Application of Strategic Foundation Concepts

The Team Application Exercise (AE#1) represents your first opportunity to apply course concepts as a team to your Global Strategic Plan (GSP) company and its industry. Your completed AE#1 will be the basis for your future application exercises, as well as your final GSP assignment. Accordingly, you must do your best to establish a strong foundation from your initial strategy formulation and implementation efforts. Please deliver a high-quality finished product, not merely a draft of a portion of your eventual GSP.

Your Team Application Exercise is evaluated using a rubric that specifies the criteria, weighting, and achievement level expected. It is included in the assignment directions. Make sure you read it!

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Readings and Activities

By the end of this module, make sure you have completed the readings and activities found in the Course Schedule.

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Chapter 6 Highlights

Looking within the organization itself is something strategic managers often disregard or, at best, perform in a perfunctory manner. The reasons are easy to explain, but sometimes difficult to correct. We often make assumptions about ourselves that limit our objectivity. Often it is hard to confront truths that require us to make difficult choices and implement difficult changes.

The Internal Environment

Organizations deal with a set of internal environmental factors, which, fortunately, are largely under their control (as opposed to the previous external factors we examined). However, that does not mean that these factors are easily changed or manipulated.

Consider the effect of organizational culture. You have probably encountered culture in some of your previous courses—Team Performance, Leadership Communications, Managing and Leading People, or Ethical and Responsible Business Leadership. Culture refers to the beliefs, routines, and patterns of behavior, developed over time, which define who we are and what we do. As a significant facet of the internal environment, culture permeates an organization. To the extent that culture is used to reinforce desired behaviors, it can be a formidable instrument of competitive advantage. However, given its power and resistance to change, if an organization needs to adapt or change—and that’s what a strategy usually requires—then a strong culture can be a real impediment to progress.

IBM Mainframes

IBM faced that exact situation in the late 1980s and early 1990s, when its culture of mainframe computer hardware had run its course. It took a change agent as CEO from outside, named Lou Gerstner, to start a major strategic shift by articulating a new vision of the company as a provider of system solutions. The company’s traditional culture had been associated with great success, but it also shaped behavior in a way that was not conducive to change.

The cultural change that Gerstner initiated was painful. People lost status or were shown the door, major structural changes were required, resources were reallocated, established reporting and coordination patterns were disrupted, software engineers gained importance at the expense of hardware engineers, and on and on. The moral of the culture-strategy connection is that managers need to consider the implications of their organizations’ cultures when crafting and implementing strategy. Simply stated, strategists who fail to consider cultural effects will likely encounter strong resistance to new ideas and to the changes that will accompany a shift in strategic direction. (We'll examine this more in Chapter 10.)

Analyzing the Internal Environment

Whereas an external assessment reveals strategic opportunities and threats, a careful internal assessment uncovers critical strengths and weaknesses in an organization's resources and capabilities. Strengths and weaknesses are always based on an organization's resources— assets and capabilities. Assets are things that an organization owns. Capabilities are skills, things that an organization does. An organization's bundle of capabilities forms a core competency—something that it does very well and better than most, if not all, of its rivals. For example, 3M's core competencies have historically been developing adhesives, abrasives, coatings, and thin films. That's it! Those four competencies have been the foundation for thousands of the company's products (including the ubiquitous and indispensable yellow Post-It notes). Weaknesses usually stem from the lack of resources and capabilities that provide sustainable competitive advantage or having resources and capabilities that cost money but do not provide for competitive advantage. As such, a statement like “Revenues from repair/service in the store are up 16%” (often given by novice strategists) is not a strength but an outcome of some underlying strength(s). It explains what the company did well in the past but says nothing about the actions of the future and what underlies future competitive advantage. A better description of the true strength here might be “Repair Capabilities/Skillsets are the best in the industry” (resulting in that 16% increase!). Note that with this formulation of a strength we have an underlying resource that management can choose to either support (by investing more in its development) or not. Hence the importance of avoiding GIGO (Garbage In, Garbage Out) issues and focusing on what management can do with its strategic processes.

Analyzing the Value Chain

The value chain is a linked set of value-creating activities. Industries and organizations both have value chains; typically, organizations reside someplace on their industry’s value chain, encompassing only a part of it.

A value chain analysis is a useful tool for managers to gain a better understanding of their organizations’ strengths and weaknesses. It enables them to identify and analyze sources of competitive advantage by revealing strategically relevant activities. Organizations competing with each other often have markedly different value chains, which helps to explain their respective competitive advantages. Essentially, competitive advantage results when an organization can perform value-creating activities better or less expensively (or both) than its rivals can.

Benchmarking is another way to gain insight into whether an organization's value chain is suitable for supporting its strategic initiatives. Benchmarking involves detailed analysis of "best in class" processes and practices within an organization's industry or, even better, beyond. For example, regardless of your industry, if you desired to improve your outbound logistics capabilities, Amazon and FedEx would be exceptional benchmarks. Note, many organizations also use organizations from outside the industry to benchmark best practices.

Core Competencies

Core competencies (CC) can be thought of as the unique set of resources (remember assets and capabilities) for an organization that underlie competitive advantage. Think Apple’s CC of product design or Walmart’s CC of logistics/inventory management. However, without continual investment and thoughtful modifications, the core competencies that have resulted in competitive advantage, in time, can become core rigidities that limit future success. That is, our successes can doom us to failure if we do not keep constantly changing and adapting to environmental change. (The importance of always returning to the external environment!) For example, Kodak's core competency in photographic film led to its iconic success, but also to its downfall when digital media replaced physical media in imaging. Kodak became better and better at making products that had less and less commercial value. Management also did not re-position its strategy towards digital photography despite being a pioneer in that very technology (In what became truly ironic, Kodak had developed some of the first digital cameras but management did not see this as a strength or the trend towards digital as an opportunity and never invested in them!)

Strategic managers need to constantly evaluate the sustainability of the competitive advantage that stems from their resources and capabilities, making changes when needed. Value is determined by customers (stakeholders), and it can evaporate quickly in the face of aggressive competition and technological changes.

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The Internal Factor Evaluation Matrix

The internal factor evaluation matrix (IFEM) is an excellent tool for you to use to synthesize your organization’s internal assessment; it complements the EFEM that you learned about previously. Again, the textbook provides a step-by-step process to follow to construct a comprehensive IFEM. This is a model for you to follow when you later construct an IFEM for your GSP company.

Note that a completed IFEM displays:

• Internal strengths and weaknesses,
• An informed judgment of the importance of each of those factors (i.e., its ranking).

Differing from opportunities and threats, strengths and weaknesses are mostly controllable through internal decisions and resource allocations. In other words, management must answer the following: What assets or capabilities to invest in? Which ones to divest or ignore? The IFEM should include only acceptable forms of Ss and Ws—i.e., make sure they are resources—either an asset or capability! Follow the textbook for more information.

The textbook also covers a number of functional strategies that need to be considered in strategy, but, for now, we will save them for later, but emphasize the need for integration of all the organization's functions.

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Mindsets: The Macro “How"

Most companies are established with a domestic mindset—all business is local. Such a mindset might serve a company well for years, but at some point, it probably becomes limiting. Based on the motivating factors described in this lesson, executives develop different strategies for and models of exploitation of potentials and advantages of foreign markets. Their approaches are based largely on the mindsets that they adopt toward worldwide business. Those mindsets can, and sometimes do, evolve over time as executives develop a better understanding and appreciation of foreign markets and operation opportunities. However, they each have a set of fundamental assumptions that shape MNEs' strategic initiatives.

International Mindset

The international mindset represents the least-developed mental model of conducting business across national borders. Executives who have this perspective consider their companies to be essentially domestic businesses, with some international operations largely separated from their core domestic operations. The underlying logic of an international mindset is to exploit domestic competitive advantages in overseas markets that desire products and services similar to what the company offers domestically. Accordingly, it can be argued that MNEs with this kind of mentality consider international business operations to be marginal—appendages. For them, the domestic market is the focus, but international activities are rather complementary, though secondary. These firms' involvements in foreign markets come mostly in the form of exports or imports. Even if they have foreign subsidiaries (and they usually don’t), the headquarters at home plays the key role in determining strategies, developing products, and staffing personnel. Centralized decision-making at the home offices is very common.

Perhaps you have seen an MNE organization chart and noticed a division labeled International, without any logical structural connection to any other division in the company. That would be a good indication that the company has an international mindset. This mindset was typical of U.S. companies that expanded after World War II to take advantage of demand all over the world for products and services that simply were not available elsewhere. Coca-Cola began its foreign business with this mindset but evolved over the years. Walmart might be considered a current MNE that views its foreign business from this perspective. 

Multinational (Or Multi-Domestic) Mindset

After realizing opportunities in foreign markets, MNEs begin to commit more time and resources to these markets. Moreover, they realize the differences among foreign markets and the necessity to respond to local needs and demands. This mindset is based on the idea that companies produce and sell the products/services that customers want, wherever they are; it views the world as composed of multiple domestic markets. Consequently, these MNEs develop different product and marketing strategies responsive to local customers. The multinational mindset is a decentralized business model that allows for tremendous flexibility and adaptation to individual market preferences.

Adopting a multinational mindset requires significant foreign direct investment, as it is concerned with adapting products and services to each individual market, rather than with coordinating across markets. Unilever (consumer goods), H.J. Heinz (processed foods), and Cadbury (confectionary products) have multinational mindsets—they have a history of adapting their products to match local preferences and are adept at competing in globally fragmented markets. Disney theme parks also follow a multinational mindset, adapting to the particular tastes of their respective markets in the United States, Europe, Japan, and China.     

Global Mindset

Contrary to a multinational mindset, a global mindset is based on the idea that companies make what most of the world’s customers want. It views the whole world as a single market, assuming that national tastes and preferences are more similar than different. Therefore, the emphasis is on coordinating the marketing of standardized products and services, branded products, or commodities with adequate costs and quality advantages.

According to Furrer, to achieve high volumes and gain overall efficiencies in operation, MNEs tend to favor "central coordination and control. In such companies, research and development, manufacturing, and marketing activities are typically managed from the headquarters, with most strategic decisions also taken at the center" (Furrer, 2006, p. 92). MNEs that operate with the global mindset know that they won’t get all of the business in the world, but they will get a lot by offering the same product or service the same way everywhere it can be sold, achieving tremendous economies of scale.

In short, this mindset comes down to making and selling the same things, the same way, everywhere. Japanese industrial companies that manufactured electronics and automobiles originally had this mindset in the 1950s and 1960s. Most of them have since evolved to a transnational mindset (below). Microsoft is an example of an MNE that takes this perspective.     

Transnational Mindset

This mindset represents a combination of the multinational and global mindsets, recognizing national or regional differences in consumer tastes and preferences, as well as the similar needs and demands of customers around the world. It pays attention to increasing pressures for localization of business products and operations in many countries, as well as internal pressures to generate operating efficiencies.

MNEs that adopt a transnational mindset are complex organizations that have significant investment in foreign operations. This mindset has arisen because increased international competition has rendered the other mindsets insufficient. Many MNEs have adopted this mindset in recent decades, adhering to its logic of local responsiveness plus global efficiency to achieve tremendous economies of both scope and scale. Of course, managing an MNE operating with a transnational mindset requires careful attention to communication, coordination, allocation of resources, and structural support—in essence, excellence in management.

MNEs that become transnational lose their specific national identities and are truly world companies. Most of the world’s auto manufacturers are now transnational, although some (mostly European) work to maintain their historical domestic image (e.g., German engineering and precision, Italian design, or Swedish uniqueness). Proctor & Gamble has become a transnational MNE, with specialized resources and activities dispersed around the world but integrated into an interdependent network of operations. Nestlé is an excellent example of a transnational company, with highly decentralized and distant operations in many countries managed by a small headquarters in Switzerland. Perhaps the company retains some elements of its Swiss character, but most consumers of its products don’t really care.

Some refer to the above four mindsets as stages of globalization. That isn’t entirely accurate, but if you encounter that term, which is what it means—a domestic, then international, then global or multinational, and then, finally, transnational mindset. A linear progression might be compelling conceptually, but in this case, it might not reflect how firms actually develop internationally. Companies will always exhibit a particular mindset, and one is not necessarily better than another. Companies can, and do, succeed using any of these perspectives.

Market Entry Modes: The Micro “How”

Companies seeking to internationalize have several different market entry modes to choose from. Each has its own set of advantages and disadvantages, which can be summarized in a graph of resource commitments and risks (Figure 4.1 below). Compare this to Figure 46 in Chapter 14 of the textbook. Note that resource commitment is commensurate with managerial control. Thus, commitment to any foreign market comes as a double-edged sword!

Exporting

Exporting is the first market entry mode used by many companies. It is conceptually and logistically simple: produce a product or service, find a local agent or representative to promote and distribute it, ship it to the respective country, and sell it. If that works, repeat the process, perhaps with higher volume.

The advantages of exporting include low risk, low cost, simplicity, and the ability to learn about local markets and gain experience. Its disadvantages include high transportation costs, a low degree of control (especially when dealing with local marketing agents), unknown customer preferences, possible trade barriers, and logical limitations to growth.

Exporting is considered an initial stage of internationalization; after developing knowledge of foreign markets and increasing demand for its products in those markets, the firm eventually may invest in foreign countries. Exporting is viewed as a less risky involvement in international business because firms do not allocate many resources in foreign markets. In summary, exporting represents a low-risk, low-reward strategy. Because of that, firms looking to grow their worldwide business employ other market entry modes.

Next, we'll discuss licensing and franchising. Those market entry modes, although similar, operate differently. Licensing gives a firm the ability to purchase use of the donor firm's technology, while franchising allows for production and operation under the franchisor's name in another country. There is a fee (called a royalty) charged in both cases, but usually franchisors maintain some additional control and responsibility for advertising.

Licensing

Licensing represents a major step up in terms of commitment. In an international context, a firm (the licensor) grants the right to use its patents, trademarks, technology, or know-how to another company abroad (the licensee). In return, the licensor receives a royalty from the licensee, usually based on the volume of sales or production as agreed upon by the parties in their licensing agreement. By engaging in a licensing arrangement, firms are able to

• generate extra income from existing technologies and services that they have developed,
• spread the costs of R&D projects over a greater number of units,
• access markets that have been closed or protected,
• test new markets before making capital investments, and
• minimize risks in entering and expanding foreign markets.

A number of companies use licensing in international business. For example, The Hershey Company manufactures chocolates under a licensing agreement with Cadbury of England. In addition, the company licensed its somewhat older technology for making chocolate bars to a Brazilian confectionary firm. Demand for licensing usually comes from firms in developing countries, which want to leverage Western companies' technologies and trademarks.

The licensor enjoys the advantages of capitalizing on its existing proprietary rights without investing much capital or effort and of testing foreign market potential without making major investments. Additionally, licensing represents a reasonably easy and quick way to enter foreign markets. However, licensing is not risk-free. Disadvantages include

• lack of control over how technology is used once licensed,
• an inability to realize location and experience-curve benefits in the foreign market,
• an inability to implement global strategic coordination,
• creating a potential competitor in the host market and other foreign markets, and
• the possibility of contract infringements (e.g., not paying royalties and imitation of technology or trademarks) by the licensee.

Of course, licensing is a two-way street. The licensee sees its advantage as receiving the benefits of an already tested technology, patent, or trademark. Plus, manufacturing and marketing an established product through a proven technology requires little investment or risk. Downsides of licensing from the standpoint of the licensee are dependence on a foreign donor for technology or trademarks, royalty payments, lack of motivation for in-house development of technologies or products, and acceptance of older technologies from a licensor who chooses not to share its most advanced technologies.

Franchising

Franchising can be considered a special form of licensing involving two parties, the franchisor and franchisee. The franchisor grants the use of a brand name, trademark, business system, or other proprietary right to a franchisee that agrees, in return, to pay a royalty based on the sales. There has been a recent explosion of franchising businesses around the world, with companies like Coca-Cola, Pepsi, McDonald's, Burger King, KFC, 7-Eleven, and Holiday Inn contributing to the expansion.

Franchising works similarly to licensing, but with a closer and more continuous relationship between the partners. For example, the franchisor directs the operations of the franchisee in order to maintain product and service quality. In addition, the franchisors usually require the franchisees to buy equipment and some ingredients from them and to contribute to common promotional expenses. For example, both McDonald's and Burger King include in their franchising agreements the stipulation that the franchisors buy all the cooking equipment and some food ingredients, while maintaining operational control of franchisees (e.g., hamburger standards, restaurant cleanliness) and training store managers. 

The final two modes that we will discuss involve foreign direct investment: international joint ventures and wholly owned subsidiaries.  

International Joint Venture 

An international joint venture (IJV) is a special strategic alliance between two or more parties, usually one foreign and one domestic, sharing ownership and working together for joint production, marketing, or both. Numerous MNEs use IJVs as a market entry mode—here, two or more firms from different countries create an independent company by contributing their share of equities. In other words, IJV children are considered independent entities from their parent companies. Most recent forms of IJV come from multiple MNEs doing R&D together, gaining market power, and entering new markets. Traditionally, MNEs were motivated to either acquire needed resources (e.g., raw materials or low-wage labor) or access to local markets, while host governments or local firms sought to obtain much-needed capital and technology. Recently, IJVs between MNEs have been designed to develop competencies jointly, or to share them.

The advantage of the IJV is access to the local partner's knowledge through a strategic alliance. A local partner, after all, knows the market, customers, and competitors better and has a network of relationships with the host government and other local institutions. To fully benefit from an IJV, an MNE needs to understand the advantages of its domestic partner's

• location,
• plant facilities,
• knowledge of the marketplace,
• entry into a specific market segment, or 
• unique aspects of competitive advantage.

An IJV typically involves sharing development costs and risks, thus forming a credible commitment in which both parties have a stake in the outcome. In many countries, IJVs are more politically acceptable than sole ownership. If an MNE has a domestic partner, it is not viewed as totally foreign by the host government and local citizens. IJVs provide market entry that is neither too headlong nor too timid, demonstrating a solid intent and long-term interest.

Some countries, such as Mexico and China, apply limits to foreign direct investment. In other countries, an IJV is the only acceptable way to enter the markets. MNEs might have no choice but to establish an IJV with a local firm. In the United States, there are few restrictions on foreign investments. As a result, there are a lot of these investments, and foreign firms hold significant business ownership here. Foreign direct investment in the United States can comprise up to 100% of a firm, while in some countries the maximum investment, or ownership, in a joint venture is limited to 49%. (In other words, an MNE owner will not be able to have a controlling investment in another country's firm.) In China, foreigners can own up to 49% of a joint venture unless the investments are made in special zones. Additionally, some countries, including China, don't just limit foreign direct investments; their laws prohibit transferring profits out of the country. In other words, when a foreign MNE makes money in China, it has to reinvest it into the country. Although the foreign firm can't legitimately take its profits outside, there are ways to accomplish the same end legitimately.

One disadvantage of IJVs is that MNEs may lose control of the technology they provide. Additionally, it is difficult for an MNE to engage in global strategic coordination when it doesn’t own a controlling interest. Another disadvantage is that the local partner could use the IJV to learn the technology and business experience of the foreign partner and then go its own way. In conflicts with the local partner, the host government and courts would usually favor the domestic firm. In such cases, the foreign partner might not have much bargaining power.

Wholly Owned Subsidiary

Finally, foreign direct investment can occur through a wholly owned subsidiary (WOS), in which the foreign MNE investor holds 100% ownership. The investing firm either buys an existing facility or builds a plant from the ground up, the latter being called a "green field investment." Either way, the foreign MNE holds all ownership through outright acquisition.

In some countries, this form of market entry is either prohibitively difficult or outright illegal. Firms need to do their homework carefully before entering a foreign country via WOS; in many cases, they would be better served using a more gradual, incremental approach to internationalization. Firms without international business experience might be tempted to jump into the water before knowing its temperature. On the other hand, today some firms are "born global," with international business in their DNA. These companies are well prepared to meet the challenges of operating internationally and thus well positioned to exploit the advantages, especially in markets with liberal policies.

With a WOS, an MNE can develop its strategy, protect its technology, and engage in global strategic coordination because it has total control that enables it to realize both economies of scale and knowledge acquisition. The disadvantage is that the WOS involves the highest risks and costs of all the market entry modes. In addition, an MNE will need to deal with all the market uncertainty, legal/political issues, and cultural differences in the host country. This is the classic high-risk, high-reward strategy.

Global Strategic Intent: Putting It All Together

Going global is more than the sum of the parts discussed in this lesson (motivation, mindset, and market entry mode). It is a synthesis of those factors, often within the context of an existing corporate strategy. If a firm views itself as part of the world and believes it can make a difference in the global market, then it could adopt the behavior of an MNE to satisfy the needs and demands of customers both domestically and internationally while creating value for its stakeholders. A firm's strategic intent is a significant determinant of its internationalization and choice of means for achieving global objectives. Management must pay serious attention to the following two considerations:

• Know the rate at which the firm wants or needs to participate in international business.
• Understand the goals and targets of internationalization.

It is critical to understand the rate at which the firm wishes to or needs to participate in international business in each of its selected foreign markets. (This reflects the firm's orientation toward uncertainty and risk-taking.) Moreover, management should understand the goals and targets of internationalization. Does the firm wish to be a major or marginal global player? Penetrate only certain markets or worldwide markets? Achieve quick returns or long-term sustainability? Act opportunistically or with social responsibility?

How to Internationalize?

Firms pursue the internationalization process in one of two ways:

• incremental internationalization (traditional firms) or
• the internationalization fast track (global-born firms).

Slow and Steady

Incremental internationalization involves less risky steps, such as exporting and licensing, initially, followed by riskier ventures, such as direct investments into foreign markets via IJVs and/or a WOS. Traditionally, the theory explaining gradual MNE involvement in international business is called the life-cycle theory, suggesting that MNEs first emerge and grow in their domestic, developed market and then spread out into other developed countries, finally expanding into developing countries. For example, Coca-Cola and GE emerged and grew in the United States, made investments in Europe and Japan, and followed with investments in other developing parts of the world.

Another theory explaining a firm's internationalization behavior comes from Leonidou and Katsikeas and focuses on the concept of psychic distance. "According to this concept, firms initially tend to target psychologically close countries, which are less risky to enter". (Leonidou & Katsikeas, 1996, p. 538) 

Psychological proximity refers to similar ways that people think and behave, rooted in cultural and historical values.

The psychic distance to certain markets will then be gradually reduced over time due to increasing market-specific knowledge, so that the firm can progressively extend its activities to other more psychologically distant countries. In this way, a firm approaches foreign markets cautiously, minimizing uncertainty and operating costs, and avoiding serious and lasting mistakes. (Leonidou & Katsikeas, 1996, p. 538)

As you can tell, firms that follow this process have more conservative orientations toward internationalization.

Quick Start

The second approach to the internationalization process is a fast track, in which global-born firms reach high export propensity in a short period of time after inception. Starbucks is a good example; this born-global firm obviously has a different mindset from traditional firms, pursuing opportunities in niche markets with customized products, advances in production and communication technologies, and internalization of knowledge, tools, and technology—thus creating a global network of customers.

As this lesson revealed, there is a lot that strategists need to consider regarding global and international issues. In fact, you need to consider these factors when you formulate a strategy for your cohesion company in upcoming lessons. There will be other global and international factors to consider when you implement a global strategic plan, which will be covered in a future lesson.

References

Furrer, O. (2006). Marketing strategies. In Marketing management: International perspectives, (1st ed.) (pp. 81-98). Vijay Nicole Publishing. https://www.researchgate.net/publication/230743793_Marketing_Strategies

Leonidou, L., & Katsikeas, C. (1996). The export development process: An integrative review of empirical models. Journal of International Business Studies, 27(3), 517-551. http://www.jstor.org/stable/155437

 

Lesson 5 Overview

Lesson 5 represents your first opportunity to apply course concepts as a team to your cohesion company and its industry. Your completed Team Application Exercise (AE#1) will be the basis for your future application exercises, as well as your Global Strategic Plan assignment. Accordingly, you must do your best to establish a strong foundation from your initial strategy formulation and implementation efforts. Please deliver a high-quality finished product, not merely a draft of a portion of your eventual Global Strategic Plan.

Your Team Application Exercise is evaluated using a rubric that specifies the criteria, weighting, and achievement level expected. It is included in the assignment directions. Make sure you read it!

Lesson Objectives

After completing this lesson, you should be able to

• apply concepts from the first unit of the course to an actual company.

Lesson Readings and Activities

By the end of this lesson, make sure you have completed the readings and activities found in the Course Schedule.