MULTINATIONAL STRATEGIC PLANNING

MULTINATIONAL STRATEGIC PLANNING

Derek F. Channon with Michael Jalland Manchester Business School

MACMILLAN PRESS LO NOON

© Derek F. Channon with Michael Jalland, Manchester Business School 1978

Softcover reprint of the hardcover 1st edition 1978 978-0-333-19312-9

All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means,

without permission

First edition 1978 Reprinted 1983

Published by THE MACMILLAN PRESS LTD

London and Basingstoke Companies and representatives

throughout the world

ISBN 978-1-349-02857-3 ISBN 978-1-349-02855-9 (eBook)DOI 10.1007/978-1-349-02855-9

Contents

List of Tables List of Figures Preface Acknowledgements

1 MULTINATIONAL STRATEGY AND THE ROLE OF PLANNING

THE MULTINATIONAL CORPORATION

WHO ARE THE MULTINATIONALS?

PATTERNS OF MULTINATIONAL EVOLUTION

THE CHANGING NATURE OF MULTINATIONAL PLANNING

xii XIV

xvii xx

2

3

7

METHODS 12

The Emergence of Environmental Turbulence 12 THE MODIFICATION OF MANAGEMENT ATTITUDES AND EXPECTATIONS 15

THE SCOPE OF TIIE BOOK 19

2 ORGANISING FOR INTERNATIONAL ~EMTIONS n THE PATTERN OF MULTINATIONAL STRUCTURE EVOLUTION

Export Sales Organisations The International Division Structure The Global Functional Structure The Functional Process Structure The Worldwide Product Division Structure

24

24 26 28 30 31

2

VI Contents

The Use of Local Umbrella Companies 33 Area-Based Organisation Structures 35 The Mother-Daughter Structure 40 Mixed Structures 42

THE IMPACT OF LEGAL STRUCTURES 44

Home Country Mergers 44 Transnational Mergers 44

THE JAPANESE APPROACH 46

CONCLUSION 48

3 MULTINATIONAL STRATEGIC PLANNING SYSTEMS 51

THE PROCESS OF MULTINATIONAL STRATEGIC PLANNING 51

PLANNING IN LIMITED ACTIVITY MULTINATIONALS 54

Export Organisation Planning 54 International Division Planning 55

PLANNING IN LOW-PRODUCT-DIVERSITY MULTINATIONALS 57

Planning in High Interregional Product Flow Businesses 57 Planning in Highly Localised Manufacturing Businesses 59

PLANNING IN HIGH-PRODUCT-DIVERSITY MULTINATIONALS 60

Planning in Multinationals with High Local Adapta-tion Needs 61 Planning in Companies with High Interdependency Nee~ 64 Planning in Mother-Daughter Structures 67

PITFALLS IN MULTINATIONAL STRATEGIC PLANNING 68

THE CONTENT OF BUSINESS UNIT PLANS 70

Business Unit Information Base 70 Key Assumptions and Business Unit Objectives 75

Contents vii

Budgets and Forward Estimates 78 Functional Plans 78 Action Plans 81 Resources 81 The Use of Contingency Planning 83 The Use of Scenario Planning 84

CONCLUSION 86

4 STRATEGIC PORTFOLIO PLANNING SYSTEMS 89

KEY DETERMINANTS OF BUSINESS STRATEGY 89

The Experience Curve Effect 89 Strategic implications of Experience Curves 92 Strategic Segmentation 92 The Importance of Market Dominance 93

STRATEGIC PORTFOLIO PLANNING APPROACHES 94 The Growth Share Matrix 94 The Early GE Planning System and its Derivatives 97 The Shell Directional Policy Matrix 99 The PIM S Approach l 04 The Par ROI Model 105 The Par Cash Flow Model 107

PRACTICAL PROBLEMS WITH PORTFOLIO PLANNING SYSTEMS 110 CONCLUSION 118

5 MULTINATIONAL CORPORATE TREASURY MANAGEMENT lW

TREASURY ORGANISATION FOR THE MNC 121

Elementary Treasury Organisation 121 Intermediate Treasury Organisation 123 Advanced Treasury Organisation 125

THE MANAGEMENT OF INDIVIDUAL FINANCE FUNCTIONS 129

Long-term Financial Planning 129 Financial Budgeting l 32

viii Contents

Capital Budgeting l 32 Cash Management l 34 Working Capital Management l 37 Subsidiary Capital Structure 138 Foreign Exchange Management 141 Remittance Policy 146 Taxation Planning 148

CONCLUSION 149

6 INTERNATIONAL TAX PLANNING 150

DIVERSION TACTICS 151

The With or Within Decision l 5 l Tax Incentives/or Exports 153 Transfer Pricing l 5 5

EXTRACTION 158

Financial Structure 158 Leasing 161 Licensing and Technology Payments l 63 Management and Service Fees 165

TAX HAVEN LOCATION 167

CONCLUSION 174

7 INVESTMENT PLANNING AND ENTRY STRATEGIES 175

THE CAPITAL INVESTMENT PROCESS 175

Project Proposal 176 Project Appraisal 177 Capital Budgeting 179 Approval 181 Authorisation 182 Post Audit 183 The Capital Investment Process and Manufacturing Strategy 183

THE PLANT LOCATION DECISION 184

Contents ix

Market Characteristics 185 Macroeconomic Factors 186 Political Factors 186 Infrastructure Characteristics 187 Labour Factors 187 Financial Considerations l 90 Fiscal Considerations l 9 l

ALTERNATIVE ENTRY METHODS 195

Entry by Licensing l 95 Entry by Joint Ventures 200

CONCLUSION 206

8 PLANNING INTERNATIONAL MERGERS AND ACQUISITIONS 207

KEY FACTORS AFFECTING COUNTRY CHOICE 209 KEY FACTORS FOR SUCCESS IN CROSS-BORDER ACQUISITIONS 210

PRE-ACQUISITION SEARCH PROCEDURES 214

NEGOTIATION PROCEDURES 215

PROSPECT EVALUATION 216

FINANCE AND FISCAL CONSIDERATIONS 223

Cash Transactions 223 Paper Transactions 225 Distribution Tax Avoidance Procedures 226

POST-ACQUISITION PROCEDURES 228

Financial Integration 229 Marketing Integration 229 Production Integration 230

CONCLUSION 233

9 THE MANAGEMENT OF POLITICAL RISK 234

FORMS OF POLITICAL INTERVENTION 235

Hos~ Government Intervention 235

x Contents

Home Country Intervention 239 Supranational Intervention 240

FORECASTING POLITICAL INTERVENTION 240

The Go/ No-Go Decision 241 The Premium for Risk 241 Risk Analysis 241 Political Acceptability Profile 243

POLITICAL RISK ASSESSMENT PRACTICE 245

RISK REDUCTION MECHANISMS 247 Preinvestment Procedures 248 Operating Risk Reduction Mechanisms 250 Tactics for Handling Expropriation Threats 257

10 MULTINATIONAL MARKETING MANAGEMENT ~9

GLOBAL MARKETING AND ORGANISATION STRUCTURE 260

Marketing in the International Division Structure 260 Marketing in Product and Geographic Based Organisations 263 Headquarters Marketing Staff Roles 265 Other Integrative Marketing Devices 266 The Growth of Central Support Services 267

KEY ELEMENTS IN GLOBAL MARKETING POLICY 269

Product Standardisation or Differentiation 269 International Marketing Planning 275 Planning for New Geographic Markets 276 New Product Planning 278 International Pricing 281 International Channel Management 283 International Advertising and Promotion 285 International Communications Strategy 292

CONCLUSIONS 292

Contents xi

11 EXTERNAL AFFAIRS AND THE INTERNATIONAL CORPORATION 294 THE MANAGEMENT OF EXTERNAL AFFAIRS 295 EXTERNAL AFFAIRS - THE NEW PRESCRIPTIONS 299

Strategic Responsiveness 300 Corporate Social Responsibility 300 Corporate Conduct 310

EXTERNAL AFFAIRS STRATEGIES AND PROGRAMMES 313

Social Citizenship Strategies 313 Economic Citizenship Strategies 318 Technology Transfer 319

ORGANISATIONAL RESPONSES 320

EXTERNAL AFFAIRS ANALYSIS 322

ORGANISING FOR EXTERNAL AFFAIRS MANAGEMENT -SOME ALTERNATIVES 325

IN CONCLUSION 327

References 328 Index 336

List of Tables

Table 1.1 Changes in the Multinational Corporate

Environment 1.2 Changes in Managerial Expectations and Attitudes 1.3 Changes in Planning and MICs Systems

3.1 The Ten Most Important Planning Pitfalls 3.2 Summary of Business Unit Quantitative Budgets

and Forecasts 3.3 Features of Scenario Planning

13-14 16

16-17

69

79 85

4.1 Companies' Competitive Capabilities Analysis I 02 4.2 PIMS Indicated Cross-impact Relationship Effects

on ROI 107 4.3 Alternative Organisation Structures and Manage-

ment Styles for Different Portfolio Positions 116-17

5.1 Debt Ratios in Selected Industries and Countries 139 5.2 Principal Factors affecting Subsidiary Capital

Structures 141 5.3 Foreign Exchange Rate Indicators 142 5.4 Foreign Exchange Risk Reduction Mechanisms 143 5.5 Limits on Leads and Lags and Netting in Select

Countries 144-5 5.6 Major Remittance Instruments used in MN Cs 148 5.7 Key Factors governing Remittance Policy 149

6.1 Effect of Tax Variables on Investment Location Decisions 150

6.2 Tax Treatment of Royalty Payments for Selected Countries 165

7 .1 Factors influencing Satellite Plant Spread and Location 189

List of Tables xm

8.1 Success Profiles in Cross-border Acquisitions com-pared to Domestic Acquisitions 208

8.2 Acquisition Success and Failure Rates by Diversi-fication Type 211

8.3 Impact of Market Share on Acquisition Success Rates 212

8.4 Impact of Size on Acquisition Success Rates 213 8.5 Impact of Profitability on Acquisition Success Rate 213 8.6 Post-acquisition Procedures: Summary of Points for

Investigation and Action 231

9.1 Political Concern by Industry 237 9.2 Type of Political Risk by Industry 238

11.1 Environmental Analysis - Some Key Issues 296-8 11.2 Assuming Social Responsibilities- the Case For and

Against 301-2 11.3 A Three-State Schema for Classifying Corporate

Behaviour 306-7 11.4 Social Responsibility Audit - Checklist of Headings 308 11.5 Key Topics in a Code of Conduct for Transnational

Enterprises 312

List of Figures

Figure 2.1 Forces for Centralisation and Decentralisation 24 2.2 Undiversified Small Exporting Organisation 25 2.3 Diversified Concern with Centralised Export

Structure 26 2.4 International Division Structure 27 2.5 Global Functional Structure 29 2.6 Functional Process Structure 30 2.7 Worldwide Product Division Structure 32 2.8 Local Umbrella Company Structure 34 2.9 Area-functional Organisation Structure 36 2.10 Area-product Organisation Structure 38 2.11 Mother-Daughter International Structure 41 2.12 Royal Dutch Shell Group Structure 45 2.13 Dunlop-Pirelli Holding Company Structure 46 2.14 Schema of Zaibatsu Structure including Inter-

national Linkages 47 2.15 International Organisational Evolution of Multi-

national Enterprise 49

3.1 Effect of Managerial Diversity and Interdependence on Relative Power in Decision-making in MNCs 53

3.2 Export Organisation Planning 54 3.3 Plan Activities in a Diversified Multinational 61 3.4 Summary of Competitor Analysis Planning 76 3.5 The Development of Base Case Scenarios 87

4.1 Japanese Motorcycle Industry: Price Experience Curves (1959-74) 90

4.2 Price-Cost Experience Curve Effects 91 4.3 Normal Relative Cost/Share Relationship 92 4.4 Growth-Share Matrix and the Corporate Portfolio 94

4.5 4.6 4.7 4.8

4.9

4.10 4.11

4.12

4.13

5.1

5.2 5.3 5.4

5.5

6. l 6.2

6.3 6.4

7.1 7.2

7.3

7.4

8.1

9.1

List of Figures

Industry-Corporation Frontier Curve McKinsey Portfolio Planning System Shell Directional Policy Matrix Product/Geography Second-order Directional Policy Matrix Relationships between Relative Market Share, Investment Intensity and Return on Investment Financial Ratio Matrix Importance of Geographic Market Definition for Business Analysis Importance of Market Segment Identification for Business Analysis Differential Effect of Inflation on the Strategic Portfolio

Elementary International Treasury Management Organisation Intermediate International Treasury Organisation Advanced International Treasury Organisation Structural Profile of Responsibility for Financial Tasks Leads and Lags in Hedging Technique

Sales Conduit Subsidiary Operation Combined Back-to-Back Finance Corporation Extraction Operations Tax Leverage Leasing Operations Global Fiscal Structure using Intermediate Hold­ing Companies

Stages in the Capital Investment Process The Parallel Processes of Business Planning and Capital Budgeting Checklist for Assessing Country Investment Climate Checklist for Establishing Licence Agreements

Developing Systematic Procedures for Risk Re­duction in Acquisitions

Political Intervention Sources and Types

xv

96 97

100

103

106 109

110

111

112

122 124 127

130 147

152

160 163

169

175

180

193--4 200

232

235

XVI

9.2 9.3

10.1 10.2

10.3

10.4 10.5

11.1 11.2 11.3

11.4 11.5

List of Figures

Decision Tree Related to Risk of Nationalisation Political Acceptability Profiles

Assessing International Product Market Needs Index of Standardisation of Marketing Decisions among European Subsidiaries of selected Multi­national Enterprises Checklist for Assessing Overseas Market

242 244

270-1

274

Potential 278 Assessing Overseas Distribution Channels 285-6 Evaluating International Communications Strategies 290-1

The Multinational Enterprise and its Publics The MNC's 'Constituencies' Clark Equipment Co. - Foreign Investment Balance Sheet Societal Response Profile Assessment Matrix Social Pressures on Business: A Systematic Analysis for Corporate Priorities

295 305

316 323

324

Preface

The basic purpose of this book is to describe the process and practice of strategic planning in the multinational enterprise. We have not started at the first principles of strategic planning systems but rather we assume that these are well understood by the majority of our readers. Rather we have concentrated on dealing with various areas of strategic planning as they have developed, with particular reference to international operations. Thus, we have included chapters on international treasury management, tax planning, political risk management and cross­border investments. In addition we have endeavoured to show how the process of planning in the MNC varies according to a number of important characteristics which can be identified.

Finally, the external environment in which the MNC must operate during the next quarter-century is likely to be consider­ably more hostile than that experienced from 1950 to the early 1970s. Already it has been seen how the considerable impact of discontinuous changes such as the oil crisis can make obsolete corporate plans based upon a steady state or a slowly changing environment. As a result planning systems, too, are responding to a world with much greater uncertainty and we have en­deavoured to capture the type of changes that are taking place.

The main basis for preparing the book has been a research programme at the Manchester Business School conducted over the past few years under the sponsorship of the Centre for Business Research and the Social Science Research Council, and Jed by R. M. Jalland and myself. We would like to express our thanks to these sponsoring bodies for their support and encouragement. This research has led to the production of a number of MBA dissertations which form the source and inspiration for much of the content of the book, and I would like to thank the research assistants involved for their efforts.

firstly, I would thank John Lovering and Warwick Jones who undertook the initial studies into multinational strategic planning systems and linked them to the strategy and structure

xviii Preface

of the firm. Although not cited directly, many of the examples used in Chapter 3 and elsewhere were drawn from their research notes. Next, after these initial research studies which surveyed current planning practice in some 40-50 British, American and European MNCs subsequent work focused upon a series of specific problem areas that were highlighted as a result of the initial research.

Secondly, therefore, I would like to thank Jeremy Kimber who conducted the first such specialised study into financial and tax planning in MNCs. This work has provided major contributions to Chapters 5 and 6. In these specialised studies our sample sizes were smaller than in the initial phase and were deliberately skewed to include only firms who were known or hypothesised to be in the forefront of the area of study. Thus Kimber's sample included only companies which were known to operate relatively well-developed financial and tax planning systems, although the sample was also balanced to include a deliberate mix of organisation structures and industrial strategies.

Similar studies were conducted by John Grewe and Jeremy Smith in the areas of political risk and external affairs, and I would thank them for contributing substantially to Chapters 9 and 11. Again skewed samples were chosen: for example, the planning of political risk was assessed in firms subjected to high levels of political risk with one relatively low-risk industry being used as a control. In the case of external affairs, companies with an advanced management position were identified from published reports and from external sources such as the church and other such agencies.

Tim Green's study of capital investment decision-making built upon Kimber's earlier sample and was designed to be complementary. This study was helpful in preparing Chapters 5 and 7. Jeremy Kimber also conducted a second study which focused upon how a number of major MN Cs planned to handle a particular political risk, namely the attempted imposition of national planning agreements by a British Labour Government. The detailed results of this latter study are not reported here in view of their sensitivity. However, in all these more specialised studies we have endeavoured not only to focus upon the specific but also to build up our general knowledge of the planning systems and processes prevailing in the companies researched. As a result, in some cases we have talked with the same

Preface xix

companies in both the initial general survey, and later during specific studies. This has helped to provide a cross-check on the research findings since each of the specialised studies was only expected to collect certain general data concerning the planning process in the firms studied. Each of the special studies involved in the second phase of research had a sample of between 15 and 20 companies while overall, during the research to date, general data has been collected on over 100 major MNCs from Europe, the UK and the USA, and to a much smaller extent Japan.

The task of the researchers was only made possible by the extremely generous help we have received from the companies researched and the many senior executives interviewed. We would like to express our thanks for this help and hope that the book in some small way helps to repay their kindness. Structured interviews were the standard research tool used throughout the research, although each company was extensively desk-re­searched before this stage. We were extremely pleased with the frankness with which details of many relatively delicate subjects were provided and in writing the book we have kept very strictly to our research code of confidentiality for individual companies. As a result, while a number of case examples from the research are used in the text they are not identifiable. Many named examples are used in the book, however, basically from published sources and a substantial number of these firms were included in one or more phases of the Manchester research.

My colleague and co-researcher during the research pro­gramme has been Mike J alland, who not only played a major role in the work itself but has contributed significantly to the production of this book. Apart from his most useful and constructive criticism and inspiration Mike has written Chapter 11 and parts of Chapters 3, 7 and 10. I am deeply grateful for this contribution.

Finally, I would thank Mrs Sue Chapman who has laboured through another series of drafts; my publishers for their encouragement and patience; and my long-suffering wife and family who have endured the production of the book with patience and 1iinderstanding. Despite all the help and guidance I have received and for which I am indebted any remaining errors or mistakes in the text are entirely mine.

Manchester September 1977

DEREK F. CHANNON

Acknowledgements

The authors and publisher wish to thank the following who have kindly given permission for the use of copyright material: The Academy of Management Journal and Dr Keith Davis for a table adapted from 'The Case For and Against Business Assumption for Social Responsibilities,' Vol. 16, No. 2, 1973; George Allen & Un win (Publishers) Ltd and Halsted Press, New York, for the extracts from International Marketing by S. Marjaro; Associated Business Programmes Ltd for a table from 'Business Survival and Social Change' by J. Hargreaves and J. Dauman; Business International Corporation for the diagrams from Business International, 1975; the tables and diagrams from Business International, S.A. Geneva, 1973, by J. Kitching, and a table from Business International Money Report, 1976; The Controller of Her Majesty's Stationery Office for a diagram from Strategic Alternatives for the British Motor Cycle Industry, House of Commons Paper 532/(1974/75); Harvard Business Review for the diagrams from 'Strategic Choices in Diversified MNCs' by C. K. Prahalad, July/Aug 1976, Copyright © 1976, 'New Financial Priorities for MNCs' by John T. Wooster and G. Richard Thoman, May/June 1974, Copyright © 1974, and 'Multinationals View Marketing Standardization' by Ralph Z. Sorenson and Ulrich E. Wiechmann, May/June 1975, Copyright © 1975, all published in Harvard Business Review and copyright of The President and Fellows of Harvard College; Longman Group Ltd for a table from Taxation and Multinational Enterprise by John F. Chown; Longman Group and Professor Raymond Vernon for a diagram from The European Internationals by L. Franko, based on material from 'Managing the Multinationals Enterprise' by Stopford and Wells; Pergamon Press Ltd for tables from 'Strategic Planning in a Turbulent International Environment' by K. A. Ringbakk, from 'The Identification and Assessment of Political Risk in the International Environment' by B. Lloyd, and from 'Social Pressures on Business: A Systematic Analysis for Corporate Priorities' by I. H. Wilson; Prentice-Hall

Acknowledgements XXl

Inc., for a diagram adapted from Manager in the International Economy, 3rd Edn © 1976, by R. Vernon and L. Wells; The Royal Dutch Shell Group Ltd for a table and a diagram from The Directional Policy Matrix, Company Publication, 1975; Professor S. Prakash Sethi for a table from 'Dimensions of Corporate Social Performance: An Analytical Framework' which appeared in California Management Review, Spring 1975, Vol. XVII, No. 3; and the United Nations for a table from 'Material Relevant to the Formulation of a Code of Conduct'.