Download Difference in strategic planning for domestic and international markets

Difference in strategic planning for domestic and
international markets: Literature Review
Monash University, Bachelor of Business and Commerce
TaeSung Park
22460683
[email protected]
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1. Introduction
Strategic planning may be described as the planning system to produce the best strategy as well
as step-by-step instructions for achieving those strategies so that the managers are able to go
through the right way (Mintzberg, 1994). The firms often pursue the business in international
scale mainly because of the goal of firm’s further growth and expansion, and international
strategy may help diversify and expansion of a business (Twarowska & Kakol, 2013). One may
argue that “the only difference between strategic planning for the domestic market and an
international market, is dealing with currency and language differences”. It may hold true
but should other factors be also analyzed further. Contrast to the domestic market in where the
managers may have already obtained the experiences and knowledge, the international market
requires the managers to explore, learn and practice the new way of doing business mainly due
to the “multidimensionality” and “complexity” of the focal markets a company may operate in
(Doole & Lowe, 2012). Analysis of the factors, in addition to language and currency, for
determining strategic planning in domestic and an international market will be described in this
essay based on the literature review.
2. Literature Review
2.1. Language and Currency
First of all, business communication is transformational translation process that is dynamic, bidirectional, and multiply influenced (Sherblom, 1998). When it comes to international business,
the process becomes complex and diversified due to multiple languages (Bobcock & DuBobcock, 2001). As it became complex and diversified, managers in international markets
would more struggle to handle business communication as compared to monolingual domestic
market, or at least multilingual nations such as India, South Africa, and Malaysia. In such
domestic market which have only few languages, managers will find the strategic planning to
be more convenient than those in international markets. In addition, Bobcock and Du-Bobcock
(2001) suggested the Communication Zones for managers to deal with multilingual
communication in multinational divisions1 for better strategic planning.
1
See Appendix - Figure 1. Communication Zones and Conversation Subjects at a Business Meeting. By Bobock & DuBobcock, 2001.
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At second, a currency, which is one of economy factor, may be the important factor to
distinguish the firm’s strategy in domestic and international markets due to foreign exchange
risk, which can be defined as the risk of an investment's value changing because of changes in
currency exchange rates (Madura & Fox, 2011). As the exchange rate fluctuates over time,
managers in international market may need to consider the stability of particular nation’s
economy or use of hedging technique when they plan the strategies in international market.
However, according to Miller (1992) reducing risk in foreign exchange may be trade-off with
another risk, for example, especially when the domestic market experiences the substantial
inflation while the firm uses the hedging technique. In contrast, managers does not have to
consider currencies in strategic planning in domestic market because they are not involved in
exchange risk directly. On the other hand, Adler (1974) found, by surveying various MNCs,
that the foreign exchange risk is irrelevant to firm’s international strategic decisions especially
in financial planning, which is also confirmed by Mehra (1978), Senbet (1979), and
Lachenmayer (1984).
Language and currency may be the factor that distinguish the strategic planning in domestic
and international market, nonetheless, it is suggested that PEST analysis - Environmental
scanning – and transaction cost theory (Miller, 1992; Kotter & Schlesinger, 2008) shall be
considered additionally to distinguish strategies in domestic and international market as
environmental factors was found to be generally not equivalent in domestic and international
market (Bartels, 1968).
2.2. PEST analysis and transaction cost
2.2.1. Political & Legal
At third, political and legal factors may be the critical role for distinguishing strategic planning
in domestic and international market. In a research done by Lee and Kwok (1988), it is found
that firms showed the differences in planning of strategy between domestic and international
market mainly due to political risk, international tax differentials, and availability of capital.
To illustrate, the determined strategic planning by managers will differ in domestic or
international markets depending on the nation’s political/ legal factors including minimum
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wage, labor laws, elections, regulations, war, coups and so on. The political/ legal factors can
be also supported by institutional theory (Kostova, Roth, & Dacin, 2008), especially formal
institutions such as governments, publics, organizations, by which firms are likely to be either
restricted or encouraged to pursue their business. For example, Hyundai, multinational
automobile manufacturer, produces and sells across South Korea which is their domestic
market as they are less restricted to do so in terms of political and legal regulations, it is even
being supported by governments by a form of subsidies, whereas it planned to enter Indonesian
market with Joint-Venture as it was restricted to operate the firm as wholly-owned (Auto, 1998).
In addition, Holburn (2001) argued that the impact of political risks is significantly lower for
firms with greater levels of international experience despite of high level of political risks. He
argued that as the MNCs gain more international experience, they tend to plan the strategies to
expand their business into more politically risky nations. For example, Rajwani (2014)
mentioned that managers in international markets can reduce the impact of the political risk by
planning the strategy for diversifying political risk such that it can trade-off with the other
beneficial factors such as greater market, cheaper resources.
2.2.2. Economic
At fourth, key economic factors such as labour costs, GDP, interest rate, inflation will possibly
influence such market demand, purchasing power (Hill, Cronk, & Wickramasekera, 2013).
Prevailing economic conditions of the nation will have an effect on the spending patterns of
consumers (Isaac, 2014). For example, tourism industry especially should monitor the domestic
and international economy in strategic planning because the consumers will spend much less
on leisures, recreation, holidays during financial hardships (Ritchie, 2004). However, in a study
conducted by Hansen and Wernerfelt (1989), economic factors are likely to have less impact
to ‘good’ companies because of created intangible assets. Therefore, firms may look for the
way to plan the strategy such as CSR activities in order for themselves to accumulate the
intangible assets.
2.2.3. Socio-cultural
At fifth, dealing with the cultures in only domestic market for managers may be easier than
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those with the international markets as it tends to be homogeneous or have only few subcultures
to consider, whereas considering cultures in international markets are complex and
extraordinarily heterogeneous. Societies or Cultures has many definitions but one of the best
is by Robert Murphy (1986) who defined the culture as “the total body of tradition borne by a
society and transmitted from generation to generation”. It may refers to the norms, values,
standards by which people act, and it includes the ways distinctive in each society of rendering
the world. In addition, Hofstede (1994) defined the culture as “collective sense of mind” which
distinguish the one society from one another with the measure of 5 dimensions: power distance,
individualism, masculinity, uncertainty avoidance, long-term orientation. For instance,
managers need to consider differently in terms of nation, region, ethnic group, women versus
men, old versus young, social class, an occupation, types of business, work organization, or
even a family depending on whether the market is domestic or international. MTV (Hill, et al.,
2013) adopted localization strategy, which is one of strategy of integration-responsiveness
framework, to enter each nations due to high local responsiveness especially in terms of culture,
on the other hand, Indofood (2014) used to focus on only Indonesian market as it had not
involved in international markets that only required strategic plans for domestic cultures not
for other cultures.
2.2.4. Technology
At sixth, changes in technology, including a rise in internet and automation in the work place
have transformed the way in where business work (Hill et al., 2013). Managers should conduct
thorough analysis of technological difference between the domestic and international markets
when they are involved in strategic planning (Bartels, 1968). Many researchers have pointed
out that business which are exposed to up-to-date technologies are likely to grow faster and
more internationally than those that are not (Coviello & Jones, 2004; Fischer & Reuber, 2008).
For example, companies that operate in international markets like semiconductor or electronic
manufacturer may conduct strategic planning that enables them to be located in Silicon Valley
for spill-over effect of technology, which is also explained by Dunning’s (1988) locationspecific advantages. Firms in domestic and international markets may compare such
technological factors like availability of internet, infrastructure and transportation, and level of
information technologies (Hill et al., 2013).
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2.3. Transaction cost
Lastly, transaction cost theory can distinguish the strategic planning in domestic and
international market. Because of the complexity of international operation, transaction costs
such as agency costs, auditing costs due to monitoring and bonding activities of MNCs are
expected to be higher than those of domestic companies (Lee & Kwok, 1988). Hennart (1986)
argued that the domestic companies are likely to internalize, which is usually of absence of
transaction costs, because they have substantial domestic information and experience whereas
firms in international may endure some transactional costs.
3. Further extension & Conclusion
In addition to factors above, other theories may support the firm’s distinction of strategic
planning in domestic and international market. For example, Dunning’s Eclectic paradigm
(Dunning, 1988) explains the firms are vary in strategic planning in domestic and international
market based on their Ownership advantage, Location advantage and Internalization. In
addition, extended from and inspired by Dunning’s Eclectic theorem, Rugman and Verbeke
(1993) suggested the method of extending Porter’s framework to incorporate the modern theory
of the MNEs with SWOT analysis. Rugman and Verbeke (1993) argued that their framework2
may possibly and practically enable the complex nature of international competitiveness by
analyzing Porter’s six influencing factors at five geographic levels when it comes to strategic
planning: local, regional, national, foreign, and global. McDougall (1989) suggested that the
domestic firms appear to be differentiated by the production expansion strategy and customer
specialization strategy which consist of targeting on limited geographical markets, maintaining
excess capacity and pursuing forward integration. On the other hand, he mentioned that
international firms are likely to be emphasized on the distribution and marketing strategy and
grand entry strategy, and apparently to compete in industries distinguished by a higher degree
of international competition and restrictiveness of governmental policies.
To summarize, languages and currency are likely to be the differences between strategic
planning for international and domestic market. However, it is shown that other environmental
factors such as political, economic, socio-cultural, and technology can possibly affect the firm’s
2
See Appendix - Figure 2. A SWOT analysis of international competitiveness determinants. By Rugman & Verbeke, 1993.
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strategic planning, with the additional theory of transactional cost. Based on the literature
review, the strategic planning in international market seems more unpredictable, complex,
difficult and challenging as more number of country in where the firms are operating in, on the
other side, the firms in domestic market may conduct strategic planning easier, simpler, and
smoother.
(1230 words – literature review section only)
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Reference list
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Appendix
Figure 1. Communication Zones and Conversation Subjects at a Business Meeting. By Bobock
& Du-Bobcock, 2001.
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Figure 2. A SWOT analysis of international competitiveness determinants. By Rugman &
Verbeke, 1993.
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