MULTINATIONAL STRATEGIC PLANNING

MULTINATIONA L
STRATEGIC
PLANNING
Derek F. Channon with Michael Jalland
Manchester Business School

MACMILLAN PRESS
LONOON
 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 xii

List of Figures XIV
Preface xvii
Acknowledgements xx

1 MULTINATION AL STRATEGY AND THE

ROLE OF PLANNING 2
THE MULTINATIONAL CORPORATION 2
WHO ARE THE MULTINATIONALS? 3
PATTERNS OF MULTINATIONAL EVOLUTION 7
THE CHANGING NATURE OF MULTINATIONAL PLANNING
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 INTERNATIONA L

~EMTIONS n
THE PATTERN OF MULTINATIONAL STRUCTURE
EVOLUTION 24
Export Sales Organisations 24
The International Division Structure 26
The Global Functional Structure 28
The Functional Process Structure 30
The Worldwide Product Division Structure 31
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 l5l
Tax Incentives/or Exports 153
Transfer Pricing l 55
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 l9l
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 13-14
1.2 Changes in Managerial Expectations and Attitudes 16
1.3 Changes in Planning and MICs Systems 16-17

3.1 The Ten Most Important Planning Pitfalls 69

3.2 Summary of Business Unit Quantitative Budgets
and Forecasts 79
3.3 Features of Scenario Planning 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
 List of Figures xv
4.5 Industry-Corporation Frontier Curve 96
4.6 McKinsey Portfolio Planning System 97
4.7 Shell Directional Policy Matrix 100
4.8 Product/Geography Second-order Directional
Policy Matrix 103
4.9 Relationships between Relative Market Share,
Investment Intensity and Return on Investment 106
4.10 Financial Ratio Matrix 109
4.11 Importance of Geographic Market Definition for
Business Analysis 110
4.12 Importance of Market Segment Identification for
Business Analysis 111
4.13 Differential Effect of Inflation on the Strategic
Portfolio 112

5.1 Elementary International Treasury Management

Organisation 122
5.2 Intermediate International Treasury Organisation 124
5.3 Advanced International Treasury Organisation 127
5.4 Structural Profile of Responsibility for Financial
Tasks 130
5.5 Leads and Lags in Hedging Technique 147
6. l Sales Conduit Subsidiary Operation 152
6.2 Combined Back-to-Back Finance Corporation
Extraction Operations 160
6.3 Tax Leverage Leasing Operations 163
6.4 Global Fiscal Structure using Intermediate Hold-
ing Companies 169

7.1 Stages in the Capital Investment Process 175

7.2 The Parallel Processes of Business Planning and
Capital Budgeting 180
7.3 Checklist for Assessing Country Investment
Climate 193--4
7.4 Checklist for Establishing Licence Agreements 200

8.1 Developing Systematic Procedures for Risk Re-

duction in Acquisitions 232

9.1 Political Intervention Sources and Types 235

XVI List of Figures
9.2 Decision Tree Related to Risk of Nationalisation 242
9.3 Political Acceptability Profiles 244

10.1 Assessing International Product Market Needs 270-1

10.2 Index of Standardisation of Marketing Decisions
among European Subsidiaries of selected Multi-
national Enterprises 274
10.3 Checklist for Assessing Overseas Market
Potential 278
10.4 Assessing Overseas Distribution Channels 285-6
10.5 Evaluating International Communications
Strategies 290-1

11.1 The Multinational Enterprise and its Publics 295

11.2 The MNC's 'Constituencies' 305
11.3 Clark Equipment Co. - Foreign Investment
Balance Sheet 316
11.4 Societal Response Profile Assessment Matrix 323
11.5 Social Pressures on Business: A Systematic
Analysis for Corporate Priorities 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 cross-
border 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 consider-
ably 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 en-
deavoured 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-re-
searched 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 pro-
gramme 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 DEREK F. CHANNON
September 1977
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'.