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Session 4 Part 1Session 4 Part 1

Chapter 5: The Global Environment

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Learning ObjectivesLearning Objectives

1. Why firms globalize

2. Identify Major Multi-National Market Groups

3. Recognize the typical evolutionary development from domestic to a global corporation

4. The differences/complexities of the global environment and the control problems that are faced by global firms

5. The globalization strategies for firms in foreign markets

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Globalization DefinedGlobalization Defined

Globalization refers to the strategy of approaching worldwide markets with standardized products

Awareness of the strategic opportunities faced by global corporations and of the threats posed to them is important to planners in almost every domestic U.S. industry

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Competitive DisadvantageCompetitive Disadvantage

If you are not global in your reach and your rivals are…

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Increasing Profitability Through Global Increasing Profitability Through Global ExpansionExpansion Location economies

Economic benefits from performing a value creation activity in the optimal location

EffectsCan lower costsCan enable differentiation

CaveatsTransportation costs and trade barriersPolitical and economic risks

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Increasing Profitability Through Global Increasing Profitability Through Global Expansion (cont’d)Expansion (cont’d) The experience curve

Serving a global market from one or a few plants is consistent with moving down the experience curve and establishing a low-cost position

Transferring distinctive competencies Companies with distinctive competencies can realize

large returns by expanding to global markets where competitors lack similar competencies and products

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Why Firms Globalize: Best Defense is a Why Firms Globalize: Best Defense is a good offensive globalization strategygood offensive globalization strategy

U.S. firms often can reap benefits from industries and technologies developed abroad

Direct penetration of foreign markets can drain vital cash flows from a foreign competitor’s domestic operations

The resulting lost opportunities, reduced income, and limited production can impair the competitor’s ability to invade U.S. markets

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Conditions are RipeningConditions are Ripening

Firms are able to globalize more easily and rapidly due to

Fall of centrally planned economies in China, Russia/Easter European companies – more free market based.

The emergence of trade alliances: EEU, Nafta…

Rapid Industrialization in Developing Nations

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Dominant Multinational Market GroupsDominant Multinational Market Groups

The G-8 NationsNAFTA – soon to be AFTAPacific Rim /AsiaEEC – not incorporating the former Soviet Bloc

nations as Independent states

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These meetings of the leaders of the United States, Britain, Italy, Japan, France,

Germany, Russia, and Canada are the way the powerful industrialized nations of the

world seek to work out differences between themselves and arrive at policies that can

reduce conflict and other problems elsewhere.

THE GROUP OF 8 NATIONS

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The European Economic CommunityThe European Economic Community

Austria, Belgium, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany (originally West Germany), Great Britain, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, and Sweden—are full members of the EU.

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1. Export-import activity

2. Foreign licensing and technology transfer

3. Direct investment in overseas operations (manufacturing plants and global management skills)

4. Substantial increase in foreign investment (foreign assets comprise significant portion of total assets)

Evolution of a global firm entails

progressively involved strategy

levels

Evolutionary Development of a Global Evolutionary Development of a Global CorporationCorporation

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Differences Between Factors: Environmental Factors Differences Between Factors: Environmental Factors

U.S. Operations International Operations

Language English used almost universally Use of local language required in many situations

Culture Relatively homogenous Quite diverse, both between countries and within countries

Politics Stable and relatively unimportant Often volatile and of decisive importance

Economy Relatively uniform Wide variations among countries and among regions within countries

Government interference

Minimal and reasonably predictable Extensive and subject to rapid change

Labor Skilled labor availableSkilled labor scarce, requiring training or redesign of production methods

Financing Well-developed financial markets Poorly developed markets; capital flows subject to government control

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Differences Between Factors: Control ProblemsDifferences Between Factors: Control Problems

U.S. Operations International Operations

Media research

Data easy to collect Data difficult and expensive to collect

Advertising Many media available; few restrictions

Media limited; many restrictions; low literacy rates may rule out print media

Money U.S. dollar used universallyDifferent currencies; problems created by changing exchange rates and government restrictions

Transportation/Communication Among the best in the world Often inadequate

Control Always a problem, but centralized control will work

A worse problem - centralized control won’t work

Contracts Once signed, are binding on both parties even if one makes a bad deal

Can be avoided and renegotiated if one party becomes dissatisfied

Labor relations

Collective bargaining; layoff of workers easy

Layoffs often not possible; may have mandatory worker participation; change sought via political process

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Comparative Management FrameworkComparative Management Framework

Compare and Contrast the Management Models, Practices, Principles, Strategies, Policies…Across Classes of Organizations

Could be Profit vs Not-For-Profit, Small vs Large , Private vs Public

Most Often Concerned with Comparative Analysis Among Different Regions of World

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Globalization Strategy Options: Two Key Globalization Strategy Options: Two Key ConsiderationsConsiderations

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Pressures for Cost ReductionsPressures for Cost Reductions

When companies produce commodity products Where differentiation on nonprice factors is difficult

and price is the main competitive weapon Where competitors are based in low-cost locations Where there is persistent excess capacity Where consumers are powerful and face low switching

costs The liberalization of the world trade and investment

environment

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Pressures for Local ResponsivenessPressures for Local Responsiveness

Differences in customer tastes and preferences Differences in infrastructure and traditional

practices Differences in distribution channels Host government demands

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Four Basic StrategiesFour Basic Strategies

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Choosing a Global StrategyChoosing a Global Strategy

International strategy Creating value by transferring competencies and

products to foreign markets where indigenous competitors lack those competencies and products

Makes sense if a company has a valuable competence that indigenous competitors in foreign markets lack and if it faces weak pressure for local responsiveness and cost reductions

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Choosing a Global Strategy (cont’d)Choosing a Global Strategy (cont’d)

Multidomestic strategy Developing a business model that allows a company

to achieve maximum local responsiveness Makes sense when there are high pressures for local

responsiveness and low pressures for cost reductions Companies may become too decentralized and lose

the ability to transfer skills and products

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Choosing a Global Strategy (cont’d)Choosing a Global Strategy (cont’d)

Global strategy Focusing on increasing profitability by reaping cost

reductions that come from experience curve effects and location economies; pursuing a low-cost strategy on a global scale

Makes sense when there are strong pressures for cost reductions and demand for local responsiveness is minimal

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True Global StrategyTrue Global Strategy

The strategy of

approaching worldwide

markets with

standardized products.

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Choosing a Global Strategy (cont’d)Choosing a Global Strategy (cont’d)

Transnational strategy (Most Common)Simultaneously seeking to lower costs, be

locally responsive, and transfer competencies in a way consistent with global learning

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Cost Pressures and Pressures for Local Cost Pressures and Pressures for Local Responsiveness Facing CaterpillarResponsiveness Facing Caterpillar

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Advantages and Disadvantages of Different Advantages and Disadvantages of Different Strategies for Competing GloballyStrategies for Competing Globally

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Multidomestic and Global IndustriesMultidomestic and Global Industries

A global industry is one in which competition crosses national borders (tires, athletic shoes)

A global industry is one in which competition crosses national borders (tires, athletic shoes)

A multidomestic industry competition is essentially

segmented from country to country (beer, food retailing)

A multidomestic industry competition is essentially

segmented from country to country (beer, food retailing)

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Strategic Management in Global IndustriesStrategic Management in Global Industries28

The World as One Battleground

More interconnected/similar than ever before

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Economies of scale in functional activities of firms in industry

Economies of scale in functional activities of firms in industry

High level of R&D expenditures on products requiring more than one market to recover development costs

High level of R&D expenditures on products requiring more than one market to recover development costs

Presence in industry of predominantly global firms expecting consistency of products across markets

Presence in industry of predominantly global firms expecting consistency of products across markets

Presence of homogeneous product needs across markets, reducing requirement of customizing product

Presence of homogeneous product needs across markets, reducing requirement of customizing product

Low level of trade regulation and regulations regarding foreign direct investment

Low level of trade regulation and regulations regarding foreign direct investment

Factors Contributing to Globalization of Factors Contributing to Globalization of CompetitionCompetition

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The Global ChallengeThe Global Challenge

Few “pure” cases of either global or multidomestic industries exist

The challenge -- global firms must

Decide which activities will be performed in how many and which locations

Determine degree to which activities are coordinated across locations

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Location and Coordination Issues of Functional Location and Coordination Issues of Functional ActivitiesActivities

Functional Activity Location Issues Coordination Issues

Operations Location of production facilities for components Networking of international plants

Marketing Product line selection;Country (market) selection

Commonality of brand name; Coordination of sales; Similarity of channels and product positioning;Coordination of pricing

Service Location of service organization Similarity of service standards and procedures worldwide

Research & Development

Number and location of R&D centers

Interchange among dispersed R&D centers; Develop products responsive to market needs in many countries

Purchasing Location of purchasing function

Manage suppliers located in different countries; Transfer market knowledge; Coordinate purchases of common items

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Globalization of the Company MissionGlobalization of the Company Mission

Different environmental opportunities, constraints, and risks confront a firm going global

Top management must reassess firm’s fundamental purpose, philosophy, and strategic intentions

Mission statement must be revised to accommodate changes in Strategic decision making Corporate direction Strategic alternatives Strategic capabilities