The Global Business EnvironmentThe Global Business Environment

International Strategy Formulation

• Why Globalize?

– expand sales• when domestic markets are saturated, should go

overseas to increase sales and profits– acquire resources

• resources may be more readily available and less costly in other countries

– diversify sources of sales and supplies• different business cycles between countries• may avoid impact of price swings or shortages

– avoid tariffs

The Changing Global Environment

• In the past, managers have viewed the global sector as closed– Each country or market was assumed to be isolated from

others– Firms did not consider global competition, exports

• Today’s business environment is very different– Managers need to view it as an open market– Organizations buy and sell around the world– Managers need to learn to compete globally

• Global organizations– organizations that operate and compete in more than one

country– are free to establish foreign subsidiaries to become strong

world competitors

Barriers to Free Trade

Free TradeBarriers

Tariffs

Economic Communities

Export

Restraints

Buy National Campaigns Quotas

Local Ownership Requirements

Distance

Cultural Differences

Barriers to International Trade

• Trade Controls - governmental influences usually aimed at reducing the competitiveness of imported products or services– Tariffs: taxes levied on goods shipped

internationally– Subsidies: direct payments to domestic producers– Quotas: legal restrictions on the import of goods

• Free trade doctrine - predicts that if each country agrees to specialize in the production of goods that it can produce most efficiently, it will– make the best use of global resources– result in lower prices

Distance and Cultural Barriers

• Distance and Cultural barriers also “closed” the global environment– Distance closed the markets as far as some managers

were concerned– Communications could be difficult– Languages and cultures were different

• During the last 50 years, communications and transportation technology has dramatically improved– Jet aircraft, fiber optics, satellites have provided fast,

secure communications and transportation– These have also reduced cultural differences

Effects of Free Trade on ManagersEffects of Free Trade on Managers

• Declining barriers have opened great opportunities for managers.– Managers can not only sell goods and services but also

buy resources and components globally.• Managers now face a more dynamic and exciting job due

to global competition.

Global Task EnvironmentGlobal Task Environment

Suppliers

Distributors

Customers

CompetitorsForces Yielding Opportunities

and Threats

Suppliers & DistributorsSuppliers & Distributors

• Managers buy products from global suppliers or make items abroad and supply themselves– Key is to keep quality high and costs low

• Global outsourcing: firms buy inputs from throughout the world– GM might build engines in Mexico, transmissions in

Korea, and seats in the U.S.– Finished goods become global products

• Distributors: each country often has a unique system of distribution– Managers must identify all the issues

Customers & CompetitorsCustomers & Competitors

• Formerly distinct national markets are merging into a huge global market– True for both consumer and business goods– Creates large opportunities

• Still, managers often must customize products to fit the culture– McDonald's sells a local soft drink in Brazil

• Global competitors present new threats– Increases competition abroad as well as at home.

Forces in the Global General EnvironmentForces in the Global General Environment

Political &Legal Systems

Economic system

SocioculturalSystem

Forces yieldingOpportunities

and threats

Political/Legal Environment

• Different legal systems: common law or civil law– Representative democracies: such as the U.S., Britain, and

Canada• Citizens elect leaders who make decision for electorate.• Usually has a number of safeguards such as freedom of

expression, a fair court system, regular elections, and limited terms for officials

• Well-defined legal system and economic freedom– Totalitarian regimes: a single political party or person monopolize

power in a country• Typically do not recognize or permit opposition• Do not have most safeguards found in a democracy

• Difficult to do business with given the lack of economic freedom • Human rights issues also cause managers to avoid dealing

with these countries

Economic Environment

Economic Systems• Market Economy

– production and prices are dictated by supply and demand

– production of goods and services is privately owned– competitive markets– strong currencies – institutional support– well-functioning infrastructures– investment opportunities for individuals– social welfare, consumer-directed,

administratively guided

Economic Environment

Command Economy– government sets goals and determines the price

and quantity of what is produced– most command economies are moving away from

the command economic system• Mixed Economy

– certain economic sectors controlled by private business, while others are government controlled

– many mixed countries are moving toward a free enterprise system

• Key Economic Issues (and indicators)– economic growth, inflation, quality of life, GDP– exchange rates

International Strategy FormulationHow Do Organizations Globalize?

Stage One: Passive Response

Importing: firm makes products and sells abroad

Exporting: to foreign countries

Stage Two: Initial (Overt) Entry

Hiring foreign representation

Contracting with foreign manufacturers

Stage Three: Fully-established operations

Licensing/Franchising

Foreign Direct Investment (FDI)

- Joint Ventures

- Foreign Subsidiary

International Strategy Formulation

• Exporting: selling abroad, either directly to target customers or indirectly by retaining foreign sales agents and distributors

• Importing: selling other countries products in the home country, either directly to target customers or indirectly

Adv: quick and relatively inexpensive

test the waters and learn about customers

Disadv: high transportation costs

tariffs and quotas

danger of poor intermediary selection

International Strategy Formulation

• Licensing: an arrangement where a firm (licensor) grants a foreign firm the right to use intangible (“intellectual”) property such as patents, copyrights, manufacturing processes, or trade names for a specified period of time, usually in return for a percentage of the earnings, called royalty

Adv: small or insignificant investment

Disadv: loss of control

International Strategy Formulation

• Franchising: an arrangement where a parent company (franchisor) grants a foreign firm (franchisee) the right to do business in a prescribed manner. Usually involves a longer time commitment by both parties than required under licensing agreements

Adv: small or insignificant investment

Disadv: loss of quality control

International Strategy Formulation

• Foreign Direct Investment:

operations in one country that are controlled by entities in a foreign countries

– acquiring control by owning more than 50 percent of the operation

– turns a firm into a multinational enterprise

Foreign Direct Investment

• Strategic Alliance: – a cooperative agreement between potential or

actual competitors– an agreement between firms that is of strategic

importance to one or both firms; competitive viability

• Joint Venture:– the participation of two or more companies jointly

in an enterprise in which each party contributes assets, owns the entity to some degree, and shares risk

• Wholly Owned Foreign Subsidiaries– provide for tightest controls by foreign firms– very costly but can yield high returns

International ExpansionInternational Expansion

ImportingExporting

LicensingFranchising

Joint VenturesStrat. Alliances

Wholly-owned For. Subsidiary

Low HighLevel of Foreign involvement and investment needed by a global organization