© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 1 Session 9 & 11 The Global Environment

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 2 Learning Objectives 1. The importance of a company’s decision to globalize 2. The four main strategic orientations of global firms 3. The complexity of the global environment and the control problems that are faced by global firms 4. Major issues in global strategic planning, including the differences for multinational and global firms 5. The market requirements and product characteristics in global competition 6. The competitive strategies for firms in foreign markets

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 3 Globalization 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 Understanding the nuances of competing in global markets is rapidly becoming a required competence of strategic managers

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 4 Why Firms Globalize 1. 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 Question: Should firms be proactive or reactive?

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 5 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 6 The 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.

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 7 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 Development of a Global Corporation

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 8 Differences Between Factors: Environmental Factors U.S. OperationsInternational 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 available Skilled labor scarce, requiring training or redesign of production methods Financing Well-developed financial markets Poorly developed markets; capital flows subject to government control

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 9 Differences Between Factors: Environmental Factors (Concluded) U.S. OperationsInternational 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 universally Different currencies; problems created by changing exchange rates and government restrictions Transportation/ Communication Among the best in the worldOften 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 10 Comparative 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 11 Increasing Profitability Through Global Expansion Location economies Economic benefits from performing a value creation activity in the optimal location Effects Can lower costs Can enable differentiation Caveats Transportation costs and trade barriers Political and economic risks

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 12 Increasing Profitability Through Global 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 13 Globalization Strategy Options: Two Key Considerations

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 14 Pressures 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 15 Pressures for Local Responsiveness Differences in customer tastes and preferences Differences in infrastructure and traditional practices Differences in distribution channels Host government demands

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 16 Four Basic Strategies

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 17 Choosing 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 18 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 19 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 20 True Global Strategy The strategy of approaching worldwide markets with standardized products.

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 21 Choosing a Global Strategy (cont’d) Transnational strategy Simultaneously seeking to lower costs, be locally responsive, and transfer competencies in a way consistent with global learning

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 22 Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 23 Advantages and Disadvantages of Different Strategies for Competing Globally

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 24 Multidomestic and Global Industries A global industry is one in which competition crosses national borders A multidomestic industry is one in which competition is essentially segmented from country to country

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 25 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 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 Low level of trade regulation and regulations regarding foreign direct investment Factors Contributing to Globalization of Competition

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 26 The 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 27 Location and Coordination Issues of Functional Activities Functional Activity Location IssuesCoordination 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 28 Globalization 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