1. The Global Environment
Session 7
The Global Environment

2. Learning Objectives Why firms globalize
Identify Major Multi-National Market Groups
Recognize the typical evolutionary development from domestic to a global corporation
The differences/complexities of the global environment and the control problems that are faced by global firms
The globalization strategies for firms in foreign markets

3. Globalization 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

4. Competitive Disadvantage
Why Globalize?
Competitive Disadvantage
If you are not global in your reach and your rivals are…

5. 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

6. 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

7. Why Firms Globalize: Best Defense is a good 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

8. Conditions 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

9. Dominant Multinational Market Groups
The G-8 Nations
NAFTA – (soon to be AFTA?)
Pacific Rim /Asia
EEC –

10. THE GROUP OF 8 NATIONS
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.

11. 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.

12. Evolutionary Development of a Global Corporation
1. Export-import activity
Evolution of a global firm entails progressively involved strategy levels
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)

13. 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 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

14. Differences 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 universally
Different 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

15. 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

16. Globalization Strategy Options: Two Key Considerations

17. 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

18. Pressures for Local Responsiveness
Differences in customer tastes and preferences
Differences in infrastructure and traditional practices
Differences in distribution channels
Host government demands

19. Four Basic Strategies

20. 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

21. 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

22. Choosing a Global Strategy (cont’d)
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

23. True Global Strategy
The strategy of approaching worldwide markets with standardized products.

24. 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

25. Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar

26. Advantages and Disadvantages of Different Strategies for Competing Globally

27. Multidomestic and Global Industries
A multidomestic industry competition is essentially segmented from country to country (beer, food retailing)
A global industry is one in which competition crosses national borders (tires, athletic shoes)

28. Strategic Management in Global Industries
The World as One Battleground
More interconnected/similar than ever before

29. Factors Contributing to Globalization of Competition
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

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

31. Location and Coordination Issues of Functional Activities
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

32. 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