1. Globalization and the Need for Global Business Competencies By S. Tamer Cavusgil The John W. Byington Endowed Chair in Global Marketing Executive Director, Center for International Business Education & Research Michigan State University 19-24 May 2001 International Business Institute for Community College Faculty East Lansing, Michigan

2. Today we will discuss…. Major developments in the world economy and their impact on business activity… What are the macro trends driving the globalization of economies? What are the consequences of globalization? How do these major events impact the globalization of business activity? What is global business competence?

3. Driving the Globalization Process are Seven Macro Trends Reduction of barriers to trade and investment Regional trade agreements and economic blocs Market liberalization and privatization Integration of world financial markets Transportation and communication technology Information technology Industrialization, economic development and modernization 1 2 3 4 5 6 7

6. Globalization of Economies Competitive Drivers 4. Integration of financial markets Cost Drivers 5. Transportation and communication technology 6. Information technology Market Drivers 7. Industrialization, economic development, and modernization Government Drivers 1. Reduction of barriers to trade and investment 2. Regional trading blocs 3. Market liberalization and privatization These Macro Trends Can Be Grouped Under Four Categories

7. The Internet is helping companies to lower costs dramatically across their supply and demand chains, take their customer service into a higher level, enter new markets, create additional revenue streams, and redefine their business relationships. The Economist 26 June 1999

9. Consequences of Globalization Competition is now on a worldwide scale Widespread industry consolidation is underway Globalization is leading to rise (and fall) of industries Diffusion of products is now worldwide New types of business enterprises are emerging, such as Born Globals Monetary unions are now a reality Interconnectedness of economies implies that financial crises spread globally

13. Economic freedom explains from 54 to 74 percent of the variation in income among countries. A 10% increase in economic freedom in a country can produce an increase in GNP per capita of 7.4% to 13.6%. CONCLUSION: The message is clear: enhancing economic freedom can lead to very large improvements in living standards. Economic Freedom and Wealth

14. A New Breed of Company: Born Global Young, entrepreneurial start-ups Export soon after establishment Offer products with universal appeal Seek global niche markets Develop global distribution networks Limitations of being small are offset by exploitation of modern advances in information, communication, and transportation technologies

15. Is Globalization a Good Thing? The Critics Benefits of globalization are unevenly distributed Globalization causes dislocation of jobs Wages for unskilled labor are declining Manufacturing moves offshore to avoid workplace safety and health regulations Global companies fail to protect the environment

16. Power shifts to multinational corporations and supranational organizations; nations loose sovereignty Concentration of power by multinational corporations leads to monopoly International financial markets are inherently unstable Globalization results in loss of national cultural values and identity Is Globalization a Good Thing? The Critics (continued)

18. For Companies, Globalization Poses Both Challenges and Opportunities Challenges Opportunities Intensified worldwide competition Excess capacity; industry consolidation Rapid technological change Need to rationalize global supply chain Need to integrate worldwide activities... Expanded opportunities in a “borderless” world Increased acceptance of global brands Scale economies and rationalization Improved market access, speed, and connectivity Learning from global partners...

20. Types of Risks in International Business Commercial Risk Country (Political and Legal) Risk Cross-Cultural Risk Currency/Financial Risk

21. Four Types of Risks Commercial Risk Types of Risks in International Business Country (Political and Legal) Risk Cross-Cultural Risk  Weak Partner  Operational Problems  Timing of entry  Competitive intensity  Poor execution of strategy  Currency exposure  Asset valuation  Foreign taxation  Inflationary and transfer pricing  Global sourcing  Social/political unrest and instability  Economic mismanagement; inflation  Distribution of income; size of middle class  Government intervention, bureaucracy, red tape  Market access; barriers; profit repatriation  Legal safeguards for intellectual property right  Cultural distance  Negotiation patterns  Decision-making styles  Ethical practices Currency/Financial Risk

22.  Social/political unrest and instability  Economic mismanagement; inflation  Distribution of income; size of middle class  Government intervention, bureaucracy, red tape  Market access; barriers; profit repatriation  Legal safeguards for intellectual property right Country (Political and Legal) Risk Types of Risks in International Business Cross-Cultural Risk  Cultural distance  Negotiation patterns  Decision-making styles  Ethical practices

23. Types of Risks in International Business Commercial Risk  Weak Partner  Operational Problems  Timing of entry  Competitive intensity  Poor execution of strategy Currency/ Financial Risk  Currency exposure  Asset valuation  Foreign taxation  Inflationary and transfer pricing  Global sourcing

24. How good is the country? How good is the partner? How good is the venture? Fundamental Tasks in International Business

25. Country Screening and In-depth Analysis Industry Market Potential Assessment Partner Selection Value Chain Complementarity Market Entry Mode Company Sales Potential Analysis Venture Formation International Market Entry Planning

26. Overall Market Opportunity Indicators Market Potential Indicators for 23 Emerging Markets

27. Case Study: Think Global, Act Local? ABC Company is an automotive supplier, specializing in precision-machined parts for noise and vibration equipment, transmission components, and AC compressor parts. It employs 2,000 people in its nine factories across the U.S. Its annual sales are about $400 million. Following its principal customers such as Ford to foreign markets, ABC went international rather hastily. It acquired companies in England, France, Spain, Brazil, South Korea and India. It also owns a new facility in Mexico.

28. ABC has not yet integrated its operations across its global network of companies. Currently, each national company has its own production, procurement, sales and other operations, and manages human resources and information technology locally. Yet, the ABC finds that each of its customers requires standardized components regardless of where in the world they are to be supplied. Case Study: Think Global, Act Local? (continued)

29. Strategy One: Decentralize Decision-Making and Control Each company in ABC’s global network has its own unique competences and culture. Management and labor in each company is proud of their specialized skills and market position developed over the years. Each will argue that they know the requirements of the local market better than the headquarters, and can respond to local developments faster, if they are given more autonomy. Country managers also stress that they have a unique organizational and national culture, reflected in such things as work styles, employee motivation, reporting relationships, and national pride. SOLUTION: Localize operations and enable maximum adaptation.

30. Headquarters at ABC is concerned with the redundancy in the worldwide network and resulting inefficiencies. There is duplicate staff in each of the national organizations. Benefits of consolidating activities such as product design, procurement, and manufacturing are not materialized. A globally coordinated, streamlined organization does not exist, where each national company knows exactly how they fit in the “big picture.” The company may also be failing to respond to converging product standards say, in the European Union, in a coordinated way. Each of its European operations is trying to meet these requirements without the benefit of experience that exists elsewhere in the global network. SOLUTION: Centralize decision making and closely coordinate activities worldwide. Strategy Two: Centralize Decision Making and Control

31. Pressures for Local Responsiveness (Decentralization) Nation states and protectionism Tariffs and Non-Tariff trade barriers Unique industry and product standards Local market requirements: customer need, competitive environment; distribution structure Cultural differences Geographic separation Pressures for Global Integration (Centralization) Homogeneous (converging) demand patterns Acceptance of global brands Harmonizing standards, practices Diffusion of uniform technology Availability of pan-regional media Integration of markets through economic blocs Spread of international collaborative ventures Need to monitor competitors on a global basis

32. Benefits of Global Integration Cost reduction Improved quality of products and processes Enhanced customer preference Increased competitive leverage Benefits of Local Responsiveness Responsive to local needs Rapid response to changing environment Exploit local talent and capabilities Create entrepreneurial spirit, greater ownership and morale Enhance local competitiveness Hold local managers accountable for performance

33. What is involved in global integration?

34. What is Global Integration? Elimination of redundancy Process improvement Commonization/uniformity Interconnectedness Balance between the HQ and subsidiaries Lead centers of excellence Best practices repository Common organization and culture Coordinated global strategy

35. National or Multi-domestic companies Global or Transnational Companies Nestle, Unilever, Asea Brown Boveri, Sony, Coca-Cola Strong national identity National endowments: talent pool, skills, capabilities Unique corporate governance/ownership patterns National regulations on employment National patterns of investment in R & D Planning and resource allocation Dependence on global markets Worldwide manufacturing capability Standardized products Globally integrated strategy Centralized structure and decision-making Uniform operational policies and routines Global organization and culture

36. Global Strategy Local Responsiveness High Low High Standardization Global brands Global identity Selective adaptation This Global, Act Local? Export-based approach Direction not coordination Multi-local Dispersed national authority Maximum autonomy

37. Partnering: An Alternative to Vertical Integration Avoid transaction costs (searching, negotiating, communicating, monitoring) Internal transaction costs may be lower Retain proprietary knowledge Exploit the benefits of internal discovery, organizational learning, strong organizational culture Avoid dependence on partners (e.g., suppliers, distributors) Reduce risk Achieve greater efficiency Concentrate on what you do best Gain market entry Achieve flexibility in sourcing Gain speed in getting products to market Establish long-term relationships with suppliers, distributors and other partners Exploit advantages of partners Take advantage of government incentives Internalization of Value Adding Activities (Vertical Integration) Externalization or Unbundling the Value Chain (Partnering)

38. Research & Development Product Design Manufacturing Marketing Distribution Sales & Service Stage in Value Chain International strategic alliances Licensing/cross licensing Design contracting Global procurement Contract manufacturing Equity joint ventures (FDI) Agency agreements Licensing Exporting to distributors/ agents Franchising Exporting to end-users Business format franchising Agency/representative relationships Types of CollaborationCompany Examples Telecoms, computers, drugs, aircraft, satellite communication systems… Dow, Pharmacia-Upjohn Software, autos, fashion goods, shoes, furniture… Whirlpool, autos Gerber (Novartis), Kellogg IKEA, Guardian Industries Kmart, Manpower, Banks, Courier Services, Amway

39. Risks in Collaboration Are we likely to grow too dependent on our partner? Will we stifle growth and innovation in our own organization? Will we share our competences excessively? Will we expose our company to high levels of commercial, political, cultural, or currency risk? Will we close some growth opportunities? Will management of the ICV become an excessive burden?

41. Rapid learning from partner How Do You Measure Success? Development of global market position Access to a new technology Profits and strategic benefits Basis for new collaborative projects

42. Weak basis for collaboration; lack of synergy Poor planning and organizational conflicts Cultural incompatibility Inability to integrate separate organizations and activities Partner goals change over time or they lose enthusiasm. Partners fail to walk the fine line between cooperation and competition. What Causes Failures In Collaboration

43. Ingredients of Success in Collaboration A synergistic plan and strategy A “win-win” sense of mission Equal governance, a shared enterprise Cultural compatibility Non-ambiguous organizational and management procedures

44. Financial Times

45. Three Components of Global Competence Country Market Knowledge Cross-Cultural Knowledge Cross-Border Transactions Knowledge

46. CROSS- BORDER TRANSACTIONS KNOWLEDGE CROSS CULTURAL KNOWLEDGE Human Resource Development Language Proficiency Cross-Cultural Skills Currency Risk/ Pricing/ Getting Paid Organizational Readiness and Structure Ethics and Social Responsibility and Government Relations Cross- Cultural Negotiation Skills International Logistics Standards and Regulations and Product Liability COUNTRY MARKET KNOWLEDGE Global Marketing Opportunity Assessment (Research and Intelligence) Subsidiary/Project Management Product Strategy (Adaptation/ Standardization) Supply Chain Management Business Partnering Configuration of Value Adding Activities in target market/entry mode Market Entry Planning and Strategy Vital Components for Global Capabilities

47. Worldwide Coordination Global Competence: An Alternative Conceptualization Customer Relationships Product Innovation and Learning Perspective Internal Business Processes

49. Constant Search for the Next Competitive Advantage Efficient organization (operational excellence; cost leadership) Flexible organization (locational advantage) Innovative organization (product/design leadership) Networked organization (partnering competence) Learning organization (knowledge assets and constant renewal) Market-oriented organization (customer focus; time to market) The Virtual or the Internet organization (ability to transfer speed and efficiency gains to the business system of suppliers and customers)

51. S. Tamer Cavusgil/Michigan State University, 20 October 1999: GMU Virtual