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© 2000 The McGraw-Hill Companies, Inc.
Irwin/McGraw-Hill
1
Session 9 & 11Session 9 & 11
The Global Environment
© 2000 The McGraw-Hill Companies, Inc.
Irwin/McGraw-Hill
2
Learning ObjectivesLearning 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
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GlobalizationGlobalization
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
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Why Firms GlobalizeWhy 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?
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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
Development of a Global CorporationDevelopment of a Global Corporation
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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
© 2000 The McGraw-Hill Companies, Inc.
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Differences Between Factors: Environmental Factors Differences Between Factors: Environmental Factors (Concluded)(Concluded)
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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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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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
© 2000 The McGraw-Hill Companies, Inc.
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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 strategySimultaneously 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
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
A multidomestic industry is one in which competition is
essentially segmented from country to country
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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