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Global Business

Global Business . Drivers of Globalization. Business Needs Lower cost factors of production (labor, natural resources) Larger market size to support efficient scale and justify large investment in R&D and product development Extended product life cycle. Opportunities

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Global Business

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  1. Global Business

  2. Drivers of Globalization Business Needs • Lower cost factors of production (labor, natural resources) • Larger market size to support efficient scale and justify large investment in R&D and product development • Extended product life cycle Opportunities • Growth of emerging nations • Declining trade and investment barriers • Common customer requirements • Increasing demand for universal products

  3. Diversifying foreign operations

  4. Organic Growth • No excess capacity • Full control • No cultural barriers • New markets and high tech markets

  5. Exporting • Allows scale and experience curve economies But • High transportation costs • Trade barriers • Problems with local marketing agents

  6. Licensing • Low development costs • Low risks But • Lack of control over technology • No scale and experience curve economies • Can’t engage in global strategic coordination

  7. Franchising • Low development costs • Low risks But • Lack of control over quality • Can’t engage in global strategic coordination

  8. Joint Ventures • Access to local partner’s knowledge • Shared development costs • Shared risks But • Lack of control over technology • Can’t engage in global strategic coordination

  9. Wholly Owned Subsidiaries • Control over operations • Protection of technology • Ability to engage in global strategic coordination • Ability to realize scale and experience economies But • High costs and risks

  10. Mergers and Acquisitions • Speed of entry • Access to technology • Speed of building market share • Bypass regulatory barriers But • Risk of overcapacity

  11. Wholly owned subsidiaries

  12. Trade Off: Local Responsiveness vs. Economies of Scale Local Responsiveness necessary when • Products are different across countries • Distribution channels require local presence • Government requirements demand local presence Scale Economies necessary when • Competitive pressure requires cost reduction • Economic logic requires cost reduction

  13. International strategy Global standardization strategy Localization strategy Transnational strategy Wholly Owned Subsidiaries:4 Strategies for Globalization High Low PressureforCostReduction Pressure for Local Responsiveness High

  14. Global Standardization Strategy • High pressure for cost and local responsiveness • Standardized product worldwide • Production, marketing, and R&D concentrated in a few favorable locations • Cost reductions from • Economies of scale • Learning curve efficiencies • Location economies • Ikea

  15. International Strategy • Low pressure for cost and local responsiveness • Product serves universal needs, but few competitors to create cost pressure (e.g., Xerox in 60s, patent) • Centralized product development (R&D) • Decentralized manufacturing and marketing with minimal local customization • Duplication expensive; no scale advantages • Tight home office control • Toys R Us, IBM, Kellogg

  16. Localization Strategy • Customize products and marketing strategies to match national tastes and conditions • Full set of functions (production, marketing, R&D, etc.) in each national market • High cost structure • Maximum local responsiveness at expense of scale economies • Aka Multinational or Multidomestic strategy • Proctor and Gamble

  17. Transnational Strategy • Pressure for cost reduction and local responsiveness • Low costs through location economies, economies of scale and learning effects • Differentiate across markets • Foster flow of skills among subsidiaries in global network • Conflict: differentiation raises costs • Ford tried and found it difficult to implement • Caterpillar more successful

  18. Future of Globalization • MNEs in Japan, North America and Europe control > 85% of world’s foreign investment • Emerging economies (China, India, South Korea, Mexico, Brazil) developing transnational capabilities • Importance of international business is rising • M&A is preferred market entry strategy for MNEs • 45% of M&A transactions are cross-border • US and Europe each account for 40% of global M&A volume

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