The Global Environment

1. The Global Environment Chapter 5

2. Globalization • Globalization is the strategy of approaching worldwide markets with standard products • The strategic operations and threats posed by globalization affect almost every U. S. industry • Understanding the nuances of competing in global markets is becoming a required competence of strategic managers

3. Why Firms Globalize • To 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 • Reduces the competitor’s ability to invade U. S. markets • Question: should firms be proactive or reactive? (Exhibit 5.3)

4. Complexity of the Global Environment • Differences in political, legal, social, and cultural environments • Demands of foreign governments • Widely differing economic and social conditions • Business practices and negotiating styles are different • Communication with, and control of, overseas affiliates is difficult • Extreme competition • Restrictions imposed by the European Union, Association of Southeast Asian Nations (ASEAN), and Latin American Free Trade Area, among others

5. Pressures for Cost Reductions • The product is a commodity • Differentiation on non-price factors is difficult. • Price is the main competitive weapon • Competitors are based in low-cost locations • There is persistent excess capacity • Customers are powerful, and switching costs are low. • Global competition, global trade, and global investment opportunities.

6. Pressures for National Responsiveness • Differences in distribution channels • Host government demands • Different product standards • Different customer needs and tastes • Businesses or consumers prefer locally made products • Managing details in a global organization is difficult and complex. • Subsidiaries know local market needs and management practices better than headquarters.

7. Global Strategy • Produce standard products efficiently in large facilities, and use a standard marketing strategy • Little or no national responsiveness • This strategy seeks to benefit from economies of scale in production, distribution, marketing, and purchasing • Requires close coordination with headquarters • Production facilities are located where total costs of production, transportation, and tariffs are low (location economies)

8. Global Strategy (2) • Used when • The need for cost reduction is high AND • The need for national responsiveness is low • This strategy is used to compete on low prices. • Some firms that use global strategies: Canon, Fuji, Texas Instruments • Firms that make commodity products (industrial chemicals, paper, etc.) often use global strategies

9. International Strategy • This strategy used by firms with products or core competencies that international competitors cannot match. • The objective is to increase earnings by utilizing core competencies in foreign markets • These firms usually compete on differentiation • Used when • The need for cost reduction is low AND • The need for national responsiveness is low

10. International Strategy (2) • Home office controls product development and marketing strategy. • Limited customization of products and marketing strategy if necessary • Limited national responsiveness • Production and a marketing department in each major country  more expensive than global strategy • This strategy does not take advantage of economies of scale and location economies • Some firms that use this strategy: IBM, Wal-Mart

11. Multidomestic Strategy • A strategy that attempts to maximize national responsiveness • Firm usually has product development, production, and marketing in each country • This strategy does not take advantage of economies of scale and location economies • Often used by companies that serve niche markets • National responsiveness is more important than cost pressures. • Often, distinctive competencies are not transferred from one market to another.

12. Multidomestic Strategy (2) • Used when • The need for cost reduction is low AND • The need for national responsiveness is high • Problems • Lack of coordination among subsidiaries in different countries • Decisions made by a subsidiary may not be in the best interest of the company as a whole • High costs

13. Transnational Strategy • A strategy that seeks to • Achieve low costs by using economies of scale and location economies • Transfer core competencies within the firm • Achieve a high degree of national responsiveness • Used when • The need for cost reduction is high AND • The need for national responsiveness is high • Some firms that use this strategy: Toyota, Honda, Caterpillar, AT & T

14. Transnational Strategy (2) • Requirements for success: • Transfer of knowledge throughout the company (global learning) • Coordination of production, purchasing, and marketing throughout the company • A corporate culture that encourages mutual trust, coordination, and knowledge sharing • Hardest strategy to implement

15. National responsiveness Low High Comparison of the 4 Strategies Transnational strategy Global strategy High Global integration International strategy Multi-domestic strategy Low