Chapter 1 The World Business Challenge

1. Chapter 1The World Business Challenge John S. Hill

2. The World Business Challenge The World Business Challenge Globalization: Historic Perspectives The Globalization Movement since 1980 Responding to the International Business Challenge International Business Topics and the Organization of this Text Figure1-1: Chapter Outline

3. The World Business Challenge • The Diverse International Marketplace • The Changing International Marketplace

4. The Diverse International Marketplace • Political diversity: Autocracies-democracies • Economic diversity: $100 per capita to $40,000 • Regional diversity:North America 5-6% world population, 30% GDP; Asia 60% world population ¼ world GDP • Cultural/Linguistic diversity: 10,000 cultural groups and 200 nations • Diversities in Country Size and Populations • Developmental diversities

5. The Changing World Marketplace • Political change: nations seek political stability but elections, governmental and leadership changes problematic • Economic change: economic growth, inflation, unemployment problems; governmental economic mismanagement; currency fluctuations • Cultural change: e.g. religious or ethnic conflict creates uncertainties for political and economic climates • Financial changes: conduct transactions in a world marketplace with over 180 currencies

6. Responding to the International Business Challenge: How Executives Cope with Global Diversity and Change • From Cultural Ignorance to Cultural Understanding • Analytic Tools: The Multi-Disciplinary Nature of International Business

7. From Cultural Ignorance to Cultural Understanding • Cultural ignorance: when individuals have no knowledge of cultural differences • Cultural awareness: when people know there are cultural differences and are looking for them • Cultural knowledge: know appropriate behaviors but not why they occur • Cultural understanding: when businesspeople not only know what behaviors are appropriate but also understand why those behaviors are occurring

8. Analytic Tools: The Multi-Disciplinary Nature of International Business • Political science: the study of politicians, political institutions and their effects on business and society • Anthropology: study of the evolution of mankind in its various environments: traditional to modern • Economic Development: changes in institutions and values as countries progress economically • Sociology: the study of group behaviors in society—social class, gender behaviors

9. Analytic Tools: The Multi-Disciplinary Nature of International Business • Religion: the primary determinant of behaviors and lifestyles in non-Christian countries e.g. Islam, Buddhism, Hinduism, Confucianism, Taoism • Geography: a known quantity in firms’ national markets, unknown in foreign markets—climate, topography, resources and their effects • History: a key tool in understanding a country’s current political, economic and cultural circumstances

10. Globalization: Historic Background • Globalization: Definition and Components • The Exploration Era to 1500 • 1500-1900:The Colonial Era • 1900-today: The Era of the Modern International Corporation

11. Globalization: Historic Background • Globalization: Definition • The globalization movement is the trend towards increasing interdependencies among world markets, and the diffusion of new ideas, technologies, products, services and lifestyles through international markets

12. Globalization: Historic Background • Globalization: Components • Modernization: the upgrading of technologies and living standards that occur as ideas, products, and services diffuse through world markets • Westernization: the emulation of lifestyles and behaviors of Western societies, most notably those of North America and Western Europe

13. Globalization: Historic Background • The Exploration Era to 1500 • Civilization of Latin America (Incas, Mayans, Aztecs), Asia (India & China), Western Europe (Romans) and Egypt (pharaohs and pyramids) • Sixth century B.C.: Silk Road from Middle East to China • Roman Empire established trade routes and common currency • 12th & 13th centuries: Major navigational advances for sail ships • 15th century: Major period of exploration to Americas, Africa and Asia

14. Globalization: Historic Background • 1500-1900:The Colonial Era • The development of mega languages: early on Latin & Chinese; later, English & European languages • Advances in arms and military capabilities • Writing and printing technologies • Transportation innovations: the steam engine • The industrial revolution: machines & electricity • Communications Advances: telephone/telegraph • Retail establishments: access to products/services

15. Globalization: Historic Background • 1900-today: The Era of the Modern International Corporation • 1900-1945: Company Internationalization • “Companies began to replace countries as the major catalysts of economic and cultural change” Aided by air travel, automobiles, radio and television • 1945-1980: Era of Increasing International Competition • “Corporations began to reassert themselves in international markets” European and Japanese companies challenge US corporations in international markets

16. The Globalization Era Since 1980 • The Major Catalysts of Post 1980 Globalization • Globalization and the Developing World • Reasons for Developmental Differences: The Diffusion Process in International Business • Diffusion Effects on Strategy Formulation and Implementation

17. The Major Catalysts of Post 1980 Globalization • International Trade: GATT and WTO. Trade increases to about $8 trillion in 2002 • Trade Blocs: Trade blocs to facilitate commercial interactions among members: EU, NAFTA • Foreign Direct Investments (FDI): International companies make investments in factories, plant and machinery in non-domestic markets. 10 fold increase over 1980-2002 to over $7 trillion • Global Movements towards Capitalism: Demise of communism in the 1980s and 1990s • Technology and Global Media: The advent of satellite, computer and Internet technology

18. Globalization and the Developing World • Up to 1985, the Triad nations of North America, Western Europe, and Japan were dominant in world commerce • As developing markets opened up to trade and investments, so new ideas and technologies began to contribute to economic and cultural change • The diffusion of technologies and consequent modernization processes have barely impacted many emerging markets

19. Reasons for Developmental Differences: The Diffusion Process in International Business • The International Diffusion Process • Figure 1-4: Diffusion Across Markets 1 2 3 Time • Figure 1-5: Diffusion Within Markets a b c 1: Advancing countries 2: Industrializing countries 3: Less advanced countries Global market diffusion a: Urban centers b: Semi-urban centers c: Rural-areas National market diffusion

20. Reasons for Developmental Differences: The Diffusion Process in International Business • The Diffusion Process in National Markets: Determined by: • Country Openness to External Influences • Education and Literacy levels: low levels retard diffusion rates; high levels facilitate diffusion • The Importance of National Infrastructures: poor roads, rails, energy grids slow down diffusion rates • Effects of National Ethnic and Linguistic Compositions: multi-ethnic/lingual societies slow down diffusion rates • How disruptive innovations are on national lifestyles

21. Diffusion Effects on Strategy Formulation and Implementation • The Arguments for Standardized Strategies • While companies make some adaptations (voltage changes for electronic goods; right/left hand drives and minor stylistic changes for autos; labeling changes for consumer products), essentially products and services are similar from market to market • Take advantage of customer demand homogenized through trade, commercial contacts, international media • Often the industrialized nations and advanced sectors of LDCs • The Arguments for Localized Strategies • This involves taking full account of national cultures, values and behaviors • Necessary in countries with strong national cultures and nations relatively untouched by the forces of globalization. Companies must adapt to be successful • Most companies need to adapt to greater or lesser degrees

22. World Business Topics and the Organization of this Text • Chapter 1 introduceskey world business concepts, globalization, its history, background and general effects • Chapter 2 examines the forces contributing to the globalization movement: the United Nations, private sector contributions, trade blocs and privatization programs • Chapter 3 looks at globalization effects: how technology transfers affect nations and the transitions from traditional to modern societies • Chapter 4tackles regional development issues • Chapter 5 shows how individual markets are analyzed • Chapter 6 looks at how firms analyze industries and competitors on a worldwide scale

23. International Business Topics and the Organization of this Text • Chapter 7 brings industry and company analyses into the corporate planning process • Chapter 8 describes companies’ globalization processes • Chapter 9 looks at the creation of global and multi-market strategies: global brands, competitive and financial strategies • Chapter 10 shows how firms choose to enter and service individual markets • Chapter 11: examines how companies manage multi-market supply chains • Chapter 12 looks at how cultural differences are managed • Chapter 13 discusses the management of local stakeholders and supply chains

24. Key Points • World business is the performing of commercial activities to promote the sale of goods and services across national boundaries • The world business challenge is to use tools from political science, anthropology, economic development, sociology, religious studies, geography and history to understand the diversity and change inherent in world markets • The globalization movement is the trend towards increasing interdependencies among world markets and the diffusion of new ideas, technologies, products, services, and lifestyles through international markets

25. Key Points • Modern corporations date from the 19th century, but grew dramatically in the post-1945 era, with US, European, and Japanese companies taking the lead • The diffusion process of new technologies and products starts with developed countries and moves over time into developing markets; within national markets, diffusion starts with urban markets and moves into semi-urban and then into rural areas • The diffusion process affects strategy formulation and implementation, with standardized strategies more likely in developed markets; and adaptation strategies more likely in rural and developing markets

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