Session 4 Part 1

1. Session 4 Part 1 Chapter 5: TheGlobal Environment

2. Learning Objectives • Why firms globalize • Identify Major Multi-National Market Groups • Recognize the typical evolutionary development from domestic to a global corporation • The differences/complexities of the global environment and the control problems that are faced by global firms • The globalization strategies for firms in foreign markets

3. Globalization Defined • 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

4. Competitive Disadvantage • If you are not global in your reach and your rivals are…

5. Increasing Profitability Through Global Expansion • Location economies • Economic benefits from performing a value creation activity in the optimal location • Effects • Can lower costs • Can enable differentiation • Caveats • Transportation costs and trade barriers • Political and economic risks

6. Increasing Profitability Through Global 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

7. Why Firms Globalize: Best Defense is a good offensive globalization strategy 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

8. Conditions are Ripening Firms are able to globalize more easily and rapidly due to • Fall of centrally planned economies in China, Russia/Easter European companies – more free market based. • The emergence of trade alliances: EEU, Nafta… • Rapid Industrialization in Developing Nations

9. Dominant Multinational Market Groups • The G-8 Nations • NAFTA – soon to be AFTA • Pacific Rim /Asia • EEC – not incorporating the former Soviet Bloc nations as Independent states

10. THE GROUP OF 8 NATIONS 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.

11. The 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.

12. Evolution of a global firm entails progressively involved strategy levels Evolutionary Development of a Global Corporation 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)

13. 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 available Skilled labor scarce, requiring training or redesign of production methods Financing Well-developed financial markets Poorly developed markets; capital flows subject to government control Differences Between Factors: Environmental Factors

14. 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 universally Different 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 Differences Between Factors: Control Problems

15. Comparative 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

16. Globalization Strategy Options: Two Key Considerations

17. Pressures 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

18. Pressures for Local Responsiveness • Differences in customer tastes and preferences • Differences in infrastructure and traditional practices • Differences in distribution channels • Host government demands

19. Four Basic Strategies

20. Choosing 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

21. 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

22. 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

23. True Global Strategy The strategy of approaching worldwide markets with standardized products.

24. Choosing a Global Strategy (cont’d) • Transnational strategy (Most Common) • Simultaneously seeking to lower costs, be locally responsive, and transfer competencies in a way consistent with global learning

25. Cost Pressures and Pressures for Local Responsiveness Facing Caterpillar

26. Advantages and Disadvantages of Different Strategies for Competing Globally

27. Multidomestic and Global Industries A multidomestic industry competition is essentially segmented from country to country (beer, food retailing) A globalindustry is one in which competition crosses national borders (tires, athletic shoes)

28. Strategic Management in Global Industries The World as One Battleground More interconnected/similar than ever before

29. Factors Contributing to Globalization of Competition 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 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 Low level of trade regulation and regulations regarding foreign direct investment

30. The 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

31. 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 Location and Coordination Issues of Functional Activities

32. Globalization 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