Chap005- The Global Environment

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The Global

Environment

Chapter 5

Learning Objectives

1. The importance of a companys 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

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Globalization

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Globalization refers to the strategy ofpursuing opportunities anywhere in the worldthat enable a firm to optimize its businessfunctions in the countries in which itoperates.

Globalization (contd.)

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 inglobal markets is rapidly becoming a required

competence of strategic managers

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Some Multinational Corporations

5

% Sales % Assets

Outside OutsideHome Home Home % Foreign

Company Country Country Country Workforce

Citicorp USA 34 46 NA

Colgate- USA 72 63 NAPalmolive

Dow USA 60 50 NAChemical

Gillette USA 62 53 NA

Honda Japan 63 36 NA

IBM USA 57 47 51

Nestle Switzerland 98 95 97Siemens Germany 51 NA 38

Unilever Britain & 95 70 64Netherlands

Development of a Global CorporationFour Levels:

1. Minimal effect on the existing managementorientation or on existing product lines (export-import activities)

2. Requires little change in management oroperation (foreign licensing and tech transfer)

3. Characterized by direct investment in overseas

operations, including manufacturing plants4. The most involved level is characterized by a

substantial increase in foreign investment, withforeign assets comprising a significant portionof total assets (global corporation)

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Projected Economic Growth

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Why Firms Globalize ?1. U.S. firms often can reap benefits from

industries and technologies developed

abroad

2. Direct penetration of foreign markets can

drain vital cash flows from a foreign

competitors domestic operations

3. The resulting lost opportunities, reduced

income, and limited production can impair

the competitors ability to invade U.S.markets

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Question: Should firms be proactive or reactive?


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Reasons for Going Global

PROACTIVE

Additional resources

Lowered costs

Incentives

New, expanded markets

Exploitation of firm-specific advantages

Taxes

Economies of scale

Synergy

Power and prestige

Protect home market

REACTIVE

Trade barriers

International customers

International

competition

Governmental

regulations

Chance

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4 Strategic Orientations of Global Firms

1. Ethnocentric orientation:When the values and priorities of the parentorganization guide the strategic decisionmaking of all its international operations

2. Polycentric orientation:

When the culture of the country in which

the strategy is to be implemented isallowed to dominate a companys

international decision making process

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4 Strategic Orientations of Global Firms

3. Regiocentric orientation

When the parent attempts to blend its own

predispositions with those of the region

under consideration, thereby arriving at a

region-sensitive compromise.

4. Geocentric orientation

When an international firm adopts a

systems approach to strategic decision

making that emphasizes global integration.

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At the Start of Globalization

External and internal assessments are

conducted before a firm enters global

markets

External assessment involves careful

examination of critical features of the global

environment

Internal assessment involves identification of

the basic strengths of a firms operations

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Checklist of Factors to Consider in

Choosing a Foreign Manufacturing Site

Economic factors

Political factors

Geographic factors

Labor factors

Tax Factors

Capital source factors

Business factors

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Complexity of the Global Environment Five factors affecting the increasing complexity

of global strategic planning: Multiple political, economic, legal, social, and cultural

environments as well as various rates of change

Interactions between the national and foreignenvironments are complex: sovereignty

Geographic separation, cultural and national differences,and variations in business practices all tend to make

communication and control efforts difficult

Globals face extreme competition

Globals are restricted in their selection of competitivestrategies by various regional blocs and economic

integrations like EU, NAFTA

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Control Problems of the Global Firm

Financial policies typically are designedto further the goals of the parentcompany and pay minimal attention tothe goals of the host countries

Different financial environments makenormal standards of company behaviormore problematic

Important differences in measurementand control systems often exist

These problems can be reducedthrough more attention to strategicplanning

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Stakeholder activism

Demands placed on a global firm by the

stakeholders in the environments in

which it operates.


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Global Strategic Planning

Increasingly complex decisions

Multidomestic vs. Global industries

A multidomestic industry is one in which

competition is essentially segmented from country

to country

In a multidomestic industry, a global corporations

subsidiaries should be managed as distinct entities

A global industry is one in which competitioncrosses national borders

Strategic management planning must be global

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Multidomestic Industry

Factors that increase the degree to which anindustry is multidomestic include:

The need for customized products to meet the

tastes or preferences of local customers

Fragmentation of the industry, with many

competitors in each national market

A lack of economies of scale in the functional

activities of firms in the industry

Distribution channels unique to each country

A low technological dependence of subsidiaries on

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Global Industry

Strategic management planning must beglobal for at least six reasons:

1. The increased cope of the global

management task

2. The increased globalization of firms

3. The information explosion

4. The increase in global competition

5. The rapid development of technology

6. Strategic management planning breeds

managerial confidence

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Global Industry Factors that make for the creation of a global

industry:

Economies of scale in the functional activities of firms in theindustry

A high level of R&D expenditures on products that requiremore than one market to recover development costs

The presence in the industry of predominantly global firmsthat expect consistency of products and services acrossmarkets

The presence of homogeneous product needs acrossmarkets, which reduces the requirement of customizing theproduct for each market

The presence of a small group of global competitors

A low level of trade regulation and of regulation regardingforeign direction investment

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Factors That Drive The of Global

Companies

Global Management Team

Global Strategy

Global Operations and Products

Global Technology and R&D

Global Financing

Global Marketing

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Market Requirements and Product

Characteristics

Businesses have discovered that beingsuccessful in foreign markets often demandsmuch more than simply shipping their well-received domestic products overseas

Firms must assess two key dimensions ofcustomer demand:

customers acceptance of standardized products

The rate of product innovation desired

Products can be arrayed along a continuumfrom products that are not subject to frequentproduct innovations to products that are oftenupgraded

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Market Requirements and Product

Characteristics

Maintain differentiation

Computer chips

Automotive electronics

Pharmaceuticals

Chemical

Telecommunications

Network equipment

Rate of product change

Fast

Standarized

inallmarkets

Operate an ever-changing

global warehouse

Consumer electronics Watch cases

Automobiles Dolls

Trucks

Toothpaste Industrial

Shampoo machinery

Customized

market-by-market

Minimalize delivered cost

Steel

Petrochemicals

Cola beverages

Fabric for mens shirt

Slow

Practice opportunistic

niche exploration

Toilets

Chocolate

bars

Competitive Strategies for Firms

in Foreign Markets Strategies for firms that are attempting to move toward

globalization can be categorized by the degree of

complexity of each foreign market being considered and by

the diversity in a companys product line

Complexityrefers to the number of critical success factorsthat are required to prosper in a given competitive arena

When a firm must consider many such factors, the

requirements of success increase in complexity

Diversity, the second variable, refers to the breadth of afirms business lines

When a company offers many product lines, diversity is

high

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Escalating Commitments to International Markets

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Competitive Strategies for Firms

in Foreign Markets

1. Niche Market Exporting

2. Licensing and Contract Manufacturing

3. Franchising

4. Joint Ventures

5. Foreign Branching

6. Equity Investment

7. Wholly Owned Subsidiary

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Key Terms

Ethnocentric

orientation

Geocentric orientation

Global industry

Globalization

Multidomestic

industry

Polycentric orientation

Regiocentric

orientation

Stakeholder activism

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Chap005- The Global Environment

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