Chapter 5

The Global Environment

Learning Objectives
1. 2. 3. 4. 5. 6.

The importance of a companys decision to globalize The four main strategic orientations of global firms The complexity of the global environment and the control problems that are faced by global firms Major issues in global strategic planning, including the differences for multinational and global firms The market requirements and product characteristics in global competition The competitive strategies for firms in foreign markets
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Globalization
Globalization refers to the strategy of pursuing opportunities anywhere in the world that enable a firm to optimize its business functions in the countries in which it operates.

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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 in global markets is rapidly becoming a required competence of strategic managers
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Some Multinational Corporations

Company Citicorp ColgatePalmolive Dow Chemical Gillette Honda IBM Nestle Siemens Unilever Netherlands Home Country USA USA USA USA Japan USA Switzerland Germany Britain & % Sales Outside Home Country 34 72 60 62 63 57 98 51 95 % Assets Outside Home Country 46 63 50 53 36 47 95 NA 70 % Foreign Workforce NA NA NA NA NA 51 97 38 64
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Development of a Global Corporation

Four Levels: 1. Minimal effect on the existing management orientation or on existing product lines (exportimport activities) 2. Requires little change in management or operation (foreign licensing and tech transfer) 3. Characterized by direct investment in overseas operations, including manufacturing plants 4. The most involved level is characterized by a substantial increase in foreign investment, with foreign assets comprising a significant portion of 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 Direct penetration of foreign markets can drain vital cash flows from a foreign competitors domestic operations The resulting lost opportunities, reduced income, and limited production can impair the competitors ability to invade U.S. markets

2.

3.

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 firmspecific advantages Taxes Economies of scale Synergy Power and prestige Protect home market
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REACTIVE Trade barriers International customers International competition Governmental regulations Chance

4 Strategic Orientations of Global Firms

1. Ethnocentric orientation:

When the values and priorities of the parent organization guide the strategic decision making of all its international operations
2. Polycentric orientation:

When the culture of the country in which the strategy is to be implemented is allowed 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 foreign environments 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 competitive strategies by various regional blocs and economic integrations like EU, NAFTA
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Control Problems of the Global Firm

Financial policies typically are designed to further the goals of the parent company and pay minimal attention to the goals of the host countries Different financial environments make normal standards of company behavior more problematic Important differences in measurement and control systems often exist These problems can be reduced through more attention to strategic planning
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Stakeholder activism

Demands placed on a global firm by the stakeholders in the environments in which it operates.

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 competition crosses national borders Strategic management planning must be global
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Multidomestic Industry

Factors that increase the degree to which an industry 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 R&D provided by the global firm
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Global Industry

Strategic management planning must be global 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 the industry A high level of R&D expenditures on products that require more than one market to recover development costs The presence in the industry of predominantly global firms that expect consistency of products and services across markets The presence of homogeneous product needs across markets, which reduces the requirement of customizing the product for each market The presence of a small group of global competitors A low level of trade regulation and of regulation regarding foreign 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 being successful in foreign markets often demands much more than simply shipping their wellreceived domestic products overseas Firms must assess two key dimensions of customer demand:
customers acceptance of standardized products The rate of product innovation desired

Products can be arrayed along a continuum from products that are not subject to frequent product innovations to products that are often upgraded
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Market Requirements and Product Characteristics

Rate of product change Fast
Maintain differentiation Computer chips Automotive electronics Pharmaceuticals Chemical Telecommunications Network equipment Operate an ever-changing global warehouse Consumer electronics Watch cases Automobiles Dolls Trucks Toothpaste Shampoo Industrial machinery

Minimalize delivered cost Steel Petrochemicals Cola beverages Fabric for mens shirt

Practice opportunistic niche exploration Toilets Chocolate bars

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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 Complexity refers to the number of critical success factors that 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 a firms business lines When a company offers many product lines, diversity is high
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Customized market-by-market

Standarized in all markets

Escalating Commitments to International Markets

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Competitive Strategies for Firms in Foreign Markets

Niche Market Exporting 2. Licensing and Contract Manufacturing 3. Franchising 4. Joint Ventures
1.

Foreign Branching 6. Equity Investment 7. Wholly Owned Subsidiary

5.
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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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