The Global Environment

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Session 9 11

• The Global Environment

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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
   markets

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Globalization

• 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
• Understanding the nuances
• of competing in global markets
• is rapidly becoming a required
• competence of strategic managers

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Why Firms Globalize

• 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
• Question Should firms be proactive or reactive?

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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.

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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
  Swedenare full members of the EU.

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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)
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Differences Between Factors Environmental
Factors
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Differences Between Factors Environmental
Factors (Concluded)
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Comparative Management Framework

• Compare and Contrast the Management Models,
  Practices, Principles, Strategies,
  PoliciesAcross 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

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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

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Increasing Profitability Through Global Expansion
(contd)

• 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

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Globalization Strategy Options Two Key
Considerations
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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

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Pressures for Local Responsiveness

• Differences in customer tastes and preferences
• Differences in infrastructure and traditional
  practices
• Differences in distribution channels
• Host government demands

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Four Basic Strategies
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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

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Choosing a Global Strategy (contd)

• 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

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Choosing a Global Strategy (contd)

• 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

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True Global Strategy
The strategy of approaching worldwide markets
with standardized products.
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Choosing a Global Strategy (contd)

• Transnational strategy
• Simultaneously seeking to lower costs, be locally
  responsive, and transfer competencies in a way
  consistent with global learning

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Cost Pressures and Pressures for Local
Responsiveness Facing Caterpillar
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Advantages and Disadvantages of Different
Strategies for Competing Globally
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Multidomestic and Global Industries
A multidomestic industry is one in which
competition is essentially segmented from country
to country
A global industry is one in which competition
crosses national borders
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Factors Contributing to Globalization of
Competition
Economies of scale in functional activities of
firms in industry
High level of RD 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
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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

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Location and Coordination Issues of Functional
Activities
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Globalization of the Company Mission

• Different environmental opportunities,
  constraints, and risks confront a firm going
  global
• Top management must reassess firms fundamental
  purpose, philosophy, and strategic intentions
• Mission statement must be revised to accommodate
  changes in
• Strategic decision making
• Corporate direction
• Strategic alternatives
• Strategic capabilities