Global Business

Drivers of Globalization Business Needs 1.Lower cost factors of production (labor, natural resources) 2.Larger market size to support efficient scale and justify large investment in R&D and product development 3.Extended product life cycle Opportunities 1.Growth of emerging nations 2.Declining trade and investment barriers 3.Common customer requirements 4.Increasing demand for universal products

DIVERSIFYING FOREIGN OPERATIONS

Organic Growth  No excess capacity  Full control  No cultural barriers  New markets and high tech markets

Exporting  Allows scale and experience curve economies But  High transportation costs  Trade barriers  Problems with local marketing agents

Licensing  Low development costs  Low risks But  Lack of control over technology  No scale and experience curve economies  Can’t engage in global strategic coordination

Franchising  Low development costs  Low risks But  Lack of control over quality  Can’t engage in global strategic coordination

Joint Ventures  Access to local partner’s knowledge  Shared development costs  Shared risks But  Lack of control over technology  Can’t engage in global strategic coordination

Wholly Owned Subsidiaries  Control over operations  Protection of technology  Ability to engage in global strategic coordination  Ability to realize scale and experience economies But  High costs and risks

Mergers and Acquisitions  Speed of entry  Access to technology  Speed of building market share  Bypass regulatory barriers But  Risk of overcapacity

WHOLLY OWNED SUBSIDIARIES

Trade Off: Local Responsiveness vs. Economies of Scale Local Responsiveness necessary when 1.Products are different across countries 2.Distribution channels require local presence 3.Government requirements demand local presence Scale Economies necessary when 1.Competitive pressure requires cost reduction 2.Economic logic requires cost reduction

Wholly Owned Subsidiaries: 4 Strategies for Globalization High Low Pressure for Local Responsiveness Global standardization strategy Transnational strategy International strategy Localization strategy High Pressure for Cost Reduction

Global Standardization Strategy  High pressure for cost and local responsiveness  Standardized product worldwide  Production, marketing, and R&D concentrated in a few favorable locations  Cost reductions from  Economies of scale  Learning curve efficiencies  Location economies  Ikea

International Strategy  Low pressure for cost and local responsiveness  Product serves universal needs, but few competitors to create cost pressure (e.g., Xerox in 60s, patent)  Centralized product development (R&D)  Decentralized manufacturing and marketing with minimal local customization  Duplication expensive; no scale advantages  Tight home office control  Toys R Us, IBM, Kellogg

Localization Strategy  Customize products and marketing strategies to match national tastes and conditions  Full set of functions (production, marketing, R&D, etc.) in each national market  High cost structure  Maximum local responsiveness at expense of scale economies  Aka Multinational or Multidomestic strategy  Proctor and Gamble

Transnational Strategy  Pressure for cost reduction and local responsiveness  Low costs through location economies, economies of scale and learning effects  Differentiate across markets  Foster flow of skills among subsidiaries in global network  Conflict: differentiation raises costs  Ford tried and found it difficult to implement  Caterpillar more successful

Future of Globalization  MNEs in Japan, North America and Europe control > 85% of world’s foreign investment  Emerging economies (China, India, South Korea, Mexico, Brazil) developing transnational capabilities  Importance of international business is rising  M&A is preferred market entry strategy for MNEs  45% of M&A transactions are cross-border  US and Europe each account for 40% of global M&A volume