2 Chapter Managing in a Global Environment Managing in a Global Environment McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives After reading this chapter, you should be able to: Understand the landscape of the global market. Develop an awareness for the role of culture in international management. Recognize the major options firms face when they choose a global strategy and the conditions that make a strategic choice most appropriate. Determine the best mode of entry into foreign markets given each firm’s unique characteristics. Develop effective human resource practices for managing international subsidiaries. Become aware of ethical issues in international operations. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

The Changing Pattern of International Business Changing world output and world trade picture  The U.S. no longer dominates the world economy  Large U.S. multinationals no longer dominate international business  The centrally planned communist economies that made up roughly half the world suddenly become accessible to Western businesses  The global economy has become more knowledge- intensive McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

The Changing Pattern of International Business (continued) Lowered trade barriers  General Agreement on Tariffs and Trade (GATT)  World Trade Organization (WTO) rules apply to over 90 percent of international trade has 144 member nations, including China moved from reducing tariffs to eliminating non tariff barriers Integrated Economic Markets  The European Union (EU) allows goods, services, capital, and human resources to flow freely across national borders goal is to strengthen Europe as an economic superpower agreement to adopt a common European currency McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

The Changing Pattern of International Business (continued) Integrated Economic Markets  The North American Free Trade Act (NAFTA) an economic pact that combined the economies of the U.S., Canada, and Mexico constitutes the world’s largest trading bloc provides access to previously protected markets in each country  The Association of Southeast Asian Nations (ASEAN) McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

The Changing Pattern of International Business (continued) Integrated Economic Markets  The Asia Pacific Economic Cooperation (APEC) trying to: reduce trade barriers establish general rules for investment develop policies that encourage foreign investment holds promise in facilitating and strengthening international business relationships member countries represent 40 percent of the world’s population and 50 percent of the world’s economic output McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

The Changing Pattern of International Business (continued) Global consumer preferences  Tastes and preferences are converging  Presence of mass media, exposure to goods from various countries, and standardized products Globalized production  Cost efficiency McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Example of Globalized Production Of the $20,000 sticker price of a General Motors Automobile LeMans: $6,000 goes to South Korea, where the car was assembled $3,000 goes to Japan for sophisticated high-tech parts (engines, transaxles, electronics) $800 goes to Taiwan, Singapore, and Japan for small parts $500 goes to Great Britain for advertising and marketing services $1,000 goes to Ireland for data processing $7,600 goes to GM and its external professional firms in the United States McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

The Changing Pattern of International Business (continued) Technological innovations  Advances in communications, information processing, and transportation technology  Fiber optics, wireless technology, the Internet and World Wide Web, and satellite technology Management across cultures  Adaptation to business strategies, structures, operational policies, and human resource programs McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Major Factors Affecting International Business General business environment Legal system Economic environment Cultural environment  Culture shock McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Dimensions of Culture Power Distance Individualism Uncertainty Avoidance Masculinity / Femininity Long-term/ Short-term Orientation McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Hofstede’s Framework  Power Distance Degree to which influence/control are unequally distributed among individuals within a particular culture  Uncertainty Avoidance Degree to which members of a society attempt to avoid ambiguity, risk, and indefiniteness of future  Individualism / Collectivism Extent to which society expects people to take care of themselves and their immediate families The degree to which individuals believe they are masters of their own destiny 3.5

Hofstede’s Framework (cont.) Tendency of group members to focus on the common welfare and feel loyalty toward one another  Masculinity/Femininity Degree to which acquisition of money and material things is valued versus quality of life  Long-term/Short-term Orientation  orientation toward future versus past or present 3.6

POWER DISTANCE HIGH – Malaysia, Mexico, Venezuela, Arab Countries, India, Singapore MODERATE – Thailand, Portugal, Greece, South Korea, Taiwan, Spain, Japan LOW – United States (38/53), Finland, Norway, Sweden, New Zealand, Denmark

UNCERTAINTY AVOIDANCE HIGH – Greece, Portugal, Belgium, Japan, Peru, France MODERATE – Taiwan, Arab Countries, Thailand, Iran, Finland LOW – United States (43/53), India, Great Britain, Sweden

INDIVIDUALISM /COLLECTIVISM HIGH – United States (1/53), Australia, Great Britain, New Zealand, Denmark, Sweden, France MODERATE – Japan, Iran, Brazil, Arab Countries, Greece LOW – Columbia, Venezuela, Panama, Guatamala

MASCULINITY/FEMININITY HIGH (Masculinity) – Japan, Austria, Venezuela, Italy, Mexico, United States (15/53) MODERATE – Canada, Malaysia, Pakistan, Brazil, Singapore, Israel LOW (Femininity)– Denmark, Netherlands, Norway, Sweden

INDIVIDUALISM-COLLECTIVISM Please indicate you level of agreement or disagreement with each of the following statements using the following scale: Strongly Disagree Neither Disagree nor Agree Strongly Agree ` _____ 1. I would rather struggle through a personal problem by myself than discuss it with my friends. _____ 2. I do my own things without minding about my colleagues/co-workers, when I am among them. ______3. I like to live close to my close friends. ______4. I would pay absolutely no attention to my close friends’ views when deciding what kind of work to do.

______5. We ought to develop the character of independence among students, so that they do not rely upon other students’ help in their schoolwork. ______6. It is a personal matter whether I worship money or not. Therefore, it is not necessary for my friends to give my advice. ______7. There is everything to gain and nothing to lose for classmates to group themselves together for study and discussion. ______8. Classmates’ assistance is indispensable to getting a good grade at school. ______9. If you work, and you have to choose between (A) getting along very well with your co-workers, and (B) being very competent and efficient in doing the job, what combination of the two aspects would you like best? (Use the scale below to make your response for this question.) 1 = 100% A2 = 80% A, 20%B3 = 60% A, 40%B 4 = 40% A, 60%B5 = 20% A, 80%B6 = 100% B

_____10. Man is a social animal that cannot flourish and grow without identifying himself with some group. _____11. Some of life’s greatest satisfactions are found in working cooperatively with others. _____12. Individuals do not really fulfill their human potentials unless they involve themselves deeply in some group. _____13. It is often more gratifying to work for the accomplishment of a goal held by a group to which one belongs than to work for the attainment of a purely personal goal. _____14. In life an individual should for the most part “go it alone’ assuring oneself of privacy, having time to oneself, attempting to resist being influenced by others. _____15. It is just as important to work toward group goals and adhere to the established rules of the group as it is to gratify one’s individual desires.

COLLECTIVISM SCORING ITEMS 1, 2, 4, 5, 6, 9, AND 14 ARE REVERSED SCORED 6 = 1 5 = 2 4 = 3 3 = 4 2 = 5 1 = 6

CULTURAL VALUES Variable United States Taiwan Collectivism Femininity Masculinity Power Distance Uncertainty Avoidance

Entry Strategy and Strategic Alliances Four key decisions of a firm contemplating foreign expansion: Which countries to enter When to enter Scale of involvement How to enter McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Choosing Foreign Countries The appeal of a particular country is likely to be greater when: The size of the domestic market is large The present wealth of consumers in that market is high and projected to grow in the future The needed resources are readily available The firm’s product offerings are suitable to a particular market A positive business environment exists McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

When to Enter Foreign Countries and Scale of Involvement When to Enter  First-mover advantages  Pioneering costs Scale of Involvement  Lowest if the firm simply decides to export its products to the foreign location  Highest if the firm decides to have a wholly owned subsidiary in the foreign country McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Modes of Entry Exporting Turnkey Project Licensing Franchising Strategic Alliance Joint Venture Wholly Owned Subsidiary McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Advantages and Disadvantages of Various Modes of Entry Choices Loss of competitive advantage Potential quality control problems Limited ability to use profits in one country to increase competition in another country Quick expansion Lower development costs and risks Lower political risk Franchising Loss of competitive advantage Limited ability to use profits in one country to increase competition in another country Quick expansion Lower expenses and risks Lower political risk Licensing Competition from local client Loss of competitive advantage Access to closed markets Turnkey Project No low cost sales High transportation costs Potential tariffs Economies of scale Lower foreign expenses Exporting DisadvantagesAdvantagesMode of Entry McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Advantages and Disadvantages of Various Modes of Entry Choices (continued) Loss of competitive advantage Potential overestimation of partner’s capabilities Access to closed markets Pooled resources increase partner’s capabilities Complementary skills & assets Strategic Alliance Large capital outlay Lack of local knowledge Increased risk Maximum control over proprietary knowledge/ technology Greater strategic flexibility Efficiencies of global production system Wholly Owned Subsidiary Potential for conflict of interest Loss of competitive advantage Knowledge of local markets Lower development costs and risk Access to closed markets Joint Venture DisadvantagesAdvantagesMode of Entry McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Examples of Strategic Alliances General Electric – Snecma of France Toshiba – IBM Mitsui – General Electric Toyota – GM, TRW Canon – Hewlett-Packard Mitsubishi – Caterpillar McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Automobile Companies Ford – Astin-Martin, Jaguar, Land Rover, Mazda, Volvo Daimler-Chrysler – Mercedes-Benz, Jeep (Mitsubishi) GM – Fiat, Hummer, Isuzu, Opel, Saab, Subaru, Suzuki, (Toyota)

Basic Approaches to Managing an International Subsidiary Ethnocentric Approach Polycentric Approach Geocentric Approach McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Why International Assignments End in Failure Career blockage Culture shock Lack of pre-departure cross-cultural training Overemphasis on technical qualifications Getting rid of a troublesome employee Family problems McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Key Human Resource Management Factors for Global Firms Selection  Selection criterion should include cultural sensitivity Training  Length of assignment determines depth of training  Cross-cultural training is critical to success Career Development  International assignments should be part of career advancement plan Compensation and Benefits  Incentives and quality-of-life concerns McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Three approaches to cross-cultural training Impression Approach Affective Approach Information-Giving Approach McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Ethics and Social Responsibility Globalization greatly increases the possibility that managers will face an ethical dilemma. Different cultures have different notions of right and wrong. U.S. Foreign Corrupt Practice Act (1977). Many firms and industry groups have developed their own codes of conduct for foreign operations. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Applications of Management Perspectives — For the Manager Firms are prevented from capitalizing on business opportunities overseas by a lack of awareness of:  How to enter foreign markets  How to operate in diverse national settings By developing a better appreciation of the unique challenges that may confront them, managers can learn how to function well overseas. Groom managers for their role in globalization. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Applications of Management Perspectives — For Managing Teams Many firms are entering joint ventures with companies in other countries. Joint ventures usually require teams made up of employees from different nations. The ability of international teams to work together in a climate of mutual respect is a key to success. This requires:  Cross-cultural sensitivity.  Understanding of the international context in which the firm operates. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Applications of Management Perspectives — For Individuals The career mobility of employees is likely to be enhanced if they have international skills. International savvy is increasingly valued. Many firms require employees to have international experience before they can move into the upper management ranks. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.