McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 1 Chapter 4 The Global Environment: Strategic Considerations for Multinational Firms

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 2 Chapter Topics Development of a Global Corporation Why Firms Globalize At the Start of Globalization Complexity of the Global Environment Control Problems of the Global Firm Global Strategic Planning Competitive Strategies for Firms in Foreign Markets

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 3 What is Globalization? The strategy of approaching worldwide markets with standardized products

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 4 Development of a Global Corporation Evolution of a global firm entails progressively involved strategy levels 1. Export-import activity 2. Foreign licensing and technology transfer 3. Direct investment in overseas operations 4. Substantial increase in foreign investment

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 5 Ex. 4-4: Reasons for Going Global – Proactive Approach Additional resources Lowered costs Incentives New, expanded markets Exploitation of firm- specific advantages Taxes Economies of scale Synergy Power and prestige Protect home market via offense in competitor’s home

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 6 Ex. 4-4: Reasons for Going Global – Reactive Approach Trade barriers International customers International competition Regulation Chance

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 7 Strategic Orientation of Global Firms Ethnocentric Values and priorities of parent organization should guide strategic decision making of all operations Polycentric Culture of country in which strategy is implemented dominates decision making Regiocentric Parent firm attempts to blend its own predispositions with those of region under consideration Geocentric Parent firm adopts global systems approach to decision making, emphasizing global integration

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 8 Ex. 4-5: Orientation of a Global Firm EthnocentricPolycentric MissionProfitability (viability)Public acceptance (legitimacy) GovernanceTop-downBottom-up StrategyGlobal integrationNational responsiveness StructureHierarchical product divisions Hierarchical area divisions, with autonomous national divisions CultureHome countryHost country TechnologyMass productionBatch production

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 9 Ex. 4-5 (contd.) MarketingProduct development determined by needs of home- country customers Local product development based on local needs FinanceRepatriation of profits to home country Retention of profits in host country Personnel practicesPeople of home country developed for key positions everywhere Local people developed for key positions in their country

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 10 Ex. 4-5: Orientation of a Global Firm RegiocentricGeocentric MissionBoth profitability and public acceptance Same as regiocentric GovernanceMutually negotiated between region and its subsidiaries Mutually negotiated at all levels of the corporation StrategyRegional integration and national responsiveness Global integration and national responsiveness StructureProduct and regional organization tied through a matrix Network of organization (includes stakeholders and competitors) CultureRegionalGlobal

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 11 Ex. 4-5 (contd.) TechnologyFlexible manufacturing MarketingStandardize within region, but not across regions Global product, with local variations FinanceRedistribution within regionRedistribution globally Personnel practicesRegional people developed for key positions anywhere in region Best people everywhere developed for key positions everywhere

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 12 Beginning to Globalize: Key Steps External assessment –Careful examination of critical features of the global environment, particularly to host nation’s status in Economic progress Political control Nationalism Internal assessment –Identification of resources in Technical and managerial skills, capital, labor, raw materials –Identification of capabilities in Product delivery, financial management systems

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 13 Factors Contributing to Complexity of Global Strategic Planning 1.Globals face multiple political, economic, legal, social, and cultural environment as well as various rates of changes within each of them 2.Interactions between national and foreign environments are complex because of national sovereignty issues and widely differing economic and social conditions 3.Geographic separation, cultural and national differences, and variations in business practices tend to complicate communication and control efforts between headquarters and overseas affiliates 4.Globals face extreme competition due to differences in industry structure 5.Globals are restricted in selecting competitive strategies by various regional blocs and economic integrations

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 14 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 concerning concerning the disposition of earnings, sources of finance, and structure of capital more problematic Important differences in measurement and control systems exist Differences exist in national attitudes toward work measurement and in government requirements about disclosure of information

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 15 Stakeholder Activism Refers to demands placed on the global firm by the foreign environments in which it operates, principally by foreign governments

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 16 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

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 17 Factors Increasing Degree to Which an Industry is Multidomestic Need for customized products to meet tastes or preferences of local customers Fragmentation of industry, with many competitors in each national market Lack of economies of scale in functional activities of firms in industry Distribution channels unique to each country Low technological dependence of subsidiaries on R&D provided by global firm

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 18 Reasons Why Strategic Management Planning Must be Global The increased scope of the global management task The increased globalization of firms The information explosion The increase in global competition The rapid development of technology Strategic management planning breeds managerial confidence

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 19 Factors Making for the Creation of a Global Industry Economies of scale in functional activities of firms in industry High level of R&D 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 products Low level of trade regulation and regulations regarding foreign direct investment

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 20 Ex. 4-8: Factors That Drive Global Companies Global Management Team Possesses global vision and culture Includes foreign nationals Leaves management of subsidiaries to foreign nationals Frequently travels internationally Has cross-cultural training Global Strategy Implement strategy as opposed to independent country strategies Develop cross-country alliances Select country targets strategically Perform business function where most efficient Emphasize participation in the triad

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 21 Ex. 4-8 (contd.) Global Financing Finance globally to obtain lower cost Hedge when necessary to protect currency risk Price in local currencies List shares on foreign exchanges Global Marketing Market global products but provide regional discretion if economies of scale are not affected Develop global brands Use core global marketing practices and themes Simultaneously introduce new global products worldwide

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 22 Ex. 4-8 (contd.) Global Operations/Products Use common core operating processes worldwide to ensure quantity and uniformity Produce globally to obtain best cost and market advantage Global Technology/R&D Design global products, designing regional differences into account Manage development work centrally but carry out globally Do not duplicate R&D and product development; gain economies of scale

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 23 The Global Challenge Few “pure” cases of either global or multidomestic industries exist The challenge – global firms must Decide what activities should be performed where Determine what degree of coordination should exist among them

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 24 Ex. 4-9: Location and Coordination Issues of Functional Activities Functional ActivityLocation IssuesCoordination issues OperationsLocation of production facilities for components Networking of international plants MarketingProduct line selection; country market selection Commonality of brand name; coordination of sales; similarity of channels and product positioning; coordination of pricing ServiceLocation of service organizationSimilarity of service standards and procedures worldwide Research and Development Number and location of R&D centers Interchange among dispersed R&D centers PurchasingLocation of the purchasing function Manage suppliers located in different countries

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 25 Ex. 4-10: Market Requirements and Product Characteristics – The Model Rate of Change of Product Fast Slow Standardized in all markets Customized market-by- market Maintain differentiation Operate an ever-changing “global warehouse” Minimize delivered cost Practice opportunistic niche exploration

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 26 Ex. 4-11: International Strategy Options High foreign investment with extensive coordination among subsidiaries Global strategy Country-centered strategy by multinationals with a number of domestic firms operating in only one country Export-based strategy with decentralized marketing High Low Coordination of activities Geographically dispersed Geographically concentrated Location of activities

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 27 Ex. 4-12: International Strategy Options Joint ventureForeign branch Wholly owned foreign subsidiary Licensing, contract manufacturing, franchising Joint venture Foreign branch Export Licensing, contract manufacturing, franchising Joint venture Market complexity Product diversity LowHigh