McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

The Global EnvironmentChapter 5

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Learning Objectives

1. The importance of a company’s 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 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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Development of a Global Corporation

Four Levels

1. Minimal effect on the existing management orientation or on existing product lines

2. Requires little change in management or operation3. 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

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Ex. 5.3 Projected Economic Growth

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Why Firms Globalize? U.S. firms can reap benefits from industries and

technologies developed abroad. Direct penetration of foreign markets can drain vital

cash flows from a foreign competitor’s domestic operations.

The resulting lost opportunities, reduced income, and limited production can impair the competitor’s ability to invade U.S. markets. Question: Should firms be proactive or reactive?

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Reasons for Going GlobalPROACTIVE

Additional resourcesLowered costsIncentivesNew, expanded marketsExploitation of firm-specific

advantagesTaxesEconomies of scaleSynergyPower and prestigeProtect home market

REACTIVETrade barriersInternational customersInternational competitionRegulationsChance

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4 Strategic Orientations of Global Firms Ethnocentric orientation

When the values and priorities of the parent organization guide the strategic decision making of all its international operations

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4 Strategic Orientations of Global Firms (contd.)

Polycentric orientation When the culture of the country in which the

strategy is to be implemented is allowed to dominate a company’s international decision making process

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4 Strategic Orientations of Global Firms (contd.)

Regiocentric orientation When a parent company blends its own

predisposition with those of its international units to develop region-sensitive strategies.

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4 Strategic Orientations of Global Firms (contd.)

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 firm’s operations

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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

Geographic separation, cultural and national differences, and variations in business practices all tend to make communication and control efforts difficult

Global face extreme competition Global are restricted in their selection of competitive strategies

by various regional blocs and economic integrations

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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.

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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 corporation’s 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:

The increased cope 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

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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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Ex. 5.8 (adapted) Factors That Drive 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 well-received 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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Ex. 5.9 Market Requirements and Product Characteristics

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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 company’s product line

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Competitive Strategies for Firms in Foreign Markets (contd.)

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

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Competitive Strategies for Firms in Foreign Markets (contd.)

Diversity, the second variable, refers to the breadth of a firm’s business lines

When a company offers many product lines, diversity is high

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Ex. 5.11 Escalating Commitments to International Markets

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Competitive Strategies for Firms in Foreign Markets

1. Niche Market Exporting

2. Licensing and Contract Manufacturing

3. Franchising

4. Joint Ventures

5. Foreign Branching

6. Acquisition

7. Wholly Owned Subsidiary

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Key Terms Ethnocentric orientation Geocentric orientation Global industry Globalization

Multidomestic industry Polycentric orientation Regiocentric orientation Stakeholder activism