The Global Environment

Chapter 5

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Learning Objectives1. The importance of a company’s decision to globalize2. The four main strategic orientations of global firms3. The complexity of the global environment and the

control problems that are faced by global firms4. Major issues in global strategic planning, including the

differences for multinational and global firms5. The market requirements and product characteristics

in global competition6. 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 Levels1. Level 1 – export/import activity has minimal effect

on the existing management orientation or on existing product lines

2. Level 2 – foreign licensing and technology transfer requires little change in management or operation

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Development of a Global Corporation (contd.)

3. Level 3 – direct investment in overseas operations –is characterized by large capital outlays and the development of global management skills

4. Level 4 – substantial increase in foreign investment – the firm begins to emerge as a global enterprise with foreign assets comprising a significant portion of total assets

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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 Global

PROACTIVE• Additional resources• Lowered costs• Incentives• New, expanded markets• Exploitation of firm-specific advantages• Taxes• Economies of scale• Synergy• Power and prestige• Protect home market

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Reasons for Going Global (contd.)

REACTIVE• Trade barriers• International customers• International competition• Regulations• Chance

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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

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Complexity of the Global Environment (contd.)

Globals face extreme competition Globals 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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Global Strategic Planning:Stakeholder Activism

• Demands placed on a global firm by the stakeholders in the environments in which it operates, principally by foreign governments.

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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

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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 Strategic Planning (contd.)

Reasons why strategic 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 21

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 22

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. 5.8 Escalating Commitments to International Markets

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Competitive Strategies for Firms in Foreign Markets

Niche Market Exporting The primary niche market approach for the

company that wants to export is to modify select product performance or measurement characteristics to meet special foreign demands

Licensing and Contract Manufacturing Licensing involves the transfer of industrial

property right from the home market (e.g., the U.S.)

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Competitive Strategies for Firms in Foreign Markets (contd.)

Franchising Franchising is a special form of licensing which allows the

franchisee to sell a highly publicized product or service, using the parent’s brand name or trademark, carefully developed procedures, and marketing strategies

Joint Ventures JVs begin with a mutually agreeable pooling of capital, etc.

Consequently, they offer more permanent cooperative relationships than export or contract manufacturing.

Wholly Owned Subsidiary This involves making the highest investment commitment to the

foreign market. These can be started either from scratch or by acquiring established firms in the host country.

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Key Terms

• Ethnocentric orientation

• Geocentric orientation• Global industry• Globalization

• Multidomestic industry• Polycentric orientation• Regiocentric orientation• Stakeholder activism

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