Theory Classes

Globalization

How do firms grow?

Horizontal Diversification

Geographic Diversification

Vertical Diversification

Basis presumption-A firm needs to be competitive in its core business before it can choose the direction of its diversification

What is Globalization?

• Value of world exports in 2014 more than quadrupled between 1980 and 2014.

• Foreign investment grow more than twenty-fold.

• Firms without international goals may find their domestic markets under threat from foreign competition.

What is Globalization?

• Standardization of products & services• Zaha na jaye bhelgari, woha jai marwari

– Go to place where there is a market but inaccessible area

– Comes with a cost—Why go there?

Globalization is not about products or services in multiple countries but about

What drives this convergence?

• 11/9 (Nov, 9, 1989)• 8/9 (Aug, 9, 1995)

• Outsourcing• Offsourcing• Open sourcing• Insourcing• Supply chaining

What does Globalization Mean for You?

• More choices• Lower prices• Blurred national identity for products

and services• Career choices and progression

What does Globalization Mean for You?

The global top 20 countries

Who benefits from globalization?Globalization index rankings

Who Benefits from Globalization?Globalization and social expenditure

Does globalization makes people happy?

Globalization is the interplay of two forces

• Homogeneous civilization• Standard products and services• Barriers to entry & exit should be

minimum

• World is heterogeneous• Non-standard products and services• Interaction between cultures, products

and different systems (legal, political economic etc)

Does globalization helps countries to become competitive?

•Institutions•Infrastructure•Macroeconomic Environment•Health & Primary education

Efficiency Enhancers• Higher education•Market efficiency•Technological readiness•Market size

Innovation & sophistication factors• Business Sophistication•Innovation

Factor Driven economies

Efficiency Driven

economies

Innovation Driven

economies

Basic requirements

What motivates a firm to go international?

• Traditional Motivations• Secure supplies• Market seeking behaviour• Low factor cost of production

• Changes in economic, technological & social developments

• Shortening product life cycle• Ballooning R&D costs

Challenges of globalization?

• Standardized products and services• Co-ordination of a globally distributed

supply chain• Globalization =f(industry)

Agenda…for next class

• What is Global strategy? • How does global strategy create value

relative to the alternative of country-specific strategies?

• Does broad global scope actually live up to its promise?

The Distinctive Content ofInternational Strategy

Finally…..

International strategy is challenging and interesting and offers degrees of freedom…………..at intermediate levels of cross-border integration.

Can’t ignore barriers. Can’t ignore linkages.

What is Global strategy?

• Configuration: What do we do where?

• Coordination: How tightly do we tie together activities in different locales?

What is Global strategy?

• A viable global strategy configures and coordinates better than available alternative means for accomplishing comparable ends.

CONFIGURATION AND COORDINATION

Nokia

R&D Units FinlandGermanyU.S.HungaryChinaMalaysiaS. KoreaAustraliaU.K. JapanItalyCanadaSwedenDenmark

Production FinlandGermanyU.S. Hungary SwedenChina MalaysiaU.K.FranceS. KoreaAustralia BrazilU.K. Mexico

Stock Exchange ListingsFinlandGermanyU.S. Hungary SwedenChina U.K.Malaysia France

When Do YouCentralize an Activity?

Economiesversus

Diseconomies of Scale

When Do YouCentralize an Activity?

• When there is a compelling advantage to carrying out an activity in a particular location

• When the costs of customizing the activity to different locations are not too high

• Home country’s institutions determine whether centralizing at home is advantageous or not

An essence of global strategy is not be restricted by your home country limitations but it is a non-trivial decision.

The Localization Dilemma:Morgan Stanley Japan

• Activity Localization• Research Information dissemination styles

and ways of assimilating /communicating analysis differ.

• New Products Using experience in U.S./Europe to introduce new products. Change Japan rather than change to Japan.

• Marketing Exceedingly difficult to penetrate local relations

• HR U.S. firm trying to create a local face

• IT Rely on local firms for local-local IT and on China/India contractors for other software

The Localization Dilemma:Morgan Stanley Japan

• “One group says that this office is Morgan Stanley, applied to Japan. The other says this is Morgan Stanley Japan; that is, keeping New York off our backs is important. There is a healthy tension between the two views.”

The Localization Dilemma:Notable Failures

• Microsoft’s misreading of its PC software in China in 1993

• Kellogg’s overestimation of the demand for breakfast cereal in India

• McDonald’s overestimation of taste homogeneity in the Philippines

• STAR TV’s overestimation of demand for recycled Western TV content in south and Southeast Asia

General Electric Medical Systems

Why not have outsourcing?

Challenges of globalization?

• Standardized products and services• Co-ordination of a globally distributed

supply chain• Globalization =f(industry)

Tradeoffs in Alternative ConfigurationsCitibank HSBC

Organizational Line of business World’s local bankemphasis Geographic focusLocal Single B\L Local B\L sheetsCommitment Large bets Conservative

Hedged local positions Unhedged local positions

Easy entry/exit Never leave a countryvoluntarily

Talent Centralized Local talentResults Most profits from U.S Even distribution of

profitFaster and volatile Slower and steadierstock price stock price appreciation appreciation

Does Globalization help the natrual environment?

• Common complaint that globalization hurts the environment

• Argued that firms relocate to escape tough pollution rules at home

• Many firms adhere to strict codes of environmental protection, and engage in cleanup of locations

• Environment is just one factor in location decision


Your responses…pliz

International Product Life Cycle Raymond Vernon

International versus Domestic Business

• International business is the outgrowth of domestic business.

• Most major corporations started their operations in the domestic market.

• International entrepreneurs– Individuals or companies that invest and

operate in another country without a home base


• Significantly different due to differences in:– Environmental Dynamics

• Currency, inflation, interest rates, accounting practices, cultures, social customs, laws, political stability

– Operational Nature• Communication, coordination, motivation,

differences in organizational principles and management philosophies

Test for International Strategy

• The “Better Off” Test– Some extra value needs to be created in the new country– How can this extra value be created?

Test for International Strategy

• The “Ownership Test”– Why can’t a firm just sell or license its

products or buy resources than being rather than being international?

What is different about international strategy?

• Heterogeneity across markets• The scale and complexity of global

operations• The Unpredictability of economic

conditions across nations

Heterogeneity?

What is it? What sort of problems ?

Decisions‐

Scale

Does scale result in CA?What sort of organizational structure is appropriate

Decisions

Volatility

What is it? Can volatility results in CA?

Global Strategy

The Distinctive Content ofGlobal Strategy

The Case of Coke

1997 1999Goizueta Invester

Think Global,Act Global

March 2000Daft

Think Local,Act Local

Dec 2000Daft

Post-Global

The Case of Coke

Between Dodo strategies and Dinosaur strategies

Globality(complete integration of markets)

Isolation(complete separation of markets)

Semi-globalization

How to survive in the middle?

Adaptation

Aggregation

Arbitrage

Local responsiveness

Scale Economies Absolute

economies

Adaptation

Multiple Strategy Levers • Product Characteristics • Decentralization• Modularization• Recombination

Aggregation

• County-by-country is expensive• How do you address complexity without

sacrificing economies of scale?

Asea Brown Boveri

Tradeoffs in Alternative Configurations

Citibank HSBCOrganizational emphasis

Line of business World’s local bank

Local Single B\L Local B\L sheetsCommitment Ability to make large bets

Hedged local positions Easy entry/exit

ConservativeUn-hedged local positionsNever leave a country voluntarily

Talent Centralized Local talentResults Most profits from U.S

Faster and volatile stock price appreciation

Even distribution of profitSlower and steadier stock price appreciation

Global/Outsourcing strategy

Mfg Logistics Brand Retail

Zara

Esquel

Benetton --------- --------- -----------------

Gap ------------------------

Li & Fung -------- --------------------------------

Viable alternative to multinationals

Latin American playgrounds & slums

Latin American little league

Latin American football academics

Minor league

Major league

Major league superstars

% chance of advancing

20%

10%

30%

10%

10%

10%0.00006

Compensation Benchmark Age

<10

10-14

12-17

18-21

21-27

>27

Gloves, jerseys etc

$800/month

Signing bonus $37,500+ salary ($7250)

Signing bonus + salary (min $ 200,000 )

International Product Life Cycle Raymond Vernon


• International business is the outgrowth of domestic business.

• Most major corporations started their operations in the domestic market.

• International entrepreneurs– Individuals or companies that invest and

operate in another country without a home base


• Significantly different due to differences in:– Environmental Dynamics

• Currency, inflation, interest rates, accounting practices, cultures, social customs, laws, political stability

– Operational Nature• Communication, coordination, motivation,

differences in organizational principles and management philosophies

Theory Classes

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