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Session 4 Part 1
Chapter 5: The Global
Environment
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Learning Objectives
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Why firms globalize
Identify Major Multi-National Market Groups
Recognize the typical evolutionary development from
domestic to a global corporation
The differences/complexities of the global
environment and the control problems that are faced
by global firms
The globalization strategies for firms in foreign
markets
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Globalization Defined
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Globalization refers to the strategy of
approaching worldwide markets with
standardized products
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
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Competitive Disadvantage

If you are not global in your reach and your
rivals are…
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Increasing Profitability Through Global
Expansion
 Location economies
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Economic benefits from performing a value creation
activity in the optimal location
Effects
Can lower costs
 Can enable differentiation
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Caveats
Transportation costs and trade barriers
 Political and economic risks
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Increasing Profitability Through Global
Expansion (cont’d)
 The experience curve
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Serving a global market from one or a few plants is
consistent with moving down the experience curve
and establishing a low-cost position
Transferring distinctive competencies
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Companies with distinctive competencies can realize
large returns by expanding to global markets where
competitors lack similar competencies and products
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Why Firms Globalize: Best Defense is a
good offensive globalization strategy
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U.S. firms often 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
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Conditions are Ripening
Firms are able to globalize more
easily and rapidly due to
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Fall of centrally planned economies in China,
Russia/Easter European companies – more free
market based.
The emergence of trade alliances: EEU,
Nafta…
Rapid Industrialization in Developing Nations
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Dominant Multinational Market Groups
The G-8 Nations
 NAFTA – soon to be AFTA
 Pacific Rim /Asia
 EEC – not incorporating the former Soviet Bloc
nations as Independent states

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THE GROUP OF 8 NATIONS
These meetings of the leaders of the United
States, Britain, Italy, Japan, France,
Germany, Russia, and Canada are the way
the powerful industrialized nations of the
world seek to work out differences between
themselves and arrive at policies that can
reduce conflict and other problems
elsewhere.
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The European Economic Community
Austria, Belgium, Cyprus, the Czech Republic,
Denmark, Estonia, Finland, France, Germany
(originally West Germany), Great Britain,
Greece, Hungary, Ireland, Italy, Latvia,
Lithuania, Luxembourg, Malta, the Netherlands,
Poland, Portugal, Slovakia, Slovenia, Spain, and
Sweden—are full members of the EU.
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Evolutionary Development of a Global
Corporation
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1. Export-import activity
Evolution
of a global
firm entails
progressively
involved
strategy
levels
2. Foreign licensing and technology
transfer
3. Direct investment in overseas
operations (manufacturing plants
and global management skills)
4. Substantial increase in foreign
investment (foreign assets comprise
significant portion of total assets)
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Differences Between Factors: Environmental Factors
U.S. Operations
International Operations
Language
English used almost universally
Use of local language required in
many situations
Culture
Relatively homogenous
Quite diverse, both between
countries and within countries
Politics
Stable and relatively unimportant
Often volatile and of decisive
importance
Economy
Relatively uniform
Wide variations among countries
and among regions within countries
Government
Minimal and reasonably predictable
interference
Extensive and subject to rapid
change
Labor
Skilled labor available
Skilled labor scarce, requiring
training or redesign of production
methods
Financing
Well-developed financial markets
Poorly developed markets; capital
flows subject to government control
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Differences Between Factors: Control Problems
U.S. Operations
International Operations
Media
research
Data easy to collect
Advertising
Many media available; few
restrictions
Money
U.S. dollar used universally
Transportation/
Communication
Among the best in the world
Often inadequate
Control
Always a problem, but centralized
control will work
A worse problem - centralized
control won’t work
Contracts
Once signed, are binding on both
parties even if one makes a bad deal
Can be avoided and renegotiated if
one party becomes dissatisfied
Labor
relations
Collective bargaining; layoff of
workers easy
Layoffs often not possible; may have
mandatory worker participation;
change sought via political process
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Data difficult and expensive to
collect
Media limited; many restrictions;
low literacy rates may rule out print
media
Different currencies; problems
created by changing exchange rates
and government restrictions
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Comparative Management Framework
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Compare and Contrast the Management Models,
Practices, Principles, Strategies,
Policies…Across Classes of Organizations
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Could be Profit vs Not-For-Profit, Small vs
Large , Private vs Public

Most Often Concerned with Comparative
Analysis Among Different Regions of World
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Globalization Strategy Options: Two Key
Considerations
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Pressures for Cost Reductions
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When companies produce commodity products
Where differentiation on nonprice factors is difficult
and price is the main competitive weapon
Where competitors are based in low-cost locations
Where there is persistent excess capacity
Where consumers are powerful and face low switching
costs
The liberalization of the world trade and investment
environment
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Pressures for Local Responsiveness
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Differences in customer tastes and preferences
Differences in infrastructure and traditional
practices
Differences in distribution channels
Host government demands
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Four Basic Strategies
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Choosing a Global Strategy
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International strategy
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Creating value by transferring competencies and
products to foreign markets where indigenous
competitors lack those competencies and products
Makes sense if a company has a valuable
competence that indigenous competitors in foreign
markets lack and if it faces weak pressure for local
responsiveness and cost reductions
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Choosing a Global Strategy (cont’d)
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Multidomestic strategy
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Developing a business model that allows a company
to achieve maximum local responsiveness
Makes sense when there are high pressures for local
responsiveness and low pressures for cost reductions
Companies may become too decentralized and lose
the ability to transfer skills and products
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Choosing a Global Strategy (cont’d)
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Global strategy
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Focusing on increasing profitability by reaping cost
reductions that come from experience curve effects
and location economies; pursuing a low-cost strategy
on a global scale
Makes sense when there are strong pressures for cost
reductions and demand for local responsiveness is
minimal
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True Global Strategy
The strategy of
approaching worldwide
markets with
standardized products.
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Choosing a Global Strategy (cont’d)
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Transnational strategy (Most Common)
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Simultaneously seeking to lower costs, be
locally responsive, and transfer competencies
in a way consistent with global learning
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Cost Pressures and Pressures for Local
Responsiveness Facing Caterpillar
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Advantages and Disadvantages of Different
Strategies for Competing Globally
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Multidomestic and Global Industries
A multidomestic industry
competition is essentially
segmented from country to
country (beer, food retailing)
A global industry is one in which
competition crosses national
borders (tires, athletic shoes)
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Strategic Management in Global Industries
The World as One
Battleground
More interconnected/similar
than ever before
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Factors Contributing to Globalization of
Competition
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 product
Low level of trade regulation and regulations regarding
foreign direct investment
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The Global Challenge
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Few “pure” cases of either global or
multidomestic industries exist
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The challenge -- global firms must
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Decide which activities will be performed in how
many and which locations
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Determine degree to which activities are coordinated
across locations
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Location and Coordination Issues of Functional
Activities
Functional
Activity
Location Issues
Coordination Issues
Location of production facilities for
components
Networking of international plants
Marketing
Product line selection;
Country (market) selection
Commonality of brand name;
Coordination of sales; Similarity of
channels and product positioning;
Coordination of pricing
Service
Location of service organization
Similarity of service standards and
procedures worldwide
Research &
Development
Number and location of R&D
centers
Interchange among dispersed R&D
centers; Develop products responsive
to market needs in many countries
Location of purchasing function
Manage suppliers located in different
countries; Transfer market knowledge;
Coordinate purchases of common
items
Operations
Purchasing
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Globalization of the Company Mission
Different environmental opportunities, constraints,
and risks confront a firm going global
 Top management must reassess firm’s fundamental
purpose, philosophy, and strategic intentions
 Mission statement must be revised to accommodate
changes in
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Strategic decision making
Corporate direction
Strategic alternatives
Strategic capabilities
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.