chapter 3Globalization and

The Manager

McGraw-Hill/IrwinPrinciples of Management

© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Learning Objectives

1. Explain what globalization is.

2. Describe the processes driving globalization.

3. Identify the implications of globalization for business enterprises.

4. Discuss different constraints limiting the pace of globalization.

5. Outline the benefits of going global for a business firm.

6. Discuss some of the challenges of managing in a global enterprise.

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Evidence of Globalization?

The clock radio wakes you with the Scorpions (Germany) singing the last part of “Rock You Like a Hurricane!” It’s 8am. You’d better get moving or you will be late for Prof. Walcutt’s class.

In the living room, the television (Taiwan) is on. You hear…Another global company president (Japan) has been found guilty of a WTO violation with Chile, North Korea is telling Al Jazeera (Quatar) that it did not ship missile technology (based on USSR design) to Pakistan and that McDonald’s (US) only serves Australian beef. As you head toward the bathroom, you grab a new bar of soap (France) and your favorite Salvatore Ferragamo towel.

After showering, you pull on your Levi jeans (US but made in Malaysia), lace up your Nike cross-trainers (US but made in Costa Rica), throw on a Burberry (UK but made in Hong Kong) pullover and grab today’s Korea Herald (Korean but the paper comes from Canada). No time for breakfast, you decide to stop somewhere before you head in to class on your Royal Enfield scooter (India). Maybe even pick up some Starbucks (US) coffee (Guatemalan, Kenyan and Columbian blend) for Prof. Walcutt as well. That might help you get an “A” in the class!

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Globalization

The process whereby national economies and business systems are becoming deeply interlinked with each other.

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Accelerated Pace of Globalization

Three main reasons:• The spread of market-based economic systems

• The decline of barriers to international trade and foreign direct investment

• Falling costs of communication and transportation

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Market Economy

• Most businesses are privately owned

• Prices are set by the interaction of supply and demand

• Government regulation is limited to ensuring that competition between individual enterprises is free and fair and that the system does not produce outcomes judged to be unacceptable

• Examples?

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Socialist Economy

• Most businesses are owned by the state

• Private producers were excluded from certain industrial and commercial activities

• Prices were set by the state

• State planners decided what was produced where, in what quantity, and by whom

• Antithetical to globalization• Examples?

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Privatization in Kosovo

• Authorities have put another 23 firms for sale in Kosovo

• Hundreds of other government-owned companies have already been sold which were considered inefficient and dilapidated

• In 2006, the province’s economy grew 5% for the first time driven by the private sector

• However, the unemployment is still at 50%

Source: The Associated Press, December 28, 2006

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Other Economic Models

• What other economic models might it be possible for an international manager to encounter?

• What challenges will each bring?

Source: The Associated Press, December 28, 2006

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Falling Barriers to Trade and Investment

• Tariffs – A tax on imports

• Quotas – A limit on the number of items of a good that can be imported from a foreign nation

• Regional trade agreements – agreements to remove barriers to trade between nations within a geographic region

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Communication & Transportation Costs

Satellite Optical fiber

Wireless technologies

Internet

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Falling Communication Costs

• In 1983, a three minute telephone call from the USA to India would cost $13.50 on AT&T (before the breakup) going through the operator

• Today, using the Internet, one can make the same call for free (no need for operator)

• The traditional telephone landline or cellular phone would cost few pennies per minute (no need for operator).

• Siberian example

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Implications of Globalization

• A massive surge in the volume of international trade and foreign direct investments

• Foreign Direct Investment (FDI) has increased even more dramatically

• For individual enterprises and their managers:

- Globalization of production is well under way- Globalization of markets is starting to occur- Advances in technology are facilitating these

trends

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Globalization of Production

Capital

Labor

Land

Energy

Factors

of Production

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Globalization of Markets

• Merging of historically distinct and separate national markets into one huge marketplace.

• How does this happen?• As firms follow each other around the world, they bring

- Products- Operating strategies- Marketing strategies- Band names

• Greater uniformity replaces diversity. (McDonaldization)

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Technology Innovations

• Allow managers to create and then manage a globally dispersed production system

• Further facilitating the globalization of production

• Facilitated in globalization of markets

• Examples?

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IT Spending

0

100

200

300

400

500

600

700

800

900

2004 2005 2006 2007 2008

Investment (inBillions)

Source: Business Week, October 27, 2005

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Constraints to Globalization

Limit the ability of managers to move production activities to places where they can be performed at the lowest

cost. Example?

Also, limit the managers’ ability to treat the entire world as a single

homogeneous marketplace. Example?

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Constraints to Globalization

Protectionist Countertrends

National Differences in

Consumer Behavior

National Differences in Business Systems

Differences in Social Culture

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Global Packaging?

• In 2003 McDonald’s announced that all 300,000 of its restaurants in over 100 countries will soon adopt the same brand packaging for its menu items. Two years later, the company backpedaled and announce localization. Why?

• Computer manufacturer HP uses as many as eight languages on its packaging

• Procter & Gamble adjusts its branding strategy across borders. How do you think?

Source: Business Week Online, January 23, 2006

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Reasons for Expansion

1. Expand the market

2. Realize scale economies

3. Realize location economies

4. Benefit from global learning

• Examples?

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Realizing Location Economies in India

According to the Federation of Indian Chambers of Commerce and Industry of India’s (FICCI) annual foreign direct investment (FDI) survey:

- 70 % of the foreign companies are earning profits from their Indian operations

- 84% said to be planning to expand their business in India

- 90% considered the information technology (IT) and business process outsourcing (BPO) services to be one of the most lucrative sectors for investments

Source: The Hindu, August 16, 2005

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Decisions When Going Global

1. Whether to treat the world as a single market or customize the firm’s products to reflect differences across nations

2. The best mode for entering a foreign market

3. Where to locate different business activities

4. How best to manage subsidiaries

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Question

If an organization wants to be global, it must treat the world as a single market and utilize global standardization strategy. Do you agree? Explain.

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Management Challenges to Globalization

Global Standardization

or Local Customization

Managing People in the Multinational

Firm

Locating Activities

Entry Mode

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Global Standardization or Local Customization

• Global standardization strategy – treating the world market as a single entity, selling the same basic product around the world

• Local customization strategy – varying some aspect of product offerings or marketing messages to take country or regional differences into account

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Question

When McDonald’s sells wine on its menu in France and Soy Burgers or Lamb Burgers in India, it is adopting which of these strategies?

a. Licensing

b. Franchising

c. Global standardization

d. Local customization

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Entry Mode

ExportingExporting

LicensingLicensing

FranchisingFranchisingJoint ventureJoint venture

Wholly owned subsidiary

Wholly owned subsidiary

Franchising x

Wholly owned subsidiary

Licensing x

Joint venture

Exporting x

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Locating Activities

1. Managers have to break the operations of the firm into discrete steps or activities

2. Each activity has to be located in the best place given a consideration of factors such as country differences in:• Labor costs and infrastructure• Transportation costs• Tariff barriers• Currency exchange rates• Strategic orientation

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Managing People

Geocentric Staffing

Ethnocentric Staffing

Polycentric Staffing

Home Country Mgmt. Host Country Mgmt.

Best Staff Mgmt.

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Exercising Your Knowledge Activity

You are managers from different domestic companies. You wish to “go” international. Answer the following questions based on your company’s products and basic assumptions about your company and industry.

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Exercising Your Knowledge Activity

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Exercising Your Knowledge Activity

1. Whether to treat the world as a single market or customize the firm’s products to reflect differences across nations

2. The best mode for entering a foreign market

3. Where to locate different business activities

4. How best to manage subsidiaries

1. Each activity has to be located in the best place given a consideration of factors such as country differences in:• Labor costs and

infrastructure• Transportation costs• Tariff barriers• Currency exchange

rates• Strategic orientation