STRATEGIC MANAGEMENT

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GLOBAL BUSINESS

ENVIRONMENT

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CONCEPT Globalization refers to the strategy of

approaching worldwide markets with standardized products.

Worldwide markets are created by end consumers that prefer lower-priced, standardized products over higher priced, customized products etc.

Global corporations that use their worldwide operations to compete in local markets.

Global firms headquartered in one country with subsidiaries in other countries.

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Any company that aspires to industry leadership in the 21st century must think in terms of global, not domestic, market leadership

The world economy is globalizing at an accelerating pace as countries previously closed to foreign companies open up their markets.

As the internet shrinks the importance of geographic distance, and as ambitious, growth minded companies race to build stronger competitive positions in the markets of more and more countries.

Companies in industries that are already globally competitive are under the gun to come up with a strategy for competing successfully in foreign markets.

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GLOBAL CORPORATIONS 1. Coca-Cola (Beverage)

2. Zara (Apparel)

3. Microsoft (Software)

4. Apple (Smartphone)

5. IBM (Personal Computers)

6. Toyota (Automobiles)

7. McDonald (Fast Food Restaurant)

8. Starbucks (Coffee Chain)

9. Nestle (FMCG)

10. FedEx (Courier Service)04/22/2023

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WHY FIRMS GLOBALIZEAdditional Resources Various inputs- including natural

resources,technologies,skilled personnel, and materials-may be obtained more readily outside the home country.

Lowered Costs Various costs-including labor, materials, transportation,

and financing-may be lower outside the home country.Incentives Various incentives may be available from the host

government or the home government to encourage foreign investment in specific locations.

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New Expanded Markets New and different markets may be available outside

the home country; excess resources-including management, skills, machinery, and money-can be utilized in foreign locations.

Exploitation of Firm-Specific Advantages Technologies, brands, and recognized names can all

provide opportunities in foreign locations.Taxes Differing corporate tax rates and tax systems in

different locations provide opportunities for companies to maximize their after tax worldwide profits.

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Economies of Scale National markets may be too small to support efficient production,

while sales from several combined allow for larger scale production.

Synergy Operations in more than one national environment provide

opportunities to combine benefits from one location with another, which is impossible without both of them.

Power and Prestige The image of being international may increase a company’s power

and prestige and improve its domestic sales and relations with various stakeholders group.

Protect Home Market Through Offense in Competitor’s Home A strong offense in a competitor’s market can put pressure on the

competitor that results in a pull-back from foreign activities to protect itself at home.

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Trade Barriers Tariffs, quotas, buy-local policies, and other

restrictive trade practices can make exports to foreign markets less attractive; local operations in foreign locations thus become attractive.

International Customers If a company’s customer base becomes

international, and the company wants to continue to serve it, then local operations in foreign locations may be necessary.

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International Competition If a company’s competitors become international,

and the company wants to remain competitive, foreign operations may be necessary.

Regulations Regulations and restrictions imposed by the home

government may increase the cost of operating at home; it may possible to avoid these costs by establishing foreign operations.

Chance Chance occurrence results in a company deciding to

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To Capitalize on it’s Core Competencies A company may be able to leverage its competencies

and capabilities into a position of competitive advantage in foreign markets as well as just domestic markets.

To Spread it’s Business Risk Across A Wider Market Base

A company spreads business risk by operating in a number of different foreign countries rather than depending entirely on operations in its domestic markets.

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STRATEGIC ORIENTATION OF GLOBAL FIRMS

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Multinational Corporations Typically display one of four orientations towards their

overseas activities. They have certain set of beliefs about how the

management of foreign operations should be handled.Ethnocentric Orientation Believes that the values and priorities of the parent

organization should guide the strategic decision making of all its operations.

Polycentric Orientation The culture of the country in which the strategy is to be

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Regiocentric Orientation Exists when the parent attempts to blend its

own predispositions/preferences with those of the region under consideration, thereby arriving at a region sensitive compromise.

Geocentric Orientation Adopts a global systems approach to

strategic decision making, thereby emphasizing global integration.

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ANALYSIS OF GLOBAL BUSINESS ENVIRONMENT

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External and Internal Assessments are conducted before a firm enters

global markets. External assessment involves careful examination of

critical features of the global environment. Firm should concern the host nations in such areas as

economic progress, political control, and nationalism.

Other major areas of concern are industrial facilities, favorable balances of payments, and improvement of technological capabilities over the past decade along with host nation’s economic progress.

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Internal Assessment Involves identification of the basic strengths of a

firm’s operations. Strengths are more important in global operations

because the these characteristics are given host nation values most and host nation can offer significant bargaining leverage.

The internal assessment of a global firm is concerned with technical and managerial skills, capital, labor, and raw materials.

The global capabilities that should be analyzed include the firm’s product delivery and financial management systems.

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ENVIRONMENTAL CONSIDERATIONS

Economic Factors Size of GNP and projected rate of growth Foreign exchange position Size of markets for the firm’s products: rate of

growthPolitical Factors Form and stability of the government Attitude toward private and foreign investment

by government, customers, and competition Degree of antiforeign discrimination

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Geographic Factors Proximity of site to export market Availability of local raw materials Availability of power, water and gas.

Labor Factors Availability of managerial, technical, and

office personnel able to speak the language of the parent company.

Degree of skill and discipline at all levels Degree and nature of labor voice in

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Tax Factors Tax rate trends Joint tax treaties with home country and others Availability of tariff protection

Capital Sources Factors Cost of local borrowing Modern banking system Government credit aids to new businesses

Business Factors State of marketing and distribution system Normal profit margins in the firm’s industry Competitive situation in the firm’s industry: do cartels

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COMPLEXITY OF THE GLOBAL BUSINESS ENVIRONMENT

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1. Global firms face multiple political,economic,legal,social and cultural environments as well as various changes.

Sometimes foreign governments work in performance with their militaries to advance economic aims even at the expense of human rights.

International firms must resist the excitement to benefit financially from such immoral opportunities.

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2. Interactions between the national and foreign environments are complex, because of national sovereignty issues and widely differing economic and social conditions.

3. Geographical separation, cultural and national differences, and variation in business practices all tend to make communication and control efforts between headquarters and the overseas affiliates difficult.

4. Global firms face extreme competition, because of differences in industry structures within countries.

5. Global firms are restricted in their selection of competitive strategies by various regional blocks and economic integrations such as NAFTA,SAFTA,SAARC,ASIAN and EU etc.

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INTL VS GLOBAL COMPETITION

International Competitor

Company operates in a selected few foreign countries, with modest ambitions to expand further

Global Competitor Company markets

products in 50 to 100 countries andis expanding operations into additional country markets annually

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MULTICOUNTRY VS GLOBAL COMPETITION

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Multicountry Competition Multicountry competition exists when competition in

one national market is not closely connected to competition in another national market-there is no global or world market, just a collection of self-contained country markets.

Features Buyers in different countries are attached to different

product attributes. Sellers vary from country to country Industry conditions and competitive forces in each

national market differ in important respects.04/22/2023

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Rivals firms battle for national championships and winning in one country does not necessarily signal the ability to farewell in other countries (SCBL vs. Nabil).

The power of company’s strategy and resource capabilities in one country may not enhance its competitiveness to the same degree in the other countries where it operates (KFC in Nepal).

Any competitive advantage a company secures in one country may not guarantee that such competencies are minimal or nonexistent in another country (MTV viewers in Nepal).

For example TV broadcasting, consumer banking, life insurance,apparel,metals fabrication, many types of food products like (coffee,cereals,breads,canned goods, frozen foods) and retailing etc.

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Global Competition Global competition exists when competitive

conditions across national markets are linked strongly enough to form a true international market and when leading competitors compete head to head in many different countries.

Same group of rivals companies competes in many different countries, but especially so in countries where sales volumes are large and where having a competitive presence is strategically important to building a strong global position in the industry.

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A company’s competitive position in one country both affects and is affected by its position in other countries.

A firm’s overall competitive advantage grows out of its entire worldwide operations.

Rival firms in globally competitive industries fight for worldwide leadership.

Global competition exists in motor vehicles, television sets, tires, mobile phones, personal computers, copiers, watches, digital cameras, bicycles, and commercial aircraft.

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LOCALIZED MULTICOUNTRY OR A GLOBAL STRATEGY

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The issue of whether to vary the company’s competitive approach to fit specific market conditions and buyer preferences in each host country or whether to employ essentially the same strategy in all countries is perhaps the foremost strategic issue that companies must address when they operate in two or more foreign markets.

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THINK LOCAL ACT LOCAL APPROACHES TO STRATEGY

MAKING This approach to strategy making a company

tailors its product offerings and perhaps its basic competitive strategy to fit buyer tastes and market conditions in each country where it opts to compete.

The strength of employing a set of localized or multicountry strategies is that the company’s actions and business approaches are deliberately crafted to accommodate the differing tastes and expectations of buyers in each country and to stake out the most attractive market positions via-via local competitors. 04/22/202

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This approach means giving local managers considerable strategy making latitude.

Moreover having plants produce different product versions for different local markets, and adapting marketing and distributions to local customs and cultures.

The bigger the country to country variations, the more that a company’s overall strategy is a collection of its localized country strategies rather than a common or global strategy.

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WHEN THIS STRATEGY WILL BE SUITABLE?

Significant country to country differences in customer preferences and buying habits.

Significant cross-country differences in distribution channels and marketing methods.

Stringent regulations requiring that products sold locally meet strict manufacturing specifications or performance standards.

Trade restrictions of host governments are so diverse and complicated that they preclude a uniform, coordinated world wide market approach.

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LIMITATIONS1. They hinder transfer of a company’s competencies and

resources across country boundaries (since the strategies in different host countries can be grounded in varying competencies and capabilities)

2. They do not promote building a single, unified competitive advantage-especially one based on low cost.

3. Companies employing highly localized or multicountry strategies face big hurdles in achieving low-cost leadership unless they find ways to customize their products and still be in position to capture scale economies and experience/learning curve effects.

For example like Dell Computers and Toyota, because they have mass customization production capabilities, can cost effectively adapt their product offerings to local buyer tastes.

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THINK GLOBAL, ACT GLOBAL APPROACHES TO STRATEGY

MAKING Global strategies are best suited for globally

competitive industries. A global strategy is one in which the company’s

approach is predominantly the same in all countries

It sells the same products under the same brand names everywhere, uses much the same distribution channels in all countries, and competes on the basis of the same capabilities and marketing approaches worldwide.

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Although the company’s strategy or product offering may be adapted in very minor ways to accommodate specific situations in a few host countries, the company’s fundamental competitive approach (low-cost,differentiation,best-cost,or focused) remains very much intact worldwide, and local managers stick close to the global strategy.

This strategic theme prompts company managers to integrate and coordinate the company’s strategic moves worldwide and to expand into most if not all nations where there is significant buyer demand.

It puts considerable strategic emphasis on building a global brand name and aggressively pursuing opportunities to transfer ideas, new products, and capabilities from one country to another.

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DIFFERENCE BETWEEN LOCALIZED MULTICOUNTRY AND GLOBAL STRATEGY

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THINK GLOBAL, ACT LOCAL APPROACHES

TO STRATEGY MAKING

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In this strategy a company can accommodate cross country variations in buyer tastes, local customs, and market conditions.

This strategy uses the same basic theme such as low cost, differentiation, best-cost, or focused

This provides the local managers full latitude to

1. Incorporate whatever country specific variations in products attributes are needed to best satisfy local buyers

2. Make whatever adjustments in production, distribution, and marketing are needed to be responsive to local market conditions and compete successfully against local rivals.

3. Slightly different product versions sold under the same brand name may suffice to satisfy local tastes.

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Foreign Market Analysis

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CROSS COUNTRY DIFFERENCES IN CULTURAL, DEMOGRAPHIC AND MARKET

CONDITIONS When any firm wants to enter into the foreign market, the

strategies uses by these firms to compete in foreign markets must be situation driven.

Cultural, demographic and market conditions vary significantly among the countries of the world.

Cultures and lifestyles are the most obvious areas in which countries differ; market demographics and income levels are close behind.

For example consumers in Spain do not have the same tastes, preferences, and buying habits as consumers in Norway; buyers differ yet again in Greece, Chile, New Zealand and Taiwan etc.

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Sometimes product designs suitable in one country are inappropriate in another.

For example in the USA electrical devices can run on 110 volt systems but in some EU the standard is a 240 volt system.

Market growth varies from country to country.

For example in emerging markets like BRICS countries market growth potential is far higher than in the more mature economies of developed nations such as UK,Canada or Japan etc. 04/22/2023 43

One of the biggest concerns of companies competing in foreign markets is whether to customize their offerings in each different country market to match the tastes and preferences of local buyers or whether to offer a mostly standardized product worldwide.

The tension between the market pressures to localize a company’s product offerings country by country and the competitive pressures to lower costs is one of the big strategic issues that participants in foreign markets have to resolve. 04/22/202

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GAINING COMPETITIVE ADVANTAGE BASED ON WHERE ACTIVITIES ARE

LOCATED Differences in wage rates, worker productivity, inflation

rates, energy costs, tax rates, government regulations, and the like create sizable variations in manufacturing costs from country to country.

Plants in some countries have major manufacturing cost advantages because of lower input costs(especially labor), relaxed government regulations, the proximity of suppliers, or unique natural resources.

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The low cost countries become principal production sites, with most of the output being exported to markets in other parts of the world.

Companies that build production facilities in low-cost countries have a competitive advantage over rivals with plants in countries where costs are higher.

The competitive role of low manufacturing costs is most evident in low wage countries like China, India, Pakistan, Cambodia, Vietnam, Mexico and Brazil etc.

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The quality of a country’s business environment also offers locational advantages-the government of some countries are attracting more FDI by lowering corporate tax rates (Ireland).

Another locational advantage is the clustering of suppliers of components and capital equipment; infrastructure suppliers such as universities, vocational training providers, research enterprises, trade associations etc.

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THE RISK OF ADVERSE EXCHANGE RATE SHIFTS

The volatility of exchange rates greatly complicates the issue of geographic cost advantages.

Currency exchange rates often move up or down 20 to 40 percent annually.

Changes of this magnitude can either totally wipe out a country’s low cost advantage or transform a former high cost location into a competitive cost location. 04/22/202

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Companies with manufacturing facilities in a particular country are more cost competitive in exporting goods to world markets when the local currency is weak (or declines in value relative to other currencies); their competitiveness erodes when the local currency grows stronger relative to the currencies of the countries to which the locally made goods are being exported.

Fluctuating exchange rates pose significant risks to a company’s competitiveness in foreign markets.

Exporters win when the currency of the country where goods are being manufactured grows weaker and they lose when the currency grows stronger.

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Domestic companies under pressure from lower cost imports are benefited when their government’s currency weaker in relation to the countries where the imported goods are being made.

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HOST GOVERNMENT POLICIES National government enact all kinds of measures

affecting business conditions and the operation of foreign companies in their markets.

Host governments may set local content requirements on goods made inside their borders by foreign based companies, have rules and policies that protect local companies from foreign competition, put restrictions on exports to ensure adequate local supplies, regulate the prices of imported and locally produced goods, enact deliberately burdensome procedures and requirements for imported goods to pass customs inspection, and impose tariffs or quotas on the imports of certain goods.

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Governments may or may not have burdensome tax structures, stringent environmental regulations, or strictly enforced labor standards.

Sometimes outsiders face a web of regulations regarding technical standards, product certification, prior approval of capital spending projects, withdrawal of funds from the country, and required minority ownership of foreign company operations by local companies or investors.

Some government provide subsidies and low interest loans, market access and technical assistance etc.

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STRATEGY OPTIONS FOR ENTERING AND COMPETING IN FOREIGN

MARKETS There are a host of generic strategic options for a company that

decides to expand outside its domestic and compete internationally or globally

1. Maintain a national (one-country) production base and export goods to foreign markets, using either company-owned or foreign-controlled forward distribution channels.

2. License foreign firms to use the company’s technology or to produce and distribute the company’s products.

3. Employ a franchising strategy 04/22/2023

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4. Follow a multicountry strategy varying the company’s strategic approach (perhaps a little, perhaps a lot) from country to country in accordance with local conditions and differing buyer tastes and preferences.

5. Follow a global strategy using essentially the same competitive strategy approach in all country markets where the company has a presence.

6. Use strategic alliances or joint ventures with foreign companies as the primary vehicle for entering foreign markets and perhaps also using them as an ongoing strategic arrangement aimed at maintaining or strengthening its competitiveness.

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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.

Complexity refers to the number of critical success factors that are required to prosper in a competitive arena.

When a firm must consider many such factors, the requirements of success increase in complexity.

Diversity refers to the breadth of a business firm’s business lines.

When a company offers many product lines, diversity is high. 04/22/2023 55

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LowHigh

High

Market Complexity

Prod

uct

Div

ersi

ty

Export

Licensing, contract manufacturing,

franchising

Joint VentureForeign branch

Private equity investment

Wholly owned foreign subsidiary

Exporting Using domestic plants as a production base for

exporting goods to foreign markets is an excellent initial strategy for pursuing international sales.

The amount of capital needed to begin exporting is often quite minimal

Existing production capacity may well be sufficient to make goods for export.

A manufacturer involvement in foreign markets by contracting with foreign wholesalers experienced in importing to handle the entire distribution and marketing function in their countries or regions of the world.

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A manufacturer can establish its own distribution and sales organizations in some or all of the target foreign markets.

These strategies are primarily favored by Chinese, Korean and Italian companies-products are designed and manufactured at home and then distributed through local channels in the importing countries.

The primary functions performed abroad relate chiefly to establishing a network of distributors and perhaps conducting sales promotion and brand awareness activities.

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In some industries, firms gain additional scale economies and experience/learning curve benefits from centralizing production in one or several giant plants whose output capability exceeds demand in any one country market.

This strategy will be inappropriate in the following situations

1. Manufacturing costs in the home country are substantially higher than in foreign countries where rivals have plants,

2. The costs of shipping the product to distant foreign markets are relatively high.

3. Adverse shifts occur in currency exchange rates. Unless an exporter can both keep its production and shipping

costs competitive with rivals and successfully hedge against unfavorable changes in currency exchange rates, its success will be limited.

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Licensing If a firm has a valuable technical know-how or a unique

patented product has neither the internal organizational capability nor the resources to enter foreign markets can use this strategy.

Advantages It can avoid the risks of committing resources to country

markets that are unfamiliar, politically volatile, economically unstable, or otherwise risky.

By licensing the technology or the production rights to foreign based firms, the firm does not have to bear the costs and risks of entering foreign markets on its own, yet it is able to generate income from royalties.

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Disadvantages The big disadvantages of using this strategy is the risk of

providing valuable technological know how to foreign companies and thereby losing some degree of control over its use.

Monitoring licensees and safeguarding the company’s proprietary know how can prove quite difficult in some circumstances.

The companies to whom the licenses are being granted should be both trustworthy and reputable so that the organization can generate maximum level of royalty.

Many software and pharmaceutical companies use this strategy

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FRANCHISING A special form of licensing is franchising. It is suitable for service and retailing enterprises. It allows a franchisee to sell a highly publicized product or

service using the parent’s brand name or trademark, carefully developed procedures, and marketing strategies.

In exchange the franchisee pays a fee to the parent company, typically based on the volume of sales of the franchiser in its defined market area.

The franchise is operated by the local investor who must adhere to the strict policies of the parent.

World most champion of franchising is McDonald’s, which has 70 percent of its company-owned stores as franchisees in foreign markets. 04/22/202

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The franchisee bears most of the costs and risks of establishing foreign locations.

A franchisor has to expend only the resources to recruit,train,support,and monitor franchisees.

The big problem a franchisor faces is maintaining quality control

Foreign franchisees do not always exhibit strong commitment to consistency and standarization,especially when the local culture does not stress the same kinds of quality concerns.

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Another problem that can arise is whether to allow foreign franchisees to make modifications in the franchisor’s product offering so as to better satisfy the tastes and expectations of local buyers.

Should McDonald’s allow its franchised units in Japan to modify Big Macs slightly to suit Japanese tastes?

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Foreign Branching A foreign branch is an extension of the company in its foreign

market It is a separately located strategic business unit directly

responsible for fulfilling the operational duties assigned to it by corporate management including sales, customer service and physical distribution.

Host countries may require that the branch be domesticated i.e. have some local managers in middle and upper level positions.

The branch most likely will be outside the domestic countries legal jurisdiction.

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Equity Investment Small and medium size enterprises with strong growth

potential frequently have the need for additional funds to be able to grow further before deciding to trade their stock publicly in the marketplace.

These firms often enlist the support of a venture capital firm or private equity company that invests its shareholders’ money in start ups and other risky but potentially very profitable small and medium sized enterprises.

In exchange for a private equity stake, which is sometimes a majority or controlling position, private equity company provides investment capital and a range of business services, including management expertise.

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Wholly Owned Subsidiaries Wholly owned foreign subsidiaries are considered

by companies that are willing and able to make the highest investment commitment to the foreign market.

These companies insist on full ownership for reasons of control and managerial efficiency.

Policy decisions about local product lines, expansion, profits, and dividends typically remain with in the headquarter top managers.

Fully owned subsidiaries can be started either from scratch or by acquiring established firms in the host country.

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Joint Venture Joint venture is a popular strategy that occurs

when two or more companies form a temporary partnership or consortium for the purpose of capitalizing on some opportunity.

In this strategy two or more sponsoring firms form a separate organization and have shared equity ownership in the new equity.

It allocates ownership, operational responsibilities, and financial risks and rewards to each member while preserving their separate identity/autonomy.

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This strategy occur because the companies involved do not want to or cannot legally merge permanently.

Joint ventures provide a way to temporarily combine the different strengths of partners to achieve and outcome of value to all.

Extremely popular in international undertakings because of financial and political-legal constraints, forming joint ventures is a convenient way for corporations to work together without losing their independence.

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Loss of control, lower profits, probability of conflicts with partners, and the likely transfer of technological advantage to the partner.

Joint ventures are often meant to be temporary, especially by some companies that may view them as a way to rectify a competitive weakness until they can achieve long term dominance in the partnership.

Joint ventures tend to be more successful when both partners have equal ownership in the venture and are mutually dependent on each other for results.

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Strategic Alliances A strategic alliance is a long term cooperative

arrangement between two or more independent firms or business units that engage in business activities for mutual gain.

Alliances between companies or business units have become a fact of life in modern business.

Reasons for forming strategic alliances1. To obtain or learn new capabilities2. To obtain access to specific markets3. To reduce financial risk4. To reduce political risk 04/22/202

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The End

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