chapter

Globalization and The Manager

McGraw-Hill/Irwin Principles 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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The clock radio wakes you with the Scorpions (Germany) singing the last part of Rock You Like a Hurricane! Its 8am. Youd better get moving or you will be late for Prof. Walcutts class. In the living room, the television (Taiwan) is on. You hearAnother 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 McDonalds (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 todays 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!

Evidence of Globalization?

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

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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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 provinces 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

Privatization in Kosovo

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What other economic models might it be possible for an international manager to encounter? What challenges will each bring?

Other Economic Models

Source: The Associated Press, December 28, 2006

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

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

Communication & Transportation Costs

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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

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:

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

Globalization of Production
Labor

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Factors
Capital

of Production

Energy

Land

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

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- Products - Operating strategies - Marketing strategies - Band names

Greater uniformity replaces diversity. (McDonaldization)

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
900 800 700 600 500 400 300 200 100 0 2004 2005 2006 2007 2008 Investment (in Billions)

Source: Business Week, October 27, 2005

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

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National Differences in Consumer Behavior

National Differences Differences in Social in Business Systems Culture

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Global Packaging?
In 2003 McDonalds 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

Reasons for Expansion

1. Expand the market 2. Realize scale economies 3. Realize location economies 4. Benefit from global learning

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Examples?

Realizing Location Economies in India

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According to the Federation of Indian Chambers of Commerce and Industry of Indias (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

Decisions When Going Global

1. Whether to treat the world as a single market or customize the firms 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.

Management Challenges to Globalization

Entry Mode

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Global Standardization or Local Customization Locating Activities

Managing People in the Multinational Firm

Global Standardization or Local Customization

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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 McDonalds 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

Entry Mode
Exporting Exporting x Exporting Wholly owned Wholly owned Wholly owned subsidiary subsidiary subsidiary Franchising Licensing Licensing x

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Joint Licensing venture Joint venture x

Joint venture Franchising Franchising

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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

Managing People

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Ethnocentric Staffing
Home Country Mgmt.

Polycentric Staffing
Host Country Mgmt.

Geocentric Staffing
Best Staff Mgmt.

Exercising Your Knowledge Activity

You are managers from different domestic companies. You wish to go international. Answer the following questions based on your companys 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 firms 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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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