Globalization - International Business Environment and Strategy

Globalization - International Business Environment and Strategy Name Abhishek Podar Chetan Devadiga Ronak Desai Sachin Gaikwad Sameer Thakker Sudeep Nair Roll Nos 202 208 232 235 236 243

Globalization- What's really new?

New Trade Pattern :Developing countries dont just have to trade their raw materials to the west and get finished product in return

THEY CAN BECOME BIG-TIME PRODUCERS AS WELL

New Production Pattern :Companies can locate different parts of their production, research and marketing in different countries

Globalization encompasses
Internationalization ( Trade & Investment ) Liberalization ( Freeing markets ) Universalization ( Culture Interchange )

History of Globalization
Sharing between world culture began 1000s of years ago In the 19th century Cultural Sharing exploded European discover the Americas European Imperialism Industrial Revolution In 20th Century Free Market Capitalism Internet Tele communication

Strategy of International Business

Strategy of International Business focus to compete more effectively in international business How firms can increase their profitability by expanding into international markets Different strategies firm can use when competing internationally benefits, costs and Risks of strategic alliances

Components
Value creation Value creation strategies Strategic positioning Global expansion Location Economies

Value Creation
Value creation profits are determined by amount of value customers place on firm goods/ services Segment the market enough to charge a price that reflects Can create more value by making product more attractive with: Superior design Functionality Features Quality

Value creation Strategies

Low cost strategy focus primarily on lowering production costs Differentiation strategy focus primarily on increasing attractiveness of product way to create superior value is to drive down the cost structure or differentiate product so consumers value more and willing to pay premium price.

Strategic Positioning
Strategic Positioning important for firm to be explicit about choice of strategic emphasis ( differentiation & cost ), important to make sure to configure internal operations accordingly & manage them efficiently Basic interest is to maximize long-run ROI & competitiveness. Pick a position that has a enough demand to support choice Configure internal operations to support position like Manufacturing Marketing Logistics Information systems

Global Expansion
Global expansion increase profitability

Realize location economies by dispersing individual value creation activities around the globe
Realize cost economies from experience effects by serving global market from central location Earn a greater return from firm distinctive skills or core competencies by leveraging & applying to new geographic markets Realize by leveraging valuable skills developed in foreign operations & transferring them to other locations

Location Economies
Location economies Countries differ along a range of dimensions ( economical, political, legal, cultural) these differences either raise or lower the cost of doing business Certain countries have a comparative advantage in the production of certain products. Trade barriers and transportation costs permitting firm will benefit from basing each value creation activity at that location where the economic, political, cultural, factor costs etc. are most conductive to the performance of the activity Location economy-economies that arise from performing a value creation activity in the optimal location for that activity, lower the costs of value creation help the firm achieve a low cost position Differences in factor costs

Choices for international entry

Global Norms Same taste and Preference of consumers Eg :- Coca-Cola, Mc Donald Global Products-accepted by almost all people in the world Eg :- Computers & Cell Phones Market differences- between national & Global markets Eg :- Promoting cars Factors to be considered Fuel Costs Income Level Traffic congestion Cultural values Matching conditions in a country

Knowledge Objectives (contd)

The five alternative modes for entering international markets The effects of international diversification on firm returns and innovation Major risks of international diversification

Opportunities and Outcomes of International Strategy

Identifying International Opportunities

International strategy A strategy through which the firm sells its goods or services outside its domestic market Reasons to having an international strategy International markets yield potential new opportunities New market expansion extends product life cycle Needed resources can be secured Greater potential product demand

Products Life Cycle

Firm Introduces Innovation in Domestic Market Foreign Competition Begins Production

Firm Begins Production Abroad

Product Demand Develops and Firm Exports Products

Production is standardized and relocated to low cost countries.

International Strategy Benefits

Increase market share Domestic market may lack the size to support efficient scale manufacturing facilities. Return on investment Large investment projects may require global markets to justify the capital outlays

Weak patent protection in some countries implies that firms should expand overseas rapidly in order to preempt imitators

International Strategy Benefits (contd)

Economies of scale or learning

Expanding size or scope of markets helps to achieve economies of scale in manufacturing as well as marketing, R&D or distribution Can spread costs over a larger sales base Can increase profit per unit

Competitive advantage through location

Low cost markets aid in developing competitive advantage by providing access to: Raw materials Lower cost labor Key customers Energy

Selecting an International Corporate-Level Strategy

The type of corporate strategy selected will have an impact on the selection and implementation of the business-level strategies Some strategies provide individual country units with the flexibility to choose their own strategies Others dictate business-level strategies from the home office and coordinate resource sharing across units

International Corporate-Level Strategy

Focuses on the scope of operations: Product diversification Geographic diversification Required when the firm operates in: Multiple industries, and Multiple countries or regions Headquarters unit guides the strategy But business or country-level managers can have substantial strategic input

Multi-Domestic Strategy
Strategy and operating decisions are decentralized to strategic business units (SBU) in each country Products and services are tailored to local markets

Business units in one country are independent of each other Assumes markets differ by country or regions

Focus on competition in each market Prominent strategy among European firms due to broad variety of cultures and markets in Europe

Global Strategy
Products are standardized across national markets Decisions regarding business-level strategies are centralized in the home office Strategic business units (SBU) are assumed to be interdependent Emphasizes economies of scale Often lacks responsiveness to local markets Requires resource sharing and coordination across borders (hard to manage)

Transnational Strategy
Seeks to achieve both global efficiency and local responsiveness Difficult to achieve because of simultaneous requirements: Strong central control and coordination to achieve efficiency Decentralization to achieve local market responsiveness Must pursue organizational learning to achieve competitive advantage

Choice of International Entry Mode Type of Entry

Exporting Licensing Strategic alliances Acquisition

Characteristics
High cost, low control Low cost, low risk, little control, low returns Shared costs, shared resources, shared risks, problems of integration Quick access to new market, high cost, complex negotiations, problems of merging with domestic operations

New wholly owned subsidiary

Complex, often costly, time consuming, high risk, maximum control, potential aboveaverage returns

Dynamics of Mode of Entry

Whats the best solution?

Situation
The firm has no foreign manufacturing expertise and requires investment only in distribution.

Optimal Solution
Export

Dynamics of Mode of Entry

Whats the best solution?

Situation
The firm needs to facilitate the product improvements necessary to enter foreign markets.

Optimal Solution
Licensing

Dynamics of Mode of Entry

Whats the best solution?

Situation
The firm needs to connect with an experienced partner already in the targeted market. The firm is facing uncertain situations such as an emerging economy in its targeted market.

Optimal Solution

Strategic Alliance

The firm needs to reduce its risk through the sharing of costs.

Dynamics of Mode of Entry

Whats the best solution?

Situation
The firms intellectual property rights in an emerging economy are not well protected, the number of firms in the industry is growing fast, and the need for global integration is high.

Optimal Solution
Wholly-owned Subsidiary

International Diversification and Returns

Expanding sales of goods or services across global regions and countries and into different geographic locations or markets: May increase a firms returns (such firms usually achieve the most positive stock returns) May achieve economies of scale and experience, location advantages, increased market size and opportunity to stabilize returns

International Diversification and Innovation

Expansion sales of goods or services across global regions and countries and into different geographic locations or markets: May yield potentially greater returns on innovations (a larger market) Can generate additional resources for investment in innovation Provides exposure to new products and processes in international markets; generates additional knowledge leading to innovations

Complexity of Managing Multinational Firms

Expansion into global operations in different geographic locations or markets: Makes implementing international strategy increasingly complex Can produce greater uncertainty and risk May result in the firm becoming unmanageable May cause the cost of managing the firm to exceed the benefits of expansion Exposes the firm to possible instability of some national governments

Risk in the International Environment

Political Risks

Economic Risks

Political risks include: Instability in national governments

War, both civil and international

Potential nationalization of a firms resources

Risk in the International Environment

Political Risks

Economic Risks

Economic risks are interdependent with political risks and include:

Differences and fluctuations in the value of different currencies Differences in prevailing wage rates Difficulties in enforcing property rights Unemployment

Risk in the International Environment

Limits to International Expansion

Management Problems Cost of coordination across diverse geographical business units Institutional and cultural barriers Understanding strategic intent of competitors The overall complexity of competition

Risk in the International Environment (contd)

Porters Diamond Model

It helps understand the competitive position of a nation in Global competition

Porters Diamond Model

Traditionally, economic theory mentions following factors for comparative advantage for regions or countries
Land Location Natural resources Labour Local Population Size

Now these are factor endowments' which are inherited and cannot be influenced As a rule Competitive Advantage of nations has been the outcome of 4 interlinked advanced factors and activities in and between companies in these cluster These can be influenced in a pro-active way by Government
Firm Strategy, Structure and Rivalry Demand Condition Related Supporting Industries Factor Conditions

Porters Diamond Model

As a rule Competitive Advantage of nations has been the outcome of 4 interlinked advanced factors and activities in and between companies in these cluster These can be influenced in a pro-active way by Government Firm Strategy, Structure and Rivalry Demand Condition Related Supporting Industries Factor Conditions

Determinants of National Advantage

Factors of production: the inputs necessary to compete in any industry: Labour Land Natural resources Capital Infrastructure Basic factors include natural and labour resources Advanced factors include digital communication systems and an educated workforce

Determinants of National Advantage

Demand conditions: characterized by the nature and size of buyers needs in the home market Size of the market segment can lead to scale-efficient facilities

Efficiency can lead to domination of the industry in other countries

Specialized demand may create opportunities beyond national boundaries

Determinants of National Advantage

Related and supporting industries: supporting services, facilities, suppliers and so on Support in design Support in distribution Related industries as suppliers and buyers

Determinants of National Advantage

Firm strategy, structure and rivalry: the pattern of strategy, structure, and rivalry among firms Common technical training Methodological product and process improvement

Cooperative and competitive systems

Thank You