Objectives

International Strategic

What is globalization?
Management
Forces behind globalization

Why go international?

Risks of going international
Chapter 7
Global vs. local strategies

Ways of going international

Conclusion

Globalization

More and more businesses are seeing the
world as a source of business opportunities

They are also facing more and more
competition from foreign companies

Globalization is the “worldwide trend of
businesses expanding beyond their domestic
boundaries”

Shift towards a more integrated and
interdependent world market
Globalization: recent
phenomenon?

No!

Middle Eastern Intercontinental Trade – King’s
highway in ancient Egypt

2000 years ago – Silk road extended over 4000
miles out of the Nile Basin to Bagdad and
Kashmir linking China, India, Persia and Rome

Commercial caravans crossed land routes and paid
custom duties

China in 1421

Sent out 3750 vessels from China to cultivate trade

Introduced uniform container measurements

Globalization – Recent History European Wave

Spearheaded by US companies post World War
Post World War II
1 – US had strong industrial, financial and
Royal Dutch Shell – purchased and consolidated
technological resources European subsidiaries

Ex: GM purchased Vauxhall in England, Opel Motors
Nestle – became world leader in powdered drinks
in Germany and opened plants in Brazil in 1920 etc

Citibank opened first US bank in China in 1920
Dutch electronics Phillips

Coca-Cola, P&G all established significant presence
Bayer and Siemens

IBM – by 1939 – had gone international and with
1974 – sudden slowdown in US and
foreign sales being 1/8 of revenues European markets

1
Asian Wave Now?

1970s – Japanese firms entered the US
Oil wave?
markets
How will things change?

1980s – South Korean economic
What are the areas of growth in the world?
transformation
Emerging economies

Further development in Taiwan, Hong Kong,
Singapore and now China

Toyota is now world’s first largest automobile
manufacturer!

Forces Driving Globalization Regional Trade Agreements

Declining trade and investment barriers

During the 20’s and 30’s, countries imposed strict
tariffs to protect domestic companies

After World War 2, advanced industrial nations
committed themselves to remove barriers to free
trade – birth of GATT

In 1993, Uruguay negotiations lead to the birth of
World Trade Organization

Increase in number of bilateral treaties to facilitate
trade

European Union – includes European
countries to allow free movement of goods
and services

2003 – included 15 nations – mostly Western
European

May 2004 – entry of 10 additional countries –
Cyprus, Czech, Estonia, Hungary, Poland,
Slovakia, etc

One currency – the ‘euro’

North American Free Trade Agreement –
U.S., Canada, Mexico – freer exchange

Regional Trade Agreement Growth in World Trade and

Association of South East Asian Nations
(ASEAN)

Objectives of association is to accelerate growth

Includes Indonesia, Malaysia, Philippines,
Singapore, Thailand etc.

Mercosur – includes South America’s largest
Investment

Phenomenal growth has taken place in
trade and investment between countries

The growth of world trade has grown much
faster than the world output
2000

trading partners – Argentina, Brazil, Paraguay 1500

and Uruguay 1000
GDP
TRADE

Pending CAFTA – Central American Free Trade 500
World GDP

Agreement with US
0
1970 1980 1990 1997

2
Transportation Technology Why International?

Development of commercial jet aircraft and
Gain access to Obtain access to
superfreighters and containerization
new customers valuable natural

Commercial jet aircrafts has ‘shrunk’ the resources
globe Help

1500-1840: Best average speed of horse-drawn achieve
carriages and sailing ships 10mph lower costs

1850-1930: Steam locomotives: 65 mph; Steam Spread
ships: 36 mph Capitalize
on core business risk

1950s: Propeller aircrafts – 300-400 mph across wider
competencies

1960s- present: Jet passenger aircraft and market base
commercial aircraft – 500mph – speed of sound

Why go international? Why International?

Increase size of potential market

Population size: USA – 280m compared to 1.2b in
China and 1b in India!

Increase in scale of operations –

ex: economies of scale;

spread of operations on fixed costs

Extend life cycle of product

Dell and HP have sought international expansion
as US markets get saturated

Performance enhancement

Microsoft’s research lab in Cambridge, UK

Risks of going international Risks

Political and economic risks
Need to overcome liability of foreignness

Currency risks
Inherent disadvantage because of nonnative
nature

Management risks

Foreign firms are discriminated against

Cross-cultural differences

Japan and Europe resist buying US beef and rice
because of genetic modification

3
McDonalds – The Global Component
of a Big Mac in Ukraine Key Dilemma: Local vs. Global

Sesame Seeds – Mexico
The local responsiveness solution

Pickles – Germany
Customize organizations and products to country
or regional differences

Special Sauce – Germany

The global integration solution

Bun – Russia

Reduce costs with worldwide standardized

Onions – US products, uniform promotional strategies and

Beef patties – Hungary distribution channels

Cheese – Poland
Seek lower costs or higher quality anywhere in
the value chain and in the world

Lettuce - Ukraine

Thinking Local, Succeeding

Local Strategy

Local markets are linked within a region

Gives top priority to local responsiveness
issues

A form of the differentiation strategy

Not limited to large multinationals
Global

LG Electronics

$38b powerhouse in electronics and
appliances

Top producer of AC and top 3 players in washing
machines, microwaves and refrigerators

Why? Focus on in-depth localization

Emphasize understanding of in-country market
research, manufacturing and marketing

Gone are the days of the global brand

Examples Other examples

LG is market leader in India

Fridges that have larger vegetable and water
storage compartments

Surge-resistant power supplies

Bright color finishes that reflect local preference

Indian microwaves have dark finishes to hide
curry stain

TV for cricket fans with inbuilt cricket video games

In Iran – microwave oven with special button
to reheat shish kebabs – 40% market share

In Korea – Kimchi fridge with special
compartment

In Russia – long winters – people entertain at
home – LG developed a karaoke phone

Middle-East - $80,000 gold-plated 71 inch flat
screen TV

4

Global Strategy

Gives two goals top priority:

Seek location advantages

Gain economic efficiencies from worldwide
networks

Benefits

Cost reductions

Higher quality of products

Customer satisfaction – can obtain and service
product anywhere

Increased competitive power
Where to enter?

Location-specific advantages

Singapore – ideal stopping point for air and sea
traffic connecting Europe/Asia and East
Asia/Australia

Austria – MNE headquarters for Central/Eastern
Europe

Turkey – great launch for Middle East and Asia

Miami – good location for companies coming
North or going South
Location, location, location

Efficiency-seeking firms

Not necessarily lowest labor cost

China and India may not be the absolute lowest
labor cost

Shanghai and Bangalore – expensive real estate

However, they can help entrant total cost

Grupo Mexico – copper production in Texas where
energy is much cheaper
Risks/Problems with
Globalization

Loss of identity – need to denationalize local
operations for a common culture

More vulnerable to environmental risk

Difficult to manage – requires coordination of
divergent cultures

Lack of local flexibility and responsiveness

Research shows that companies feel
regionalization is more manageable and less
risky
Location, location, location

Seeking natural resources

Oil in Middle East, Russia; Bananas in Central
America and Carribean

Market seeking firms – go after countries for
highest price and highest demand

Seafood companies look for top dollars in Japan

Number of soft drinks company in Mexico

Second largest per capita consumption of Cola drinks
Location

Innovation-seeking

Silicon Valley, Bangalore – IT

NY and London – financial services

France –cosmetics etc.

Germany - chemicals
5
Participation Strategies Exporting

The choice of how to enter each international
The easiest – low risk, minimal investment,
market and fast withdrawal

1. Exporting

Passive exporting – treating and filling

2. Licensing overseas orders like domestic orders

3. Strategic alliances

Active export strategies – indirect through

4. Foreign direct investment
Export Management Companies

Downsides

Study of 250 instances where MNCs used
local distributors

Dismal results – in vast majority of cases, you
give up strategic control

Most distributors were fired or bought

Success factors

Carried product lines that complemented MNC’s
products

Behaved as business partners with MNCs
Licensing

International licensing is a contractual agreement
between a domestic licensor and a foreign licensee

International franchising

Contract manufacturing

Turnkey operations

Licensing distinctions:

Patent – legal protection for new inventions

Trademark – legal protection for symbols, picture [Nike
swoosh]

Copyright

Trade secret – Coca Cola formula etc.

The International Strategic

Examples

Yoplait is licensed by General Mills from
Sodima, a French cooperative

Logos of college and professional sports
team are also licensed
Alliance

Cooperative agreements between two or more firms
from different countries

Why?

To gain access to specific markets

Ex – Chrysler and Benz – to gain access to EU where
regulations favor local companies

Strategic alliances with Eastern European companies

To increase market share

To avoid import barriers, licensing requirements, and other
protectionist legislation

GM-Toyota venture – to avoid import quotas

6
Failure

JV develops its own identity – difficult
problems of integration/coordination

Lack of clarity regarding responsibilities

Corporate amnesia because of turnover of
expatriates

No plan if the venture ends
Foreign Direct Investment
(FDI)

FDI means that companies own and control
directly a foreign operation

symbolizes the highest stage of
internationalization

Why?

To extract raw materials

To find low cost sources of labor, components,
parts, or finished goods

To penetrate new markets
Disadvantages of FDI

Increased capital investment

Increased investment of managerial and
other resources

Greater exposure of the investment to
political and financial risks
Anheuser-Busch Lessons

Important element was to establish minority
JVs with local breweries

5 to 50% ownership in emerging economies
with fast-growing (although uncertain)
demand for beer

Grupo Modelo, Mexico; Tsingtao – China, AmBev
– Brazil

Tremendous opportunities to expand

Yet little risk if no development materializes
Advantages of FDI

Greater control

Lower costs of supplying host country

Avoid import quotas

Greater opportunity to adapt product to the
local markets

Better local image of the product
Conclusions

Crucial aspect of most companies

Need to recognize and appreciate
challenges

Can be a great avenue for increased
revenue

Problem abound