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Day 1

Globalization

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McGraw-Hill/Irwin

International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

What Is Globalization?

The world is moving away from self-containednational economies toward an interdependent,integrated global economic system

Globalization refers to the shift toward a moreintegrated and interdependent world economy

Globalization has two facets:1) the globalization of markets

2) the globalization of production

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McGraw-Hill/Irwin


The Globalization Of Markets

The globalization of mark ets r ef ers to the mer ging of historically

distinct and separate national mark ets into one huge global

mark et place

In many industries, it is no longer meaningf ul to talk about the³Ger man mark et´ or the ³American mark et´

Instead, ther e is only the global mark et

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McGraw-Hill/Irwin


The Globalization Of Markets

Falling trade barriers mak e it easier to sell internationally

The tastes and pr ef er ences of consumers ar e conver ging on some

global nor m

Fir ms hel p cr eate the global mark et by off ering the same basic products worldwide

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Classroom Performance System

The shift toward a more integrated and interdependent world economy is referred to as

a) economic integrationb) economic interdependency

c) globalization

d) internationalization

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McGraw-Hill/Irwin


The Globalization Of Production

The globalization of production r ef ers to the sourcing of goods

and services from locations around the globe to tak e advantage of

national diff er ences in the cost and quality of factors of

production lik e land, labor, and ca pital

Companies compete mor e eff ectively by lowering their overall

cost str uctur e or improving the quality or f unctionality of their

product off ering

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McGraw-Hill/Irwin



The mer ging of historically distinct and separate national

mark ets into one huge global mark et place is known as

a) global mark et facilitation

b) cross-bor der trade

c) supranational mark et integration

d) the globalization of mark ets

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McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.


Fir ms that ar e involved in international business tend to be

a) lar ge b) small

c) medium-sized

d) lar ge, small, and medium-sized

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The Emergence Of Global Institutions

Institutions ar e needed to:

hel p manage, r egulate, and police the global mark et place

promote the establishment of multinational tr eaties to govern the

global business system

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Institutions cr eated over the past half century include:

the General Agr eement on Tariffs and Trade (GATT)

the World Trade Or ganization (WTO)

the International Monetary Fund (IMF)the World Bank

the United Nations (UN)

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The World Trade Or ganization (lik e its pr edecessor GATT) is

primarily r es ponsible for policing the world trading system and

making sur e that nation-states adher e to the r ules laid down in

trade tr eaties signed by WTO mem bers

In 2007, the 150 nations that accounted for 97% of world trade

wer e WTO mem bers

The WTO promotes lower barriers to trade and investment

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The International Monetary Fund and the World Bank wer e

cr eated in 1944

The IMF was established to maintain or der in the international

monetary systemThe World Bank was established to promote economic

develo pment

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The United Nations was established in 1945 to:

maintain international peace and security

develo p friendly r elations among nations

coo perate in solving international problems and in promotingr es pect for human rights

be a center for har monizing the actions of nations

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Which is not a factor of production?

a) trade

b) landc) ca pital

d) ener gy

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Drivers Of Globalization

Two macro factors underlie the tr end towar d gr eater

globalization:

the decline in barriers to the fr ee flow of goods, services, and

ca pital that has occurr ed since the end of World War IItechnological change

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Declining Trade AndInvestment Barriers

International trade occurs when a fir m exports goods or services

to consumers in another country

For eign dir ect investment (FDI) occurs when a fir m invests

r esources in business activities outside its home countryAfter World War II, advanced countries made a commitment to

lower barriers to trade and investment

Since 1950, average tariffs have fallen significantly and ar e now

at about 4%

Countries have also been o pening mark ets to FDI

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The sourcing of good and services from around the world to tak e

advantage of national diff er ences in the cost and quality of

factors of production is called

a) economies of scale

b) the globalization of production

c) global integration

d) global sourcing

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Table 1.1: Average Tariff R ates on Manufactur ed Products as

Percent of Value

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Lower barriers to trade and investment mean:

that fir ms can view the world, rather than a single country, as

their mark et

that fir ms can base production in the o ptimal location for that activity

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Which or ganization is r es ponsible for policing the world trading

system?

a) the International Monetary Fund b) the United Nations

c) the World Trade Or ganization

d) the World Bank

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The Role Of Technological Change

Technological change has made the globalization of mark ets a

r eality

Important advances have occurr ed in:micro processors and telecommunications

the Internet and World Wide We b

trans portation technology

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Implications of technological change for the globalization of

production include:

lower trans portation costs that enable fir ms to dis perse

production to economical, geogra phically separate locationslower infor mation processing and communication costs that

enable fir ms to cr eate and manage globally dis persed production

systems

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Implications of technological change for the globalization of

mark ets include:

low cost global communications networks hel p cr eate electronic

global mark et placelow-cost trans portation hel p cr eate global mark ets

global communication networks and global media ar e cr eating a

worldwide cultur e, and a global mark et for consumer products

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The Changing DemographicsOf The Global Economy

Ther e has been a drastic change in the demogra phics of the

world economy in the last 30 years

Four tr ends ar e important: the Changing World Out put and World Trade Pictur e

the Changing For eign Dir ect Investment Pictur e

the Changing Natur e of the Multinational Enter prise

the Changing World Or der

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The Changing World OutputAnd World Trade Picture

In 1960, the United States accounted for over 40% of world

economic activity

By 2006, the United States accounted for less than 20% of world

economic activityA similar tr end occurr ed in other develo ped countries

The shar e of world out put accounted for by develo ping nations

is rising and is expected to account for mor e than 60% of world

economic activity by 2020

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The Changing World OutputAnd World Trade Picture

Table 1.2: The Changing Demogra phics of World GDP and

Trade

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The Changing Foreign DirectInvestment Picture

In the 1960s, U.S. fir ms accounted for about two-thir ds of

worldwide FDI flows

Today, the United States accounts for less than one-fifth of

worldwide FDI flowsOther develo ped countries have followed a similar pattern

In contrast, the shar e of FDI accounted for by develo ping

countries has risen from less than 2% in 1980 to almost 12% in

2005

Develo ping countries, es pecially China, have also become

po pular destinations for FDI

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Figur e 1.2: Percentage Shar e of Total FDI Stock 1980-2005

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Figur e 1.3: FDI Inflows 1988-2006

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What is the single most important innovation to the globalization

of mark ets and production?

a) advances in trans portation technology b) the develo pment of the micro processor

c) advances in communication

d) the Internet

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The Changing Nature Of The Multinational Enterprise

A multinational enter prise (MNE) is any business that has

productive activities in two or mor e countries

Since the 1960s, ther e has been a rise in non-U.S. multinationals,

and a growth of mini-multinationals

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The Changing World Order

Many for mer Communist nations in Euro pe and Asia ar e now

committed to democratic politics and fr ee mark et economies and

so, cr eate new o pportunities for international businesses

China andL

atin America ar e also moving towar d gr eater fr eemark et r efor ms

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The Global Economy Of The Twenty-first Century

The world is moving towar d a mor e global economic system,

but globalization is not inevitable

Globalization also brings risks lik e the financial crisis that swept

through South East Asia in the late 1990s

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Which of the following tr ends is tr ue?

a) the United States is accounting for a gr eater percentage of

world trade than ever befor e b) the United States is accounting for a gr eater percentage of

for eign dir ect investment than ever befor e

c) the shar e of world trade accounted for by develo ping countries

is rising

d) the shar e of for eign dir ect investment by develo ping countries

is declining

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The Globalization Debate

Is the shift towar d a mor e integrated and inter dependent global

economy a good thing?

Supporters believe that incr eased trade and cross-bor der

investment mean lower prices for goods and services, gr eater

economic growth, higher consumer income, and mor e jobs

Critics worry that globalization will cause job losses,

environmental degradation, and the cultural imperialism of global

media and MNEs

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Anti-Globalization Protests

Mor e than 40,000 anti-globalization protesters took to the str eet

at the WTO meeting in Seattle in 1999

Protesters now r egularly show up at most ma jor meetings of

global institutions

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Globalization, Jobs, And Income

Globalization critics ar gue that falling barriers to trade ar e

destroying manufacturing jobs in advanced countries

Supporters of globalization contend that the benefits of this tr end

outweigh the costs²that countries will s pecialize in what they do

most efficiently and trade for other goods²and all countries will

benefit

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Globalization, Labor Policies,And The Environment

Globalization critics ar gue that fir ms avoid costly efforts to

adher e to labor and environmental r egulations by moving

production to countries wher e such r egulations do not exist, or

ar e not enforced

Globalization supporters claim that tougher environmental and

labor standar ds ar e associated with economic progr ess, so as

countries get richer from fr ee trade, they get tougher

environmental and labor r egulations

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Globalization AndNational Sovereignty

Critics of globalization worry that today¶s inter dependent global

economy is shifting economic power away from national

governments towar d supranational or ganizations lik e the WTO,

the EU, and the UN

Supporters of globalization contend that the power of these

or ganizations is limited to what nation-states agr ee to grant, and

that the power of the or ganizations lies in their ability to get

countries to agr ee to follow certain actions

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Globalization And The World¶s Poor

Critics of globalization ar gue that the ga p between rich nations

and poor nations is getting wider

Supporters of globalization claim that the best way for the poor

nations to improve their situation is to r educe barriers to trade and

investment and implement economic policies based on fr ee

mark et economies, and to r eceive de bt for giveness for de bts

incurr ed under totalitarian r egimes

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Which of these is not a concern of anti-globalization protesters?

a) globalization raises consumer income

b) globalization contributes to environmental degradationc) globalization is causing a loss of manufacturing jobs in

develo ping countries

d) globalization implies a loss of national sover eignty

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Managing In The Global Marketplace

An international business is any fir m that engages in

international trade or investment

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Managing In The Global Marketplace

Managing an international business diff ers from managing a

domestic business because:

countries ar e diff er ent

the range of problems confronted in an international business is wider and the problems mor e complex than those in a domestic

business

fir ms have to find ways to work within the limits imposed by

government intervention in the international trade and investment

system

international transactions involve converting money into

diff er ent curr encies

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Day 2

The Strategy of International Business

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What Makes Firms Different?

Apple Computers vs. Dell

BMW vs. Toyota

Yum! vs. McDonald¶s

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Strategy and the Firm

Strategy can be defined as the actions that managers must tak e to attain the goals of the fir m

- For most firms, the preeminent goal is to maximize thevalue of the firm for its owners

Profitability can be defined as the rate of r eturn that the fir m mak es on its invested ca pital (ROIC), whichis calculated by dividing the net profits of the fir m by

total invested ca pital Profit growth is measur ed by the percentage incr easein net profits over time

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Strategy and the Firm

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Value Creation

The way to incr ease the profitability of a fir m is to cr eate mor evalue

- The amount of value a firm creates is measured by the difference

between its costs of production and the value that consumersperceive in its products

Michael Porter states that ther e ar e two basic strategies for cr eating value and attaining a competitive advantage in an industry

- Low-cost strategy suggests that a firm has high profits when itcreates more value for its customers and does so at a lower cost

- Differentiation strategy focuses primarily on increasing theattractiveness of a product

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Value Creation

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Strategic Positioning

It is important for a fir m to be explicit about its choice of

strategic emphasis with r egar d to value cr eation

- Management must decide where the company wants to be

positioned with regard to value and cost

A central tenet of the basic strategy paradigm is: To maximize

its profitability, a fir m must do thr ee things

- Pick a position on the efficiency frontier that is viable in the sense

that there is enough demand to support that choice

- Configure internal operations so that they support that position

- Make sure that the firm has the right organization structure in

place to execute its strategy

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Strategic Choice in the

International Hotel Industry

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The Value Chain

Any fir m is composed of a series of distinct valuecr eating activities

- Primary activities Research & development

Production

Marketing & sales

Service

- Support Activities

Materials management or logistics Human resource

Information systems

Company infrastructure

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Global Expansion, Profitability,

and Profit Growth

Expanding globally allows fir ms to incr ease their profitability

and rate of profit growth in ways not available to pur ely

domestic enter prises

Fir ms that o perate internationally ar e able to

- Expand the market for their domestic products

- Realize location economies by dispersing individual value

creation activities

- Realize greater cost economies

- Earn a greater return by leveraging any valuable skills developed

in foreign operations

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EXPANDING THE MARKET:

LEVERAGING PRODUCT

AND COMPETENCIES

A company can incr ease its growth rate by taking goods or services develo ped at home and selling them internationally

- Returns from such a strategy are likely to be greater if indigenouscompetitors in the nations a company enters lack comparableproducts

Success of multinational companies also r est upon the cor ecompetencies that underlie the develo pment, production, andmark eting of goods or services

- Core competencies are skills within the firm that competitorscannot easily match or imitate

- Core competencies are the bedrock of a firm¶s competitiveadvantage and enable them to reduce the costs of value creation

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Location Economies

Location economies ar e the economies that arise from perfor ming a value cr eation activity in the o ptimal location for that activity

Can have one of two eff ects- It can lower the costs of value creation and help the firm toachieve a low-cost position and/or

- It can enable a firm to differentiate its product offering from thoseof competitors

One r esult of this kind of thinking is the cr eation of a global we b of value cr eation activities, with diff er ent stages of thevalue chain being dis persed to those locations around the globewher e perceived value is maximized or wher e the costs of valuecr eation ar e minimized

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Experience Effects

The experience curve r ef ers to systematic r eductions in

production costs that have been observed to occur over the lif e

of a product

Ther e ar e two explanations for the experience eff ect- Learning effects refer to cost savings that come from learning by

doing

- Economies of scale refer to the reductions in unit cost achieved

by producing a large volume of a product

The strategic significance of the experience curve is clear;

moving down the experience curve allows a fir m to r educe its

cost of cr eating value and incr ease its profitability

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Leveraging Subsidiary Skills

Leveraging the skills cr eated within su bsidiaries and a pplyingthem to other o perations within the fir m¶s global network may cr eate value

L

earning how to leverage the skills of su bsidiaries pr esents a challenge for managers of multinational or ganizations- They must have the humility to recognize that valuable skills

leading to competencies can arise anywhere within the firm¶sglobal network

- They must establish an incentive system that encourages local

employees to acquire new skills- They must have a process for identifying when valuable new

skills have been created in a subsidiary

- They need to act as facilitators, helping to transfer valuable skillswithin the firm

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Cost Pressures and Pressures for

Local Responsiveness

Fir ms that compete in the

global mark et place

ty pically face two ty pes of competitive pr essur e

- Pressures for cost

reductions

- Pressures to be locally

responsive

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Pressures for Cost Reductions

International businesses often face pr essur es for cost r eductions

because of the competitive global mark et

Pr essur es for cost r eduction can be particularly intense in

industries producing commodity-ty pe products- Universal needs exist when the tastes and preferences of

consumers in different nations are similar if not identical

Pr essur es for cost r eductions ar e also intense

- In industries where major competitors are based in low-cost

locations

- Where there is persistent excess capacity

- Where consumers are powerful and face low switching costs

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Pressures for Local

Responsiveness

Diff er ences in consumer tastes & pr ef er ences- North American families like pickup trucks while in Europe they

are viewed as a utility vehicle for firms

Diff er ences in infrastr uctur e & traditional practices- Consumer electrical system in North America is based on 110

volts; in Europe on 240 volts

Diff er ences in distribution channels- Germany has few retailers dominating the food market, while in

Italy it is fragmented

Host-Government demands- Health care system differences between countries require

pharmaceutical firms to change operating procedures

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Choosing a Strategy

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International Strategy

Cr eate value by transf erring valuable cor ecompetencies to for eign mark ets that indigenous competitors lack

Centralize product develo pment f unctions at home Establish manufacturing and mark eting f unctions in local country but head office exercises tight control over it

Limit customization of product off ering and mark et strategy- Strategy effective if firm faces weak pressures for

local responsive and cost reductions

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Global Standardization Strategy

Focus is on achieving a low cost strategy by r ea ping

cost r eductions that come from experience curve

eff ects and location economies Production, mark eting, and R&D concentrated in f ew

favorable f unctions

Mark et standar dized product to k eep costs low

Eff ective wher e strong pr essur es for cost r eductions and low demand for local r es ponsiveness exist

- Semiconductor industry

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Localization Strategy

Main aim is maximum local r es ponsiveness

Customize product off ering, mark et strategy including

production and R&D accor ding to national conditions

Generally unable to r ealize value from experience

curve eff ects and location economies

Possess high cost str uctur e

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Transnational Strategy

To meet competition, fir ms aim to r educe costs, transf er cor e competencies while paying attention to pr essur es for local r es ponsiveness

Global learning- Valuable skills can develop in any of the firm¶s world

wide operations- Transfer of knowledge from foreign subsidiary to

home country, to other foreign subsidiaries

Transnational strategy can be a difficult task due to contradictory demands placed on the or ganization

- Caterpillar

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Multinationals and the

Global Environment of

Business

© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/Irwin

Introduction to Business

Chapter Four

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Chapter 4


Global Environment of Business

1. Describe the role of multinational companies in global production andtrade today and the way they aff ect the countries in which they o perate.

2. Discuss how multinationals ar e aff ected by the political systems of thecountries they o perate in and es pecially by the desir e of countries aroundthe world to pursue fr ee trade and r educe or abolish tariff barriers.

3. Describe the natur e of the s pecific forces in the global environment anda ppr eciate why they pr esent so many challenges for multinational companies today.

4. Describe the natur e of the general forces in the global environment that aff ect all companies as they compete in industries or countries around the

world.5. Identify the main challenges facing multinationals in managing global

business commerce and business occupations, and choosing a method of global or ganizing.

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Chapter 4



Multinational companies

Ar e o perating in a global environment and conditions such as o pportunities and thr eats that aff ect the

multinational company¶s profitability

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Chapter 4



Review SWOT analysis in Cha pter 3

Evaluate SWOT analysis from a personal pers pective

The giant multinationals can dominate business

activity in most industries

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Chapter 4



Significance of Multinationals

In business commerce, multinationals control the giant production and distribution of products that handle the

ma jority of world trade

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Chapter 4




Production is worldwide and tends to countries wher elabor costs ar e low and ther efor e higher productivity

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Chapter 4




Multinationals have grown so lar ge they can aff ect thewell being of the countries they do business in as the

role of the government may be to control the

r elationshi p of this company and the peo ple

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Chapter 4




Company and individual behavior ar e aff ected by a country¶s choice of pro perty rights and is a main

deter minant of its political system

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Chapter 4



Capitalism

Ca pitalism as a business system (private ownershi p of

the means of production and distribution) ± is most commonly found in r epr esentative democracies andmay be illustrated as a continuum or a range

Evaluate Be Your Own Boss video and r elate to ca pitalism and the global environment of business

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McGraw-Hill/Irwin


Chapter 4



Capitalism

At your left is ³strong´ ca pitalism wher e individuals ar e ultimately r es ponsible for their own f utur e success

± ³strong´ pro perty rights

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C 4

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McGraw-Hill/Irwin


Chapter 4



Capitalism

At you move right ca pitalism becomes ³weak er´ as the government and/or welfar e ca pitalism establishes a

social support framework to aid citizens who don¶t

support themselves

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Ch 4

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McGraw-Hill/Irwin


Chapter 4



Capitalism

Ca pitalism varies as to the amount of a government social support by country

Canada is a ³stronger´ ca pitalist country compar ed to

Sweden

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Ch t 4

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Chapter 4



Totalitarian government

One person, usually a dictator, or party exercises

absolute control over all business and social activity

Evaluate Ca pitalism and

r elate its k ey elements to

Socialism and Communism

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Ch t 4

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McGraw-Hill/Irwin


Chapter 4



Communism

Not only totalitarian but all pro perty is owned by thestate (no pro perty rights) or government and

distribution is totally controlled by the state

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Ch t 4

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Chapter 4



Communism

Controls the cr eation of wealth as ther e isn¶t any motivation to produce mor e product

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Ch t 4

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Chapter 4



Free trade agreements

Established by countries to r educe or eliminate price barriers to and ar e designed to incr ease the flow of products amongcountries

Evaluate China Brands video and r elate to ca pitalism and the

global environment of business

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Ch t 4

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Chapter 4



Tariffs

Taxes on imported products that raises the price andmay mak e them uncompetitive with the local product

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Ch t 4

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Chapter 4



Free Trade Zones

The establishment of fr ee trade ar eas cr eates an o pportunity for global manufacturing companies as it

minimizes the cost and barriers to trade

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Chapter 4

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McGraw-Hill/Irwin


Chapter 4



Free Trade Zones

Fr ee trade ar eas incr ease competition and somemultinationals consider this a thr eat rather than an

o pportunity

Evaluate an FTZ and r elate to the global environment

of business

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Chapter 4

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McGraw-Hill/Irwin


Chapter 4



Global Environment

You may want to think of the global environment as a worldwide mark et place and as the set of forces

surrounding you that deter mine the ability to obtain

productive r esources of land, labor, ca pital, and

enter prise

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Chapter 4

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McGraw-Hill/Irwin


Chapter 4



Global EnvironmentEvery product goes through thr ee stages:

In put Conversion Out put

In the process of making and selling of goods andservices

Evaluate the Peace Cor ps video and r elate to theglobal environment of business

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Chapter 4

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McGraw-Hill/Irwin


Chapter 4



Forces in the Global Environment

The s pecific forces dir ectly aff ect the company¶s

business model while general forces aff ect all

multinationals

Specific forces ar e dir ectly r elated to profitability and

ar e suppliers, distributors, competitors, and customers

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Customers and competitors ar e also s pecific forces and both aff ect the company¶s mark et shar e or that portion

of a product sold in a mark et by one company

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General forces in the global environment aff ect

multinationals access to r esources and deter mineworldwide demand and include, economic, socio-

cultural, demogra phic, and legal forces

Evaluate the PWE and productivity of Mexican

br ewery work ers in a multicultural or ganization

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These forces ar e general because they aff ect all multinationals and their suppliers, distributors and

customers

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Global outsourcing

Of suppliers is not only a very controversial issue as it is the process by which companies purchase supplies,

labor or raw materials throughout the world

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Global outsourcing

An inter mediary such as a agent, brok er, or wholesaler is a company that distributes or supplies a

product to another company

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Challenges of global commerce

Building a global competitive advantage, integration of the Internet into the business models

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Challenges of global commerce

Managing ethically Incor porating the diff ering cultur es into global

planning and or ganizing

Evaluate a multinational or ganization of your choice and

describe their global environment

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Globalization

Has led to the develo pment of a diverse supply of ITwork ers in both Euro pe and Asia as these work ers ar e

link ed through the Internet as a part of the global

workforce

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