Globalization and the Need for

Global Business Competencies

By

S. Tamer CavusgilThe John W. Byington Endowed Chair in Global Marketing

Executive Director, Center for International Business Education & Research

Michigan State University

19-24 May 2001 International Business Institute for Community College Faculty

East Lansing, Michigan

Today we will discuss….

Major developments in the world economy and their impact on business activity…

• What are the macro trends driving the globalization of economies?

• What are the consequences of globalization?

• How do these major events impact the globalization of business activity?

• What is global business competence?

Driving the Globalization Processare Seven Macro Trends

Reduction of barriers to trade and investment

Regional trade agreements and economic blocs

Market liberalization and privatization

Integration of world financial markets

Transportation and communication technology

Information technology

Industrialization, economic development and modernization

123

4

56

7

Globalizationof Economies

Competitive Drivers

4. Integration of financial markets

Cost Drivers5. Transportation and

communication technology

6. Information technology

Market Drivers7.

Industrialization,economic

development,and modernization

Government Drivers1. Reduction of barriers to trade and investment

2. Regional trading blocs

3. Market liberalization and privatization

These Macro Trends Can Be GroupedUnder Four Categories

The Internet is helping companies to lower costs dramatically across their supply and demand chains, take their customer service into a higher level, enter new markets, create additional revenue streams, and redefine their business relationships.

The Economist26 June 1999

Consequences of Globalization

• Competition is now on a worldwide scale

• Widespread industry consolidation is underway

• Globalization is leading to rise (and fall) of industries

• Diffusion of products is now worldwide

• New types of business enterprises are emerging, such as Born Globals

• Monetary unions are now a reality

• Interconnectedness of economies implies that financial crises spread globally

• Economic freedom explains from 54 to 74 percent of the variation in income among countries.

• A 10% increase in economic freedom in a country can produce an increase in GNP per capita of 7.4% to 13.6%.

CONCLUSION:

The message is clear: enhancing economic freedom can lead to very

large improvements in living standards.

Economic Freedom and Wealth

A New Breed of Company:Born Global• Young, entrepreneurial start-ups

• Export soon after establishment

• Offer products with universal appeal

• Seek global niche markets

• Develop global distribution networks

• Limitations of being small are offset by exploitation of modern advances in information, communication, and transportation technologies

Is Globalization a Good Thing?The Critics

• Benefits of globalization are unevenly distributed

• Globalization causes dislocation of jobs

• Wages for unskilled labor are declining

• Manufacturing moves offshore to avoid workplace safety and health regulations

• Global companies fail to protect the environment

• Power shifts to multinational corporations and supranational organizations; nations loose sovereignty

• Concentration of power by multinational corporations leads to monopoly

• International financial markets are inherently unstable

• Globalization results in loss of national cultural values and identity

Is Globalization a Good Thing?The Critics (continued)

For Companies, Globalization Poses BothChallenges and Opportunities

Challenges OpportunitiesIntensified worldwide

competitionExcess capacity; industry

consolidationRapid technological changeNeed to rationalize global

supply chainNeed to integrate worldwide

activities...

Expanded opportunities in a “borderless” world

Increased acceptance of global brands

Scale economies and rationalization

Improved market access, speed, and connectivity

Learning from global partners...

Types of Risksin International

Business

Commercial Risk

Country (Political and Legal) Risk

Cross-CulturalRisk

Currency/FinancialRisk

Four Types of Risks

Commercial Risk

Types of Risksin International

Business

Country (Political and Legal) Risk

Cross-Cultural Risk

Weak Partner Operational Problems Timing of entry Competitive intensity Poor execution of strategy

Currency exposure Asset valuation Foreign taxation Inflationary and transfer

pricing Global sourcing

Social/political unrest and instability Economic mismanagement; inflation Distribution of income; size of middle class Government intervention, bureaucracy, red tape Market access; barriers; profit repatriation Legal safeguards for intellectual property right

Cultural distance Negotiation patterns Decision-making styles Ethical practices

Currency/Financial Risk

Social/political unrest and instability Economic mismanagement; inflation Distribution of income; size of middle class Government intervention, bureaucracy, red tape Market access; barriers; profit repatriation Legal safeguards for intellectual property right

Country (Political andLegal) Risk

Types of Risksin International

Business

Cross-CulturalRisk

Cultural distance Negotiation patterns Decision-making styles Ethical practices

Types of Risksin International

Business

Commercial Risk Weak Partner Operational Problems Timing of entry Competitive intensity Poor execution of

strategy

Currency/Financial Risk

Currency exposure Asset valuation Foreign taxation Inflationary and

transfer pricing Global sourcing

How goodis the country?

How goodis the

partner?

How goodis the

venture?

FundamentalTasks in

International Business

Country Screening and In-depth AnalysisIndustry Market Potential Assessment

Partner SelectionValue Chain

Complementarity

Market Entry Mode

Company Sales Potential Analysis

Venture FormationInternational

Market Entry Planning

Overall Market Opportunity IndicatorsMarket Potential Indicators for 23 Emerging Markets

Case Study:Think Global, Act Local?

ABC Company is an automotive supplier, specializing in precision-machined parts for noise and vibration equipment, transmission components, and AC compressor parts. It employs 2,000 people in its nine factories across the U.S. Its annual sales are about $400 million.

Following its principal customers such as Ford to foreign markets, ABC went international rather hastily. It acquired companies in England, France, Spain, Brazil, South Korea and India. It also owns a new facility in Mexico.

ABC has not yet integrated its operations across its global network of companies. Currently, each national company has its own production, procurement, sales and other operations, and manages human resources and information technology locally. Yet, the ABC finds that each of its customers requires standardized components regardless of where in the world they are to be supplied.

Case Study:Think Global, Act Local?

(continued)

Strategy One:Decentralize Decision-Making and Control

Each company in ABC’s global network has its own unique competences and culture. Management and labor in each company is proud of their specialized skills and market position developed over the years. Each will argue that they know the requirements of the local market better than the headquarters, and can respond to local developments faster, if they are given more autonomy. Country managers also stress that they have a unique organizational and national culture, reflected in such things as work styles, employee motivation, reporting relationships, and national pride.

SOLUTION: Localize operations and enable maximum adaptation.

Headquarters at ABC is concerned with the redundancy in the worldwide network and resulting inefficiencies. There is duplicate staff in each of the national organizations. Benefits of consolidating activities such as product design, procurement, and manufacturing are not materialized. A globally coordinated, streamlined organization does not exist, where each national company knows exactly how they fit in the “big picture.” The company may also be failing to respond to converging product standards say, in the European Union, in a coordinated way. Each of its European operations is trying to meet these requirements without the benefit of experience that exists elsewhere in the global network.

SOLUTION: Centralize decision making and closely coordinate activities worldwide.

Strategy Two:Centralize Decision Making and

Control

Pressures for Local Responsiveness (Decentralization)

• Nation states and protectionism• Tariffs and Non-Tariff trade barriers• Unique industry and product

standards• Local market requirements: customer

need, competitive environment; distribution structure

• Cultural differences• Geographic separation

Pressures for Global Integration

(Centralization)

• Homogeneous (converging) demand patterns

• Acceptance of global brands• Harmonizing standards,

practices• Diffusion of uniform technology• Availability of pan-regional

media• Integration of markets through

economic blocs• Spread of international

collaborative ventures• Need to monitor competitors

on a global basis

Benefits of Global Integration

• Cost reduction• Improved quality of

products and processes• Enhanced customer

preference• Increased competitive

leverage Benefits of Local Responsiveness

• Responsive to local needs• Rapid response to changing

environment• Exploit local talent and capabilities• Create entrepreneurial spirit,

greater ownership and morale• Enhance local competitiveness• Hold local managers accountable

for performance

What is involved in global integration?

What is Global Integration?

• Elimination of redundancy

• Process improvement

• Commonization/uniformity

• Interconnectedness

• Balance between the HQ and subsidiaries

• Lead centers of excellence

• Best practices repository

• Common organization and culture

• Coordinated global strategy

National orMulti-domesticcompanies

Global orTransnationalCompanies

Nestle, Unilever,Asea Brown Boveri, Sony, Coca-Cola

• Strong national identity

• National endowments: talent pool, skills, capabilities

• Unique corporate governance/ownership patterns

• National regulations on employment

• National patterns of investment in R & D

• Planning and resource allocation

• Dependence on global markets

• Worldwide manufacturing capability

• Standardized products

• Globally integrated strategy

• Centralized structure and decision-making

• Uniform operational policies and routines

• Global organization and culture

Global Strategy

Local Responsiveness

High

Low

Low High

Standardization

Global brandsGlobal identity

Selective adaptation

This Global, Act Local?

Export-based approach

Direction not coordination

Multi-local

Dispersed national authority

Maximum autonomy

Partnering: An Alternative to Vertical Integration

•Avoid transaction costs (searching, negotiating, communicating, monitoring)

•Internal transaction costs may be lower

•Retain proprietary knowledge•Exploit the benefits of internal discovery, organizational learning, strong organizational culture

•Avoid dependence on partners (e.g., suppliers, distributors)

•Reduce risk•Achieve greater efficiency•Concentrate on what you do best•Gain market entry•Achieve flexibility in sourcing•Gain speed in getting products to market

•Establish long-term relationships with suppliers, distributors and other partners

•Exploit advantages of partners •Take advantage of government incentives

Internalization of Value Adding Activities

(Vertical Integration)

Externalizationor Unbundling the Value Chain

(Partnering)

Research & Development

Product Design

Manufacturing

Marketing

Distribution

Sales & Service

Stage in Value Chain

International strategic alliancesLicensing/cross licensing

Design contracting

Global procurementContract manufacturingEquity joint ventures (FDI)Agency agreementsLicensing

Exporting to distributors/ agentsFranchising

Exporting to end-usersBusiness format franchising

Agency/representative relationships

Types of Collaboration Company Examples

Telecoms, computers, drugs,aircraft, satellite communication systems… Dow, Pharmacia-Upjohn

Software, autos,fashion goods, shoes,furniture…

Whirlpool, autos

Gerber (Novartis), Kellogg

IKEA, Guardian Industries

Kmart, Manpower, Banks,Courier Services, Amway

Risks in Collaboration

• Are we likely to grow too dependent on our partner?

• Will we stifle growth and innovation in our own organization?

• Will we share our competences excessively?

• Will we expose our company to high levels of commercial, political, cultural, or currency risk?

• Will we close some growth opportunities?

• Will management of the ICV become an excessive burden?

• Rapid learning from partner

How Do You Measure Success?

• Development of global market position

• Access to a new technology

• Profits and strategic benefits

• Basis for new collaborative projects

• Weak basis for collaboration; lack of synergy

• Poor planning and organizational conflicts

• Cultural incompatibility

• Inability to integrate separate organizations and activities

• Partner goals change over time or they lose enthusiasm.

• Partners fail to walk the fine line between cooperation and competition.

What Causes FailuresIn Collaboration

Ingredients of Success in Collaboration

• A synergistic plan and strategy

• A “win-win” sense of mission

• Equal governance, a shared enterprise

• Cultural compatibility

• Non-ambiguous organizational and management procedures

Financial Times

Three Components of GlobalCompetence

Country MarketKnowledge

Cross-CulturalKnowledgeCross-Border

TransactionsKnowledge

CROSS-BORDER

TRANSACTIONSKNOWLEDGE

CROSSCULTURAL

KNOWLEDGE

Human ResourceDevelopment

LanguageProficiency

Cross-CulturalSkills

Currency Risk/Pricing/Getting

Paid

OrganizationalReadiness

andStructure

Ethics andSocial

Responsibilityand

GovernmentRelations

Cross-Cultural

NegotiationSkills

InternationalLogistics

Standardsand

Regulations andProduct Liability

COUNTRYMARKET

KNOWLEDGE

Global MarketingOpportunityAssessment(Research

and Intelligence)

Subsidiary/ProjectManagement

Product Strategy(Adaptation/

Standardization)SupplyChain

ManagementBusinessPartnering

Configuration ofValue Adding

Activities in targetmarket/entry mode

Market EntryPlanning and

Strategy

Vital Components for Global Capabilities

WorldwideCoordination

Global Competence: An AlternativeConceptualization

CustomerRelationships

ProductInnovation and

LearningPerspective

InternalBusinessProcesses

Constant Search for the Next

Competitive Advantage• Efficient organization (operational excellence; cost leadership)

• Flexible organization (locational advantage)

• Innovative organization (product/design leadership)

• Networked organization (partnering competence)

• Learning organization (knowledge assets and constant renewal)

• Market-oriented organization (customer focus; time to market)

• The Virtual or the Internet organization (ability to transfer speed and efficiency gains to the business system of suppliers and customers)

S. Tamer Cavusgil/Michigan State University, 20 October 1999: GMU Virtual