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Managing in the Global Environment

Karol I. Pelc

NOTE: Some lecture materials are based on or adapted from the C. A. Bartlett and P. W. Beamish textbook “Transnational Management” McGraw-Hill 2011, and use some slides for that book. Those lectures are marked with a dual copyright note.

Copyright © 2012 Karol Pelc; Copyright © 2011 McGraw-Hill Irwin

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Lecture 1

The process of globalization

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Copyright © 2012 Karol Pelc; Copyright © 2011 McGraw-Hill Irwin

Initial questions:

1. What are potential advantages of business globalization ?

2. What are potential risks and negative effects of business globalization?

3. Can globalization be avoided? Why or why not?

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Copyright © 2012 Karol Pelc; Copyright © 2011 McGraw-Hill Irwin

• Substantial direct investment in foreign countries (not just an export business)

• Active management of these offshore assets (not simply holding them as a passive financial portfolio)

• Management integration of operations located in different countries

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What is a Multinational Enterprise (MNE)?

• Multiple operating environments• Diverse pattern of consumer preferences,

channels, legal frameworks, etc.

• Political demands and risks•Need to mesh corporate strategy with host

country policies

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What’s Different about Multinational Management?

• Global competitive game• Multiple markets, new strategic options

• Currency fluctuation and exchange risk•Economic performance measured in multiple

currencies

• Organizational complexity and diversity• Need to manage complex demands across

barriers of distance, time, language and culture

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What’s Different (Continued)?

• Largest MNEs are as large as (and perhaps more influential than) mid-sized countries• Exxon Mobil value-added 2006: $112 billion• Hungary value-added 2006: $113 billion

• Some industries completely dominated by MNEs, including automobiles, computers and soft drinks

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MNE Influence in the Global Economy

• Traditional motivations• Market seeking: Fill capacity, develop scale• Resource seeking: Secure supplies, exploit factor

cost differences

• Emerging motivations•Competitive positioning (or “global chess”): Need

global operations to pre-empt others, secure profit sanctuaries

•Global scanning: Access emerging trends, new technologies and best skills worldwide

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Motivations: Pushes and Pullsto Internationalize

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International Expansion Motivation

Market and Resource Seeking• Secure raw materials• Exploit factor cost differences• Protect exports• Provide growth

Market and Resource Seeking• Secure raw materials• Exploit factor cost differences• Protect exports• Provide growth

Competitive Positioning• Match competitors• Capture global scale• Preempt markets• Play “Global Chess”

Competitive Positioning• Match competitors• Capture global scale• Preempt markets• Play “Global Chess”

Global Scanning/ Learning• Global intelligence scan• Access scarce knowledge• Recruit skills, expertise

Global Scanning/ Learning• Global intelligence scan• Access scarce knowledge• Recruit skills, expertise

Pre-1970

70s/80s

90s/00s

• International Capital Theories: FDI driven by return equalization, portfolio diversification

• Location Theories: FDI driven by countries’ comparative advantage

• Product Cycle Theory: FDI driven by firms’ management of the global product life cycle

• Oligopolistic Behavior Theories: FDI driven by firms’ search for, or defense of, competitive advantage

• Internalization Theory: FDI driven by organizations’ internal transaction efficiency (hierarchy vs. markets)

• Eclectic Theory: FDI driven by many shifting forces 1-

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Evolving Theory of Foreign Direct Investment (FDI)

• Foreign countries must offer location-specific advantages • To motivate the company to invest there

• Company must have strategic competencies or ownership-specific advantages •To counteract its relative unfamiliarity with foreign

markets

• Company must have organizational capabilities•To get better returns from leveraging strengths

internally rather than through external market mechanisms such as contracts and licenses

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Means of Internationalization: Pre-requisites

• Classic internationalization process:• Incremental process of increasing commitment

and understanding of foreign market (Uppsala Model)

• Today many companies short-cut this process• In an Internet Age, many are even “Born Global”

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Means of Internationalization: Processes

• Export• Indirect• Direct (e.g. agent)• Controlled (e.g. sales branch)

• Contractual• License• Franchise• Management/Service Contracts• Cooperation Agreements

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Entry Mode Alternatives

• Investment• Greenfield• Acquisition• Joint Venture• Capital

Participation

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Process of Internationalization

Export (agentor distributor)

Wholly-ownedsubsidiary

Franchising

Licensing

IndirectExport

High

High

Low

Low

Amount of resources committed to foreign market

Co

ntr

ol o

ver

fore

ign

act

ivit

ies

Joint venture (local partner)

• Multinational Perspective: Overseas markets a portfolio of local opportunities; managed as a decentralized federation

• International Perspective: Leverages its domestic capabilities worldwide; managed as a coordinated federation

• Global Perspective: Views world as a single unit of analysis; operations managed centrally

• Transnational Perspective: Simultaneously responds to local needs, global demands, and cross-border learning opportunities; managed as an integrated network

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Evolving Mentality: International to Transnational

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Evolving Mentality

High

Glo

bal

In

teg

rati

on

Low

Low National Responsiveness High

Global

International

Multinational

Transnational

• Forces for cross-border integration and coordination

• Forces for national differentiation and responsiveness

• Forces for worldwide innovation and learning

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Three Conflicting Setsof External Demands

• Economies of Scale

• Economies of Scope

• Factor Costs

• Increasingly Liberalized Environment for Trade

• Expanding Spiral of Globalization1-18

Forces for Global Integrationand Coordination

• Cultural differences• Consumer tastes and preferences• Ways of doing business

• National infrastructure•Technical standards (e.g., voltage, TV broadcast, etc.)•Distribution channels (e.g., supermarkets vs. bazaars)

• Government demands•National laws and regulations•Host country pressures and demands

• Local competitors•Appeal to nationalism

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Forces for Local Responsiveness

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Relations with host government

• Motivators• Strategic viability: global

competitiveness• Operational viability:

profit• Objectives

• Freedom to integrate operations globally

• Ability to market and ability to transfer resources freely across borders

• Measures (primarily financial)

• Profit• ROI• Market share

• Motivators• National independence:

social, economic, political• International competitiveness

• Objectives• Protect national sovereignty

from external influence• Capture global benefits of

export markets, efficient industrial base, leading edge technology

• Measures (social/economic/political)• Social cost/benefit• Political return• Industrial policy “fit”

MNC Host Government

• Increased need for rapid and coordinated worldwide innovation driven by:

• Shortening product life-cycles

• Increased cost of R&D

• Emergence of global technology standards

• Competitors’ ability to develop and diffuse innovation globally

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Forces for Worldwide Innovationand Learning

• Strength of forces vary by industry; three typical models

• Global industries (consumer electronics)

• Multinational industries (branded packaged goods)

• International industries (telecom)

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Responding to Diverse Forces Simultaneously

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Global & National Forces: Industry Effect

Global Integration

National Responsiveness

Consumer Electronics

Telecom Switching

BrandedPackaged ProductsCement

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SUMMARY

1. Multinational Enterprise (MNE) and multinational management; Influence on global economy

2. Internationalization of business: motives, means and process

3. Foreign Direct Investment (FDI): theories

4. Evolving perspectives on internationalization

5. Global and national forces in globalization process