Chapter 1Globalization of markets and competition

Globalization of the world economy and foreign direct investments

Globalization of the world economy

Globalization of the world economy and business firms

Wider scope of markets Growth potential Wider access to resources:

- Labor- Raw materials- Components- Knowledge

Ability to gain costs advantages through economies of scale Ability to moderate risks

Governments regulation Cultural diversity Need for adaptation? Cross border management

Total numbers of multinational corporations

37000 82000

Total number of foreign affiliates 170000 810000

Opportunities for firmsChallenges for firms

1990 2008

Globalization of the world economy: the macro drivers

POLITICAL • Peace in the triad• Opening of markets ( GATT, EEC, WTO…)• Liberalization of foreign direct investments • Liberalization of financial flows

TECHNOLOGICAL • Increased efficiency of transportation and logistics: air; cargos; containers• Increased efficiency of telecommunication and information technology• Increased critical mass of investments in R&D and production

SOCIAL • Some convergence of middle class consumer behavior• Wider access to information, movies, TV series, internet

Macro driver: liberalization of trade

Macro driver: decline in maritime transport costs

Macro driver: decline in air transport costs

Macro driver: decline in telecommunication costs

Cost of a phone call to the USA

Why do firms globalize?

MARKETS

To capture new markets

RESOURCES

Natural resources

Offshoring/Offsourcing

Knowledge

Security of supply

COMPETITIVENESS

Economies of scale

Costs

Networks

Risk-spreading

Historically, corporate globalization took place in 3 stages

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R

P M

R

P M

R

P M

R

P M

R

P M

R

P M

R

P M

R

P M

R

P MR

P

M

R

M MP

PM M M

MM M

P

GIS 4

A classic example of transition from multinational to global elevators in Europe

Multi local industries

Local industries are industries in which firms can sustain competitive advantages within the boundaries of countries.

Firms competing in multi local industries are either:• Domestic firms within each country• Subsidiaries of multinational companies operating independently of each other in their respective countries

Global industries

Global industries are industries in which firms can sustain competitive advantages only if:

• They are present in the key countries of the world• They integrate and coordinate their activities across the world in a centralized manner

Industries: global or multi local?

Factors pushing for globalizationLow entry barriersHigh scale technologyConvergence of consumptionTransport

Factors against globalizationCultural differencesCustomer proximityTransport costsLegal requirements

Characteristics of global industries Similar needs and customer behavior Standardized products Beyond country economies of scale Speed of innovation Transferability of experience “Global” customers “Global” pricing “Global” competitors

Characteristics of local industries Different needs andcustomer behavior Customized products/services Low economies of scale Complex distribution Transferability of experience “Local” customers High transport costs

Going global

Competitivebattlefield

Countryby countryLocal

WorldGlobal

The competitive battlefield is within the country boundaries. Competitors are local or subsidiaries of multinational firms.

The competitive battlefield is worldwide. The world is one market. Competitors are global firms who compete with a full integration of their activities.

The competitive battlefield is regional. Regions have different markets and competitive characteristics. Competitors arefirms operating regionally.

RegionRegional

Global firms Domestic and multinational firms

Globalization path

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Expand value adding activities into countries in order to capture:• Market opportunities• Resources• Learning

Optimize competitiveness by leveraging international: • Resources• Assets• CompetencesLeading to:• Differentiated advantage• Cost advantage• Speed advantage• Innovation advantage

Spread Risk

Globalintegration and coordination

Multinational expansion

Traditional globalization

Recent globaliza

tion

The different benefits of going global

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Benefitsof multimarketspresence

Market opportunities Resources opportunities Risk spreading

The multinational advantage

Benefits of knowledge creationand transfer

Learn new knowledge Use global operations to leverage local capabilities and knowledge Mix new capabilities and market knowledge

The metanational advantage

Optimize competitiveness by leveraging international: • Resource• Assets• CompetencesLeading to: Differentiated advantagesCost advantages Speed advantagesInnovation advantagesArbitrage

The global advantage

Benefitsof global integrationand coordination

Get access to resources and procurement (S)

Increase size benefit from economies of scale (C)

Increase size (V): capture market opportunities

Get access to low cost labor and infrastructure (C)

Get access to knowledge (CV and C)

Serve global customers (CV) Reduce risks through geographical diversification

Customer ValueCV

Internal Costs

C

Supplies (S)

Costs

Volume (V)

Price

The economic benefits of going global

Profit

Different industries have different competitive requirements

Civil aircraft

Microprocessors

Bulk Chemicals

Catering

Automobile

Telecommunicationequipment

Package tours

Retail banking

Foodretail

Paint

Corporate bankingInstitutional banking

HIGH

HIGH

LOW

LOW LOCAL FORCES

GLOBALFORCES

Within businesses, different segments have different competitive requirements

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HIGH

GLOBALFORCES

LOWLOW HIGHLOCAL FORCES

Automotive

Aircraft

Marine

Car repair

Industrial

DIY

Paints

Within businesses, different functions benefit from being either local or global

Research

Finances

Development

After salesservices

Logistics

Component sourcing

Component manufacturing

Marketing

Accounting

Customer services

Sales

Advertising

HIGH

LOW

LOW HIGHLOCAL FORCES

GLOBAL FORCES