inTRODUCTiOn TO GLOBAL BUSinESS

Course: MBA

Subject: GLOBAL BUSINESS ENVIRONMENT

Unit: I

• Globalization is the increasing interdependence, integration & interaction among people and corporation in various locations around the world.

• Globalization refers to rapid increase in the share of economic activity taking place across national borders.

• It goes beyond the international trade includes the way in which goods/ services are produced /created, delivered &sold & movement of capital.

Definitions• A typical - but restrictive - definition can be taken

from the International Monetary Fund which stresses the growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, free international capital flows, and more rapid and widespread diffusion of technology.

• This goes beyond the international trade in goods and includes the way those goods are produced, the delivery and sale of services, and the movement of capital.

Origins of IB (i)• IB is the result of the internationalisation

of production and the emergence of the multinational corporations (MNCs), the subject matter of IB.

• Internationalisation of production (‘globalization’) involves international capital flows, international trade of commodities (exports-imports) and Foreign Direct Investment (FDI) by MNCs.

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Origins of IB (ii)

• Until the 1980s, there has been a tendency towards concentration of industry, and oligopolistic market structures. Firms have observed a ‘law of increasing size’ consisting of four stages:– First, the owner managed and controlled small firm (nineteenth

century).– Second, the public limited ‘national’ company (limited liability,

separation of ownership from management).– Third, the multidivisional (M-form) organisation (division- based),

separation of strategic (long term) and operational (day-to-day) decisions.

– Fourth, multinational corporations (MNCs) with production activities outside (and including) their home-base.

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Reasons for going international• Reactive (from reaction - to receive information,

then act)• the company is responding to demand it discovers

in another location• it sees it competitors going to a particular place• regulations - environmental/work safety may be

“easier” overseas• costs of production at home force it to cheaper

areas• chance occurrence

additional reasons on page 240 - 241

Reactive, continued

• If a companies customers go international, then it may be required to follow.eg. if an auto parts supplier to Magna sees Magna beginning to make some important component in Mexico, then it may also have to go to Mexico so it can mfg. there and continue to supply Magna - it would be too expensive to ship the parts from Canada

page 242

Reasons for going international

• Proactive (to actively look for an opportunity)

• strategically seeking out advantages• launch and offense into a new market before

competitor does• power and prestige• incentives• lower costs of labour, production, energy

Proactive, continued

• As costs of labour have increased in North America, many assemblers and component parts mfg. have had to move offshore

• Also, another reason to go international is to gain prestige which can be applied to customers at home - if a company has overseas offices, it appears to be more impressive at home ie. law firms, CA firms

Globalization Drivers

• Market Drivers• Cost Drivers• Government Drivers• Competitive Drivers

Low

Multidomestic

High

Global

Market Globalization Drivers

• Common customer needs• Global customers• Global market channels• Transferable marketing

Strength of Market Drivers

Low High

Baked Goods

Book Publishing

Commercial Banking

Toothpaste

Soft Drinks

Automobiles

Computers

Aircraft

Multidomestic Global

Cost Globalization Drivers

• Global scale economies• Sourcing efficiencies• Factor of production differences• High product development costs• Rapidly changing technology

Strength of Cost Drivers

Low High

Baked Goods

Commercial Banking

Toothpaste

Soft Drinks

Automobiles

Computers

Aircraft

Pharmaceuticals

Multidomestic Global

Government Globalization Drivers• Trade and investment policies• Compatible technical standards• Common marketing regulations

^

Strength of Government Drivers

Low High

Baked Goods

Commercial Banking

Toothpaste

Soft Drinks

Automobiles

Computers

Airlines

Pharmaceuticals

^

Multidomestic Global

Competitive Globalization Drivers• High two-way trade• Global competitors• Interdependence among countries

– Policy Link– Trade/Investment Link– Management Link

Strength of Competitive Drivers

Low High

Baked Goods

Commercial Banking

Toothpaste

Soft Drinks

Automobiles

Computers

Aircraft

Pharmaceuticals

Multidomestic Global

Restrainers of Globalization

Globalization poses four major challenges that will have to be addressed by governments, civil society, and other policy actors.

• One is to ensure that the benefits of globalization extend to all countries. That will certainly not happen automatically.

• The second is to deal with the fear that globalization leads to instability, which is particularly marked in the developing world.

• The third challenge is to address the very real fear in the industrial world that increased global competition will lead inexorably to a race to the bottom in wages, labor rights, employment practices, and the environment.

• And finally, globalization and all of the complicated problems related to it must not be used as excuses to avoid searching for new ways to cooperate in the overall interest of countries and people.

• Several implications for civil society, for governments and for multinational institutions stem from the challenges of globalization.

• Civil society organizations concerned with development have traditionally focused on aid and resource transfers; they now are going to have to broaden their agenda to deal with the much more complex issues of trade and investment, international financial flows, environment, and migration, among others. Civil society organizations in the old industrial countries also will have to deal with the backlash against global ization, which is producing a growing unwillingness to support multilateral cooperation.

Governments are going to have to decide what they mean by “civil society” and to identify new ways of dealing with its organizations. At the Overseas Development Council, we define civil society broadly to encompass not only development and advocacy groups, but also corporations, financial institutions, think tanks, foundations, and a range of other groups that are not part of government. But governments and other actors need to decide whether civil society is simply an effective—and even cheap—way of delivering social programs, or whether it is good in and of itself, an essential component of a democratic society. In other words, they are going to have to be much more precise about the purposes of working with civil society groups and about how they fund them.

Then, there is a whole set of critical questions for the multilateral institutions, particularly concerning participation and transparency. These issues are extremely difficult because these remain governmental institutions, and governments often do not welcome the participation of civil society in decisions.

Finally, there is a need for high-level political discussions among leaders from the old industrial countries, the emerging economies, and the countries that risk marginalization by globalization. We are urging the Group of Eight this year in London to call for a new summit on globalization in order to begin a discussion of maximizing its benefits and minimizing its costs

International OrientationInternational orientation of an enterprise is defined as the intensity of international connectedness of an enterprise in

terms of the presence of trade (imports, exports both goods and services) investments (inward and outward) and the

degree of influence and control across borders.

ETHNOCENTRIC

• The word ethnocentrism derives from the Greek word "ethnos", meaning “nation” or “people,” and the English word center or centrism.

• ” In this context, ethnocentrism is the view that a particular ethnic group’s system of beliefs and values is morally superior to all others. Ethnocentrism is characterized by or based on the attitude that one’s own group is superior to others.

• The ethnocentric attitude is found in many companies that have many nationalities and culture groups working together.

• It is a natural tendency for people to act ethnocentrically because it is what they feel comfortable with.

• It is based on past experiences and learned behaviors and norms.

Ethnocentric OrientationOverseas operations are viewed as secondary to domesticoperations.A means of disposing of surplus domestic production.Overseas operations are conducted from home- countrybase-strong reliance on export agents.Domestic product-mix without major modifications for the overseas markets.International marketing characterized by Extensionstrategy.Cultural factors in overseas markets are overlooked for instance most Indian handicrafts exporters hardlyappreciated the market difference and need for adaptationof marketing strategyA number of Indian products sold abroad such as dresseslike salwar ± kurta, Saries and food items such as dosa mix, idli mix vada mix, sambhar mix, gulab jamoon mix, papad and Indian sweets are primarily targeted at Indian population abroad

POLYCENTRIC

• Polycentrism can be defined as a host country orientation; which reflects host countries goals and objectives with respect “to different management strategies and planning procedures with regard to international operations.

• ”Under a polycentric perspective, a company’s management team believes that in international business practices local preferences and techniques are usually found most appropriate to deal with the local market conditions.

Polycentric Orientation

Polycentric approach is highly market oriented Each market is considered unique in terms of its market environment. Local marketing techniques are best suited to deal with local market

conditions. Subsidies are established in overseas markets. Environment of each market is considered while formulating marketing

strategy. Emphasis is put on local laws, custom and culture and great care is taken to

understand the local way of doing business. Marketing is characterized by Adaptation strategy

Characteristic features

Ethnocentrism Polycentrism

1) Management orientation

Home country orientation

Host country orientation

2) Perception of the market

•Domestic market is superior.•Focuses on the similarities between the home and the foreign markets•Foreign markets are extensions of domestic market

•Each national market is distinctive •Focuses on the differences between the home and foreign markets

3) Marketing strategy

Extension of domestic strategy to foreign markets

Localization

Regiocentric or regional orientation is defined as a functional rationalization on a more than one country basis.

The marketing firms here segment the markets on the basis of regional similarities.

Thinks of exporting to the neighboring countries of the host country

Considers regional environment

Regions are consistent with some natural boundaries

Regional autonomy in decision making

Staff move with in the designated region, rather than globally

o The entire world is just like a single country

o Select the employees from the entire globe

o Independence to subsidiary companies

o Focus on world oriented approach

o Does not show a bias to either home or host country

o The sole goal is to globally unite both headquarters & subsidiaries

o Product differentiation, diversifying functions & R & D

o It attempts to balance both global integration & local responssiveness

Forces that push an organization to the geocentric notion of managing MNC

Competition

For effective target

Growing World markets

Selection of suitable orientation depends on following factor:

• Size of the firm

• Experience in overseas market

• The nature of the product

• Company’s objectives & the specific market situation

• The size of the potential market

DOMESTIC

The stage-one company is domestic in its focus,vision, and operations. Its orientation is ethnocentric. This company focuses upon domestic markets, domestic suppliers, and domestic competitors. The environmental scanning of the stage-one company is limited to the domestic familiar, home-country environment. The unconscious motto of a stage-one company is: “If it’s not happening in the home country, it’s not happening.” The world’s graveyard of defunct companies is littered with stage-one companies that were sunk by the Titanic syndrome: the belief, often unconscious but frequently a conscious conviction, that they were

unsinkable and invincible on their own home turf

INTERNATIONAL• The stage-two company extends marketing, manufacturing, and other

activity outside the home country. • When a company decides to pursue opportunities outside the home

country, it has evolved into the stage-two category.• In spite of its pursuit of foreign business opportunities, the stage-two

company remains ethnocentric, or home country oriented, in its basic orientation.

• The hallmark of the stage-two company is the belief that the home-country ways of doing business, people, practices, values, and products are superior to those found elsewhere in the world. The focus of the stage-two company is on the home-country market.

MULTINATIONAL

The focus of the stage-three company is multinational or in strategic terms, multi- domestic. The orientation of this company shifts from ethnocentric to polycentric. . A polycentric orientation is the assumption that markets and ways of doing business around the world are so unique that the only way to succeed internationally is to adapt to the different aspects of each national market In stage-three companies, each foreign subsidiary is managed as if it were an independent city-state The subsidiaries are part of an area structure in which each country is part of a regional organization that reports to world headquarters. The stage-three marketing strategy is an adaptation of the domestic marketing mix to meet foreign preferences and practices.

Global

• strategic departure • The global company will have either a global

marketing strategy or a global sourcing strategy, but not both

• Global companies plan activities on a global basis. By operating in more than one country benefits from savings or economies on activities such as R&D, marketing, operations and finance are achieved which may not be available to domestic companies

Transnational

• A Transnational Corporation (TNC) differs from a traditional MNC in that it does not identify itself with one national home

• An example of a TNC is Nestlé who employ senior executives from many countries and try to make decisions from a global perspective rather than from one centralised headquarters.

International Business Decision:-

1. Economic Factors: Not all countries will be attractive for all companies. Some companies may discover that some markets cannot afford the products that they sell and they should refrain from entering those markets, whereas there may be some markets which would readily accept a slightly different version of their existing product. Companies should be aware that terms like ‘middle class’ have different meaning in the developed world and developing countries.

2. Social and Cultural Factors: Countries are different from one other in terms of language spoken, religion practiced, food eaten and in many other ways. These differences are very real and significant, and marketers should consider how these differences can hinder or facilitate the marketing efforts of the company in the new market.

3. Political and Legal Factors:

It is important to know the attitude of the government and the people of the host country before a company decide to commit resources. A company’s historical record and its professed attitude towards foreign investments and properties should also be considered.

4. Market Attractiveness: The attractiveness of a market can be assessed by evaluating the market potential in terms of revenues that can be generated, access to the market in terms of the host country being warm to investments by multinational companies, and potential competition and dynamics of the industry in the prospective market

5. Capability of the Company: Before a company decides to go global it should conduct an audit of its resources and capabilities. The company should have clear competitive advantages in terms of market knowledge, technology, portfolio of products, reliable partners and other relevant parameters

Types of International Business./Modes of operation in International Business.

• There are a number ways an organization can start to sell their products in international markets.

1. Direct export.• The organization produces their product in their home

market and then sells them to customers overseas. 2. Indirect export• The organizations sell their product to a third party

who then sells it on within the foreign market.

3. Licensing • Another less risky market entry method is licensing. Here the

Licensor will grant an organization in the foreign market a license to produce the product, use the brand name etc in return that they will receive a royalty payment.

4. Franchising• Franchising is another form of licensing. Here the organization

puts together a package of the ‘successful’ ingredients that made them a success in their home market and then franchise this package to oversea investors. The Franchise holder may help out by providing training and marketing the services or product. McDonalds is a popular example of a Franchising option for expanding in international markets.

5.Contracting• Another of form on market entry in an overseas

market which involves the exchange of ideas is contracting. The manufacturer of the product will contract out the production of the product to another organization to produce the product on their behalf. Clearly contracting out saves the organization exporting to the foreign market.

6.Manufacturing abroad• The ultimate decision to sell abroad is the decision to

establish a manufacturing plant in the host country. The government of the host country may give the organization some form of tax advantage because they wish to attract inward investment to help create employment for their economy.

7.Joint Venture• To share the risk of market entry into a foreign

market, two organizations may come together to form a company to operate in the host country. The two companies may share knowledge and expertise to assist them in the development of company; of course profits will have to be shared out also

Difference between International Business and Domestic Business

S.No International Business Domestic Business

1. It is extension of Domestic Business and Marketing Principles remain same.

The Domestic Business Follow the marketing Principles

2. Difference is customs, cultural factors No such difference. In a large countries languages likeIndia, we have many languages.

3. Conduct and selling procedure changes Selling Procedures remain unaltered

4. Working environment and management practices change to suit local conditions.

No such changes are necessary

5. Will have to face restrictions in trade practices, licenses and government rules.

These have little or no impact on Domestic trade.

6. Long Distances and hence more transaction time.

Short Distances, quick business is possible.

Sr.No International Business Domestic Business

7. Currency, interest rates, taxation, inflation and economy have impact on trade.

Currency, interest rates, taxation, inflation and economy have little or no impact on Domestic Trade.

8. MNC’s have perfected principles, procedures and practices at international level

No such experience or exposure.

9. MNCs take advantage of location economies wherever cheaper resources available.

No such advantage once plant is built it cannot be easily shifted.

10. Large companies enjoy benefits of experience curve

It is possible to get this benefit through collaborators.

11. High Volume cost advantage. Cost Advantage by automation, new methods etc.

12. Global Standardization No such advantage

13. Global business seeks to create new values and global brand image.

No such advantage

14. Can Shift production bases to different countries whenever there are problems in taxes or markets

No such advantage and get competition from some spurious or SSI Unit who get patronage of Government.

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