chapter
3
Globalization and
The Manager
McGraw-Hill/Irwin
Principles of Management
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Learning Objectives
1. Explain what globalization is.
2. Describe the processes driving globalization.
3. Identify the implications of globalization for
business enterprises.
4. Discuss different constraints limiting the pace of
globalization.
5. Outline the benefits of going global for a business
firm.
6. Discuss some of the challenges of managing in a
global enterprise.
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Globalization
The process
whereby national
economies and
business systems
are becoming
deeply interlinked
with each other.
Accelerated Pace of
Globalization
Three main reasons:
• The spread of market-based economic
systems
• The decline of barriers to international
trade and foreign direct investment
• Falling costs of communication and
transportation
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Market Economy
• Most businesses are privately owned
• Prices are set by the interaction of supply and
demand
• Government regulation is limited to ensuring
that competition between individual enterprises
is free and fair and that the system does not
produce outcomes judged to be unacceptable
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Socialist Economy
• Most businesses are owned by the state
• Private producers were excluded from certain
industrial and commercial activities
• Prices were set by the state
• State planners decided what was produced where, in
what quantity, and by whom
• Antithetical to globalization
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Privatization in Kosovo
• Authorities have put another 23 firms for sale in
Kosovo
• Hundreds of other government-owned
companies have already been sold which were
considered inefficient and dilapidated
• In 2006, the province’s economy grew 5% for
the first time driven by the private sector
• However, the unemployment is still at 50%
Source: The Associated Press, December 28, 2006
Falling Barriers to Trade
and Investment
• Tariffs – A tax on imports
• Quotas – A limit on the number of items of a
good that can be imported from a foreign nation
• Regional trade agreements – agreements to
remove barriers to trade between nations within
a geographic region
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Communication &
Transportation Costs
Satellite
Optical fiber
Wireless
technologies
Internet
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Falling Communication Costs
• In 1983, a three minute telephone call from
the USA to India would cost $13.50 on
AT&T (before the breakup) going through
the operator
• Today, using the Internet, one can make the
same call for free (no need for operator)
• The traditional telephone landline or cellular
phone would cost few pennies per minute
(no need for operator).
Implications of
Globalization
• A massive surge in the volume of international
trade and foreign direct investments
• Foreign Direct Investment (FDI) has increased
even more dramatically
• For individual enterprises and their managers:
- Globalization of production is well under way
- Globalization of markets is starting to occur
- Advances in technology are facilitating these
trends
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Globalization of
Production
Labor
Factors
Capital
of
Production
Land
Energy
Globalization of
Markets
• Merging of historically distinct and separate national
markets into one huge marketplace
• As firms follow each other around the world, they
bring
- Products
- Operating strategies
- Marketing strategies
- Band names
• Greater uniformity replaces diversity
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Technology Innovations
• Allow managers to create
and then manage a globally
dispersed production
system
• Further facilitating the
globalization of production
• Facilitated in globalization
of markets
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IT Spending
900
800
700
600
500
Investment (in
Billions)
400
300
200
100
0
2004
Source: Business Week, October 27, 2005
2005
2006
2007
2008
Constraints to
Globalization
Limit the ability of managers to move
production activities to places where
they can be performed at the lowest
cost.
Also, limit the managers’ ability to
treat the entire world as a single
homogeneous marketplace
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Constraints to
Globalization
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Protectionist
Countertrends
National
Differences in
Consumer Behavior
National Differences
in Business Systems
Differences in
Social Culture
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Global Packaging?
• In 2003 McDonald’s announced that all 300,000 of its
restaurants in over 100 countries will soon adopt the
same brand packaging for its menu items. Two years
later, the company backpedaled and announce
localization
• Computer manufacturer HP uses as many as eight
languages on its packaging
• Procter & Gamble adjusts its branding strategy across
borders
Source: Business Week Online, January 23, 2006
Reasons for Expansion
1. Expand the market
2. Realize scale economies
3. Realize location
economies
4. Benefit from global
learning
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Realizing Location Economies
in India
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According to the Federation of Indian
Chambers of Commerce and Industry of India’s
(FICCI) annual foreign direct investment (FDI)
survey:
- 70 % of the foreign companies are earning profits from
their Indian operations
- 84% said to be planning to expand their business in
India
- 90% considered the information technology (IT) and
business process outsourcing (BPO) services to be one
of the most lucrative sectors for investments
Source: The Hindu, August 16, 2005
Decisions When
Going Global
1. Whether to treat the world as a single market
or customize the firm’s products to reflect
differences across nations
2. The best mode for entering a foreign market
3. Where to locate different business activities
4. How best to manage subsidiaries
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Question
If an organization wants
to be global, it must
treat the world as a
single market and utilize
global standardization
strategy. Do you agree?
Explain.
Management Challenges
to Globalization
Entry Mode
Global
Standardization
or Local
Customization
Managing
People in the
Multinational
Firm
Locating
Activities
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Global Standardization or
Local Customization
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• Global standardization strategy – treating the
world market as a single entity, selling the same
basic product around the world
• Local customization strategy – varying some
aspect of product offerings or marketing
messages to take country or regional
differences into account
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Question
When McDonald’s sells wine on its menu in
France and Soy Burgers or Lamb Burgers in
India, it is adopting which of these strategies?
a. Licensing
b. Franchising
c. Global standardization
d. Local customization
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Entry Mode
Exporting
x
Exporting
Wholly
Whollyowned
owned
subsidiary
subsidiary
Licensing
Joint venture
x
Franchising
Licensing
x
Joint
Franchising
venture
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Locating Activities
1. Managers have to break the operations of the firm into
discrete steps or activities
2. Each activity has to be located in the best place given
a consideration of factors such as country differences
in:
•
•
•
•
•
Labor costs and infrastructure
Transportation costs
Tariff barriers
Currency exchange rates
Strategic orientation
Managing People
Geocentric
Staffing
Ethnocentric
Staffing
Polycentric
Staffing
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