Ch. 6 Outline
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The Global Environment
Consequences of a Global Economy
Global Strategy
Entry Mode
Managing Across Borders
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The Global Environment
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The Global Environment
• Europe is integrating economically to form the
biggest market in the world
– The Euro was adopted as a common currency in 2001
– The EU has 25 members with a population of more
than 450 million and a gross domestic product
equivalent to the US
– The pace of European unification accelerated in 2004
with the addition of countries like Poland and
Hungary
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The Global Environment
• Japan dominated world attention toward the end of
the last century; today China the rising economic
power to watch
– China is on its way to becoming the largest producer and
consumer
– China is the world’s largest consumer of basic resources
like steel and cement
– China has averaged an economic growth rate of 8% since
1980
• If current rate of expansion continues China will be the
world’s largest economy in in the next 10 years
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The Global Environment
• The North American Free Trade Agreement
(NAFTA) combined the economies of the US,
Canada, and Mexico into the world’s largest
trading bloc with more than 390 million
consumers and a total output of $10 trillion
• Efforts are under way to go beyond NAFTA
and create a Free Trade Area of the Americas
(FTAA) which would go from Canada to Chile
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Consequences of a Global
Economy
• During the last decade the volume of world
trade has grown at a faster rate than has the
volume of world output
• Foreign direct investment (FDI) is playing an
ever-increasing role in the global economy as
companies of all sizes invest overseas
• Imports are penetrating deeper into the world’s
largest economies
• The growth of world trade, FDI, and imports
implies that companies around the globe are
finding their home markets under attack from
foreign competitors
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Consequences of a Global
Economy
• During the last decade the volume of world
trade has grown at a faster rate than has the
volume of world output
• Foreign direct investment (FDI) is playing an
ever-increasing role in the global economy as
companies of all sizes invest overseas
• Imports are penetrating deeper into the world’s
largest economies
• The growth of world trade, FDI, and imports
implies that companies around the globe are
finding their home markets under attack from
foreign competitors
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Consequences of a Global
Economy
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Opportunities are greater
The environment is more complex
The environment is more competitive
Companies view the world as a single
marketplace
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The Role of Outsourcing
• Outsourcing occurs
when an organization
contracts with an
outside provider to
produce one or more
of an organization’s
products or services
• Off-shoring occurs
when the outside
provider is located
abroad
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The Role of Outsourcing
• Decline in US manufacturing
employment is evident – almost
3 million jobs lost from 200 to
2003
• One study estimates that by
2015 more than 3 million US
jobs will be sent abroad
Should we outsource if the cost is US jobs?
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The Truth of Outsourcing
• There is considerable evidence to suggest that
the cause of job decline is not off-shoring but
innovation
– New technology and processes require fewer workers
to produce the same quantity of goods
– The steel industry has lost 70% of its workers since
1970 while domestic steel production has not declined
• Statistics overlook the fact that job transfers
related to off-shoring is a small fraction of the
135 million jobs in the US
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The Truth of Outsourcing
• The controversy to off-shoring overlooks the
extent to which jobs are often in-sourced or
brought to the US by foreign companies
– One study estimated that in-sourcing employees
about 5.4 million workers
• Job movements are one inevitable result of the
effects of globalization
• One ‘problem’ that outsourcing causes is wage
stagnation in industries where outsourcing and
off-shoring is common
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Making a Decision to
Outsource
• What is the competitive
advantage of the
products they offer?
• Is the business in its
early stages?
• Can production savings
be achieved locally?
• Can the entire supply
chain be improved?
Distribution of tulips from the
Netherlands can be managed
by tiny Springhill Greenhouses
in Lodi, Ohio.
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Global Strategy
• Reasons that managers may need or want
a common global strategy
– Universal needs
– Pressures to reduce costs
– Competitors have a global strategy
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Pressures for Local
Responsiveness
• There are strong pressures for local
responsiveness when:
– Consumer tastes and preferences differ significantly
among countries
– There are differences in traditional practices among
countries
– There are differences in distribution channels and
sales practices
– There are economic and political demands imposed
by host countries
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Pressures for Local
Responsiveness
When you travel, remember that a foreign
country is not designed to make you
comfortable. It is designed to make its own
people comfortable.
- Clifton Fadiman
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Choosing a Global Strategy
• International Model is an organizational model
that is composed of a company’s overseas
subsidiaries and characterized by greater
control by the parent company over the
research function and local product and
marketing strategies
• Multinational Model is an organizational model
that consists of the subsidiaries in each country
in which a company does business, with
ultimate control exercised by the parent
company
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Choosing a Global Strategy
• Global Model is an organizational model consisting of a
company’s overseas subsidiaries and characterized by
centralized decision making and tight control by the
parent company over most aspects of worldwide
operations; typically adopted by organization that base
their global competitive strategy on low-cost
• Transnational Model is an organizational model
characterized by centralization of certain functions in
locations that best achieve cost economies and basin
other functions in the company’s national subsidiaries
to facilitate greater local responsiveness; and fostering
of communication among subsidiaries to permit
transfer of technological expertise and skills.
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Entry Mode
• When considering to begin operations in
a foreign country management has five
entry modes to consider
– Exporting
– Licensing
– Franchising
– Joint Venture
– Wholly owned subsidiary
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