INTRODUCTION

1. Globalization, considered by many to be the inevitable wave of the future, is

frequently confused with internationalization, but is in fact something totally
different. Internationalization refers to the increasing importance of international
trade, international relations, treaties, alliances, etc. Inter-national, of course, means
between or among nations. The basic unit remains the nation, even as relations among
nations become increasingly necessary and important. Globalization refers to global
economic integration of many formerly national economies into one global economy,
mainly by free trade and free capital mobility, but also by easy or uncontrolled
migration. It is the effective erasure of national boundaries for economic purposes.
International trade (governed by comparative advantage) becomes interregional trade
(governed by absolute advantage). What was many becomes one.

GLOBAL STRATEGIC MANAGEMENT

2. During the last half of the twentieth century, many barriers to international trade fell
and a wave of firms began pursuing global strategies to gain a competitive advantage.
However, some industries benefit more from globalization than do others, and some
nations have a comparative advantage over other nations in certain industries. To
create a successful global strategy, managers first must understand the nature of
global industries and the dynamics of global competition.

Source of Competitive Advantage from a Global Strategy

A well designed global can help a firm to gain a competitive advantage. This advantage
can arise from the following sources:

• Efficiency
o Economies of scale from access to more customers and markers
o Exploit another country’s resources – labor, raw material
o Extend the product life cycle – older products can be sold in lesser
developed countries
o Operational flexibility – shirt production as costs, exchanges rates, etc.
change over time

• Strategic
o First mover advantage and only provider of a product to a market
o Cross subsidization between countries
o Transfer price

• Risk
o Diversify macroeconomic risks (business cycles not perfectly correlated
among countries)

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 o Diversify operational risks (labor problem, earthquakes, wars)

• Learning
o Broaden learning opportunities due to diversity of operating environments

• Reputation
o Crossover customers between markets – reputation and brand
identification

Strategic Objectives Sources of Competitive Advantage

National Differences Scale Economies Scope Economies
Efficiency in Exploit factor cost Scale in each activity Sharing investments and
Operations differences costs
Flexibility Market or policy-induced Balancing scale with Portfolio diversification
changes strategic &
operational risks
Innovation and Societal differences in Experience - cost Shared learning across
Learning management and reduction and activities
organization innovation

3. MODE OF FOREIGN MARKET ENTRY

• Exporting
• Licensing
• Local Manufacturing
• Joint Venture
• Franchising

Indirect Exporting:
• Indirect exporting includes dealing through export management companies of
foreign agents, merchants or distributors. Several types of intermediaries located in the
domestic market are ready to assist a manufacturer in contacting international markets
or buyers. The major advantage for managers using a domestic intermediary lies in that
individual`s knowledge of foreign market conditions. Particularly, for companies with
little or no experience in exporting, the use of a domestic intermediary provides the
exporter with readily available expertise. The most common types of intermediaries are
brokers, combination export and manufacturers` export agents. Group selling
activities can also help individual manufacturers in their export operations.

Direct Exporting:
• Direct exporting includes setting up an export department within the firm or
having the firm`s sales force sell directly to foreign customers or marketing
intermediaries. A company engages in direct exporting when it exports through
intermediaries located in the foreign markets. Under direct exporting, an exporter must

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deal with a large number of foreign contacts, possibly one or more for each country the
company plans to enter. Although a direct exporting operation requires a larger degree
of expertise, this method of market entry does provide the company with a greater
degree of control over its distribution channels than would indirect exporting. The
exporter may select from two major types of intermediaries: agents and merchants.
Also, the exporting company may establish its own sales subsidiary as an
alternative to independent intermediaries. Successful direct exporting depends on the
viability of relationship built up between the exporting firm and the local distributor or
importer. By building the relationship well, the exporter saves considerable investment
costs

Licensing:
• Licensing is similar to contract manufacturing, as the foreign licensee receives
specifications for producing products locally, but the licensor generally receives
a set fee or royalty rather than finished products. Licensing may offer the
foreign firm access to brands, trademarks, trade secrets or patents associated with
products manufactured. Under licensing, a company assigns the right to a patent
(which protects a product, technology or process) or a trademark (which protects
a product name) to another company for a fee or royalty. Using licensing as a
method of market entry, a company can gain market presence without an equity
(capital) investment. The foreign company, or licensee gains the right to
commercially exploit the patent or trademark on either an exclusive (the
exclusive right to a certain geographic region) or an unrestricted basis

Franchising:
• Franchising is a special form of licensing in which the franchiser makes a total
marketing program available including the brand name, logo, products and method
of operation. Usually the franchise agreement is more comprehensive than a regular
licensing agreement in as much as the total operation of the franchisee is
prescribed. It differs from licensing principally in the depth and scope of quality
controls placed on all phases of the franchisee`s operation. The franchise concept is
expanding rapidly beyond its traditional businesses (such as service stations,
restaurants and real-estate brokers) to include less traditional formats such as travel
agencies, used car dealers, the video industry and professional and health
improvement services. About 80 percent of all McDonald`s restaurants are
franchised and as of 1999 the firm operated about 24,500 stores in 116 countries

Local Manufacturing:
• A common and widely practiced form of market entry is the local
manufacturing of a company`s products. Many companies find it to their advantage to
manufacture locally instead of supplying the particular market with products made
elsewhere. Numerous factors such as local costs, market size, tariffs, laws and
political considerations may affect a choice to manufacture locally. The actual type of
local production depends on the arrangements made; it may be contract manufacturing,
assembly or fully integrated production. Since local production represents a greater
commitment to a market than other entry strategies, it deserves considerable attention

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before a final decision is made. Under contract manufacturing, a company arranges to
have its products manufactured by an independent local company on a contractual basis.
This is an entry mode in which a firm contracts with a foreign firm to manufacture
parts or finished products or to assemble parts into finished products. The
manufacturer`s responsibility is restricted to production. Afterward, products are turned
over to the international company which usually assumes the marketing responsibilities
for sales, promotion and distribution. In a way, the international company rents the
production capacity of the local firm to avoid establishing its own plant or to
circumvent barriers set up to prevent the import of its products. Contract manufacturing
differs from licensing with respect to the legal relationship of the firms involved. The
local producer manufactures based on orders from the international firm but the
international firm gives virtually no commitment beyond the placement of orders.
Typically, the contracting firm supplies complete product specifications to the foreign
firm, sets production volume and guarantees purchase. Lower labor costs abroad are the
major incentive for using this entry mode

Owner ship Strategies:

Companies entering foreign markets have to decide on more than the most suitable
entry strategy. They also need to arrange ownership, either as a wholly owned
subsidiary, in a joint venture, or more recently in strategic alliance.

Joint Ventures:
• In a joint venture, an investing firm owns roughly 25 to 75 percent of a foreign
firm, allowing the investing firm to affect management decisions of the foreign firm.
Under a joint venture (JV) arrangement, the foreign company invites an outside partner
to share stock ownership in the new unit. The particular participation of the partners
may vary, with some companies accepting either a minority or majority position. In
most cases, international firms prefer wholly owned subsidiaries for reasons of control;
once a joint venture partner secures part of the operation, the international firm can no
longer function independently, which sometimes lead to inefficiencies and
disputes over responsibility for the venture. If an international firm has strictly defined
operating procedures, such as for budgeting, planning and marketing, getting the JV
company to accept the same methods of operation may be difficult. Problems may also
arise when the JV partner wants to maximize dividend payout instead of reinvestment
or when the capital of the JV has to be increased and one side is unable to raise the
required funds. Experience has shown that JVs can be successful if the partners share
the same goals with one partner accepting primary responsibility for operations
matters. Despite the potential for problems, joint ventures are common because they
offer important advantages to the foreign firm. By bringing in a partner the company
can share the risk for a new venture. Furthermore, the JV partner may have important
skills or contacts of value to the international firm. Sometimes, the partner may be an
important customer who is willing to contract for a portion of the new unit`s output
in return for an equity participation. In other cases, the partner may represent important
local business interests with excellent contacts to the government. A firm with
advanced product technology may also gain market access through the JV route by
teaming up with companies that are prepared to distribute its products. Many

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international firms have entered Japan, China and Eastern Europe with JVs. But, not all
joint ventures are successful and fulfill their partners` expectations. Despite the
difficulties involved, it is apparent that the future will bring many more joint ventures.
Successful international and global firms will have to develop the skills and experience
to manage JVs successfully often in different and difficult environmental circumstances.
And in many markets, the only viable access to be gained will be through JVs

4. GLOBAL BUSINESS CHALLENGES

As companies become global enterprises, they face common challenges sparked by
their growing aspirations and operations and the need to leverage resources and
control costs across geographies. These shared experiences have led to a number of
global business priorities that now dominate corporate agendas.

Mercer identified these global business challenges through a review of business,

academic and governmental research in 2006. Mercer then conducted a survey of
nearly 400 global organizations to learn how they are prioritizing these challenges
and what implications the challenges have for HR and the management of their
organizations’ workforces. In particular, the research probed the impact on total
rewards programs, which are critical to attracting and motivating the talent that is
essential for global business success.

The Nature of competitive Advantage in Global Industries

A global industry can be defined as :

• An industry in which firms must complete in all world markets of that product
in order to survive
• An industry in which a firm’s competitive advantage depends on economics
of scale and economies of scope gained across markers

Some industries are more suited for globalization than are others. The following drivers
determine an industry’s globalization potential

5. COST DRIVERS
• Location of strategic resources
• Differences in country costs
• Potential for economies of scale (production, R&D, etc) Flat experience curves in
an industry inhibits globalization. One reason that the facsimile industry had more
global potential than the furniture industry is that for fax machine, the production
cost drop 30%-40% with each doubling of volume; the curve is much flatter for
the furniture industry and many service industries. Industries fir which the larger
expenses are in R & D, such as the aircraft industry, exhibit more economies of
scale than those industries for which larger expenses are rent and labor, such as
the dry cleaning industry. Industry in which costs drip by at least 20% for each
doubling of volume tend to be goods candidates for globalization.
• Transportation cost (value/bulk or value/weight ratio) => Diamonds and
semiconductors are more global than ice

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6. CUSTOMER DRIVERS
• Common customer need favor globalization. For example, the facsimile
industres customers have more homogeneous needs than those of the furniture
industry, whose needs are defined by local tastes, culture, etc
• Global customers; if a firm’s customers are other global business,
globalization may be required to reach these customers in all their markets.
Furthermore, global customers often require global standardized products
• Global channels require a globally coordinated marketing program. Strong
extablished local distribution channels inhibits globalization.

7. COMPETITIVE DRIVERS
• Global competitors. The existence of many global competitor indicates that an
industry is ripe for globalization. Global competitirs will have a cost
advantage over local competitors.
• When competitors begin leveraging their global positions through cross-
subsidization, an industry is ripe for globalization.
•
8. GOVERNMENT DRIVERS
• Trade policies
• Rechnical standards
• Regulations

9. THE ADVANTEGES OF A MULTINATIONAL BUSINESS ARE :

• Gaining a strong foothold into the international market

• Low-cost locations
• Cheaper labor costs
• Cheaper raw materials and distribution costs
• Taking advantage of the many tax breaks offered by foreign countries
• Access to new technologies and methods
• Availability of government grants

10. DISADVANTEGES INCLUDES :-

• Taxes or tariffs imposed on imports from other countries

• Limited quantities (quotas) of imports
• Effective management of a globally dispersed organization

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