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    Learning Objectives | Environn Ssiness After studying this chapter you should be able to: 1, Describe the role of multinational companies in global production and trade today and the way they affect the countries in which they operate. 2. Discuss how multinationals are affected by the political systems ‘of the countries in which they operate, and especially by the desire of countries around the world to pursue free trade and reduce or abolish tariff barriers. 3. Describe the nature of the specific forces in the global environment and appreciate why they present so many challenges for multinational companies today. 4. Describe the nature of the general forces in the global environment that affect all companies as they compete in industries and countries around the world. 5. Identify the main challenges facing multinationals in terms of managing global business commerce and business occupations and choosing a method of global organizing. WHY IS THIS IMPORTANT [id Where do you think you will be working when you complete your education? If you travel to another country, or even a new part of the United States, would you understand how to deal with the cus tomers, suppliers, and government agencies? ‘This chapter looks at the forces in the global envi- ronment that affect whether a company is able to create a profitable, sustainable business model or not. General forces in the environment such as a nation’s culture, political, and economic systems will shape an organization and how it competes there. ‘The more specific forces affecting an industry, such as a nation’s supply and distribution systems, also affect whether or not a company will achieve suc- cess. Learning to understand and appreciate differ- ences between nations and their cultures is vital to anyone in business today. S4on of Busi; Nestlé's Global Foog Empire What ch the glob allenges is Neste facing i Te global eng onment? In 1886 Henri Nestlé, a Pharmacist living in Vevey, Switzerland, invented an infant formula made from cow's milk and wheat flour that could be used as a substitute for mother's milk, Today, food brands in the United States but also to mod- ily them to suit the tastes of customers in coun- tries around the globe. He is particularly anxious Nestlé S.A., the company Henri founded, is the world's largest food company, Its sales are over $75 billion annually, and it has 250,000 employees and 500 factories in 80 countries worldwide. In 2004, Nestlé made and sold over 8,000 food products, including popular brand- name products such as Kit-Kat chocolate bars, Taster’s Choice coffee, Carnation Instant Milk, and Stoutler's foods. At Nestlé's corporate headquarters in Vevey, CEO Peter Brabeck-Latmathe (who has been in charge of the company since 1997) is responsible {or boosting the company’s profitability. Brabeck has faced many challenges. He has been work- ing to increase Nestlé's global revenues by enter- ing attractive markets in both developed and emerging countries. He is continuing the global expansion that Nestlé began in the 1990s when, for example, it bought the U.S. food companies Carnation and Buitoni Pasta, the British choco- late maker Rowntree, the French bottled-water a company Pertier, and the Mexican food maker "0 enler emerging markets, such as those in Ortega. Under Brabeck, Nestlé has spent S18bil- Eastern Europe and Asia, where there are an lon to acquire U.S. companies Ralston Purina, enormous number Of potential new customers Dreyer's Grand Ice Cream, and Chet America. But increasing global revenues Brabeck intends not only to Continue selling these by improving Product sales is Only the first part of Brabock’s toa camper Four He is also anxious 10 in- ing efficiency and reduce pal operations As you mmployees and 500 ing Nestle's global global business plan. crease Nestle’s operat the costs of running its glo can imagine, with 250,000 e factories, the costs of organizi activities are enormous. Brabeck benchmarked the company's operating costs to those of its competitors, including Kratt Foods and Unilever, and found Nestle’s costs were significantly higher. So, he then cut Neste’s global workforce by 15%, closed 114 of i factories, and reduced its operat- ing costs by over 10%. And he plans to make more sizable cuts over the next five years. In another move to reduce operating costs, Nestlé is investing $1.8 billion to install a global, information system to link all of its companies and their global suppliers to corporate headquar- ters in Vevey. Brabeck’s goal is to automate and integrate all of NNestle’s operations from purchas- ing through manufacturing, distribution, and mar- keting. Nestlé began this overhaul by signing a $200 million contract with SAP, the world's lead- ing enterprise management software supplier. I will use SAP's information technology to monitor tivities around the globe. This Nestlé 15 getting the lowost- quality inputs possible. Nestlé menses HY on ee ie number of its global suppliers and to negott- ly contracts with them— ate more favorable SUPPIY ue moves that should result in a signilicant drop in purchasing costs. To improve the efficiency ol its purchasing and retailing functions, it has also veveloped e-business Web sites whore it lists the Getailed specifications of the inputs It requires from suppliers Brabeck hopes that the new IT system will result in an increased flow of information allowing Nostié to capitalize on what has always been Its main source of competitive advantage—superior innovation. His goal is to use Nestlé’s new IT sys- tem to share information between its global food divisions, which he believes will enhance their ability to create a flow of new and improved prod- ucts for Nestlé’s markets around the world. If his plan works, Brabeck will be well on the way to making Nestlé not only the largest but also the most profitable global food company." its purchasing ac! will help ensure OVELViIEW sieinasina companies the Nee compete with oer malinaonals in the global environment for scarce and valuable resources, such as customers and raw materials. In this chapter we first describe the nature of the muluna- tional company and the way it affects, and is affected by, the countries in which it oper~ ates Second, we discuss the forces in the specifie global environment that affect the way these companies operate. Third, we describe the forces in the general global environ ‘ment that affect the activities of multinationals as they compete around the globe. Lastly, wwe examine the challenges that confront all businesses today in a changing global envi- ronment. By the end of the chapter you will appreciate why conditions in the global environment are a major determinant of a multinational company’s profitability The “Today, in most industries, giant multinational companies have come to dominate the global business system. The largest mult Multinational national companies, such as General Motors, Exxon Mobil, Cc Pier, and Wal Mart, generate sales and revenues grates a m those of many countries in the world. Many of the millions of 0 pany ‘small businesses around the world also operate as mulunationals, however. They also buy their inputs from companies located y y P P ttt capsnias Companies that operate ana trade in aay ditgrent countries ‘around the world the world. al around the world and sell their products internationally. For example, automakers like Porsche and Ferran make their cars from the finest components available globally; sim ilarly, fashion designers like Dior and Armani buy their fabrics, leathers, and acces: sories from small specialist suppliers around the world. In turn, all of these companies Porsche, Ferrari, Dior, and Armani~sell the products they produce to people around being ona ofthe fst comparias to estaish foreign Multinati ‘nals and he Gleb Environment of Bus ness Multinationals - usiness System othe Global In terms of busin tribution networks 2 ‘multinationals control the global production and dis- car oF computes edhe tnd the majority of world trade i industries such asthe same customnens cats for example, a handful of multinationals compete forthe designed for lobe — In many caves, the ators is Spat ces a ais ption; For example, the same car (with perhaps just a few — in A e local markets) can be produced and traded round the world 7 8 of global occupations, muluinationals locate in, and purchase inputs from, runtries where the costs of productive resources are favorable. They are attracted t0 countries where labor costs are relatively low and occupational skills are relatively Sigh. Capital dus moves to those counries where the hor characteris seer (9 offer the greatest prospect for increasing companies’ productivity and profitability ‘The demand by these companies fo sled employees typeally increases the div sion of labor in the countries in which they locate, speeding the economic growth of these nations. In fact, countries compete to be the places where multinationals oper~ ate for this very reason: They increase a country's prosperity ~Deigning a global business organization to operate across counties is a very crt: eal issue for multinational companies, as we discuss later in the chapter. Ford ts « {good example of a company that has confronted these issues. Following World War TI, Ford realized that it could increase its profitability by taking its car making skills abroad. It established operating units in different countries in Europe, the Far East, and Australia ities and evelop ears suited to its local market, The result vas that each unit operated more ot Joos inddependenily from Ford in the United States. Ford of Europe, for example, became the largest carmaker in Europe and produced many kinds of small ears suited to European roads and budgets. Japanese ent manufacturers began their big push to export reliable, low priceds small cars to the rest of the world in the 1970s and 1980s. To counter the growing suc Sess of the Japanese, Ford ted to draw upon the skills ofits European operations to felp it build salle, more fuel-efficient cars for the U.S. market. However, because Porat had never before tried to get its U.S. and European design and manufacturing ores to cooperate with one another, it took a decade for them to do s0. In the mean ~ Japanese continued to gain market share Ford realized that task and authority problems in its organizational structure were preventing it from utilizing ts global resources productively. Iedecided toichange'its global organizational structare, It moved toa “world structure” in which one set of managers was given authority over the whole ofa specific global operation stich as manufacturing or ear design, Then it began to design cars for the global market. How- ever, ittook a decade before Ford was able to produce ite first fuel-efficient sinall ear that could be sold to customers throughout the world. Tord has encountered many organizational prob- {ting its world structure to work. The com: ly changing its lines of authority and which it operates to increase prof Each of these units was allowed to control its own act pany the locations i senna ey orpanniona|preoleme _tbility. But all multinationals-not just Ford~face sig [is world suture to wrk Wal coud Ford have done ry? nificant challenges when they organize their business activities on a global basis. 108 at Te chon of peep wd tive i" ‘torn of povernmerd thie toitarton capnvont Atermot eswinment in which a Pevsen or goup et people ater to eancise absolute cont eve at forms of business act. igure 4.4 The Relationship ‘etwoon Business, jovernment and ociety Copier Fou Political Systems ; and National Governments janals are s0 large they can affect the Ye mentioned earlier that some multinational i te paren sperate. One important cole of a nation tt ean system and society. The voversinient it the , and tem) Ueingof the courts in wich th senip between the bese ; ivien of bath domestic comp Recall fom Chapier hat one he il vane Fegan dat ea of wedi ties and belts teceptabie dr onoceepable mie ce of bus at kinds of laws are thone that pe ect, ane bs tas al p pecafic kinds of rules and -e them, determine whieh kin 1. Moreover, a country's choice 0 ical system. Figure 4.1 outlines the property rights am. telationship between a hnsiness, the government, and the Tinday, representative democracy and tutaltananistn are cegarded as the two pris cipal, anid opposite, kinds of pultical systems. In a vepvee demierracy, et individuals to represent their interests, lect ane! monlify private property rights ta jerefore reflects the desire and ciety i which it opera zens Inave te legal right ta conditions. A den sople and grovaps init senctety As you nught expeet, capi fs the most common fort of business system found in representative democracies. (ecall from Chapter 2 that capitalise is the pobtical system in which the private ownership of productive resources i the bas for Uh dluction and dtubution of goods and services) However, many vareues of expel ist have been adapted by different counties around the work, The Lited saat {or example, ts commonly cegazded as prastcing the “strong” form of capitals becauve it makes uidividuats ultimately responible for their own future suceeoer shag Pay to accumulate property and wealih-the ultimate goal of a eapitaliat sateen USS. law is designed to promote the free flaw of resources to tl ties that can make th On the other hand, many other countties such as Canada, Germany, Sweden, New nd, and to a lesser extent the United Kingdom and France, practice's "ecahens Is selforecapttalima which, while encouraging and reccad ing enterprise, ako establishes a suctal support framework to aid titinens whe fey k the ability oF resoutees to support themselves. ln theve cong people and compa 2 form of capitalism, kn whatever reason, la tries, gusrantecing some degree of equity in the social ur clase system isan stpostand Pahiucal cbjective-perhaps a move umportant objective than encouraging peeple ta act ina selfinterested and enterprising way, All these countries have strong private Property nights systems, however A tetaitarian yoversmieut is one in which one person or political party attempts to exercise abvolute contol overall forms of busuess and social activity. Sech a gow, grnment commonly bars or oud any other politcal party. Normally, a ditatoahip {exits in which one poiical or social group of family has gained the power to impose their will on a society and decide which rules and regulations should govern business and other aspects of life a Le omen) mrumiom A one: wor Latent Me open ih annem morn pony an csi eran ye ig ‘iy stwang Beli that ond ey Pend he om escinivnsy doe ocr nwathhong aman en ha ne cpermutem TM rpetonh ees aand adage used to defend the tism asa pea tomuich wealth being they cannot claim one ety do nap ck of any private property nights. The failure of corns ‘ms most commonly attributed to the fact that it does no ead produced becanse people have litle motivation to work hard if ership” ofthe rss of ther had work Sopp a oc Many totalitarian states exit in the Middle East Al countries the polit and Avia today: fa these al patty or ruling family that contrals the government decides how to allocate property rights atnong diffrent kinds of social groups and therefore determine which group gain at the 6 ine of others, Cammonly, lies and regula tions are drawn up that henehit the social group that ism power. fa essence, im th kind of totalitarian system a fow people prosper but mo: equity, and justice ave lacking inthe syste {Almost all countries that are bs 1 companies have developed rhpresentative democracies of are in the process of ding Many’ dictatorships and Aotaltarian regimes have collapsed around the world because their business systen do not provide the pols fand their vital foreign capital the richer society, the more to not, and freed Stmate the growth of their economies. In general, jate tend to be its poitical institut ‘and the mare democratic ists government. A sable and democratic oeiety, im turn. continues to attract more busin investinent fr rr multinationals whose activities result 4a 3 country beeoming richer over ime. Where totalitarian regimes sll exit, they do s0 Ihecause their complete control ofthe armed fo ple and fend off attempts to reform their econ ‘es allows them to suppress theit peor nic and pobtical practices sueoucesseeewer' National Governments and Free Trade “Tore decison by eouries jomeaceerebmmatsr86 Qe important way countries ean increase their ing and is by eliminating their Dares eaterpede De arrieny to trade. Free trails syssvemeats age joint decisions made by countries to row prdtsBOtIPEN—elyce or eliminate price- and quantay-resticing bartiers that impede the flow of prod: tits between nations. Tor example, taf are one main form of tade barrier. (fle are taxes of duties on ported prodct that raise the pce at which they must be sold in a country abroad, this often makes ther uneo Competition is ham Coot Tana or tie on Imported proets Bat te te pce at wich ipetitve with locally pronuced products peed by tarifs so consumers pay higher prices than they might oth Tom ofapredvet hat an be imported into a county, The effect ofa quota ismch tke ata tea Sly Seingramtoncop hj user ete Did You Know? Kea or ther gods sesce by Tercent of world population who speak thee asst exporting and investing i foreign Courtes. And curse, the sf 15%-German 2.8%-Hind toward a more open global econ 20% Japanese 4.8%-English fomy has created mate opportunitins 2.5% Russian 5.1%-Spanish to buy foreign goods and services, 279-Bengalt 14.9%-Chinese too. Land's End, wat one of the frst 28%-Portuguere USS. multinationals to enjoy increas ing success because of its decision to eer ee LCT Anirternatnal reaty between nator ‘bg WOVE, rama vain tee rode. casio wren & soup of counties hat agree to promote the fee Now of goods and services bbetwoen thom, * seas manufseturers. Land’s End par aa falaysta, Taiwan, and Chins ne se quality, styling. flexibility, or er te a gerauss Wal Matt, and Target heir purchasing activities chapter Foe bedding from over ort low-cost lees and Be@HIOR TTT Kang, M oa ig from manus chases clothin because US. texe mabers of vice, Today, mont big retailers of ere inajor players inthe global ens GLOBAl AND REGIONAL TRADE AGE TN to prevent the import of inexpensive PrO) Miduced by agreements such as the General 17 (GATT), a worldwide ine toa massive reduction in (WTO). Since its passage, the ain multiplied tie oe MT conttues today to ight to lower trade barriers: his way ae eer cmamnes that posses te skills, technology, and know-how 10 F to best use to ereate the most value and profit A free-trade p of countries th removing all barriers to the free flow of goods and services betwe trade agreements are being nego amples inelude the North American Free Tiade Agr (NAFTA), the European Union (EU), and the Association of Southeast Asian } (ASEAN). But there “The growth of these regional trade agreements also presents opportunities and wr effective on January 1, 1994, for threats for multinationals. NAFTA, which nds a Mexico, Canada, example, abolished the tariis on 97 and the United States by 2004. NAFTA alsa removed most bamers on the crows border flow of resources, giving, for Canada and the Ui NAFTA was signed ny other counties su factur! fren do not of ‘Tanff barriers designed abroad have been greatly er en Tarts and Trade Mowing World War I GATT le 2 id bale onganization Wed ike never before them AGREEMENTS sernational treaty {org nfs and the creation of th ‘ount of world trade ha have committed themselves 10 m, More free: ef upon on a regular basis than ever of the g ded betw tuple, financial institutions and retail businesses in 1 States untestri vo the Mexican marketplace. After je was a flood of investment into Mexico from the United States as Japan, Wal Mart, Paice Club, Radio Shack, and other expanded their operations in Mexico. ome multinationals see ¢ ‘rade agreements as a threat because the agreements expose thera to increased competition from companies abroad. Indeed, Companies in Mesicu, the United States, and Canada have all experienced this since NAFTA‘: passage. For the first time, for example, many Mexican companies faced head torhead competition with more efficient U.S. and Canadian companies. But the ‘opposite is true as well: US. and Canadian companies operating in labor-i fndustries, such as the tile and textile industries, faced new competiuon from Mexican businesses that have a cost advantage in these industries In 2005, the United States, Costa Rica, El Sal- vador, Nicaragua, Guatemala, Honduras, and the Dominican Republic were negotiating to establish a new agreement called the Central American Free ‘Trade Agreement (CAFTA). CAFTA would eliminate tariffs between the countries and give them duty free access to the U.S. market, Because wages in countries like Honduras are only $1 hour, compared to $3 an hour in Mexico, sf CAFTA is implemented, oppo- nents of the agreement argue that in addition to the United States, even Mexico would lose jobs-despite the fact that wages are already relatively low there. Clearly, the establishment of free-trade areas cte- ates an opportunity for global manufacturing eompa- ins al sonal fre ‘Lands End is one company that has benetited rom tre vnde. The cempary purchases clothing fem manutecturers in Hong ong. Malaysia, Tawan, and China because US. texte ‘raulactters eon d0 net oer same quality tying, Neatly and price advantages. Do you think there aro negative ‘aspect to ee ade? Iso, what are they? nies because it allows them to reduce their costs They can do this either by shifung production to the lowest-cost locations within the free-trade area or by serving the whole region from one location, rather than establishing separate operations in each country. Video Small Business, n Action shat envirenmont ‘ooneing aeomeary ‘Reetermine ae aby 10 sourees—tand bo, pal anderterprse then PENN On he Gita Eman Business Your 0 Summary ae Boss: Vineyard Vines srmall Barer gee the United States there are about 10 owe starts ral an fan equal number of fatures as shows the viclee fron Tat Mars o8 your Student DVD. This segment intoauces bothers Shep am thee ur Sho ate the success oveners of Vineyard Vines. The Mornays started theit business a few years ago by maxing out their credit cards to fund theit business tart up-manufacturing ties Original thete was no store front and sales were generated by going doe to door. During this formative stage, the business was trig. Th over, however. Today, gross sales will each 20 million dollars, The Murrays initially bad only one product-nechtes, Today, however, their product fines inchade the orig nal nechties and totes, shirts, and belts, These prnducts are sold in a variety of epaitment and specialty stores. The importance af “passion” forthe entesprise 1 emphasized asthe key clement in their tesnendous success They don se then selves as selling tes and other products. Rather, they focus on building relation ships as the central activity im grossing their busines The video segment concludes with a feature on Columbia University’s tive Business School's progeam, The “Enttepreneurin Residence” provi dents with direct expostre to a stecessful {classes on have to be successful The professor notes that between tueprencur a 104 the most frequent new business start ups have been service enterprises such as convenience stores: He concurs with the observations of the Murray brothers that “passion” for what you Uo is the most important factor in being success Discussion Questions: 4. UE Vineyard Vines was interested in expanding to global should 1 take into consideration as lvkets, what factors ategy? 1 Vines have to velop al matk 2. What “general forces” in the glo consider if they were veeking to expand globall 3. The Murrays emphasize “relationship building” rather than “sates” as the principal element in the swecessful growth of Vineyard Vines, \ Rnd/of concerns should be explored by the Murrays if they were to consider expanding globally? The Global Environment of Business Like Nestlé, multinationals have to take into account many different factors when they develop a business model to compete on a global level, The existence of markets and billions of potential new customers is a major opportunity; there potentially L2 billion customers in China for cell phones and cars for exaraple. AKO, the possibility of gaining global access to lower-cost resources like raw materials and labor ean help a company increase its profits The global environment a com that determine the ease with which sy operates in is the set of forces surronnding it a0 obtain these resources-land, labor, capital and enterprise. A multinational depends on the giohal environment for the resources it needs to make and sell goods and services to customers worldwide, Recause resources are often scarce, and because many companies compete for the same resources, obtaining them is « challenging task “To understand how the global environment. n affect a company, itis useful to dis fee stages in the process of making and selling goods and servi the input, conversion, and output stiges. Business commerce begins at the input slage when an enteepreneus searches out asd purchases the resources necessary to produer a paticular preduet. At stage 2 it uses its technical skills and knowledge to change or transform these inputs into finished goods and se; es. Atthe output stage, products 110 = Figure 4.2 Forces in the Global Environment ‘suppins | Conversion Y ouput BUSINESS ORGANIZATION SPECIFIC. Customers ENVIROMENT oat General ENRONMENT 2 illustrates these th also shows are ready to be sold to customers, Figure 4.2 illustrates these three stages, ital two kinds of forces in the environment that affect a company's profitability: specific ‘forces that drrecly affect a company's business model, and general forces that affect all ross diferent industries, These types of forces are discussed. types of multination indepth in the nex wo sections of this ch Specific Forces: spi in the Global ‘rramgcos Environment Supplier in the global environment are those that diveetly alinat niy's sales revenues oF tability. Below we examine the 5, distributors, compet 5, and REISS Forme Suppliers Pranic that provide a company with the inputs Reg eesterwonment raw material parts, employees, and s0 on) that it needs to produce Sereuncarguye, Sond and services Obsivasy, a company prefers lower pried inpae bennaee eer Fediuces what i costs to make products The prsce tl € company ultimately pays for its Resources, hawever, depends un it relatice beg r fe power versus is suppliers : raise the price of a particular umber or they are prominent in their industry Intel for In general, suppliets will have more power tesource if they are few ra ome fxampte the worlds eating supplier of computer hie ae a ter chips Av such, Intel har the semgay power to demand hgh prices forte chipn is sels ew PC chon ae ee Seanad stm a have mere tarunng pone: A compay tae ba bate ‘auth eeredice goes alninuit els cettann in put wall have moge power over the pia arava many mupph Ms \ sf * competing forts busines, For exanples Ree nae cat make ca pas ike igi bulb door handen snd at ere saps compete tel ae bie ol ge bag Hc ‘demand lower overall mput pce ts 8 Ford and Other forces tat alert the avila uf matcl ee so guoline prc specially sf there are ase hundeeds of global Pees companies around the weet aot oureing ‘The process ef purchasing Inputs rom mrughout tne World Wo take aceantage of Ctlarences i te cost and ‘quate of eseurces silsteibutnee Fl that the commparies that ake products wih the ceustemers wna fay them. utermntions A company such nea rmetense, broke, vehotesale tat by the Product ol on company and sets tem to act Figure 4, The Role of tho Intormediary Zompantes everywhere have experienced a massive ee m el btlecs. The worlds demand tor at GLOBAL OUTSOURCING The purchasing man agers of multinationals like Ford, Procter & Gamble, and IDM are responsible for searching out the lowest cost, best-quality inputs no matter where they. are located. This task is called clefsal anit vw « Cane sider how Boeing's newest jet airliner, he 777 was Duik. The 777 required 132,500 engineered parts pro. duced around the world by 545 supphers. Although Boeing makes the majority af these parts, eight Japa nese suppliers make parts for the 777’ fuselage, dors, and wings. A Singapore supplier tiakes the doars fe the plane's forward landing grat, and tree Malian suppliers manufacture wing flaps. Boeing's rationale for buying se many inputs from suppliers abroad is NNN ee asetmpginct ee Wed ie eines chet they do. In order for Boeing to produce a high-quality Final product-a safe and reliable comm reraftit is Vial. (An interesting article ‘on the growing supply of chips made in China appears at the end of the chapter) But again, t's not just multinationals like Boeing that engage in global outsourcing, The Internet has made it much easicr for companies both large and small to purchare {inputs and sell outputs around the world, Distributors Atthe output stage ate dviibutors. Dietthutore link the companies that mate prod ‘cts with the customers who buy them, Wholesalers and merchants me cotpie Once again, bargaining av! negotiation ies place over the pce a eonspant eon ‘obtain for its produets ‘The more powerlal a company’s bargaining poslen retuve to ts distributes. the higher the price i will receive. For example; major US, flee stuios have the bargaining power to contol the pice ofthe videciape, they el to Aissibutors Uke Blockbnser and Hest Du. This sbecause the movie audi contol ‘ost ofthe hit movies on which the sbecess of these distibutors depend. Or the other hand, Wal-Mar is avery powesful global distibutor of consumes podoct to Eustmers sionwide. Wal Mar uses is buying power lo negotiate ge piesa aunt rom the thousand of companies aon the world competing wo ayely a wih detergent clothing, hardware snd son, THE ROLE OF INTERMEDIARIES Sometimes companies called intermedi- aries act as a “go between” to manage the sales of products between sellers and buy ets. An Intermediary is a company such as a broker, metchant, or wholesaler tho does not make a product but acts as a supplier o distributor, buying the products of some companies and selling them to others, often across counitfes Figure 4-4 iluy trates the role ofthe intermediary. For example, hundreds of companies worldwide make lighting products, For a mall Privately owned lighting store, the transaction costs related to finding andl negotiating with each of these manufacturers would be veering takes advantage of a commercial opportaity 0 act as 3 posbets ‘manufacturers and individual stores, The wholesaler selects » rag ma setof global manufacturers, It then sell these products ts thous ands of individual lighting stores, using # product eats logue, online store, or skilled sales force. Store owners, in turn, select and stock those lighting produets they think wll be the most profitable to sel to customers in the cities The intermediary's profit isthe difference between the price at which they buy products from lighting mantfac: furers and the price they can sell those products to indic vidual stores. Stores are willing to pay the wholesaler's =. So, a wholesaler linking lighting, of lighting prod igure 4.4 larket Share of ree Largest ‘companies Cchoptor Four involved in searching aking it much easier for individ turers and “cutout” the intermediary ites sccienses ent dirty i or hey Keep the profit the intermediary woul OATS roe thes pray bea aging the fw of resources into and aut ofthe production process later in the book. transaction costs igher prices to avoid the ere 1¢ Internet is mi ucts for themselves. Today, th to deal directly with manufac! Customers bility a company must make sure its products meet the needs of To increase its pr custoriers, One way of doing this is by grouping customers according to what they from a product. For example, Dell groups customers according to 'y are (1) individuals purchasing PCs for home use, (2) small companies, 3) large companies, (4) government agencies, or (5) educational institutions. Each of these groups wants something different from its PCs; Individual people might want 1'Cs with many multimedia applications; large companies might want very powerful PCs called workstations; and educational customers with limited budgets might want town ed PCs, Dell the PCs with different features and prices to each of these ‘A company must b are seckit whether hanging tes and needs, for provide a company, such ample, Nestlé makes dehy. es, but itis a best-selling ia I dehydrated soup becomes more Popular eran cous, Rests musket soup needs to be aware of thi so the 8 meet this new demand before ts competitors do, Global marketing and red to quickly alter its business model to uch example. A vital role played by the m: trends in the global envicc as Nestlé, with exactly this drated soup. [eis not a popular popular p product in some cou Competitors One of the mo important Ay confronts in the global environ to obtain a larger share of the mar ment is, of course, competito bet. A co company’s market sh Ac are hse of the total quantity of a pact ted sat m he relative market share of different c ies in an industry can be illustrated by the size of the piece of the * mpc of the “pie* it occupies, as shown in Figure 44.7 example, and over a 40 oas 22% shave of the US. ha eof the global market — et in SUVs, for AL omer inusty ‘companies 0% Ee ae ‘Nutinatonats and tw Gta Enter of Busnes Th wel he Seater the number of competitors there are ina particular marke, hel Tove hriees they can charge. Competitors drellyaet each other's aires Carefully conrdes eee ation means lower profitability. As ares a company must targa omsier how is competion wil expand toi busines decsns-epecily 1 ie wise vop ‘a small German PC maker might think it can increase its profitability It eedces it prices to attra more customers, The company igh orca that in sell 10,000 PCs priced at $1,000 each (resulting in $10 million in revenues) but ‘that it can sell 30,000 PCs if it reduces the price to $600 (resulting in $18 milion in revenues). This seems like a clever competitive move because it would result in a large increase in profitability. But the company may not have considered how com: Petitors like Dell, which also operates in Germany, will respond. Competitors will do all they ean to avoid losing customers because this will reduce: their market share. They know that if a competitor cuts its prices, they will also have to do so, 00, or lose customers. The result will be that Dell and other ’'C makers will also cut the prices of their PCs to $600 apiece. “The German company that initially cut its price will sell more computers~for a time. ut once its competitors lower their prices, its sales will taper off. In six months’ time, it might sell only 15,00 computers versus the 30,000 it had projected. At $600 per PC + only $2 tnillion in revenues, So, even though the company has increased its market share, it has actually become less profitable! (Remember, before the price cut it was earsing $10 million in yevenwes) ‘CRather than engaging in a price war, companies develop different strategies to compote for customers. These strategies include competing on the basis of better product design, quality, or better customer service. By differentiating their products This way, companies ean charge highce prices and not get caught in a price war. A Striking example of the way 4 multinational company can achieve this feat is the meteoric rie of Samsung, discassed in Business in Action this will gen Samsung’s New Global Business Model In the last five years Samsung, based in Scout, Korea, has risen to become the most Trafiable consomerelecuonics company nthe world, Since 1909 Samsungsrew ries have doubted, and in 2004 it nade a record $12 billion prof whic made it Tre secand most profitable global technology company after Microsoft, The way . Sunsaung's global txiness taodel has changed overtime explains how the com Business pay hasveached ix covablepositon oui ‘i f the 1D80s Samsung could only watch ss Japanese companies like Sony an in Action qin Sie See evan and JV froduc) tne out undeds and thousands of innovative new consumer electronic products such as the Walkman, VCs, high-quality tlevisons, and CD players. Samsung's strategy was to wate, Nhich'of these products, and wich oftheir specific features, customers iked best. Samsung would then make a low-cost copy of these products and sell them at Tower prices However, although it was profitable, Samsung was notin the samme Jeaguelas companies lke Sony. Sony, for example, plowed back the huge profits made from its products into research to make even ¢ advanced, better elec- tronie products-thus sustaining its increasing profitabil ‘Samsung continued to pursue its low-cost strategy until the mid-1990s when its chairman, Lee Kun Hee, made a major decision, Sensing the emerging threat posed by China and other Asian countries whose cheap Inbor would rob Samsung of its low-cost advantage, Lee realized that Samsung needed to find a way to enter the big. leagues and compete directly against the Japanese giants. The question was how. Lee hegan his new strategy by closing down 32 unprofitable product divisions and laying off 40% of Samsung's workforce. With its costs lower, Samsung was able to invest much more of its capital in research and development. Lee decided ia \ chapter Four research money devel rmicroprocentors end epee ed would eventually be el + producing new di bee ‘femand by companies F % ty ta pres amnsung supplicn Today vey makers all over the sl tl f Lee's new business ntent to deve company’s ips and LCD screens nodel for to cect But at the crater nology being ps, and Nokia suing to pump peed of new product development fits busine tel, Samsung was ing, have b it profitatntity has decline — " M4 when Sony and Samsung vie ons mnuwared a tnayor egreeiment to share the costa of coreotine it any billions of ala However, we should not for Samsung petitive advantage was orig inally built upon its ability to make many kinds of electronic components at a low cost. As Lee predicted w-cost Chinese ers are now doing to Sam: sung what Samsung did suon ts, will they be able to e Samsung did? entually set themselves apatt from their corp General Forces tose gene: lve i he loa eovionment poli in the Global tutinacnstssccess to recess ee Eu reer affect ; Jovi lor tah products "Those lorena penced reetene Environment affect all multinationals and their suppliers, distributors, and customers, Political-Economic Forces Pot tpamme econoiic torcesae cased by changes in the orm an ature ofa coun cena cre cial and political systems. Around the globe pola economic span voae Scmiyetwcutns” “ely and change overtime: Managers must lara how difeceat contort wee wean especially tue when they ae eheogings cerone sytiminanch Ha eeeinarker ceonomy, the production of goods and services i left inthe Soranctonl pan” hands f pata opponed ta foeramenenerpraee The goods sod serve Hen ne terete produced and the quanti: tht are produced, art ant sped ty et ass of Fr authority, Rather, production is determined by the interaction of the forces of supply erpnse, and demand. If demand for a product exeeeds supply, the price of the product will ‘onomny Economic system in vitich {ho quantity and price a! (goods and services that a country produces Is planned by the ‘goverment, talzed ceonony Economic system a which cortan goods and services are produced by grate proviged via cena ‘government planing Muttinationals andthe Global Emvtanment By ct Besnass ste tise, prompting mana ‘anagers and organizations demand, pices wl Rca ean 0 produce more. spp exceed Beeman economy Be cer anager ad gains opr le. In Reta ar apraued ating patterns of consumers, as signaled to managers ine peat iad — wad is much is produced. cence ay }omy, the goods and services that a country produces, the ae - they ae produced, and he prices at which they are sold ate ll the government. In a pure command economy, all businesses are govern ‘ent owned and private enterpits is forbidden. As recently as 199, the communist countries of Eastern Europe and the Soviet Union had command ecanomies, Other Comununist countries such as China and Vietnam still do, ‘The failure of these economies to improve the well being of their citizens relative to free-market countries ike Germany, Japan, and the United States helped precipi tate the collapse of communism in many countries (along with their command economies), People began to figure out that when the government gets involved! in economic activity, economic growth is ofien impeded. Although China and Vietnam ‘remain communist controled, they are moving away from command economies and becoming more frce trade oriented, Figure 4.5 shows the changes inthe politcal and economic freedom of relect countries daring the last decade. Betwe ne hand, and command economies, on the other, ae mixed economies. In mixed econc 1, certain sectors ofthe economy fare chargcterized by private ownership and free-market mechanisms, and other se tors are characterized by significant government ownership and goverment planning, Mixed economies are most commonly found in the democratic countries of Western Europe, but the size ofthe government component is falling as these countries shift nore tevvard the free-market model For example, many European and Asian cour: tries ate seling off what ance fran industries-ineluding srlines, rail, Trealth care steel, and telecomsmunications op stions-to private investors ia fer-market system for two reasons. Furst, because much of the economy is in private hands, there tend to be few restrictions on compa. nies tha Companies face fewer impediments to investing in Britain with is largely free-market system, than they doin Chin, wi ‘Multinationals generally pret it incounteies with free-market economies. For example, US. re u free market is allowed in only certain sectors. Fie econuriy Second, feee-matket economies tend to be mare economically devel Sped anid have higher sates of economie growth than command or mixed economies, ee their citizens tend to have highes per-capita incomes and more buying power ‘A decade ago, few Western companies exported (o or invested in Eastern Europe because the combination of totalitarian political regimes and command economies created a hostile environment for Western businesses. Since 1990, however, the emeerate Briain Bata Russa "2005: Totton Set 1998 Command Mie Freo mart ‘ecosemy economy feomory Economie Freedom 110 ral forces Changes Inv ci structure of a county and inte lace stuctu cute, eustem, and elets Genera! standards an guteg reps hat people ma sect use to dotrmine whch kinds of teers aro nght or vicog ‘rms. Unaton codes abel tof econcms, Does, and socal waves 4a norms tat eit ina >aniculreounty Cheater Four Cesier Fou has become far more favorable for Western busi. environment in Ease Fat ran businesses have invested more than $250 bition nesses; from 1990 to 2005, Wes in Eastern Europe. A similar story has wa totalitarian communist regim: sewers duced a surge of Western and Japanese business. By ‘over $800 billion in China, where despite the continued presence of a : cconomic freedom has pro, nationals had invested faded in Chin nel we toward greater ae pusness. By 2005, ol Sociocultural Forces cultural forces relate to changes in a country's class structure, culture, customs, Fold. Values are general standards and gulding principles that pe eine society use of Japanese, French, or German companies because the values of these countries differ HOFSTEDE'S MODEL OF WATIONAL CULTURE Researchers have spent considerable time and effort identifying sitnilarities and differences between the scl tural values and norms of different countses. A movel of national culture developed by researcher Geert Hofstede i the 1970s and 80s argues that differences in the oe tues and norms of dffcent countries are captured by five cultural dimensiong The frst dimension, which Hofstede called indiovdualim vers eoleticinm, Focuses fon the valuts that govern the relationship between individuals and groups, incon, tries where individualism preva, sndividul achievement freedom, and compeliiny are values Hat ge stressed. In counties wheve collectivism prevails group hicinony Gelesivenes,consenes, an cooperation ae sessed, Japan epitomizes «coun dominated by collectivism, whereas the United States epitomizes a country dog nated by individvaism Hofstede used power distance, the second dimension, to reer to the degree to which & country accepts the fat that differences in its citizens" physical and intellonca capabilities give rise to inequalities in their well-being. This concept also measures the degree to which countries accept economic and social dlfereaces in wealth, sates and wellbeing as natural. Couatres that allow inequaliis to persist or increase are said to have high power distance. Professionally successful workers in high-power distance covaurteree, wealth and pass it on to their children. In these countries, inequaliies increase ony time; the gap between rich and poor, with all the attendant polical and socal conse, ences sows very large. In contrast, countries tha dlke the development of large inequalities between their citizens are said to have low power distance, Such coun es tse taxation or social welfare programs i reduce inequality nd improve the lot ofthe = feast fortunate members of society Low-powerdistance countries are id You Know? ‘more interested in preventing a wide gap between rch and poor and dis. “een of the world’s population living on less than $2 perday: cord between chase * billion or 4486 of the world. Advanced Western countries such as the United States, Germany, the 47 Netherlands, and the Us atively low on power d individualism, Poor 1 ited Kingatom score tel distance and are high on atin American countries such as Guatemala and Panama and Asian enn {ies such as Malaysia and the Philippines score high on poser distance and fow on individual ism These fningy suggest that he eultura val ues of richer couutzies emphasize protecting th phasize protecting the rights of individuals and, atthe sate time, pro: a far chance of success ta every membre of society even among Western countries there are differences, as noted earlier. Both the Dutch and the Batish see their countries as move Protective af the poor and disadvantaged than do Americans, who believe that people have the right to be rich as well as the right to be poor. stede's thd dimensio ‘The Unted Stites s conser a low pown-ctan ‘even though he ration tht Pas curry becauee ste acaceonaice necuntyaramecmncteratie Th isan achievement d rermus a nurturing counity orients Countries that are achievement oriented s. performance, success, and compeution and are rests oriented. Coun tries that are nurturing oriented value the quality of life, warm personal relaionshi and service and care for the weak. Japan and the United States tend to be achievement ‘oriented. Thr Netherlands, Sweden, and Denmark tend to be nurturing oriented jus te differ in their toletance for uncertainty and willingness to take risks, s0 do countries, Hofstede refers to this as the dimension of uncertain avoidance Counties tows on uncertainty avoidance (such as the United States and Hong Kong) are easygoing, value diversity, and are tolerant of differences in what people beheve and do. Countries high on uneertunty avoidance (such as Japan and France) tend to nid intolerant. Ir high-uncertainty avoidance cultures, conforming to the values of the social and work groups to which a person belongs is the norm, and structured situations are preferred because they provide a sense of security The last dimension that Hofstede identified concerns whether citizens ef a country orttern orientation toward Ife andl work. A long. term orientation. that include dhift (saving and persistence in achieving goals. A short term orientation derives from values that express a concern for maintaining personal stability or happiness and for living an the present. Countries with long-term orientations include Japan and Hong Kong, which are well known for their high per savings ratec The United States and France, which tend to spend more and save Tess, have a short-term orientatian Differences in national culture help to explain why the cultures of mulkinationals bated in one country tend to be different fram thase based in another. More g¢ ally, sociocultural forces affect the way miuitinationals can and should operate in dif. ferent countries. Far example, in some countries night shifts are taboo. ln other coun tics employers are expected to provide employees with meals and transportation to and from their homes and workplaces. Sociocultural forces also affect what kinds of products companies should offer cus: tomers in different societies. During the 1980s and 1990s, for example, people in ‘Western countnies became increasingly concerned about their personal health, fies, and safety. Global companies that recognized this rend early were able to reap signif’ icant guins. PepsiCo, for example, used the opportunity presented by the fitness trend to take market share from rival Coca Cola by being the first to inteaduce diet ealas whose sales have soared worldwide. Similarly, the rising price of oil and global warm ing have led to greater environmental conscioussess in many counties. People in the nited States, for example, are beginning to question how socially responsible it to dive a gax-guzzling SUV, Many customers ate demanding more fuelxaving hybrid vehicles and automakers are now rushing to meet this demand, have along: ora derives from val angen ee haratestes 28 runing popu, S32 ts ag. gone, eH gree, ard sens) ‘went, once Changes va coms ers ard regustons hatin (evar becaute ct changes ine peta! ad eben! tiaras wana 20 eer Four rapt Foo ic Forces Demograp hit me sf ehanges inte caacersts of 2 cOUNY perl outcome race, a sexta OF Changing demo- papain sch as age, nee ends of products Hat cus- eat nay cP rrieneing the aging of rp ees aes te 9 P edustiaized ratios sre enpvesing the aig of femers want. For example ee paple meres es ar sei eee a a ad ane Be eagle jemand for their products 204 Ve Becoming more are sadn eae ace dt HS He met nthe wa ces Sm vena, iar Ute Sms ning Op rece decided 4 convert any oF 8 regular Fee a uermaskets ith dsinelly Hispanic Mae snie forces are ute Legal Forces egulations that oceut neat fuse ae outcomes of changes in a country’s las and regubions & Lo ee me and ihe tes win a society. Inportan ep becaue of clang Fans on enronmental protecuow and the preservation of tee ee ecienan inerwsed emphasis on sfety inthe workplace; and legal cone Stan againnt discrimination on the basis of 4c tae llr fer Sea i tc mge over time, ai this ean also pose complications for as bes and kbc commonly cepted bnsnes practice: But US rare ase prahia th sort of actsty, and the enforceanent ofthese Laws has a ae eee ears Asa reall U.S. fms Ise millions, sf not billions, of oe ec cch Year to foveign companies glad to offer kickbacks to eus doers tv! govermmcnt fats slvoad if st means closing a dea Are iersmpartant change tought the world that goes hand in had with oa eerie ue been a strong tresl tseardudasry devegulation s0 that een ee auly regulated by the government ate now allowed to comp aeneeet fewer reticuors Inthe Uited Slates, deregulation ofthe aisle industry soe i oe aime treater the industry. Tht has fed to intense competion, fate aoe ihe Venkeupty ef numerous arines, The same patern has been seen in Eup tight national sins thot ved to have a mionopely i their own coun aeeee tee threstened by new low-cotathines dat ate now allowed to carry engers Between my counties they choose as Tusiness in Action illustrates 7 Business in Action A Battle for Control of European Skies Ryanair, based in Dublin, Ieeland, imitated and improved upon the tow cast busi now model pioneered by Southwest Airlines in the United States and used it to become a leading player in the European air market. Ryanair’s CEO, the flamboy- ant Michael O'Leary, sam how he could use the specifi strategies Southwest had developed to cut costs Today, Ryanair is positioned as the lowest cost, lowest- priced airline in Eutope “The average cast of a Ryanair ticket within Europe is $48, compared to $330 on Britsh Airways, and $277 on Lufthansa, which have long dominated the European ‘The result is that Ryanair now flies mote passengers inside ‘Aivways, and its share of the European market is growing as fast as itcan gain access to new landing spots and buy the new planes needed to service is expanding route structure How has O'Leary managed to prove on Southwest's low-cost business model? By using every tick inthe book to squeeze every cent out of Ryan: s cost ra CEO Michael OLeary Hoge Grveloped by "hon Pyanait 9 Europe 119 wed the main elements of Southwest's model such as using only one type of plane ((he 737) to educe maintenance costs, sell tickets directly to customers, and eliminating se assignments and free in flight meals, Ryanair also, avoids high-cost airports hke London's Heathrow airport, opting for smaller ones outside of big eities, such as Luton, its London hub, ‘This was jast the heginning for O'Leary, however, ‘To teduce eleanup cost, he eliminated th vackets in which passengers woud throw tra Bo eliminated blanket pillow, re sna nck, and even “sick” bage-virtually everything passengers how he could uso the cost. had come to-expecton regular airlines. “You get what ratings iosimiaiy you pay fo,” ix Ryanait's philosophy To implement his business madel, O'Leary ex: pects all Ryanair employees to alo find ways to wipe ‘out the small, incremental expenses associated with performing the tens of thousands of specific operations needed to run the aitline. Using all ofthese tactics, Ryanair has ‘been able to lower its costs to such an extent that no other European Airline ean come lose to touching its fares aa sill break even, let alone make a profi. How have global competitors teacted to Ryanair’s low cast strategy? Some airlines, like British Airways, ate not suffering because their strengths le in the lucrative, higher fare business segment of the market. However, other airlines like Italy's flag ship airline, Alitalia, are close to bankruptcy; the Fesh cartier Ace Lingus has had to cut its costs by 50F% just to survive. Stil other airlines have launched theit osm low priced, low-cost subsidiaries, lik ‘with Southwest Airlines inthe U es. O'Leary says he expects other airlines ta do the same in Europe, in which ease the brutal price wars wil continue? Challenges int cstesescing matinsonl edysto deselop ata the Global tonicintimonpuitantyepconeaeeteen te ' Environment take advantage of operating globa ath an ogertog atoran aro ‘aregers tore, ae rang ints aan wre 4.6 summarizes the process by whi ly. A company usually Legins operating globally by transfering its domestic or domestically developed skills and know-how ta 8 foreign market. Micros, for example, with its competence in the development of state-of the-art software, has taken its expertise to countries around the world. Ts for ign units or divisions then sell eustamets in those counties software specifically ta luted to their local needs. In 2004, for example, Micro intoxtuced a suapped-down vetsion of Windows that could be sold at prices low enough to attract customers India Today, over 500 of Microsoft's revenue comes from its sales aboad Similaly. McDonalds has established testauranis im most counties; its Geetnan stores tell beer for example, Virtually all of Coca Colas sales growth is occurring in counties abroad because the company has already captured much of the U.S ma Uunlly, when a company decides to expand glabully it locate {economic and sociocultural forces exeate favoralile conditions in which te tell it products ablishes a global network a set of task and reporting tela en fees, managers, and operating units around the world to take advantage of those conditions ‘or example, to incteave its efficiency a videogame maker like S ‘oly operations in Malaysia, which has low labor con ms inthe United States, which has skilled gaune den rh a company’ ny might peeforsn locate its game design vers, have its corporate Figure 4.6 Profiting trom Global Expansion oa Far seve geoumres nin compact Ss [ekssaha con neva ohn poe Trane aba 8 lepers antntbe nna Tatvrowedy 1 1 cso starsat J inprom etsangy and eacerers ccrperet pr ta ect etane foa oelacoe eT clone sore Sit dha my fhe wry, Bel Sr xa cy or lei we In fact, Dell employs move peop Moivover, sovitimes companies cal or manufacturing competency that sis nyetuise atlvantage. For tiers. Soa company ean example Japan is bane for is efeitos Potentially benefit by etablsting an uperating wat mn Japan an vader bo Jean bet hnuqures Many US companies have dane exactly this, Ford andl I purchased layge sakes n varios Japanese carmakers to get actesy to shally and exper ‘new shill it an then transfer them to is domestic Aller aco Seperation. Hy eapraluing an the trengths of te different plants assur the mesic g can continacusly improve ts overall operations. Having a global network me pheee se enleeprencunal opportunites t can seize upon, a8 a8 commerce, busines¥ as. introduced in Chapter 1 constantly exposes «company t Next, we discuss these «portunities tht ul the bus ‘an occupation, and busin as an organieaion fremmewerh Global Commerce Challenges any can peofit from global by the size oftheir sales rev panies competing globally face Integrating the Tnteret into thei neompotating the effects of diller- and organizing fe are many ways in which « multinational comy n. Table 1 bats the 100 bigest multinati fenues. Four challenges that these, and all ether are (1) build ol competitive advantage, [ bbusiness models, (J) snamaging ethically and (3) ‘e0ces in national cultures sto theit global planta BUILDING A GLOBAL COMPETITIVE ADVANTAGE A multinatiom! suis a competitive advantage by more efcently and ellectively producing goods or services customers around the world deste. The fout main wins to inne Sepey an eHfecticeness ae tw esprave a company’s pradty, goa, fmaeron, and repenenes te cutemer as shown in Figured adetvin, a discussed in Chapter 3, measutes how efficiently a company is urns tesources to make a product This is measured by the company’s ante ray Snbraducion-the vox of makang one ust a partcnat hand of produce Soper gacamPanies charge a similar price fora paticlas product, say dn emtep lent The com we highest productivity and therefore the loseest costs san te sdvaatage, Toyota, for exanyle, the most productive eatmeher aha None oft competiors can match slow cost 0 thi pives ita canspeniey Company Wal-Mart Stores op Exxon Mobil Royal Dutch/Shell Group General Motors DaimlerChrysler ‘Toyota Motor Ford Motor General Electrie Total Chevron ConocoPhillips AXA Volkswagen up Nippon Telegraph & Telephone American Intl, Group ss Machines Carrefour Hitachi Assicurazioni Generali Matsushita Electric Industrial McKesson Honda Motor Hewlett-Packard Nissan Motor Fortis Sinopec Berkshire Hathaway ENI Home Depot Aviva HSBC Holdings Deutsche Telekom Verizon Communications Samsung Electronics ‘State Grid? Peugeot Metro Nestlé US. Postal Service BNP Paribas China National Petroleum Sony Cardinal Health Royal Ahold Alia Group Revenues {S millions) 287,989.0 1285,059.0 270,720 268,690.0 193,5170 176,6875 72.6163 172,.233.0 152,860 152,609.5, 47,9670 121,663.0 121,606.3 118.9372 105,886.4 100,545.3 97,9870 96,.203.0 91,493. 90,381,7 83,0939 83,2076 81,0777 0,514.6 80,1866 79,905.0 79,799.6 5518.1 75,076.7 74,382.0 142077 73,094.0 73,025.2 72,550.0 71,988.9 71,563.3, 71,5559 71,2902 70,641.9 70,1593 69,825.7 6,996.0 68,654.4 67,7238 66,618.0 65,1306 64,675.6 64,4400 Profts (S millions) 0.2070 15,3710 25,3300 18,183.0 2,805.0 0071 10,8082 14870 16,819.0 7A228 6,608.0 9,731.0 8,430.0 AMG Wr 479.2 1,635.1 544.1 156.7 4,523.9 3,4970 4,766.6 472 1,268.9 7,308.0 9,042.1 5,001.0 1,936.8 11,8400 5,763.6 7,830.7 9,419.5 694.0 1.6878 1,028.6 5405.4 3,065.0 5,805.9 8.7571 1524.5 14745 542.3 9,416.0 (continued) chapter Four ‘Table 4.4 (continued) Top 100 Multinational Companies Revenues: Profits. rank Company {Smillions) —_($ mifllonsy 51 Pemex 63,690.5 2,258.9 52 Bank of America Corp. 63,324.0 14,1430 53 | Vodafone 62,9714 -13,910.4 a | Tesco 62,458.7 25113 55 Munich Re Group 60,7055 22798 56 Nippon Life Insurance 60,5208 1,886.3 57 Fiat 59,972.9 1,972.6 5B Royal Bank of Scotland 59,7500 8,267.4 59 Zurich Financial Services 59,678.0 25870 | Grete Agate 59,0538 4,936.5 edit Suisse 2 2 Site fam lsuance Cos api soone 63 France Télécom fast sane G4 Blectricité De France sneer 3,462.6 65 | LP. Morgan Chase & Co. pa 1,629 so | ‘Uns 6,931.0 4466.0 67 | Kroger | sear8 6,509.5 68 Deutsche Rank podeee ~100.0 69 | EON 55,6605 3076 70 Deutsche Post poeeet 5,396.7 a | BMW 55,3884 tov 2 Toshiba S522, 263.6 3 Valero Energy $4,303.5 | 42 1, AmerisoureeRery suse | aoa 75 | Phzee gen | 5879.0 ae 76 | Boeing 52,9210 weg 77 | Procter & Gamble 52/5530 ee % RWE 51,4070 ee 79 | Suez 50,951.9 Baalo 80 Renault 5 50,6701 aoe 81) Unilever 50,630.7 oa 82 Target 49,960.7 eee 83 | Robert Bosch | 49.9340 on58 84 | Dell | 49,759.2 ee 85 | ThyssenKrupp 49,205.0 A 86 | Costco Wholesale i dezsar | 49438 nos sauna | yee z Johnson & Johnson 47,755.72 | 5, or | 82 | Prudential _a73a8o | aon 80 Tolyo Electric Power | $7055. ce A BASF ; egen7 | outs at Motor 6 b 33 3 | mM i {e866 | Bat. | 9$ | Marathon Oit | 45,5304 i& 85 | Statoil | as4aso tan ao i] cNEC | 45,4400 Pay | Rept vor | ass | ears ch : : 2) ‘Mutual Life Insurance | wee 24253 00 | Time Warner | 4s3160 10 : 7 | 42,8690 ease ~ 4 3,364.0 Soure:"Te obs soo $00" Forte, hy 25, 2005, ee Ee ee a Muftinationals and the Global Environment of Business 12 | Superice |) Responsiveness) (5 fo Customers = forte ey cages nt Reena advantage that leads to superior profitability. To increase productivity companies need to find Inver cost resources, and they must find new ways to perform global business activites at a lower cost Quality is a function of how well a product performs when itis put to use and is measured by sich things as durability and rekabilay (how well the product works and how often i breaks dawn), and customer satisfaction ‘the consumer's perception of product's value, given its price). Multinationals that can make higher-quality products Felative to the average cost of producing them are effective because these products ‘Command higher prices and lead to higher profit margins. Also, over time higher Gquakty products atract more customers. This happened to Toyota after it entered the UNS. car market in the 1960s. Toyota bewan by selling a small, ugly, entry-level ear at alow price. But as the quality ofthe cat became apparent, demand fur it soared. Toy- fla used it growing profits fo continually improve its car design and quality, and its Sales have continued to climb, Today, as Table 4.1 shows, its sales revenues are not much less dian GM and Ford's, but ts profitability is much higher Tanovation, as you have leamed, is a function of a company’s ability to develop new and improved products that better satisy customers’ needs. This also increases a Sim's tffectivencss because when a product better meets the needs of customers, the demand for it increases. For example, Toyota, has consistently used its growing profits to create new kinds of vehicles to appeal to existing and new groups of customers. In the last decade it has introduced over 20 different kinds of vehicles in the SUV, family sedan, economy, and sports segments of the market. The automaker's new Matrix hatchback and Scion hybrid models designed to appeal to students and young people, for example, fave Become extemely popu This was «market igen previously overlooked by other automakers. Innovation also involves finding ways (o make products faster or at a lower cost. This leads to higher productivity and efficieney. Toyota also constant searches for ways to improve the quality and reduce the cost of making its ears~which is ‘why itlocates is manufacturing plants in many different countries around the world venta ‘A companys responsivenee tomers is a function of its ability to better customers Ameature anticipate the changing needs of customers, resolve any problems they have with a Sfacomanfewys prod aml prove fas akersles srrice, The grew a company's ably To ce ere ge ‘pond ts comer’ need, the higher nit eflectvenes This neat the oy cusloras mess estve ity of existing customers and attracts nev customers. Once again, Toyota is ver rere, yest aets eon gh ts Genes Tnetatersnessendee sedan in the market, Toyota has continued to improve its performance and reliability Likewise, Subaru has excelled in the customer satisfaction area for many y¢ ‘customer satisfaction levels rival those of Mercedes-Benz. pireartelis GLOBAL E-COMMERCE AND ELECTRONIC MARICETS Today, most mult nationals are finding ways to increase their efficiency and effectiveness by integrating eee Eteerroni nie marcets tat ink snap tocoresnes rranvactue posits swore Eecrons rytens at compen compare Pat trate nod podace Sete a! Business in Action cheprer Fut rc int ther lol busines li el Tak pple lo example, supplies of at pats or lesen Cuetemer (2c) tear ink selling” companies, for example ee cae an os ee rae eextmen for thee products, By making product inf cso the ert Bs alo expanded the sizeof he gle ers. Companies ike Amazon.com, ellay, Lan Enid and ETade moved ui take advantage ofthe Internet to do just this, as describe in Busines in ACES Additionally, by wsing the Internet, many companies ha ctobypaes ermediaies lke wholesalers or brokers and deal directly with companies ava ‘Asnoted enc, when buyer a soles deal dectly wilt cach other tye BR and sell products ata lower price. Moreover, buyers who are able to choose from among a lage number ofslobal suppliers ate also able to use their bargaining power to negotiate price ciseounts, =-Commerce and Customer Responsiveness {oceom companies like Amazon.com and eBay were quick to wal ofthe Internet ase new way to reach customers and ereste a fompetitve advantage, These companies quickly built their vial saree et Sen ier the procs to US easomes firs. Amazon com, fr examole tothe choredged lear in terms of designing an online storeron that ellen cee e ng, Ptwonaled shopping experience. The company's ably to coer Publication as low price wiped ent thoussads oferty phat the United States. Siu, eay's aby to eeatea plage wer fres eg Slt ound te lobe could exchange satay any Hoa eee tat (even botled ait) revoluuonized the $300 billion ayear mcuor ge eS United States it seemed natural to dotcom managers Pecan thei US. storefronts cy could do it quite inexpens Shady lltey would have todo is tweak thee ste by making ee specie adjustments Yialing © hw oa staked com i attclaly aggresive with its expansion plans In 1996 me ceste an caine boksct inthe United Kingdon anda oba oe German market Since then. ithas ented counties ich ssJopam, fees ea Aosta Sina, Ertae, ete ease and tanking company, entered the Japancae ee ket and expanded into Europe ‘ Hut developing « successful global business model was much more dificult and expensive egy the dotcomu anticipated. As Amaroncom daca, cred in the United States, having a successful ef i inal store is only one of inany pieces of the purge. ‘The need to create a suphisicited global purchas: is and distribution network t yet the prodat to Customer was also vital-and very expensive funteed, the enormous investment needled to ents lish its overseas operations drained Avon thatthe need eerie ey ea ond 125 Munkey to " aon COUNTY was much more time consuming and costly than it The dot.coms thar Performed the best on a Togue:based sellers ike Lands’ End and Avon. raablshea atts sles and distributes networks and {10 Profit from them whe they took their catalogue line. Other e prod cettt Online. Other competes that also performed well were those whose products did scr Fequirea hight ina physical businese infrastructure. eBay, for example, merely pr "onic platform that links buyers and sellers around yee world. All the n shipping products Sloballys borne by the buyers and sellers." SLOBAL ETHICS Euicg hapter. It is impor [Nt to note here, however, that mae Bslobal business decisions have ethical saa Tegal SGneequences. People in countnes dey pughout th. ate affected by multinationals whose headquatters are most coon fest and most prosperous and ant it Say that mukinationale hug hte and deal with overseas companies, THe Meat Fesources such as land and lake in different countries cannot be ignored Their business practices ean benef harm millions of people and whole natisns As we have discusted, US. companian she sin lower-cost raw material FB phed products by buying or mahine then Countries where labor costs are low Law labor costs often mean, however sh people abroad,

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