STRATEGIC

MANAGEMENT
II

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GLOBAL
BUSINESS
ENVIRONMENT

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CONCEPT

Globalization refers to the strategy of

approaching
worldwide
markets
with
standardized products.

Worldwide markets are created by end

consumers
that
prefer
lower-priced,
standardized products over higher priced,
customized products etc.

Global corporations that use their worldwide

operations to compete in local markets.

Global firms headquartered in one country with

subsidiaries in other countries.
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Any company that aspires to industry leadership in the

21st century must think in terms of global, not domestic,
market leadership

The world economy is globalizing at an accelerating

pace as countries previously closed to foreign companies
open up their markets.

As the internet shrinks the importance of geographic

distance, and as ambitious, growth minded companies
race to build stronger competitive positions in the
markets of more and more countries.

Companies in industries that are already globally

competitive are under the gun to come up with a strategy
for competing successfully in foreign markets.
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GLOBAL CORPORATIONS
1.

Coca-Cola (Beverage)

2.

Zara (Apparel)

3.

Microsoft (Software)

4.

Apple (Smartphone)

5.

IBM (Personal Computers)

6.

Toyota (Automobiles)

7.

McDonald (Fast Food Restaurant)

8.

Starbucks (Coffee Chain)

9.

Nestle (FMCG)

10.

FedEx (Courier Service)

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WHY FIRMS GLOBALIZE

Additional Resources

Various
inputsincluding
natural
resources,technologies,skilled personnel, and materialsmay be obtained more readily outside the home
country.

Lowered Costs

Various costs-including labor, materials, transportation,

and financing-may be lower outside the home country.

Incentives

Various incentives may be available from the host

government or the home government to encourage
foreign investment in specific locations.
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New Expanded Markets

New and different markets may be available outside

the home country; excess resources-including
management, skills, machinery, and money-can be
utilized in foreign locations.

Exploitation of Firm-Specific Advantages

Technologies, brands, and recognized names can all

provide opportunities in foreign locations.

Taxes

Differing corporate tax rates and tax systems in

different locations provide opportunities for
companies to maximize their after tax worldwide
profits.
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Economies of Scale

National markets may be too small to support efficient production,

while sales from several combined allow for larger scale
production.

Synergy

Operations in more than one national environment provide

opportunities to combine benefits from one location with another,
which is impossible without both of them.

Power and Prestige

The image of being international may increase a companys power

and prestige and improve its domestic sales and relations with
various stakeholders group.

Protect Home Market Through Offense in Competitors Home

A strong offense in a competitors market can put pressure on the

competitor that results in a pull-back from foreign activities to
protect itself at home.
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Trade Barriers

Tariffs, quotas, buy-local policies, and other

restrictive trade practices can make exports to
foreign markets less attractive; local
operations in foreign locations thus become
attractive.

International Customers

If a companys customer base becomes

international, and the company wants to
continue to serve it, then local operations in
foreign locations may be necessary.
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International Competition

If a companys competitors become international,

and the company wants to remain competitive,
foreign operations may be necessary.

Regulations

Regulations and restrictions imposed by the home

government may increase the cost of operating at
home; it may possible to avoid these costs by
establishing foreign operations.

Chance

Chance occurrence results in a company deciding to

enter foreign locations.
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To Capitalize on its Core Competencies

A company may be able to leverage its competencies

and capabilities into a position of competitive
advantage in foreign markets as well as just domestic
markets.

To Spread its Business Risk Across A Wider Market

Base

A company spreads business risk by operating in a

number of different foreign countries rather than
depending entirely on operations in its domestic
markets.

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STRATEGIC ORIENTATION
OF GLOBAL FIRMS

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12

Multinational Corporations

Typically display one of four orientations towards their

overseas activities.

They have certain set of

beliefs about how the
management of foreign operations should be handled.

Ethnocentric Orientation

Believes that the values and priorities of the parent

organization should guide the strategic decision making
of all its operations.

Polycentric Orientation

The culture of the country in which the strategy is to be

implemented is allowed to dominate the decision making
process.
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Regiocentric Orientation

Exists when the parent attempts to blend its

own predispositions/preferences with those of
the region under consideration, thereby
arriving at a region sensitive compromise.

Geocentric Orientation

Adopts a global systems approach to

strategic
decision
making,
thereby
emphasizing global integration.

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ANALYSIS OF GLOBAL
BUSINESS ENVIRONMENT

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External and Internal

Assessments are conducted before a firm enters

global markets.

External assessment involves careful examination of

critical features of the global environment.

Firm should concern the host nations in such areas as

economic progress, political
control, and
nationalism.

Other major areas of concern are industrial facilities,

favorable balances of payments, and improvement of
technological capabilities over the past decade along
with host nations economic progress.
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Internal Assessment
Involves

identification of the basic strengths of a

firms operations.

Strengths

are more important in global operations

because the these characteristics are given host nation
values most and host nation can offer significant
bargaining leverage.

The

internal assessment of a global firm is concerned

with technical and managerial skills, capital, labor,
and raw materials.

The

global capabilities that should be analyzed

include the firms product delivery and financial
management systems.
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ENVIRONMENTAL CONSIDERATIONS
Economic Factors

Size of GNP and projected rate of growth

Foreign exchange position

Size of markets for the firms products: rate of

growth

Political Factors

Form and stability of the government

Attitude toward private and foreign investment

by government, customers, and competition

Degree of antiforeign discrimination

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Geographic Factors

Proximity of site to export market

Availability of local raw materials

Availability of power, water and gas.

Labor Factors

Availability of managerial, technical, and

office personnel able to speak the language of
the parent company.

Degree of skill and discipline at all levels

Degree and nature

management.

of labor
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19

in

Tax Factors

Tax rate trends

Joint tax treaties with home country and others

Availability of tariff protection

Capital Sources Factors

Cost of local borrowing

Modern banking system

Government credit aids to new businesses

Business Factors

State of marketing and distribution system

Normal profit margins in the firms industry

Competitive situation in the firms industry: do cartels

exists?
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COMPLEXITY OF THE GLOBAL

BUSINESS ENVIRONMENT

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Global
firms
face
multiple
political,economic,legal,social and cultural
environments as well as various changes.
. Sometimes foreign governments work in
performance with their militaries to
advance economic aims even at the
expense of human rights.
. International
firms must resist the
excitement to benefit financially from such
immoral opportunities.
1.

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2.

Interactions between the national and foreign

environments are complex, because of national
sovereignty issues and widely differing economic and
social conditions.

3.

Geographical separation, cultural and national

differences, and variation in business practices all tend
to make communication and control efforts between
headquarters and the overseas affiliates difficult.

4.

Global firms face extreme competition, because of

differences in industry structures within countries.

5.

Global firms are restricted in their selection of

competitive strategies by various regional blocks and
economic
integrations
such
as
NAFTA,SAFTA,SAARC,ASIAN and EU etc.
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INTL VS GLOBAL COMPETITION

International
Competitor

Company operates
in a selected few
foreign countries,
with modest
ambitions to
expand further

Global Competitor
Company

markets
products in 50 to 100
countries and
is expanding operations
into additional country
markets annually
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MULTICOUNTRY VS GLOBAL
COMPETITION

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Multicountry Competition

Multicountry competition exists when competition in

one national market is not closely connected to
competition in another national market-there is no
global or world market, just a collection of selfcontained country markets.

Features

Buyers in different countries are attached to different

product attributes.

Sellers vary from country to country

Industry conditions and competitive forces in each

national market differ in important respects.
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Rivals firms battle for national championships and winning in

one country does not necessarily signal the ability to farewell
in other countries (SCBL vs. Nabil).

The power of companys strategy and resource capabilities in

one country may not enhance its competitiveness to the same
degree in the other countries where it operates (KFC in
Nepal).

Any competitive advantage a company secures in one

country may not guarantee that such competencies are
minimal or nonexistent in another country (MTV viewers in
Nepal).

For example TV broadcasting, consumer banking, life

insurance,apparel,metals fabrication, many types of food
products like (coffee,cereals,breads,canned goods, frozen
foods) and retailing etc.
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Global Competition

Global competition exists when competitive

conditions across national markets are linked
strongly enough to form a true international market
and when leading competitors compete head to head
in many different countries.

Same group of rivals companies competes in many

different countries, but especially so in countries
where sales volumes are large and where having a
competitive presence is strategically important to
building a strong global position in the industry.

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A companys competitive position in one

country both affects and is affected by its
position in other countries.

A firms overall competitive advantage grows

out of its entire worldwide operations.

Rival firms in globally competitive industries

fight for worldwide leadership.

Global competition exists in motor vehicles,

television sets, tires, mobile phones, personal
computers, copiers, watches, digital cameras,
bicycles, and commercial aircraft.
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LOCALIZED MULTICOUNTRY
OR A GLOBAL STRATEGY

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The issue of whether to vary the

companys competitive approach to fit
specific market conditions and buyer
preferences in each host country or
whether to employ essentially the same
strategy in all countries is perhaps the
foremost strategic issue that companies
must address when they operate in two
or more foreign markets.
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THINK LOCAL ACT LOCAL

APPROACHES TO STRATEGY
MAKING

This approach to strategy making a company

tailors its product offerings and perhaps its basic
competitive strategy to fit buyer tastes and market
conditions in each country where it opts to
compete.

The strength of employing a set of localized or

multicountry strategies is that the companys
actions and business approaches are deliberately
crafted to accommodate the differing tastes and
expectations of buyers in each country and to
stake out the most attractive market positions viavia local competitors.
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This approach means giving local managers

considerable strategy making latitude.

Moreover having plants produce different

product versions for different local markets,
and adapting marketing and distributions to
local customs and cultures.

The bigger the country to country variations,

the more that a companys overall strategy is
a collection of its localized country strategies
rather than a common or global strategy.

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WHEN THIS STRATEGY

WILL BE SUITABLE?

Significant country to country differences in

customer preferences and buying habits.

Significant cross-country differences in distribution

channels and marketing methods.

Stringent regulations requiring that products sold

locally meet strict manufacturing specifications or
performance standards.

Trade restrictions of host governments are so diverse

and complicated that they preclude a uniform,
coordinated world wide market approach.
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LIMITATIONS
1.

They hinder transfer of a companys competencies and

resources across country boundaries (since the strategies in
different host countries can be grounded in varying
competencies and capabilities)

2.

They do not promote building a single, unified competitive

advantage-especially one based on low cost.

3.

Companies employing highly localized or multicountry

strategies face big hurdles in achieving low-cost leadership
unless they find ways to customize their products and still be
in
position
to
capture
scale
economies
and
experience/learning curve effects.
For example like Dell Computers and Toyota, because they
have mass customization production capabilities, can cost
effectively adapt their product offerings to local buyer tastes.
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THINK GLOBAL, ACT GLOBAL

APPROACHES TO STRATEGY
MAKING

Global strategies are best suited for globally

competitive industries.

A global strategy is one in which the companys

approach is predominantly the same in all
countries

It sells the same products under the same brand

names everywhere, uses much the same
distribution channels in all countries, and
competes on the basis of the same capabilities
and marketing approaches worldwide.
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Although the companys strategy or product offering may be

adapted in very minor ways to accommodate specific
situations in a few host countries, the companys fundamental
competitive approach (low-cost,differentiation,best-cost,or
focused) remains very much intact worldwide, and local
managers stick close to the global strategy.

This strategic theme prompts company managers to integrate

and coordinate the companys strategic moves worldwide and
to expand into most if not all nations where there is
significant buyer demand.

It puts considerable strategic emphasis on building a global

brand name and aggressively pursuing opportunities to
transfer ideas, new products, and capabilities from one
country to another.

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DIFFERENCE BETWEEN LOCALIZED

MULTICOUNTRY AND GLOBAL STRATEGY

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THINK GLOBAL, ACT

LOCAL APPROACHES TO
STRATEGY MAKING

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In this strategy a company can accommodate cross country

variations in buyer tastes, local customs, and market
conditions.

This strategy uses the same basic theme such as low cost,
differentiation, best-cost, or focused

This provides the local managers full latitude to

1.

Incorporate whatever country specific variations in products

attributes are needed to best satisfy local buyers

2.

Make whatever adjustments in production, distribution, and

marketing are needed to be responsive to local market
conditions and compete successfully against local rivals.

3.

Slightly different product versions sold under the same brand

name may suffice to satisfy local tastes.
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Foreign Market
Analysis

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CROSS COUNTRY DIFFERENCES IN

CULTURAL, DEMOGRAPHIC AND MARKET
CONDITIONS

When any firm wants to enter into the foreign market, the
strategies uses by these firms to compete in foreign markets
must be situation driven.

Cultural, demographic and market conditions

significantly among the countries of the world.

Cultures and lifestyles are the most obvious areas in which

countries differ; market demographics and income levels are
close behind.

For example consumers in Spain do not have the same tastes,

preferences, and buying habits as consumers in Norway;
buyers differ yet again in Greece, Chile, New Zealand and
Taiwan etc.
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vary

Sometimes product designs suitable in one

country are inappropriate in another.

For example in the USA electrical devices can

run on 110 volt systems but in some EU the
standard is a 240 volt system.

Market growth varies from country to

country.

For example in emerging markets like BRICS

countries market growth potential is far
higher than in the more mature economies of
developed nations such as UK,Canada or
Japan etc.
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One of the biggest concerns of companies

competing in foreign markets is whether to
customize their offerings in each different
country market to match the tastes and
preferences of local buyers or whether to offer
a mostly standardized product worldwide.

The tension between the market pressures to

localize a companys product offerings
country by country and the competitive
pressures to lower costs is one of the big
strategic issues that participants in foreign
markets have to resolve.
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GAINING COMPETITIVE ADVANTAGE

BASED ON WHERE ACTIVITIES ARE
LOCATED

Differences in wage rates, worker productivity, inflation

rates, energy costs, tax rates, government regulations, and
the like create sizable variations in manufacturing costs
from country to country.

Plants in some countries have major manufacturing cost

advantages because of lower input costs(especially labor),
relaxed government regulations, the proximity of
suppliers, or unique natural resources.
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The low cost countries become principal

production sites, with most of the output
being exported to markets in other parts of the
world.

Companies that build production facilities in

low-cost countries have a competitive
advantage over rivals with plants in countries
where costs are higher.

The competitive role of low manufacturing

costs is most evident in low wage countries
like China, India, Pakistan, Cambodia,
Vietnam, Mexico and Brazil etc.
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The quality of a countrys business

environment also offers locational
advantages-the government of some
countries are attracting more FDI by
lowering corporate tax rates (Ireland).
Another locational advantage is the
clustering of suppliers of components
and capital equipment; infrastructure
suppliers such as universities, vocational
training providers, research enterprises,
trade associations etc.

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THE RISK OF ADVERSE

EXCHANGE RATE SHIFTS

The volatility of exchange rates greatly

complicates the issue of geographic cost
advantages.

Currency exchange rates often move up or down

20 to 40 percent annually.

Changes of this magnitude can either totally wipe

out a countrys low cost advantage or transform a
former high cost location into a competitive cost
location.
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Companies with manufacturing facilities in a

particular country are more cost competitive in
exporting goods to world markets when the local
currency is weak (or declines in value relative to
other currencies); their competitiveness erodes when
the local currency grows stronger relative to the
currencies of the countries to which the locally made
goods are being exported.

Fluctuating exchange rates pose significant risks to a

companys competitiveness in foreign markets.

Exporters win when the currency of the country

where goods are being manufactured grows weaker
and they lose when the currency grows stronger.
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Domestic companies under pressure

from lower cost imports are benefited
when their governments currency
weaker in relation to the countries where
the imported goods are being made.

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HOST GOVERNMENT POLICIES

National government enact all kinds of measures affecting

business conditions and the operation of foreign
companies in their markets.

Host governments may set local content requirements on

goods made inside their borders by foreign based
companies, have rules and policies that protect local
companies from foreign competition, put restrictions on
exports to ensure adequate local supplies, regulate the
prices of imported and locally produced goods, enact
deliberately burdensome procedures and requirements for
imported goods to pass customs inspection, and impose
tariffs or quotas on the imports of certain goods.
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Governments may or may not have burdensome tax

structures, stringent environmental regulations, or
strictly enforced labor standards.

Sometimes outsiders face a web of regulations

regarding technical standards, product certification,
prior approval of capital spending projects,
withdrawal of funds from the country, and required
minority ownership of foreign company operations
by local companies or investors.

Some government provide subsidies and low interest

loans, market access and technical assistance etc.

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STRATEGY OPTIONS FOR ENTERING

AND COMPETING IN FOREIGN
MARKETS

There are a host of generic strategic options for a company that

decides to expand outside its domestic and compete internationally or
globally

1.

Maintain a national (one-country) production base and export goods

to foreign markets, using either company-owned or foreigncontrolled forward distribution channels.

2.

License foreign firms to use the companys technology or to produce

and distribute the companys products.

3.

Employ a franchising strategy

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4. Follow a multicountry strategy varying the

companys strategic approach (perhaps a little,
perhaps a lot) from country to country in accordance
with local conditions and differing buyer tastes and
preferences.
5. Follow a global strategy using essentially the same
competitive strategy approach in all country markets
where the company has a presence.
6. Use strategic alliances or joint ventures with foreign
companies as the primary vehicle for entering
foreign markets and perhaps also using them as an
ongoing strategic arrangement aimed at maintaining
or strengthening its competitiveness.
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Strategies for firms that are attempting to move

toward globalization can be categorized by the
degree of complexity of each foreign market being
considered and by the diversity in a companys
product line.

Complexity refers to the number of critical success

factors that are required to prosper in a competitive
arena.

When a firm must consider many such factors, the

requirements of success increase in complexity.

Diversity refers to the breadth of a business firms

business lines.

When a company offers many product lines,

diversity is high.
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Exporting

Using domestic plants as a production base for

exporting goods to foreign markets is an excellent
initial strategy for pursuing international sales.

The amount of capital needed to begin exporting is

often quite minimal

Existing production capacity may well be sufficient

to make goods for export.

A manufacturer involvement in foreign markets by

contracting with foreign wholesalers experienced in
importing to handle the entire distribution and
marketing function in their countries or regions of
the world.
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A manufacturer can establish its own distribution

and sales organizations in some or all of the target
foreign markets.

These strategies are primarily favored by Chinese,

Korean and Italian companies-products are designed
and manufactured at home and then distributed
through local channels in the importing countries.

The primary functions performed abroad relate

chiefly to establishing a network of distributors and
perhaps conducting sales promotion and brand
awareness activities.

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In some industries, firms gain additional scale economies and

experience/learning curve benefits from centralizing
production in one or several giant plants whose output
capability exceeds demand in any one country market.

This strategy will be inappropriate in the following situations

1.

Manufacturing costs in the home country are substantially

higher than in foreign countries where rivals have plants,

2.

The costs of shipping the product to distant foreign markets

are relatively high.

3.

Adverse shifts occur in currency exchange rates.

Unless an exporter can both keep its production and shipping

costs competitive with rivals and successfully hedge against
unfavorable changes in currency exchange rates, its success
will be limited.
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Licensing

If a firm has a valuable technical know-how or a unique

patented product has neither the internal organizational
capability nor the resources to enter foreign markets can use
this strategy.

Advantages

It can avoid the risks of committing resources to country

markets that are unfamiliar, politically volatile, economically
unstable, or otherwise risky.

By licensing the technology or the production rights to

foreign based firms, the firm does not have to bear the costs
and risks of entering foreign markets on its own, yet it is able
to generate income from royalties.
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Disadvantages

The big disadvantages of using this strategy is the risk of

providing valuable technological know how to foreign
companies and thereby losing some degree of control over its
use.

Monitoring licensees and safeguarding the companys

proprietary know how can prove quite difficult in some
circumstances.

The companies to whom the licenses are being granted

should be both trustworthy and reputable so that the
organization can generate maximum level of royalty.

Many software and pharmaceutical companies use this

strategy
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FRANCHISING

A special form of licensing is franchising.

It is suitable for service and retailing enterprises.

It allows a franchisee to sell a highly publicized product or

service using the parents brand name or trademark, carefully
developed procedures, and marketing strategies.

In exchange the franchisee pays a fee to the parent company,

typically based on the volume of sales of the franchiser in its
defined market area.

The franchise is operated by the local investor who must

adhere to the strict policies of the parent.

World most champion of franchising is McDonalds, which has

70 percent of its company-owned stores as franchisees in
foreign markets.
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The franchisee bears most of the costs and risks

of establishing foreign locations.

A franchisor has to expend only the resources to

recruit,train,support,and monitor franchisees.

The big problem a franchisor

maintaining quality control

Foreign franchisees do not always exhibit strong

commitment
to
consistency
and
standarization,especially when the local culture
does not stress the same kinds of quality
concerns.
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is

Another problem that can arise is whether to

allow
foreign
franchisees
to
make
modifications in the franchisors product
offering so as to better satisfy the tastes and
expectations of local buyers.

Should McDonalds allow its franchised units

in Japan to modify Big Macs slightly to suit
Japanese tastes?

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Foreign Branching

A foreign branch is an extension of the company in its foreign

market

It is a separately located strategic business unit directly

responsible for fulfilling the operational duties assigned to it
by corporate management including sales, customer service
and physical distribution.

Host countries may require that the branch be domesticated

i.e. have some local managers in middle and upper level
positions.

The branch most likely will be outside the domestic countries

legal jurisdiction.

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Equity Investment

Small and medium size enterprises with strong growth

potential frequently have the need for additional funds to be
able to grow further before deciding to trade their stock
publicly in the marketplace.

These firms often enlist the support of a venture capital firm

or private equity company that invests its shareholders
money in start ups and other risky but potentially very
profitable small and medium sized enterprises.

In exchange for a private equity stake, which is sometimes a

majority or controlling position, private equity company
provides investment capital and a range of business services,
including management expertise.

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Wholly Owned Subsidiaries

Wholly owned foreign subsidiaries are considered

by companies that are willing and able to make the
highest investment commitment to the foreign
market.

These companies insist on full ownership for reasons

of control and managerial efficiency.

Policy decisions about local product lines,

expansion, profits, and dividends typically remain
with in the headquarter top managers.

Fully owned subsidiaries can be started either from

scratch or by acquiring established firms in the host
country.
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Joint Venture

Joint venture is a popular strategy that occurs

when two or more companies form a temporary
partnership or consortium for the purpose of
capitalizing on some opportunity.

In this strategy two or more sponsoring firms

form a separate organization and have shared
equity ownership in the new equity.

It
allocates
ownership,
operational
responsibilities, and financial risks and rewards to
each member while preserving their separate
identity/autonomy.
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This strategy occur because the companies involved

do not want to or cannot legally merge permanently.

Joint ventures provide a way to temporarily combine

the different strengths of partners to achieve and
outcome of value to all.

Extremely popular in international undertakings

because of financial and political-legal constraints,
forming joint ventures is a convenient way for
corporations to work together without losing their
independence.

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Loss of control, lower profits, probability of

conflicts with partners, and the likely transfer of
technological advantage to the partner.

Joint ventures are often meant to be temporary,

especially by some companies that may view them
as a way to rectify a competitive weakness until they
can achieve long term dominance in the partnership.

Joint ventures tend to be more successful when both

partners have equal ownership in the venture and are
mutually dependent on each other for results.

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Strategic Alliances

A strategic alliance is a long term cooperative

arrangement between two or more independent firms
or business units that engage in business activities
for mutual gain.

Alliances between companies or business units have

become a fact of life in modern business.

Reasons for forming strategic alliances

1.

To obtain or learn new capabilities

2.

To obtain access to specific markets

3.

To reduce financial risk

4.

To reduce political risk

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The End

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