Ch. 6 Outline

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Ch. 6 Outline

1. The Global Environment
2. Consequences of a Global Economy
3. Global Strategy
4. Entry Mode
5. Managing Across Borders

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The Global Environment
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The Global Environment

• Europe is integrating economically to form the
  biggest market in the world
• The Euro was adopted as a common currency in 2001
• The EU has 25 members with a population of more
  than 450 million and a gross domestic product
  equivalent to the US
• The pace of European unification accelerated in
  2004 with the addition of countries like Poland
  and Hungary

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The Global Environment

• Japan dominated world attention toward the end of
  the last century today China the rising economic
  power to watch
• China is on its way to becoming the largest
  producer and consumer
• China is the worlds largest consumer of basic
  resources like steel and cement
• China has averaged an economic growth rate of 8
  since 1980
• If current rate of expansion continues China will
  be the worlds largest economy in in the next 10
  years

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The Global Environment

• The North American Free Trade Agreement (NAFTA)
  combined the economies of the US, Canada, and
  Mexico into the worlds largest trading bloc with
  more than 390 million consumers and a total
  output of 10 trillion
• Efforts are under way to go beyond NAFTA and
  create a Free Trade Area of the Americas (FTAA)
  which would go from Canada to Chile

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Consequences of a Global Economy

• During the last decade the volume of world trade
  has grown at a faster rate than has the volume of
  world output
• Foreign direct investment (FDI) is playing an
  ever-increasing role in the global economy as
  companies of all sizes invest overseas
• Imports are penetrating deeper into the worlds
  largest economies
• The growth of world trade, FDI, and imports
  implies that companies around the globe are
  finding their home markets under attack from
  foreign competitors

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Consequences of a Global Economy

• During the last decade the volume of world trade
  has grown at a faster rate than has the volume of
  world output
• Foreign direct investment (FDI) is playing an
  ever-increasing role in the global economy as
  companies of all sizes invest overseas
• Imports are penetrating deeper into the worlds
  largest economies
• The growth of world trade, FDI, and imports
  implies that companies around the globe are
  finding their home markets under attack from
  foreign competitors

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Consequences of a Global Economy

• Opportunities are greater
• The environment is more complex
• The environment is more competitive
• Companies view the world as a single marketplace

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The Role of Outsourcing

• Outsourcing occurs when an organization contracts
  with an outside provider to produce one or more
  of an organizations products or services
• Off-shoring occurs when the outside provider is
  located abroad

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The Role of Outsourcing

• Decline in US manufacturing employment is evident
  almost 3 million jobs lost from 200 to 2003
• One study estimates that by 2015 more than 3
  million US jobs will be sent abroad

Should we outsource if the cost is US jobs?
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The Truth of Outsourcing

• There is considerable evidence to suggest that
  the cause of job decline is not off-shoring but
  innovation
• New technology and processes require fewer
  workers to produce the same quantity of goods
• The steel industry has lost 70 of its workers
  since 1970 while domestic steel production has
  not declined
• Statistics overlook the fact that job transfers
  related to off-shoring is a small fraction of the
  135 million jobs in the US

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The Truth of Outsourcing

• The controversy to off-shoring overlooks the
  extent to which jobs are often in-sourced or
  brought to the US by foreign companies
• One study estimated that in-sourcing employees
  about 5.4 million workers
• Job movements are one inevitable result of the
  effects of globalization
• One problem that outsourcing causes is wage
  stagnation in industries where outsourcing and
  off-shoring is common

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Making a Decision to Outsource

• What is the competitive advantage of the products
  they offer?
• Is the business in its early stages?
• Can production savings be achieved locally?
• Can the entire supply chain be improved?

Distribution of tulips from the Netherlands can
be managed by tiny Springhill Greenhouses in
Lodi, Ohio.
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Global Strategy

• Reasons that managers may need or want a common
  global strategy
• Universal needs
• Pressures to reduce costs
• Competitors have a global strategy

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Pressures for Local Responsiveness

• There are strong pressures for local
  responsiveness when
• Consumer tastes and preferences differ
  significantly among countries
• There are differences in traditional practices
  among countries
• There are differences in distribution channels
  and sales practices
• There are economic and political demands imposed
  by host countries

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Pressures for Local Responsiveness

• When you travel, remember that a foreign country
  is not designed to make you comfortable. It is
  designed to make its own people comfortable.
• - Clifton Fadiman

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Choosing a Global Strategy

• International Model is an organizational model
  that is composed of a companys overseas
  subsidiaries and characterized by greater control
  by the parent company over the research function
  and local product and marketing strategies
• Multinational Model is an organizational model
  that consists of the subsidiaries in each country
  in which a company does business, with ultimate
  control exercised by the parent company

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Choosing a Global Strategy

• Global Model is an organizational model
  consisting of a companys overseas subsidiaries
  and characterized by centralized decision making
  and tight control by the parent company over most
  aspects of worldwide operations typically
  adopted by organization that base their global
  competitive strategy on low-cost
• Transnational Model is an organizational model
  characterized by centralization of certain
  functions in locations that best achieve cost
  economies and basin other functions in the
  companys national subsidiaries to facilitate
  greater local responsiveness and fostering of
  communication among subsidiaries to permit
  transfer of technological expertise and skills.

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Entry Mode

• When considering to begin operations in a foreign
  country management has five entry modes to
  consider
• Exporting
• Licensing
• Franchising
• Joint Venture
• Wholly owned subsidiary