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					Chapter 4 - The Global Environment
• International Business – activities that require the movement of resources, goods, services, and skills across national boundaries – all business transactions that involve two or more countries • International Trade – the export or import of goods or services to consumers in another country • International Investment – investment of resources in business activities outside a firm’s home country • International Management – the performance of the management functions (POLC) across national borders

International Strategy Formulation
• Why Globalize?

– expand sales • when domestic markets are saturated, should go overseas to increase sales and profits – acquire resources • resources may be more readily available and less costly in other countries – diversify sources of sales and supplies • different business cycles between countries • may avoid impact of price swings or shortages – avoid tariffs

The Changing Global Environment
• In the past, managers have viewed the global sector as closed – Each country or market was assumed to be isolated from others – Firms did not consider global competition, exports

• Today’s environment is very different – Managers need to view it as an open market – Organizations buy and sell around the world – Managers need to learn to compete globally

©The McGraw-Hill Companies, Inc., 2000

The Changing Global Environment
• Global organizations – organizations that operate and compete in more than one country – are free to establish foreign subsidiaries to become strong world competitors • Home Country – country in which the parent organization is based • Host Country – country in which the parent organization makes the investment

Barriers to Free Trade
Tariffs Export Restraints Distance

Buy National Campaigns

Free Trade Barriers

Quotas

Economic Communities

Cultural Differences

Local Ownership Requirements

Barriers to International Trade
• Trade Controls - governmental influences usually aimed at reducing the competitiveness of imported products or services – Tariffs: taxes levied on goods shipped internationally – Subsidies: direct payments to domestic producers – Quotas: legal restrictions on the import of goods • Free trade doctrine - predicts that if each country agrees to specialize in the production of goods that it can produce most efficiently, it will – make the best use of global resources – result in lower prices

Distance and Cultural Barriers
• Distance and Cultural barriers also “closed” the global environment – Distance closed the markets as far as some managers were concerned – Communications could be difficult – Languages and cultures were different

• During the last 50 years, communications and transportation technology has dramatically improved – Jet aircraft, fiber optics, satellites have provided fast, secure communications and transportation – These have also reduced cultural differences

Effects of Free Trade on Managers
• Declining barriers have opened great opportunities for managers. – Managers can not only sell goods and services but also buy resources and components globally. • Managers now face a more dynamic and exciting job due to global competition.

©The McGraw-Hill Companies, Inc., 2000

Economic Integration
Free Trade Area: all barriers to trade among member countries are removed, so that goods and services are freely traded among the member countries • NAFTA (North American Free Trade Agreement)

Customs Union: barriers to trade among members are dismantled while a common trade policy with respect to nonmembers is established Common Market: no barriers to trade exists between members and a common external trade policy is in force; also, factors of production, such as labor, capital, and technology move freely between member countries • European Union (EU)

Global Task Environment
Figure 4.2

Suppliers

Competitors

Forces Yielding Opportunities and Threats

Distributor s

Customers
©The McGraw-Hill Companies, Inc., 2000

Suppliers & Distributors
• Managers buy products from global suppliers or make items abroad and supply themselves – Key is to keep quality high and costs low • Global outsourcing: firms buy inputs from throughout the world – GM might build engines in Mexico, transmissions in Korea, and seats in the U.S. – Finished goods become global products • Distributors: each country often has a unique system of distribution – Managers must identify all the issues

Customers & Competitors
• Formerly distinct national markets are merging into a huge global market – True for both consumer and business goods – Creates large opportunities • Still, managers often must customize products to fit the culture – McDonald's sells a local soft drink in Brazil • Global competitors present new threats – Increases competition abroad as well as at home.

Forces in the Global General Environment
Figure 4.3

Political & Legal Systems

Sociocultural System

Forces yielding Opportunities and threats

Economic system

©The McGraw-Hill Companies, Inc., 2000

Political/Legal Environment
• Different legal systems: common law or civil law
– Representative democracies: such as the U.S., Britain, and Canada • Citizens elect leaders who make decision for electorate. • Usually has a number of safeguards such as freedom of expression, a fair court system, regular elections, and limited terms for officials • Well-defined legal system and economic freedom – Totalitarian regimes: a single political party or person monopolize power in a country • Typically do not recognize or permit opposition • Do not have most safeguards found in a democracy • Difficult to do business with given the lack of economic freedom • Human rights issues also cause managers to avoid dealing with these countries

Economic Environment
Economic Systems • Market Economy – production and prices are dictated by supply and demand – production of goods and services is privately owned – competitive markets – strong currencies – institutional support – well-functioning infrastructures – investment opportunities for individuals – social welfare, consumer-directed, administratively guided

Economic Environment
Command Economy – government sets goals and determines the price and quantity of what is produced – most command economies are moving away from the command economic system • Mixed Economy – certain economic sectors controlled by private business, while others are government controlled – many mixed countries are moving toward a free enterprise system

• Key Economic Issues (and indicators) – economic growth, inflation, quality of life, GDP – exchange rates

Recent Trends
• Current shift away from totalitarian dictators toward democratic regimes – very dramatic example seen in the collapse of the former Soviet Republic – also very pronounced in Latin America and Africa • With this shift, has come a strong movement toward free market systems – this provides great opportunities to business managers on a global level – many businesses are investing millions in former totalitarian countries to seize these opportunities

Changing Political and Economic Forces
Figure 4.4

Democratic
Russia 1995 Britain 1985 Britain 1995 Hungary 1995

Political Freedom

Hungary 1985 Russia 1985 China 1985 China 1995

Totalitarian

Command
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Mixed Market Economic Freedom

Sociocultural Forces
• National culture: includes the values, norms, knowledge, beliefs, and other practices that unite a country. • Values: abstract ideas about what a society believes to be good, desirable and beautiful. – Provides attitudes for democracy, truth, appropriate roles for men, and women. – Usually not static but very slow to change. • Norms: social rules prescribing behavior in a given situation. – Folkways: routine social conventions including dress codes and manners. – Mores: norms that are central to functioning of society - much more significant than folkways. • examples of mores include theft, adultery, and are often enacted into law

Hofstede’s Model of National Culture
Individualism Collectivism High Power Distance Nurturing Oriented High Uncertainty Avoidance Long Term Orientation

Low Power Distance
Figure 4.5

Achievement Oriented Low Uncertainty Avoidance Short Term Orientation

©The McGraw-Hill Companies, Inc., 2000

Hofstede’s Modal of National Culture
• Individualism/Collectivism: measured by whether or not the ties between individuals are normally loose or close • Power distance: the extent to which less powerful members of society accept and expect that power will be distributed unequally • Achievement/Nurture: the extent to which societies value assertiveness (“achievement”) or caring (“nurture”) • Uncertainty avoidance: refers to whether people in the society are uncomfortable with unstructured situations in which unknown or surprising incidents may occur • Long-term/Short-term: the extent to which societies have a long-term or short-term outlook on life plans

Individualism v. Collectivism
• Individualism: world view that values individual freedom and self-expression – Usually has a strong belief in personal rights and need to be judged by achievements • Collectivism: world view that values the group over the individual – widespread in Communism – prevalent in Japan as well • Managers must understand how their workers relate to this issue.

Power Distance
• A society’s acceptance of differences in the well being of citizens due to differences in heritage, and physical and intellectual capabilities
– In high power distance societies, the gap between rich and poor gets very wide – In low power distance societies, any gap between rich and poor is reduced by taxation and welfare programs • Most western cultures (U.S., Germany, United Kingdom) have relatively low power distance and high individualism. • Many economically poor countries such as Panama, Malaysia have high power distance and low individualism.

Achievement vs Nurturing
• Achievement oriented societies value assertiveness, performance, and success – the society is results-oriented • Nurturing-oriented societies value quality of life, personal relationships, and service • The U. S. and Japan are achievement-oriented while Sweden, Denmark are more nurturing-oriented.

Uncertainty Avoidance
Societies and people differ on their willingness to take on risk.

• Low uncertainty avoidance cultures (U.S., Hong Kong), value diversity, and tolerate differences – tolerate a wide range of opinions and beliefs • High uncertainty avoidance cultures (Japan and France) are more rigid and do not tolerate people acting differently – high conformity to norms is expected

Long Term Outlook
• Long-term outlook is based on values of saving, and persistence – Taiwan and Hong Kong are cultures that are long -term in outlook.

• Short-term outlook seeks the maintenance of personal stability or happiness right now. – France and the U. S. are examples of this approach.

Hofstede’s Cultural Dimensions
INDIVIDUALISM/ COUNTRY Australia Canada COLLECTIVISM Individual Individual POWER DISTANCE Small Moderate UNCERTAINTY AVOIDANCE Moderate Moderate/Low

England
France Greece Italy Japan Mexico Singapore

Individual
Individual Collective Individual Collective Collective Collective

Small
Large Large Moderate Moderate Large Large

Low
High High High High High Low

Sweden
US Venezuela

Individual
Individual Collective

Small
Small Large

Low
Low High

International Strategy Formulation
How Do Organizations Globalize? Stage One: Passive Response Importing: firm makes products and sells abroad Exporting: to foreign countries Stage Two: Initial (Overt) Entry Hiring foreign representation Contracting with foreign manufacturers Stage Three: Fully-established operations Licensing/Franchising Foreign Direct Investment (FDI) - Joint Ventures - Foreign Subsidiary

International Strategy Formulation
• Exporting: selling abroad, either directly to target customers or indirectly by retaining foreign sales agents and distributors • Importing: selling other countries products in the home country, either directly to target customers or indirectly Adv: quick and relatively inexpensive test the waters and learn about customers Disadv: high transportation costs tariffs and quotas danger of poor intermediary selection

International Strategy Formulation
• Licensing: an arrangement where a firm (licensor) grants a foreign firm the right to use intangible (“intellectual”) property such as patents, copyrights, manufacturing processes, or trade names for a specified period of time, usually in return for a percentage of the earnings, called royalty Adv: Disadv: small or insignificant investment loss of control

International Strategy Formulation
• Franchising: an arrangement where a parent company (franchisor) grants a foreign firm (franchisee) the right to do business in a prescribed manner. Usually involves a longer time commitment by both parties than required under licensing agreements Adv: small or insignificant investment Disadv: loss of quality control

International Strategy Formulation
• Foreign Direct Investment: operations in one country that are controlled by entities in a foreign countries

– acquiring control by owning more than 50 percent of the operation
– turns a firm into a multinational enterprise

Foreign Direct Investment
• Strategic Alliance: – a cooperative agreement between potential or actual competitors – an agreement between firms that is of strategic importance to one or both firms; competitive viability • Joint Venture: – the participation of two or more companies jointly in an enterprise in which each party contributes assets, owns the entity to some degree, and shares risk • Wholly Owned Foreign Subsidiaries – provide for tightest controls by foreign firms – very costly but can yield high returns

International Expansion

Importing Exporting

Licensing Franchising

Joint Ventures Strat. Alliances

Whollyowned For. Subsidiary

Low

Level of Foreign involvement and investment needed by a global organization

High

©The McGraw-Hill Companies, Inc., 2000

The Global Manager

Managerial Attitudes
Ethnocentric Polycentric Geocentric

Home Market Oriented

Individual Foreign Markets

Integrated Worldwide Marketing

International Managerial Attitudes
• Ethnocentric: the belief that the home (originating) country’s management style is superior to the host (recipient) country’s management style
– companies with this type of management may do business in foreign countries but their subsidiaries will be managed by home country personnel with home management style

• Geocentric: (sometimes called regiocentric management) tends to see the whole world as a single marketplace and as such employ a mix of management styles of the home country and host country
– managers and other key personnel are selected based on merit without regard to their country of origin

• Polycentric: the philosophy that the host country’s management style is superior to the home country’s style
– will employ host country managers to run each subsidiary


				
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