Gregory G. Dess
G. T. Lumpkin
Marilyn L. Taylor
The Global Economy: A Grief Overview
•
Opportunities and risks when firms
diversify abroad
•
Trade across nations will exceed trade
within nations
•
Rise of market capitalism around the
world
•
Transfer of money from rich to poor
countries
n Equity
n Bond
investments
n Commercial
loans
•
Opportunities and risks when firms
diversify abroad
•
Economies of East Asia have grown
rapidly, but little progress in the rest of the world
•
Poor education levels in many countries
•
Failure to manage broader economic
factors in some countries
n Interest
rates
n Inflation
n Unemployment
Factors Affecting a Nation’s Competitiveness
•
Factor conditions
•
Nation’s position in factors of
production
n Skilled
labor
n infrastructure
•
Demand conditions
•
Nature of home-market demand
n Industry’s
product
n Industry’s
service
•
Related and supporting industries
•
Presence or absence in the nation of
internationally competitive
n Supplier
industries
n Other
related industries
•
Firm strategy, structure, and rivalry
•
Conditions in the nation governing
how companies are
n Created
n Organized
n Managed
•
Nature of domestic rivalry
Factor Conditions
•
To achieve competitive advantage,
factors of production must be created
•
Industry specific
•
Firm specific
•
Pool of resources at a firm’s or
country’s disposal is less important than the speed and efficiency with which
the resources are deployed
Demand Conditions
•
Demands that consumers place on an
industry for goods and services
•
Demanding consumers push firms to move
ahead of companies from other nations
•
Demanding consumers drive firms in a
country to
n Meet
high standards
n Upgrade
existing products and services
n Create
innovative products and services
Related and Supporting Industries
•
Related and supporting industries
•
Enable firms to manage inputs more
effectively
n Strong
supplier base adds efficiency to downstream activities
n Competitive
supplier base lets a firm obtain inputs using cost-effective, timely methods
•
Allow joint efforts among firms
•
Create the probability that new entrants
will enter the market
Firm Strategy, Structure and Rivalry
•
Rivalry is intense in nations with
conditions of
•
Strong consumer demand
•
Strong supplier bases
•
High new entrant potential from related
industries
•
Competitive rivalry increases the
efficiency with which firms develop, market, and distribute products and
services within the home country
•
Competitive rivalry increases the
efficiency with which firms
•
Develop within the home country
•
Market within the home country
•
Distribute products and services within
the home country
•
Domestic rivalry provides a strong
impetus for firms to
•
Innovate
•
Find new sources of competitive
advantage
•
Domestic rivalry forces firms to look
beyond national borders for new markets
Population of Selected Nations
Country July
2002 (estimated)
China 1,284,303,000
India 1045,845,000
United States 280,562,000
Japan 126,974,000
Germany 83,251,000
Potential Risks of International Expansion
•
Currency risks
•
Currency exchange fluctuations
•
Appreciation of the U.S. dollar
•
Management risks
•
Culture
•
Customs
•
Language
•
Income levels
•
Customer preferences
•
Distribution system
Two Opposing Pressures: Reducing Costs and Adapting
to Local Markets
•
Strategies that favor global products
and brands
•
Should standardize all of a firm’s
products for all of their worldwide markets
•
Should reduce a firm’s overall costs by
spreading investments over a larger market
Two Opposing Pressures: Reducing Costs and Adapting
to Local Markets
•
Strategies that favor global products
and brands
•
Are based on three assumptions
•
Customer needs and interests worldwide
are becoming more homogeneous
•
People (worldwide) prefer lower prices
at high quality
•
Economies of scale in production and
marketing can be achieved through supplying global markets
Two Opposing Pressures: Reducing Costs and Adapting
to Local Markets
•
But those three assumptions may not
always be true
•
Product markets vary widely between
nations (customer needs and interests?)
•
In many product and service markets
there appears to be a growing interest in multiple product features, quality
and service (preference for low price?)
•
Technology permits flexible production,
cost of production may not be critical to product cost, and firm’s strategy
should not be product-driven
International Strategy
•
Pressure for both local adaptation and
low costs are rather low
•
Different activities in the value chain
have different optimal locations
•
Susceptible to higher levels of currency
and political risks
Global Strategy
•
Competitive strategy is centralized and
controlled largely by corporate office
•
Emphasizes economies of scale
•
Advantages
•
Larger production plants
•
Efficient logistics and distribution
networks
•
Supports high levels of investment in
R&D
•
Standard level of quality throughout the
world
•
Competitive strategy is centralized and
controlled largely by corporate office
•
Emphasizes economies of scale
•
Disadvantages
•
Concentration on scale-sensitive resources
and activities in one or few locations leads to higher transportation and
tariff costs
•
Activity is isolated from targeted
markets
•
The rest of the firm becomes dependent
on that geographically isolated location
Multidomestic Strategy
•
Emphasis is differentiating products and
services to adapt to local markets
•
Authority is more decentralized
•
Risks include
•
Increased cost structure
•
Potential problems with local
adaptations
•
Finding optimal degree of local
adaptation is difficult
Transnational Strategy
•
Optimization of tradeoffs associated
with efficiency, local adaptation, and learning
•
Firm’s assets and capabilities are
dispersed according to the most beneficial location for a specific activity
•
Avoids the tendency to either
•
Concentrate activities in a central
location
•
Disperse them across many locations to
enhance adaptation
•
Unique risks and challenges
•
Choice of an “optimal” location cannot
guarantee that the quality and cost of factor inputs will be optimal
•
Knowledge transfer can be a key source
of competitive advantage, but it does not take place automatically
Exporting
•
Relatively inexpensive way to enter foreign
market
•
Minimal risk
•
Successful distributors
•
Carry product lines that complement the
multinational’s products
•
Behave as if they are business partners
with the multinationals.
•
Invest in training, information systems,
and advertising and promotion
Licensing and Franchising
•
Franchisor receives a royalty or fee
•
Franchisee gets to use trademark,
patent, trade secret or other valuable intellectual property
•
Disadvantages
•
Loss of control over its product
•
Licensee may become a competitor
•
Threat to brand name and reputation of
products
•
Advantages
•
Limited risk exposure
•
Expanded revenue base
Strategic Alliances and Joint Ventures
•
Partnerships that enable firms to share
risks and potential revenues and profits
•
Partners
•
gain exposure to new knowledge and
technologies
•
Develop core competencies that can lead
to competitive advantages
•
Gain information on local markets
conditions
•
Partnerships that enable firms to share
risks and potential revenues and profits
•
Risks
•
Needs to be clearly defined strategy
supported by both partners
•
Needs to be clear understanding of
capabilities and resources that will be central to the partnership
•
Must be trust between partners
Wholly Owned Subsidiaries
•
Business owned by only one multinational
company
•
Acquire an existing company in the home
country
•
Develop a totally new operation
(greenfield venture)
•
Most expensive and risky of all global
entry strategies
•
Greatest control over all activities
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