UNIT V Global Environment of Business:

Globalization
 G LOBALISATION
Globalization refers to rapid increase in the
share of economic activity taking place across
national borders.
It goes beyond the international trade includes
the way in which goods/ services are
produced /created, delivered &sold &
movement of capital
Globalisation

Globalisation
could involve
all these
things!
 Integration of Economies
The increasing reliance of
economies on each other
The opportunities to be able
to buy and sell in any
country in the world
The opportunities for labour
and capital to locate
anywhere in the world
The growth of global markets
in finance
Stock Markets are now accessible
from anywhere in the world!
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 Integration of Economies
Made possible by:
Technology
Communication networks
Internet access
Growth of economic cooperation trading
blocks (EU, NAFTA, etc.)
Collapse of communism
Movement to free trade
 Global Company
Common ownership
Common pool of resources
Common strategy
Eg.
Nestle
Mercedes, Toyota
Sony
 Why Companies go global
Push and Pull factors

going global story of

cardekho.com under
Eg. Ciba Geigy tata mentorship
 Reasons For Globalization
Firm operate internationally for a number of
reasons:
They may be seeking to secure better sources of raw materials
& energy.
They may want to obtain access to low cost factors of
production such as labour.
They may be attracted to certain countries because of
subsidies those countries provide.
They may be seeking new markets for their products.
Domestic markets may no longer be able to attract production
at minimum efficient scale.
 Contd
They may be motivated by life style
factors.Domestic markets become
saturated As they older , firms look abroad
for new opportunities.
They may be seeking opportunities for
economies of scope & for learning.
STAGES OF GLOBALISATION
Domestic company
International company
(ETHNOCENTRIC)
MNC
(POLYCENTRIC)
Global company
(REGIOCENTRIC)
Transnational company
( GEOCENTRIC)
 DOMESTIC COMPANY
Limits its operations, mission & vision to the national
political boundaries. These companies focus its view on
the domestic opportunities, domestic suppliers, domestic
customers etc.
these companies analyze the national environment of the country,
formulate the strategies to exploit the opportunities offered by the
environment.
The domestic companys unconscious motto is that if its
happening in the home country its not happening any where.
Domestic companies never thinks of growing globally. If it
grows, beyond its present capacity the company selects
diversification strategy of entering into new domestic
market, new products, technology. It does not select the
strategy of expansion or penetrating international markets.
 INTERNATIONAL COMPANY
Companies who divide to develop the opportunities outside
the domestic country are stage two companies.
They remain ethnocentric or domestic country oriented.
They believe that practice adopted in domestic business,
people and product of domestic business are superior to
other companies.
Focus of their companies in domestic but extends its wings
to foreign countries. They select the strategy of locating the
branch in foreign country, extend domestic operation to
foreign markets, and extend domestic price and product
and promotion practice to foreign markets.
Company follows these strategies due to limited resources
and to learn from foreign market gradually before becoming
a global company without much risk.
 MULTINATIONAL COMPANY
Formulates different strategies for different
market so orientation shift from
ethnocentric to polycentric orientation.
Under polycentric orientation the office and
the subsidiaries of multinational companies
work like domestic company in each country
where they operate with individual policies
and strategies suitable to that country
concerned.
 GLOBAL COMPANY
A company, which has either global marketing
or global strategy

1. Either produce in home country or a single

country and focus on marketing products globally

2. Produce the products globally and focus on

marketing the products domestically. Eg. Dr.
Reddys lab designs and produces drugs in India
and markets globally.
 TRANSNATIONAL COMPANY
Produces, markets, invest and operate
across the world.
Its an integrated global enterprise which links
global resource with global markets at profits.
There is no pure transnational corporation.
Most of the transnational companies satisfy
many of the characteristics of the global
corporation.
Its geocentric in approach.
 ETHNOCENTRIC:

They treat all foreign operations as if they

were extension of domestic operations. Each
unit is integrated into the planning and control
system of the parent country. Standard
products and services are produced that can
be used anywhere in the world. They follow
the same procedure of the parent country to
the other countries also. This is suitable only
if the tastes and preferences of different
markets are same. Eg whirlpool when
entered Japan.
 POLYCENTRIC
They go to every market and study the
market and then produce goods that suits the
market. It is right opposite to ethnocentric.
They have a danger of global presence in the
market. They treat the MNE as a holding
company and to decentralize decision
making to the subsidiary level.
 REGIOCENTRIC
The managements operate in the foreign
market and change the policies and
procedures depending on the regions and
situations. They are better than
ethnocentric as they suit the purpose of
profit maximization by thoroughly
understanding the market and changing
conditions
 GEOCENTRIC
GLOCALISATION- THINK GLOBAL ACT
LOCAL
they maintain brand image, standards of
quality but they style make the strategies
depending on the market. Operations,
manpower, resources are global. Company
needs a lot of experience to adapt this
operation.
 Benefits of Global
Trade:
Increased choice
Greater potential for
growth
Increase
international
economies of scale
Greater employment
opportunities

Trade has led to massive increases in wealth

for many countries.
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 Disadvantages
of global trade:

Increase in gap between the rich and the poor

Dominance of global trade by the rich, northern

hemisphere countries

Lack of opportunities for the poor to be able to have

access to markets

Exploitation of workers and growers

MNCs :

Advantages:
Advantages New investment and New technology
Innovative and competitive practices
Disadvantages Contributions of taxation
Foreign exchange/Export
Integrating Economies
Economy building

Disadvantages :

High competitive advantages over local

firms
Operate polices that may create distortion
in local market
Misuse the environment and resources
Avoid tax by practicing transfer pricing
Political Pressure
 ADVANTAGES OF GLOBALISATION
Opportunistic development
Following customers abroad
Pursuing geographic diversification
Market extension for incremental profit
Develop PLC differences ( if a product is in decline
stage it can be introduced in the other country)
Maximum capacity utilization
Leverage key success factors abroad
quality products
improve standard of living
technological advantage
reduction in the price of the goods
employment generation
competition in the domestic market
 DISADVANTAGES OF GLOBALISATION

expensive ( spent on research)

differences in political and legal environment
cultural differences
unemployment in the local market
economic differences
difficulty in trade practices
dumping of products
HR policies of company ( issues in the work
culture)
exploitation of resources
 Other Issues:
Accountability
of Global businesses?
Increased gap between
rich and poor fuels
potential terrorist
reaction
Ethical responsibility of
business?
There are plenty of people who believe that
globalisation is a negative development,
protests at the G8 summits, pollution, poverty
Efforts to remove trade
and concern over GM crops are just some of
the issues.
barriers
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Economic Globalization:
Goods and Services, e.g. exports plus imports as a
proportion of national income or per capita of
population

Labour/people, e.g. net migration rates; inward or

outward migration flows

Capital, e.g. inward or outward direct investment as

a proportion of national income or per head of
population

Technology, e.g. international research &

development flows
 Corporate Expansion
Characteristics:
Expanding revenue
Lowering costs
Sourcing raw materials
Controlling key
supplies
Control of processing
Global economies
of scale

Controlling supplies may be one reason

for global expansion.
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Globalization Index: Swiss think tank KOF.

Index measures: three main dimensions of globalization:

economic, social, and political.

In addition to three indices measuring these dimensions, an overall index of

globalization and sub-indices referring to actual economic flows, economic
restrictions, data on personal contact, data on information flows, and data on
cultural proximity is calculated.

World's most globalized countries: Belgium, Austria, Sweden, United Kingdom

and the Netherlands.

The least globalized countries according to the KOF-index are Haiti, Myanmar
the Central African Republic and Burundi.

A.T. Kearney Globalization Index. 2006:

Singapore, Ireland, Switzerland, the U.S., the Netherlands, Canada and Denmark
are the most globalized, while Indonesia, India and Iran are the least globalized
among countries listed.
Effects of globalization
Industrial
Financial
Economic.
Political
Informational
Language
Competition
Cultural
Ecological
Social (International cultural exchange)
Legal/Ethical
ROUTES OF GLOBALISATION
EXPORTING
LICENSING
FRANCHISING
JOINT VENTURES
MERGERS AND ACQUISITION
COUNTERTRADE AGREEMENTS
MANUFACTURING ABROAD
 EXPORTING

Most of the firms start their operations in

the foreign country as exporters and then
later switch to other modes. In this the
companies manufacture in the home
country and then send it to the other
national markets. Eg. most of the leather
industries .
 LICENSING

It is an agreement where a licensor grants

the rights to intangible property to another
entity (licensee) for a specified period of
time and in return, the licensor receives a
royalty fee from the licensee. Intangible
property includes patents, inventions,
formulas, processes, designs, copyrights
and trademarks
 ADVANTAGES OF LICENSING
The firm does not have to bear the development costs and
risks associated with opening foreign market.
It is used when a firm wishes to participate in a foreign market
but is prohibited from doing so due to barriers to investment.
It can help a company to establish a market and to set
operating standards for new technologies and products.
It is a method of earning short term fees with the promise of
longer term profits.
Eg. Sun micro systems has licensed its micro processor
technology to Toshibas and other leading computer
manufacturers in Japan.
Eg Coca-Cola has licensed its trademark to clothing
manufacturers.
DISADVANTAGES OF LICENSING
Does not give the firm a tight control over manufacturing, marketing
and the strategy required for realizing experience curve
Competing in the global market may require a firm to coordinate in
other countries by using the profits earned in one country to support
competitive attack in the other. Licensing does not allow the firm to
do this .
A firm can lose control over its technology by licensing it.
Competitors are given new technology, process or information
without having to spend any money on R&D.
The licensor typically has no local presence but rather relies
exclusively on the licensee.
There is no chance for complimentary opportunities of any kind such
as identifying local demand for goods that could be produced by
spinning of this technology.
Competitive obsolescence is guaranteed as the licensee seeks
methods of improving the technology and striking out on its own.
 FRANCHISING

It is basically a specialized form of licensing in

which the franchisor not only sells the intellectual
property rights to the franchisee but also insists
him to follow strict rules as to how it does
business.
The franchisor will also often assist the franchisee
to run the business on an ongoing basis. As with
licensing, the franchisor typically receives a royalty
payment that amounts to some percentage of the
franchisees revenues. Whereas licensing is
pursued primarily by manufacturing firms,
franchising is employed by service firms. Eg KFC,
Mc.Donalds.
 Why Franchise?
More rapid expansion at lower capital
cost
Motivated owner/operators
Economies of scale and operating
efficiencies
Revenue
Location
Flexibility
 Barriers to Global
Franchising
Culture, Culture, Culture!
Location, Location, Location!
Intellectual Property Protection
Political/Legal Framework
Availability of Raw Materials
Availability of Skilled Managers
Education and Training
Quality Control
Marketing Strategy
 JOINT VENTURES

It is the establishment of a firm that is

jointly owned by two or more independent
firms. It does not involve buying and
selling of shares. A and B come together
to form a new company C. And hence both
the companies still exist. The expertise of
A and B may be different and hence
decides to leverage. They exist for a
particular period of time.
 ADVANTAGES OF JOINT
VENTURES
To upgrade technology( eg. TVS tie up with Suzuki )
More funds. ( may have attractive business but not the
capital and hence results in a joint venture.)
Managerial expertise
To block competition ( eg. Mahindra Ford )
Exports ( eg Tata and Dalmier )
Operational improvements
Reduction of risk of failure by sharing the burden with
the partner
Rapid market access and opportunity for quick profits
An increase in the company and product acceptance
brought about by having a local firm serve as the direct
interface with the customer.
 DISADVANTAGES OF JOINT
VENTURES
Overcharging ( if u want to learn the
technology the company charges u more)
Interference of management
Inability to work well with the foreign partner
results in either sellout or a cessation of the
arrangement.
Domination of the local market by the partner
and hence not allowing the foreign company
to have direct contacts with the customer.
MERGERS AND ACQUISITION
This involves buying and selling of shares
In a merger two or more companies combine to form a
new company. They might exist in the market place
with their own brand name or dissolve and come out
with another brand name or combine both the brand
names. Eg. Smithline Beecham and Glaxo formed
Glaxo Smithline. HP and Compaq merged and now
exists as HP.
In a take over one company buys the other company.
Normally it has a negative impact. In this one gets the
market share over night. eg.HLL took over TOMCO
(Tata Oil Mill Ccmpany). If the brand image of the
company is good then they leverage with the brand
image.
 ADVANTAGES
Economies of scale
Increase market power
Diversification
Technology acquisition
Market entry ( eg. Coke entered India by acquiring Thums up)
Possession of market infrastructure (eg. OBC merged with
GTB to have an advantage of the network strength of GTB.)
Product mix optimization
Optimum utilization of resources and facilities
Pre emptive strategy ( before a company could take
advantage of the market place u create entry barriers and
attack them)
Acquisition of brands
 DISADVANTAGES
Might have a problem with integration
May but technology that is outdated
Dissolution of the brand name if changed
 COUNTERTRADE
AGREEMENTS
It is a form of international trade in which certain export and
import transactions are directly linked with each other
and in which import of goods are paid for export of
goods, instead of money payements.
forms of counter trade
Barter
Buy back
countrpurchase
 MANUFACTURING ABROAD

The ultimate decision to sell abroad is the

decision to establish a manufacturing plant in
the host country. The government of the host
country may give the organization some form
of tax advantage because they wish to attract
inward investment to help create employment
for their economy
 Organization of MNCs
Operations
Definition
Designing The Skeleton and The Structure
That Delineate The Nature and Extent of
Formal Relationships Among:
Internal Components: Tasks, Jobs and Units
Physical and Nonphysical Forms in Response
to Internal Requirements and External
Environment
A Tool for Goal Attainment
Factors Influencing MNC Structure

External Forces
Economic Conditions
Technological Development
Product-Market Characteristics (Competition)
Host Government Policies

Company Factors
History
Top Management Philosophy
Nationality
Corporate Strategy
Degree of Internationalization
Organizational Structure of MNCs :

International Division Structure

Product Structure

Functional Structure

Geography Structure

Hybrid/ Matrix Structure

 MNC Corporate Structure

The Extension of Domestic Structure

Export Manager Reports to the Marketing
Executive (Narrow Product Line)
Export Manager Reports to C.E.O. (Broad
Product Line)
Increased Competition and Marketed
Maturity-- Local Manufacturing
 MNC Corporate Structure

International Division Structure

Four Factors Prompt The Establishment of
International Division
Increased International Involvement -- Require
a Senior Executive
Concentration Allows Exploiting The Worldwide
opportunities
Internal Specialist Are Needed
A Desire to Be Proactive (Identify Opportunities)
Geographic Division Structure

CEO

Headquarters Staff

European North American South American

Division Division Division
 Product Division Structure

CEO

Headquarters Staff

Product Group A Product Group B Product Group C

International Function Structure

CEO

R&D Marketing Manufacturing Finance

(Worldwide) (Worldwide) (Worldwide) (Worldwide)
 International Mixed Structure

CEO

European
Product A Product B USA Division
Division
(Worldwide, (Worldwide,
except US except US
and Europe and Europe
Management Approach of International
Business
Ethnocentric

Polycentric

Regiocentric

Geocentric