Internationalisation: WEEK 4

International business and global companies:

International business is the study of transactions taking place across national borders for the purpose of satisfying the needs of individuals and organisations. These transactions can be trade (importing, exporting) and direct investment.

The main focus will be Multinational Enterprises: MNE. MNEs have directly invested billions of dollars overseas. Most of these foreign investments have been two-way.

MNEs have recently been turning their attention to developing countries. Another international business activity has been the international joint venture (agreement between two or more partners to own and control overseas business).

SME

Many small and medium-sized business are involved in international business. We include here service industries that currently employ 70% of work force in USA, Canada and Europe.

Large multinational enterprises tend to influence the success of smaller businesses because they rely on small business for goods and services.

“The world is a global village where the producers of goods and services often compete domestically and internationally”

What is globalisation?

It is the production and distribution of products and services of a homogeneous type and quality on a worldwide basis. To a large extend MNEs have homogenised tastes and helped to spread international consumerism.

“Globalisation is the activity whereby “distinct” national economies are subsumed and re-articulated into the system by essentially international processes and transactions”

Hirst and Thomson, 1992

We can define globalisation in some different levels:

Worldwide level:

• Growing economic interdependence among countries reflected in cross border flow of goods, services, capital and know-how.

Country level:

• Extent of a country's inter-linkages with the rest of the world

Industry level:

• Degree to which a company's competitive position within that industry in one country is interdependent with that in another country

Specific company level:

• Extent to which a company has expanded its revenue and asset base accros countries and engages in cross-borders flows of capital, good an know-how across subsidiaries. (Ex: Harley Davidson, symbol).

Why is important globalisation?

• It can lead into cultural homogenisation (“Global village”)

• It make markets to converge

• It leads to globalisation of customers

• Globalisation is characterised by cost drivers:

• Economies of scale and scope

• Increase in levels of fixed costs

• Globalisation has lead to fundamental changes in industry structure (deregulation, privatisation, technological change)

Drivers of Globalisation:

Some drivers of globalisation arise either from the country and regional structure, others from the economics of the industry or can be strategically determined by companies themselves.

• Country and regional level

• Increasing number of countries are embracing the free market ideology

• Economic center of gravity is shifting from developed to developing countries

• The opening of borders to trade, investment and technology transfers not only creates new market opportunities for companies but also enables companies from abroad to enter in their home markets.

• Industry drivers

• Shift in scale economies and R&D costs

• Government policy

• Changes in country infrastructure

• All theses factors are exogenous to the firm

• Strategy drivers

• Local content without sacrificing rising global scale

• Increase product homogeneity through design

• Systems to make co-ordination easier

• These factor mean innovation by the firm

So, we can conclude that GLOBALISATION is the process that emerges from:

• The internationalisation of production and services

• Stateless corporations

• The existence of world markets (Ford, McDonalds, Coke, Hollywood, Revlond, Sony, Levy's)

• Increase integration into the international division of labour: China and Eastern Europe specialising in cheap labor

• Internationalisation of financial markets: transnational banks and subsidiaries of multinationals.

Global companies:

MNEs are also called global companies:

“A global company is one which operates with resolute constancy at low relative cost-as if the entire world (or major regions of it) were a single entity; it sells the same things in the same way anywhere”

T. Levitt, 1983, HBR

The majority of international business is conducted by MNEs, this activity can be carried out by:

Exports and imports:

Exports: Goods and services produced by a firm in one country and then sent to another country. Imports: goods and services produced in one country and brought in by another country. The European Union is the world's single largest trading unit, followed by Asia and North-America.

Information about exports and imports help us to understand the impact of international business in the economy.

FDI: (foreign direct investment)

It is equity funds in other nations. Industrialised countries have invested large amounts of money in other industrialised nations and smaller amounts in less developed countries.

Ex: by 1990, the USA had become such a major investment target that foreign investment in the USA amounted by 1.5$ trillion. At the same time Us holdings abroad totaled amounted 1.2$ trillion.

What must nations do to gain and hold strong international trading and investment position?

There are three basic points:

Maintain economic competitiveness:

During the 1980s the USA saw some of its economic competitiveness wakened by the Japanese and European imports, although in the late 90s, it was seen a strong resurgence and the USA once again become the world's most competitive country.

So, economic competitiveness is in a continual state of flux.

The most important determinants of competitiveness are: labor costs, interest rates, exchange rates and economies of scale. Research shows that the best way for companies to achieve advantage is with innovation.

International competitiveness: (Porters Diamond)

Factor conditions:

According to international trade theory, a nation will export those goods that make most use of the factor conditions with which it is relatively well endowed.

These factor conditions include: land, labour and capital.

In order to maintain a competitive position, a country must continually upgrade and adjust its factors conditions.

Ex: Netherlands (world leading export of flowers) has created research institutes in the cultivation, packaging and shipping flowers: No one has been able to dislodge that country's foothold in the international flower industry.

Demand conditions:

Porter states that a nation's competitive advantage is strengthened if there is a strong local demand for its goods and services:

• It helps the seller understand what buyer wand

• If changes become necessary, it provides early warning and can adjust or innovate for the market before more distant competitors

Related and supporting industries:

Another factor that suppose the existence of national competitive advantage is the presence of related and supporting industries that are internationally competitive (mainly service industries). When suppliers are located near the producer, these firms often provide lower-cost inputs that are not available to distant competitors.

Firm strategy, structure and rivalry:

Firms are created organized and managed as well as the nature of domestic rivalry.

• Vigorous domestic rivalry and competitive advantage are related. Nations with leading world position often have a number of strong, local rivals (Swiss firms in pharmaceutical sector, it helps the country to maintain its international competitive edge).

In Porter's system, each determinant depends on the others. If a country has sophisticated buyers that can provide a company with feedback about how to modify or improve its product, this information will not be useful if the firm lacks personnel with the skills to carry out these functions.

Government policies can have serious consequences for international trade. Government intervention for the purpose of protecting home industry usually results in less competitive national companies.

Developing an international global perspective: 3 basic elements:

Experience: one way to create an international perspective is to hire individuals with international experience. It helps managers learn how to evaluate situations and this process is often different from that used at home.

Focus: Emphasise the importance of international activities

Attitude: For example, to change the attitudes that many US managers have toward their work (US firms don't have international orientation, managers focused on domestic operations, feeling little need to spend time abroad), they tend to have a short-term orientation, to be overmaterialistic, to lack subtlety, to be informal and to be impatient.

Nature of Multinational enterprises:

Multi-Domestic Industries vs Global industries:

International trade incorporates many different types of competition and industries differ markedly in their patterns of international competition.

Multi-domestic industries:

• Competition in one country is independent of competition elsewhere

• This lead to a collection of domestic industries

• A firm can and should manage its world-wide activities as a portfolio of independent subsidiaries in each country.

• The firm therefore should adopt a country-centred strategy.

Global industries:

• Competition in one country influenced by competition elsewhere, leads to international rivalry

• To be a leader a firm must develop and implement a strategy that integrates its activities in various countries but some portions of the firm's activities must take place in each individual country.

• The firm should adopt a global strategy.

• Ongoing integration of activities on a worlwide basis.

What are the main characteristics of “Global”? (What do we mean by “global”?)

IT IS:

• Standardisation of large international market segments

• Product standardisation

• Reconfiguration of the value chain (distribution…)

• Global marketing function

• Multi-point competition

• Governments play two roles: “players” and “referees”

Multinationals:

The USA has identified over 45,000 MNEs, but the largest 500 account for 80 percent of all the world's foreign direct investment. This firms are engaged in operations such as autos, chemicals, computers, consumer goods, financial goods, industrial equipment, oil and steel production…

Their main characteristics are:

• Looking at the environment in which they operate, there are two major areas of concern: the home country of its headquarters and the host countries in which it does business (stakeholders can come from anywhere in the world)

• Their affiliates must be responsive to a number of important environment forces, including competitor, customers, suppliers, financials institutions and government.

• The MNE draws on a common pool of resources, including patents, trademarks, information and human resources

• Its affiliates are linked by a common strategic vision.

Firms become multinationals to:

• Protect themselves from the risks and uncertainties of the domestic business cycle (International diversification)

• To tap the growing world market for goods and services ( part of the definition of globalisation)

• In response to increased foreign competition and to protect world market share.

• To reduce costs

• To overcome tariffs walls by serving a foreign country from within

• To take advantage of technological expertise by manufacturing goods directly rather than allowing others do it under a license (for example). MNEs are better able to protect their international competitiveness than companies that have license agreements.

PHILOSOPHY OF MNEs

MNEs make decisions primarly based on what is best for the company even if this means transferring funds or jobs to other countries.

MNEs make whatever agreements are in their best interest, even if this means bringing in firms from three or four different countries.

Globalisation and corporate strategy:

To a large extent MNEs have homogenised tastes and helped to spread international consumerism, but, do we need co-ordination across International Markets?

Reasons for high co-ordination:

• Share know how and learning

• Reinforce brand reputation

• Supply identical differentiation world wide

• Differentiate to local buyers by meeting their needs anywhere

• Seek bargaining counters with governments

• Respond to competitor's flexibility

Reasons for Low co-ordination:

• Respond to diverse local conditions

• Product needs

• Marketing systems

• Business practises

• Raw material sources

• Infraestructure

• Circumvent government restrictions on flow or goods or information

• Avoid high co-ordination costs

• Acknoledge organisational difficulties of achieving co-ordination across subsidiaries.

National responsiveness:

It is the ability of MNEs to understand different consumer tastes in segmented regional markets and to respond to different national standards and regulations that are imposed by autonomous governments and agencies.

Globalisation versus National responsiveness:

Transnational MNEs need to reconcile these twin issues:

High

Globalisation

Low

Low High

National responsiveness

Vertical axis measures the need for globalisaton, called “economic integration”. Globalisation generates economics of scale as a firm moves into a worldwide marke, selling a single product or service.

Horizontal axis measures the need for corporations to be nationally responsive. Companies must address local tastes and government regulations.

Four situations distinguished:

The need for globalisation is high and the need for awareness of sovereignity is low: this focus on economies of scale and leads to competitive strategies that are based on price competition. Mergers and acquisitions often occur.

4- The opposite:the need for national responsiveness is high but the globalisation concern is low. This companies adapt product to satisfy the high demands of sovereignity an to ignore economies of scale since globalisation is not very important.

2 - It incorporates cases where the need for both globalisation and national responsiveness is low. The potential to obtain economies of scale are of little value: Characterised by increased international standarisation of products and services

Needs for globalisation and national responsiveness are high. Strong need for integration in production and higher requirement for regional adaptations in marketing. 3 is the most challenging quadrand an one in which successful “transnational” MNEs operate.

Example:

CE

Global integration

TC

PF National responsiveness

CE: Consumer Electronics

TC: Telecomunications

PF: Packaged foods

PART TWO: (managing internationally)

Introduction:

• Leading firms today are focusing resources on core competences and outsourcing nearly everything else

• With the advent of global economy many of these firms have determined that often domestic purchasing of materials and services is too restrictive

• Instead they are searching the world for the best price, technology, delivery and quality.

International management is:

“The process of planning, organizing and leading and controlling in a multicultural or cross cultural environment” (Deresky 1994)

Strategic management of Multinational Enterprises

MNE affiliates are linked by a strategic plan. Basic nature of strategic management process consists of:

Strategy formulation, strategy implementation, evaluation and control of operation.

These functions encompass a wide range of activities: environmental analysis of external and internal conditions and an evaluation of organisational strengths and weaknesses .

Steps in the strategic management process:

Strategic planning: typically begins with a review of the company's basic mission, which is determined by answering the question: What is the firm business? What is its reason for existence?

After determining its mission, the MNE will evaluate the external and internal environment. The goal of external environmental analysis is to identify opportunities and threats that will need to be addressed.

Internal and external analysis will help the MNE to identify both long-range goals (2-5 years) and short-range goals (less than 2 years).

Example of strategic management: Scenario Analysis (lo noto Ramon!!!) it involves a formulation and analysis of events that are likely to happen. After analysing each of the scenarios, the company will decide how to allocate resources.

Globally strategic planning:

Strategic planning is the process of evaluating the enterprise's environment and its external strengths, next identifying long and short-range objectives and then implementing a plan of action for attaining these goals. MNEs rely on this process because it provides them with both general direction and specific guidance in carrying out their activities.

International Human Resources Management is made more complex by:

• Different labour markets

• International Mobility Problems

• National Management And Labour Supply Styles And Practices

• Strategy and Control Issues

Cultural Issues:

Some aspects of culture differ significantly across national borders and have great impact on how business is conducted

Effective international management depends partially on recognising and accommodating these cultural differences.

Cultural values:

Two cultural variables shape the characteristics of a culture's values

• Religion: Religion rules and events: muslim religion, effects closing times, use of alcohol, regulates daily timetable, praying, eating behaviours…

• Language: is used to transmit culture but is an important influence in itself. Different languages have different thought patterns and effects the way we look at things and problem…

Specific Culturally Derived Behaviours:

INDIVIDUALISM VS COLLECTIVISM

Describe the relationship between the individual and the group to which he/she belongs

Individualism: predominantly masculine behaviours and work goals

Collectivism: team work, synergy, whole equals the sum of the parts.

NEUTRAL VS AFFECTIVE EMOTIONAL CULTURES

Neutral: cool an aloof life: The British Royal Family exhibiting self control (y un churro)

Effective: very emotional

SPECIFIC AND DIFFUSE CULTURES:

Specific: keep separate you public/private face, your religion/home life and work

Diffuse:Share both sides of your life and work

MONOCHRONIC VS POLYCHRONIC TIME CULTURES

Mono: time is linear, like an asset can be spend and saved, schedules

Poly: simultaneous activities, human interactions more important than holding to schedules.

Approaches to managing cultural differences:

MNEs have strategic predisposition towards doing things in a particular way. These are:

Ethnocentric predisposition: will rely on the values and interest of the parent company in formulating and implementing the strategic plan. Primary emphasis will be given to profitability and the firm will try to run operations abroad the way they are run at home. Firms that try to sell the same product abroad and at home.

Polycentric predisposition: will tailor its strategic plan to meet the needs of a local culture. If the firm is doing business in more than one culture, the overall plan will be adapted to reflect these individual needs. The basic mission of a polycentric MNE is to be accepted by the local culture. Each subsidiary will decide the objectives it will pursue, based on local needs.

Regioncentric predisposition: will be interested in obtaining both profit and public acceptance and will use a strategy that allows it to address both local and regional needs.

Geocentric predisposition: will view operations on a global basis. They will produce global products with local variations and will staff their offices with the best people they can find, regardless their country of origin: Example: Multinationals.

CONCLUSION:

Myths of Globalisation:

• Distance and national borders no longer matter

• Developing countries are the best new markets

• Manufacture where labour is cheapest

• Globalization is forever

• Government no longer matter

• There are no Borders

• Consumers worldwide have homogeneous needs

• Global strategies and processes can be implemented globally so all products and services can be of a global standard

• Managing global-local tensions is straight-forward!!!

Que aproveche chicos…. Bye bye

Proxima entrega, la cultura

Largest investors in the USA in 1996 were: Britain, Japan, The Netherlands, Germany and Canada. At the same time, USA is a major worldwide investor.

En los handouts podeis encontrar mas ejemplos como este, aunque la forma mas facil de explicar esto de la national responsiveness y globalisation creo que es esta que os he puesto arriba.

IBS Week 4 Internationalisation - Globalisation

1

Structure of Firms and

Rivalry

Related and supporting industries

Factor conditions

Demand conditions

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