Term Project

A. FORCES FOR GLOBAL INTEGRATION AND COORDINATION

Globalization is the continuation of a trend that began over 100 years ago.

1. Forces Leading to Change

a. Economies of Scale

i. Achieved through high volume production

ii. Use of large-batch or continuous-process technologies

iii. Production levels exceed domestic sales.

b. Economies of Scope

i. Possible due to improved communications and transportation networks

ii. Rise in use of large trading companies (e.g., Panasonic)

c. Factor Costs

i. need to find cheaper sources of factors (i.e., raw materials, labor, capital)

ii. Finding cheap labor – a constant challenge. Labor cost/wage rates increase as labor force becomes educated.

NOTE: No country remains a cheap source of labor indefinitely (e.g., labor costs in China now increasing)

d. Liberalization of World Trade Agreements

i. Agreements facilitate of global expansion (i.e., through WTO, EU, NAFTA)

2. Expanding Spiral of Globalization

a. External triggers

i. Major technological innovations (semiconductors, etc.) resulting in changes in industry’s economics (e.g., cell phones)

2. Expanding Spiral of Globalization (continued)

b. Internal restructuring

i. Done by firms lacking external forces for change

ii. Firms go global to take advantage of economies of scale (e.g., automobiles)

iii. Achieved by use of rationalized production, streamlined/standardized products

3. Global Competitors as Change Agents

a. “Global Chess”

i. Defined as: A competitive strategy where a firm’s worldwide operations are managed as interdependent units using a coordinated global strategy.

ii. Use of cross-border subsidization is common

B. FORCES FOR LOCAL DIFFERENTIATION AND RESPONSIVENESS

1. Management’s strategic task: How to sense (identify), respond to, and/or exploit differences in environments.

2. Current trend: Global companies now recognizing importance of being “local”

3. Factors driving current trend towards localization:

a. Cultural differences – nationality still plays important role

b. Government demands – especially those of host governments

i. “Positives” of MNE/Host Government relationship:

· MNE seen as source of funds, technology, expertise

· Host government seen as key to access local markets and resources

Continued

b. Government demands (continued)

ii. “Negatives” of MNE/Host Government relationship:

· Host government belief that MNE operations result in:

· Social disruption – relocation from rural to urban areas

· Rising consumerism

· Rejection of indigenous values

· Breakdown of traditional community structures

· Large MNEs seen as political threat to small local governments

iii. Conflicting objectives of MNE vs. Host government

· MNEs main objectives:

· Unrestricted access to global markets and resources

· Freedom to integrate operations across national borders

· The right to coordinate and control all operations.

· HOST GOVERNMENT main objectives:

· Competitive economic development (using “national champion” or flagship companies).

c. Growing Pressures for Localization

i. Customers are moving away from global homogenized products to more “local” ones.

ii. Cost of centralized production involves more than just freight costs. Administrative costs are also significant.

C. FORCES FOR WORLDWIDE INNOVATION AND LEARNING

1. Successful MNEs must have ability to harness access to worldwide knowledge to develop innovative products

Continued

2. Impact of Worldwide Innovation and Learning

a. Companies forced to globalize to amortize R&D costs/investments

b. Voluntary transfer of technologies through

i. Licensing (to raise funds)

ii. Cross-licensing (to acquire technology)

iii. Strategic alliances (to maintain competitive advantage)

c. Domestic market may no longer be source of most sophisticated consumer need and advanced technology

d. Innovation driven by increased importance of global industrial standards – companies setting new standards/platforms for products have competitive advantage.

D. RESPONDING TO DIVERSE FORCES SIMULTANEOUSLY

1. Global, Multinational, and International industries

a. Global Industries

i. Defined as: Industries historically driven by economic forces that require scale economics to remain competitive

ii. Economic factors more important than environmental factors.

iii. Use of a global strategy

iv. Evidenced by:

· Homogenization of national markets

· Centralized, scale-intensive manufacturing and R&D

· Worldwide exports of standardized global products

v. e.g., Consumer electronics up to mid to late 1980s

b. Multinational Industries

i. Defined as: Industries in which localizing forces of national, cultural, social and political differences dominate development of industry characteristics.

ii. Differences in culture etc., require differentiated products/strategies on country-by-country basis.

b. Multinational Industries (continued)

iii. Use of multinational strategies which respond to local market sensitivities.

iv. e.g., food production

c. International Industries

i. Defined as: Industries in which technological forces are dominant and the need to develop and diffuse innovations is critical to the firm’s competitive position.

ii. Competition driven by ability to develop and harness new technology

iii. Use of international strategy - new products developed at home using new technology then distributed to worldwide affiliates.

2. Transnationality

a. “Center of Gravity” – the set of environmental forces that have most significant impact on firm’s strategic tasks.

b. Post 1980s – industries no longer impacted by a single set of environmental forces. Now facing multiple sets of forces of equivalent importance (e.g., must meet scale economies while satisfying local tastes).

c. Transnational industries

i. Defined as: Industries in which companies respond effectively to all diverse and conflicting forces at the same time to manage efficiency, responsiveness and innovation.

ii. No longer able to compete on basis of one dominant capability.

iii. Responsiveness using local, tailor-made products in each overseas market no longer feasible.

iv. Global customers demand sensitivity simultaneously with lower costs and high quality of global products.