Globalization

How do firms grow?

Horizontal
Diversification

Vertical
Diversification

Geographic
Diversification

Basis presumption-A firm needs to be competitive in its core

business before it can choose the direction of its diversification

What is Globalization?
Value of world exports in 2014 more
than quadrupled between 1980 and
2014.
Foreign investment grow more than
twenty-fold.
Firms without international goals may
find their domestic markets under threat
from foreign competition.

What is Globalization?
Standardization of products & services
Zaha na jaye bhelgari, woha jai marwari
Go to place where there is a market but
inaccessible area
Comes with a costWhy go there?

Globalization is not
about products or
services in multiple
countries but about

What drives this convergence?

11/9 (Nov, 9, 1989)

8/9 (Aug, 9, 1995)

Outsourcing
Offsourcing
Open sourcing
Insourcing
Supply chaining

What does Globalization Mean for You?

More choices
Lower prices
Blurred national identity for products
and services
Career choices and progression

What does Globalization Mean for You?

The global top 20 countries

Who benefits from globalization?

Globalization index rankings

Who Benefits from Globalization?

Globalization and social expenditure

Does globalization makes people happy?

Globalization is the interplay of two

forces
Homogeneous civilization
Standard products and services
Barriers to entry & exit should be
minimum
World is heterogeneous
Non-standard products and services
Interaction between cultures, products
and different systems (legal, political
economic etc)

Does globalization helps countries to

become competitive?
Basic requirements
Institutions
Infrastructure
Macroeconomic
Environment
Health & Primary
education
Efficiency Enhancers
Higher education
Market efficiency
Technological readiness

Factor Driven
economies

Efficiency
Driven
economies

Market size
Innovation &
sophistication factors
Business Sophistication
Innovation

Innovation
Driven
economies

What motivates a firm to go international?

Traditional Motivations
Secure supplies
Market seeking behaviour
Low factor cost of production

Changes in economic, technological &

social developments
Shortening product life cycle
Ballooning R&D costs

Challenges of globalization?
Standardized products and services
Co-ordination of a globally distributed
supply chain
Globalization =f(industry)

Agendafor next class

What is Global strategy?
How does global strategy create value
relative to the alternative of countryspecific strategies?
Does broad global scope actually live
up to its promise?

The Distinctive Content of

International Strategy

Finally..
International strategy is challenging and
interesting and offers degrees of
freedom..at intermediate levels
of cross-border integration.
Cant ignore barriers.
Cant ignore linkages.

What is Global strategy?

Configuration:
What do we do
where?
Coordination:
How tightly do we
tie together
activities in
different locales?

What is Global strategy?

A viable global strategy configures and

coordinates better than available
alternative means for accomplishing
comparable ends.

CONFIGURATION AND
COORDINATION

Nokia
R&D Units
Finland
Germany
U.S.
Hungary
China
Malaysia
S. Korea
Australia
U.K.
Japan
Italy
Canada
Sweden
Denmark

Production
Finland
Germany
U.S.
Hungary
Sweden
China
Malaysia
U.K.
France
S. Korea
Australia
Brazil
U.K. Mexico

Stock Exchange Listings

Finland
Germany
U.S.
Hungary Sweden
China U.K.
Malaysia France

When Do You
Centralize an Activity?
Economies
versus
Diseconomies of Scale

When Do You
Centralize an Activity?
When there is a compelling advantage
to carrying out an activity in a particular
location
When the costs of customizing the
activity to different locations are not too
high
Home countrys institutions determine whether
centralizing at home is advantageous or not

An essence of global strategy is not be restricted by your home

country limitations but it is a non-trivial decision.

The Localization Dilemma:

Morgan Stanley Japan
Activity
Research

New Products

Marketing
HR
IT

Localization
Information dissemination styles
and ways of assimilating
/communicating analysis differ.
Using experience in U.S./Europe to
introduce new products. Change
Japan rather than change to Japan.
Exceedingly difficult to penetrate
local relations
U.S. firm trying to create a local
face
Rely on local firms for local-local IT
and on China/India contractors for
other software

The Localization Dilemma:

Morgan Stanley Japan
One group says that this office is
Morgan Stanley, applied to Japan. The
other says this is Morgan Stanley
Japan; that is, keeping New York off our
backs is important. There is a healthy
tension between the two views.

The Localization Dilemma:

Notable Failures
Microsofts misreading of its PC
software in China in 1993
Kelloggs overestimation of the demand
for breakfast cereal in India
McDonalds overestimation of taste
homogeneity in the Philippines
STAR TVs overestimation of demand
for recycled Western TV content in
south and Southeast Asia

General Electric Medical Systems

Why not have
outsourcing?

Challenges of globalization?
Standardized products and services
Co-ordination of a globally distributed
supply chain
Globalization =f(industry)

Tradeoffs in Alternative Configurations

Organizational
emphasis
Local
Commitment

Talent
Results

Citibank
Line of business

HSBC
Worlds local bank
Geographic focus
Single B\L
Local B\L sheets
Large bets
Conservative
Hedged local positions Unhedged local
positions
Easy entry/exit
Never leave a
country
voluntarily
Centralized
Local talent
Most profits from U.S Even distribution of
profit
Faster and volatile
Slower and steadier
stock price
stock price
appreciation
appreciation

Does Globalization help the natrual

environment?
Common complaint that globalization
hurts the environment
Argued that firms relocate to escape
tough pollution rules at home
Many firms adhere to strict codes of
environmental protection, and engage in
cleanup of locations
Environment is just one factor in
location decision

What motivates a firm to go international?

Your responsespliz

What motivates a firm to go international?

Traditional Motivations
Secure supplies
Market seeking behaviour
Low factor cost of production

Changes in economic, technological &

social developments
Shortening product life cycle
Ballooning R&D costs

International Product Life Cycle

Raymond Vernon

International versus Domestic Business

International business is the outgrowth
of domestic business.
Most major corporations started their
operations in the domestic market.
International entrepreneurs
Individuals or companies that invest and
operate in another country without a home
base

International versus Domestic Business

Significantly different due to differences
in:
Environmental Dynamics
Currency, inflation, interest rates, accounting
practices, cultures, social customs, laws,
political stability

Operational Nature
Communication, coordination, motivation,
differences in organizational principles and
management philosophies

Test for International Strategy

The Better Off Test
Some extra value needs to be created in the new country
How can this extra value be created?

Test for International Strategy

The Ownership Test
Why cant a firm just sell or license its
products or buy resources than being rather
than being international?

What is different about international strategy?

Heterogeneity across markets
The scale and complexity of global
operations
The Unpredictability of economic
conditions across nations

Heterogeneity?
What is it?

Decisions

What sort of problems ?

Scale
Does scale result in CA?

Decisions

What sort of organizational

structure is appropriate

Volatility
What is it?

Can volatility results in

CA?

Global Strategy

The Distinctive Content of

Global Strategy

The Case of Coke

1997

1999

Goizueta

Invester

Think Global,
Act Global

March 2000
Daft

Dec 2000
Daft

Think Local,
Act Local

Post-Global

The Case of Coke

Between Dodo strategies

and Dinosaur strategies

Isolation
(complete
separation of
markets)

Semi-globalization

Globality
(complete
integration of
markets)

How to survive in the middle?

Local
responsiveness
Adaptation

Aggregation

Scale
Economies

Arbitrage

Absolute
economies

Adaptation

Multiple Strategy Levers

Product Characteristics
Decentralization
Modularization
Recombination

Aggregation

County-by-country is expensive
How do you address complexity without
sacrificing economies of scale?

Asea Brown Boveri

Tradeoffs in Alternative Configurations

Citibank

HSBC

Organizational
emphasis

Line of business

Worlds local bank

Local

Single B\L

Local B\L sheets

Commitment

Ability to make large bets

Hedged local positions
Easy entry/exit

Conservative
Un-hedged local positions
Never leave a country
voluntarily

Talent

Centralized

Local talent

Results

Most profits from U.S

Faster and volatile stock
price appreciation

Even distribution of profit

Slower and steadier stock price
appreciation

Global/Outsourcing strategy
Mfg

Logistics

Brand

Retail

Zara
Esquel
Benetton

--------- ---------

-----------------

Gap

------------------------

Li & Fung

--------

--------------------------------

Viable alternative to multinationals

Compensation
Benchmark

% chance of advancing
Latin American
playgrounds & slums

Age

<10

20%
Latin American little
league
10%

Latin American football

academics

Gloves, jerseys
etc

10-14

$800/month

12-17

30%
Minor league
10%
Major league
10%

0.00006

10%

Major league
superstars

Signing bonus $37,500+

salary ($7250)
Signing bonus + salary
(min $ 200,000 )

18-21

21-27
>27

What motivates a firm to go international?

Traditional Motivations
Secure supplies
Market seeking behaviour
Low factor cost of production

Changes in economic, technological &

social developments
Shortening product life cycle
Ballooning R&D costs

International Product Life Cycle

Raymond Vernon

International versus Domestic Business

International business is the outgrowth
of domestic business.
Most major corporations started their
operations in the domestic market.
International entrepreneurs
Individuals or companies that invest and
operate in another country without a home
base

International versus Domestic Business

Significantly different due to differences
in:
Environmental Dynamics
Currency, inflation, interest rates, accounting
practices, cultures, social customs, laws,
political stability

Operational Nature
Communication, coordination, motivation,
differences in organizational principles and
management philosophies