International Business

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International Business

• Prof. dr. Pieter Klaas Jagersma

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1 Globalization An Introduction

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• Headlines of international newspapers
• The Globalization of Markets .....
• A Global Trade War on the Way?
• Protectionist Pressures are Building .....
• Ads that celebrate the Global Product .....
• Multinationals Tackle Global Marketing .....
• Globalization The Debate Goes on .....
• PGs Gamble on Globalization .....
• Going Global in Europe .....
• .....

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• Globalization - Whats in a name?
• A step-by-step process of international business
  development whereby a firm becomes increasing- ly
  committed to and involved in international bu-
  siness operations through specific products in
  se- lected markets
• Definition depending on the level to focus on

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• Globalization - Whats in a name? (2)
• At a worldwide level .....
• globalization refers to the growing economic in-
  terdependence among countries as reflected in
  increasing cross-border flows of goods, services,
  capital and know-how

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• Globalization - Whats in a name? (3)
• At the level of a specific country .....
• globalization refers to the extent of the
  interlinka- ges between a countrys economy and
  the rest of the world
• Not all countries are equally integrated into the
  global economy

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• Globalization - Whats in a name? (4)
• At the level of a specific industry .....
• globalization refers to the degree to which a
  com- panys competitive position within that
  industry in one country is interdependent with
  that in another country

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• Globalization - Whats in a name? (5)
• At the level of a specific company .....
• globalization refers to the extent to which a
  com- pany has expanded its revenue and asset base
  ac- ross countries and engages in cross-border
  flows of capital, goods know-how across
  subsidiaries

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• Conclusion
• There is no universally accepted definition of
  glo- balization
• Globalization is at the heart of the New World
  Economic Order
• Globalization is here to stay

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• Globalization in perspective
• According to the World Bank, the share in world
  output of multinational affiliates jumped from
  4,5 per cent in 1970 to 15,5 per cent in 2000
• The share in manufacturing output of multinatio-
  nal affiliates was 18 per cent in 1992 (26
  percent in 2000), up from 12 per cent in 1977
• Tariffs of developing countries are set to fall
  from 34 per cent between 1984 and 1987 to 14 per
  cent in 2003

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• Globalization in perspective (2)
• Ratios of exports to global output were 9 per
  cent in 1913, 7 per cent in 1950, 11 per cent in
  1973 and 16 per cent in the late 1990s
• FDI flows grew at 12 percent a year between 1991
  and 2002, while global exports grew at 6 per cent
• In 2001, 30 per cent of total FDI went to
  develop- ing countries
• In 2001, 300.000 foreign affiliates generated US
  10,000 billion in global sales

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2 Global Industries

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• Global industries - Whats in a name?
• Global industry
• an industry in which a competitive advantage is
  derived from the exploitation of scale/skills
  eco- nomies or comparative advantage across
  country boundaries within a centrally coordinated
  busi- ness system

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• Globalization of industries is the result of
  three major structural changes
• Rise and equalization of incomes across the
  indus- trialized countries
• Growth of homogenous demand patterns as reflec-
  ted in similarity of tastes and standards among
  (OECD) countries
• Secular decline in trade barriers among (OECD)
  countries, even though selective sector-specific
  restrictions continue to exist

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Substantial rise and equalization of income
levels across the industrialized countries
Comparative per capita in- come ( thou- sands)

Switzerland U.S.A. Netherlands Japan Singapore/Tai
wan S. Korea
30 20 10 0
Year
1960 1970 2000
Source UN National Accounts Yearbooks OECD
National Accounts
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• The convergence of income levels has resulted in
  similar consumption levels and demand patterns

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The past decades have witnessed a secular
decline in trade barriers

• Barrier Trends Examples
• Trade restrictions GATT negotiations Particularly
  effective among developed nations
• Preferential pur- Gradual relaxation For
  example, telecommunications market
• chasing policies and opening up of
• government markets
• Local content Continues to be im- Mexico and
  India have adopted more liberal
• policies portant though most foreign investment
  regulations
• governments under-
• stand the need for
• companies to link their
• local operations as part
• of a global network
• National security Continues to be in- Greater
  willingness on part of countries such as
• policies voked as reason for France to accept
  participation of foreign firms
• protection in high tech and defense projects

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• Examples of non-tariff (trade) barriers
• Voluntary export restraints
• Subsidies

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• Increasing interdependence among countries is
  evident
• Exports are increasing in importance .....
• Exports as a percent of GDP (in EU, Japan and
  U.S.)
• 15 percent (in 1965) gt 31 percent (in 2002)
• Source OECD National Accounts

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• World business is and will continue to be
  characterized by .....
• Increasing interdependence among countries via
  trade and foreign direct investment
  (inter-industry trade/FDI)
• Increasing interdependence and interpenetration
  within the same industry across countries (intra-
  industry trade/FDI)

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• FDI/Cross-border direct investment is a key
  feature of global competition in many industries
• Automobiles
• Aircraft
• Telecommunications
• Banking
• Management Consultancy
• Business Schools

From Goods to Services
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• Foreign direct investments (FDI) nature changed
  Typology
• Global expansion vehicles 1970 1980 1990 1995
  00
• Greenfield investments 89 66 47 35 21
• MA 4 25 32 36 37
• Cooperative agreements 7 9 21 29 42
• Number of international expansions (European
  firms)
• Source Jagersma (2001)

Major increase in global MA and (especially)
global alliances
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• Japanese companies took the lead in globalizing
  industries
• Share of world trade gained/lost 1970-1995
• Global/emerging industries US Japan BRD
• Motor vehicles lost (2) won (20) lost (5)
• Machines, nonelectronic won (3) won (5) lost
  (10)
• Aircraft won (10) won (5) lost (5)
• Power machinery (nonelectric) lost (15) won
  (2) won (5)
• Office machines lost (5) won (18) lost (2)
• Automatic data processing lost (15) won (30)
  lost (5)
• Machinery for specialized industries won (20)
  won (20) lost (17)
• Telecommunications equipment won (5) won (8)
  lost (12)
• Electrical power machinery won (2) won (11)
  lost (12)

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• Share of world trade gained/lost 1970-1995 (2)
• Global/emerging industries US Japan BRD
• Sound recorders, phonographs lost (4) won (18)
  lost (14)
• Woven textiles, man-made lost (2) won (15)
  lost (4)
• Iron/steel lost (2) won (11) lost (2)
• Plastic materials lost (1) won (9) won (3)
• Civil engineering equipment won (2) won (12)
  lost (7)
• Metalworking machines won (3) won (7) lost
  (2)
• Transistors and valves lost (20) won (17)
  lost (8)
• Electrical machinery won (2) won (8) lost (5)
• Source UN Yearbook on International Trade
  Statistics (1970-1995)

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3Global Strategy An Introduction

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• Industries can be characterized on a spectrum
• Sources of sustainable competitive advantage
• Local gtgtgt Emerging gtgtgt Global
• Derived from Derived from worldwide
• country market management of business
• system (integration)
• - Scale/skills economies
• - Country comparative
• advantage (factor costs)
• - Centralization of stra-
• tegy and decentralization
• of stages of business sys-
• tem as economies and ef-
• ficiency dictate

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• Characteristics of industries
• Local Global
• Product market Wide variation in
  customer Homogenous buyer
• preferences preferences, standards
• worldwide
• Economics Limited scale/high adap- Large
  scale/low adap-
• tation costs tation costs
• Competition Major competitors are lo- Major
  competitors are
• cal competitors in each global even though
• country they may be weak in a
• particular country
• World consists of ... Largely separate
  markets Linked markets

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• Characteristics of industries (2)
• Local Global
• Role of global Competing globally Competing
  globally
• strategy optional vital
• KFS Success comes from res- Competitive
  advanta-
• ponding to local conditions ge comes from
  global
• centralization/coordi-
• nation

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• Examples of local, emerging and global industries
• Local Emerging Global
• Cement Medical equipment Automobiles
• Brewing Scientific instruments Computers
• Soaps, detergents Optical goods Construction
  mach.
• Food processing Plastic materials Agricultural
  mach.
• Travel goods Measuring devices Pharmaceuticals
• Retailing Specialized machinery Television
• Housing Aircraft
• HR consultancy Strategic consultancy
• Retail banking Wholesale banking Investment
  banking
• et cetera

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4Global Businessmodels

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• Globalization of business enhances need to change
• Multi-national approach gtgt Global/integrated
  approach
• (business units are stand- (business units
  are inter-
• alone activities) linked activities)

Economies of scale (output) Economies of scope
(input) Economies of skills
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• In many industries, competing globally is
  imperative
• Industries Global competitors Non-global
  casualties
• Aircraft Boeing, Airbus Lockheed, MDD
• Construction Caterpillar, Komatsu International
  Harvester
• equipment
• Autos Toyota, Ford, GM, VW British Leyland, DAF,
  Lada
• Semiconduc- Intel, NEC, Fujitsu
• tors
• Computers IBM, HP, Dell, Apple ICL, Tulip
• Pharma Merck, Novartis (almost Lots of small
  players
• all large players)
• Consumer Sony, Philips, Sharp, Grundig, AEG, RCA
• electronics Matsushita, BO

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• Global strategy requirements of competing glo-
  bally differs from country-centered competi- tion
  (in multi-market industries/segments)
• Country-centered strategy Global strategy
• (multi-market industries) (global
  markets/industries)
• Portfolio of country subsidiaries Coordinated
  global system
• Subsidiaries largely independent
  evalua- Subsidiaries dependent on other
• ted as profit centers on local results units
  evaluated on basis of con-
• (DeloitteTouche) tribution to worldwide system
• Competitive position based on in-country Competiti
  veness based both on
• factors subsidiaries may follow varied
  systemwide strengths and in-
• strategies (KPMG) country factors subsidiaries
• have roles within system
• Power and authority are weighted towards Power
  and authority are shared
• country managers authority (PWC) among managers
  of business
• units and country managers

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5Globalization A Dynamic Process

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• Industries take three basic routes to
  globalization
• The traditional path of becoming global when
  mature evolution
• Major discontinuities or innovation revolution
• Born global

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Evolution paths1 automobiles, color TV,
construction equipment (evolution examples)2
software, telecommunications (major
discontinuities or innovation examples)3
pharmaceuticals, large aircraft, robotics, large
computers (born global examples)

Source of competitive advantage
Industries .....
Domestic Emerging/Multimarket
Global
3
RD Manufac- turing Marketing and distri- bution
1
2
3
1
Source Jagersma (2000)
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• Main characteristic of market structure evolution
  during globalization greater concentration
  (example autoindustry)

/- 255 players
/- 25 players
1920 1995
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• ..... and also a decline in average profitability

In percent 20
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4,5 percent in 1995
1950 1995
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6Implications for Global Strategy

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• The essence of global strategy involves a firms
  deciding where and how to perform each business
  system element
• Each element of the industry chain has its own
  globalization logic (or not!!)
• Three kinds of design configurations are possible
  for each business system element
• Centralized activities centralized strategy
• Central coordination of geographically dispersed
  activities inter-linked strategy
• Decentralized (differentiated) activities in each
  country stand-alone strategy

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• Globalization may take different approaches in
  each stage of the business system Global RD
• Approach Rationale Example
• One central location - Economies of scale Boeing
  aerospace labs
• in RD in Seattle
• - Likely in country with
• clear lead in techno-
• logical infrastructure
• Centrally coordinated, - Take advantage of
  unique Pharmaceutical compa-
• multiple locations skills or strengths
  avai- nies
• around the world lable in different country
• locations
• - Specialize labs by different
• products/technologies

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• Globalization may take different approaches in
  each stage of the business system Global RD (2)
• Approach Rationale Example
• Same RD in multiple - Draw on multiple scien-
  IBM (basic research
• locations tific perspectives on same labs in
  U.S. and Europe)
• problem
• - Avoid risk of being tied
• down to one approach

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7Generic Global Businessmodels

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Global businessmodelsSource Jagersma (2000)

• Business profitability in
• one country independent of
• another
• Profitability in one country
• depends on operations in
• other countries

National Scope of optimum business system G
lobal
Stand- alone business systems
Country Global niche
Regional Transnat.
Single regional/ worldwide business systems
High Low Extent of local adaptation
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8Winners in Global Industries Play a Global Game

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Many companies have to cope with these challenges
.....
Actual strategy Country Regional Transnati
o- nal

Unilever GE Nestle IKEA
IBM
Philips Siemens Chrysler Xerox Ford Boeing
Caterpillar Toyota Sony Daimler-Benz
Olivetti
Country
Regional Transnational
Required
strategy
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Nature of global strategy challenge depends on
the extent of misfit
Actual strategy Country Regional Transnati
onal

Requires readaptation of business system and
or- ganization If not feasible, seek
part- nerships
Fundamental restructuring of business
system Significant investment and organizational
realignment
Global strategy fit
Difficult transition
Global strategy fit
Decentralize, permit local differentiation
Global strategy fit
Country
Regional Transnational
Required
strategy
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9Take Aways

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• Take aways
• World has entered a new era of global
  competition funda- mental environmental forces
  (.....) will continue this deve- lopment
• Winners in this/the next decade will be those
  with skills fin. resources to play a global
  game companies unable to attain global
  leadership must also adapt to minimize their
  disadvantages (.....)
• There is no one pattern of global competition nor
  one type of global businessmodel (.....)
• Globalization is here to stay people want the
  best goods/ services, whatever their origin.
  Along with the right to vote they want the right
  to buy (.....)

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International Success Will Skill

Thrill