Topic 11:
GLOBALIZATION
Chapter 5 in Text Book
Pages: 125 - 154
Key topics in this chapter :
Ñ History of Globalization
Ñ Meaning of Globalization
Ñ Market Entry Strategies
Ñ Modes of International Market Entry
Ñ A Comprehensive Model of International
Market Entry
Ñ Growth of Globalization
History of Globalization
Individuals and nation states have involved themselves in international trade ever since the first national borders were formed. International business consists of transactions that are carried out across national borders, to satisfy the objectives of the individuals and the organisations. The wave of internationalization of the economic activities was much enhanced by the onset and diffusion of industrialization, in Europe, from the 18th century onwards. Today the national boundaries of the country no longer act as water tight containers. We are moving away from a market in which each national market is a distinct entity, isolated from each other by barriers of trade, barriers of distance, time and culture and towards a system in which national markets are merging into one huge global marketplace.
Example: Even with it's long history of international involvement - Henry Ford had a sales branch in France by 1908 and a manufacturing facility in England by 1911 - the company is still learning how to master the challenges of global operations. The company is globalizing product development, purchasing, sales, and manufacturing through multifunctional teams staffed from around the world to develop new cars and trucks as the firm strives to become a true global player.
Meaning of Globalization
Economic activity is not only becoming more internationalized but it is increasingly becoming globalizes. Globalization is a complex and advanced form of internationalization which implies a degree of functional integration between internationally dispersed economic activities. It is the recognition by organisations that businesses must have a global and not a local focus. To survive gallantly in this ‘global village’ firms need to co-ordinate their marketing activities within the social, cultural, political, economic, technological, and legal constraints of the global environment. When going abroad organisations have to face a variety of stimuli in the external environment which differ from nation to nation. A key concern of international marketing strategist, therefore, is to decide the market entry strategies that it must adopt to meet the ‘global customer’ needs better than the competitors.
Market Entry Strategies
Successful market entry strategy is built on the pre-requisite of a systematic ‘environmental scanning’ of both the macro and the micro variables involved in a foreign market opportunity. A market entry is not an end in itself but is a means to an end. A variety of motivations can push and pull firms along the international path. Some of the major motivations that have been found to make firms go international are given below:
· To seek a profit advantage by exploiting the opportunities available in other countries.
· To market a unique product that the firm may have developed.
· To make use of the technological advantages that a country may possess.
· To make use of the exclusive information about the country's demand situation, people's buying habits, market scenario etc that the firm may have gathered through it's own research.
· To make use of the tax benefits that a country may offer, especially in free trade zones.
· To produce more goods at a lower price through the economies of scale.
· To overcome the competitive pressures from rival firms who have already gone international or have come in the domestic market from abroad.
· To maintain the declining profit and sales level due to low domestic demand.
Before selecting a market entry mode organisations have to consider a range of criteria such as:
· The company goals in terms of volumes of international business, geographical coverage, international market share, profitability etc.
· Costs: Organisations have to consider indirect costs such as freight charges, costs of strikes, disruptions to output, as well as the costs of doing nothing which may be higher than the attendant risk of moving into a relatively unknown market
· The level of flexibility required.
· The variety of risks associated with the entry mode.
· The investment payback period.
· The speed of market entry desired.
· The managerial commitment.
· The organization's product line and the nature of the products.
· The intensity of competition abroad.
Example: "Going global" as a business enterprise often means adapting products to fit local needs around the world. When Whirlpool Corporation set out to develop convinced the product development team that uniformity wouldn’t work. Differences between countries in customs, costs, and available materials made it impractical. The team therefore chose a flexible design for a lightweight, low-cost washer and preferences. It is manufactured in the country where it is to be sold by companies that are Whirlpool affiliates or joint venture partners.
Modes of International Market Entry
A firm may decided to go international in one or more of the following ways. Often, a firm may enter the international market in one mode and after getting a strong foothold may change the way in which it's mode of international presence in the country. Some of the important modes of international market entry are:
· Exporting: the selling of domestically produced goods in foreign markets. Exporting may be direct or indirect (through an agent)
Example: Direct - Komatsu exporting earth-moving machines to the US
Indirect - Jaguar appointed Inchcape, a UK based services and industrial marketing group as its importer/ distributor for China.
· Licensing: the selling of rights to market brand name products or to use patented processes or copyrighted materials.
Example: Sanofi, a French pharmaceutical company appointed Bristol-Myers Squibb to market the drug, Plavix in the US. Johnson's baby soap is made by Soap and
Chemicals Industrial And Trading Co. (SCITRA) Shj, under license from Johnson and Johnson, UK.
· Franchise: an arrangement in which a company sells a "package" of support containing a trademark, equipment, material and managerial guidelines.
Example: Firms like McDonald's, KFC, and others sell facility designs, equipment, product ingredients, and management systems to foreign investors while retaining certain product and operating controls.
· Joint venture: a business undertaking in which foreign and domestic companies share the costs of establishing operations.
Example: The collaboration between Caterpillar of the US and Mitsubishi Heavy Industries of Japan
· Contract manufacturing: an arrangement under which the principal company gives a foreign company a contract to manufacture a product(s) under the principal company's brand name.
Example: Chrysler has a contract manufacturing agreement with Dailmer - Puch, an Austrian group, to build its Jeep Cherokee model at an yearly volume of 47,000.
· Assembly: a business operation under which various parts of the component are brought together at the foreign unit and assembled to make the final product.
Example: Daewoo , the motor vehicle manufacturer of Korea has an assembly operation in Vietnam.
· Wholly owned local production: a local operation completely owned by the foreign firm where the complete production of the product takes place.
Example: In 1982, Honda became the first Japanese car manufacturer to set up production in the US.
· Acquisitions: a transaction in which a firm acquires all or part of the assets, business, stock, or other securities of the selling company, there by gaining operational control of a part or all of the acquired firm
Example: Reckitt and Coleman of the UK buying L&F Household from Eastman Kodak to compete with Procter and Gamble.
· Strategic Alliances: alliances formed by organisations generally with an aim of exploiting opportunities in research and development or towards achieving leadership in supply.
Example: General Mills of the US entered into a global alliance with Nestle of Switzerland to form Cereal Partners Worldwide, owned equally by both companies.
Growth of Globalization
Thus we can see that globalizations has reduced the cultural differences between consumers and producers and is now bringing convergence of consumer tastes and preferences. Formerly protected markets have opened their doors in the form of economic integration like
EU and NAFTA. Global communication networks and global media such as CNN, BBC and MTV and the growth of global products like Sony Walkman, McDonald etc are creating a worldwide culture. The IT revolution has also brought new challenges and opportunities by making the world a highly connected web and thus increasing the real proximity between countries. Even though, globalization today has become more complex and competitive it still offers the international manager various new possibilities that will continue to test them anew throughout the continued years of the new millenium.
Test Your Knowledge
& ____________ is the recognition by organizations that businesses must have a global and not a local focus.
& When firm go international they have to face a variety of external environmental stimuli which differ from nation to nation (True or False)
& Two reasons because of which firms go international are ______________ and ____________.
& A firm can decide any mode of international market entry without considering any factors (True or False)
& Exporting may be ___________ or ___________
& ___________ is the selling of rights to market branded products or to use patented processes or copyrighted materials.
& An example of franchise operations can be seen in the fast food industry firms KFC, McDonald's etc. (True or False)
& An _____________ is a transaction in which a firm acquires all or part of the assets of another company.
& Strategic alliances may lead to exploitation of consumers (True or False)
& Any three factors that a firm may consider in the foreign market while going international are __________, ____________ and ____________
& Two examples of economic integration that can be seen in the world today are ________ and ____________.