International Negotiation

Effects of Globalization
 Globalization
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 So, what is Globalization?
The economical process that consists of the
integration of different national economies into
a unique world-wide market economy related to
the mobility of financial, commercial and human
resources

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 Globalization
What do we see in the World Economy today?

• From self-contained national economies with high barriers to cross-border trade

and investment
• A more integrated global economic system with lower barriers to trade and
investment
• About $3 trillion in foreign exchange transactions taking place everyday
• Over $12 million of goods and over $3 trillion of services are being sold everyday
across national borders
• Increasing Foreign Direct Investment
• Increasing economic regionalization process between “block” economies
• The establishment of international institutions in order to regulate those flows of
Trade and Investment

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 Consumption habits become more
universal…

• In the cars people drive

• In the food people eat
• In the companies where people work
• In the clothes people wear

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 Two facets of Globalization
I. Globalization of Markets

II. Globalization of Production

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 Globalization of Markets
• It refers to the merging of historically distinct and separate
national markets into one huge global marketplace

• In many markets today, the tastes and preferences of

consumers in different nations are converging toward some
global norm

Ex. Coca Cola, Starbucks, Sony PlayStation, McDonald’s, etc

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 Globalization of Production
• Sourcing of goods and services from locations around the
globe to take advantage of national differences in cost and
quality of production (labor energy, land, and capital)

• The goal is to lower the overall cost structure or improve the

quality or functionality of the product, and gain competitive
advantage

Ex. Boeing, Toyota, Philips …..

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 Drivers of Globalization

• Declining trade and investment barriers

• Technological change

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 Declining trade and
investment barriers
Some definitions…

• International trade occurs when a firm exports goods or services to consumers in another country
• Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home
country

Some history…

• During the 1920s and 1930s, many nations erected barriers to international trade and FDI to protect
domestic industries from foreign competition
• After WWII, advanced Western countries began removing trade and investment barriers
• Under GATT (General Agreement on Trade and Tariffs signed in 1947 initially between 23 nations) as the
forerunner of the WTO (Established in1995 -157 members and 26 observers), over 100 nations negotiated
further decreases in tariffs and made significant progresses on a number of non-tariff issues
• Under the WTO (Established in 1995 -157 members and 26 observers),, a mechanism now exists for
dispute resolution and the enforcement of trade laws, and there is a push to cut tariffs on industrial goods,
services, and agricultural products

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 Declining barriers…cont.
Consequences

• Lower trade barriers enable companies to view the world as a

single market and establish production activities in optimal
locations around the globe

• Acceleration in the volume of world trade and investment

since the early 1980s.

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 Technological Change
• The lowering of trade barriers made globalization of markets
and production a theoretical possibility. Technological change
made it a tangible reality

• Since World War II, there have been major advances in

communications, information processing, and transportation

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 Technological Change
• The development of the microprocessor has lowered the cost of global
communications, and therefore the cost of coordinating and controlling a global
organization

• Web-based transactions have grown from virtually zero in 1994 to $250 billion in
2007 in the U.S. alone; and Internet usage was up from fewer than 1 million users
in 1990 to 1.3 billion users in 2007

• Commercial jet aircrafts and super freighters, and the introduction of

containerization have greatly simplified trans-shipment from one mode of
transport to another

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 Global Integration Forces
Restraining Forces Driving Forces
• Culture • Technology
• Market Differences • Culture
• Costs • Market Needs
• National Controls • Costs
• Nationalism • Free Markets
• Peace vs. War/Stability • Economic Integration
• Management Myopia • Peace
• Organizational History • Strategic Intent
• Domestic Focus • Management Vision, Strategy and
Action

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 Challenges
• Markets can present higher profit opportunities than
present markets.

• Markets can offer size but not profits. i.e : promoting

aji Amarillo in Argentina, Uruguay and Brazil

• Company needs a larger customer base for

economies of scale.

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 CONVERGENCE
VS. DIVERGENCE

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 Convergence
Theodore Levitt, HBS, 1983:

“A powerful force drives the world toward a

converging commonality, and that force is
technology”

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 Absolute Convergence?

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 Standardize or Adapt?
Standardization
– Companies offer same products
– Companies adjust the balance of the marketing mix to market
segments with similar needs across countries

Adaptation
– Companies offer different products
– Adjust balance of marketing mix to market segments with differing
needs across countries

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 Standardize or Adapt?
High

Global Transnational
Strategy Strategy
Cost Pressures

International Multidomestic
Strategy Strategy

Low

Low Local Responsiveness Pressures High

Hill & Jones, Strategic Management

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 Pressures to reduce costs
• Companies competing internationally face pressures to reduce costs.
• Sometimes companies need to reduce their costs of value creation by producing
standardized products in optimal places around the world to obtain economies from
optimal localization and from the experience curve.
• Pressures to reduce costs may be very intense in industries that manufacture mass
products, where differentiation is hard to accomplish and competition is mostly on price.
• Products that serve universal needs fall into this category. Universal needs appear when
tastes and preferences are similar, if not identical, among consumers of different nations.
• Examples: Chemicals, Oil, Steel, Sugar; industrial and consumption products like
calculators, chips, semiconductors, personal computers.
• Pressures to reduce costs are also intense in industries where the main competitors
support their activities in low cost countries, where there is excess capacity, or where
consumers have high negotiation power and low costs to exchange providers

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 Pressures to adapt
Differences in consumer tastes and preferences

• This creates pressure to adjust the product, message or other variables of the
marketing mix. Usually marketing departments have to be deployed across
countries.
• For example, in the automobile industry, US consumers have high demand for
vans. Many families have vans as their 2nd or 3rd vehicle. In contrast, in Europe,
vans are considered utilitarian vehicles, and are seldom purchased by individual
consumers. They are purchased by companies. As a result, the marketing
message has to be adapted by region

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 Pressures to adapt…cont.
Differences in infrastructure and traditional practices

• Pressure to achieve local acceptance emerge from difference in infrastructure and

traditional practices. Satisfying the differing needs may require assigning
manufacturing functions in subsidiaries. For example, in North America, the
electricity standard for electronics is 110V, while in Europe it is 240V. As a result,
electric appliances have to be adapted per region.
• In the UK, people drive their cars on the left side, requiring cars that have the
steering wheel on the right side, whereas in France it´s the opposite.

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 Global Strategy
• High cost pressure, Low adaptation pressure
• Competitors pursue increase in profitability from economies obtained
from going further down in the experience curve, and localization
economies. They pursue a low cost strategy
• Production, Marketing, R&D are concentrated in a few favorable places
• They don´t adjust their products and marketing strategy to local conditions
• They prefer to sell a standardized product for the whole world
• Examples: Intel, Motorola

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 Transnational Strategy
• High cost pressures, high pressures to adapt
• They seek both low costs and differentiation
• Distinctive abilities reside in each country, so innovation may come from all over the world.
This differs from the International Strategy, where innovation comes from a central location
• Example: Caterpillar.
– They compete with huge low cost companies like Komatsu, making them seek more economies of
scale. Nevertheless, variations in construction practices and government regulations in each country
mean that Caterpillar should also respond to local adaptation pressures.
– With these issues in mind, the company redesigned its products to use many components, and
invested in a few large scale manufacturing facilities in favorable places with the purpose of
satisfying global demand and pursuing economies of scale.
– At the same time, the company increases centralized manufacturing of pieces with assembly plants
in each of its main global markets. In these plants, Caterpillar adds local characteristics to its
products

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 International Strategy
• Low cost pressures, low adaptation pressures
• These companies transfer products and valuable abilities to foreign markets where
incumbent (local) competitors don´t have those abilities and products
• Most of them have succeeded by creating differentiated products in their home territories
for new foreign markets
• They tend to centralize R&D. Nevertheless, they also establish manufacturing and marketing
functions in big countries
• They could also adjust the marketing offer to some local markets but with some limits
• The central office holds strict control over foreign marketing and products
• Examples: Toys R Us, IBM, Kellogg, and Procter & Gamble
• P&G has manufacturing facilities in all important markets outside the US. Nevertheless,
these plants manufacture differentiated products that have been developed in headquarters,
and sold with a marketing message developed in the US

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 Multidomestic Strategy
• Low cost pressures, high adaptation pressures
• They transfer abilities and products designed locally to international markets. The difference
with the international strategy is that they extensively adjust their offer and marketing
strategy to each country.
• They could deploy value creating activities around the world (production, marketing, R&D)
• Weakness: it creates vulnerability in costs and duplication of efforts
• Example: The case of Philips in the 70s: They tried to introduce the VCR V200 as a
predominant format, competing with Matsushita´s VHS, but the US subsidiary opposed, and
even worse, they purchased Matsushita´s products to stamp their brand on them.

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 How do the uncontrollable
elements affect us?
US Farmers respond to CAFTA

https://www.youtube.com/watch?v=7HM6Gys
CRHU

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 The Globalization Debate
Pro
 Lower prices for goods
and services
 Economic growth
 Increase in consumer
income
 Creates jobs (for many)
 Countries specialize in
production of goods and
services that are produced
most efficiently
Con
 Destroys manufacturing
jobs in wealthy nations
 Wage rates of unskilled in
advanced countries
decline
 Companies move to
countries with fewer labor
and environment
regulations
 Loss of sovereignty
 Homogenized cultures