Global Islamic Business

Environment
DAY ONE
DATE: SAT , 10 JULY 2010
TIME : 9.00 AM – 5.00 PM

Even the ideal strategy is useless ,unless properly implemented. Getting

the right people is the cornerstone of executing strategy” .

Zimmerer and Scarborough

What Is Globalization?
 The world is moving away from self-contained national
economies toward an interdependent, integrated global
economic system
 Globalization refers to the shift toward a more integrated
and interdependent world economy
 Borderless

Globalization has two facets:

1) the globalization of markets
2) the globalization of production
The Globalization Of Markets

 The globalization of markets refers to the merging of

historically distinct and separate national markets
into one huge global marketplace
 In many industries, it is no longer meaningful to talk
about the “German market” or the “American market”
 Instead, there is only the global market
 Falling trade barriers make it easier to sell
internationally
 The tastes and preferences of consumers are
converging on some global norm
 Firms help create the global market by offering the
same basic products worldwide
The Globalization Of Production

 The globalization of production refers to the sourcing of

goods and services from locations around the globe to
take advantage of national differences in the cost and
quality of factors of production like land, labor, and
capital.
ieNike never have a factory

 Companies compete more effectively by lowering their

overall cost structure or improving the quality or
functionality of their product offering
The Emergence Of Global Institutions
Institutions are needed to:
 help manage, regulate, and police the global
marketplace
 promote the establishment of multinational treaties to
govern the global business system
The Emergence Of Global Institutions

Institutions created over the past half century include:

 the General Agreement on Tariffs and Trade (GATT)

 the World Trade Organization (WTO)
 the International Monetary Fund (IMF)
 the World Bank
 the United Nations (UN
The Emergence Of Global Institutions

 The World Trade Organization (like its predecessor

GATT) is primarily responsible for policing the world
trading system and making sure that nation-states
adhere to the rules laid down in trade treaties signed by
WTO members

 In 2007, the 150 nations that accounted for 97% of world

trade were WTO members

 The WTO promotes lower barriers to trade and

investment
The Emergence Of Global Institutions
 The International Monetary Fund and the World Bank were
created in 1944
 The IMF was established to maintain order in the
international monetary system
 The World Bank was established to promote economic
development

 The United Nations was established in 1945 to:

 maintain international peace and security
 develop friendly relations among nations
 cooperate in solving international problems and in
promoting respect for human rights
 be a center for harmonizing the actions of nations
Global Business Strategy
 Global Business Strategy can be defined as the business
strategies engaged by the businesses, companies or
firms operating in a global business environment and
serving consumers throughout the world.

 Global business strategies are closely related to the

business developing strategies adopted by businesses to
meet their short and long term objectives.
Global Business Strategy

2 types of strategies:
 The short term goals of the business would be related to
improving the day-to-day operations of the company

 the long term objectives are generally targeted towards

increment of the profits, sales and earnings of the company
in the long run ensuring growth and stability of the business
and dominance over the national or regional market.
DRIVERS OF GLOBALISATION
Four drivers determine the extent and nature of globalisation in
an industry:

 (1) Market drivers

 Degree of homogeneity of customer needs
 Existence global distribution networks
 Transferable marketing

 (2) Cost drivers

 Potential for economies of scale
 Transportation cost
 Product development costs
 Economies of scope
DRIVERS OF GLOBALISATION

 (3) Government drivers

 Favour trade policies e.g. market liberalisation
 Compatible technical standards and common marketing
regulations
 Privatisation

 (4) Competitive drivers

 The greater the strength of the competitive drivers the
greater the tendency for an industry to globalise
 Globalisation-Characterictics
 International Business -
 activities that require the movement of resources,
goods, services, and skills across national
boundaries
 all business transactions that involve two or more
countries
 International Trade -
 the export or import of goods or services to
consumers in another country
 International Investment -
 investment of resources in business activities outside
a firm’s home country
 International Management -
 the performance of the management functions
(POLC) across national borders
International Strategy Formulation

 Why Globalize?
 expand sales
 when domestic markets are saturated, should go

overseas to increase sales and profits

 acquire resources
 resources may be more readily available and less

costly in other countries

 diversify sources of sales and supplies
 different business cycles between countries

 may avoid impact of price swings or shortages

 avoid tariffs
 The Changing Global Environment
 In the past, managers have viewed the global sector
as closed
 Each country or market was assumed to be isolated
from others
 Firms did not consider global competition, exports

 Today’s environment is very different

 Managers need to view it as an open market
 Organizations buy and sell around the world
 Managers need to learn to compete globally

©The McGraw-Hill Companies, Inc., 2000

The Changing Global Environment
 Global organizations
 organizations that operate and compete in more
than one country
 are free to establish foreign subsidiaries to become
strong world competitors
 Home Country
 country in which the parent organization is based
 Host Country
 country in which the parent organization makes
the investment
Barriers to Free Trade
Export
Tariffs
Restraint
s

Distance
Buy
National
CampaignsFree Trade Quotas
Barriers
Economic
Cultural
Communitie
Differenc
s
es
Local Ownership
Requirements
Barriers to International Trade
 Trade Controls - governmental influences usually
aimed at reducing the competitiveness of imported
products or services
 Tariffs: taxes levied on goods shipped
internationally
 Subsidies: direct payments to domestic producers
 Quotas: legal restrictions on the import of goods

 Free trade doctrine - predicts that if each country

agrees to specialize in the production of goods that it
can produce most efficiently, it will
 make the best use of global resources
 result in lower prices
 Distance and Cultural Barriers
 Distance and Cultural barriers also “closed” the global
environment
 Distance closed the markets as far as some managers
were concerned
 Communications could be difficult
 Languages and cultures were different

 During the last 50 years, communications and

transportation technology has dramatically improved
 Jet aircraft, fiber optics, satellites have provided fast,
secure communications and transportation
 These have also reduced cultural differences
 Effects of Free Trade on Managers
 Declining barriers have opened great opportunities for
managers.
 Managers can not only sell goods and services but also
buy resources and components globally.

 Managers now face a more dynamic and exciting job due

to global competition.

©The McGraw-Hill Companies, Inc., 2000

Economic Integration
Free Trade Area: all barriers to trade among member
countries are removed, so that goods and services are freely
traded among the member countries
• NAFTA (North American Free Trade Agreement)
Customs Union: barriers to trade among members are
dismantled while a common trade policy with respect to
nonmembers is established
Common Market: no barriers to trade exists between
members and a common external trade policy is in force;
also, factors of production, such as labor, capital, and
technology move freely between member countries
• European Union (EU)
 Global Task Environment
Figure 4.2

Suppliers

Forces Yielding
Competitors Opportunities Distribu
and Threats tors

Customers

©The McGraw-Hill Companies, Inc., 2000

 Suppliers & Distributors
 Managers buy products from global suppliers or make
items abroad and supply themselves
 Key is to keep quality high and costs low

 Global outsourcing: firms buy inputs from throughout

the world
 GM might build engines in Mexico, transmissions in
Korea, and seats in the U.S.
 Finished goods become global products

 Distributors: each country often has a unique system of

distribution
 Managers must identify all the issues
 Customers & Competitors
 Formerly distinct national markets are merging into a
huge global market
 True for both consumer and business goods
 Creates large opportunities

 Still, managers often must customize products to fit

the culture
 McDonald's sells a local soft drink in Brazil

 Global competitors present new threats

 Increases competition abroad as well as at home.
Forces in the Global General Environment
Figure 4.3

Political &
Legal Systems

Sociocultural Forces yielding Economic

Opportunities
System and threats
system

©The McGraw-Hill Companies, Inc., 2000

Political/Legal Environment

 Different legal systems: common law or civil law

 Representative democracies: such as the U.S.,
Britain, and Canada
 Citizens elect leaders who make decision for

electorate.
 Usually has a number of safeguards such as

freedom of expression, a fair court system, regular

elections, and limited terms for officials
 Well-defined legal system and economic freedom
Political/Legal Environment

 Totalitarian regimes: a single political party or

person monopolize power in a country
 Typically do not recognize or permit opposition

 Do not have most safeguards found in a

democracy
 Difficult to do business with given the lack of

economic freedom
 Human rights issues also cause managers to avoid
dealing with these countries
Economic Environment
Economic Systems
 Market Economy
 production and prices are dictated by supply and
demand
 production of goods and services is privately owned
 competitive markets
 strong currencies
 institutional support
 well-functioning infrastructures
 investment opportunities for individuals
 social welfare, consumer-directed, administratively
guided
Economic Environment
 Command Economy
 government sets goals and determines the price
and quantity of what is produced
 most command economies are moving away from
the command economic system
 Mixed Economy
 certain economic sectors controlled by private
business, while others are government controlled
 many mixed countries are moving toward a free
enterprise system
Economic Environment

 Key Economic Issues (and indicators)

 economic growth, inflation, quality of life, GDP
 exchange rates
 Recent Trends
 Current shift away from totalitarian dictators toward
democratic regimes
 very dramatic example seen in the collapse of the
former Soviet Republic
 also very pronounced in Latin America and Africa

 With this shift, has come a strong movement toward

free market systems
 this provides great opportunities to business managers
on a global level
 many businesses are investing millions in former
totalitarian countries to seize these opportunities
 Changing Political and Economic Forces
Figure 4.4
Democratic
Britain Britain
1985 1995
Russia
1995
Hungary
1995
Political
Freedom
Hungary
1985

China
Russia China 1995
Totalitarian 1985 1985

Command Mixed Market

©The McGraw-Hill Companies, Inc., 2000 Economic Freedom
 Sociocultural Forces
 National culture: includes the values, norms,
knowledge, beliefs, and other practices that unite a
country.

 Values: abstract ideas about what a society believes

to be good, desirable and beautiful.
 Provides attitudes for democracy, truth,
appropriate roles for men, and women.
 Usually not static but very slow to change.
Sociocultural Forces

 Norms: social rules prescribing behavior in a given

situation.
 Folkways: routine social conventions including dress
codes and manners.
 Mores: norms that are central to functioning of society
- much more significant than folkways.
 examples of mores include theft, adultery, and are

often enacted into law

 Hofstede’s Model of National Culture

Individualism Collectivism

Low Power High Power

Distance Distance
Figure 4.5

Achievement Nurturing
Oriented Oriented

Low Uncertainty High Uncertainty

Avoidance Avoidance

Short Term Long Term

Orientation Orientation
©The McGraw-Hill Companies, Inc., 2000
 Hofstede’s Modal of National Culture

 Individualism/Collectivism: measured by whether or

not the ties between individuals are normally loose or
close
 Power distance: the extent to which less powerful
members of society accept and expect that power will be
distributed unequally
 Achievement/Nurture: the extent to which societies
value assertiveness (“achievement”) or caring (“nurture”)
Hofstede’s Modal of National Culture

 Uncertainty avoidance: refers to whether people in the society are

uncomfortable with unstructured situations in which unknown or
surprising incidents may occur

 Long-term/Short-term: the extent to which societies have a long-

term or short-term outlook on life plans
 Individualism v. Collectivism
 Individualism: world view that values individual freedom
and self-expression
 Usually has a strong belief in personal rights and need
to be judged by achievements

 Collectivism: world view that values the group over the

individual
 widespread in Communism
 prevalent in Japan as well

 Managers must understand how their workers relate

to this issue.
 Power Distance
 A society’s acceptance of differences in the well being
of citizens due to differences in heritage, and
physical and intellectual capabilities

 In high power distance societies, the gap between rich

and poor gets very wide
 In low power distance societies, any gap between rich
and poor is reduced by taxation and welfare programs
 Most western cultures (U.S., Germany, United

Kingdom) have relatively low power distance and

high individualism.
 Many economically poor countries such as Panama,

Malaysia have high power distance and low

individualism.
 Achievement vs Nurturing

 Achievement oriented societies value

assertiveness, performance, and success
 the society is results-oriented

 Nurturing-oriented societies value quality of life,

personal relationships, and service

 The U. S. and Japan are achievement-oriented while

Sweden, Denmark are more nurturing-oriented.
 Uncertainty Avoidance
Societies and people differ on their willingness to take
on risk.

 Low uncertainty avoidance cultures (U.S., Hong Kong),

value diversity, and tolerate differences
 tolerate a wide range of opinions and beliefs

 High uncertainty avoidance cultures (Japan and

France) are more rigid and do not tolerate people acting
differently
 high conformity to norms is expected
 Long Term Outlook
 Long-term outlook is based on values of saving, and
persistence
 Taiwan and Hong Kong are cultures that are long -term
in outlook.

 Short-term outlook seeks the maintenance of personal

stability or happiness right now.
 France and the U. S. are examples of this approach.
Hofstede’s Cultural Dimensions
INDIVIDUALISM/ POWER UNCERTAINTY
COUNTRY COLLECTIVISM DISTANCE AVOIDANCE
Australia Individual Small Moderate
Canada Individual Moderate Moderate/Low
England Individual Small Low
France Individual Large High
Greece Collective Large High
Italy Individual Moderate High
Japan Collective Moderate High
Mexico Collective Large High
Singapore Collective Large Low
Sweden Individual Small Low
US Individual Small Low
Venezuela Collective Large High
International Strategy Formulation
How Do Organizations Globalize?
Stage One: Passive Response
Importing: firm makes products and sells abroad
Exporting: to foreign countries
Stage Two: Initial (Overt) Entry
Hiring foreign representation
Contracting with foreign manufacturers
Stage Three: Fully-established operations
Licensing/Franchising
Foreign Direct Investment (FDI)
- Joint Ventures
- Foreign Subsidiary
International Strategy Formulation
 Exporting: selling abroad, either directly to target
customers or indirectly by retaining foreign sales agents
and distributors

 Importing: selling other countries products in the home

country, either directly to target customers or indirectly
Adv: quick and relatively inexpensive
test the waters and learn about customers
Disadv: high transportation costs
tariffs and quotas
danger of poor intermediary selection
International Strategy Formulation
 Licensing:
def : an arrangement where a firm (licensor) grants a
foreign firm the right to use intangible (“intellectual”)
property such as patents, copyrights, manufacturing
processes, or trade names for a specified period of
time, usually in return for a percentage of the
earnings, called royalty

Adv: small or insignificant investment

Disadv: loss of control
International Strategy Formulation
 Franchising: an arrangement where a parent company
(franchisor) grants a foreign firm (franchisee) the right to
do business in a prescribed manner. Usually involves a
longer time commitment by both parties than required
under licensing agreements

Adv: small or insignificant investment

Disadv: loss of quality control
International Strategy Formulation
 Foreign Direct Investment:
operations in one country that are controlled by
entities in a foreign countries

 acquiring control by owning more than 50 percent

of the operation

 turns a firm into a multinational enterprise

Foreign Direct Investment
 Strategic Alliance:
 a cooperative agreement between potential or
actual competitors
 an agreement between firms that is of strategic
importance to one or both firms; competitive
viability
 Joint Venture:
 the participation of two or more companies jointly
in an enterprise in which each party contributes
assets, owns the entity to some degree, and
shares risk
 Wholly Owned Foreign Subsidiaries
 provide for tightest controls by foreign firms
 very costly but can yield high returns
 International Expansion
Figure 4.6

Wholly-
Importing Licensing Joint Ventures owned For.
Exporting Franchising Strat. Alliances Subsidiary

Low Level of Foreign involvement and investment High

needed by a global organization

©The McGraw-Hill Companies, Inc., 2000

The Global Manager

M a n a g e r ia l A t t it u

E t h n o c e P n ot r l i y c c e n G t r ei c o c e n

H o m e I n d i v i d u I an lt e g r a t
M a r k e t F o r e i g nW o r l d w
O r i e n t e dM a r k e t sM a r k e t i
 International Managerial Attitudes
 Ethnocentric: the belief that the home (originating)
country’s management style is superior to the host
(recipient) country’s management style
 companies with this type of management may do
business in foreign countries but their subsidiaries will
be managed by home country personnel with home
management style
 Geocentric: (sometimes called regiocentric management)
tends to see the whole world as a single marketplace and
as such employ a mix of management styles of the home
country and host country
 managers and other key personnel are selected based
on merit without regard to their country of origin
International Managerial Attitudes

 Polycentric: the philosophy that the host

country’s management style is superior to
the home country’s style

 will
employ host country managers to run each
subsidiary
The impacts of Industrial Revolution in
Malaysia
 The set of one stop centre to facilitate Foreign Direct Investment
(FDI) ie MATRADE, MDEC, EPU
 2) The set up Regional Economic Corridor
 ie Wilayah Pembangunan Iskandar ( WPI ), East Coast
Economic Region ( ECER ), Sabah Development Corridor ( SEDIA )
etc
 3) Introduced technical subject to all higher Learning Institution and
Set up of Technical University ie German Malaysian Institute (GMI ),
MFI , SMI and UTM to ensure sufficient supply of manpower
 4) Relax and flexible of skilled and semi skilled foreign workers to
address shortage of manpower
The impacts of Industrial Revolution in
Malaysia
 The Introduction of Free Trade Zone ( FTZ ) ie Pasir Gudang FTZ,
Prai FTZ, Klang FTZ etc
 2) Government undivided support on development through :
 - Financial support ie EXIM Bank, Bank Pembangunan &
Industri, Labuan off-shore Financial Centre
 - Advisory through MITI, MATRADE, FAMA
 - Infrastructures support ie Penang Port, PTP, KLIA,
Enhancement on mode of transportation ( expressways )
 3) Tax incentives / relax on duty / trade tariff
 4) Encourage technology transfer to boost up development and
set up of policy like LOOK EAST POLICY
 5) Malaysia become – Asia Economic Tiger , along with Hong
Kong, Singapore, India , China