Globalization and Firms

41. With the help of an example discuss the characteristics of globalization. Globalization refers to a fundamental shift in the world economy in which national economies are no longer relatively self-contained entities. Instead, nations are moving toward an interdependent global economic system. Within this new global economy, an American might drive to work in a car designed in Germany that was assembled in Mexico by DaimlerChrysler from components made in the U. S. and Japan that were fabricated from Korean steel and Malaysian rubber.
A company does not have to be the size of these multinational giants to facilitate, and benefit from, the globalization of markets. 42. Define globalization and discuss it has changed the business environment? Globalization has created many opportunities for businesses to expand their revenues by selling around the world while at the same time reducing their costs by producing in nations where labor and other inputs are cheap. However, globalization has also produced new threats for companies in the form of increased competition. 41.
Compare and contrast a pure democracy and a representative democracy. Which type of democracy is more common today? Why? The pure form of democracy is based on a belief that citizens should be directly involved in decision making. In contrast, in a representative democracy, citizens periodically elect individuals to represent them. The elected individuals form a government and make decisions on behalf of the electorate. Because a pure democracy is impractical in advanced societies with tens or hundreds of millions of people, representative democracies are far more common in today’s world. 2. Explain the differences between common law and civil law systems by the approach of each to contract law. Contracts drafted under a common law framework tend to be very detailed with all contingencies spelled out. In contrast, contracts in a civil law system tend to be much shorter and less specific because many of the issues typically covered in a common law contract are already covered in civil law. 43. What are state-owned companies? Why do they exist? Why do they usually perform poorly? A state-owned company is a company that is owned by a nation’s government.

After World War II, many social democratic governments nationalized private companies that were to be run for the public good rather than private profit. Great Britain, for example, nationalized so many companies that by the end of the 1970s, state-owned monopolies existed in telecommunications, electricity, gas, coal, and several other industries. However, because state-run companies such as the ones that existed in Great Britain are protected from competition by their monopoly position and guaranteed financial support, they become inefficient. 1. Compare and contrast folkways and mores. Folkways are the routine conventions of everyday life. Generally, folkways are actions of little moral significance. Folkways include rituals and symbolic behavior. In contrast, mores are norms that are seen as central to the functioning of a society and to its social life. Mores have much greater significance than folkways. Accordingly, violating mores can bring serious retribution. 42. What is the difference between a caste system and a class system?
A caste system is a closed system of stratification in which social position is determined by the family into which a person is born, and change in that position is usually not possible during an individual’s lifetime. The caste system is the most rigid form of social stratification. A caste frequently involves a specific occupation. In contrast, a class system is a less rigid form of social stratification in which social mobility is possible through an individual’s personal achievements and/or luck. 43.
Discuss why the stratification of a society is important to business. The stratification of a society is significant if it affects the operation of business organizations. In a country like Great Britain for example, the relative lack of class mobility and the differences between classes has resulted in hostility between middle-class managers and their working-class employees. This hostility and the resulting lack of cooperation can make it more difficult for firms to establish a competitive advantage in the global economy. While the last two decades has seen a eduction in the number of industrial disputes in Britain, there are signs that class consciousness may be reemerging in China. 44. Describe the four dimensions of culture as identified by Geert Hofstede. Geert Hofstede identified four dimensions that he claimed summarized the differences between different cultures. According to Hofstede, the power distance dimension focused on how a society deals with the fact that people are unequal in physical and intellectual capabilities. The second dimension identified by Hofstede, individualism vs. collectivism, focused on the relationship between the individual and his/her fellows.
Hofstede’s third dimension, uncertainty avoidance, measured the extent to which different cultures socialize their members into accepting ambiguous situations and tolerating uncertainty. Finally, Hofstede’s fourth dimension, masculinity vs. femininity, examined the relationship between gender and work roles. 41. Compare and contrast import quotas and voluntary export restraints. An import quota is a direct restriction on the quantity of some good that may be imported int o a country. The restriction is normally enforced by issuing import licenses to a group of individuals or firms.
In contrast, a voluntary export restraint (VER) is a quota imposed by the exporting country, typically at the request of the importing country’s government. Foreign producers agree to VERs because they fear more damaging punitive tariffs or import quotas might follow if they do not. Both import quotas and VERs benefit domestic producers, but hurt consumers through higher prices. 42. What are the political reasons for governments to intervene in markets? There are a number of political reasons why governments intervene in markets. The most common reason for intervention is to protect jobs and industries.
Governments may also intervene to protect national security, to threaten punitive retaliatory actions, to protect consumers or to protect human rights, and to further foreign policy objectives. 43. Discuss the economic reasons for government intervention in markets. The economic reasons for government interaction have undergone a renaissance in recent times as more economists support economic reasons for intervention. The oldest argument for intervention is the infant industry argument. Strategic trade policy is the other main reason given for economic government intervention in markets. 44.
What is strategic trade policy? Provide an example. Strategic trade policy suggests that in industries where the existence of substantial scale economies implies that the world will profitably support only a few firms, countries may predominate in the export of certain products simply because they had firms that were able to capture first-mover advantages. Boeing’s dominance in the aerospace industry has been attributed to these types of factors. According to strategic trade policy, a government can help raise national incomes if it can ensure that the firms that gain first-mover advantages in such industries are omestic rather foreign. Further, the theory argues that it might pay governments to intervene in an industry if it helps domestic firms overcome the barriers to entry created by foreign firms that have already reaped first-mover advantages. 45. Explain how trade barriers affect a firm’s strategy. There are four main ways trade barriers affect a firm’s strategy. First, tariffs raise the cost of exporting, putting the firm at a competitive disadvantage. Second, quotas may limit a firm’s ability to serve a country from outside of that country.
Third, to conform to local content regulations, a firm may have to locate more production activities in a given market than it would otherwise. Finally, the threat of antidumping actions limits the firm’s ability to use aggressive pricing to gain market share in a country. 41. What is a greenfield investment? How does it compare to an acquisition? Which form of FDI is a firm more likely to choose? Explain your answer. FDI can take the form of a greenfield investment in a new facility or an acquisition of or a merger with an existing local firm.
Research shows that most FDI takes the form of mergers and acquisitions rather than greenfield investments. Mergers and acquisitions are more popular for three reasons. First, mergers and acquisitions are quicker to execute than greenfield investments. Second, foreign firms are acquired because those firms have valuable strategic assets. Third, firms make acquisitions because they believe they can increase the efficiency of the acquired firm by transferring capital, technology, or management skills. 42. Compare and contrast the advantages of foreign direct investment over exporting and licensing.
A firm will favor foreign direct investment over exporting as an entry strategy when transportation costs or trade barriers make exporting unattractive. Furthermore, the firm will favor foreign direct investment over licensing (or franchising) when it wishes to maintain control over its technological know-how, or over its operations and business strategy, or when the firm’s capabilities are simply not amenable to licensing, as may often be the case. 43. Discuss the various political ideologies and their impact on foreign direct investment.
The radical view writers argue that the multinational enterprise (MNE) is an instrument of imperialist domination. The free market view argues that international production should be distributed among countries according to the theory of comparative advantage. The pragmatic nationalist view is that FDI has both benefits and costs. The radical view has a dogmatic radical stance that is hostile to all inward FDI. The free market view is at the other extreme and based on noninterventionist principle of free market economics. Between these two extremes is an approach called pragmatic nationalism. 4. Describe the situations when licensing is not a good option for a firm. Licensing is not a good option in three situations. First, licensing is hazardous in high-tech industries where protecting firm-specific expertise is very important. Second, licensing is not attractive in global oligopolies where tight control is necessary so that firms have the ability to launch coordinated attacks against global competitors. Finally, in industries where intense cost pressures require that MNEs maintain tight control over foreign operations, licensing is not the best option. 46.
Discuss Michael Porter’s interpretation of value creation and competitive advantage. According to Michael Porter, low cost and differentiation are two basic strategies for creating value and attaining a competitive advantage in an industry. Porter argues that those firms that create superior value will achieve superior profitability. Porter notes that it is not necessary for a firm to have the lowest cost structure or create the most valuable product; rather it is only important that the gap between value and the cost of production be greater than that of competitors. 7. Discuss strategic positioning. How does strategic positioning relate to the efficiency frontier? The efficiency frontier shows all of the different positions that a firm can adopt with regard to adding value to the product and low cost assuming that its internal operations are configured efficiently to support a particular position. It is important that managers decide where a firm should be positioned with regard to value and cost, configure operations accordingly, and manage them efficiently to ensure the firm is operating on the efficiency frontier. 8. Describe the benefits of global expansion for firms. Global expansion allows firm to capture many opportunities not open to firms that remain focused purely on the domestic market. Firms that operate globally have the opportunity to sell their product in a much larger marketplace. Location economies can be realized through global expansion by dispersing value creation activities to the optimal location in the world. International expansion allows a firm to realize greater cost economies from experience effects.
Finally, global expansion provides firms with the opportunity to earn a greater return by leveraging any skills developed in foreign operations and transferring them within the organization. 49. What are the two types of competitive pressures that firms competing in the global marketplace face? How do firms respond to these pressures? Firms that compete in the global marketplace typically face two types of competitive pressure that affect their ability to realize location economies and experience effects, to leverage products and transfer competencies and skills within the enterprise.
They face pressures for cost reductions and pressures to be locally responsive. These competitive pressures place conflicting demands on a firm. Responding to pressures for cost reductions requires that a firm try to minimize its unit costs. Responding to pressures to be locally responsive requires that a firm differentiate its product offering and marketing strategy from country to country in an effort to accommodate the diverse demands arising from national differences in consumer tastes and preferences, business practices, distribution channels, competitive conditions, and government policies. 50.
What are the four basic strategies that firms use to compete in international markets? Under what conditions is each strategy most appropriate? The four basic strategies that firms use to compete in international markets are the international strategy, the global standardization strategy, the localization strategy, and the transnational strategy. The international strategy is most appropriate when there is low pressure for local responsiveness and low pressure for cost reduction. When there is high pressure for cost reduction, but low pressure for local responsiveness the global standardization strategy makes sense.
A localization strategy is appropriate when pressure for local responsiveness is high, but pressure for cost reduction is low. Finally, when pressure for both cost reduction and local responsiveness is high, the transnational strategy is best. 52. What are the three challenges related to strategy and structure that firms must accomplish if they are to achieve superior profitability? Superior enterprise profitability requires that firms fulfill three conditions. First, the different elements of a firm’s organizational architecture must be internally consistent.
Second, the organizational architecture of the firm must be consistent with its strategy. Third, the strategy and the structure must not only be consistent with each other, they must also be consistent with the competitive conditions prevailing in the marketplace. 53. Discuss the relationship between a firm’s control systems and a firm’s incentive system. Why is this relationship important? The relationships between a firm’s control systems and incentive systems is a close one. Control systems are the metrics used to measure the performance of subunits and make judgments about how well managers are running those subunits.
Incentives are the devices used to reward appropriate managerial behavior. The relationship between these two areas is important because incentives are very closely tied to performance metrics. For example, the incentives of a manager in charge of a national operating subsidiary might be linked to the performance of that company. Specifically, he/she might receive a bonus if her subsidiary exceeds its performance targets. 54. Discuss the location of decision-making in a firm that is following a transnational strategy. Decision-making in a firm pursuing a transnational strategy is complex.
The need to realize location and experience curve economies requires some centralized control over global production centers. Yet, the need for local responsiveness requires the decentralization of many operating decisions, particularly those for marketing, to foreign subsidiaries. Decentralization of decision-making is also needed to allow subsidiaries the freedom to develop their own skills and competencies—a requirement that is necessary for the global learning component of the transnational strategy. 55. Discuss the sources of inertia in organizations. Is it easy to make organizational changes?
Organizations are difficult to change. Within most organizations are strong inertia forces. These forces come from a number of sources. One source of inertia is the existing distribution of power and influence within an organization. Managers who are not happy with the changes are likely to resist and slow the process. A second source of inertia is the existing culture. Since value systems reflect deeply held beliefs, they can be very hard to change. A third source of inertia derives from senior managers’ preconceptions about the appropriate business model or paradigm.
Managers may not recognize the value in a given business model that has been successful in the past. Finally, institutional constraints may act as a source of inertia. In some cases, local content rules or regulations pertaining to layoffs can make it difficult for firms to adopt the most effective strategy and architecture. 45. What are first-mover advantages? Discuss the advantages associated with them. First-mover advantages are the advantages frequently associated with entering a market early. One first-mover advantage is the ability to preempt rivals and capture demand by establishing a strong brand name.
A second advantage is the ability to build sales volume in that country and ride down the experience curve ahead of rivals, giving the early entrant a cost advantage over later entrants. A third advantage is the ability of early entrants to create switching costs that tie customers into their products or services. Such switching costs make it difficult for later entrants to win business. 46. Explain the relationship between first-mover disadvantages and pioneering costs. When a firm enters a market prior to other international businesses, it can have first-mover disadvantages.
These disadvantages may give rise to pioneering costs, costs that an early entrant has to bear that a later entrant can avoid. Pioneering costs arise when the business syste m in a foreign country is so different from that in a firm’s home market that the enterprise has to devote considerable effort, time, and expense to learning the rules of the game. Pioneering costs also include the costs of promoting and establishing a product offering. Finally, an early entrant may be put at a disadvantage, relative to a later entrant, if regulations change in a way that diminishes the value of the early entrant’s investments. 7. Discuss Bartlett and Ghoshal’s perspective on how firms from developing countries should approach international expansion. Bartlett and Ghoshal suggest that companies based in developing countries should use the entry of foreign multinationals as an opportunity to learn from these competitors by benchmarking their operations and performance against them. They argue that the local company might be able to find ways to differentiate itself from foreign companies by focusing on market niches that the multinational ignores or is unable to serve effectively if it has a standardized global roduct offering. Then, the firm from the developing nation may then be in a position to pursue its own international expansion strategy. 48. Discuss strategic alliances. How successful are they? Why do firms form strategic alliances? The term strategic alliance refers to cooperative agreements between potential or actual competitors. Strategic alliances run the range from formal joint ventures, in which two or more firms have equity stakes, to short-term contractual arrangements, in which two companies agree to cooperate on a particular task.
Firms enter into strategic alliances for four main reasons. First, strategic alliances may facilitate entry into a foreign market. Second, strategic alliances allow firms to share the fixed costs of developing new products or processes. Third, strategic alliances allow firms to bring together complementary skills and assets that neither company could develop easily on its own. Fourth, strategic alliances can help firms establish technological standards for an industry.