Chapter 4 Doing Business China Has Never Been Smooth

CHAPTER 4

MANAGING IN A GLOBAL ENVIRONMENT

CHAPTER OUTLINE

Are You Ready to Work Internationally?

I. A Borderless World

A. Globalization

B. Developing a Global Mindset

II. Multinational Corporations

IV. The International Business Environment

V. The Economic Environment

A. Economic Development

B. Economic Interdependence

VI. The Legal-Political Environment

VII. The Sociocultural Environment

ANNOTATED LEARNING OBJECTIVES

After studying this chapter, students should be able to:

1. Define globalization and explain how it is creating a borderless world for today’s managers.

Globalization refers to the extent to which trade and investments, information, social and cultural

ideas, and political cooperation flow between countries. One result is that countries, businesses,

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2. Describe a global mindset and why it has become imperative for companies operating

internationally.

Succeeding on a global level requires more than a desire to do business globally and a new set of

skills and techniques; it requires a global mindset. A global mindset is the ability of managers to

3. Describe the characteristics of a multinational corporation and explain the “bottom of the

pyramid” concept.

A multinational corporation typically receives more than 25 percent of its total sales revenues

from operations outside the parent’s home country. MNC’s have the following distinctive

4. Define international management and explain how it differs from the management of

domestic business operations.

International management is the management of business operations conducted in more than one

country. The fundamental tasks of business management, including the financing, production,

Managing in a Global Environment • 57

5. Indicate how dissimilarities in the economic, sociocultural, and legal-political environments

throughout the world can affect business operations.

Environmental factors that affect international business are similar to the task and general

environmental sectors described in Chapter 3. However, when comparing one country with

6. Discuss how the international landscape is changing, including the growing power of China,

India, and Brazil.

Many companies today are going straight to China or India as a first step into international

business. Although outsourcing is probably the most widespread approach to international

involvement in China, the country is moving toward a consumer-driven economy, with the

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7. Describe how regional trading alliances are reshaping the international business

environment.

Regional trading alliances have a significant impact on international business through increased

LECTURE OUTLINE

ARE YOU READY TO WORK INTERNATIONALLY?

American managers often display cross-cultural ignorance during business negotiations

compared to counterparts in other countries. This exercise helps students determine the extent to

which they are ready to participate in international negotiations.

I. A BORDERLESS WORLD Exhibit 4.1

A. Globalization

Globalization refers to the extent to which trade and investments, information, social and

cultural ideas, and political cooperation flow between countries. One result is that

countries, businesses, and people become increasingly interdependent. Globalization

provides a competitive edge at all stages of developing, manufacturing, and marketing

B. Developing a Global Mindset

Managing in a Global Environment • 59

A global mindset is the ability of managers to appreciate and influence individuals,

groups, organizations, and systems that represent different social, cultural, political,

institutional, intellectual, and psychological characteristics.

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II. MULTINATIONAL CORPORATIONS

The size and volume of international businesses are so large that they are hard to comprehend.

Although the term has no precise definition, a multinational corporation (MNC) typically

receives more than 25 percent of its total sales revenues from operations outside the parent’s

home country. MNCs also have the following distinctive characteristics:

• MNCs are managed as integrated worldwide business systems in which foreign affiliates

act in close alliance and cooperation with one another.

Discussion Question #6: Should a multinational corporation operate as a tightly integrated,

worldwide business system, or would it be more effective to let each national subsidiary operate

autonomously?

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A. A Globalization Backlash

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1. As the world becomes increasingly interconnected, a backlash over globalization is

2. Activists charge that globalization not only hurts Americans who lose their jobs but

contributes to worldwide environmental destruction and locks people into poverty. In

1. Although large, multinational organizations are accused of many negative

contributions to society, they also have the resources needed to do good things in the

2. Although the BOP concept has gained significant attention recently, the basic idea is

nothing new. Unilever (formerly Lever Brothers) has been working for many years to

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III. GETTING STARTED INTERNATIONALLY Exhibit 4.2

Organizations can become involved internationally in a couple of different ways. One way is to

seek cheaper sources of material or labor offshore, which is called offshoring or global

outsourcing. Another way is to implement market entry strategies such as exporting, licensing,

and direct investment. These market entry strategies represent alternative ways to sell products

and services in foreign markets.

A. Exporting

1. Exporting is a strategy in which the corporation maintains its production facilities

2. Exporting does entail numerous problems based on physical distances, government

Managing in a Global Environment • 61

B. Outsourcing

1. Global outsourcing, or offshoring, means engaging in the international division of

labor so that work activities can be done in countries with the cheapest sources of

1. Licensing is a strategy in which the corporation (the licensor) in one country makes

certain resources available to companies in another country (the licensees). These

resources can include technology, managerial skills, and/or patent and trademark

1. Direct investing is a strategy in which the corporation is involved in managing the

productive assets, which distinguishes it from other entry strategies that permit less

managerial control. The most popular form of direct investment is to engage in

strategic alliances and partnerships.

a. In a joint venture, a company shares costs and risks with another firm, typically

in the host country, to develop new products, build a manufacturing facility, or set

up a sales and distribution network.

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Discussion Question #5: Compare the advantages associated with the market entry strategies of

exporting, licensing, and wholly owned subsidiaries. What information would you need to

collect and what factors would you consider when selecting a strategy?

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IV. THE INTERNATIONAL BUSINESS ENVIRONMENT Exhibit 4.3

International management is the management of business operations conducted in more than one

V. THE ECONOMIC ENVIRONMENT

A. Economic Development Exhibit 4.4

1. Economic development differs widely among the countries and regions of the world,

and countries can be categorized as developing or developed countries. Developing

2. Infrastructure refers to a country’s physical facilities support economic activities

such as transportation, energy producing facilities, and communications. Companies

1. The recent financial crisis has made it abundantly clear just how economically

interconnected the world is. Although the recent crisis may seem atypical, savvy

international managers realize that their companies will probably be buffeted by

VI. THE LEGAL-POLITICAL ENVIRONMENT

Managing in a Global Environment • 63

A. Political risk is a company’s risk of loss of assets, earning power, or managerial control

due to politically -based events or actions by host governments. It includes government

takeovers of property and acts of violence directed against a firm’s properties or

employees.

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VII. THE SOCIOCULTURAL ENVIRONMENT

A. Social Values

1. A nation’s culture includes the shared knowledge, beliefs, and values, as well as the

common modes of behavior and ways of thinking among members of a society. One

way managers can comprehend local cultures is to understand differences in social

a. Hofstede’s Value Dimensions Exhibit 4.6

• Power distance. High power distance means people accept inequality in

power among institutions, organizations, and people. Countries that value

high power distance include Malaysia, and the Philippines. Low power

distance means people expect equality in power. Countries that value low

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• Individualism and Collectivism. Individualism reflects a value for a loosely

knit social framework in which individuals are expected to take care of

themselves. Countries with individualist values include the United States,

Canada, and Great Britain. Collectivism is a preference for a tightly knit

social framework in which individuals look after one another and

organizations protect their members’ interests. Countries with collectivist

values are China, Mexico, and Brazil.

2. GLOBE Project Value Dimensions Exhibit 4.7

a. Research by the GLOBE Project (Global Leadership and Organizational Behavior

Effectiveness) used data collected from 18,000 managers in 62 countries. They

collected data on nine dimensions that explain cultural differences. In addition to

the ones identified by Hofstede, the Globe project identified the following

characteristics:

• Assertiveness is the extent to which a society encourages toughness,

assertiveness, and competitiveness.

b. . GLOBE dimensions give managers an added tool for identifying and managing

cultural differences.

3. Social values have great influence on organizational functioning and management

styles.

Managing in a Global Environment • 65

Discussion Question #10: How might the social value of low versus high power distance

influence how you would lead and motivate employees? What about the value of low versus high

performance orientation?

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NEW MANAGER SELF-TEST: WHAT ARE YOUR SOCIAL VALUES?

B. Communication Differences Exhibit 4.8

1. People from some cultures tend to pay more attention to the social context (social

setting, nonverbal behavior, social status) of their verbal communication than

Americans do.

a. In a high-context culture, people are sensitive to circumstances surrounding

Discussion Question #4: Do you think it’s possible for someone to develop a global mindset it

they live outside their native country? How might they do that?

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THE CHANGING INTERNATIONAL LANDSCAPE

A. China Inc.

1. For the past several years, foreign companies have invested more in business in China

than they spent anywhere else in the world. Outsourcing is probably the most

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2. Doing business in China has never been smooth, and new regulations are making it

B. India, the Service Giant

1. Whereas China is strong in manufacturing, India is a rising power in software design,

services, and precision engineering. Numerous companies see India as a major source

1. Brazil is another country that is gaining increasing attention of managers. Although

Brazil’s economic growth slowed in 2011, it is still one of the fastest-growing

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VIII. INTERNATIONAL TRADE ALLIANCES

A. GATT and the World Trade Organization

1. The General Agreement on Tariffs and Trade (GATT), signed by 23 nations in 1947,

started as a set of rules to ensure nondiscrimination, provide clear procedures, settle

2. The World Trade Organization (WTO) was established as the result of the 1986 to

1994 Uruguay round. As of July 2008, 153 countries were members of the WTO.

Managing in a Global Environment • 67

B. European Union Exhibit 4.9

1. European Economic Community, now called the European Union (EU), was

formed in 1957 to improve economic and social conditions among its members, and

2. The economic crisis has revived national loyalties and cross-border resentments,

1. NAFTA went into effect on January 1, 1994, and merged the U.S., Canada, and

2. Opinions remained divided over the benefits of NAFTA; some call it a success and

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Suggested Answers to End–Of-Chapter Discussion Questions

1. What specifically would the experience of living and working in another country contribute

to your skills and effectiveness as a manager in your own country?

Generally speaking, the global exposure of working in another country helps people develop

skills and networks that will grow over time and instills a greater level of sensitivity to

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2. Do you think it is realistic that BOP business practices can have a positive effect on poverty

and other social problems in developing countries? Discuss.

The bottom of the pyramid (BOP) concept proposes that corporations can alleviate poverty and

other social ills, as well as make significant profits, by selling to the world’s poorest people. The

3. Somnio, a start-up running shoe company in California, decided to start selling its products

around the world from the very beginning. In general terms, name some of the challenges a

start-up company such as Somnio might face internationally.

The basic management functions of planning, organizing, leading, and controlling are the same

whether a company operates domestically or internationally. However, managers will experience

4. Do you think it’s possible for someone to develop a global mindset if they never live outside

their native country? How might they do that?

It is possible for someone to develop a global mindset even if they never live outside their native

county by understanding and appreciating differences in social values. People from some

5. Compare the advantages associated with the market entry strategies of exporting, licensing,

and wholly owned subsidiaries. What information would you need to collect and what

factors would you consider when selecting a strategy?

Managing in a Global Environment • 69

Of these four entry strategies, exporting is considered to be low risk and low cost. The reason is

that the firm keeps its production facilities in its home country and uses middlemen or foreign

distributors to market its products abroad, thereby avoiding the costs of setting up its own

marketing channels. The problem with exporting is that the firm has little control over the

marketing of its product and no direct contact with foreign customers.

6. Should a multinational corporation operate as a tightly integrated, worldwide business

system, or would it be more effective to let each national subsidiary operate autonomously?

There is no single correct answer to this question because arguments can be made both ways.

The answer depends partly on the goals and strategy of the multinational corporation. Operating

as an integrated, worldwide system means that the parent company and its foreign affiliates work

together to fulfill common business objectives. Such global integration allows a multinational

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overcoming the image of outside control.

7. Why do you think many people are so frightened by globalization? Based on what is

occurring in the world today, do you expect the globalization backlash to grow stronger or

weaker over the next decade?

Generally, it may be that people who are afraid of globalization think they will somehow come

out on the losing end as globalization runs its course. They may be frightened by the sheer size

and power of large multinational corporations, sensing that they are simply and gradually losing

all vestiges of control over their lives as these enormous organizations become more and more

8. Two U.S. companies are competing to take over a large factory in the Czech Republic. One

delegation tours the facility and asks questions about how the plant might be run more

efficiently. The other delegation focuses on ways to improve working conditions and produce

a better product. Which delegation do you think is more likely to succeed with the plant?

Why? What information would you want to collect to decide whether to acquire the plant for

your company?

There is no clear answer to this question. The Czech Republic is a former communist-bloc

country and a newly emerging democratic economy, and its people have been used to

9. Which style of communicating do you think would be most beneficial to the long-term success

of a U.S. company operating internationally—high-context or low-context communications?

Why?

It seems likely that high-context communications would be more beneficial to the long-term

success of a U.S. company operating internationally because the most rapidly developing

Managing in a Global Environment • 71

10. How might the social value of low versus high power distance influence how you would lead

and motivate employees? What about the value of low versus high performance orientation?

Power distance refers to the extent to which accept inequality in power among institutions,

organizations, and people. Low power distance means that people expect equality in power. In

Apply Your Skills: Experiential Exercise

Rate Your Global Management Potential

The world is truly shrinking and the number of companies doing business abroad increases each

year. In coming years it will become harder and harder to find medium- and large-sized

companies that do not have some international interactions, whether that be importing or

exporting parts and supplies, needs for assembling abroad, or international subsidiaries, joint

ventures or strategic alliances.

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One of the best ways to begin to prepare yourself for this world of globalized business is to begin

reading about events in other parts of the world, studying other cultures, learning a language,

traveling without being merely a “tourist,” and seeking out foreign restaurants, as well as foreign

students. Look at the differences as something new and fascinating. The people who fail in

international assignments are often those who are “ethnocentric” and cannot see the beauty in

other cultures, but tend to constantly compare them in terms of how deficient they are compared

to the U.S. Successful American expatriates, though, view new cultures with an attitude of

curiosity and a sense of wonder.

Apply Your Skills: Small Group Breakout

Where Have You Been?

This exercise asks students to create lists of countries they’ve visited outside their home

countries, record the population of each country, compute the percentage of the world’s

Apply Your Skills: Ethical Dilemma

AH Biotech

1. Do the clinical trials in Albania. You’ll be able to bring the drug to market faster and

cheaper, which will be good for AH Biotech’s employees and investors and good for the

millions of people who suffer from anxiety attacks.

The problem with this option is that when the trials end in Albania, free treatment for those

2. Do the clinical trials in the United States. Even though it will certainly be more expensive

and time-consuming, you’ll feel as if you’re living up to the part of the Hippocratic Oath that

instructed you to “prescribe regimens for the good of my patients according to my ability

and my judgment and never do harm to anyone.”

This option may be best if Hassan’s primary concern lies in not violating his own values with

regard to the Hippocratic Oath and he does not want to, or has doubts about his ability to

best option.

3. Do the clinical trials in Albania, and if the drug is approved, use part of the profits to set up

a compassionate use program in Albania, even though setting up a distribution system and

training doctors to administer the drug, monitor patients for adverse effects, and track

results will entail considerable expense.

If Hassan believes the drug will eventually produce adequate profits to pay for a compassionate

Apply Your Skills: Case for Critical Analysis

We Want More Guitars!

1. How accurate is Adam Wainwright’s analysis of the situation at Guitarras Dominguez? Do

you think craftsmanship is incompatible with increasing productivity in this company? Why?

Adam Wainwright’s analysis of the situation at Guitarras Dominguez is not accurate. Adam does

not understand the working and management at Guitarras Dominguez. There are major

2. What social values are present in Guitarras Dominguez, that seem different from U.S. social

values (Exhibit 4.6 and Exhibit 4.7)? Explain.

The social values present in Guitarras Dominguez are quite different from U.S. social values.

3. What do you recommend Wainwright do to increase production in a business setting that

does not seem to value high production?

Wainwright should communicate more with Salvador and explain him the need for increased

On the Job Video Cases Answers

Holden Outerwear

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1. Identify Holden’s primary approach to entering the international market. What are the benefits

of this entry strategy?

For small businesses that want to “go global,” exporting, global outsourcing, and licensing

represent low-cost ways of conducting business internationally. To reach global consumers and

2. Based on what you know of Holden from this video, do managers seem to have a global

3. What are the challenges of international management for leaders at Holden?

While the four management functions of planning, organizing, leading, and controlling are the

same whether a company operates domestically or internationally, managers experience greater