GS 120 – iGlobalization

Professor: Dr. Jean-Paul Rodrigue

Hofstra University, Department of Global Studies & Geography

Topic 2 – Global Markets, Global Products, Global Firms

A – Production and Consumption in a Globalized WorldB – The Multinational EnterpriseC – Outsourcing and Offshoring

Post-Industrial Revolution

Economic foundation Relative shift from manufacturing to services.In absolute numbers, manufacturing increases.

Capital Knowledge becomes a form of capital.

Growth High reliance on innovation.

Labor Declining importance of “blue collar” tasks. Increasing importance of technical and creative tasks.

Trade Highly diversified trade (from resources to high value goods).

Information technologies Global telecommunication networks. IT embedded in products and services.

Production and Consumption in a Globalized World

Global Consumption

■ Consumerism• Consumption:

• Always existed (mostly essential needs).• Part of social ideals; persona’s definition.

• Marketing:• Department store (facility designed to incite consumption).• Advertising (create wants and needs).• Fashion (planned obsolescence).

• Buying power:• Mass consumption requires mass production.• Relative price reduction of consumption goods; “mass luxury”.• Higher wages.• Access to credit.

World's Urban Population and Human Development Index, 2010

Advertising and Psychology

Global Consumption

■ Products• A good or service.• Tangible (characteristics) and intangible (brand

association) attributes.• Global products:

• Uniform features in all countries.• Cost reduction (economies of scale).• Improved quality control• Global customers and market.• Most globalized products: drinks, fashion and electronics.

• Regional products:• Unique or adapted to a particular area (customization).• Specific preferences.

Global Consumption

■ Brand• A specific product:

• Tablet computer (a product).• iPad (a brand).

• Added value that accrues to a product:• Created by the relationship between the brand and customer

over time.• Investments in the marketing of the brand.• A recognized quality standard.

• Brand image:• Images and experiences in the customer’s mind.• Differentiation between competing products.

The World’s Most Valuable Brands, 2011 (in millions)

Coca ColaIBM

MicrosoftGoogle

GEMcDonnald's

intelApple

DisneyHP

ToyotaMercedes-Benz

CiscoNokiaBMW

GilletteSamsung

Louis VuitonHondaOracle

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000

Global Product Strategies

Extension:Offering product

almost unchanged in markets outside home country

Adaptation:Changing elements of design, function,

and packaging according to needs

of different countries.

Creation:Developing new products for the world market.

National Food Preferences Adaptation: The Case of Campbell

Region Dominant Campbell Soup

United States Chicken Noodle & Cream of Mushroom

South America Cream of Asparagus

UK Tomato

Japan Corn

Australia Cream of Pumpkin

Convergence in Alcohol Consumption Preferences

Personal Consumption Expenditures, United States 2010

81.9% 18.1%

Made in US from US partsOther

5.9%

0.7%

6.1%

1.2%

2.7%

1.5%

US content of production in China

US content of production in other countries

Final goods imported from China

Final goods imported from other countries

Made in US from parts imported from China

Made in US from parts made in other countries

Annual Resource Consumption per Person, 2001-2002

Japan

France

United States

Mexico

China

India

0 50 100 150 200 250 300 350 400 450 500

1624

Paper (kg/pers.)Meat (kg/pers.)Motor Gasoline (L/pers.)

Number of McDonald’s per Country, 2004

31,000 McDonalds restaurants worldwide (2009), employing 1.5 million people.

12,8043,598

1,154

Main Elements of Kraft’s Portfolio

The Illusion of Diversity, Ownership of the Soft Drink Industry, United States

Coca Cola (42.8%) Pepsi (31.1%) Dr Pepper Snapple Group (15%)

Coca ColaHonest TeaDesaniPoweradeNesteaGlaceauFuzeFantaMinute MaidSpriteFrescaMr. Pibb

PepsiAquafinaMountain DewSierra MistGatoradeLiptonOceansprayTropicanaDoleSobeLife Water

SnappleA&WBig RedNantucket NectarsSeven UpCrushDr PepperAcceleradeHawaiian PunchWelch’sCanada DrySunkistSchweppesOrangina

Consumption of Coca-Cola Beverages per Capita (Liters)

IndiaIndonesia

NigeriaChinaRussia

ThailandWorld

PolandFrance

PhilippinesItaly

JapanGermany

CanadaSouth Africa

SpainArgentina

AustraliaUnited States

ChileMexico

0 20 40 60 80 100 120 140 160

1.663.08

6.396.62

16.3219.1620.11

25.5530.7630.76

33.3641.6442.35

56.0759.62

71.6973.82

76.6597.47

101.02150.23

200819981988

The Multinational Enterprise

The Corporation as a Decision, Management and Planning Unit

Management Unit Decision Unit Planning Unit

Nature Maintain operational conditions.

Decisions about the allocation of resources.

Anticipate market changes and opportunities. Allocate its factors of production.

Scope Production (generator), sales (attractor), marketing, payroll, distribution.

Financial, labor, raw materials, etc.

Economic, technological, social and political change.

Time frame

Short term (production cycles).

Short to long term (product cycles).

Medium to long term (business cycles).

Conflicting Elements of a Corporation

• Highest dividend possible.

• Share value growth.

• Highest compensation.

• Various benefits.

• Lowest price.• Highest quality.

• Tax collection.• Regulations

(wages, benefits, environment, etc.)

Shareholders Employees

CustomersSociety (State)

Dow Jones Industrial Index, 1950-2012

Jan-5

0

Nov-51

Sep-53

Jul-5

5

May-57

Mar-59Ja

n-61

Nov-62

Sep-64

Jul-6

6

May-68

Mar-70Ja

n-72

Nov-73

Sep-75

Jul-7

7

May-79

Mar-81Ja

n-83

Nov-84

Sep-86

Jul-8

8

May-90

Mar-92Ja

n-94

Nov-95

Sep-97

Jul-9

9

May-01

Mar-03Ja

n-05

Nov-06

Sep-08

Jul-1

0

May-12

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Cost and Production of Ford Vehicles, 1908-1924

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

0.00

250,000.00

500,000.00

750,000.00

1,000,000.00

1,250,000.00

1,500,000.00

1,750,000.00

2,000,000.00

2,250,000.00

Cost

Production

Treasury Department Gross Tax Collection, 1987-2010

1987 1990 1995 2000 2005 20100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Employment Taxes

Corporation Income Taxes

Individual Income Taxes

Fordist and Post-Fordist Corporate Structure

Characteristics Fordism Post-FordismOrganization Pyramidal NetworkedFocus Supply DemandStyle Structured FlexibleReach Regional / National GlobalResources Physical Assets Information / KnowledgeProduction Mode Mass Production Mass Customization

Production Structure Self-Sufficiency AlliancesInventories Months HoursProduction Cycle Time Weeks / Months DaysInformation Weekly Real-TimeProduct Life Cycle Years MonthsQuality Affordable Best Zero-Defect

Corporations in the Global Economy

■ Multinational corporation• A corporation that takes a global approach for:

• Its inputs (raw materials, parts).• Its outputs (customers).

• Different parts of the industrial system are located in places where they are the most productive.

Inputs OutputsMNC

Types of Multinational Corporations

Raw Materials Seekers

Market Seekers Minimal Cost Seekers

Lower input costs Economies of scale Comparative advantages

Resource acquisition Expand market Lower production and distribution costs

First MNCs to emerge Large investors Remain competitive

Corporations in the Global Economy

Domestic International

High International Trade Trading industries

(aerospace, mining, agriculture)

Globally integrated

(oil, automobile, electronics)Low International Trade Domestic industries

(rail, personal services)

Multidomestic industries

(banking, restoration)

System of production located in several countries.Complex products.

Interdependency in productivity.Importance of logistics.

Globally Integrated Corporation

Independent operations.Simple products.

Production can be integrated globally, while the marketing is

multidomestic.Better answer the needs of every

market.Independency in productivity.

Multidomestic Corporation

The Structure of Multinationals

■ Industrial strategy• Decrease of production costs:

• One of the main goals of a corporation.• Exploitation of comparative advantages.

• Stability of prices and deliveries:• The rationality of low costs must also take account of price

changes of raw materials and parts.• Risked to relocate (long-term investment) to take advantage

of conditions that can change on the short term.• Product quality:

• Performance, service and maintenance.• A quantitatively competitive product has limited advantages if

not qualitatively competitive. • Flexibility of production and distribution:

• Facing changes in the demand confers a notable advantage.

The Impacts of Multinationals

Positive Negative

Favor economic growth (employment) Balance of payments (repatriation of profits)

Provision of investment capital High influence over governments

Provision of goods and services Bankrupt local businesses

Transfer of technology and skills Oligopoly / monopoly on local market

Increase export opportunities Leverage (can relocate / threaten to)

"(A corporation has) neither body to jail nor soul to damn." - Lord Edward Thurlow (1731-1806)

The Impact of Multinationals on International Trade

NationState

NationState

Within Corporations (33%)

Between Corporations (66%)

Large Multinational Corporations

■ Context• Size can be assessed through:

• Stock market capitalization (value of tradable shares).• Number of employees.• Sale volumes.

• Some have sale volumes larger than the GDP of a country.

• Most large corporations had modest beginnings.• Formation of the Anglo-Persian Oil Company (1909).• Became British Petroleum (BP).• 37th largest corporation in the world (2011).• 138 $B sales.• Oil, chemicals, agriculture, mines and information

technologies.• Greece had a GDP of 305 $B in 2010.

The Growth of Large Multinationals

New

marke

t op

portunity

•Resource, technology, product•Technology and Innovation

Bette

r management

•Less innovative sectors•Mostly financial (holdings)•Outsourcing

State

suppor

t

•Large government contracts (e.g. defense corporations)•Corporate socialism (private profits / socialized losses)

The World’s 20 Largest Corporations by Market Value, 2011 ($US millions)

Exxon Mobil

PetroChina

Apple

Industrial & Commerical Bank of China

Petrobas

BHP Billiton

China Construction Bank

Royal Dutch Shell

Chevron

Microsoft

General Electric

Berkshire Hathaway

Nestle

IBM

Gazprom

China Mobile

JP Morgan Chase

HSBC

Wal-Mart

AT&T

0 100,000 200,000 300,000 400,000 500,000

World's 250 Largest Corporations by Head Office City

Outsourcing and Offshoring

The Corporation and its Expansion

Vertical Integration Horizontal Integration Outsourcing

Nature Expand backward (suppliers) or forward (customers) along the supply chain.

Acquiring or merging with competitors.

Some activities performed by another corporation.

Goal Lower costs. Enhance and protect product quality. Improve supply chain efficiency.

Economies of scale. Product differentiation. Business model replication. Oligopoly.

Reduce costs. Focus on core competencies.

Issues Higher cost structure of suppliers. More difficult to adapt to changes.

Different business cultures, Anti-monopolistic responses

Dependency. Loss of competency.

Coal Extraction

Iron Ore

Steel Making

Metallic Products

Mechanical Products

Corporation A Corporation B Corporation C

Corporation

Activity

Outsourcing

■ Definition• Moving some of a firm’s internal activities to outside

providers: • Administrative, engineering, research, development, or

technical support processes.• Substitution; the replacement of internal capacity and

production by the supplier.• Binding agreement (supplier/client) defining the transferred

services and terms.• Supplier acquires the means of production:

• Transfer of people, assets and other resources from the client. • Client procures the services from the supplier for the

term of the contract.

Outsourcing

■ Reasons to outsource• “Labor arbitrage”.• Reduce or control costs.• Free up internal resources.• Gain access to world-class capabilities.• Increase revenue potential.• Increase process efficiencies.• Focus on core activities.• Compensate for a lack of specific capabilities or skills.

Outsourcing

■ Main outsourcing sectors• Fabrication (parts).• IT and telecommunications.• Logistics and supply chain management.• Business processing (data entry).• Finance and accounting.• Facilities management.• Call centers.• HR (including payroll and benefits administration,

recruitment and training).

Differences Between Outsourcing and Subcontracting

Outsourcing

Long term relationship

Profit / loss sharing

Process improvement

Offshoring

■ Definition• Transfer of an organizational function to another

country:• Whether the work is outsourced or stays within the same

corporation. • Distinction between outsourcing and offshoring often blurred.• Outsourcing can involve some level of off-shoring.

• Nearshoring:• Moving activities in a neighboring country.• Usually higher level of cultural affinity / similar time zones.• E.g. US activities into Mexico.

• Farshoring:• Moving activities to countries in another continent.• Different time zones.

Disconnection of Global Production and Distribution

R&DDistributi

onMarketing

/Retail

Core Base

Manufacturing Base

Value Creation and Capture, iPhone 4 (in USD)

Korea

Germany

France

Japan

Other

USA China

Factory Gate Price($194.04)

Inputs ($24.63)Distribution($90.00)

Retail($600)

Inputs ($80.05)

Inputs ($16.08)

Inputs ($3.25)

Inputs ($0.70)

Inputs ($62.79)

VA ($6.54)Misc.

($45.95)

Apple($269.05)

($329.95)

International trade figures are therefore skewed…

Topper the Trick Terrier

Voice Recognition Requirements:(San Francisco)Voice Recognition Programming:(Taiwan)

Plastic Eyes:(Shenzhen, China)

Plastic Body: (Malaysia)

Motors for legs:(Shaoguan, China)

Microfiber for Coat: (Korea)

Plastic legs: (Taiwan)

Speaker for voice:(Dongguan, China)

Transistors:(Shenzhen, China)

IC chips: (Taiwan)

Wiring: (Dongguan, China)

Packaging: (Hong Kong)