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
Restraints

Distance
Buy National
Campaigns
Free Trade Quotas
Barriers
Economic
Cultural
Communities
Differences

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 Distributors
and Threats

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

Forces yielding
Sociocultural 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
Global Islamic Business Environment

DAY TWO
DATE: SUN , 11 JULY 2010
TIME : 9.00 AM – 5.00 PM

“ History belongs to those who execute best ”

The impacts of Globalization in Malaysia
 The set of one stop centre to facilitate Foreign Direct
Investment (FDI) ie MATRADE, MDEC, EPU

 The set up Regional Economic Corridor

ie Wilayah Pembangunan Iskandar ( WPI ), East Coast
Economic Region ( ECER ), Sabah Development Corridor (
SEDIA ) etc

 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

 Relax and flexible of skilled and semi skilled foreign

workers to address shortage of manpower
The impacts of Globalization in Malaysia
 The Introduction of Free Trade Zone ( FTZ ) ie Pasir
Gudang FTZ, Prai FTZ, Klang FTZ etc

 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 )
The impacts of Globalization in Malaysia

 Tax incentives / relax on duty / trade tariff

 Encourage technology transfer to boost up development

and set up of policy like LOOK EAST POLICY

 Malaysia become – Asia Economic Tiger , along with

Hong Kong, Singapore, India , China
Strategy and the Firm

 Strategy can be defined as the actions that managers

must take to attain the goals of the firm
For most firms, the preeminent goal is to maximize the
value of the firm for its owners
 Profitability can be defined as the rate of return that the
firm makes on its invested capital (ROIC), which is
calculated by dividing the net profits of the firm by total
invested capital
 Profit growth is measured by the percentage increase in
net profits over time
Strategy and the Firm
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
Why International strategy might fail???
1) Unrealistic objective
-do not contain attainable objective
-lack of time frame, no priorities, no action plan

2) Failure to anticipate obstacles

-no indicator to recognise problem
-no admission of possible mistakes/weaknesses
-NO CONTINGENCY PLAN

3) No commitment and dedication

-commitment on capital and human investment
Why international strategy might fail???
4) Poor execution of the strategy
-heavily dependent on third party
ie ;dealer, distributor, transporter

5) Lack of business or tehnical experience ie oil&gas

6) No market niche ie alado of china

7) Problems of business culture-resistance to change

 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
 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 ttitu d e s

E th n o c e n tr ic P o ly c e n tr ic G e o c e n tr ic

H om e In d iv id u a l In te g ra te d
M a rk e t F o r e ig n W o r ld w id e
O r ie n te d M a rk e ts M a r k e tin g
 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
Value Creation
 The way to increase the profitability of a firm is to create more value
The amount of value a firm creates is measured by the
difference between its costs of production and the value that
consumers perceive in its products
 Michael Porter states that there are two basic strategies for creating
value and attaining a competitive advantage in an industry
Low-cost strategy suggests that a firm has high profits when it
creates more value for its customers and does so at a lower cost
Differentiation strategy focuses primarily on increasing the
attractiveness of a product
Value Creation
Strategic Choice in the International
Hotel Industry
The Value Chain
 Any firm is composed of a series of distinct value creating
activities
Primary activities
 Research & development

 Production

 Marketing & sales

 Service

Support Activities
 Materials management or logistics

 Human resource

 Information systems

 Company infrastructure
Global Expansion, Profitability, Profit and
Growth
 Expanding globally allows firms to increase their
profitability and rate of profit growth in ways not available
to purely domestic enterprises
 Firms that operate internationally are able to
Expand the market for their domestic products
Realize location economies by dispersing individual
value creation activities
Realize greater cost economies
Earn a greater return by leveraging any valuable skills
developed in foreign operations