QuickMBA / Strategy / Global Strategy
During the last half of the twentieth century, many barriers to international trade fell and a wave of firms began pursuing global strategies to gain a competitive advantage. However, some industries benefit more from globalization than do others, and some nations have a comparative advantage over other nations in certain industries. To create a successful global strategy, managers first must understand the nature of global industries and the dynamics of global competition.
Sources of Competitive Advantage from a Global Strategy
A well-designed global strategy can help a firm to gain a competitive advantage. This advantage can arise from the following sources:
- Economies of scale from access to more customers and markets
- Exploit another country's resources - labor, raw materials
- Extend the product life cycle - older products can be sold in lesser developed countries
- Operational flexibility - shift production as costs, exchange rates, etc. change over time
- First mover advantage and only provider of a product to a market
- Cross subsidization between countries
- Transfer price
- Diversify macroeconomic risks (business cycles not perfectly correlated among countries)
- Diversify operational risks (labor problems, earthquakes, wars)
- Broaden learning opportunities due to diversity of operating environments
- Crossover customers between markets - reputation and brand identification
Sumantra Ghoshal of INSEAD proposed a framework comprising three categories of strategic objectives and three sources of advantage that can be used to achieve them. Assembling these into a matrix results in the following framework:
|Strategic Objectives||Sources of Competitive Advantage|
|National Differences||Scale Economies||Scope Economies|
|Efficiency in Operations||Exploit factor cost differences||Scale in each activity||Sharing investments and costs|
|Flexibility||Market or policy-induced changes||Balancing scale with strategic & operational risks||Portfolio diversification|
|Innovation and Learning||Societal differences in management and organization||Experience - cost reduction and innovation||Shared learning across activities|
The Nature of Competitive Advantage in Global Industries
A global industry can be defined as:
An industry in which firms must compete in all world markets of that product in order to survive.
An industry in which a firm's competitive advantage depends on economies of scale and economies of scope gained across markets.
Some industries are more suited for globalization than are others. The following drivers determine an industry's globalization potential.
Location of strategic resources
Differences in country costs
Potential for economies of scale (production, R&D, etc.) Flat experience curves in an industry inhibits globalization. One reason that the facsimile industry had more global potential than the furniture industry is that for fax machines, the production costs drop 30%-40% with each doubling of volume; the curve is much flatter for the furniture industry and many service industries. Industries for which the larger expenses are in R&D, such as the aircraft industry, exhibit more economies of scale than those industries for which the larger expenses are rent and labor, such as the dry cleaning industry. Industries in which costs drop by at least 20% for each doubling of volume tend to be good candidates for globalization.
Transportation costs (value/bulk or value/weight ratio) => Diamonds and semiconductors are more global than ice.
Common customer needs favor globalization. For example, the facsimile industry's customers have more homogeneous needs than those of the furniture industry, whose needs are defined by local tastes, culture, etc.
Global customers: if a firm's customers are other global businesses, globalization may be required to reach these customers in all their markets. Furthermore, global customers often require globally standardized products.
Global channels require a globally coordinated marketing program. Strong established local distribution channels inhibits globalization.
Transferable marketing: whether marketing elements such as brand names and advertising require little local adaptation. World brands with non-dictionary names may be developed in order to benefit from a single global advertising campaign.
Global competitors: The existence of many global competitors indicates that an industry is ripe for globalization. Global competitors will have a cost advantage over local competitors.
When competitors begin leveraging their global positions through cross-subsidization, an industry is ripe for globalization.
The furniture industry is an example of an industry that did not lend itself to globalization before the 1960's. Because furniture has a high bulk compared to its value, and because furniture is easily damaged in shipping, transport costs traditionally were high. Government trade barriers also were unfavorable. The Swedish furniture company IKEA pioneered a move towards globalization in the furniture industry. IKEA's furniture was unassembled and therefore could be shipped more economically. IKEA also lowered costs by involving the customer in the value chain; the customer carried the furniture home and assembled it himself. IKEA also had a frugal culture that gave it cost advantages. IKEA successfully expanded in Europe since customers in different countries were willing to purchase similar designs. However, after successfully expanding to several countries, IKEA ran into difficulties in the U.S. market for several reasons:
Different tastes in furniture and a requirement for more customized furniture.
Difficult to transfer IKEA's frugal culture to the U.S.
The Swedish Krona increased in value, increasing the cost of furniture made in Sweden and sold in the U.S.
Stock-outs due to the one to two month shipping time from Europe
More competition in the U.S. than in Europe
Country Comparative Advantages
Competitive advantage is a firm's ability to transform inputs into goods and services at a maximum profit on a sustained basis, better than competitors. Comparative advantage resides in the factor endowments and created endowments of particular regions. Factor endowments include land, natural resources, labor, and the size of the local population.
In the 1920's, Swedish economists Eli Hecksher and Bertil Ohlin developed the factor-proportions theory, according to which a country enjoys a comparative advantage in those goods that make intensive use of factors that the country has in relative abundance.
Michael E. Porter argued that a nation can create its own endowments to gain a comparative advantage. Created endowments include skilled labor, the technology and knowledge base, government support, and culture. Porter's Diamond of National Advantage is a framework that illustrates the determinants of national advantage. This diamond represents the national playing field that countries establish for their industries.
Types of International Strategy: Multi-domestic vs. Global
- Product customized for each market
- Decentralized control - local decision making
- Effective when large differences exist between countries
- Advantages: product differentiation, local responsiveness, minimized political risk, minimized exchange rate risk
- Product is the same in all countries.
- Centralized control - little decision-making authority on the local level
- Effective when differences between countries are small
- Advantages: cost, coordinated activities, faster product development
A fully multi-local value chain will have every function from R&D to distribution and service performed entirely at the local level in each country. At the other extreme, a fully global value chain will source each activity in a different country.
Philips is a good example of a company that followed a multidomestic strategy. This strategy resulted in:
- Innovation from local R&D
- Entrepreneurial spirit
- Products tailored to individual countries
- High quality due to backward integration
The multi-domestic strategy also presented Philips with many challenges:
- High costs due to tailored products and duplication across countries
- The innovation from the local R&D groups resulted in products that were R&D driven instead of market driven.
- Decentralized control meant that national buy-in was required before introducing a product - time to market was slow.
Matsushita is a good example of a company that followed a global strategy. This strategy resulted in:
- Strong global distribution network
- Company-wide mission statement that was followed closely
- Financial control
- More applied R&D
- Ability to get to market quickly and force standards since individual country buy-in was not necessary.
The global strategy presented Matsushita with the following challenges:
- Problem of strong yen
- Too much dependency on one product - the VCR
- Loss of non-Asian employees because of glass ceilings
A third strategy, which was appropriate to Whirlpool is one of mass customization, discussed below.
Global Cost Structure Analysis
In 1986, Whirlpool Corporation was considering expanding into Europe by acquiring Philips' Major Domestic Appliance Division. From the framework of customers, costs, competitors, and government, there were several pros and cons to this proposed strategy.
Internal components of the appliances could be the same, offering economies of scale.
The cost to customize the outer structure of the appliances was relatively low.
The appliance industry was mature with low growth. The acquisition would offer an avenue to continue growing.
Fragmented distribution network in Europe.
Different consumer needs and preferences. For example, in Europe refrigerators tend to be smaller than in the U.S., have only one outside door, and have standard sizes so they can be built into the kitchen cabinet. In Japan, refrigerators tend to have several doors in order to keep different compartments at different temperatures and to isolate odors. Also, because houses are smaller in Japan, consumers desire quieter appliances.
Whirlpool already was the dominant player in a fragmented industry.
Since Philip's had a relatively small market share in the European appliance market, one must analyze the cost structure to determine if the acquisition would offer Whirlpool a competitive advantage. With the acquisition, Whirlpool would be able to cut costs on raw materials, depreciation and maintenance, R&D, and general and administrative costs. These costs represented 53% of Whirlpool's cost structure. Compared to most other industries, this percentage of costs that could benefit from economies of scale is quite large. It would be reasonable to expect a 10% reduction in these costs, an amount that would decrease overall cost by 5.3%, doubling profits. Such potential justifies the risk of increasing the complexity of the organization.
Because of the different preferences of consumers in different markets, a purely global strategy with standard products was not appropriate. Whirlpool would have to adapt its products to local markets, but maintain some global integration in order to realize cost benefits. This strategy is known as "mass customization."
Whirlpool acquired Philips' Major Domestic Appliance Division, 47% in 1989 and the remainder in 1991. Initially, margins doubled as predicted. However, local competitors responded by better tailoring their products and cutting costs; Whirlpool's profits then began to decline. Whirlpool applied the same strategy to Asia, but GE was outperforming Whirlpool there by tailoring its products as part of its multi-domestic strategy.
Globalizing Service Businesses
Service industries tend to have a flat experience curve and lower economies of scale. However, some economy of scale may be gained through knowledge sharing, which enables the cost of developing the knowledge over a larger base. Also, in some industries such as professional services, capacity utilization can better be managed as the scope of operations increases. On the customer side, because a service firm's customers may themselves be operating internationally, global expansion may be a necessity. Knowledge gained in foreign markets can used to better service customers. Finally, being global also enhances a firm's reputation, which is critical in service businesses.
High quality service products often depend on the service firm's culture, and maintaining a consistent culture when expanding globally is a challenge.
A good example of a service firm that experienced global expansion challenges is the management consulting firm Bain & Company, Inc. In consulting, a firm's most important strategic asset is its reputation, so a consistent firm culture is very important. Bain faced the following challenges, which depend on the firm's strategy and which affect the ability to maintain a consistent culture:
- Coordinating across offices and sharing knowledge
- Whether to hire locals or international staff
- How to compensate
Modes of Foreign Market Entry
An important part of a global strategy is the method that the firm will use to enter the foreign market. There are four possible modes of foreign market entry:
- Licensing (includes franchising)
- Joint Venture
- Foreign Direct Investment
These options vary in their degree of speed, control, and risk, as well as the required level of investment and market knowledge. The entry mode selection can have a significant impact on the firm's foreign market success.
Issues in Emerging Economies
In emerging economies, capital markets are relatively inefficient. There is a lack of information, the cost of capital is high, and venture capital is virtually nonexistent. Because of the scarcity of high-quality educational institutions, the labor markets lack well trained people and companies often must fill the void. Because of lacking communications infrastructure, building a brand name is difficult but good brands are highly valued because of lower product quality of the alternatives. Relationships with government officials often are necessary to succeed, and contracts may not be well enforced by the legal system.
When a large government monopoly (e.g. a state-owned oil company) is privatized, there often is political pressure in the country against allowing the firm to be acquired by a foreign entity. Whereas a very large U.S. oil company may prefer acquisitions, because of the anti-foreign sentiment joint ventures often are more appropriate for outside companies interested in newly privatized emerging economy firms.
Knowledge Management in Global Firms
There is much value in transferring knowledge and best practices between parts of a global firm. However, many barriers prevent knowledge from being transferred:
- Barriers attributable to the knowledge source
- lack of motivation
- lack of credibility
- Barriers attributable to the knowledge itself - ambiguity and complexity
- Barriers attributable to the knowledge recipient
- lack of motivation (not invented here syndrome)
- lack of absorptive capacity - need prerequisite knowledge to advance to next level
- Barriers attributable to the recipient's existing process - process rigidity
- Barriers attributable to the recipient's external environment and constraints
Furthermore, even when the transfer is successful, there often is a temporary drop in performance before the improvements are seen. During this period, there is danger of losing faith in the new way of doing things.
To facilitate knowledge transfer a firm can:
- Implement processes to systematically identify valuable knowledge and best practices.
- Create incentives to motivate both the knowledge source and recipient.
- Develop absorptive capacity in the recipient - cumulative knowledge
- Develop strong technical and social networks between parts of the firm that can share knowledge.
Country managers must have the following knowledge:
- Knowledge of strategic management
- Firm-specific knowledge
- Country-specific knowledge
- Knowledge of the global environment
Country organizations can assume the role of implementor, contributor, strategic leader, or black hole, depending on the combination of importance of the local market and local resources.
of Local Market
|Level of Local Resources & Capabilities|
|High||Black Hole||Strategic Leader|
The least favorable of these roles is the black hole, which is a subsidiary in a strategically important market that has few capabilities. A firm can find itself in this situation because of company traditions, ignorance of local conditions, unfavorable entry conditions, misreading the market, excessive reliance on expatriates, and poor external relations. To get out of a black hole a firm can form alliances, focus its investments, implement a local R&D organization, or when all else fails, exit the country.
Country managers assume different roles (The New Country Managers, John A. Quelch, Professor of Business Administration, Harvard Business School).
International Structure: Country manager is a trader who implements policy.
Multinational Structure: Country manager plays the role of a functional manager with profit and loss responsibilities.
Transnational Structure: Country manager acts as a cabinet member (team player) since management control systems are standardized and decision-making power is shifted to the region manager. The country manager develops the lead market in his country and transfers the knowledge gained to other similar markets.
Global Structure: Country manager acts as an ambassador and administrator. In a global firm there usually are business directors who oversee marketing and sales. The role of the country manager becomes one of a statesman. This person usually is a local with good government contacts.
Bartlett, Christopher A., and Sumantra Ghoshal, Managing Across Borders: The Transnational Solution
Ohmae, Kenichi, The Borderless World: Power and Strategy in the Interlinked Economy
QuickMBA / Strategy / Global Strategy
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