|How to Take Your Company to the Global Market
George S. Yip
Pierre M. Loewe
Michael Y. Yoshino
Deciding how to deal with the globalisation of markets poses tough issues and choices for mangers. There are both external business forces, and internal organisational factors to consider. External business forces revolve around the interaction of industry drivers of globalisation and the different ways a business can be global. Understanding this interaction is key to formulating the right global strategy. Internal organisational factors play a major role in determining how well a company can implement global strategy. This paper provides a systematic approach to developing and implementing a global strategy.
MOST MANAGERS have to face the increasing globalisation of markets and competition. That fact requires each company to decide whether it must become a worldwide competitor to survive.
This is not an easy decision. Take the division of a multibillion-dollar company, a company that's very sophisticated and has been conducting international business for more than fifty years. The division sells a commodity product, for which it is trying to charge 400% more in Europe than it does in the United States. The price was roughly the same in the United States and in Europe when the dollar was at its all-time high. The company built a European plant which showed greater return on investment with that European price. But the dollar has fallen and, if the company drops its European price to remain roughly the same as the US price, the return on the plant becomes negative, and some careers are in serious jeopardy. So it is attempting to maintain a 40% European price premium by introducing minor upgrades to the European product.
But its multinational customers will have none of it. They start buying the product in the United States and transhipping it to Europe. When the company tries to prevent them from transhipping, they go to a broker, who does the work for them; they still save money.
The manufacturer doesn't have a choice. It's working in a global market. And it's going to have to come up with a global price. But management is fighting a losing battle because it is unwilling to make the hard strategic and organisational changes necessary to adapt to global market conditions.
European and Japanese corporations also face these kinds of organisational roadblocks. Large European firms, for example, historically have been more multinational than US companies. Their international success is due, in part, to decentralised management. The companies simply reproduced their philosophy and culture everywhere, from India to Australia to Canada. They set up mini-headquarters operations in each country and became truly multinational with executives of different nationalities running them.
Now they are having problem running operations on a worldwide basis because these multinational executives are fighting the global imperative. In one European company, for example, the manager running a Latin American division has built an impenetrable wall around himself and his empire. He's done very well, and everyone has allowed him to do as he pleases. But the company's global strategy requires a new way of looking at Latin America. The organisation needs to break down his walls of independence. So far, that's proved next to impossible.
Japanese companies face a different set of problems. On the whole, they have followed a basic, undifferentiated marketing strategy: make small Hondas, and sell them throughout the world. Then make better Hondas, ending up with the $30,000 Honda Acura. It's incremental, and it has worked.
Now, however, the Japanese must create various manufacturing centres around the globe and they're facing many difficulties. They have a coordinated marketing strategy and have built up infrastructures to coordinate marketing, which requires one particular set of skills. But now they've begun to establish three or four major manufacturing operations around the world, and they need a different set of skills to integrate these manufacturing operations. In addition, many Japanese companies are trying to add some elements of a multinational strategy back into their global one.
American multinationals have tended to take a different path. The huge domestic market, combined with cultural isolation, has fostered an "Us-them" mentality within organisations. This split has made it difficult to fully adapt to the needs of international business. Until recently, overseas posts have been spurned. A marketing manager for new products in a United States consumer products company told us that running the sizeable United Kingdom business would be a step down for him. As a result of others' similar views, many American firms face two conflicting challenges today. They need to complete their internationalisation by increasing their adaptation to local needs, while at the same time they need to make their strategies more global.
But some companies are better off not trying to compete globally because of the difficulties of their internal situation. The CEO of one Midwest manufacturer decided that his company had to go global to survive. He gave marching orders. And the organisation marched. Unfortunately, they started marching over a global cliff. For example, they set up a small operation in Brazil since they had targeted South America as part of their global strategy. But the executives they appointed to run the operation had never been outside the United States before, and the company started losing money. Company analysis found that going global was just too unnatural to its cultural system and that a viable strategic alternative was to stay in the United States and play a niche strategy.
Most international companies have grappled with the types of problems we have been describing, and have tried to find a solution. This paper provides a framework for thinking through this complex and important issue. In particular the framework addresses the dual challenge of formulating and implementing a global strategy. Readers may find the framework a convenient way to analyse globalisation issues.
The Dual Challenge
Managers who want to make their businesses global face two major challenges. First, they need to figure out what a global strategy is. Then, when they know what to do, they have to get their organisations to make it happen.
Different Ways Of Being Global
Developing a global strategy is complicated by the fact that there are at least five major dimensions of globalisation. These are:
Playing big in major markets.
Standardising the core product.
Concentrating value-adding activities in a few countries.
Adopting a uniform market positioning and marketing mix.
Integrating competitive strategy across countries.
Each of these can offer significant benefits:
Playing Big in Major Markets
Playing big in major markets - countries that account for a sizeable share of worldwide volume or where changes in technology or consumer tastes are most likely to start - brings
Larger volume over which to amortise development efforts and investments in fixed assets.
Ability to manage countries as one portfolio, including being able to exploit differences in position along the product life cycle.
Learning from each country.
Being at the cutting edge of the product category by participating in the one or two major countries that lead development.
Standardising the Core Product
The local managers of multinational subsidiaries face strong pressures to adapt their offerings to local requirements. This gets the company laudably close to the customer. But the end result can be such great differences among products offered in various countries that the overall business garners few benefits of scale.
The core product can be standardised while customising more superficial aspects of the offering. McDonald's has done well with this approach - Europeans and Japanese may think they are eating the same hamburgers as Americans, but the ingredients have been adapted for their tastes. A French McDonald's even serves alcohol. But the core formula remains the same.
Concentrating Value-adding Activities in a Few Countries
Instead of repeating every activity in each country, a pure global strategy provides for concentration of activities in just a few countries. For example. fundamental research is conducted in just one country, commercial development in two or three countries, manufacturing in a few countries, and core marketing programs developed at regional centres, while selling and customer service take place in every country in the network. The benefits include gaining economies of scale and leveraging the special skills or strengths of particular countries. For example, the lower wage rates and higher skills in countries such as Malaysia or Hong Kong have encouraged many electronics firms to centralise worldwide assembly operations in these countries.
Adopting a Uniform Market Positioning and Marketing Mix
The more uniform the market positioning and marketing mix, the more the company can save in the cost of developing marketing strategies and programs. As one company told us, "Good ideas are scarce. By taking a uniform approach we can exploit those ideas in the maximum number of countries." Another benefit is internal focus. A company may struggle with numerous brand names and positioning around the world, while its rivals single-mindedly promote just one or two brands. There also are marketing benefits to a common brand name as international travel and cross-border media continue to grow. In consolidating its various names around the world, Exxon rapidly achieved global focus and recognition. Coca-Cola, Levis, and McDonald's are other companies that have successfully used a single brand strategy. Mercedes, BMW, and Volvo not only use the same brand name throughout the world, but also have consistent images and positioning in different countries.
Example of Global Strategy: Black & Decker
Black & Decker, manufacturer of hand tools, provides an example of a company that is pursuing a global strategy. In the past decade, Black & Decker was threatened by external and internal pressures. Externally, it faced a powerful Japanese competitor, Makita. Makita's strategy to produce and market standardised products worldwide made it a low-cost producer, and enabled it to increase steadily its share in the world market. Internally, international fiefdoms and nationalist chauvinism at Black & Decker had stifled co-ordination in product development and new product introductions, resulting in lost opportunities.
In response, Black & Decker decisively moved toward globalisation. It embarked on a major program to coordinate new product development worldwide to develop core standardised products that can be marketed worldwide with minimal modification. The streamlining in R&D also offers scale economies and less duplication of effort, and new products can be introduced more quickly. It consolidated worldwide advertising by using two principal agencies, gaining a more consistent image worldwide. Black & Decker also strengthened the functional organisation by giving functional managers a larger role in coordinating with the country management. Finally, Black & Decker purchased General Electric's small appliance business to achieve world-scale economies in manufacturing, distribution, and marketing.
The globalisation strategy initially met with scepticism and resistance from country management due to entrenched factionalism among country managers. The CEO took a visible leadership role and made some management changes to start the company moving toward globalisation. Today, in his words, "Globalisation is spreading and now has a life of its own."
Integrating Competitive Moves Across Countries
Instead of making competitive decisions in a country without regard to what is happening in other countries, a global competitor can take an integrated approach. Tyrolia, the Austrian ski-binding manufacturer, attacked Solomon's stronghold position in its biggest market, the United States. Rather than fighting Tyrolia only in the US, Salomon retaliated in the countries where Tyrolia generated a large share of its sales and profits-Germany and Austria. Taking a global perspective, Solomon viewed the whole world-not just one country-as its competitive battleground.
Another benefit of integrating competitive strategy is the ability of a company to cross-subsidise. This involves utilising cash generated in a profitable, high-market-share country to invest aggressively in a strategically important but low-market-share country. The purpose is, of course. to optimise results worldwide.
Industry Drivers Of Globalisation
How can a company decide whether it should globalise a particular business? What sort of global strategy should it pursue? Managers should look first to the business's industry. An industry's potential for globalisation is driven by market, economic, environmental and competitive factors (Chart 1 omitted from this version) Market forces determine the customers' receptivity to a global product; economic factors determine whether pursuing a global strategy can provide a cost advantage; environmental factors show whether the necessary supporting infrastructure is there; and competitive factors provide a spur to action.
The automotive industry provides a good example of all four forces. People in the industry now talk of "world cars." A number of market factors are pushing the industry toward globalisation, including a mature market, similar demand trends across countries (such as quality/ reliability and fuel efficiency), shortening product life cycles (e.g., twelve years for the Renault 5, eight for the Renault 18, and five each for the Renault 11 and Renault 9), and worldwide image-building. Similarly, economic factors are pushing the automotive industry toward globalisation. For example, economies of scale, particularly on engines and transmissions, are very important, and few country markets provide enough volume to get full benefits of these economies of scale. Similarly, many car manufacturers have now moved to worldwide sourcing. In the environmental area, converging regulations (safety, emissions) and rapid technological evolution (new materials, electronics, robotics), all requiring heavy investment in R&D and plant and equipment, also are moving the industry inexorably toward globalisation. Finally, competitive factors are contributing to globalisation. Witness the increasing number of cooperative ventures among manufacturers-Toyota-GM, Toyo Kogyo-Ford, Chrysler-Mitsubishi. These ventures are putting pressure on all automotive manufacturers to go global.
In summary, managers wrestling with globalisation issues should first analyse the four sets of industry forces to determine whether they compete in an industry that is global or globalising. Next, they need to assess how global their companies are, and how global their competitors are along the five dimensions defined previously. A very difficult part remains: assessing whether the organisation has the capacity to go global.
Organisational Factors In Globalisation
Organisational factors can support or undercut a business's attempt to globalise., Therefore, taking a close look at how the organisation will affect the relative difficulty of globalisation is essential. Four factors affect the ability of an organisation to develop and implement global strategy: organisation structure, management processes, people and culture (Chart 2 omitted from this version). Each of these aspects of organisation operates powerfully in different ways. A common mistake, in implementing any strategy, is to ignore one or more of them, particularly the less tangible ones such as culture.
Centralisation of global authority.
One of the most effective ways to develop and implement a global strategy is to centralise authority, so all units of the business around the world report to a common sector head. Surprisingly few companies do this. Instead, they are tied for historical reasons to a strong country-based organisation where the main line of authority runs by country rather than by business. In a company pursuing a global strategy, the business focus should dominate the country focus. It's difficult, but necessary.
A common structural barrier to global strategy is an organisational split between domestic and international divisions. The international division oversees a group of highly autonomous country subsidiaries, each of which manages several distinct businesses. A global strategy for any one of these businesses can then be coordinated only at the CEO level. This split is very common among US firms, partly for historical reasons and partly because of the enormous size of the US market. Ironically, some European multinationals with small domestic markets have separated out not their home market but the US market. As a result they find it difficult to get their US subsidiaries to cooperate in the development and implementation of global strategy. In one European company we know, the heads of worldwide business sectors go hat in hand to New York to solicit support for their worldwide strategies.
While organisation structure has a very direct effect on management behaviour, it is management processes that power the system. The appropriate processes can even substitute to some extent for the appropriate structure.
Providing cross-country co-ordination is a common way to make up for the lack of a direct reporting structure. Some consumer packaged goods companies are beginning to appoint European brand managers to coordinate strategy across countries.
Too often strategic plans are developed separately for each country and are not aggregated globally for each business across all countries. This makes it difficult to understand the business's competitive position worldwide and to develop an integrated strategy against competitors who plan on a global basis.
Similarly, country budgets need to be consolidated into a global total for each product line to aid the allocation of resources across product lines. Surprisingly few companies do this.
Global performance review and compensation.
Rewards, especially bonuses, need to be set in a way that reinforces the company's global objectives. An electronics manufacturer, for example, decided to start penetrating the international market by introducing a new product through its strongest division. The division head's bonus was based on current year's worldwide sales, with no distinction between domestic and international sales. Because increasing his domestic sales was easier and had a much quicker payoff-than trying to open new international markets. the division head didn't worry much about his international sales. Predictably, the firm's market penetration strategy failed.
International groups and forums.
Holding international forums allows exchange of information and building of relationships across countries. This in turn makes it easier for country nationals to gain an understanding of whether the differences they perceive between their home country and others are real or imagined. It also facilitates the development of common products and the co-ordination of marketing approaches. For example, a French manufacturer of security devices uses councils of country managers, with different countries taking the lead on different products. While this approach is time consuming, the company has found that this reliance on line managers makes it easier for various countries to accept the input of other countries, and thus for global approaches to be pursued by all.
Being truly global also involves using people in a different way from that of a multinational firm.
Use foreign nationals.
High-potential foreign nationals need to gain experience not only in their home country, but also at headquarters and in other countries. This practice has three benefits: broadening the pool of talent available for executive positions; demonstrating the commitment of top management to internationalisation; and giving talented individuals an irreplaceable development opportunity. US companies have been slow to do this, particularly at the most senior ranks.
Promoting foreigners, and using staff from various countries, has often paid off. In the 1970's, an ailing NCR vaulted William S. Anderson, the British head of their Asian business, to the top job. Anderson is widely credited with turning around NCR. A French packaged goods manufacturer undertook seven years ago to move its European staff from country to country. Today, of fifteen staff members working at headquarters, seven are French, three are English, three are German and two are Italian. The company credits this practice-among others - for its remarkable turnaround.
Require multicountry careers.
Making work experience in different countries necessary for progression, rather than a hindrance, is another step that helps a company become truly global. One electronics manufacturer decided to make a major push into Japan, but an executive offered a transfer there was loath to take it. He was unsure a job would remain for him when he came back. As he put it, "The road to the executive suite lies through Chicago, not Osaka."
Senior managers must spend a large amount of time in foreign countries. The CEO of a large grocery products company we have worked with spends half his time outside the United States - a visible demonstration of the importance and commitment of the company to its international operations.
State global intentions.
The senior management of a company that wants to go global needs to constantly restate that intention and to act accordingly. Otherwise, the rank and file won't believe that the globalisation strategy is real. One test among many is the prominence given to international operations in formal communications such as the chairman's letter in the annual report and statements to stock analysts.
Culture is the most visible aspect of organisation, but, as shown below, it can play a formidable role in helping or hindering a global strategy.
Global (vs national) identity
Does the company have a strong national identity? 'This can hinder the willingness and ability to design global products and programs. It can also create a "them and us" split among employees. One firm was making a strong global push, and yet many of its corporate executives wore national flag pins! European companies are generally well in advance of both American and Japanese firms in adopting a global identity.
Worldwide (vs. domestic) commitment to employment.
Many American companies view their domestic employees as more important than their overseas employees and are much more committed to preserving domestic employment than to developing employment regardless of location. This often leads them to decide to keep expensive manufacturing operations in the United States, rather than relocate them to lower-cost countries. This puts them at a competitive cost disadvantage and threatens their overall competitive position.
Interdependence (vs. autonomy) of businesses.
A high level of autonomy for local business can also be a barrier to globalisation.
In sum, the four internal factors of organisation structure, management processes, people and culture play a key role in a company's move toward globalisation.
For example, a company with a strong structural split between domestic and international activities, management processes that are country -rather than business-driven, people who work primarily in their home countries, and a parochial culture is likely to have difficulty implementing integrated competitive strategies. If the analysis of external drivers has shown that such strategies are necessary for market, competitive, environmental, or economic reasons, top management needs to either adapt the internal environment to the strategic moves the company needs to make-or decide that the profound organisational changes needed are too risky. In the latter case, the company should avoid globalisation and compete based on its existing organisational strengths.
There are many was to pursue a global strategy. Industry forces play a major role in determining whether going global makes sense. An analysis of a company's competitive position against the five dimensions of globalisation - major market participation, product standardisation, activity specialisation, uniform market positioning and integrated competitive strategy-helps define the appropriate approach for a globalisation strategy. Finally, and very importantly, the ability of the organisation to implement the different elements of global strategy needs to be considered.
Matching the external and internal imperatives is critical. For example, we have worked with a company whose culture included the following characteristics:
A high degree of responsiveness o customers' requests for product tailoring.
A strong emphasis on letting every business and every country be highly autonomous.
A desire for 100% control over foreign operations.
A commitment to preserving domestic employment.
The difficulty the company found in pursuing a globalisation strategy is illustrated in the strategy/culture fit matrix in Exhibit 3.[omitted here] The matrix helped management articulate the pros and cons of the three major options they could pursue: a pure global strategy with an organisational revolution; a series of incremental changes in both strategy and organisation, leading to a mixed strategy of globalisation/national responsiveness; and an explicit rejection of globalisation, accompanied with a conscious decision to build on the company's existing organisational and cultural characteristics to develop a pure national responsiveness strategy. This enabled them to make fundamental and realistic choices rather than assuming the unavoidable dominance of strategy over organisation and of globalisation over national responsiveness.
Competing globally is tough. It requires a clear vision of the firm as a global competitor, a long-term time horizon, a concerted effort to match strategy and organisation changes, a cosmopolitan view and a substantial commitment from the top. But the result can be the opportunity to gain significant competitive advantage through cost, focus, and concentration, and improved response to customers' needs and preferences.
Source: Columbia Journal Of World Business Volume 23 Number 4 Winter 1988
Note: For technical reasons, the appendix, charts and references have been omitted from this version.