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Guidance on Teamwork

Use this document to learn about the team roles and work schedule for Project 3.

Roles in Capsim

There are four business roles in the simulation:

· research and development (R&D) manager

· marketing manager

· production manager

· finance manager

Each role plays a functional part in the simulation and will be responsible for making decisions for that area of the simulation. In addition, one student will assume the role of team coordinator. The coordinator is responsible for organizing team meetings, making sure deadlines are met, and ensuring that team members have saved their decisions in Capsim.

Given that all teams in MBA 670 have four to six members, you will accomplish a fair distribution of roles by following these guidelines.

Roles are broken down by primary and secondary roles. Only one student is assigned a primary role in each functional area. If you have a primary role, you will have the main responsibility for decisions in that functional area. If you do not have a primary role, you will have to assume two secondary roles. Consequently, you will have either a primary role or two secondary roles. You should not have primary and secondary roles simultaneously. 

Students assigned two secondary roles are not getting a free ride. These roles are critical for the success of your team and for your individual analysis report demonstrating that you participated fully in your assigned functional area, even if you occupied a secondary role. Furthermore, those with two secondary roles are positioned to foster communication among several departments, so that no single department makes a decision without an understanding of how it influences the three other functional areas.

Meet as a team to decide on roles. There may be some negotiation required if several people choose the same role. When assigning primary and secondary roles, leverage your strengths and interests.

Don’t worry too much about whether the roles were distributed to everybody’s satisfaction. Your individual report will be based on your analysis of results from each round and whether you can logically relate the outcomes of the simulation to the team’s decisions.

Your team’s final ranking will not be a factor in your individual grade. Since your individual analysis is based on an understanding of your team’s collective decisions, it is important that you communicate effectively with all your team members during the decision-making process. Ask as many questions as needed in your team meetings to get a good grasp of the logic being applied. You do not have to agree with every team decision; you will still be able to analyze your team’s results and outcomes.

Here is one example of how roles are distributed among three teams of different sizes:

Six-Member Team Example
Last Name, First Name	R&D	Marketing	Production	Finance
Team member 1				Primary
Team member 2	Primary
Team member 3		Primary
Team member 4		Secondary		Secondary
Team member 5			Primary
Team member 6	Secondary		Secondary

    Team coordinator:  ___________________________

Five-Member Team Example
Last Name, First Name	R&D	Marketing	Production	Finance
Team member 1			Primary
Team member 2	Primary
Team member 3		Primary
Team member 4		Secondary		Secondary
Team member 5				Primary

    Team coordinator:  ___________________________

Four-Member Team Example
Last Name, First Name	R&D	Marketing	Production	Finance
Team member 1			Primary
Team member 2	Primary
Team member 3		Primary
Team member 4				Primary

    Team coordinator:  ___________________________

Take Action

Download and complete this  team work plan for Project 3. The team coordinator will post the completed team work plan to the group’s discussion area.

Team Meeting Schedule

Consult the table below for deadlines for saving your final decisions for each round and enter your team’s agreed upon method for reaching and saving decisions:

Round	Deadline
1	8 p.m. ET on Friday of Week 6
2	8 p.m. ET on Monday of Week 6
3	8 p.m. ET on Thursday of Week 7
4	8 p.m. ET on Sunday of Week 7
5	8 p.m. ET on Wednesday of Week 8

Note! Classes in Europe and Asia will follow the schedule set by their faculty.

The Capsim simulation processes each round automatically at 8 p.m. ET, with or without your selections. Thus, your decisions from each functional area should be saved before the deadline. Once the round is processed, the simulation moves forward one year, and each team will be able to view the results in the Simulation Reports section, as early as 8:01 p.m.

Each team is responsible for agreeing on a schedule (Coordination Plan) that accommodates team members' availability and ensures deadlines are met. Click  here to download a template.

© 2024 University of Maryland Global Campus

All links to external sites were verified at the time of publication. UMGC is not responsible for the validity or integrity of information located at external sites.

Learning Topic

Industry Structure

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What Is an Industry?

An industry can also be viewed as a collection of firms offering goods or services that are close substitutes of each other. For example, an industry can be defined broadly (e.g., the healthcare industry, the transport industry) or more precisely (e.g., pharmaceuticals, medical diagnostics, automobiles, electric vehicles, SUVs.). How one circumscribes an industry depends on the kinds of analysis to be performed. In analyzing industry structure, it is generally better to define an industry as precisely as possible.

It is important to distinguish between the industry in which a company competes and the market it serves. For example, a company might compete in the aerospace industry but choose commercial aircraft or private jets as its served market. Or, a company may compete in the computer industry but choose to serve the software or hardware market. Defining the boundaries of the industry a company competes in is critical to delineate the size of the market, the drivers of demand, and potential competitors.

There are many  industry classification systems. For example, the publications  Fortune, Forbes, and  Businessweek, have their own classification systems. The United States used to have an official Standard Industrial Classification (SIC) system, established in 1937 that designated industries using a four-digit SIC Code. In 1997, the United States Census Bureau replaced the SIC system with the  North American Industry Classification System (NAICS), which places business establishments into specific industries. In performing an industry analysis, it is preferable to use the NAICS since all government statistics related to industries are now reported using this classification system (Jain, 2002; United States Census Bureau, 20018).

Industry Structure 

Different industries show varied returns over time. Some perform well in the short term but not so well in the long term. For example, the infrastructure (such as utilities and energy) and financial services industries (such as banks, investment funds, and insurance) perform better in the middle to long term (Fidelity, n.d.).

This difference in performance is due to a number of factors including the kind of market the industry operates in. One approach to determining the kind of market is to view industry as collection of firms that directly compete with each other and to examine their markets according to the degree of competition between the firms. The markets could be (1) perfect competition, where a large number of companies compete against each other, (2) an oligopoly, where a small number of firms compete against each other, or (3) a monopolistic competition, where a single firm dominates the market.

The number and size distribution of firms in an industry defines its  industry structure. “If all firms in an industry are small in size, relative to the size of the industry, it is a  fragmented industry. If a small number of firms controls a large share of the industry’s output or sales, it is a  consolidated industry. The type of competition in fragmented industries is generally very different from that in consolidated (or concentrated) industries” (Jain, 2002).

Industry structure also influences the profitability of companies in that industry. Some industries are inherently more attractive than others because of an underlying structure that positively affects the performance of firms in those industries. (Porter, 1979)

Industry concentration therefore is an important aspect of competition. The  concentration ratio (CR) of an industry is used as an indicator of the relative size of firms in relation to the industry as a whole. It is designed to measure industry concentration, and by inference, the degree of market control. This helps analysts understand the nature of the industry operates in which the organization operates.

A commonly used concentration ratio is the  four-firm concentration ratio (CR4). It is calculated by adding the total sales for the four largest firms in the selected industry, then dividing that sum by the total sales of the industry, and converting that result to a percentage.

While there is no distinct concentration ratio that separates one market structure from another, these values can be used as indicators of market structure, as shown in the table below:

Four-Firm Concentration Ratio and Market Structure
CR4	Degree of concentration	Market structure
0%–40%	Low concentration	Ranges from perfect competition to oligopoly
40%–70%	Medium concentration	Oligopoly
70%–100%	High concentration	Ranges from oligopoly to monopoly

There is of course nothing magical about using four firms to compute the concentration ratio; one can compute a five-firm concentration ratio (CR5), eight-firm concentration ratio (CR8), and so on. In general, the  n-firm concentration ratio is the percentage of market output generated by the  n largest firms in the industry.  

The United States Census Bureau (2013) publishes concentration ratios for all industries every five years as the results of its census. It can also be found using FactFinder (Cramer, 2012). Concentration ratios provide an indication of the market structure of an industry; they do not provide a lot of detail about the competitiveness of the industry.

For example, an  n-firm concentration ratio does not reflect changes in the size of the largest firms. The same concentration ratio can be achieved in a number of ways, as the relative size of the top  n companies can vary. The oligopolistic industry is more competitive if four firms have nearly equal sales than if sales of one firm dominates the others (“Four-Firm Concentration Ratio, n.d.). The  Herfindahl-Hirschman index (HHI), an indicator of the degree of competition among companies, addresses this issue.

HHI is applied in competition law and antitrust and is a commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market and then summing the resulting figures. It can range from close to zero to 10,000. Decreases in the Herfindahl index generally indicate a loss of market power and an increase in competition, whereas increases imply the opposite (Kenton, 2019).

The structure of an industry affects the conduct of industry members (sellers and buyers) which, in turn, affects industry performance (profitability). This principle is represented in the  structure-conduct-performance (SCP) model. Structure refers to the concentration, ownerships structure, barriers to entry, exit, and vertical integration, etc. Conduct refers to the companies’ approach to pricing, R&D, capacity investments, etc. And performance refers to profits, value creation, shareholder returns, etc. Under this model, the market structure has a direct influence on the firm's economic conduct, which in turn affects its market performance (“Enduring Ideas,” 2008).

References

Cramer, S. (2012, Jul 27).  Finding industry concentration ratios using the Economic Census & American FactFinder. [Video file]. Retrieved from https://www.youtube.com/watch?v=k3lKD446xag

Enduring ideas: The SCP framework. (2008, July).  McKinsey Quarterly. Retrieved from https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/enduring-ideas-the-scp-framework

Fidelity.  Sectors & industries—Performance. Retrieved from   https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/si_performance.jhtml?tab=siperformance

Four-firm concentration ratio. (n.d.).  AmosWeb Encylonomic Webpedia. Retreated from http://www.amosweb.com/cgi-bin/awb_nav.pl?c=dsp&k=four-firm+concentration+ratio&s=wpd

Jain, V. K., (2002). Note on industry structure. Document posted in University of Maryland Global Campus Course AMBA 607 online classroom, archived at http://info.umgc.edu/mba/public/AMBA607/IndustryStructure.html

Kenton, W. (Ed.). (2019, February 7). Herfindahl-Hirschman Index—HHI.  Investopedia. Retrieved from https://www.investopedia.com/terms/h/hhi.asp

United States Census Bureau. (2013, September 3).  Concentration ratios. Retrieved from https://www.census.gov/econ/concentration.html

United States Census Bureau. (2018, December 3).  North American Industry Classification System. Retrieved March 18, 2019 from  https://www.census.gov/eos/www/naics/

© 2024 University of Maryland Global Campus

All links to external sites were verified at the time of publication. UMGC is not responsible for the validity or integrity of information located at external sites.

Learning Topic

Industry Analysis

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It is important to appreciate the difference between industry performance and company performance, as different forces drive profitability at each level. Any industry that is not willing to change with the times is vulnerable to poor performance in the medium and long term. Companies operate in a global economy, and an industry’s survival in the medium to long term is based on its ability to change with the times and regroup according to changes the economy in their markets.

Whether  industry performance is generally good or poor over the long term, the overall economy and, for some industries, commodity prices are factors. However, the real drivers of industry performance are strategic factors—Porter’s five forces (Porter, 2008)—four of which affect the degree of competition in an industry, and all five of which affect the overall attractiveness (i.e., profitability) of an industry. For traditionally high-performing industries like pharmaceuticals, the five forces are set very favorable conditions. The opposite is the case for low-performers, like airlines, utilities, and food producers.  

As an example, Microsoft and Apple operate in an industry with fairly differentiated product lines and with buyers who have high switching costs once they are invested in the company’s products. Therefore, each company can earn high profits from those near-captive buyers, who have little power to complain or to influence either company’s pricing, profitability, or service. This is a good industry position for both companies, which greatly affects their success.

By contrast, the airline industry has high competition (i.e., the same routes and customers), high exit barriers (i.e., heavy capital investment), and high “power of suppliers” (notably fuel suppliers). In this industry, profits are kept low for all firms, as they largely compete on price for buyers who have many choices. This is an unprofitable industry, with a commoditized product (lots of buyer choice, so lots of buyer power), but  company factors can mitigate some of those negative industry factors. 

Consider Southwest Airlines, which has managed to be profitable in this unprofitable industry. According to Porter (1996), differentiation can mitigate this commoditizing effect. With a commoditized product in an unprofitable industry, it is not easy to differentiate, but companies try to do so, as Southwest’s example shows.

Another risk mitigation strategy airlines have tried in order to avoid direct price competition is to negotiate more favorable long-term fuel contacts, to reduce an individual firm’s costs and allow it to be more profitable than its competitors at the same price level.

Aside from Porter’s five forces, other factors can also influence an industry’s potential performance. As an example, the consumer industry has high entry barriers in the form of marketing networks that protect firms from new entrants. Government regulation is not one of Porter’s five forces, yet it is a powerful influence, as government rules can affect each of the five forces, which in turn affect the competitiveness of the industry. 

Consider FDA regulations for the pharmaceutical industry or emission regulations for the auto industry. These regulations can drive supplier costs and licensing requirements can directly drive costs for all firms. Understanding these forces can help firms develop mitigating strategies to weaken the effect of powerful suppliers (e.g., long-term fuel contracts) or powerful buyers (e.g., monitoring their changing needs and desires) or keep out new entrants (e.g., investing in R&D for patents).

Consequently, it is important for firms to recognize the industry factors and how they operate in order to develop risk-mitigating strategies. That is why it is crucial to consider multiple levels—industry, company, and country level—as you consider how marketing and strategy can affect firm and industry performance.

Activities that constitute a value chain are generally carried out in global networks. Global value chains (GVCs) break up the production process so different steps can be carried out in different countries. Many smart phones and televisions, for example, are designed in the United States or Japan, incorporate sophisticated inputs—such as semiconductors and processors—produced in the Republic of Korea or Taiwan, and are assembled in China (World Bank, 2017).

According to Gereffi and Fernandez-Stark (2016), “By focusing on value-adding activities from conception and production to end use, global value chain (GVC) analysis provides a view from the top down, for example, examining how lead firms ‘govern’ their global-scale affiliate and supplier networks, and from the bottom up, for example, asking how these business decisions affect the ‘upgrading’ or ‘downgrading’ in specific countries and regions.”

Keep in mind that global value chain analysis has four dimensions (Gereffi and Fernandez-Stark, 2011):

· input-output structure

· geographic scope

· governance

· institutional context

A good strategy is one that helps mitigate risks—external in the industry and country and internal to the company—and uses company strengths to leverage external opportunities. 

References

Gereffi, G., & Fernandez-Stark, K. (2011).  Global value chain analysis: A primer. Durham, NC: Center on Globalization, Governance & Competitiveness (CGGC), Duke University. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.447.3521&rep=rep1&type=pdf

Porter, M. E. (1996). What is strategy?  Harvard Business Review, 74(6), 61–78.

Porter, M. E. (2008). The five competitive forces that shape strategy.  Harvard Business Review, 86(1), 78–93.

World Bank (2017).  Global value chain development report 2017—Measuring and analyzing the impact of GVCs on economic development. Washington, DC: World Bank. Retrieved from http://documents.worldbank.org/curated/en/440081499424129960/pdf/117290-WP-P157880-PUBLIC.pdf

© 2024 University of Maryland Global Campus

All links to external sites were verified at the time of publication. UMGC is not responsible for the validity or integrity of information located at external sites.

Learning Topic

International Strategy

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Companies operating in global markets choose from among three basic international strategies: (1) multidomestic, (2) global, and (3) transnational. Each of these strategies responds to the local markets and business efficiency in different ways.

A multidomestic strategy emphasizes local needs rather than pushing products and services from the company’s home country. For example, the television show  Master Chef customizes the programming that is shown in different countries.

A global strategy emphasizes operational efficiency to benefit from economies of scale. It offers the same products in different locations. Examples include Microsoft and Intel, where local preferences do not dominate. Consumer goods makers such as Levi’s and L’oreal develop global brands to gain efficiency.

A transnational strategy emphasizes balance between local country preferences and the efficiency of standard products. For example, McDonald’s relies on its brand name but adjusts its offerings in different countries. It does not serve beef in India and it sells wine with food in France.

The three types of international strategies are compared in the figure below.

Types of International Strategies

Approaches to International Strategy 

Whichever international strategy is chosen, the entry strategy for international markets needs to present a comprehensive plan that sets goals, allocates resources, and establishes policies to guide international operations over a period long enough to achieve sustainable growth in world markets, often three to five years.

Without a well-integrated entry strategy, there is only a sales approach to international markets. The sales and entry strategy approaches are contrasted in the table below.

Sales Approach versus Entry Strategy Approach
Aspect	Sales approach	Entry strategy approach
Entry mode	No systematic choice. Take opportunities as they come	Systematic choice of most appropriate mode
Target markets	No systematic selection	Selection based on analysis of market/sales potential
Dominant objective	Immediate sales	Build market position
Resource commitment	Only enough to get immediate sales	Whatever is necessary to gain market position
Time horizons	Short run	Long run (say, 3 to 5 years)
New-product development	Exclusively for home market	For both home and foreign markets
Product adaptation	Only mandatory adaptations (to meet legal/technical requirements) of domestic products	Adaptation of domestic tests and services to foreign preferences
Channels	No effort to control	Implement control to support market objectives
Price	Determined by domestic costs with some adjustments to specific sales situations	Determined by demand, competition, objectives, and other marketing policies, as well as costs
Promotion	Mainly confirmed to personal selling	Advertising and sales promotion

While the sales approach may be justified as a first attempt, a prolonged adherence to this approach would not be sustainable in the long run.

Choosing a Market and Entry Modes

The assessment and choice of target markets would include the following tasks:

· define the market—Consider the demographics, location, and common interests or needs of your target customers.

· perform market analysis—Gain an understanding of market growth rates, forecasted demand, competitors, and potential barriers to entry.

· assess internal capabilities—Which of the company’s core competencies can be leveraged? Are the sales channels, infrastructure, and relationships in place? What are the time-to-market considerations?

· prioritize and select markets—What are the gaps in the marketplace that the company can fill better than its competitors?

· develop market entry options

The selected entry mode could be one or more of the options in the table below.

Entry Modes
Offshore	Contractual	Investment
· Indirect · Direct agent/distributor · Direct branch/subsidiary	· Licensing · Franchising · Technical agreements · Service contracts · Management contracts · Turnkey contracts	· Sole venture, new establishment · Sole venture, acquisition · Joint venture, new establishment or acquisition

As the company develops its international strategy, it is useful to visualize the long-term evolution of the company in world markets. As seen in the table below, in Stage 1 the company is constrained to one or two entry modes. At Stage 4, the company is able to evaluate all possible entry modes to select the most appropriate one. Stage 4 denotes that the company has become multinational, meaning its foreign market entry strategies is designed from a global perspective rather than a single-country perspective.

Entry Mode Stages

· Stage 1: Ad hoc exports

· Stage 2: Active exporting and licensing

· Stage 3: Active exporting, licensing, and equity investment in foreign countries

· Stage 4: Full-scale multinational marketing and servicing

Servicing of occasional, unsolicited export orders. Also includes response to unsolicited licensing arrangements. Marginal commitment to foreign markets.

back to tab

The choice of entry mode also depends on the degree of control, financial outlay, and risk in each mode over a period of time, as shown in the figure below.

Decision on Entry Modes

The actions in the international marketing plan include the following:

· service—a combination of tangible and intangible attributes that confer benefits on users

· price—pricing discretion to achieve differentiation in the market. Together with sales volume, price determines sales revenue

· channel—wwn none, some, or all channel agencies

· logistics—physical movement of samples, including transportation, handling, and storage, as well as the choice of location of collection centers and labs

· promotion—includes personal selling, advertising, sales promotion, and publicity

The following evaluation matrix can be used for each of the countries to decide on an entry strategy.

Entry Strategy Evaluation Matrix
Modes\ Criteria	Investment	Sales	Costs	Profit contribution	Market share	Reversibility	Control	Risk	Other
Local sales office
Licensing
Franchising
Agent/distributor
Investment:  New venture
Investment:  Acquisition
Joint venture
Mixed

Resources

· Types of International Strategies

© 2024 University of Maryland Global Campus

All links to external sites were verified at the time of publication. UMGC is not responsible for the validity or integrity of information located at external sites.

Learning Topic

Target Market Analysis

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A successful marketing strategy depends on the clear identification of a company’s target market. A target market is the group of customers that a company reaches out to because they are most likely to buy the products the company sells. For example, if the company makes lawnmowers, the customers will likely be adult homeowners, and it would be useful to find out about their age, place of residence, when and where they shop, the places they go, and the kinds of media they consume.

Target markets shift based on the company’s product and the strategy the company chooses to follow. They are defined by a number of different factors, such as, geography, demographics, socioeconomics, behavior, psychology, and the segment of the customers the company plans to reach out to.

Nosyrevy / iStock/ Getty Images; Rainbow / skdesigns / DigitalVision Vectors / Getty Images

“Target groups can include people who live in a particular region of the world or a particular climate” (McSorley, 2014). A company that manufactures and sells home heating or snow blowers would market to a target group in areas that experience cold weather.

Target customer groups are also influenced by socioeconomic and demographic factors. They can be organized on the basis of age, gender, level of education, and personal disposable income. For example, a luxury car maker will target high-income customers. They would most likely live in affluent areas, and marketing efforts would be targeted to these individuals. Toy and board game companies market their products so that children are interested in the toys and parents are willing to buy them. “The target market, in terms of adults, includes people of a certain advanced age, since younger people are less likely to have children. Families with children tend to live in suburban areas rather than in large cities or metropolitan centers, so the target market probably also includes those people who live in suburban parts of the country or the world” (McSorley, 2014).

Psychographic segmentation takes into account factors such as “lifestyles, values, and attitudes of potential customers. When companies are marketing products such as video game consoles, they examine how their potential customers spend their free time to focus their advertising on people who are interested in entertainment” (“Retargeting Campaign,” 2015). Apple advertised their Mac computers for a target market of tech-savvy customers, convincing them that they could not do without Apple products.

Amazon’s e-reading device, the Kindle, initially targeted younger customers, as they had an appetite for technology. The target market also included more educated people who were likely to spend time reading for pleasure and were able to afford an e-reader.

In conducting target market analysis, it is useful to focus on five questions about potential customers:

Five Questions about Potential Customers
Who	What are their ages, genders, education levels, occupations, etc.?
What	What are their interests, hobbies, and needs? What features in your product are they interested in buying?
When	When are they are most likely to buy the product? Is it once, seasonally, on a subscription-based pattern, or only when something breaks? Are there locations or mediums that are more likely to catch your customers’ attention?
Where	Where do they live? Where do they work? What is the population in that area? Depending on what you sell, you should consider the climate as well.
Why	Why would they buy from you instead of from one of your competitors?
How	What are their lifestyles or purchasing habits?

Identifying target markets, therefore, requires research to focus on a group of potential consumers that expands the sales of a particular product or line of products and creates a better understanding of overall business strategies.  

The assessment and choice of target markets includes the following tasks (Stark & Stewart, 2013):

· define the market—Consider the demographics, location, and common interests or needs of your target customers.

· perform market analysis—Gain an understanding of market growth rates, forecasted demand, competitors, and potential barriers to entry.

· assess internal capabilities—Which of the company’s core competencies can be leveraged? Are the sales channels, infrastructure, and relationships in place? What are the time-to-market considerations?

· prioritize and select markets—What are the gaps in the marketplace that the company can fill better than its competitors?

· develop market entry options—Analyze the potential modes of entry. What kind of legal structure will your company have?

References

McSorley, B. (2014). “Target market examples.” Retrieved from https://blog.udemy.com/target-market-examples/

Retargeting campaign and attracting new consumers. (2015, May 28). Retrieved from https://mpk732.wordpress.com/category/topic-4-segmentation-targeting-and-positioning/

Stark, K., & Stewart, B. (2013, April 9). 5-step primer to entering new markets.  Inc. Retrieved from https://www.inc.com/karl-and-bill/5-step-primer-to-entering-new-markets.html

© 2024 University of Maryland Global Campus

All links to external sites were verified at the time of publication. UMGC is not responsible for the validity or integrity of information located at external sites.

Learning Topic

Modes of Entry

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What is the best way to enter a new market? Should a company first establish an export base or license its products to gain experience in a newly targeted country or region? Or does the potential associated with first-mover status justify a bolder move, such as entering an alliance, making an acquisition, or even starting a new subsidiary? Many companies move from exporting to licensing to a higher investment strategy, in effect treating these choices as a learning curve. Each has distinct advantages and disadvantages.

Exporting is the marketing and direct sale of domestically produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since it does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses.

While relatively low risk, exporting entails substantial costs and limited control. Exporters typically have little control over the marketing and distribution of their products, face high transportation charges and possible tariffs, and must pay distributors for a variety of services. Further, exporting does not give a company firsthand experience in staking out a competitive position abroad, and it makes it difficult to customize products and services to local tastes and preferences.

Licensing essentially permits a company in the target country to use the property of the licensor. Such property, such as trademarks, patents, and production techniques, is usually intangible. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance.

Because little investment on the part of the licensor is required, licensing can provide a very large return on investment. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost. Thus, licensing reduces cost and involves limited risk. However, it does not mitigate the substantial disadvantages associated with operating from a distance. As a rule, licensing strategies inhibit control and produce only moderate returns.

Strategic alliances and joint ventures have become increasingly popular in recent years. They allow companies to share the risks and resources required to enter international markets. And although returns also may have to be shared, these arrangements give companies a degree of flexibility not afforded by going it alone through direct investment.

There are several motivations for companies to consider a partnership as they expand globally, including facilitating market entry, risk and reward sharing, technology sharing, joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships.

Such alliances often are favorable when (1) the partners' strategic goals converge while their competitive goals diverge; (2) the partners' size, market power, and resources are small compared to the industry leaders; and (3) partners are able to learn from one another while limiting access to their own proprietary skills.

The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions. Potential problems include (1) conflict over asymmetric new investments, (2) mistrust over proprietary knowledge, (3) performance ambiguity, that is, how to "split the pie," (4) lack of parent firm support, (5) cultural clashes, and (6) if, how, and when to terminate the relationship.

Ultimately, most companies will aim at building their own presence through company-owned facilities in important international markets. Acquisitions and greenfield start-ups represent this ultimate commitment. Acquisition is faster, but starting a new, wholly owned subsidiary might be the preferred option if no suitable acquisition candidates can be found.

Also known as foreign direct investment (FDI), acquisitions and greenfield start-ups involve the direct ownership of facilities in the target country and, therefore, the transfer of resources including capital, technology, and personnel. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment.

Coca-Cola and Illycaffé

In March 2008, the Coca-Cola company and Illycaffé Spa finalized a joint venture and launched a premium ready-to-drink espresso-based coffee beverage. The joint venture, Ilko Coffee International, was created to bring three ready-to-drink coffee products—caffè, an Italian chilled espresso-based coffee; cappuccino, an intense espresso, blended with milk and dark cacao; and latte macchiato, a smooth espresso, swirled with milk—to consumers in 10 European countries. The products will be available in stylish, premium cans (150 milliliters for caffè and 200 milliliters for the milk variants). All three offerings will be available in 10 European Coca-Cola Hellenic markets, including Austria, Croatia, Greece, and Ukraine. Additional countries in Europe, Asia, North America, Eurasia, and the Pacific were slated for expansion at a later date.

The Coca-Cola Company is the world's largest beverage company. Along with Coca-Cola, recognized as the world's most valuable brand, the company markets four of the world's top five nonalcoholic sparkling brands, including Diet Coke, Fanta, Sprite, and a wide range of other beverages, including diet and light beverages, waters, juices and juice drinks, teas, coffees, and energy and sports drinks. Through the world's largest beverage distribution system, consumers in more than 200 countries enjoy the company's beverages at a rate of 1.5 billion servings each day.

Based in Trieste, Italy, Illycaffé produces and markets a unique blend of espresso coffee under a single brand leader in quality. Over 6 million cups of Illy espresso coffee are enjoyed every day. Illy is sold in over 140 countries around the world and is available in more than 50,000 of the best restaurants and coffee bars. Illy buys green coffee directly from the growers of the highest quality Arabica through partnerships based on the mutual creation of value. The Trieste-based company fosters long-term collaborations with the world's best coffee growers—in Brazil, Central America, India, and Africa—providing know-how and technology and offering above-market prices.

Entry Strategies: Timing

In addition to selecting the right mode of entry, the timing of entry is critical. Just as many companies have overestimated market potential abroad and underestimated the time and effort needed to create a real market presence, so have they justified their overseas' expansion on the grounds of an urgent need to participate in the market early. Arguing that there existed a limited window of opportunity in which to act, which would reward only those players bold enough to move early, many companies made sizable commitments to foreign markets even though their own financial projections showed they would not be profitable for years to come. This dogmatic belief in the concept of a first-mover advantage (sometimes referred to as pioneer advantage) became one of the most widely established theories of business. It holds that the first entrant in a new market enjoys a unique advantage that later competitors cannot overcome (i.e., that the competitive advantage so obtained is structural and therefore sustainable).

Some companies have exemplified this concept. Procter & Gamble (P&G), for example, has always trailed rivals such as Unilever in certain large markets, including India and some Latin American countries, and the most obvious explanation is that its European rivals were participating in these countries long before P&G entered. Given that history, it is understandable that P&G erred on the side of urgency in reacting to the opening of large markets such as Russia and China. For many other companies, however, the concept of pioneer advantage was little more than an article of faith and was applied indiscriminately and with disastrous results to country-market entry, to product-market entry, and, in particular, to the new economy opportunities created by the Internet.

The get-in-early philosophy of pioneer advantage remains popular. And while there are clear examples of its successful application—the advantages gained by European companies from being early in colonial markets provide some evidence of pioneer advantage—first-mover advantage is overrated as a strategic principle. In fact, in many instances, there are disadvantages to being first. First, if there is no real first-mover advantage, being first often results in poor business performance, as the large number of companies that rushed into Russia and China can attest to. Second, pioneers may not always be able to recoup their investment in marketing required to kick-start the new market. When that happens, a fast follower can benefit from the market development funded by the pioneer and leapfrog into earlier profitability. For a more detailed discussion, see Tellis & Golder (2002).

This ability of later entrants to free-ride on the pioneer's market development investment is the most common source of first-mover disadvantage and suggests two critical conditions necessary for real first-mover advantage to exist. First, there must be a scarce resource in the market that the first entrant can acquire. Second, the first mover must be able to lock up that scarce resource in such a way that it creates a barrier to entry for potential competitors. A good example is provided by markets in which it is necessary for foreign firms to obtain a government permit or license to sell their products. In such cases, the license, and perhaps government approval, more generally, may be a scarce resource that will not be granted to all comers. The second condition is also necessary for first-mover advantage to develop. Many companies believed that brand preference created by being first constituted a valid source of first-mover advantage, only to find that, in most cases, consumers consider the alternatives available at the time of their first purchase, not which came first.

Starbucks’ Global Expansion

Starbucks' decision to expand abroad came after an extended period of exclusive focus on the North American market. From its founding in 1971, it grew to almost 700 stores by 1995, all within the United States and Vancouver, Canada. It was not until the next decade that Starbucks made its first entry into other international markets. By 2006, Starbucks operated approximately 11,000 stores—with 70 percent in the United States and 30 percent in international markets—and international revenue had grown to almost 20 percent of Starbucks' total revenue. Starbucks offered the same basic coffee menu internationally as it did in the United States. However, the range of food products and other items, such as coffee mugs stocked, varied somewhat according to local customs and tastes.

Along with many other companies that pursue global expansion, Starbucks continually faces questions about where and how to further increase its global presence. Should the emphasis be on growth in existing countries or on increasing the number of countries in which it has a presence? How important is the fact that international markets so far have proven less profitable than US and Canadian markets?

Starbucks in Japan

Interestingly, Starbucks' first move outside the United States and Canada was a joint venture in Japan. At the time, Japan had the second-largest economy in the world and was consistently among the top five coffee importers.

The decision to use a joint venture to enter Japan followed intense internal debate. Concerns among senior executives centered on Starbucks' lack of local knowledge, and questions were raised about the company's ability to attract the local talent necessary to grow the Japanese business quickly enough. Starbucks was acutely aware that there were significant differences between doing business in Japan and in the United States and that it might not have enough experience to be successful on its own.

Among other factors, operating costs were predicted to be double those of North America, and Starbucks would have to pay to ship coffee to Japan from its roasting facility in Kent, Washington (near Seattle). In addition, retail space in Tokyo was two to three times as expensive as in Seattle. Just finding rental space in such a populous city might prove to be a tremendous challenge. Starbucks concluded it needed to form an alliance with a local group that had experience with complex operations and real estate.

Starbucks executives worried that a licensing deal would not be the right solution. Specifically, they were concerned about a possible loss of control and insufficient knowledge transfer to learn from the experience. A joint venture was thought to be a better answer, and, after a long search, Starbucks approached Sazaby, Inc., operators of upscale retail and restaurant chains, whose president had approached Starbucks years earlier about the potential of opening Starbucks stores in Japan. Similarity in values, culture, and community development goals between Starbucks and Sazaby were important considerations in concluding the 50-50 deal. The two companies were equally represented on the board of directors of the newly created Starbucks Coffee Japan. Starbucks was the sole decision-making power in matters relating to brand, product line advertising, and corporate communications, while decisions regarding real-estate operational issues and human resources were handled by Sazaby. Despite strong local competition, the venture was successful from the start. By fiscal year 2000, Starbucks Coffee Japan became profitable more than two years ahead of schedule.

Starbucks in the United Kingdom

Unlike its expansion into Asia and later, the Middle East, Starbucks chose to enter the United Kingdom through acquisition rather than partnerships. Speed was a major factor in Starbucks' decision to enter the fast-growing UK market by acquisition. In addition, the culture, language, legal environment, management practices, and labor economics in the United Kingdom were considered sufficiently similar to those that Starbucks' management already knew. This meant that a  wholly owned UK subsidiary could be successfully established from the outset. In May 1998, Starbucks acquired the Seattle Coffee Company, which had had a presence in the United Kingdom for some time. This fast-growing chain was modeled on its own style of operations and, at the time of the purchase, had 56 retail units. The Seattle Coffee Company was an attractive acquisition target because of its focus—relatively small market capitalization and established retail units. By 2005, Starbucks had 469 stores in the United Kingdom, which made it the third-largest country, after the United States and Japan, to serve Starbucks coffee.

Licensing in China

In a number of developing markets, including China, Starbucks chose to enter into minority share licensing agreements with high-quality, experienced local partners in order to minimize market-entry risks. Under these agreements, the local partners absorbed the capital costs (real estate, store construction) of bringing the Starbucks brand abroad. These steps eliminated the need for substantial general and administrative expenses by Starbucks and enabled it to establish a presence in foreign markets much more quickly than it would have if it had to invest its own capital and absorb start-up losses.

Risk was also a major consideration when Starbucks looked to enter China. While offering high-volume opportunities in an untapped coffee market, the prevailing culture and politics in China potentially posed significant problems. In April 2000, Beijing city authorities ordered Kentucky Fried Chicken to close its store near the Forbidden City when its lease expired in 2002. Similarly, under pressure from local authorities, McDonald's removed its golden arches from outlets near Tiananmen Square. These incidents demonstrated China's ambiguous attitude toward a growing Western economic and cultural influence.

Another major concern with starting operations in China was recruiting the right staff. Uniformity of customer experience and coffee quality was the key driver behind the Starbucks brand. Failure to recruit the staff to ensure these key criteria not only would mean failure for the Chinese retail outlets but also could harm the company's image globally.

Although these factors made licensing an attractive entry model, with growing experience in the Chinese market, Starbucks is steadily reducing its reliance on the licensing model and switching to its core company-operated business model to increase control and reap greater rewards.

Starbucks' globalization history shows that while it was a first mover in the United States, it was forced to push harder in international markets to compete with existing players. In Japan, Starbucks was initially a huge success and became profitable two years earlier than anticipated. However, just two years after Starbucks Japan had become profitable, the company announced a loss of $3.9 million in Japan, its second largest market at the time, reflecting a major increase in local competition. Additional international challenges were a result of Starbucks' chosen entry mode. Although joint ventures provided Starbucks with local knowledge about the market and a low-risk entry into unproven territory, joint ventures did not always reap the rewards that the partners had anticipated. One key factor was that it was often difficult for Starbucks to control the costs in a joint venture, resulting in lower profitability.

Glossary

exporting

The marketing and direct sale of domestically produced goods in another country

fast follower

A firm that uses the benefits from prior market development by a pioneering firm to achieve profitability more quickly

foreign direct investment (FDI)

A firm's direct ownership of facilities in a target country market

greenfield start-ups

Wholly-owned subsidiaries created by firms to gain entry in foreign markets

joint ventures

Methods by which firms share the resources and risks required to enter international markets

licensing

Permits a firm (licensee) in the target country to use the intangible property of the licensor for a fee

strategic alliances

Methods by which firms share the resources and risks required to enter international markets

Key Points

· Selecting global target markets, entry modes, and deciding how much to adapt the company's basic value proposition are intimately related. The choice of customers to serve in a particular country or region with a particular culture determines how and how much a company must adapt its basic value proposition. Conversely, the extent of a company's capabilities in tailoring its offerings around the globe limits or broadens its options to successfully enter new markets or cultures.

· Few companies can afford to enter all markets open to them. The track record shows that picking the most attractive foreign markets, determining the best time to enter them, and selecting the right partners and level of investment has proven difficult for many companies, especially when it involves large emerging markets such as China.

· Research shows there is a pervasive the-grass-is-always-greener effect that infects global strategic decision making in many companies—especially those without global experience—and causes them to overestimate the attractiveness of foreign markets.

· Four key factors in selecting global markets are (1) a market's size and growth rate, (2) a particular country or region's institutional contexts, (3) a region's competitive environment, and (4) a market's cultural, administrative, geographic, and economic distance from other markets the company serves.

· There is a wide menu of options regarding market entry, from conservative strategies, such as first establishing an export base or licensing products to gain experience in a newly targeted country, to more aggressive options, such as entering an alliance, making an acquisition, or even starting a new subsidiary.

· Selecting the right timing of entry is equally critical. Many companies have overestimated market potential abroad, underestimated the time and effort needed to create a real market presence, and have they justified their overseas expansion on the grounds of an urgent need to participate in the market early.

References

Davila, A., Foster, G., Putt, C., & Somjen, A. (2006). Starbucks: A global work-in-progress (Case No. IB74). Retrieved from https://www.gsb.stanford.edu/faculty-research/case-studies/starbucks-global-work-progress

Tellis, G. J., & Golder, P. (2002).  Will and Vision: How latecomers grow to dominate markets. New York, NY: McGraw Hill.

Licenses and Attributions

Fundamentals of Global Strategy v. 1.0 was adapted by Saylor Academy and is available under a  Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the work's original creator or licensor. UMGC has modified this work and it is available under the original license.

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Learning Topic

Globalizing the Management Model

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There are four components of the business model framework: value proposition, market choices, value-chain infrastructure, and management model. This text examines globalizing the fourth component—the company's management model—which summarizes its choices about a suitable global organizational structure and decision-making framework.

The judicious globalization of a company's management model is critical to unlocking the potential for global competitive advantage. But globalizing a company's management model can be ruinous if conditions are not right or the process for doing so is flawed. Key questions include, when, and to what extent, should a company globalize its decision-making processes and its organizational and control structure? What are some of the key implementation challenges? How does a company get started?

The first part of this text discusses a key soft dimension of globalizing a company's management model—creating and embedding a global mind-set, a prerequisite for global success. The second part deals with the hard dimensions of creating a global architecture: choosing a suitable organizational structure and streamlining global decision-making processes.

Pitfalls in Globalizing a Management Model 

Globalizing a company's management model is hard. As firms increase their revenue by expanding into more countries and extending the lives of existing products by bringing them into emerging markets, costs can often be reduced through global sourcing and better asset utilization. But capitalizing on such profit opportunities is hard because every opportunity for increased globalization has a cost and carries a danger of actually reducing profit. For example, the company's customer focus may blur as excessive standardization makes products appeal to the lowest common denominator, alienating key customer segments and causing market share to fall. Or a wrong globalization move makes innovation slow down and causes price competition to sharpen.

The best executives in a worldwide firm are often country managers who are protective of their markets and value-delivery networks. Globalization shrinks their power. Some rise to new heights within the organization by taking extra global responsibilities, and some leave. Many fight globalization, making it tough for the CEO. Sometimes they win, and the CEO loses. Overcoming organizational resistance is therefore a key to success.

When Global Strategy Goes Wrong

In April of 2002, Japan's leading mobile operator, NTT DoCoMo, Inc., announced it would write down the reduced value of its investment in AT&T Wireless Services, Inc., a move expected to contribute to an extraordinary loss of about 1 trillion yen ($7.53 billion) for the fiscal year. And when the full extent of the write-downs of all its recent European, U.S., and Asian investments was realized, the bill for the ambitious globalization strategy pursued by Japan's—and Asia's—most valuable company exceeded $10 billion.

NTT DoCoMo clearly had the cash flow from its domestic business to avoid, by a long way, the high-profile fate of now bankrupt Swissair. However, the two companies' approaches to global strategy provide interesting parallels and lessons for other international players in all industries. NTT DoCoMo and the former Swiss flag carrier enjoyed strong economic success built around a former monopoly and highly protected incumbent positions in their home markets. NTT DoCoMo was the clear leader in the Japanese mobile market, with a 60% market share that drove an annual operating cash flow of more than $10 billion. Swissair's dominant carrier position delivered financial performance that was similarly blue chip.

But a strong domestic market position and excess cash flow do not guarantee success abroad. In fact, without a quite sophisticated understanding of the uniqueness of its domestic situation, a strong domestic position could conceal some of the risks of a global strategy. The first lesson is one of microeconomics: understand what drives superior economic performance in a particular business and do not take domestic success for granted. Both the airline and the telecommunications businesses are highly regulated, technology-driven, and capital-intensive industries with high fixed and very low marginal costs (per airline seat or per mobile-call minute). Rapid changes in regulation and technology are changing some of the rules of the game but not the basic economics of either of these businesses.

In the airline industry, cost advantages are driven by an airline's dominance in airport hubs and on specific routes. The airline with the most flights in and out of a specific airport generates lower unit costs per flight and per passenger than competitors. The airline with the highest market share and flight frequency on a given route typically has lower costs per seat, higher utilization, and superior pricing power. In the mobile industry, the significant fixed-cost components of the business (networks, product development, and brand advertising and promotion) provide unit cost advantages to the national market leader compared with its followers.

The second lesson from NTT DoCoMo and Swissair's experience is to have a clear view of the real economic boundaries of your business—is it a global business or, rather, a multilocal or regional one? Sitting on increasing cash balances, both DoCoMo and Swissair saw a high volume of merger and acquisition activity. They concluded a wave of "globalization" was underway in their industries and that they could not afford to be left out. The result: they developed growth aspirations beyond their national boundaries.

But while regulatory changes allowed increased foreign shareholdings in telecommunications and airlines opened up new international investment opportunities, they have not changed the laws of economics. Despite regulatory changes, the economics of the mobile-phone industry remain primarily national or regional in nature. This implies that it is better to be a market leader in one country than a follower in two countries. Similarly, regulatory changes in traditional, bilateral air-transport agreements have shifted barriers to entry and hence increased competition and reduced pricing power in the airline industry, but they have not changed its fundamental economics. All successful airline mergers have been driven around building or expanding hub or route dominance, not around building sheer, absolute scale in terms of either aircraft or destinations served.

When both NTT DoCoMo and Swissair convinced themselves they needed to expand beyond domestic boundaries to survive, the race to fulfill their global aspirations seems to have resulted in a set of investments more focused on the number of flags on a boardroom map rather than on these basic economics driving superior profitability in their industries. The risks of these two aggressive expansion strategies were further compounded by not having control over most of their international investments. This suggests a third lesson: move to management control if you are serious about capturing acquisition synergies.

During the mid to late 1990s, Swissair kept its investment bankers busy with a nonstop string of deals. The company adopted an explicit "hunter strategy," which led to acquisitions of noncontrolling minority stakes in a string of strategically challenged nonincumbent carriers: German charter carrier LTU, the French airlines AOM-Air Liberte and Air Littoral, and Italy's Volare Airlines and Air Europe. In addition, Swissair acquired stakes in Polish flag carrier LOT, Belgium's Sabena, and South African Airways.

Without majority control, there was very limited scope for Swissair management to drive the economic benefits from these airline shareholdings through route consolidation, aircraft fleet rationalization and purchasing benefits. In addition, there was no ability to take corrective action when operational or financial performance deteriorated.

Similarly, in short order, DoCoMo accumulated direct or indirect stakes in nine mobile operators—most for cash—at the peak of the telecom bubble. But this acquisition spree resulted in equity stakes in only two market leaders, and these were in relatively minor geographic markets: KPN Mobile domestically in the Netherlands and Hutchison in Hong Kong. All the others were lesser players. DoCoMo acquired stakes in the No. 3 U.S. player, AT&T Wireless; Taiwan's No. 4 player, KG Telecom; the United Kingdom's No. 5 player, Hutchison U.K., and distant followers KPN Orange in Belgium and E-Plus in Germany. Worse still, all these investments were minority stakes and so gave DoCoMo limited ability to exert control over critical strategic and operational issues at these operators.

The Importance of a Global Mind-Set 

A common challenge that many corporations encounter as they move to globalize their operations can be summed up in one word: mind-set. Successful global expansion requires corporate leaders who think proactively, sense and foresee emerging trends, and act upon them in a deliberate, timely manner. To accomplish these objectives, they need a global mind-set and an enthusiasm to embrace new challenges, diversity, and a measure of ambiguity. Simply having the right product and technology is not sufficient; it is the caliber of a company's global leadership that that makes the difference.

Herbert Paul defines a mind-set as "a set of deeply held internal mental images and assumptions, which individuals develop through a continuous process of learning from experience" (Paul 2000). These images exist in the subconscious and determine how an individual perceives a specific situation and his or her reaction to it. A global mind-set, then, is "the ability to avoid the simplicity of assuming all cultures are the same, and at the same time, not being paralyzed by the complexity of the differences" (Paul, 2000). Thus, rather than being frustrated and intimidated by cultural differences, an individual with a global mind-set enjoys them and seeks them out due to a fascination and understanding of the unique business opportunities these differences present.

The concept of a mind-set does not just apply to individuals. It can be logically extended to organizations as the aggregated mind-set of all of its members. Naturally, at the organizational level, mind-set also reflects how its members interact and such issues as the distribution of power within the organization. Certain individuals, depending on their position in the organizational hierarchy, will have a stronger impact on the company's mind-set than others. In fact, the personal mind-set of the CEO is sometimes the single most important factor in shaping the organization's mind-set.

A corporate mind-set shapes the perceptions of individual and corporate challenges, opportunities, capabilities, and limitations. It also frames how goals and expectations are set, and therefore has a significant impact on the strategies that are considered and selected and the ways they are implemented. Recognizing the diversity of local markets and seeing them as a source of opportunity and strength—while at the same time pushing for strategic consistency across countries—lies at the heart of global strategy development. To become truly global, therefore, requires a company to develop two key capabilities. First, the company must have the ability to enter any market in the world it wishes to compete in. This goal requires that the company constantly look for market opportunities worldwide, processes information on a global basis, and is respected as a real or potential threat by competitors, even in countries or markets it has not yet entered. Second, the company must have the capability to leverage its worldwide resources. Making a switch to a lower-cost position by globalizing the supply chain is a good example. Leveraging a company's global know-how is another.

To understand the importance of a corporate mind-set to the development of these capabilities, consider two often quoted corporate mantras: "think global and act local" and its opposite, "think local and act global." The "think global and act local" mind-set is indicative of a global approach in which management operates under the assumption that a powerful brand name with a standard product, package, and advertising concept serves as a platform to conquer global markets. The starting point is a globalization strategy focused on standard products, optimal global sourcing, and the ability to react globally to competitors' moves. While sometimes effective, this approach can discourage diversity, and it puts a lot of emphasis on uniformity. Contrast this concept with a "think local and act global" mind-set, which is based on the assumption that global expansion is best served by adaptation to local needs and preferences. In this mind-set, diversity is looked upon as a source of opportunity, whereas strategic cohesion plays a secondary role. Such a "bottom-up" approach can offer greater possibilities for revenue generation, particularly for companies wanting to rapidly grow abroad. However, it may require greater investment in infrastructure necessary to serve each market and can produce global strategic inconsistency and inefficiencies.

C. K. Prahalad and Kenneth Lieberthal (1998) first exposed the Western (which they refer to as "imperialist") bias that many multinationals have brought to their global strategies, particularly in developing countries. They note that they would perform better—and learn more—if they more effectively tailored their operations to the unique conditions of emerging markets. Arguing that literally hundreds of millions of people in China, India, Indonesia, and Brazil are ready to enter the marketplace, they observe that multinational companies typically target only a tiny segment of affluent buyers in these emerging markets: those who most resemble Westerners. This kind of myopia—thinking of developing countries simply as new places to sell old products—is not only shortsighted and the direct result of a Western "imperialist" mind-set, it also causes these companies to miss out on much larger market opportunities further down the socioeconomic pyramid that are often seized by local competitors (Prahalad and Lieberthal, 1998).

Companies with a genuine global mind-set do not assume that they can be successful by simply exporting their current business models around the globe. Citicorp, for example, knew it could not profitably serve a client in Beijing or Delhi whose net wealth is less than $5,000 with its US business model and attendant cost structure. It therefore had to create a new business model—which meant rethinking every element of its cost structure—to serve average citizens in China and India.

As we have seen, the innovation required to serve the large second- and third-tier segments in emerging markets has the potential to make them more competitive in their traditional markets and therefore in all markets. The same business model that Citicorp developed for emerging markets, for example, was found to have application to inner-city markets in the United States and elsewhere in the developed world.

To become truly global, multinational companies will also increasingly have to look to emerging markets for talent. India is already recognized as a source of technical talent in engineering, sciences, and software, as well as in some aspects of management. High-tech companies recruit in India not only for the Indian market but also for the global market. China, Brazil, and Russia will surely be next. Philips, the Dutch electronics giant, is downsizing in Europe and already employs more Chinese than Dutch workers. Nearly half of the revenues for companies such as Coca-Cola, Procter & Gamble (P&G), Lucent, Boeing, and GE come from Asia, or will in the near future.

As corporate globalization advances, the composition of senior management will also begin to reflect the importance of the BRIC (Brazil, Russia, India, and China) countries and other emerging markets. At present, with a few exceptions, such as Citicorp and Unilever, executive suites are still filled with nationals from the company's home country. As the senior management teams for multinationals become more diverse, however, decision-making criteria and processes, attitudes toward ethics, and corporate responsibility, risk taking, and team building all will likely change, reflecting the slow but persistent shift toward Asia in many multinational companies. This shift will make the clear articulation of a company's core values and expected behaviors even more important than it is today. It will also increase the need for a single company culture as more and more people from different cultures have to work together.

Determinants of a Corporate Global Mind-Set 

What factors shape a corporation's mind-set? Can they be managed? Given the importance of mind-set to a company's global outlook and prospects, these are important questions. Paul (2000) cites four primary factors: (1) top management's view of the world, (2) the company's strategic and administrative heritage, (3) the company's dominant organizational dimension, and (4) industry-specific forces driving or limiting globalization.

Top Management's View of the World

The composition of a company's top management and the way it exercises power both have an important influence on the corporate mind-set. The emergence of a visionary leader can be a major catalyst in breaking down existing geographic and competitive boundaries. Good examples are Jack Welch at General Electric or Louis Gerstner at IBM, who both played a dominant role in propelling their companies to positions of global leadership. In contrast, leaders with a parochial, predominantly ethnocentric vision are more likely to concentrate on the home market and not be very interested in international growth.

Administrative Heritage

The second element of a corporate mind-set is a company's administrative heritage—a company's strategic and organizational history, including the configuration of assets the company has acquired over the years, the evolution of its organizational structure, the strategies and management philosophies the company has pursued, its core competencies, and its corporate culture. In most companies, these elements evolve over a number of years and increasingly define the organization. As a consequence, changing one or more of these key tangible and intangible elements of a company is an enormous challenge and therefore a constraint on its global strategic options. For example, many traditional multinationals, such as Philips and Unilever, created freestanding subsidiaries with a high degree of autonomy and limited strategic coordination in many of the countries and markets where they chose to compete. Companies with such a history may encounter greater resistance in introducing a more global mind-set and related strategies than companies such as Coca-Cola, which have predominantly operated with a more centralized approach.

Organizational Structure 

The type of organizational structure a company has chosen—discussed more fully in the next section—is also a key determinant of a corporate mind-set. In a strongly product-oriented structure, management is more likely to think globally as the entire information infrastructure is geared toward collecting and processing product data on a worldwide basis. Compare this to an organization with a focus on countries, areas, or regions, where the mind-set of managers tends to be more local. Here, the information infrastructure is primarily oriented toward local and regional needs. It follows that in a matrix structure based on product as well as geographic dimensions, the mind-set of management is expected to reflect both global and local perspectives.

Industry Forces 

Industry factors, such as opportunities for economies of scale and scope, global sourcing, and lower transportation and communication costs, push companies toward a global efficiency mind-set. Stronger global competition, the need to enter new markets, and the globalization of important customers pull in the same direction. Similarly, the trend toward a more homogeneous demand, particularly for products in fast-moving consumer goods industries, and more uniform technical standards for many industrial products, encourage a more global outlook. Another set of industry drivers, however, works in the opposite direction and calls for strategies with a high degree of local responsiveness. Such drivers include strong local competition in important markets and the existence of cultural differences, making the transfer of globally standardized concepts less attractive. Issues such as protectionism, trade barriers, and volatile exchange rates may also force a national business approach. All these forces work together and help create the conditions that shape the global mind-set of a company.

Creating the Right Global Mind-Set

Thus, to create the right global mind-set, management must understand the different, often opposite, environmental forces that shape it. At the corporate level, managers focusing on global competitive strategies tend to emphasize increased cross-country or cross-region coordination and more centralized, standardized approaches to strategy. Country managers, on the other hand, frequently favor greater autonomy for their local units because they feel they have a better understanding of local market and customer needs. Thus, different groups of managers can be expected to analyze data and facts in a different way and favor different strategic concepts and solutions depending on their individual mind-sets.

In practice, two separate scenarios can develop. In the first scenario, one perspective consistently wins at the expense of the other. Under this scenario, the company may be successful for a certain period of time but will most likely run into trouble at a later time because its ability to learn and innovate will be seriously impaired as it opts for "short-sighted" solutions within a given framework. In the second scenario, a deliberate effort is made to maintain a " creative tension" between both perspectives. This scenario recognizes the importance of such a tension to the company's ability to break away from established patterns of thinking and look for completely new solutions. This ability to move beyond the existing paradigm and, in that sense, further develop the mind-set is probably one of the most important success factors for many of the established successful global players. Using creative tension in a constructive manner requires the development of a corporate vision as well as a fair decision-making process. The corporate vision is expected to provide general direction for all managers and employees in terms of where the company wishes to be in the future. Equally important is setting up a generally understood and accepted fair decision process, which must allow for sufficient opportunities to analyze and discuss both global and local perspectives, and their merits, in view of specific strategic situations.

P&G has been particularly innovative in designing its global operations around the tension between local and global concerns. Four pillars—global business units, market development organizations, global business services, and corporate functions—form the heart of P&G's organizational structure. Global business units build major global brands with robust business strategies, market development organizations build local understanding as a foundation for marketing campaigns, global business services provide business technology and services that drive business success, and corporate functions work to maintain our place as a leader of our industries.

Organization as Strategy 

Organizational design should be about developing and implementing corporate strategy. In a global context, the balance between local and central authority for key decisions is one of the most important parameters in a company's organizational design. Companies that have partially or fully globalized their operations have typically migrated to one of four organizational structures: (1) international, (2) multidomestic, (3) global, or (4) transnational. Each occupies a well-defined position in the global aggregation or local adaptation matrix first developed by Bartlett and Ghoshal and usefully describes the most salient characteristics of each of these different organizational structures. This section draws substantially on Aboy (2009). (See also, Bartlett & Ghoshal 1987a, 1987b, 1988, 1992, 2000).

The international model characterizes companies that are strongly dependent on their domestic sales and that export opportunistically. International companies typically have a well-developed domestic infrastructure and additional capacity to sell internationally. As their globalization develops further, they are destined to evolving into multidomestic, global, or transnational companies. The international model is fairly unsophisticated, unsustainable if the company further globalizes, and is therefore usually transitory in nature. In the short term, this organizational form may be viable in certain situations where the need for localization and local responsiveness is very low (i.e., the domestic value proposition can be marketed internationally with very minor adaptations) and the economies of aggregation (i.e., global standardization) are also low.

The multidomestic organizational model describes companies with a portfolio of independent subsidiaries operating in different countries as a decentralized federation of assets and responsibilities under a common corporate name (Bartlett and Ghoshal, 1987a, 1987b). Companies operating with a multidomestic model typically employ country-specific strategies with little international coordination or knowledge transfer from the center headquarters. Key decisions about strategy, resource allocation, decision making, knowledge generation and transfer, and procurement reside with each country subsidiary, with little value added from the central headquarters. The pure multidomestic organizational structure is positioned as high on local adaptation and low on global aggregation (integration). Like the international model, the traditional multidomestic organizational structure is not well suited to a global competitive environment in which standardization, global integration, and economies of scale and scope are critical. However, this model is still viable in situations where local responsiveness, local differentiation, and local adaptation are critical, while the opportunities for efficient production, global knowledge transfer, economies of scale, and economies of scope are minimal. As with the international model, the pure multidomestic company often represents a transitory organizational structure. An example of this structure and its limitations is provided by Philips during the last 25 years of the last century. In head-to-head competition with its principal rival, Matsushita, Philips's multidomestic organizational model became a competitive disadvantage against Matsushita's centralized global organizational structure.

The traditional global company is the antithesis of the traditional multidomestic company. It describes companies with globally integrated operations designed to take maximum advantage of economies of scale and scope by following a strategy of standardization and efficient production (Yip & Madsen, 1996). By globalizing operations and competing in global markets, these companies seek to reduce the cost of research and development (R&D), manufacturing, production, procurement, and inventory; improve quality by reducing variance; enhance customer preference through global products and brands; and obtain competitive leverage. Most, if not all, key strategic decisions—about corporate strategy, resource allocation, and knowledge generation and transfer—are made at corporate headquarters. In the global aggregation-local adaptation matrix, the pure global company occupies the position of extreme global aggregation (integration) and low local adaptation (localization). An example of a pure global structure is provided by the aforementioned Japanese company Matsushita in the latter half of the last century. Since a pure global structure also represents an extreme ideal, it frequently is also transitory.

The transnational model is used to characterize companies that attempt to simultaneously achieve high global integration and high local responsiveness. It was conceived as a theoretical construct to mitigate the limitations of the pure multidomestic and global structures and occupies the fourth cell in the aggregation-adaptation matrix. This organizational structure focuses on integration, combination, multiplication of resources and capabilities, and managing assets and core competencies as a network of alliances as opposed to relying on functional or geographical division. Its essence, therefore, is matrix management. The ultimate objective is to have access and make effective and efficient use of all the resources the company has at its disposal globally, including both global and local knowledge. As a consequence, it requires management-intensive processes and is extremely hard to implement in its pure form. It is as much a mind-set, idea, or ideal, rather than an organization structure found in many global corporations (Ohmae, 2006).

Given the limitations of each of the above structures in terms of either their global competitiveness or their implementability, many companies have settled on matrix-like organizational structures that are more easily managed than the pure transnational model but that still target the simultaneous pursuit of global integration and local responsiveness. Two of these have been labeled the modern multidomestic and modern global models of global organization (Aboy, 2009, p. 3).

The modern multidomestic model is an updated version of the traditional multidomestic model that includes a more significant role for the corporate headquarters. Accordingly, its essence no longer consists of a loose confederation of assets, but rather a matrix structure with a strong culture of operational decentralization, local adaptation, product differentiation, and local responsiveness. The resulting model, with national subsidiaries with significant autonomy, a strong geographical dimension, and empowered country managers allows companies to maintain their local responsiveness and their ability to differentiate and adapt to local environments. At the same time, in the modern multidomestic model, the center is critical to enhancing competitive strength. Whereas the primary role of the subsidiary is to be locally responsive, the role of the center is multidimensional; it must foster global integration by (1) developing global corporate and competitive strategies, and (2) playing a significant role in resource allocation, selection of markets, developing strategic analysis, mergers and acquisitions, decisions regarding R&D and technology matters, eliminating duplication of capital intensive assets, and knowledge transfer. Nestlé is an example of a modern multidomestic company.

The modern global company is rooted in the tradition of the traditional global form but gives a more significant role in decision making to the country subsidiaries. Headquarters targets a high level of global integration by creating low-cost sourcing opportunities, factor cost efficiencies, opportunities for global scale and scope, product standardization, global technology sharing and information technology (IT) services, global branding, and an overarching global corporate strategy. But unlike the traditional global model, the modern global structure makes more effective use of the subsidiaries in order to encourage local responsiveness. As traditional global firms evolve into modern global enterprises, they tend to focus more on strategic coordination and integration of core competencies worldwide, and protecting home country control becomes less important. Modern global corporations may disperse R&D, manufacturing and production, and marketing around the globe to ensure flexibility in the face of changing factor costs for labor, raw materials, exchange rates, and talent acquisition worldwide. P&G is an example of a modern global company.

Realigning and Restructuring for Global Competitive Advantage

Creating the right environment for a global mind-set to develop and realigning and restructuring a company's global operations, at a minimum, requires (1) a strong commitment by the right top management, (2) a clear statement of vision and a delineation of a well-defined set of global decision-making processes, (3) anticipating and overcoming organizational resistance to change, (4) developing and coordinating networks, and (5) a global perspective on employee selection and career planning.

A Strong Commitment by the Right Top Management 

Shaping a global mind-set starts at the top. The composition of the senior management team and the board of directors should reflect the diversity of markets in which the company wants to compete. In terms of mind-set, a multicultural board can help operating managers by providing a broader perspective and specific knowledge about new trends and changes in the environment. A good example of a company with a truly global top management team is the Adidas Group, the German-based sportswear company. Its executive board consists of two Germans, including the CEO, an American, and a New Zealander. The company's supervisory board includes representatives from Germany, France, and Russia. Adidas is still an exception. Many other companies operating on a global scale still have a long way to go to make the composition of their top management and boards reflects the importance and diversity of their worldwide operations.

A Clear Statement of Vision and Delineation of a Global Decision-Making Processes 

For decades, it has been general management's primary role to determine corporate strategy and the organization's structure. In many global companies, however, top management's role has changed from its historical focus on strategy, structure, and systems to one of developing a corporate purpose and vision, processes, and personnel. This new philosophy reflects the growing importance of developing and nurturing a strong corporate purpose and vision in a diverse, competitive global environment. Under this new model, middle and upper-middle managers are expected to behave more like business leaders and entrepreneurs rather than administrators and controllers. To facilitate this role change, companies must spend more time and effort engaging middle management in developing strategy. This process gives middle and upper-middle managers an opportunity to make a contribution to the global corporate agenda and, at the same time, helps create a shared understanding and commitment of how to approach global business issues. Instead of traditional strategic planning in a separate corporate planning department, Nestlé, for example, focuses on a combination of bottom-up and top-down planning approaches involving markets, regions, and strategic product groups. That process ensures that local managers play an important part in decisions to pursue a certain plan and the related vision. In line with this approach, headquarters does not generally force local units to do something they do not believe in. The new philosophy calls for development of the organization less through formal structures and more through effective management processes.

Anticipating and Overcoming Organizational Resistance to Change 

The globalization of key business processes such as IT, purchasing, product design, and R&D is critical to global competitiveness. Decentralized, siloed local business processes simply are ineffective and unsustainable in today's intense, competitive global environment. When all of a company's metrics are focused locally or regionally, locally or regionally inspired behaviors can be expected. Until the adoption of a consistent set of global metrics designed to encourage global behaviors, globalization is unlikely to take hold, much less succeed. Resistance to such global process initiatives runs deep, however. As many companies have learned, country managers will likely invoke everything from the "not invented here" syndrome to respect for local culture and business heritage to defend the status quo.

Developing and Coordinating Networks 

Globalization has also brought greater emphasis on collaboration, not only with units inside the company but also with outside partners such as suppliers and customers. Global managers must now develop and coordinate networks, which give them access to key resources on a worldwide basis. Network building helps to replace nationally held views with a collective global mind-set. Established global companies, such as Unilever or GE, have developed a networking culture in which middle managers from various parts of the organization are constantly put together in working, training, or social situations. They staff multicultural project teams, develop sophisticated career path systems encouraging international mobility, and provide training courses and internal conferences.

A Global Perspective on Employee Selection and Career Planning 

Recruiting from diverse sources worldwide supports the development of a global mind-set. A multicultural top management, as described previously, might improve the company's chances of recruiting and motivating high-potential candidates from various countries. Many companies now hire local managers and put them through intensive training programs. Microsoft, for example, routinely brings foreign talent to the United States for intensive training. P&G runs local courses in a number of countries and then sends trainees to its headquarters in Cincinnati or to large foreign subsidiaries for a significant period of time. After completion of their training, they are expected to take over local management positions.

Similarly, a career path in a global company must provide for recurring local and global assignments. Typically, a high-potential candidate will start in a specific local function, for example, marketing or finance. A successful track record in the chosen functional area provides the candidate with sufficient credibility in the company and, equally important, self-confidence to take on more complex and demanding global tasks, usually as a team member where he or she gets hands-on knowledge of the workings of a global team. With each new assignment, managers should broaden their perspectives and establish informal networks of contact and relationships. Whereas international assignments in the past were primarily demand-driven to transfer know-how and solve specific problems, they are now much more learning-oriented and focus on giving the expatriate the opportunity to understand and benefit from cultural differences as well as to develop long-lasting networks and relationships. Exposure to all major functions, rotation through several businesses, and different postings in various countries are critical in creating a global mind-set, both for the individual manager and for the entire management group. In that sense, global human resource management is probably one of the most powerful medium- and long-term tools for global success.

Citi Announces New Corporate Organizational Structure

Vikram Pandit, Citi's chief executive officer, announced a comprehensive reorganization of Citi's structure to achieve greater client focus and connectivity, global product excellence, and clear accountability. The new organizational structure was designed to let Citi focus its resources toward growth in emerging and developed markets and improve efficiencies throughout the company.

Specifically, Citi established a regional structure to bring decision making closer to clients. The new structure gave the leaders of the geographic regions authority to make decisions on the ground. The geographic regions were each led by a single chief executive officer who reported to Mr. Pandit.

In addition, Citi reorganized its consumer group into two global businesses: Consumer Banking and Global Cards. This brought Citi's number of global businesses to four: Institutional Clients Group and Global Wealth Management are already organized as global businesses. The four global businesses allowed Citi to deliver on product excellence in close partnership with the regions. The product leaders also reported to Mr. Pandit.

"Our new organizational model marks a further important step along the path we are pursuing to make Citi a simpler, leaner and more efficient organization that works collaboratively across the businesses and throughout the world to benefit clients and shareholders," said Mr. Pandit. "With this new structure, we reinforce our focus on clients by moving the decision-making process as close to clients as possible and assigning some of our strongest talent to lead the regional areas and global product groups" (Morcroft, 2008).

As part of the reorganization, in order to drive efficiency and reduce costs, Citi further centralized global functions, including finance, IT, legal, human resources, and branding. By centralizing these global functions, particularly IT, Citi sought to reduce unnecessary complexity, leverage its global scale, and accelerate innovation. Risk was already centralized.

The business reorganization reflects priorities outlined by Mr. Pandit, who had been conducting intensive business reviews since being named CEO, to drive greater cross-business collaboration; eliminate bureaucracy and create a nimbler, more client-focused organization; ensure strong risk management and capital resources; and drive cost and operational efficiencies to generate additional shareholder value.

Glossary

administrative heritage

A firm's strategic and organizational history, management philosophies, core competencies, and culture

corporate mind-set

The aggregated mind-set of all of the firm's members

creative tension

A firm's constructive efforts to break away from established patterns of thinking by analyzing and discussing local and global perspectives to discover new strategic opportunities

global company

A firm with globally integrated operations designed to take maximum advantage of economies of scale and scope by following a strategy of standardization and efficient production

global mind-set

The ability to avoid the simplicity of assuming all cultures are the same, and at the same time, not being paralyzed by the complexity of the differences

industry factors

Those opportunities for economies of scale and scope, global sourcing, and lower costs that push firms toward a global efficiency mind-set

international model

Characterizes firms that are strongly dependent on their domestic sales and that export opportunistically

management model

A model that summarizes a firm's choices about its global organizational structure and decision-making framework

mind-set

The set of deeply held internal mental images and assumptions, which individuals develop through a continuous process of learning from experience

multidomestic organizational model

Describes firms with a portfolio of independent subsidiaries operating in different countries as a decentralized federation of assets and responsibilities under a common corporate name

modern global company

Characterized by a high level of global integration due to low-cost sourcing opportunities, factor cost efficiencies, global scale and scope, product standardization, globalized technology sharing and information technology services, global branding, and a global corporate strategy

modern multidomestic model

A matrix structure with a strong culture of operational decentralization, local adaptation, product differentiation, and local responsiveness

networking culture

Created through the extensive use of multicultural project teams, career path systems that encourage international mobility, intensive training courses and internal conferences

"think global and act local" mind-set

The assumption that a powerful brand name with a standard product, package, and advertising concept serves as a dominating platform across global markets

"think local and act global" mind-set

The assumption that global expansion is best served by a firm adopting a bottom-up approach in adapting its products, services, and practices to local needs and preferences

transnational model

Characterizes firms that attempt to simultaneously achieve high global integration and high local responsiveness

Western "imperialist" mind-set

The tendency of multinational firms to target only those affluent buyers in emerging markets who most resemble Western consumers

Key Points

Developing a global mind-set requires companies to accomplish the following:

· Integrate the global aspects of strategy into their overall corporate strategy and change thinking patterns from a single domestic focus to a broad global focus.

· Manage uncertainty while constantly adapting to change and accepting it as part of a process.

· Get the right people in place with the skills necessary to focus on international expansion.

· Combine the various cultures and values of the corporate workforce into a unique global organizational culture.

· Invest in people so they can help the company to succeed globally.

· Embrace diversity and differences.

· Learn how to cooperate with partners worldwide by successfully managing global supply chains, teams, and alliances.

On the subject of creating a global organization, the following factors are important:

· Globalization is driving a wholesale reinvention of organizational structure and management. The need for global scale and process efficiency is challenging corporate leaders to replace old paradigms of centralized control and decentralized autonomy with new models.

· Achieving the potential of global operations requires a mix of soft and hard approaches. Optimizing global processes requires cultural change management, proactive team- and relationship-building, and more traditional budgetary and accountability mechanisms and metrics.

· Long-term vision, planning, and goal alignment can greatly increase chances of success. Corporations should start with a clear vision of their global objectives and values, and consciously develop shared language and identity, with participation from all global regions, not just headquarters.

· Identifying and replicating successes quickly and continuously is crucial to global competitiveness. Today's complex global markets require multifaceted, not monolithic, approaches and capabilities. Global collaboration with face-to-face feedback loops, and a focus on identifying local successes and building them into the global process portfolio, can maximize the value of a corporation's global assets.

References

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Bartlett, C. A., & Ghoshal, S. (1987b). Managing across borders: New strategic requirements.  Sloan Management Review, 28(4), 7–17.

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Garstka, M. (2002, April 4). When global strategies go wrong.  The Wall Street Journal. Retrieved from https://www.wsj.com/articles/SB1017883732728774080

Morcroft, G. (2008, March 31). Citigroup restructures, breaks out cards as new unit.  MarketWatch. Retrieved from https://www.marketwatch.com/story/citi-restructures-breaks-out-cards-as-new-unit

Ohmae, K. (2006). Growing in a global garden.  Leadership Excellence, 23(9), 14–15.

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