2 discussion questions (see below details)
Finance & EconPART I
STRATEGIC AND
MANAGEMENT ISSUES IN
GLOBAL AND
TRANSNATIONAL BUSINESS 1
Learning objectives
After studying this chapter students should be able to:
. define the key terms used in the study of international business;
. describe the changes in international business behaviour in the
second half of the 20th and early 21st century;
. explain the causes, nature and problems of globalization;
. describe some of the key issues in global and transnational business
management;
. define and distinguish between the ‘big controversies’ in strategic
management in relation to global business;
. explain the management processes involved in successful global
and transnational business management.
Global and transnational business – an introduction
Some important definitions
Globalization is pehaps the single most important force at work in contemporary
society, business, management and economics. For this reason,
it is strategic management in a global context that forms the central theme
of this book. Globalization is a complex phenomenon, and this chapter
explores its causes, nature, effects and implications for managers in
modern business organizations. Alongside the exploration of globalization,
this chapter examines recent developments in strategic management and
identifies their impact on transnational management, setting out the analytical
frameworks which will form the core of the subsequent chapters.
It is useful to begin by clarifying some of the terminology used in the
literature of international business. The terms international, multinational,
transnational and global business are often used interchangeably. This can
be a cause of serious confusion, so it is important to define and distinguish
between the terms. A spectrum of international business activity can be
identified depending on the nature and extent of a business’s involvement
in international markets and the degree of co-ordination and integration of
geographically dispersed operations. The importance of making this
distinction lies in the fact that the strategic and management issues facing
an organization will vary considerably depending on the breadth of its
international presence.
International, multinational, global and transnational business
The term international business simply implies that an organization is
operating in more than one country or, to put this another way, organizations
from different countries are trading across their national boundaries.
In this sense it is a generic term. A business that is multinational is one
conducting international business and operating in several countries; but, in
addition, Bartlett and Ghoshal (1989) suggested the term implies some
decentralization of strategy and management decision making to overseas
subsidiaries, with little co-ordination of activities and subsidiaries across
national boundaries. In other words subsidiaries operating in different
countries are allowed considerable autonomy in terms of their strategies,
which are largely determined by local conditions. In contrast, a global
business is one conducting its activities in a large range of countries
across the world with a single strategy that is highly co-ordinated and
integrated throughout the world. Company strategy is determined centrally
and subsidiaries have little autonomy in their operations. Finally, the term
transnational business describes the situation when an organization
conducts its activities across national boundaries, with varying degrees of
co-ordination, integration and local differentiation of strategy and operations,
depending on market and business conditions.
Globalization
One of the most used yet complex terms in international business is globalization.
The word is used to describe a range of related but distinct, sociological,
economic, political and business phenomena. In general terms,
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globalization refers to the development of global or worldwide business
activities, competition and markets and the increasing global interdependence
of national economies.
In economic terms, globalization refers to the increasing interdependence
between national economies and markets. From a sociological perspective,
it describes an increasing degree of cultural interaction and convergence
between the countries of the world. From the standpoint of business,
globalization describes the increasingly global nature of markets, the
tendency for transnational businesses to configure their business activities
on a worldwide basis, and to co-ordinate and integrate their strategies and
operations across national boundaries.
Definitions of globalization
Globalization of economies – increasing interdependence between
national economies throughout the world.
Globalization of markets – increasing homogenization of consumer
tastes and product preferences in certain markets, as evidenced by
the popularity of global brands in certain markets, like Armani, Hugo
Boss and Calvin Klein in fashion clothing, McDonald’s, Burger King
and Pizza Hut for fast food, and Coca-Cola and Pepsi-Cola for soft
drinks.
Globalization of industries – the increasing globalization of the
productive process, with firms choosing to concentrate or disperse
value-adding activities around the world according to the locational
advantages to be obtained.
Globalization of strategy – the extent to which an international
business configures and co-ordinates its strategy globally. A global
strategy will normally include a global brand name and products,
presence in major markets throughout the world, productive activities
located so as to gain maximum advantage, and co-ordination of
strategy and activities throughout the world.
Although the origins of globalization can be traced back to the early history
of international business, its rapid acceleration in the 19th and 20th
centuries can be attributed to relatively recent developments in:
. manufacturing technology, which began during the industrial revolution,
making mass production possible;
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. transportation technology, like railways, motor transport, steam shipping
and aeroplanes, allowing the movement of people, materials and finished
products from country to country and continent to continent
more quickly and cheaply;
. information and communications technology, like the telephone, computers,
the Internet, satellite television, which have together contributed
to both the globalization of markets and the global co-ordination of
worldwide business activities;
. trade liberalization, through GATT (the General Agreement on Tariffs
and Trade) and its successor, the WTO (the World Trade Organization),
which have reduced tariff and other barriers to trade between countries;
. rising real term incomes, which have contributed to an increase in
demand for products and services worldwide.
GATT and the WTO
The most prominent international trade agreements are the General
Agreement on Tariffs and Trade (GATT) and its successor, the
World Trade Organization (WTO). The GATT agreement began life
as the Havana Charter 1948 when 23 countries acted as signatories to
what they hoped would become an international trading organization
(ITO). As negotiations progressed, it became clear that such a worldwide
trading block was too ambitious and so a ‘general agreement’ was
arrived at. The main points of the agreement were as follows:
1 tariffs should not be increased above current levels;
1 quotas should be reduced and eventually abolished;
1 each signatory was a ‘most favoured nation’ (this meant that trading
privileges extended by one member nation to another must be
widened to include all of the others);
1 the general agreement recognized that other trading blocks may
exist, such as the EU and NAFTA (North American Free Trade
Area), but these were encouraged to be outward-looking rather
than insular as far as trading restrictions were concerned.
The WTO has evolved over the years through the staging of several
‘rounds’ of lengthy and complicated negotiation. The number of
countries subscribing to the WTO has grown as the various rounds
have progressed. With over 100 members, the WTO now accounts
for about 80% of international trade. Overall, the WTO has succeeded
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in generally reducing import tariffs and significantly cutting down on
quotas. Recent rounds have focused on attempting to reduce the stark
variations in prosperity between wealthy and poorer countries – the
‘north–south dialogue’.
Globalization and business
From the perspective of business, interest in globalization centres on two
major facets: the globalization of markets and the globalization of production
and the supply chain. Levitt’s seminal work of 1983, ‘The globalization
of markets’ (Levitt, 1983), suggested that technological change, social, political
and economic developments have, in recent decades, driven the world
toward a ‘global village’ or ‘converging commonality’ – a homogenized,
unified global market in terms of consumer tastes and product preferences.
For Levitt, the main beneficiaries of this convergence would be global
organizations producing globally standardized products in order to
achieve world economies of scale. Such global businesses are able
(because of scale economies) to undercut the prices of more nationally
orientated competitors. Levitt concluded that a global strategy must be
based on standardization of product, branding and advertising.
While there is strong evidence that many markets are becoming increasingly
global in certain respects, an approach to strategy that concentrates
almost exclusively on standardization and costs represents an oversimplification
of the situation. The global environment is becoming increasingly
complex and requires more sophisticated approaches to strategy. There are
important variations in consumer needs regionally and locally, as well as
globally. At the same time as markets become more global, consumers are
becoming more sophisticated, demanding products (goods and services)
that are differentiated rather than standardized. Thus, although the market
may be essentially global, the sophistication of consumers’ needs and wants
will dictate that strategy must be flexible and responsive, rather than rigidly
standardized.
A further complexity is that globalization is not confined simply to consumer
markets but also relates to the global scope of all of an organization’s
business operations and its ability to compete on a global scale (Yip, 1992).
Yip used the term ‘total global strategy’ to describe an approach to strategy
that embraces the worldwide scope of an organization’s activities, a view
that the whole world is a potential market. Yip, however, recognized the
need to adapt aspects of strategy where local conditions dictate.
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Porter (1990) focused on the globalization of an organization’s valueadding
activities. Globalization has given business the opportunity to configure
its activities so as to take account of locational and other advantages
arising from differences in resources, skills and economic conditions in
different parts of the world. By configuring its activities to take advantage
of these differences and by co-ordinating its global activities effectively, an
organization can gain global competitive advantage. Bartlett and Ghoshal
(1989) used the word transnational to describe the configuration, coordination
and control of global business activities across national
boundaries in the pursuit of global competitiveness, at the same time as
encompassing local adaptation and differentiation of organizational strategy
and structures. Such an approach to business allows an organization to take
advantage of both global and local advantages and opportunities.
Both markets and the ways in which international businesses configure
and co-ordinate their activities are becoming increasingly global in scope
and transnational in nature. It is the process of developing global and
transnational strategies, and the management and co-ordination of worldwide
operations that provide the main focus to this text.
It should be obvious that definitions of the term globalization that are
either overly prescriptive or vague are not particularly useful. Few markets
and industries are fully global although many display global characteristics
(Yip, 1992). A global strategy of complete world standardization is therefore
unlikely to be successful and, as a result, very few (if any) organizations
adopt such strategies. Otherwise ‘global’ corporations like McDonald’s and
Coca-Cola make minor adjustments to their strategies as national circumstances
demand. Using the term ‘globalization’ to describe the strategy of
any company expanding abroad is too wide in scope since it would encompass
all businesses with any interests overseas, and clearly not all such
organizations are global.
Globalization N is it a blessing or a curse?
Globalization has become one of the most contentious political and
economic issues of modern times. It is the subject of debate, demonstrations
and even violence. So what is it that gives rise to such passions
and are there any answers to the problems?
There is no single form of globalization; rather there are many.
Globalization of markets is the development of products satisfying
customer needs that are common throughout the world (‘market’ in
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this context refers to the demand side of an economic system of exchange).
This may be the need for fast food, soft drinks, films, popular
music, sport, fashion clothing, fragrances, computers, consumer electronics
and so on. In these circumstances consumer needs throughout
the world appear to have grown more similar, perhaps based on
cultural convergence (i.e., national cultures growing more similar to
each other). The advantage to consumers is that their choice of
products has widened and that prices have fallen. The advantage to
producers is that they are able to earn much higher revenues, which in
turn finance research and development of new products, and that they
are able to achieve economies of scale, which then reduce unit costs of
production. Sony, the Japanese electronic giant, is able to introduce a
constant stream of new and improved products, financing the development
out of global sales revenues and keeping prices low on the
basis of the huge economies of scale obtained.
The second form of globalization relates to the way in which firms
organize their value-adding activities on a worldwide basis, according
to availability of resources, cost levels, skills, quality and so on. The
firms benefit from much lower unit cost levels and often higher quality
manufacturing. Consumers benefit from lower prices and increased
choice, together with better quality. Designer clothing, including
labels like Ralph Lauren, Calvin Klein, Armani and Yves St Laurent, is
produced in the Far East and thus made affordable to consumers
because of low production costs (because labour costs are often
cheaper in the Far East than in the West).
Both the globalization of markets and production have led to the
development of huge transnational organizations or global companies
whose revenues exceed the national incomes of many medium-sized
countries. Such organizations produce and sell throughout the world.
Organizations like General Electric, Microsoft, Procter and Gamble,
Unilever, Sony, Ford, General Motors, Toyota and their activities
span the globe.
At the same time technological developments like the Internet and
air travel have considerably increased the interdependence between
the countries of the world. Increased travel and improved communications
have increased awareness of ethnic products and of political,
social and economic events and changes. Satellite television, films
and package holidays have all increased consumers’ awareness of
and demands for foreign products.
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The blessings
Many people argue that these types of globalization have brought
many benefits. Consumers have access to a much wider range of products,
which are constantly being updated, and at relatively low prices.
Increased global trade has made people wealthier and allowed them to
lead more diverse lifestyles. Companies benefit from access to global
markets and low cost production in developing countries. Developing
countries like Thailand, Vietnam and Cambodia, it is argued, benefit
from increased levels of employment and increasing wage levels.
Transnationals like Nike pay wages well above the local average but
well below those in the USA.
Globalization is not entirely a new phenomenon, however. Trade
between nations goes back centuries and even millennia, but the
extent of globalization and its rate of increase have been most
marked in the years following World War II (1939–45). There are
many reasons that may account for this change. Rising real term (i.e.,
after inflation) incomes and living standards have led to a dramatic
increase in demand for consumer products while international travel
and communications have introduced consumers to products from
other countries. Western democracies have played an important role
by placing increasing emphasis on the market economy as a vehicle for
economic growth and by building and strengthening international ties
as a way of fostering trade and good international relations.
The developing of international ties, increasing travel and the development
of the Internet have diminished the importance of national
borders and brought about greater interdependence and fusing of individual
national markets. At the same time the reduction in protectionist
barriers, resulting from the work of organizations like GATT and its
successor, the WTO, has stimulated free movement of products and
capital and paved the way for the development of transnational
organizations with centres throughout the world.
So, globalization has been welcomed by consumers and by capitalists
who believe in international free trade between nations as a matter
of principle. For consumers, international trade has increased competition,
driven down prices, given greater choice in High Street
stores, and these factors have, in turn, resulted in greater spending,
rising living standards and increased international travel. In addition,
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sympathizers with globalization say it has increased information flows
between countries, assisted cross-cultural understanding, promoted
democracy and furthered world peace. The fall of communism in
Eastern Europe and the absence of a major war in Western Europe
since 1945 are all attributed, at least in part, to increased international
trade and understanding between the nations of the world.
The curses
In the face of all these economic, social and political benefits, it may be
difficult to understand why several anti-globalization demonstrations
have taken place. What is it that arouses such anti-globalization
passions? The groups of demonstrators who protested against globalization
in Seattle in November 2000 at the World Trade Organization
conference in London, at the G8 meeting in Genoa, and in Prague at
the annual meetings of the International Monetary Fund and the
World Bank clearly believe that globalization is essentially a harmful
phenomenon.
The demonstrators argue that the gains in living standards in the
developed countries has been at the expense of the developing countries.
While living standards have risen for many as a result of globalization,
more than a billion people live in extreme poverty throughout
the world. Globalization has brought no benefits for these people. In
fact, the share of the global income of the poorest people in the world
fell throughout the 1990s. The already impoverished countries are
becoming even poorer. The gap between rich and poor is becoming
ever wider. They argue that although transnational organizations may
have brought employment to some developing countries, some are
accused of employing child labour, condoning inhumane working
conditions and paying slave wages among producers in developing
countries. In addition to this, what of the underdeveloped countries
in Africa that have enjoyed little or no investment by transnationals and
whose economies show little or no sign of development?
Even in the developed economies, globalization has been the cause
of problems. In developed countries there have been huge job losses
among unskilled workers as transnationals shift production to lowwage
economies in the developing world. Some small businesses in
developed countries are afraid of transnationals, fearing that they may
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be forced out of business if they are unable to emulate the economies
of scale and low costs of these global juggernauts.
Globalization brings threats to the national cultures and identities of
developing and developed countries alike through the spread of satellite
TV, the development of international media networks and increased
personal travel. Some traditional customs, industries and
languages are disappearing.
Huge transnational companies are seen as a threat to democracy as
they have greater economic power than the governments of the developing
countries in which they are operating. They may fatally damage
the economy of a country by attaching greater importance to shareholder
value than to social, cultural and national economic concerns. It
is suggested that they threaten human rights through their selfish
pursuit of profit.
The transnationals are also accused of damaging the ecological
environment in the pursuit of profits. Developing countries contribute
little to the world’s pollution problems while the developed countries
contribute much. Transnationals may bring the problem to the
developing countries as they seek ever increasing levels of low-cost
production. Increasing levels of global consumption also threaten the
world’s non-renewable resources. Our living standards today may be at
the expense of future generations. Our growth in living standards may
not be sustainable.
The opposition groups
The protesters who have gathered in Seattle, London, Genoa and
Prague to highlight these fundamental issues represent a disparate
group of causes, unified only by their opposition to globalization.
They are an unlikely coalition of environmentalists, anti-poverty campaigners,
trade unionists, anti-capitalist groups and anarchists who tend
to view globalization and transnational companies as a major threat to
people, the developing countries and the environment. One umbrella
group that sought to unite these anti-globalization groups in Prague
was the Initiative Against Economic Globalization (INPEG). It provided
the campaigning groups with training in demonstration management,
making human chains, first aid, tree climbing, street theatre and communicating
with the media. INPEG described itself as ‘a loose coalition
of various Czech environmental, human rights and autonomist/
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anarchist groups, organizations and individuals who are ready to stand
up critically against the summit of the world financial oligarchy.’
The record of these demonstrations is not itself good. They have
been marred by violence, death and destruction of property. These
acts may only be perpetrated by a small minority of demonstrators,
but they feature heavily in the portrayal of the demonstration by the
world’s media. The heavy media coverage of these acts of violence
tends to cloud the basic issues of social justice, sustainability and
ecology that underpin the globalization debate. It is ironic, however,
that it is the world’s media, the epitome of globalization itself, that
allows the debate to take place across national and continental boundaries.
Perhaps this is indicative of the fact that the global village,
predicted by Marshall McLuhan, has already arrived.
Can globalization be managed?
If globalization is a trend that can be traced back far into our history
and that is inextricably intertwined with so many people’s lives, can its
march be halted? Indeed, is it desirable to halt its march? It is likely that
it is impossible to halt the driving forces behind globalization. The vast
majority of people throughout the world, especially in developed
countries, are addicted to consumerism and actively seek new products
at low prices. They may well be concerned about the conditions under
which the products are produced, but are unwilling to completely
boycott their purchase. Nevertheless, companies like Nike have been
forced to monitor and improve the conditions under which the workers
producing their products are employed. They have sought to eliminate
child labour, raise wage levels and provide social and medical benefits
to workers in the factories producing the products as a result of the
pressure of public opinion.
People in developing countries lived in poverty before globalization,
and it is unlikely that poverty can be meaningfully tackled without the
assistance of foreign governments and without investment from transnationals.
The wages paid by transnationals in developing countries
may be well below those paid to workers in developed countries but
they are, nevertheless, often well above average wage levels throughout
the developing world.
The answer to the problems posed by globalization may therefore
not be to try to prevent change, but to seek to ameliorate and eliminate
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its harmful consequences. In other words governments, international
bodies like the WTO, IMF and World Bank, and transnational businesses
must work together to create conditions under which the potential
benefits of globalization are realized while its potentially damaging
outcomes are eradicated.
Free trade between countries is often presented as necessary for
global business. Yet free trade need not mean a complete absence of
regulation. The dangers of the monopoly power of developed countries
and huge transnationals must be controlled. Developing countries
must be assisted in achieving economic prosperity. Free trade need not
be unregulated trade. Bodies like the WTO seek to develop rules
through which developing countries and their populations are protected.
The problem is that developing countries are a majority of
the WTO’s members and can dominate its proceedings. This is not
surprising when half the least developed countries have no representation
at the WTO headquarters in Geneva. The WTO must find mechanisms
for representing the opinions of developing countries and for
implementing rules that prevent developed countries and transnational
businesses from striking deals that harm the developing world. Furthermore,
the WTO must set and achieve development targets that reduce
poverty, create sustainable development and protect the environment.
The world’s governments have agreed to targets like halving the
number of people living in poverty by 2015, universal primary education
in all countries by 2015, gender equality, a reduction of two-thirds
in infant mortality rates by 2015, improved primary health care and the
implementation of national strategies for sustainable development in all
countries by 2005.
The reduction of poverty is not simply a social and moral issue it is
also economic and political. Globalization means increasing interdependence
between nations. If the poorer countries become richer
then they become markets for the products and services of transnationals.
If developing countries have social and political problems then
they also affect developed countries. As a consequence it is in the
interests of developed countries to assist their development. The
uneven spread of the benefits of globalization, as illustrated by the
development of East Asian countries compared with the failure to
improve the lives of millions of people in rural Africa, remains an issue.
It remains a challenge for the governments of poorer countries to
create domestic conditions that attract foreign investment. This means
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the elimination of corruption, the development of education, the regulation
of working conditions and the provision of primary health care.
These governments cannot achieve these goals on their own and must
be assisted by developed countries and by international bodies. There
are many causes of poverty, but it is widely accepted that education is
an important factor in its reduction. Recent research suggests that
investing in primary education, particularly for girls, is the most effective
path to economic development and the elimination of poverty.
Education creates a skilled and adaptable workforce that attracts
inward investment and rising levels of income. At the present time
(2003) it is estimated that worldwide 113 million children of primary
school age have never gone to school and a further 150 million drop
out before achieving basic literacy and numeracy skills.
Transnational businesses can themselves play a much greater role in
reducing poverty and creating sustainable development. They can insist
on best practice in relation to child labour, corruption, corporate
governance, human rights, health and safety, and the environment,
so creating employment, eliminating poverty and improving conditions
in poor countries. Many companies have already realized the benefits
to their reputations and productivity levels that can be achieved by
investing and setting standards in poor countries.
Developed countries might also set a better example in terms of
protecting the environment, reducing pollution and preserving
natural resources. Developing countries might then, in turn, ensure
that their newly emerging industries conform to global environmental
agreements (such as the Rio and Kyoto Protocols).
A key way in which developed countries can assist the poorer
nations is through aid. Developing countries have already been
given huge amounts of aid, but it has often been given unwisely and
used equally as badly. Lending governments have often tied aid to
contracts for their countries’ products. The governments of developing
countries have often not made the best use of the money that they have
received. It is generally accepted that aid should be used to create
conditions in developing countries which not only help the poor but
also attract inward investment that assists in promoting economic
growth.
Globalization cannot be prevented but can be managed by governments,
international bodies and global businesses to raise living
standards for all.
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Global and transnational strategy
Yip (1992) used the term total global strategy more broadly than many
other writers, arguing that ‘a [global] strategy can be more or less global
in its different elements.’ To avoid confusion with more limited definitions
of global strategy this book uses the term transnational strategy. A
transnational strategy is one that combines a global configuration and
co-ordination of business activities with local responsiveness, based on
continuous organizational learning, and consists of:
. global knowledge-based core competences giving access to global
markets;
. extensive participation in major world markets;
. global configuration of value-adding activities which exploits both
national similarities and differences;
. global co-ordination and integration of activities;
. local responsiveness where required;
. differentiated structure and organization.
The definition of globalization and transnational strategy above provide the
focus of this book.
Table 1.1 shows how international business has developed over recent
decades. Note how the configuration of international activities has increased
over time.
Structure of the book
The emphasis of this book – on global and transnational strategy, rather
than international or multinational strategy and management – reflects the
major changes that have taken place in the environment of international
business since the early 1980s. These changes accelerated in the 1990s and
have continued into the 21st century (see Chapter 2). The overarching
theme is the link between the trend toward globalization of competition,
markets and products, and the consequent imperative to adopt global and
transnational strategies and approaches to management.
Competition in many industries and markets has become increasingly
global rather than international in scope (Porter, 1990; Yip, 1992). As a
consequence, many established international businesses have replaced
their traditional country-centred multidomestic strategies with ones that
involve closer co-ordination and integration of geographically dispersed
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operations. In other words organizations and strategies are no longer best
described as multinational but as global and transnational.
The extent of globalization, however, varies both within and between
industries and markets and its effects vary from country to country. Indeed,
there are still many industries and markets where local conditions dictate
local adjustments to strategy and management. These factors raise major
implications for management within businesses. It is therefore necessary to
adopt a co-ordinated approach to global production, technology, marketing,
financial, human resource management and so on, combined with
differentiated structures and strategies where and when local conditions
require. A global or transnational strategy, therefore, implies taking advantage
of both global and local conditions through a differentiated, rather than
standardized, approach to business.
Part II of the book (Chapters 2–5) is concerned mainly with developing
an understanding of global business and the globalization of the business
environment. The implications of globalization for business strategies are
examined in Part III (Chapters 6–8). Part IV (Chapters 9–14) examines
global and transnational business management. The remainder of this
chapter develops the concept of globalization further and explains the
approach adopted to the processes of strategic management.
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Table 1.1 The evolution of international and global strategy (1950–21st century)
Period International strategy of the period
1950s/1960s Multinational expansion through the establishment of miniature replica
subsidiaries abroad. Predominance of multidomestic strategies, with
largely autonomous foreign subsidiaries supplying local/regional
markets. Limited global co-ordination or integration of geographically
dispersed operations.
1970s Multinationals in retreat: divestments, rationalizations and host country
plant closures.
1980s Shift toward co-ordinated and integrated global strategies by established
MNEs (multinational enterprises); focus on global competitiveness and
use of global scope as a competitive weapon in global industries
involving plant specialization and national interdependency.
1990s Transition to global and transnational strategies. Businesses focus on
developing core competences with outsourcing of other non-core
activities. This results in the development of global networks and
strategic alliances that are both horizontal and vertical. Increasing
emphasis on knowledge as an asset and early forms of learning
organization begin to develop.
2000s The era of the ‘virtual corporation’ and the ‘intelligent organization’.
Increasing global co-ordination in Philips Electronics
In 1991, Philips of the Netherlands – one of the world’s largest
electronics multinationals – celebrated its one-hundredth anniversary.
The celebrations coincided with the announcement of a major change
in Philips’ corporate mission and strategy for the 1990s aimed at
improving global competitiveness.
Although operating on a global scale with a very large number of
geographically dispersed activities, Philips was not a global company.
Historically, the company had adopted a multidomestic or countrycentred
strategy with national subsidiaries being responsible mainly
for the domestic markets in which they operated and with a lack of
global co-ordination and integration of activity in different countries.
By the late 1980s, it had become obvious to senior executives that this
multidomestic strategy was becoming increasingly inappropriate given
the rapid changes taking place in the world’s electronics industry. The
most important of these were:
1 the globalization of the market and the emergence of strong global
competitors, especially from the Far East;
1 rapid technology change leading to a stream of new product
developments and closer convergence between consumer and
professional electronics;
1 changes in production processes (e.g., CADCAM) that were becoming
much less labour-intensive;
1 new patterns of industry competition and co-operation through
strategic alliances; and
1 fluctuating exchange rates.
In response to these changes, electronics companies required global
sales to achieve economies of scale and learning curve effects.
They also needed to spread R&D costs and to justify new product
developments.
The major change in Philips’ corporate strategy and mission was the
adoption of a global orientation or strategic vision with the objective of
becoming a leading global electronics company with strengths in the
major ‘triad’ markets of the USA, Europe and the Far East. The adoption
of a global philosophy and a reorientation of strategy toward global
markets was to be achieved through the implementation of several
CHAPTER 1
Increasing global co-ordination in Philips Electronics
In 1991, Philips of the Netherlands – one of the world’s largest
electronics multinationals – celebrated its one-hundredth anniversary.
The celebrations coincided with the announcement of a major change
in Philips’ corporate mission and strategy for the 1990s aimed at
improving global competitiveness.
Although operating on a global scale with a very large number of
geographically dispersed activities, Philips was not a global company.
Historically, the company had adopted a multidomestic or countrycentred
strategy with national subsidiaries being responsible mainly
for the domestic markets in which they operated and with a lack of
global co-ordination and integration of activity in different countries.
By the late 1980s, it had become obvious to senior executives that this
multidomestic strategy was becoming increasingly inappropriate given
the rapid changes taking place in the world’s electronics industry. The
most important of these were:
1 the globalization of the market and the emergence of strong global
competitors, especially from the Far East;
1 rapid technology change leading to a stream of new product
developments and closer convergence between consumer and
professional electronics;
1 changes in production processes (e.g., CADCAM) that were becoming
much less labour-intensive;
1 new patterns of industry competition and co-operation through
strategic alliances; and
1 fluctuating exchange rates.
In response to these changes, electronics companies required global
sales to achieve economies of scale and learning curve effects.
They also needed to spread R&D costs and to justify new product
developments.
The major change in Philips’ corporate strategy and mission was the
adoption of a global orientation or strategic vision with the objective of
becoming a leading global electronics company with strengths in the
major ‘triad’ markets of the USA, Europe and the Far East. The adoption
of a global philosophy and a reorientation of strategy toward global
markets was to be achieved through the implementation of several
changes in the worldwide strategy and management of the company.
The major measures included:
1 the adoption of globalization and an orientation to global markets;
1 restructuring of product development and production for global
market distribution through the establishment of international production
centres (IPCs) as manufacturing centres for products aimed
at world markets;
1 centralization of product policy and planning aimed at achieving a
coherent, integrated global marketing strategy covering product
planning, design, development, etc. (national marketing, sales and
service programmes should complement the overall global product
strategy);
1 organizational restructuring to conform to global orientation;
1 production restructuring, especially a shift from local production for
local markets to highly efficient factories for large-volume production
for world markets through IPCs;
1 improving the management of resources through decentralizing the
organization through the establishment of business units and project
teams;
1 an effective human resource management development programme;
1 greater attention paid to the management of external relationships;
and
1 improving the management of operating systems.
These changes were aimed at achieving a balance between global
integration and national responsiveness (i.e., a balance between centralization
to achieve global integration and decentralization to achieve
national responsiveness).
Global and transnational strategies and
management – the issues
The Philips’ case illustrates many of the complex strategic and management
issues involved in global business including:
. the importance of organizational learning in a turbulent international
business environment (industry globalization had made Philips’ traditional
country-centred strategy inappropriate);
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. global strategies involving co-ordination and integration of geographically
dispersed operations were becoming essential to maintain
competitiveness in global electronics;
. the adoption of global strategies requires an underlying global
philosophy or strategic vision;
. the shift from country-centred to global strategies required major changes
in the internal management of Philips – especially in production,
logistics, R&D, human resource management and development, etc.;
. the shift to global strategies implied significant changes in organization
and control.
In this complex area we need to draw a distinction between the conception
of strategy and that of management. Strategy concerns organizational
learning about the business and its environment and the development of
knowledge that produces core competences which position the organization
favourably with regard to the variables in the environment (which in
the case of international business are usually very complex and turbulent
environments). Management is concerned with how the company
configures and oversees its internal value-adding and support activities to
implement its strategy and achieve competitive advantage. The key issues
surrounding global and transnational strategy and management are
summarized in Table 1.2.
A framework for global and transnational
strategic management
The controversies in strategic management
Strategic management is a comparatively young discipline and, in consequence,
there is considerable debate over which approach managers
should adopt in devising their strategies. The alternative approaches are
considered here before the frameworks used in this book are developed.
McKiernan (1997) identified four well-established approaches to strategic
management. The approaches can be broadly identified as:
1. the prescriptive approach (also called the deliberate or planned
approach);
2. the emergent (or learning)approach ;
3. the competitive positioning approach;
4. the resource, competence and capability approach.
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STRATEGIC AND MANAGEMENT ISSUES
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Table 1.2 Global and transnational business strategy and management: the issues
Issues involved
(a) Global and transnational strategy
Global transnational strategy (how the Knowledge, global core competence and
organization positions itself with regard to the capability.
global business environment and how it Global generic/hybrid strategy.
formulates its strategies). Competence and strategy relationships.
Global, transnational, regional and
multidomestic strategies.
Collaborative network strategies – the virtual
corporation.
Learning organizations – knowledge-based
competition.
Global/transnational marketing servicing (how Market-servicing strategies – the alternatives:
the global organization sets about responding exporting; contractual agreements; joint ventures
to and servicing its markets – its groups of strategies, foreign direct investment (FDI);
customers in various parts of the world). cross-border mergers, acquisitions and strategic
alliances.
Subsidiary strategies (how the organization deals Types of subsidiaries – subsidiary and global
with its subsidiaries in other parts of the world). strategies.
Evolution of subsidiary strategies.
Subsidiary strategies and management.
(b) Global and transnational management
Human resource management (how the global Transformational leadership.
organization manages its people). Staffing and expatriate policies.
Cross-cultural management and global
management development.
Production and logistics management (how the Global production.
organization manages its main value-adding Global logistics.
activities, such as manufacturing and distribution). Plant location.
Global procurement (purchasing).
Technology management (how the organization Technology accumulation, development, diffusion
invests in and employs all technologies). and deployment.
Technology and competitiveness.
Marketing management (how the organization Role of marketing in global strategy.
understands and communicates with its Global marketing.
customers). Global marketing strategies.
Segmentation and positioning for global markets.
Global marketing mix.
Financial management (how the organization Financing international development.
raises funds for global activity and how it Strategies for managing exchange rate risk.
manages its financial resources in a complex Transfer pricing.
environment). Financial strategies for global competitiveness.
Organizational structure and global control (how Organizational structures – types and evolution of.
the organization is structured and controlled to Organizational culture.
achieve its global objectives). Decision making and control.
Global strategy, structure and competitiveness.
More recently the focus in the literature has shifted to a knowledge-based
approach to competitive advantage (Nonaka et al., 2000; Stonehouse and
Pemberton, 1999). This approach combines elements of the various
methodologies of strategic management, particularly learning and
resource-based strategy and is the basis of this book.
Each of these approaches to strategic management has its distinct characteristics
and emphases. Equally, however, the approaches are interlinked
and share certain concepts. No single approach presents a prescription for a
complete methodology of strategic management. As a consequence, we
draw on certain of the frameworks developed by each school of thought,
in order to develop a methodology for devising transnational strategies.
Global strategic management is by its nature an eclectic academic
discipline.
The prescriptive or deliberate approach to strategy
This approach focuses on long-term planning aimed at achieving a ‘fit’
between an organization’s strategy and its environment (Ansoff, 1965;
Learned et al., 1965; Argenti, 1974; Andrews, 1987). Internal competences
are matched to opportunities and threats in the environment. Strategic
management is presented as a highly systematized and deterministic
process, from the setting of objectives through external and
internal analysis, to the formulation and implementation of a grand
organizational strategy aimed at achieving a ‘fit’ between the organization
and its environment. Each stage of the process is highly structured and
prescribed.
The major advantage of such systematized planning is that it
structures complex information, defines and focuses business objectives,
establishes controls, and sets targets against which performance can be
measured.
There are, however, dangers inherent in an approach that is overly
prescriptive. The business environment (particularly complex international
environments) can be very chaotic and complex. The information on which
planning is based can accordingly be uncertain and often inaccurate. To
adopt rigidly defined plans based on incomplete information may result in
flawed decision making. Accordingly, strategies must be adapted to take
advantage of unanticipated opportunities and to deal with unanticipated
threats.
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The emergent or learning approach to strategy
The complexity and dynamism of modern business organizations and their
environments has led many writers to suggest that strategy will emerge and
evolve incrementally over time (Lindblom, 1959; Mintzberg and Waters,
1985; Mintzberg et al., 1995). It has been suggested that organizations
simply ‘muddle through’ in the face of complexity. The research of
Quinn (1978), however, suggests that, rather than ‘muddling through’,
many organizations continually adapt their strategies to changing circumstances.
He termed this approach logical incrementalism. In other words
strategy evolves rationally in response to changes in the environment.
Mintzberg argued that strategy is a combination of deliberate plans and
emergent adjustments over time. There is likely to be a substantial difference
between planned (or intended) strategy and the strategy that is
actually realized by an organization. Some aspects of intended strategy
will not be realized, while other elements of emergent strategy, will
evolve as the strategy is carried out. Logical incrementalism is therefore a
fusion of planning and the incremental adaptation of plans.
The competitive positioning approach to strategy
Strategic management thinking in the 1980s was dominated by the work of
Michael Porter at the Harvard Business School whose five forces, generic
strategy and value chain frameworks (1980 and 1985) added considerably
to the tools available to the business strategist. In essence, Porter’s
approach to strategic management begins with analysis of the competitive
environment using the five-forces framework. This serves two major
purposes. It indicates the potential profitability of the industry and assists
in identifying the appropriate generic strategy for acquiring competitive
advantage. External analysis is followed by value chain analysis, which
examines the value-adding activities of the organization and the linkages
between them. The final stage is selection of a generic strategy, supported
by the appropriate configuration of value-adding activities. This, Porter
argued, will position the business in its competitive environment in such
a way that it achieves competitive advantage. McKiernan (1997) suggested
that this approach can be termed outside-in as the initial focus is on the
competitive environment rather than the resources of the organization.
Porter’s approach has been criticized on the grounds that:
. it is prescriptive and static;
STRATEGIC AND MANAGEMENT ISSUES
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. differences in industry profitability do not necessarily determine the
profitability of the organizations within them (Rumelt, 1991);
. it highlights (and presupposes) competition rather than collaboration;
. it emphasizes the environment rather than the competences of the
corporation.
Despite these criticisms, Porter’s work provides tools that are invaluable to
managers seeking to make sense of complex environments and activities.
The resource, competence and capability approach
to strategy
Just as the 1980s were dominated by the competitive positioning school of
thought, the 1990s saw the rise of resource-based theories of strategic
management. These emphasized the importance not of the organization’s
position in relation to its industry but rather the way in which it manages its
resource inputs in developing core competences and distinctive capabilities
(Prahalad and Hamel, 1990; Stalk et al., 1992; Kay, 1993; Heene and
Sanchez, 1997). Research in the late 1980s and early 1990s (Rumelt, 1991;
Baden-Fuller and Stopford, 1992) suggests that choice of industry is not a
major factor in determining business profitability. The core competence of
the organization is of greater importance. This indicates an ‘inside-out’
approach to strategic management based on the premise that competitive
advantage depends on the behaviour of the organization rather than its
competitive environment.
Competence-based theories are not new; they came to prominence in the
1990s. Prahalad and Hamel (1990) argued that an organization must identify
and build on its core competence:
Core competencies are the collective learning of the organisation,
especially how to co-ordinate diverse production skills and integrate
multiple streams of technologies.
The organization may then exploit these competences in a wide variety of
markets. The emphasis on organizational learning as a source of competitive
advantage has resulted in renewed interest in knowledge as an
organizational competence (Quinn, 1992; Demarest, 1997; Grant, 1997;
Sanchez and Heene, 1997). The resource-based approach also emphasizes
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the potential advantages of collaboration between organizations whose
competences are mutually complementary (Sanchez and Heene, 1997).
To give an example of collaboration, let us consider the UK retailer Marks
& Spencer whose core competences have traditionally lain in retailing and
related activities and not in manufacturing. For this reason the manufacturing
of the products sold in Marks & Spencer stores is outsourced to chosen
manufacturers. Marks & Spencer collaborate with such manufacturers at
home and abroad in the design and manufacture of the clothing, furniture
and food products sold in the stores. There are advantages to both sides in
such relationships. For Marks & Spencer there are advantages in terms of
quality and cost control, input to the design process, freedom to concentrate
on marketing and retailing activities. For the collaborating manufacturers
there are the advantages of the St Michael brand name, access
to a large number of retail outlets, long-term supply agreements, etc. Both
sides benefit from collaboration by being able to concentrate on their
respective areas of core competence. Furthermore, collaborative relationships
are much more difficult for competitors to emulate. In this way, the
ability of both Marks & Spencer and its suppliers to compete with other
retailers and manufacturers is enhanced by the collaborative relationships.
The recent recovery of Marks & Spencer after a difficult period has been
highly dependent on a refocusing of its core competences and the
development of new global strategic relationships with suppliers.
Developments in information and communications technology have
transformed collaborative relationships so that co-operating organizations
can be characterized as what have become known as ‘virtual’ corporations
(Davidow and Malone, 1992; Alexander, 1997). It is therefore no longer
sufficient to analyse the strategies of individual organizations. The dynamics
of linked organizations and their strategies must be examined.
Despite the insight that the competence-based approach provides, two
criticisms can be levelled at it:
1. It suffers from a lack of well-developed analytical frameworks –
McKiernan (1997) pointed out that it is ironic that it is Michael Porter
who ‘developed one of the most useful tools for internal resource
analysis in the value chain’ when the major focus of the resourcebased
view is on internal activities.
2. It tends to overlook and even neglect the importance of the competitive
environment – research by McGahan and Porter (1997) revived the
STRATEGIC AND MANAGEMENT ISSUES
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view that industry is an important determinant of profitability as well as
the business itself.
An increasing body of evidence (Hamel and Prahalad, 1994; Narver and
Slater, 1990; Greenley and Oktemgil, 1996) suggests that business must be
market-driven and sensitive to customer needs. The organization must
therefore analyse those markets in which its competences can be exploited.
It is evident that the competence-based approach is far from being a
complete methodology of strategic management in these respects.
The knowledge-based approach to strategy
Increasingly in the field of strategic management, knowledge is viewed as
being the only sustainable source of competitive advantage. Organizational
knowledge can be defined as a shared collection of principles, facts, skills,
and rules which inform organisational decision-making, behaviour and
actions forming the basis of core competences (Stonehouse and Pemberton,
1999). Knowledge can be categorized as:
. know-how (practical knowledge);
. know-why (theoretical knowledge);
. know-what (strategic knowledge).
For an organization to gain competitive advantage through knowledge it is
necessary to create new knowledge through processes of organizational
learning and manage and utilize existing knowledge through processes of
knowledge management, so that organizational knowledge is embodied in
the firm’s core competences and value-adding activities. In many ways, the
knowledge-based approach to strategic management is a natural development
from the learning and core competence-based approaches. It is the
approach to strategy that is largely adopted in this book. Organizations
must seek to create new knowledge that is grounded in organizational
learning and that underpins core competences and value-adding activities,
through which competitive advantage is achieved.
The approach to global strategy in this book
The framework for global strategic management adopted by this book is
derived from each of the schools of thought in the field of strategic manage-
CHAPTER 1
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ment discussed in the previous sections. In reviewing the foregoing
discussion, we propose the following conclusions:
1. competitive advantage is based on superior organizational knowledge
embodied in core competences and value-adding activities;
2. knowledge is created through the process of organizational learning –
organizations must seek to learn and create new knowledge more
quickly than their rivals;
3. strategy will inevitably be both planned and emergent;
4. competitive advantage can result from both competitive and collaborative
behaviour;
5. the complexity and unpredictability of change in both the business
environment and in businesses themselves means that businesses
must be intelligent or ‘learning’ organizations.
The implications of these conclusions shape the approach to global strategy
adopted in this book.
Assumption 1 Competitive advantage arises from new and superior
knowledge
Knowledge is the basis of competitive advantage and it is new knowledge
that allows organizations to outperform their competitors.
Assumption 2 Organizational learning and knowledge management
are vital to creating and sustaining competitive
advantage
Chaos and complexity require that businesses are flexible and responsive.
Such flexibility and responsiveness are critically linked to the ability of
organizations to learn. Organizational learning both increases responsiveness
and improves competitive performance through the creation of new
knowledge. Equally, organizations must manage their knowledge assets
effectively to create superior performance.
Assumption 3 Strategy is both planned and emergent
We base our discussion of strategy on the working premise that both
prescriptive and emergent understandings of strategy are valid in part
and that it is possible to construct a model which includes elements of
both.
STRATEGIC AND MANAGEMENT ISSUES
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Some planning of strategy is necessary so as to:
. set objectives and targets against which performance can be measured;
. organize activities in a meaningful way based on prespecified objectives;
. guide actions and ensure consistency of behaviour.
Equally, a strategy will always be adapted (and hence continually emerged)
when:
. there are major or minor unanticipated changes in the global business
environment;
. goals and targets are not being met (and hence must be continually
redefined);
. there are changes in the resources or competences of the organization.
The pace and unpredictability of change means that strategy must be
flexible. It is essential that strategic management is not viewed as a oneoff
planning activity but as a continuous series of iterations constituting
organizational learning and the subsequent adaptation of strategy. Such
learning must be focused on the core competences of the organization
and the changes taking place in its environment. This book attempts to
reflect the need for both planning and adaptation of strategy.
Assumption 4 Competitive advantage results from both internal
knowledge-based core competence development and
from changing conditions in the business environment
The implication of this assumption is that both external analysis of the
business environment and internal analysis of business competences,
resources, activities, etc. are essential to organizational learning. The
sequencing of external and internal analyses are not viewed as critical
and, in reality, both types of analysis are likely to be undertaken simultaneously.
Learning must be viewed as a holistic and continuous process
and it is critical, however, that both analyses are undertaken on a continuous
basis through external scanning of the environment and through
constant monitoring of business performance, activities and competences.
Equally, it is critical that the results of internal and external analysis are
linked together as they will define the critical strategic issues facing the
business at any point in time.
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Assumption 5 It is important to distinguish between industries and
markets
Industries and markets are separate but linked concepts. Whereas industries
are defined in terms of competences, technologies and products,
markets are defined in terms of customers and customer needs. It is necessary
to understand both the concepts and the relationships between them
as they will affect strategy. The nature of the industry will affect both the
competence development and organization of value-adding activities.
Similarly, market and customer needs will determine the ultimate success
of any strategy.
Assumption 6 Competitive advantage results from both competitive and
collaborative behaviour
There is ample evidence that competitive advantage results from the way
that individual businesses leverage, develop and deploy their resources and
competences. Equally, there is evidence that competitive advantage can be
enhanced by the development of collaborative business networks that are
often difficult for competitors to emulate. The potential for such collaboration
has been increased by developments in information and communications
technology that have resulted in the potential for formation of a virtual
corporation.
A summary of the frameworks
The frameworks employed in this book have been developed by a number
of different researchers and are drawn from each of the schools of strategic
management. The frameworks employed are summarized in Figure 1.1.
The global and transnational strategic
management process
The management process matrix
The process of global strategic management is best represented as a series
of learning loops which constantly iterate. The function of these ‘learning
loops’ is to augment organizational learning so as to continuously develop
and improve the transnational strategy of the organization. There is a
strategic process that is both formal and informal, planned and emergent.
STRATEGIC AND MANAGEMENT ISSUES
[ 29 ]
The process is both ‘inside-out’ and ‘outside-in’ as strategy is inevitably
shaped by both the environment and by the resources, competences and
capabilities of the organization. The global strategic management process
therefore forms a matrix that is indicative of the complex series of relationships
between the various elements of the framework employed in this
book (Figure 1.2).
The major elements in the process matrix
Each chapter of this book examines one or more elements of the process
matrix. The order in which the elements occur is not necessarily indicative
of the order of analysis. For example, analysis of the global business, its
resources, competences and capabilities is covered before analysis of the
global business environment, even though in reality the two key stages
(internal and external analyses) are usually carried out concurrently. The
elements are briefly outlined below and then explored in detail in the
remainder of the book.
Globalization and the need for a global mission and objectives
Globalization means that managers must adopt a global strategy underpinned
by a global vision and global objectives.
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Knowledge
Core distinctive
Learning
Competence
Positioning
Generic strategy
Five forces/value chain
Configuration
Coordination
Prescriptive
Planning
STEP
SWOT
Emergent
Organizational
learning loops
Global and
transnational
strategy
Global strategy
Globalization
Global strategy
Porter diamond
Collaborative
Core competence
Configuration
Outsourcing
Figure 1.1 Global/transnational strategy and management – a conceptual summary
STEP ¼sociological, technological, economic, political; SWOT ¼ strength, weaknesses, opportunities, threats
The overall strategic vision or mission of the company must be based on
the resources and competences of the organization and the extent of industry
and market globalization. Globalization to a large extent is a business
philosophy or way of thinking that emphasizes the similarities between
national markets rather than the differences. The philosophy also highlights
the potential for globalization of organizational activities whether through
geographical concentration or dispersion. A transnational strategy will be
based on a global vision, but will also involve appropriate local variations.
Organizational learning – analysis of global resources, competences and
value-adding activities
Analysis of the business (internal analysis) is concerned with identification
of its current and potential strengths and weaknesses in terms of its
resources, competences and global activities. Globalization necessitates
changes in the way that the value-adding activities of the business are
organized, changes in working practices and therefore changes in an
organization’s structure and culture. Such analysis is aimed at identifying
the nature and extent of the changes that are required to support a strategy
STRATEGIC AND MANAGEMENT ISSUES
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Organizational learning
Internal analysis
Define global vision
and objectives
Redefine vision
and objectives
Develop strategy
Resource/competence analysis
Value chain analysis
Culture and structure analysis
Identify need to leverage and
build core competences and
build collaborative ventures
Global environment
Globalization drivers
Industry and market
definition
Macroanalysis – STEP
Micro-analysis
Five forces
Market analysis
Implement transnational
strategy
Configure and co-ordinate
Value-adding activities based
on core competences
Continue to scan and monitor
macro and microenvironments
Organizational learning
Review environment
Monitor and review
strategy
Monitor and review
competences, networks, etc.
Leverage and build core
competences and
build collaborative ventures
Organizational learning
Analysis of the
macroenvironment
Develop knowledgebased
core competences
& generic strategies
Logical increment
Figure 1.2 The process matrix (global strategic management) used in transnational strategy
STEP ¼sociological, technical, economic, political
which is both global and transnational. It will help to determine the global
configuration and co-ordination of value-adding activities.
Organizational learning – analysis of the global business environment
Environmental analysis is concerned with understanding the macro and
microenvironments in which the business operates (external analysis). Its
aim is to establish the key influences on the present and future well-being
of the organization and therefore on the choice of strategy. These
influences include environmental threats and opportunities. It is to be
emphasized that strategy is determined by both the competences of the
organization and its environment.
In global business there are three particularly important aspects of
environmental analysis. First, analysis of the global business environment
enables identification of global opportunities and threats. Second, it
increases understanding of the competitive environment in the form of
the industry and associated markets so that critical success factors can be
identified. Third, it establishes the nature and extent of sectoral globalization.
The outcome of this analysis is essential in determining the precise
nature of the global or transnational strategy of the organization.
Developing knowledge-based global and transnational competences
and strategies
This element is concerned with the generation of global strategic options.
Such options will be dependent on the development and leveraging of
those core competences and distinctive capabilities that support global
and transnational strategies.
Various typologies of international business strategy have been developed
(Porter, 1986; Bartlett and Ghoshal, 1989; Yip, 1992) that address
the issues of global configuration and co-ordination, local responsiveness
and differentiated organizational structure. These are blended with recent
developments in mainstream strategic management thinking relating to
core competences, collaboration and organizational learning. This
chapter should be viewed as central to the rest of the book since the
type of strategy adopted will have major implications for the global and
transnational management, organization and control examined in subsequent
chapters. The type of global strategy adopted will also have major
implications for strategy at the level of overseas subsidiaries, with Chapter 7
examining the link between subsidiary and corporate strategy in global
business.
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Global and transnational management is concerned with the implementation
of the chosen strategy in the context of a global organization. Issues
relating to organizational structure and culture, marketing, finance, logistics,
resource allocation, management of technology, location of value-adding
activities and human resource management within global businesses are
explored.
Conclusion
The rapid growth of international business over the last few decades and
the increasing globalization of many industries has led to a proliferation of
publications on the subject. The purpose of this book is to provide a review
of the work of leading authors in the field and to present this within the
context of an integrative framework that establishes clear linkages between
global strategy, global management and global competitiveness.
This book is intended as a core text for courses in international and global
business at advanced undergraduate, postgraduate and executive levels. It
can be differentiated from the competition in at least three main ways. First,
many of the currently available texts are intended as basic introductions to
international business. This book, in contrast, is both comprehensive and
up to date in its coverage of both strategic management and the major
issues of global business. Second, this book has a much clearer focus on
global and transnational business (strategy and management) than its
competitors. Third, the book can be differentiated from the competition
in the high level of integration of global and transnational strategy, management
and competitiveness throughout the text.
Review and discussion questions
1. Distinguish between globalization and internationalization.
2. Identify and discuss the major stages in the development of international
and global strategy.
3. Do you agree with the view that a global strategy implies standardization
of products, services, advertising and brand names?
4. Why are the activities involved in strategic management best
represented as a matrix?
5. What are the major similarities and differences between the positioning
and resource-based schools of strategic management? What are the
major limitations of each approach?
STRATEGIC AND MANAGEMENT ISSUES
[ 33 ]
6. Discuss the view that strategies cannot be planned because of the
complexity and turbulence of the global business environment.
7. Why must strategies be both global and transnational?
References and further reading
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February.
Andrews, K. (1987) The Concept of Corporate Strategy. Homewood, IL: Irwin.
Ansoff, H.I. (1965) Corporate Strategy: An Analytical Approach to Business Policy for Growth and
Expansion. New York: McGraw-Hill.
Ansoff, H.I. (1991) ‘Critique of Henry Mintzberg’s the ‘‘Design School’’ reconsidering the basic
premises of strategic management’. Strategic Management Journal, September, 449–461.
Argenti, J. (1974) Systematic Corporate Planning. Sunbury-on-Thames, UK: Nelson.
Baden-Fuller, C. and Stopford, J. (1992) Rejuvenating the Mature Business. London: Routledge.
Bartlett, C.A. and Ghoshal, S. (1989) Managing Across Borders: The Transnational Solution. Boston:
Harvard Business School Press.
Campbell, D., Stonehouse, G. and Houston, B. (1999) Business Strategy: An Introduction. Oxford:
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Cravens, D.W., Greenley, G., Piercy, N.F. and Slater, S. (1997) ‘Integrating contemporary strategic
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Century – The Virtual Corporation. London: Harper Business.
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PART II
FROM NATIONAL CULTURE
TO GLOBAL VISION 2
Learning objectives
After studying this chapter students should be able to:
. understand the causes and nature of globalization;
. describe the effects that increased environmental turbulence has
had on globalization;
. define and distinguish between global mission, objectives and
strategy;
. understand the nature of culture at national and organizational
levels;
. distinguish the forces that influence and characterize culture;
. recognize and understand the influence of culture transnational
business strategy and operations;
. identify and apply techniques for managing in different cultural
contexts.
Introduction
This chapter explores the relationships between globalization and culture
in terms of their impact on the strategy and management of transnational
organizations.It may seem paradoxical to devote detailed attention to the
implications of national cultural differences for business and management
in a book that has globalization as a central theme.Indeed, there are those
who have argued that globalization is associated with the development of a
business context in which culture is effectively ignored.Such a view,
however, is simplistic and to adopt an approach based on this assumption
could result in the development of seriously flawed strategy.Although
global trends can be identified in many aspects of business, there are
also important limitations to the extent of globalization.Similarly, the
degree of globalization varies considerably both between and within
industries and markets.Even within markets where there are readily identifiable
leading global players, important differences exist in both customer
needs and local competition that are rooted in still strongly prevalent
cultural differences.
McDonald’s, for example (perhaps the business most often thought of as
being global), adapts its products to local differences and local competition:
in some parts of Europe it offers salad dishes and beer; in Greece it offers
the ‘Greek Mac’ (similar to a Big Mac but served in pitta bread with yoghurt
replacing mayonnaise); and in China it serves chicken on the bone.All of
these variations in offerings are based on differences in culture and taste
and on the nature of local competition.Similarly, no manager in a transnational
enterprise can afford to ignore the impact of cultural differences on
working practices, industrial relations, relationships between managers and
employees and so on.Furthermore, cultural differences arise within
national cultures based on regional factors and within individual business
organizations based on factors like the nature of their business, leadership
and country of origin.For all these reasons it is essential that transnational
strategy takes account of cultural similarities and differences.
At the same time, the trend toward globalization necessitates that organizations
adopt a global vision.It is important to note that a global vision and
strategy can, and should, recognize and embrace local cultural and other
differences where appropriate.This chapter therefore considers the causes
and nature of globalization, the nature of culture and cultural differences,
and the need for, and nature of, global vision.
The concept of globalization
Industries and markets
What are industries and markets?
‘Globalization’ is a frequently used term that is almost as frequently
misused.This misuse probably arises from attempts to oversimplify what
is, in reality, a complex concept.It is important to distinguish between the
globalization of markets and the globalization of industries, as each of these
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forms of globalization has different implications for different aspects of
business strategy and activity.It is also important to understand the linkages
between global industries and markets as the nature of a global and transnational
strategy will be influenced by industry and market characteristics.
At their simplest, we can understand the concepts of industry and market
by considering them as the two sides of any economic system of exchange.
Industries supply and markets demand.Such a simple definition, however,
should not lead us to think that understanding industries and markets in an
international setting is as straightforward.
Globalization of markets
Markets are defined by customers and their needs.The extent to which a
market is global will depend on the extent to which customer needs for
a product are similar throughout the world (a product may consist of a
tangible good, an intangible service or a combination of both).It may
well be true that customer needs are becoming increasingly homogeneous
with respect to certain products.American jeans have become ubiquitous
as have many other items of fashion clothing.Yet there are also many
products for which markets remain nationally or regionally differentiated.
In most countries of the world there is a customer need for bread, so it
might be supposed that a global market for bread exists.In one sense there
is, as the market for bread is worldwide.On the other hand, customer
preferences for bread differ significantly between countries.For example,
the French prefer the baguette, the Indians the chapatti or nan bread, the
Greeks pitta bread and so on throughout the world.The market is not
global in the sense that customer needs are different in each country.
There is evidence that the market is becoming more global in that in
many countries it is possible to obtain types of bread associated with
other countries.Supermarket s in the UK typically supply all the types of
bread listed above, in addition to traditional British white and wholemeal
sliced breads.Despite this trend the market is far from global and, even as it
becomes more global, there is unlikely to be the standardization of
products that Levitt (1983) predicted.In fact, customers are likely to
demand an increased variety of products (those previously associated
with a variety of countries).
This demand for variety is a consequence of the fact that globalization
has made customer needs more informed and sophisticated.They demand
more varied and complex products rather than the standardized offerings
that some predicted would become the norm.It was also predicted that
FROM NATIONAL CULTURE TO GLOBAL VISION
[ 41 ]
global customers would be more price-conscious.This may be the case,
but in many countries they are often more conscious of quality, technical
features and design than price.In serving seemingly global markets, therefore,
the business must not only be alert to the similarities in customer
needs but also to the differences and to the increasing complexity of
their requirements.
Globalization of industries
The globalization of industries is linked, but different in nature, to the
globalization of markets.Whereas market globalization is centred on
customer needs, industry globalization centres on the ability of businesses
to configure and co-ordinate their productive or value-adding activities
globally and across national boundaries.A business can choose to disperse
all its activities around the world or to disperse some activities and concentrate
others in locations that possess specific advantages.For example,
Benetton outsources much of its manufacturing to a group of producers
concentrated in a particular region of Italy because there is a high density of
skilled workers in that area.At the same time as manufacturing activities are
concentrated, Benetton retail outlets are dispersed so as to reach customers
in different parts of the world.Globalized industries are characterized by
worldwide competition, opportunities for economies of scale and scope,
rapid technological change, common technical standards and favourable
trading conditions.
A global industry is capable of serving fragmented markets by producing
products that are adapted to meet local requirements.In most cases,
however, global industries serve markets that are themselves increasingly
global.
Causes of market and industry globalization
Overview
The causes of globalization are, like their effects, complex.Although globalization
is itself regarded as a relatively recent phenomenon, its roots can be
traced back to many of the forces causing the internationalization of
business activity. There are many excellent accounts of this process (e.g.,
see Dicken, 1998) and only a summary is presented here.International
business can be traced back to many of the earliest civilizations: the
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Egyptians, Phoenicians, Greeks and Romans were all heavily involved in
trade across national boundaries.Yet the roots of globalization as we
understand it today lie in the 18th, 19th and 20th centuries.It is major
technological, economic, social and political forces, some recent and
others more distant, that have caused businesses to become internationalized
and then globalized.All of these forces are closely linked to each
other and are largely interdependent (Figure 2.1).
Technological forces
Industrial development
The technological origins of globalization lie in the Industrial Revolution,
beginning in the late 18th century and continuing into the 19th and 20th
centuries. Industrialization marked the beginning of the factory system
and mass production of goods.It marked the beginning of ‘a new pattern
of geographical specialisation’ (Dicken, 1998).The continued development
of mass production techniques underlies the globalization of industries and
FROM NATIONAL CULTURE TO GLOBAL VISION
[ 43 ]
Economic forces
Increasing incomes
World trade
World financial markets
Market forces
World competition
Social forces
Consumerism
Convergence in
customer tastes
Education and skills
Reduced trade barriers
Intellectual property rights
Privatization
Development of trade blocs
Technical standards
Technological forces
Industrialization
Transport revolution
Information and communications revolution
Political forces
Globalization
of industries
and markets
Figure 2.1 Forces leading to globalization
the concentration of activities in certain locations, but this has also been
dependent on other global forces.Mass production also contributed to the
development of mass markets and, ultimately, to global markets.As mass
production forced prices down, the global attractiveness of certain products
increased.
Improved transportation
Development in transportation is the second technological force without
which globalization could not have taken place.The development of
railway networks throughout the world and the impact of steam and
diesel power on shipping provided the means for moving materials and
finished goods around the world.This, in turn, opened national markets to
international products on a previously unknown scale at the same time as
reinforcing the benefits of concentrated manufacturing.Similarly, air travel
has played a major role in the globalization of businesses both by allowing
managers to travel quickly anywhere in the world and by allowing consumers
to travel widely, giving them experience of products and services
that were previously denied to them.
Improved information management
The most recent technological development, which arguably completes the
jigsaw of globalization, is that of what has been called the ‘information
revolution’.Developmen ts in information and communications technology
have had major impacts directly on the advance of globalization itself and
on its underlying forces.Global communication technologies, like the telephone,
the fax, the Internet and electronic mail, have made it possible for
businesses to co-ordinate their activities throughout the world.Global communications
like satellite television have also played a role in creating
global customer needs, increasing awareness of products and brands
across the globe.
As well as directly contributing to the globalization of industries and
markets, all three groups of technological developments have played a
major role in bringing about the economic, political and social changes
that have also contributed to globalization.
Social forces
Rising real levels of income coupled with a rise in consumer credit in recent
years have contributed to worldwide consumerism.Demand for consumer
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goods and services has increased beyond recognition in comparison
with, say, the postwar years.This has been most evident in the case of
motor vehicles, consumer electronics products like televisions, hi-fis, video
recorders, telephones and home computers, and white goods like washing
machines and refrigerators.
Such products are closely associated with increasing affluence and with
converging consumer tastes and wants.Improvements in education and
training have also contributed to technological progress and to rising
levels of productivity throughout the world that have, in turn, helped to
give rise to the globalization of production.
Political and legal forces
Another cause of increasing world trade and globalization has been the
gradual reduction in barriers to international trade.Under the provisions of
the World Trade Organisation (WTO) and its predecessor GATT (the
General Agreement on Tariffs and Trade), barriers to trade have fallen
substantially in postwar years, although progress has been uneven.
Trading blocs (sometimes called customs unions), like the EU and the
North American Free Trade Area (NAFTA), have also played a major role
in fostering the inter-country trade that is the forerunner of global business.
The increasing legal recognition of intellectual property rights in most
countries of the world has played a major part in protecting global products
and brands.There have been similar moves to secure acceptance of similar
technical standards throughout the world that are particularly important to
the development of global consumer electronics products.
Many governments have taken steps to reduce their levels of intervention
in economic matters.Privatization has become commonplace alongside
gradual real term reductions in overall taxation and government spending.
In Eastern Europe the collapse of communism in the late 1980s and early
1990s has opened up markets that were previously closed to international
trade.This increasing prevalence of market forces over government regulation
has helped to reduce the political barriers to globalization.
Economic forces
Competition in many industries and markets has become increasingly
global as the role of governments diminishes and free market forces are
allowed to play a more significant role.In addition, the increasing volume
FROM NATIONAL CULTURE TO GLOBAL VISION
[ 45 ]
of world trade has gone hand in hand with rising real term income levels in
the major developed economies.Both are interdependent and closely
associated with technological and political developments.Increasing
levels of income have greatly stimulated the demand for global products
and services.Finally, the finance for world trade has been made available
through the development of world financial markets between which transactions
charges have been made effectively insignificant by technological
developments.
The extent of globalization
From the previous discussion it might seem that the world has already
become a global economy and that its industries and markets are already
fully globalized.This is far from being the case. Different countries have
been affected to differing extents by global trends.World trade remains
dominated by the ‘Triad’ regions of Western Europe, North America, and
the Pacific Rim countries of Asia.These three areas account for 80% of the
world’s output and only 20% of its population and are at the heart of global
business.The Triad regions’ dominance is based on technological and
economic superiority.Other parts of the world like Eastern Europe,
Africa and South America are both economically and technologically disadvantaged.
As a consequence, the spread of global business is far from
geographically complete.Similarly, there are many markets and industries
that remain largely localized, and even within global industries there are
businesses that operate successfully either only locally or regionally.
For Yip (1992) the debate was not about whether industries and markets
were global but rather the extent of globalization in an industry and the
impact that this has on business strategy.Yip’s globalization driver framework
is developed in Chapter 4 as a tool for analysing the extent of industry
and market globalization.The remainder of this chapter, however, is
concerned with the forces at work in the global macroenvironment that
stimulate globalization rather than the techniques which are used to analyse
them.We describe the context in which global managers must make their
decisions before the subsequent chapters introduce the techniques
available to support the making of such decisions.
Despite many important exceptions, the overall trend is still toward the
increased globalization of business.The benefits of globalization are,
however, accompanied by some difficulties.
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Globalization and environmental turbulence
The example of the South Korean economy
Alongside the forces driving many industries and markets toward globalization,
the business environment is becoming increasingly turbulent,
complex and interdependent.The impact of overseas debt and the falling
value of the ‘won’ (the South Korean unit of currency) in 1997–98 on
Korean business is an illustration of these unpredictable forces.In the
1990s the Korean economy was growing at a rate averaging almost 9%
and Korean corporations like Samsung were investing heavily overseas.
Then the country, along with many other South East Asian economies,
was hit by a mounting financial crisis as currency values plummeted in
the mid-1990s.Despite the positive impact that this might have had on
Korean exports, its impact on foreign debt and investment plans was
devastating.No one could have predicted such a rapid economic collapse
nor that it could affect so many countries.
There are many changes taking place in the global environment with
long and short-term implications.The GATT and the WTO have had a
significant impact on increasing the volume of world trade since World
War II, although progress slowed in the 1990s as the USA and EU wrangled
over further reductions in cross-border tariffs.The development of the
single European market has significantly affected trade within Europe
and between Europe and other regions.At the global level, the opening
of Eastern Europe, the Gulf War, the entry of China to the WTO and the
growing importance of ‘green’ issues have all affected global business
activity.
Tariffs and quotas
The most used types of governmental restrictions on international
trade – the reduction and eventual removal of tariffs and quotas – is
one of the stated aims of the WTO.Tariffs are a form of indirect
taxation and are levied upon some goods and services on importation
into a country.Sometimes referred to as excise duties, tariffs are intended
partly to raise taxation revenues but mainly to protect domestic
production by placing a cost disadvantage on imports.Quotas are
limits placed on the volumes of imports and are also intended as a
protectionist measure.Quotas can be expressed either in absolute
FROM NATIONAL CULTURE TO GLOBAL VISION
[ 47 ]
terms (e.g., 1 million tonnes a year) or as a proportion, where, for
example, a government may specify that no more than a certain proportion
of all units sold (cars, e.g.) can come from a certain foreign
country or region.
Currents and cross-currents
Porter (1986a), in discussing these globalization trends, made a distinction
between currents and cross-currents of change.
Currents are the broad forces that have led to the widespread globalization
of business since World War II (1939–45) including:
. the growing similarity of countries in many important areas of demand;
. increased fluidity in global capital markets;
. falling tariff barriers;
. technological restructuring and improvement;
. the integrating role of technology;
. the emergence of new global competitors.
Cross-currents are those factors that have made the patterns of international
competition different and more complex since the 1960s and 1970s.These
include:
. slowing rates of economic growth in some countries that push businesses
to internationalize;
. eroding types of competitive advantage (e.g., labour costs that upset the
traditional competitive balance between countries);
. new types of government inducements to attract inward investment;
. the proliferation of coalitions between companies and countries;
. the growing ability to tailor products to local demand conditions.
The major cross-currents of global business in the last decade or so are
examined later in this chapter.Prior to this, it is necessary to introduce an
analytical framework for examining global trends.Changes in the macro or
far environment are major causes of the globalisation of industries and
markets.Chapter 5 gives an analysis of the macroenvironment in terms
of changes and trends in social and cultural, demographic, political,
legal, technological, economic and financial factors, and their effects on
international industries and markets – and the businesses that compete
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within them.These classifications are employed in subsequent sections of
this chapter to assist in understanding the nature of changes in the global
macroenvironment.
All of these changes in businesses and in the macroenvironment are
likely to have a serious impact on the nature and structure of global
industries and markets.If international businesses are to cope and thrive
in the face of these changes, then they must adopt a more global outlook.
Global mission, objectives and strategy
Globalization implies that managers must develop perspectives that are
both global and transnational.They must evolve a global philosophy and
culture within their business that underpins a transnational approach to
organization and strategy.
Strategy, purpose and objectives
It is not only an organization’s competences, strategy and operations that
distinguish it from its competitors.Sanchez et al.(1996) argued that ‘firms
are distinguished by their distinctive sets of goals, as well as by their individual
approaches to achieving those goals.’ As objectives set out the
purpose of the organization, its priorities and standards of performance,
it is essential that they are also reviewed as part of the analysis process.
Objectives shape global strategy as they set out both the broad and specific
intentions of the organization.Objectives define:
. the purpose and raison d’eˆtre of the organization;
. long and short-term aims and goals of the organization;
. the decision-making framework of the organization;
. anticipated outcomes of its plans and actions.
The objectives of any organization will be determined by:
. the nature of its business activities;
. the resources at its disposal;
. its culture;
. its stakeholders and their influence;
. the environment in which it operates.
FROM NATIONAL CULTURE TO GLOBAL VISION
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A major purpose of the analysis of objectives is to ensure that they continue
to be relevant in such a rapidly changing environment.Objectives should
lead rather than lag behind organizational change.The need to develop a
global vision as the strategic intent guiding a global strategy is an excellent
example of this.
Global vision
The highest and broadest level of business objective is the vision of the
organization.This is a statement of broad aspiration.It deals with where an
organization hopes to be in the future.The vision is concerned with the
strategic intent of the organization (Hamel and Prahalad, 1989, 1994).It is
an attempt by managers to identify the gap between where the organization
currently is and where it expects to be in the future.Hamel and Prahalad
argued that the vision of the organization must relate to its core competences
and to its future environment.
A global vision is an essential prerequisite to global and transnational
strategy.This implies that the whole world is treated as a potential
market, competition is viewed as global, that activities are configured to
exploit global advantages, that activities are globally co-ordinated and,
perhaps most importantly, that the organization has a global philosophy,
ethos and outlook.Examples of global vision statements (Pitts and Lei,
1996) are:
CNN – to be the best and most reliable news source on any topic,
anywhere, anytime.
Coca-Cola – to ensure that ‘a Coke is in arm’s reach’ of any potential
customer anywhere in the world.
McDonald’s – to be the leading provider of quality food to anyone,
anywhere.
Vision, philosophy and global strategy
Hamill (1992) suggested that a global strategy is, to a large extent, ‘a
business philosophy or way of thinking.’ It is therefore important to understand
how far a business is globally oriented.Perlmutter (1969) argued that
the value system of the company, its history and development, its methods
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and practices, its vision and corporate culture will shape managerial
outlook toward global strategy.
One useful framework for categorizing organizational philosophy is
known as the EPRG matrix.Company philosophy can fall into one of
four categories:
. An ethnocentric philosophy is one where there is a predisposition
toward the home country based on a belief that the home industry is
superior.
. A polycentric philosophy is oriented toward the host country (or foreign
market), but emphasizes adaptation to local conditions in other locations.
. A regiocentric philosophy is an approach that emphasizes an orientation
toward a regional grouping of countries, such as Europe, North America
or the Far East.
. A geocentric philosophy implies a global approach to business.
Each philosophy has implications for the likely strategy of the business
adopting it.Ethnocentricity implies that foreign markets are seen as inferior
to the home market and the strategy adopted will be the same as that in the
home market with the same product offering.Polycentricity results in a
multidomestic strategy adapting fully to the requirements of each national
market.Regiocentricity implies regional co-ordination of strategy but not
global.Geocentricity suggests that strategy is developed on a global basis
and is not determined by home or host country factors.Managers must
assess the underlying philosophy of the business and determine the
extent to which it is to be geared to support and encourage a transnational
approach to business.
Nokia’s global vision
In recent years some of the best examples of a global vision have been
provided by the telecommuncations industry where companies such as
Nokia and Vodafone have risen from fairly modest beginnings to establish
strong positions in the global marketplace by pursuing bold and
highly focused strategies.
Nokia, based not as might be expected in California’s Silicon Valley
but next to the Nokia River in rural Finland, has grown to emerge as the
largest manufacturer of mobile phones in the world.Its origins,
however, can be traced back to the 1860s when the company was
FROM NATIONAL CULTURE TO GLOBAL VISION
[ 51 ]
founded as a paper mill.In the 1960s and 1970s the company added
other interests, such as plastic and metal products, but the key strategic
change in direction occurred in the early 1980s when the company
began producing cellular phones and progressively focused on their
production.
The domestic (Finnish) market was small but highly sophisticated,
which had two implications for Nokia.The company had, first, to be
innovative to survive in its domestic market and, second, had to export
from day 1 in order to achieve its challenging growth objectives, which
foresaw a 25% global market share by 1995.Thus the company turned
decisively from producing low-value-added commodity products
toward an emerging rapidly growing technology with few entry
barriers other than technical standards and requirements for capital
investment.
How then did a company from a small Nordic country rise to become
internationally successful.It is difficult to be precise since there are
undoubtedly a number of reasons and they are complex.However,
undoubtedly the clear vision of managers in refocusing the company
and setting global objectives was important.Other key factors included
the priority the company placed on design, the attention given to
building the awareness of the brand, fast development of new products
that were attractive to customers, building numerous alliances with
distributors (such as Tandy in the USA) and flexible production
methods.Nokia avoided the potential pitfalls of a vertically integrated
structure through outsourcing the manufacture of most essential electronic
components (although they were often produced to Nokia
designs).Nokia, however, assembles both cellular infrastructure and
handsets in order to be able to offer complete packages to operators.
Culture and global business
Levels of culture
Culture – the way that people think, feel and act – differs between
countries, industries and organizations.Each of these levels of culture
interacts with, and helps to shape, the others.For example, while each
advertising agency will have its own distinct and identifiable culture,
there will be certain cultural characteristics like creativity and innovation
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common to all such agencies.At the same time, while all advertising
agencies worldwide share certain cultural characteristics, there will be
differences between, say, Japanese and American agencies, which are
based on national cultural differences.This chapter examines the relationships
between national culture, business culture and organizational culture
and the requirements of management of transnationals in diverse cultural
contexts.While globalization may mean that certain aspects of culture have
converged across national boundaries, there are still enormous differences
that impact on approaches to leadership and management, and on
consumer behaviour.A transnational strategy must be based on a vision
that encompasses both cultural similarity and diversity.
For example, the organizational culture of Microsoft places a high value
on individual and organizational learning, so that the sharing of knowledge
and information is encouraged throughout the organization.Within
Japanese culture a high value is placed on age and experience so that
senior managers are often older people.Younger managers are expected
to defer to the decisions of their seniors.In contrast, within Western
organizations promotion to senior positions is often based on merit and
performance rather than age.
From a business perspective, it is useful to think of culture as existing
at four different levels, those of the nation, business, industry and
organization.
National culture consists of the distinctive shared values, attitudes,
assumptions, beliefs and norms of the inhabitants of a nation which
guide their behaviour.For example, the British place a high value on personal
freedom and have resisted attempts to introduce identity cards which
are seen as representing a threat to such freedom.In contrast, identity cards
are widely accepted in many other countries.
Business culture (within a nation) comprises the shared values, attitudes,
assumptions, beliefs and norms of the inhabitants of a country which guide
business activity in that country.Aspects of business culture affect consumer,
manager, investor and government behaviour, business ethics and
so on.In certain countries, showing favouritism toward friends and family
in business activities is both accepted and expected.In other countries such
behaviour would be regarded as unethical.
Industry culture can be defined as the values, attitudes, assumptions,
beliefs and norms that influence the ways in which the firms in a particular
industry conduct their business.For example, universities throughout
the world share certain cultural features like a belief in academic
FROM NATIONAL CULTURE TO GLOBAL VISION
[ 53 ]
independence, irrespective of different national cultures.There will of
course be some differences between the cultures of universities in different
countries which arise from differences in national cultures.
Organizational (corporate) culture consists of the values, attitudes,
assumptions, beliefs and norms that influence the ways in which the
people in an organization behave and the way that its activities are
conducted.This will depend on factors like national culture, business
culture and industry culture.Of course, this is even more complicated in
the case of a transnational enterprise where conducting business across
national boundaries will involve an organization in dealing with many
different national and business cultural differences.Managing a transnational
business thus requires taking several types of cultural factor into
account, such as cultural differences in consumer behaviour, attitudes to
work and authority and ethical considerations.
Each of these levels of culture will interact with and affect the others.For
example, an organization’s culture will depend on factors that will include
national culture, the business culture of the nation, the culture of the
industry of which the firm is a part and organization-specific factors, like
the size and nature of the business, the style of leadership and the structure.
EuroDisney N a European or American
cultural identity?
The popularity of Europe as a tourist destination, the number of European
visitors to Disney in the USA and the success of the Disney theme
park in Japan were all factors suggesting that a similar venture would
be immediately successful in Europe.The site chosen for EuroDisney
(now Disneyland Paris) was Marne-la-Valle´e, near Paris in northern
France.The site was chosen because Paris, as well as being Europe’s
leading tourist destination, is also one of its best served cities in terms
of road, rail and air linkages to the remainder of the continent.The
transport infrastructure was also further strengthened by the development
of direct road and rail linkages to EuroDisney from Paris itself and
from Roissy, the major airport of Paris.
The theme park itself is equal in splendour to its American and
Japanese counterparts located on a site one-fifth the size of Paris,
with the trademark Disney castle, a wide array of state-of-the-art
rides and attractions, and a range of hotels and restaurants designed
to cater for all tastes and pockets.
CHAPTER 2
[ 54 ]
Despite the meticulous planning, splendid location and magnificent
attractions, the park struggled to attract visitors after its opening on 12
April 1992.It only attracted 3 million visitors in its first year of operation
against a target of 11 million, leading to losses of US$920 million, which
had risen to US$1.2 billion by the end of 1994.
There were many reasons for the park’s initial failure.The theme
park encountered severe criticism from influential sections of French
society who held the view that it posed a threat to French culture which
had spawned great philosophers, artists and composers.Consequently,
the park’s opening was shunned by leading members of French society
and by the French public.This was despite the fact that, after extensive
market research, many of the attractions had been given French names
like Le Chateau de la Belle au Bois Dormant (the Enchanted Castle)
and La Cabane des Robinson (The Swiss Family Treehouse),
restaurants and cafes adopted European features like table service
and continental breakfasts.There were also industrial relations problems
with strict discipline and American training methods proving
particularly unpopular.
In recent years there has been something of a turnaround in the
park’s fortunes (although only after significant amounts of loss were
written off).By 2000 Disneyland Europe was attracting over 12 million
visitors a year, many of whom were French.There are many reasons
for this turnaround including increasing ‘Americanization’ with
attractions being given their original American names and fast food
restaurants, together with price reductions.
Characteristics of culture
Despite the intangible nature of culture, several researchers and authors
have produced frameworks that make cultural comparisons between
nations, industries and organizations possible.Such comparisons and
categorizations are particularly important for organizations undertaking
international business activities as they may well have to adapt activities
because of cultural differences.Cultural differences may well affect consumer
behaviour and employee working practices which will, in turn, affect
the ways that international businesses organize, manage and structure their
activities as well as the nature of the products they offer and the strategies
that they pursue.In the same way, there are elements of similarity between
FROM NATIONAL CULTURE TO GLOBAL VISION
[ 55 ]
human needs and wants which must be taken into account in transnational
strategy.To make matters even more complex, culture is not a static
phenomenon but changes irregularly over time.
There are several frameworks available to managers that can be utilized
in comparing the characteristics and dimensions of culture.Two of the
major frameworks are explained and compared in the next sections of
this chapter – those suggested by Hofstede and by Trompenaars.
Hofstede’s cultural dimensions framework
Elements of Hofstede’s framework
The best known of these frameworks is that devised by Hofstede (1980,
1983, 1986, 1991, 1995).It was based initially on research in an American
multinational enterprise and its subsidiaries.Hofstede identified four
dimensions (later five) that could be used for comparing cultural similarities
and differences.These five dimensions are:
. power distance;
. uncertainty avoidance;
. individualism/collectivism;
. masculinity/femininity;
. long-term orientation.
Power distance
Power distance concerns the extent to which people accept that power in
society and organizations is distributed unevenly.When people are willing
to accept that power is distributed unevenly, power distance is regarded as
high.Low power distance is where people do not readily accept an uneven
distribution of power.
Typically, within European and American cultures there is low tolerance
of power distance, while in many Asian cultures there is acceptance of high
power distance.Such differences will affect the nature of leadership and
management, as well as decision making and structure within organizations.
Within European organizations there is often an expectation that a
participative style of decision making will be the norm, while in Asian
organizations employees are more willing to accept decisions made by
their leaders with little consultation.
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[ 56 ]
Uncertainty avoidance
The cultural dimension of uncertainty avoidance relates to the lengths to
which an organization or society will go to escape uncertainty.It thus
describes the attitude to risk.An organization or society with a high level
of uncertainty avoidance will attempt to reduce uncertainty through rules
and laws, and will have a low tolerance of risk and non-conformity.On the
other hand, an organization or society with low uncertainty avoidance will
be characterized by an acceptance of risk taking, informality and a degree
of non-conformity.A highly entrepreneurial organization like Nike embodies
low uncertainty avoidance, encourages risk taking and embraces
non-conformity among its customers and employees.The need for uncertainty
avoidance is often higher in poorer, less developed countries, where
non-conformity is often discouraged, while in richer, developed countries
high degrees of non-conformity are readily accepted and even encouraged.
Individualism/collectivism
The dimension of individualism versus collectivism is based on the extent
to which people stress individual or group needs.An organization or
society which emphasizes individualism is characterized by self-interest,
self-reliance and individual effort.American culture and many of its businesses
embody highly individualistic cultures.Collectivism stresses the
need for group harmony and the expectation that the group will take
care of its members.This is traditionally characteristic of many Asian cultures
and organizations, and is exemplified by the importance of saving
‘face’ in business dealings in this part of the world.At meetings Asians will
often say ‘yes’ when they might mean ‘no’, so as not to give offence to their
visitors, thus avoiding situations where there is a danger of either side
losing face.
Masculinity/femininity
Masculinity/femininity centres on the extent to which a society or
organization values assertiveness and materialism versus harmony and
supportiveness.A culture is masculine when a high value is placed on
assertiveness and materialism.When a high value is placed on harmony
and partnership, the culture is characterized as feminine.Again contrasts
can be made between largely masculine Western cultures and the femininity
of eastern cultures.
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[ 57 ]
Long-term orientation
Long-term orientation is the extent to which a culture emphasizes long or
short-term goals.A culture with a long-term orientation is based on stability,
persistence, order and thrift.On the other hand, a culture with a short-term
orientation will expect immediate returns and will focus on the satisfaction
of immediate needs and wants rather than on long-term investments.The
success of Japanese companies in the 1970s, 1980s and early 1990s has
often been attributed to their focus on long-term investment, commitment
to their workers and the building of relationships with their customers.
American and British companies are often criticized for their focus on
short-term goals because of the need to satisfy their shareholders and
thus maintain share prices.
Figures 2.2 and 2.3 show comparisons between various countries in
terms of Hofstede’s cultural dimensions.
To summarize, Hofstede’s framework allows managers to analyse
national and organizational cultures in terms of the dimensions of power
distance, uncertainty avoidance, individualism/collectivism, masculinity/
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[ 58 ]
Low Power distance index High
Uncertainty avoidance index
High
Low
• USA
• UK
• Japan
• France
• Germany
•Spain
• Denmark
• Sweden
• Greece
• Ireland
• Netherlands
Figure 2.2 Selected countries: uncertainty avoidance versus power distance
Adapted from Mercado et al.(2001)
femininity and long-term orientation.This will allow cultural similarities
and differences to be considered when formulating a transnational strategy
in terms of consumer preferences, management style, etc.
Trompenaars’ dimensions of culture framework
Elements of Trompenaars’ framework
Trompenaars (1993) and Trompenaars and Hampden-Turner (1997)
devised an alternative model that can be used in the analysis of culture.
It comprises three groupings of cultural factors:
. relationships with people;
. time;
. relating to nature (the natural environment).
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[ 59 ]
Low Individualism index High
Masculinity index
High
Low
• USA
• UK
• Japan
• France
• Germany
•Spain
• Denmark
• Sweden
• Greece
• Ireland
• Netherlands
Figure 2.3 Selected countries: masculinity index versus individualism index
Adapted from Mercado et al.(2001)
Relationships with people can be considered in five subdivisions of: universalism
versus particularism; individualism versus communitarianism;
affective versus neutral cultures; specific versus diffuse relationships; and
achieving versus ascribing status.Thus, in total, Trompenaars identifies
seven dimensions along which culture can be compared.The first five
come under the general heading of relationships with people and the
remaining two are time and relating to nature.
Relationships with people
This dimension concerns how people relate to each other within a culture.
Universalism versus particularism
Universalism versus particularism focuses on the importance of rules, as
opposed to relationships, in determining behaviour.There are two variants.
A universalist culture is one within which rules determine behaviour and
the favouring of friends or relations is not accepted.A particularist culture,
on the other hand, is one where obligations to friends and relatives are
important and must be observed in business.In Chinese culture, for
example, the concept of guanxi (friendship) underlies many business relationships
and activities.For the Chinese, friendship is a vital component of
business relationships.Friends must always be favoured in business dealings.
For this reason, the building of relationships is essential to successful
business in China, a fact often overlooked by Western business people who
are used to a universalist culture.In Western cultures, favouring friends and
relatives is often opposed on the grounds of inequality of opportunity.In
employment, for example, it is expected that people will be given equality
of opportunity and will be appointed to posts on merit not on the basis of
friendship or kinship.
Individualism versus communitarianism (collectivism)
This dimension corresponds to Hofstede’s individualism versus collectivism
and relates to the extent to which people stress individual or group needs.
An individualistic culture is one within which self-interest, self-reliance and
individual effort are predominant.Communitari anism, conversely, stresses
the need for group harmony and the expectation that the group will take
care of its members.
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[ 60 ]
Affective versus neutral cultures
This dimension concerns the extent to which people may show emotions in
communications.In an affective culture people are expected to show their
emotions whereas in a neutral culture emotions must be controlled and
subdued.In Japanese and Chinese cultures public displays of emotion are
rare and are found embarrassing, so that these cultures can be regarded as
neutral.Southern European cultures are, in contrast, far more affective
whereas Northern European cultures are more neutral, but are nevertheless
more affective than the Chinese and Japanese cultures.
Specific versus diffuse relationships
The extent to which people have relationships in more than one area of life
is described as either specific or diffuse.A culture where relationships are
only in specific areas of life (e.g., work) is known as specific. A diffuse
culture is one within which relationships exist in multiple areas of life (e.g.,
they can span work and leisure).
Achieving versus ascribing status
This dimension centres on how far status is accorded on the basis of
achievement or ascribed on the basis of age or seniority.An achieving
culture is one where status is based on a person’s achievements, while in
an ascribing culture status is based on seniority, age or class.American
culture is usually considered to be an achieving culture whereas Chinese
and Japanese cultures are more ascribing in nature.
Time
This relates to time and structuring which affect planning and management.
In a sequential culture the focus is on time moving forward and the focus
is on efficiency.In a synchronic culture time is regarded as cyclical and
repetitive, and there is more focus on effectiveness rather than efficiency.
Southern European culture can therefore be regarded as synchronic as
there is less importance attached to punctuality and efficiency while
Northern European cultures are far more synchronic, placing much
greater emphasis on efficiency.
Relating to nature
This concerns perceptions of the relationship to the natural environment
and the ability to control nature.In inner directed or internalist cultures
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[ 61 ]
there is a common belief that nature can be controlled and manipulated.In
outer directed or externalist cultures there is a shared view that people and
organizations are part of nature which cannot be mechanically controlled.
People in an externalist culture are far more fatalistic and accept natural
benefits and disasters equally philosophically.Developed countries are far
more internalist, believing that natural events can be controlled, by and
large, whereas in developing countries the culture is more often externalist.
Tayeb – major cultural characteristics observed in
various nations
Tayeb (2000) devised a comprehensive framework to allow cultural comparisons
in terms of: individual; relationships with others; relationship with
environment; relationships with society and the state; expectations from
companies; political views and activities; economic views and activities
(Table 2.1).
The importance and determinants of culture in
transnational business
The importance of culture
Culture is important to transnational organizations in several respects including
consumer behaviour and management.
Consumer behaviour
Culture is an important influence on consumer behaviour, consumption
patterns, preferences and expenditure patterns.Certainly, global trends
have affected fashions in clothing, fragrances and have influenced the
design of many products.At the same time there remain important cultural
differences affecting the acceptability and popularity of products, and in
different parts of the world.Culture has a similar affect on the appeal and
acceptability of different types of advertisement in different countries.
Humour, an important ingredient of many Western advertisements, does
not always translate across linguistic and cultural boundaries.As a consequence
transnational businesses must pay careful attention to culture in
product design and in their marketing and promotional strategies.
CHAPTER 2
[ 62 ]
FROM NATIONAL CULTURE TO GLOBAL VISION
[ 63 ]
Table 2.1 Tayeb – major cultural characteristics observed in various nations
Individual f Honesty, truthfulness, f Independence of f Control of emotions
trustworthiness mind
f Assertiveness, ambition, f Ability to cope with f Care for quality of life
achievement orientation uncertainty, ambiguity,
anxiety and stress
f Competitiveness f Resilence f Hard-working, work
ethic
f Easy-going, laid-back f Modesty, arrogance,
self-confidence
Relationships f Interpersonal trust f Co-operation and f Respect for people in
with others competition senior positions
f Fear of the powerful f Expect equality, f Kindness, generosity,
acceptance of inequality politeness
f Appreciation of favours f Acceptance of f Caring
responsibility
f Group orientation, f Self-orientation, f Small in-group, large
collectivism individualism in-group
f Family ties, kinship f Keeping promises f Punctuality
f Respect for others’ f Conflict, harmony f High context
viewpoints communication
f Low context
communication
Relationship f Submission to failure, f Mastery over the f Living in harmony
with fatalism environment with the environment
environment f Nature is a resource for f Nature belongs to our
us to exploit children, we have it on
loan
Relationships f Law abiding, law f Community orientation, f Welfare state, social
with society breaking family orientation net
and the state f Statism, individual f Big government, small f National health service
responsibility government
f Universal education f Private insurance
Expectations f Active role in the f Active interest in f Separation of private
from community (hospitals, employees’ private life and company life
companies schools) and well-being
f Care for the environment f Contribution to charities f Sponsorship of
sporting and cultural
events
Political f Republicanism, f Participation, f Attitudes to women’s
views and monarchism indifference, revolution and minority rights,
activities etc.
Economic f Entrepreneurial spirit f Capitalism versus f Market, mixed,
views and socialism state-controlled
activities economy
Adapted from Tayeb (2000)
Transnational organizations and their management
The dimensions of culture identified by Hofstede and Trompenaars will
affect the approach to management adopted within a transnational organization.
Management in a transnational will inevitably have to take account
of cultural differences like the importance attached to time, the need for
formality in work relationships, the importance of ability versus seniority
and so on.
Culture will also have an important effect on the attitudes to work of
employees, aspects of motivation, loyalty to the business, personal initiative
and collective responsibility.Whereas the success of Western enterprises is
often attributed to personal initiative and entrepreneurship, the success of
Asian-based business is often associated with aspects of culture, like a
strong work ethic and company loyalty.
In a transnational, senior management can adopt a variety of approaches
to managing cultural diversity (see Chapter 9).It is important to stress that
cultural diversity must be viewed as a source of potential strength to an
organization, as well as being a potential source of conflict.Cultural differences
can cause friction and difficulties, but, equally, diversity can be an
important source of the creativity required by businesses in the rapidly
changing business environment of the 21st century.
Culture and the success ofmergers in the
automobile industry
The world automobile industry has been subject to increasing globalization,
particularly since the 1980s.Globalization has been accompanied
by increasing competition as well as increasing worldwide
opportunities.The last decade has seen several major mergers and
the development of a number of strategic alliances, partly in response
to competition and partly in response to new market opportunities.
The long-standing alliance between Honda and Rover (from 1979 to
1994) was mutually beneficial.Rover benefited from the technology
and reputation of Honda, while Rover’s UK base provided access to
European markets for Honda.The alliance was brought to an end by
the sale of Rover by its parent company to the German luxury car
manufacturer BMW.BMW believed that by taking over Rover they
could gain access to new segments of the market, particularly those
for four-wheel drive sports utility vehicles (SUVs) and Minis.Despite
the seeming logic of the merger, it was to become one of the 70% of
international mergers that fail.
While there were business reasons for the collapse of the merger and
the subsequent buyout of Rover, cultural factors, both national and
organizational, were important contributory factors.One of the first
actions of the BMW directors was to replace the British management
of the company with its own German managers.This was seen as a
condemnation of Rover’s management, who had actually done much
to improve the reputation, quality and reliability of the company’s
vehicles during the years immediately preceding the merger.This
action was perceived as culturally insensitive and confirmed many
cultural stereotypes of German approaches to management in the
minds of the British managers.The subsequent approach to managing
the company was viewed by many as autocratic.The consequence was
that British managers viewed their German counterparts with
suspicion.At the same time BMW’s management held the view that
the more laid-back approach to management of their British colleagues
was a contributory factor to Rover’s poor performance which had to be
eliminated.The perceptions of both sides of each other were hardly
conducive to the development of an inclusive team spirit.It is hardly
surprising that the merger was to fail and that BMW and Rover were
soon to go their separate ways.
Organizational culture
Each organization will have its own distinctive culture or way of working.
In the case of a transnational this culture will be determined by the culture
of its home nation, the cultures of the nations in which it operates and
factors like the nature of its industry and business, its size, its history, its
leadership and its structure.
Culture is therefore an aspect of transnational organizations which
requires considerable management attention.Management will seek to
shape the culture of an organization into a form that effectively supports
its objectives, strategies and operations.The intangible nature of culture
makes cultural change difficult to manage.
The culture of an organization (sometimes known as its corporate
culture) is made up of the distinctive values, attitudes, beliefs and norms
which influence the ways in which it conducts its business.Charles Handy’s
FROM NATIONAL CULTURE TO GLOBAL VISION
[ 65 ]
description of culture as ‘the way we do things round here’ is a helpful one.
In some ways it is the ‘feel’ or the ‘smell’ of an organization.In their famous
book In Search of Excellence (1982), Peters and Waterman found that
organizational culture was related to performance in that:
. dominance and coherence of culture was an essential feature of
‘excellent’ companies;
. a handful of guiding values was more powerful than manuals, rule books
and controls;
. if companies do not have strong notions of themselves as reflected in
their values, stories, myths and legends, the only security that employees
have comes from their positions on the organization chart.
Determinants of organizational culture
It is as complex to describe the determinants of a given organizational
culture as it is to describe the determinants of a human personality.In
both cases a number of interdependent factors will be relevant.For an
organization, we have seen earlier in this chapter that major influences
will include the national culture (of the country or region in which the
organization mainly operates or is based) and its industry culture, but in
addition its history, size, management style and the type of employees that
work within an organization will also strongly influence its culture.A
schematic of these respective influences is shown in Figure 2.4. The different
factors are described in Table 2.2.
Analysing organizational culture – the cultural web
Like national culture, organizational culture is impossible to measure.
It is possible, however, to identify facets and characteristics of culture
which can be described qualitatively.It is possible to use Hofstede’s and
Trompenaars’ frameworks to analyse the culture of an organization, but the
cultural web framework (Figure 2.5), developed by Johnson and Scholes
(1992, 2001) is probably more suitable for analysing culture at the microlevel
of the organization rather than the macro-level of the nation.
The cultural web is a representation of the manifestations of the culture of
an organization.The central paradigm or world view – the centre of the
culture – is shown and explained by the six factors described around it in
FROM NATIONAL CULTURE TO GLOBAL VISION
National
culture(s)
Industry
culture
Size of
organization
Organizational
culture
History
of organization
Management
style
Nature of
employees
Figure 2.4 Determinants of organizational culture
Table 2.2 A description of the influences on organizational culture
National culture Home and host country cultures will play an important role in shaping
organization culture.American and Japanese organization cultures tend
to be heavily based on their home country culture.
Industry culture Businesses in the same industry will also have cultural similarities that
cross national boundaries.All advertising agencies will tend to have
cultures emphasizing creativity rather than formality.Of course, there
will still be differences in culture between each individual organization
in an industry.
Size of the organization Culture differs between large and small organizations.Culture will tend
to be less formal and more centred around an individual leader in a
small organization.In a large organization culture will be far more
complex and formalized.
Organization history As culture evolves over time the culture of an organization will be
associated with its history and the changes it has experienced.
Management and leadership The leaders and senior managers of an organization play a vital role in
style shaping the ‘feel’ of an organization.Jack Welch played a vital role in
creating the innovative and entrepreneurial culture of GE.
Nature of the employees The background of employees and the nature of their work, education
and training is also important in forming an organization’s culture.For
example, professionals who are well educated will expect a culture
where there is a high value placed on individual autonomy and where
the management style is participative.
Figure 2.5. Organizational culture is a vital source of core competence and
hence competitive advantage, as well as being vital to the coherent operation
of the organization.The cultural web represents the culture of an
organization in terms of the stories, symbols, rituals and routines, control
systems, organizational and power structures which define its purpose and
existence.Table 2.3 describes the nature of each facet of the cultural web.
Culture, at any level, develops from the interaction of people over time.
[ 68 ]
Stories Symbols
Rituals
and
routines
The
paradigm
Power
structures
Control
systems
Organizational
structures
Figure 2.5 The cultural web
Reproduced from Johnson and Scholes (2001)
of which they are part.Naturally, the context within which people live and
work will also play a role in shaping culture so that geography and climatic
factors, history, politics, religion, economics, etc.will all help determine
culture within nations, organizations and other social groupings.
Sources ofculture N an example ofthe influences on
a country’s culture
History
Several factors in a nation’s history will contribute to the way that its
culture develops.Empires, wars, being conquered, industrial and
economic developments, emigration and immigration, and the development
of political systems will all play a role in how a culture is
shaped.The fact that a country has possessed an empire in its past
may well give its people confidence long after it has disappeared.
People from a similar country that has had no empire may not
possess such confidence.Economic development also affects the confidence
which a nation’s people feel.
Religion
In some societies, religion is very important and highly valued, but,
even in societies where religion does not appear to be highly valued
FROM NATIONAL CULTURE TO GLOBAL VISION
[ 69 ]
Table 2.3 The elements of the cultural web
Paradigm Assumptions that constitute the culture of an organization.The central
world view or set of irreducible assumptions made by the culture.
Stories Told by members of the organization internally and externally to signal the
history of the organization and its underlying values, successes and
failures, and the personalities who have had a significant effect on the
development of the organization.
Symbols Logos, buildings, offices, cars, language used, etc.representin g the nature
of the organization, symbolizing success, power, hierarchy, etc.
Rituals and routines Exmplify the way that things are done within the organization both
formally and informally.
Control systems Measurement and rewards systems which exist within the organization,
indicative of the nature of its culture, emphasizing teamwork or
individuality, organizational priorities and so on.
Organizational structures Formalization of power structures, indicative of factors like power distance.
Power structures Where power lies in the organization – may be based on seniority, merit
or organizational history.
Based on Johnson and Scholes (2001)
today, it has still played and continues to play a significant role in
shaping values and the way that people behave.Tayeb (2000)
pointed out that some of the contrasting features of Eastern and
Western cultures can be traced back to religious differences.For
example, the individualism that characterizes many Western cultures
can be traced back to the Protestant branch of Christianity which
placed a high value on individuals taking personal responsibility for
their lives and gaining rewards for their own hard work.In contrast the
group orientation, respect for age and hierarchy, and avoidance of
conflict and competition which characterizes many oriental societies
can be attributed to Confucianism.
Geographic and climatic factors
Geography (including terrain and natural resources) and climate will
also play an important role in shaping and sustaining national culture.
A country with difficult geographical conditions (mountains and lack of
natural resources) and a hostile climate will tend to produce a culture
where people are hard-working, patient and resilient.According to
Misumi (1994) the fact that the Japanese are hard-working can be
attributed, in part, to the fact that Japan is poor in natural resources,
so that people have always had to work hard to survive.
Review and discussion questions
1. Outline the major trends in the macroenvironment which have brought
about the increasing globalization of (a) markets and (b) industries.
2. Why is the global environment becoming more turbulent?
3. What is the relationship between strategic intent and global vision?
4. Discuss the impact of culture on the way that a transnational business
conducts its activities.
5. Explain how culture can be evaluated and compared.
References and further reading
Dicken, P.(1998) Global Shift – Transforming the World Economy.London: Paul Chapman.
Ginter, P.and Duncan, J. (1990) ‘Macroenvironmental analysis’. Long Range Planning, December.
Hamel, G.and Prahalad, C.K. (1989) ‘Strategic intent’. Harvard Business Review, 67(3).
Hamel, G.and Prahalad, C.K.(1994) Competing for the Future.Boston: Harvard Business School
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ANALYSIS OF THE GLOBAL
BUSINESS 3
Learning objectives
After studying this chapter students should be able to:
. explain the components of an internal analysis;
. define and distinguish between an organization’s competences,
resources and capabilities;
. describe the value chain framework and understand its components;
. explain how value chains differ in global organizations;
. define and distinguish between configuration and co-ordination as
the terms apply to global value-adding activities;
. describe the importance of organizational culture and structure as
they affect the strategy of global businesses;
. explain how to analyse an organization’s products, portfolio and
performance.
Introduction
Strategic analysis of any business enterprise involves two stages: internal
analysis is the systematic evaluation of the key internal features of an
organization (we address this in this chapter); and external analysis,
which is covered in Chapters 4 and 5.
Internal analysis enables managers to gain a picture of their organization.
Such information is essential when deciding on strategic options or on
adjusting global strategy to provide optimum performance.Superior performance
(i.e., returning higher profitability than the industry average)
depends on management’s ability to employ their resource inputs into core
competences more effectively than competitors.This, in turn, depends on
how well configured the organization’s value-adding activities are and how
it configures and co-ordinates its value-adding activities in the various parts
of the world.
Product analysis is important in internal analysis because the product is
the final expression of value added and the output of the whole organizational
process.The extent to which products are balanced in a portfolio or
are adjusted to suit regional preferences can be a vital factor in the success
or failure of a global strategy.
Analysis of the global organization
Internal analysis
When considering the internal analysis of any organization, four broad
areas need to be considered.They are the analysis of:
1. The organization’s resources, capabilities and competences.
2. The way in which the organization configures and co-ordinates its key
value-adding activities.
3. The structure of the organization and the characteristics of its culture.
4. The performance of the organization as measured by the strength of its
products.This, in turn, is largely determined by the three aforementioned
factors (see Figure 3.1).
These categories of enquiry form the basis of the structure of this chapter.
Competences, resources and capabilities
Understanding global competences
Many researchers in strategy including Prahalad and Hamel (1990), Kay
(1993) and Heene and Sanchez (1997) have made the case that internal
factors (resources, capabilities and competences) are more important in
acquiring and sustaining competitive advantage than the organization’s
position in relation to its competitive environment.In other words, the
major sources of global competitive advantage are business, rather than
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industry, specific.It is therefore important to understand what constitutes
core competence or distinctive capability as they form the basis of successful
strategy.These concepts are also explored further in Chapter 6 which
deals with the ‘sources’ of global and transnational strategy.
This understanding of strategy (sometimes called the ‘resource-based’
approach) can be traced back to the work of Penrose (1959).It is only
recently, however, that researchers have begun to develop the conceptual
frameworks that allow this approach to make a valuable contribution to
global strategic analysis.
Definitions of resources, capabilities and competences
Although core competences are widely acknowledged as important sources
of competitive advantage, there is no precise and universally agreed
definition of the term.As a result, according to Kay (1995), ‘Core competence
is one of the most used and abused phrases in business strategy.’
Accordingly, the terms resource, capability, core competence and distinctive
capability are often used imprecisely in the literature.It is therefore
necessary to define each of the concepts, explain their major characteristics
and the relationships between them.
Prahalad and Hamel (1990) defined core competence as ‘the collective
learning in the organisation, especially how to co-ordinate diverse production
skills and integrated multiple streams of technologies.’ This definition
does little, however, to reduce the ambiguity.Instead, definitions based on
those proposed by Kay (1993, 1996), Gorman and Thomas (1997), Petts
(1997) and Sanchez and Heene (1997) are developed and illustrated in
Figure 3.2.
ANALYSIS OF THE GLOBAL BUSINESS
[ 75 ]
Analysis of the
global business
Global value chain analysis:
configuration and
co-ordination
Resources, capabilities and
core competences
Cultural and structural analysis
Global products and performance
Figure 3.1 Internal analysis
There are significant difficulties in identifying and analysing core competences.
This is because they tend to be complex bundles of resources and
capabilities which are invisible and intangible, and are, therefore, difficult to
describe precisely and are equally difficult to evaluate.
Despite these limitations, however, we suggest that analysis of core
competences is possible by examining the factors that go to create them –
resources and general competences.
Resources
Resources are assets that are employed in the activities and processes of the
organization.Such assets can be either tangible or intangible.They can be
obtained externally from suppliers in resource markets or can be internally
generated.Internally generated resources are organization-specific, while
externally obtained resources are organization-addressable (Sanchez and
Heene, 1997).Resources can be highly specific or non-specific.Specific
resources can only be used for highly specialized purposes and are very
important to the organization in adding value to goods and services.Assets
that are less specific are less important in adding value, but are usually
more flexible.
Resources fall within several categories: human, financial, physical,
technological or informational.An audit of resources would be likely to
include an evaluation of resources in terms of availability, quantity and
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Resources:
human, financial,
physical, technological,
legal, informational
Core
Capabilities: competence:
Industry-specific
skills, relationships,
organizational
knowledge
+ =
Tangible and
visible assets
Intangible
and invisible
assets
Unique, and
difficult to copy
Distinctive and superior
skills, technology
relationships, knowledge
and reputation of the firm
Perceived
customer
benefits/value added
denotes feedback
loop
denotes core competence
development
Inputs to
the firm’s
processes
Integration of
resources into
value-adding
activities
Not all capabilities are core
competences - only those
that add greater value than
those of competitors
Figure 3.2 The relationships between resources, capabilities and core competences
quality, extent of employment, sources, control systems and performance.
The audit would also be likely to employ benchmarking techniques including
internal and external comparisons:
. Against objectives and strategies – are the resources adequate to achieve
organizational objectives?
. Against benchmarks like competitors – is the organization in question
stronger or weaker?
. Against performance indicators over time – has the organization
matched, exceeded or fallen short of the key indicators?
Table 3.1 illustrates some of the resource audits that may be carried out
within a global organization.
General competences/capabilities
These are assets like industry-specific skills, relationships and organizational
knowledge which are largely intangible and invisible assets.
Competences and capabilities will often be internally generated, but may
be obtained by collaboration with other organizations.In other words,
competences may be shared or created across organizational boundaries.
They are often shared between the organization and one or more of its
suppliers, distributors or customers.
Certain competences are likely to be common to competing businesses
within a global industry or strategic group.These competences relate to the
critical success factors in the industry or market.Most competitors in the
brewing industry, for example, will possess certain competences or
capabilities which are essential to the production and selling of beer.
Such competences are not distinctive, however, and do not account for
distinctive or superior performance.They simply mean that the business
in question has sufficient competence to produce and distribute beer.
Core competences/distinctive capabilities
Core competences or distinctive capabilities are combinations of resources
and capabilities which are unique to a specific organization and which are
responsible for generating its competitive advantage.Core competences
only create competitive advantage when they are applied in markets,
thus creating benefits that are perceived by customers as adding value
ANALYSIS OF THE GLOBAL BUSINESS
[ 77 ]
Table 3.1 Content of a resources audit
Human Physical Financial Technological Informational
Numbers of staff, Buildings and equipment: Global sources and Technology – ‘know how’, Customer information, supplier
deployment, age distribution, locations, age, repair, availability of finance, global patents, R&D facilities, IT information, competitor
education, skills, training flexibility, configuration, accounts, global assets and and communication systems information, internal process
(including linguistic skills), expansion potential, capacity, liabilities, control systems, (internal and external), information, agreements with
motivation, attitudes and utilization.inte rnational accounting production systems. suppliers, customers,
cultural awareness, flexibility, systems, taxation systems.distr ibutors.Note: the
productivity, job Materials: information resource is
specifications, recruitment, sources, quality, costs, generated both within the
industrial relations, availability. business as a result of its
remuneration. activities and outside the
business.
over and above those of competitors.Core competences often have the
potential to produce competitive advantage in more than one market.
Kay (1993) identified four potential sources of distinctive capability:
reputation, architecture (i.e., internal and external relationships), innovation
and strategic assets.
Core competences or distinctive capabilities may well be based on
unique external relationships with other organizations or with customers.
Benetton’s competitive advantage, for example, rests in large part on its
reputation, its knowledge of the fashion clothing industry and markets, and
its unique network of relationships with manufacturers and retailers.
Core competences must be perceived by customers as providing benefits
if they are to create competitive advantage.Thus reputation is vitally important
to businesses like Porsche, Nike and Tommy Hilfiger, in achieving
global competitive advantage, because customers place a high value on the
reputations of such companies when purchasing their products.
Core competence development depends on the distinctive way that
the organization combines, co-ordinates and deploys its resources and
capabilities (Sanchez and Heene, 1997), as well as on the resources and
capabilities themselves.Core competences can be evaluated against a set of
criteria:
. Complexity – how elaborate is the bundle of resources and capabilities
which comprise the core competence?
. Identifiability – how difficult is it to identify?
. Imitability – how difficult is it to imitate?
. Durability – how long does it endure?
. Substitutability – how easily can it be replaced by an alternative
competence?
. Superiority – is it clearly superior to the competences of other
organizations?
. Adaptability – how easily can the competence be leveraged or adapted?
. Customer orientation – how is the competence perceived by customers
and how far is it linked to their needs?
(Adapted from Petts, 1997)
By evaluating core competences against these criteria, managers can gain a
valuable insight into their ability or likelihood to bring about any sustained
advantage.The strengths and weaknesses of existing competences can be
assessed and any opportunities or needs for competence building and
ANALYSIS OF THE GLOBAL BUSINESS
[ 79 ]
leveraging can be identified.These opportunities and needs may refer to
resource markets, the industry, competing industries or product markets.
Resources, capabilities and competences are both critical to, and interdependent
with, the value-adding activities of the business.Value-adding
activities are therefore analysed in the following section of this chapter.
Global value chain analysis
Organizations as systems
Sanchez and Heene (1997) described an organization as ‘an open system of
asset stocks and flows including tangible assets like production equipment
and intangible assets like capabilities and cognitions.’ This system converts
inputs (resources) into outputs (goods and services).A major objective of
the system is to add value to the inputs so that the value of the outputs
exceeds the value of the resources used in their creation.Competitive
advantage depends on the ability of the organization to organize its
resources and value-adding activities in a way that is superior to its
competitors, thus enabling more value to be added and more quickly.
Value chain analysis is a technique developed by Porter (1985) for understanding
an organization’s value-adding activities and the relationships
between them.Value can be added in two ways:
1. by producing products at a lower cost than competitors;
2. by producing products of greater perceived value than those of
competitors.
The analysis of value-adding activities allows managers to identify where
value is currently added and where there is potential to add further value
in the future by reconfiguration of activities.Porter extended value chain
analysis to the value system so that, as well as internal activities, the
technique also includes analysis of the relationships between the organization,
its suppliers, distribution channels and customers.
The value chain
The value chain is the chain of activities which results in the final value of a
business’s product.Value added, or margin, is indicated by sales revenue
(units sold multiplied by price) minus total costs (variable costs like
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[ 80 ]
materials, wages, etc.plus fixed costs of capital equipment, rents, etc.).In
other words, ‘the margin is the difference between the total value and
collective cost of performing the value activities’ (Porter, 1985).
In Porter’s framework, value is added as a result of value-adding activities
and the linkages between them.Porter divided the internal parts of the
organization into primary and support activities as indicated in Figure 3.3.
Primary activities (inbound logistics, operations, outbound logistics, marketing
and sales, and service) are those that directly contribute to the
production of the good or services and the organization’s provision to
the customer. Support activities (the firm’s infrastructure, human resource
management, technology development and procurement) are those that aid
primary activities, but do not themselves add value.Certain activities or
combinations of activities are likely to relate closely to the organization’s
core competences.Logically, these can be termed core activities.They are
those activities that:
. add the greatest value;
. add more value than the same activities in competitors’ value chains;
. relate to and reinforce core competences.
Other value chain activities relate to capabilities, but do not add greater
value than competitors and therefore do not relate to core competence
(because they do not contribute toward competitive advantage).
Value chain analysis involves analysis of all the company’s activities, and
its internal and external linkages, in order to determine how the company’s
ANALYSIS OF THE GLOBAL BUSINESS
[ 81 ]
Inbound logistics
Service
Operations
Outbound logistics
Marketing and sales
Infrastructure
Human resource management
Technology development
Procurement
Support
activities
Primary
activities
Margin
Margin
Figure 3.3 The value chain
Adapted from Porter (1985)
activities are currently organized and how they can be can be better
organized so that competitive advantage can be achieved.The activities
in the company’s value chain must be organized in such a way as to
support its corporate strategy.A value chain analysis will therefore include:
. a breakdown and analysis of all the activities of the organization;
. an examination of the match between configuration and current strategy
(e.g., cost or differentiation-based strategy);
. identification of internal and external linkages between activities that
result in additional added value;
. identification of blockages that reduce the organization’s competitive
advantage.
Primary and support activities can be broken down into several elements
for analysis.
Primary activities
Inbound logistics
These are activities concerned with the receipt and storage of materials
(inputs), stock control and distribution of inputs to those areas of the
business concerned with operations.
Operations
Operations transforms inputs into final products or services.It may be
concerned with manufacturing processes, assembly, testing, etc.
Outbound logistics
This function is responsible for storage and distribution of finished goods
to customers.It includes warehousing, order processing, transport and
distribution.
Marketing and sales
This includes activities that are concerned with analysis of markets and
customers, persuading customers to buy the product, and making the
product accessible to customers via appropriate channels.
Service
This consists of activities concerned with installation of the product and
after-sales service.
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Support activities
Procurement
This is concerned with purchasing the resource inputs used in the organization’s
activities (other than those that directly add value, which are part of
inbound logistics).Certain purchasing functions may be centralized so as to
obtain economies and control the quality of inputs.Other purchasing
activities may be decentralized.Purchasing has a clear impact on value
added both in terms of controlling costs and in terms of controlling the
quality of inputs and therefore of final products.
Technology development
All activities within the business employ technology both in the production
and distribution of physical products and in terms of producing information
and services.Technology development is concerned with product, process
and resource development, and improvement.It includes the research and
development function if the organization has one.
Human resource management
Human resource management is concerned with obtaining, training and
motivating appropriate employees.It therefore involves recruitment,
selection, training, rewards and motivation.Again, human resources are
employed throughout the organization’s value chain.The quality and
‘appropriateness’ of human resources is closely associated with its ability
to add value.
Firm infrastructure
The firm’s infrastructure includes management systems, planning, finance,
accounting, information systems and quality management.The infrastructure
is vital to the success of the business and its global corporate strategy.
Using the value chain framework
All the primary and support activities described contribute to the final value
of the product to the consumer, so the organization must analyse each
activity and the linkages between the activities to see if any improvements
can be made which will increase the final value of the product or decrease
the costs of making it.
Just as important as the internal activities are the external linkages – with
suppliers of inputs and services, and linkages with distribution channels
ANALYSIS OF THE GLOBAL BUSINESS
[ 83 ]
and customers.The value of the product may depend on linkages with
retailers, for example.Similarly, linkages with suppliers may be critical to
competitive success if the business operates a just-in-time (JIT) operational
philosophy.
Every different type of organization will have a very different value chain.
Adidas, for example, is not generally involved in the retailing of its product,
but is heavily involved in the design and marketing activities.Nissan is
involved in design and manufacturing, and has involvement in the
distribution of its products.Other businesses’ value chains may be
centred on manufacturing with no design, little marketing and no retailing.
The businesses who manufacture the products sold under the Nike or
Marks & Spencer brand names would fall into this category.
This analysis helps us to add to our picture of the organization’s strengths
and weaknesses.It may be possible to compare one value chain with that of
organizations in similar sectors so as to make comparisons of performance.
The value chain of an individual organization, however, provides an
incomplete picture of its ability to add value, as many value-adding
activities are shared between organizations often in the form of a collaborative
network.As organizations identify and concentrate on their core
competences and core activities, they increasingly outsource activities to
other businesses for whom such activities are core.For example, Marks &
Spencer, the UK retailer, would regard its core competence as being based
on its skills in design and retailing which have established its reputation for
quality.Marks & Spencer has no expertise or core competence in manufacturing
and, therefore, it obtains its products from a network of suppliers,
for whom manufacturing is a core competence and activity.The ability to
add value is enhanced for all members of the network as they benefit from
each other’s core competences.Marks & Spencer benefit from the core
competences of its suppliers in manufacturing quality products, while the
suppliers benefit form Marks & Spencer’s retailing skills and reputation.
It is therefore necessary to analyse the value system of the business so as
to establish the effectiveness of its external linkages.
The value system
The value system is the chain of activities from supply of resources through
to final consumption of a product (Figure 3.4).
The total value system, in addition to the organization’s own value chain,
can consist of upstream linkages with suppliers and downstream linkages
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with distributors and customers.A single organization can form any part or
the whole of the value system for a product or service.The value system is
a similar concept to that of the supply chain and illustrates the interactions
between an organization, its suppliers, distribution channels and customers.
It also illustrates the fact that such relationships may also be common to its
competitors.Managing these external relationships can be equally as important
to competitive advantage as the management of internal activities
and linkages.
Co-ordinating activities and linkages
Competitive advantage arises from an organization’s core competences and
core activities.Businesses make themselves distinctive by the way in which
they configure and co-ordinate their competences and value-adding activities.
Competitive advantage is also enhanced by the distinctive network of
relationships that a business has with its suppliers, distribution channels
and customers.Inter-company relationships must be co-ordinated and
integrated with those competences and activities which are core to the
business itself.There may well be synergies between the core competences
of an organization and those of linked organizations.Certainly, the linking
of core competences increases the range of competences which can be
deployed competitively and, at the same time, they can create a more
complex source of competitive advantage which is more difficult for
competitors to emulate.
At the same time, effective management of complex, linked activities can
further extend advantage.To summarize, managing internal and external
ANALYSIS OF THE GLOBAL BUSINESS
[ 85 ]
Supplier Organization
Distribution Customers
channel
Distribution
channel Customers
Competitor
Distribution
Supplier Competitor channel Customers
Supplier
Figure 3.4 The value system
Adapted from Porter (1985) by permission of Free Press
linkages between competences and activities is just as important as the
management of the individual primary and support activities which make
up the value chain.An important aspect of strategic analysis is therefore the
examination of internal and external relationships between competences
and activities.
The ‘global’ value chain
A more complex value chain
Globalization offers new opportunities and new challenges for the configuration
and co-ordination of value-adding activities (Porter, 1986, 1990).
The configuration of an organization’s activities relates to where and in
how many nations each activity in the value chain is performed.Global
businesses can configure their activities to take advantage of both global
and localized advantages.Co-ordination is concerned with the management
of dispersed international activities and the linkages between them.
Co-ordination of globally dispersed activities is, of course, a complex
matter, but it is because of this complexity that it offers considerable potential
for achieving competitive advantage.Managers must therefore examine
the current configuration of value-adding activities and the extent and
methods of co-ordination as part of their strategic analysis.This analysis
makes it possible to determine possibilities for reconfiguration or improved
co-ordination.
In understanding the complexity of global value chain management, two
concepts are important – configuration of activities and co-ordination
between them.
Configuration
In terms of each value-adding activity a global business has two broad
choices of configuration:
1. Concentration of the activity in a limited number of locations to take
advantage of benefits offered by those locations (such benefits may
relate to availability of materials or labour, to cost advantages,
demand conditions, markets, government incentives, etc.).
2. Dispersion of the activity to a large number of locations (when transport
costs are high, when national markets differ significantly, etc.).
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Changes in the business environment (e.g., technological change) may well
lead to changes over time in the configuration that gives greatest competitive
advantage.Businesses must therefore constantly monitor their
current configuration in conjunction with the environment in order to
identify opportunities to reconfigure their global activities to take advantage
of changing conditions.
Co-ordination
Competitive edge can also be increased by more effectively co-ordinating
those diverse activities that are located in a number of different nations.Coordination
is essentially about overseeing the complexity of the organization’s
configuration such that all value-adding parts of the business act in
concert with each other to facilitate an effective overall synergy.The more
complex the configuration becomes (and some global businesses can have
very complex configurations) then the greater the difficulties will be in
retaining control over each value-adding part.
Those businesses that overcome the potential difficulties of co-ordination
are those that sustain the greatest competitive advantage.New technology
and organizational structures offer new possibilities for co-ordinating
diverse activities.The increasing ability to co-ordinate activities more
effectively also expands the range of alternative configurations accessible
to global business.
Analysis of configuration and methods of co-ordination assists in the
process of understanding current competences and identifying the potential
for strengthening and adding to them.Core competences are closely related
to value-adding activities.Configuring the value chain globally offers
further opportunities to develop competences that are both distinctive
and difficult to emulate.Figure 3.5 illustrates the issues that must be considered
in relation to analysing the management of a business’s value
system.
Global organizational culture and structure
The importance of culture and structure
A global business must have a culture and structure which allow it to carry
out its global activities.Culture and structure are investigated in more detail
in Chapter 13, but they are examined briefly here as part of the process of
internal business analysis.
ANALYSIS OF THE GLOBAL BUSINESS
[ 87 ]
In attempting to answer the question why an organization has a particular
culture and structure, we find a complicated range of explanations (see,
e.g., Campbell et al., 1999).
We encountered the idea that culture has a number of influences in
Chapter 2.The structure of an organization is also the result of a number
of factors including:
. its history;
. its size;
. the nature of its product and production processes;
. the nature of its business environment, markets and industry;
. its country of origin and areas of operation;
. the nature of its strategy;
. the philosophy of key members of the organization.
Structure
Major problems can arise when either structure or culture is not adapted
in response to changes in strategy, size, the environment, processes or
philosophy.As organizations grow they must restructure to continue to
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Core
competences
Core
activities
Channels
Value-adding
activities
Concentration
Internal
linkages
External
linkages
Suppliers
Customers
Value system
Value
chain
Configuration
Dispersion Internal
co-ordination
External
co-ordination
Co-ordination
Internal
activities
External
activities
Figure 3.5 Managing the value system
co-ordinate and control their activities.More clearly defined roles, responsibilities
and channels of communication are required than the informal
arrangements that exist in small businesses.
Some large businesses with very rigid and hierarchical structures have
difficulty in responding to changes in the environment.As the environment
becomes more turbulent and as activities globalize it becomes increasingly
difficult to reconcile the need for flexibility with that for control and coordination.
Similarly, different strategies require different structures.As the
pace of environmental change increases, there is the potential for misalignment
between an organization’s structure and its strategy.Analysis of
structure on an ongoing basis is therefore necessary to ensure it is the
most appropriate, given its ephemeral environmental conditions.The
aspects of structure that require analysis include:
. grouping of activities and functions;
. roles and responsibilities;
. communication channels;
. lines of authority;
. rules and regulations.
The structure of the business must allow it to accomplish its objectives as
effectively and as efficiently as possible.The larger and more diverse the
activities of an organization the more complex its structure will usually need
to be.
BP Amoco andglobal structure
BP Amoco, the British-based energy company, is one of the world’s
largest companies and was one of the world’s first ‘truly’ global businesses.
The factors that drove BP Amoco’s globalization in the middle
years of the 20th century are those common to other players in the
petrochemicals industry.The resource markets and products markets
relevant to petrochemicals companies are both global, and the scale
economies required for competitive advantage in the sector necessitate
a capital intensiveness of very large proportions.
The fact that oil and gas are primary products means that parts of BP
Amoco need to be located, with substantial investment, wherever
reserves are to be found.In practice, this means that BP sources oil
and gas from all six continents.Similarly, because demand for energy
ANALYSIS OF THE GLOBAL BUSINESS
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products is global, BP Amoco’s participation in products markets
means it operates in most regions of the world.
The company is primarily structured according to its major activities:
exploration and production; gas, power and renewables; refining and
marketing; and chemicals.In order to enable each activity to operate as
autonomously as possible, each ‘division’ is a separate ‘stand-alone’
company, and the name BP Amoco refers to the parent holding
company.
Each of the four activity areas is responsible for its own performance
against targets and has the autonomy to operate in order to ensure that
performance targets are met.The different nature of the four areas
means that the extent of globalization and international presence
differs between them.Exploration and production tends to be global
but concentrated around oil and gas fields and so has a strong presence
in such areas as South America and the Caspian region of Eastern
Europe.Marketing activities, by contrast, tend to be geographically
focused around the locations of the company’s key product markets –
predominantly the developed countries and regions where the concentration
of customers make such activities economically worthwhile.
Culture
What is culture?
One of the best definitions of culture was offered by Stacey (1996):
The culture of any group of people is that set of beliefs, customs,
practices and ways of thinking that they have come to share with
each other through being and working together. It is a set of assumptions
people simply accept without question as they interact with each
other. At the visible level the culture of a group of people takes the form
of ritual behaviour, symbols, myths, stories, sounds and artefacts.
Hence, the culture of any organization consists of the shared values, attitudes,
assumptions and beliefs of the managers and employees of the
organization which shape their behaviour and actions.The culture of an
organization shapes its style and ‘feel’.It will govern attitudes to work and
dictate how people think things ought to be done.Culture will be an
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important determinant of how effectively the organization operates and has
important implications for employee motivation.
Culture and success
Although this is not a textbook designed to explore culture in any depth,
we do make the following observations about the linkages between culture
and successful strategy.
First, successful organizations tend to have cultures that emphasize
excellence, quality and customer service.It affects interactions between
people within the business and between the business and its customers,
its suppliers and its other stakeholders.
Second, culture should not be seen as static – it must change as environmental
conditions change.As is often the case with structure, a frequent
problem for businesses is that culture does not change quickly enough to
account for environmental changes.Culture is thought to change relatively
over time through the process of socialization.The pace of culture change
cannot always be controlled by managers.These difficulties in achieving
change arise because people’s long-held attitudes and beliefs do not alter
unless they can be persuaded that the alterations are both justified and
necessary.It is therefore important to appraise organizational culture as
part of the analysis process.Yet the process of appraisal is problematic
because there are difficulties inherent in ‘measuring’ culture.Culture
cannot be readily described nor quantified.
Finally, culture is closely linked to the vision and mission of the organization.
Vision and mission can help to shape organization culture and vice
versa.To develop a global and transnational outlook is clearly dependent
on both vision and culture (see Chapter 2).
Products, performance and portfolio analysis
The concept of portfolio
A global business exploits its resources, capabilities and competences in the
production of goods and services which meet the needs of its customers.A
key concept with regard to successful product or subsidiary strategy is that
of portfolio.
Many, although not all global companies consist of a portfolio of businesses
offering multiple products and services.Portfolio analysis is used in
ANALYSIS OF THE GLOBAL BUSINESS
[ 91 ]
evaluating the balance of an organization’s range of products.Successful
product management relies on maintaining a portfolio of products that
increase the organization’s ability to withstand and exploit opportunities
and threats in the environment.In this regard, the key advantage of a broad
portfolio is that risk can be spread across more than one market.Offsetting
this is the fact that a narrower portfolio can mean that the organization
becomes more specialized in its knowledge of fewer products and
markets – its expertise is less ‘diluted’.
Several matrices have been developed to allow analysis of an organization’s
products and markets.Probably the best known of these is the Boston
Consulting Group (BCG) growth-share matrix.The matrix is most often
used by organizations in multiproduct and multimarket situations.It considers
products in terms of their market share and the growth rate of the
market in which they are sold.
The BCG matrix
The Boston Consulting Group matrix offers a way of examining and making
sense of a company’s portfolio of product and market interests.It is a
relatively sophisticated approach, based on the idea that market share in
mature markets is highly correlated with profitability and that it is relatively
less expensive and less risky to attempt to win share in the growth stage of
the market, when there will be many new customers making a first purchase.
This is the approach taken by the BCG matrix.It is used to analyse
the product range with a view to aiding decisions on how the products
should be treated in an internal strategic analysis.Figure 3.6 shows the
essential features of the Boston matrix.
The market share measure
The horizontal axis is based on a very particular measure of market share.
That measure is share relative to the largest competitor.A product with a
share of 20% of the market, where the next biggest competitor had a share
of 10% would have a relative share of 2, whereas a product with a market
share of 20% and the biggest competitor also had 20%, would have a
relative share of 1.The cut-off point between high and low share is 1, so
high market share products in this analysis are market leaders.This arrangement
of scale is sometimes described as being logarithmic in nature.
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The market growth measure
The vertical axis is the rate of market growth, with the most relevant
definition of the market being served.A popular point used to divide
high and low growth in the market is 10% year-on-year growth, but the
authors have found it useful in practical situations to use growth that is
faster than the rate of growth in the economy as a whole, which, after
inflation in most Western countries, is usually between 1 and 2.5% a year.
Using the BCG matrix
Cash cows
A product with a high market share in a low-growth market is normally
both profitable and a generator of cash.Profits from this product can be
used to support other products that are in their development phase.
Standard strategy would be to manage conservatively, but to defend
strongly against competitors.Such a product is called a cash cow because
profits from the product can be ‘milked’ on an ongoing basis.This should
not be used as a justification for neglect.
Dogs
A product that has a low market share in a low-growth market is termed a
dog in that it is typically not very profitable.To cultivate the product to
increase its market share would incur cost and risk, not least because the
market it is in has a low rate of growth.Accordingly, once a dog has been
identified as part of a portfolio, it is often discontinued or disposed of.
More creatively, opportunities might be found to differentiate the dog and
obtain a strong position for it in a niche market.A small share product can
ANALYSIS OF THE GLOBAL BUSINESS
[ 93 ]
Stars
Cash cows
Question marks
Dogs
Relative market share
Rate of market growth
High Low
Low High
10x 1x
Figure 3.6 The Boston Consulting Group matrix
be used to price aggressively against a very large competitor as it is
expensive for the large competitor to follow suit.
The matrix does not have an intermediate market share category, but
there are large numbers of products that have large market share, but are
not market leaders.They may be the biggest profit earners for the companies
that own them.They usually compete against the market leader at a
disadvantage that is slight, but real.Management need to make very
efficient use of marketing expenditure for such products and to try to
differentiate from the leader.They should not normally compete head
on, especially on price, but should attempt to make gains if the market
changes in a way that the leader is slow to exploit.
Stars
Stars have a high share of a rapidly growing market and therefore rapidly
growing sales.They may be the sales manager’s dream, but they could be
the accountant’s nightmare, since they are likely to absorb large amounts of
cash, even if they are highly profitable.It is often necessary to spend
heavily on advertising and product improvements, so that when the
market slows these products become cash cows.If market share is lost,
the product will eventually become a ‘dog’ when the market stops growing.
Question marks
Question marks are aptly named as they create a dilemma.They already
have a foothold in a growing market, but if market share cannot be improved
they will become dogs.Resources need to be devoted to winning
market share, which requires bravery for a product that may not yet have
large sales, or the product may be sold to an organization in a better
position to exploit the market.
Limitations of the BCG matrix
Accurate measurement and careful definition of the market are essential to
avoid misdiagnosis when using the matrix.Critics, perhaps unfairly, point
out that there are many relevant aspects relating to products that are not
taken into account, but it was never claimed by the Boston Consulting
Group that the process was a panacea and covered all aspects of strategy.
Above all, the matrix helps to identify which products to push or drop, and
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when.It helps in the recognition of windows of opportunity and can
provide strong evidence against simple rules of thumb for allocating
resources to products.
The matrix has also been criticized for the imprecise nature of its four
categories and because of the difficulties inherent in predicting future
market growth.There are alternatives to the BCG matrix which indicate
competitive position and market development (Hofer and Schendel, 1979),
but these share similar limitations.Despite these limitations, evaluating the
performance and potential performance of products is a necessary part of
the process of analysis.
Global activity may add an extra dimension to the process of portfolio
analysis.The market for a global product may be at different stages of
development in different countries.Similarly, the market share which a
given product commands may differ from country to country.Global portfolio
analysis must take these factors into account.
BAT in the 1970s and1980s N managing an
international portfolio
BAT, the Anglo-American tobacco group, underwent a number of
changes in the period from the 1970s to the 1990s and is a good
example of the way that both product and geographical interests can
be spread to maximize robustness.The tobacco part of BAT’s portfolio
began in the 1890s in the USA, and the company structure in 1950 was
the result of a number of mergers and acquisitions over the intervening
decades.
In the 1950s the realization that there was a link between tobacco
consumption and ill health drove the company to look to diversify in
order to reduce its dependency on tobacco.Throughout the 1960s and
early 1970s, BAT made substantial investments by acquisition in several
sectors other than tobacco.Its acquisitions in tobacco tended to
concentrate on developing its international portfolio.
BAT in the 1970s
By 1976, BAT had developed its business to the point that, although
tobacco still formed the majority of product output, it had substantial
interests in retailing, paper and pulp, cosmetics and some other minor
sectors.
ANALYSIS OF THE GLOBAL BUSINESS
[ 95 ]
In tobacco, the company boasted over 300 brands of cigarettes,
operating 90 factories in 37 countries together with a number of
affiliated (part rather than wholly owned) companies in another 38
countries.This grew to the point where BAT had interests in a total
of 47 countries based around principal subsidiaries in the UK, Europe,
Latin America, the Caribbean, Asia and Africa.
In addition to BAT tobacco brands it also owned Brown and
Williamson (USA) – manufacturers of Kool, Raleigh and Viceroy
brands; Interversa (Germany) – main brands included HB, Kim and
Krone; and Souza Cruz (Brazil) – main brands included Minister,
Hollywood and Continental.
Its major retail subsidiaries included International Stores (UK) – a
chain of 694 supermarkets and self-service stores in England and
Wales; Gimbel Brothers (USA) – 38 department stores in the New
York, Philadelphia, Pittsburgh and Milwaukee areas; Kohl Corporation
(USA) – 92 supermarkets in Wisconsin and Illinois; Saks Fifth Avenue
(USA) – 30 high-fashion stores in major metropolitan locations throughout
the USA; Supermercados Peg-Pag SA (Brazil) – 39 stores in or near
the major cities of Sa˜o Paolo and Rio de Janeiro.BAT purchased Argos
in 1979.The relatively new concept of catalogue shopping on the high
street was thought to have significant growth potential, and on acquisition
Argos had 91 stores in England and Wales.
The Group’s paper interests included industrial and printing papers.
Subsidiaries in the paper and pulping business (mainly mills and
factories) were situated in the UK, Europe, Brazil, India and Africa.In
1979 the company acquired Mardon Packaging International from Imperial
Group (Mardon had packing and printing operations in Canada,
the USA, France, Germany, Republic of Ireland and Zimbabwe).
The company’s fourth major division – cosmetics – produced perfumes,
cosmetics, toiletries and skin care products.Manufacturing of
cosmetics took place in 41 countries and the products were sold in 143
stores.The main brands in the cosmetics division included the Houses
of Yardley, Lenthe´ric, Cyclax, Juvena and Morny.
BAT in the 1980s
By 1982 over 80% of total assets by value were outside the UK.The
chairman, Patrick Sheehy, described the company’s approach to its
international coverage:
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Geographically, we are well represented in the industrialised parts
of the world and also in the more volatile regions where there are
greater inherent risks, but where good growth prospects can be
discerned. Both types of area have a place in the Group’s development
and we will continue to strengthen our businesses and to
extend them into new markets.
In his second statement as chairman (in 1983), Sheehy set out his
perspective on the company’s activities:
Although tobacco profits were significantly affected by difficulties
in a number of markets [i.e. in different national markets], the
balance was more than made good by the substantial profit
increase achieved by our newer businesses.
These ‘newer businesses’ referred to in 1983 mainly comprised its
major acquisitions of the previous year.Other financial services business
– Farmers (USA) and Allied Dunbar (UK) – were later added to the
group.
Global products and services
Yip (1992) argued that ‘The benefits of global products (or services) can be
achieved by standardising the core product or large parts of it, while
customising the peripheral or other parts of the product.’ Analysis of an
organization’s products must identify those features of a product which
appeal to customers on a worldwide basis and those features that must
be adapted to meet local preferences.A global product will have core
features that will appeal to all customers.For example, most of Sony’s
consumer electronics products are generally standardized, but some parts
are adapted to meet national electrical standards (Yip, 1992).Similarly,
McDonald’s offerings are largely standardized, but there are minor
variations from country to country in terms of the products offered and
in their presentation.
There are several benefits to be obtained from offering global products:
reduced costs, enhanced quality, increased consumer preference, competitive
leverage (Yip, 1992).The analysis of global products must be
closely related to analysis of the global competitive environment (see
Chapter 4).
ANALYSIS OF THE GLOBAL BUSINESS
[ 97 ]
Performance analysis
Strategic analysis of the global organization must also include appraisal of
past and present performance.Current performance can be evaluated
against:
. stated objectives and targets;
. past performance;
. competitors’ performances;
. external and internal benchmarks.
In addition, the performance of different divisions within the same organization
can be compared.The measures of performance can include the
following areas:
. finance – accounting information including profits, return on investment,
sales, etc.;
. products – price, quality, value for money, functionality, design, etc.;
. customer interfaces – delivery times, after-sales service, etc.;
. marketing – market share, etc.;
. production – productivity, quality standards, etc.
Establishing objectives, targets and performance standards can be
extremely effective in improving organizational performance, but it is
important that standards are prioritized and related to critical success
factors.They should also relate to areas of core competence which
generate competitive advantage.
Benchmarking
A benchmark is the value of some parameter that is used as a reference
point in comparisons (e.g., the top speed of a car or the number of pages
per minute from the leading laser printer).The benchmark may also be the
performance of a business (e.g., ROCE, profit/employee or customer
satisfaction).Benchmarking is used to compare the effectiveness of the
various processes within a business with those in other organizations and,
using this information, to help improve the original processes.Benchmarking
can be:
. internal, using other businesses owned by the parent company;
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. external, using divisions of multinationals or companies in different
sectors;
. best practice – identifying the leader in whatever sector they operate.
Note that unlike conventional comparative analysis, the benchmark for any
given process may be selected from businesses of different size and in
different sectors – often the best solutions are to be found in businesses
that are not competitors.To summarize, benchmarking is:
. a continuous process of evaluating and developing products, services
and practices by comparison with the best that can be recognized
globally;
. an integral part of total quality management;
. essential for continuous improvement of products and performance.
Successful benchmarking must be based on:
. commitment from the managers of the organization;
. acceptance of the need for improvement;
. willingness to take on other people’s ideas;
. a supportive vision, mission and clear objectives;
. subsequent development of competences;
. a supportive culture.
Performance measures, although imprecise and potentially misleading,
provide important indications of past and current performance.They
help in identifying strengths and weaknesses which form the basis of
future developments in global strategy.
Outside in or inside out?
In understanding internal analysis, we need to understand the two ‘sources’
of strategy and how they relate to this part of the strategic process.
‘Outside in’ strategy
The positioning school implies an approach to strategic analysis which is
‘outside in’.That is to say, the strategic process begins with analysis of the
ANALYSIS OF THE GLOBAL BUSINESS
[ 99 ]
environment in order to establish which industries are potentially the most
profitable.Global strategy is then determined by adopting a strategy that
best matches industry conditions.In other words, the business looks for a
‘strategic fit’ between its resources and strategies so as to exploit opportunities
and reduce threats in the global environment.
‘Inside out’ strategy
The resource-based school emphasizes the importance of organizationspecific
resources, capabilities and competences in acquiring competitive
edge.The approach is therefore ‘inside out’.Analysis begins inside the
organization to identify core competences and how new competences
can be built or existing competences can be leveraged in new markets.
The two approaches and internal analysis
Despite the different starting points there is more common ground than is
apparent at first glance.The positioning school accepts the importance of
organization-specific factors in gaining competitive advantage as part of a
generic strategy.In fact, value chain analysis (Porter, 1985) is a fundamental
part of its methodology, just as the way that a business’s value-adding
activities are configured and co-ordinated will determine its strategy and
therefore its competitiveness.
Similarly, the resource-based approach, although focused on the organization,
accepts the necessity to analyse the environment so as to identify
the potential for competence-building and leveraging opportunities.The
reality is that no business can ignore its environment and that competitive
advantage depends on the competences of the organization and the way
that it deploys them.In practice, the rapidly changing environment indicates
that both external analysis and the analysis of competences and
activities must both be continuous and therefore simultaneous.The
purpose of strategic analysis remains, as it has always been, to determine
the organization’s strengths and weaknesses, to identify opportunities and
threats in the environment prior to developing a strategy, based on core
competences, which produces and sustains competitive advantage.
Review and discussion questions
1. Distinguish and explain the relationships between resources, capabilities
and core competences.
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2. Evaluate the role of core competences in delivering sustainable
competitive advantage.
3. Choose a transnational business that you know of, identify its core
competences and assess the competences against the criteria specified
in the chapter.
4. Using the same business as in the previous question, identify and
evaluate the key activities and relationships in its value chain and
value system.
5. Using the same company again, explore the relationships between its
core competences and key value-adding activities.
6. Obtain the annual company report of an international business and
gather any other relevant materials that you can, covering a recent
period of as many years as you can.Using the appropriate measures,
evaluate its performance.
References and further reading
Bogner, W.C., Thomas, H. and McGee, J. (1996) ‘A longitudinal study of the competitive positions and
entry paths of European firms in the US pharmaceutical industry’. Strategic Management Journal,
17, 85–107.
Campbell, A.(1997) ‘Mission statements’. Long Range Planning, 30(4), August, 931–932.
Campbell, D., Stonehouse, G. and Houston, B. (1999). Business Strategy – An Introduction.Oxford:
Butterworth-Heinemann.See especially p.44ff. on culture and p.171ff. on structure.
Collis, D.J. and Montgomery, C.A. (1995) ‘Competing on resources: Strategy in the 1990s’. Harvard
Business Review, July/August, 199–128.
Cravens, D.W., Greenley, G., Piercy, N.F. and Slater S. (1997) ‘Integrating contemporary strategic
management perspectives’. Long Range Planning, 30(4), August, 493–506.
Day, G.S. (1994) ‘The capabilities of market-driven organizations’. Journal of Marketing, 38, October,
37–52.
Gorman, P.and Thomas, H.(1997) ‘The theory and practice of competence-based competition’. Long
Range Planning, 30(4), August, 615–620.
Hamel, G.and Prahalad, C.K.(1994) Competing for the Future.Boston: Harvard Business School
Press.
Hamill, J. (1992) ‘Global marketing’. In M.J. Baker (ed.), Perspectives on Marketing Management, Vol.
2.Englewood Cliffs, NJ: Prentice Hall.
Heene, A.and Sanchez, R.(eds) (1997) Competence-based Strategic Management.New York: John
Wiley & Sons.
Hofer, C.and Schendel, D.(1979) Strategy Formulation: Analytical Concepts.St Paul, MN: West
Publishing.
Kay, J.(1993) Foundations of Corporate Success.Oxford: Oxford University Press.
Kay, J.(1995) ‘Learning to define the core business’. Financial Times, 1 December.
Penrose, E.(1959) The Theory of the Growth of the Firm.Oxford: Oxford University Press.
Perlmutter, H.V. (1969) ‘The tortuous evolution of the multinational corporation’. Columbia Journal of
World Business, January/February.
ANALYSIS OF THE GLOBAL BUSINESS
[ 101 ]
Petts, N.(1997) ‘Building growth on core competences – a practical approach’. Long Range Planning,
30(4), August, 551–561.
Pitts, R.A. and Lei, D. (1996) Strategic Management – Building and Sustaining Competitive
Advantage.St Paul, MN: West Publishing.
Porter, M.E. (1985) Competitive Advantage.New York: Free Press.
Porter, M.E. (1986) Competition in Global Industries.Boston: Harvard Business School Press.
Porter, M.E. (1990) The Competitive Advantage of Nations.London: Macmillan.
Prahalad, C.K. and Hamel, G. (1990) ‘The core competence of the corporation’. Harvard Business
Review, May/June, 79–91.
Sanchez, R.and Heene, A. (1997) Strategic Learning and Knowledge Management.New York: John
Wiley & Sons.
Sanchez, R., Heene, A. and Thomas, H. (eds) (1996) ’Towards the theory and practice of competencebased
competition’. Dynamics of Competence-based Competition: Theory and Practice in the New
Strategic Management.Oxford: Elsevier.
Stacey, R.(1996) Strategic Management and Organisational Dynamics (2nd edn).London: Pitman.
Stalk, G., Evans, P., and Shulmann, L. E. (1992) ‘Competing on capabilities: The new rules of
corporate strategy’, Harvard Business Review, March/April, 57–69.
Yip, G.S. (1992) Total Global Strategy.Englewoo d Cliffs, NJ: Prentice Hall.
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ANALYSIS OF THE
COMPETITIVE
ENVIRONMENT 4
Learning objectives
After studying this chapter students should be able to:
. define and distinguish between the micro and macroenvironments;
. define and distinguish between industries and markets;
. explain and apply Porter’s five-forces framework for analysing
industries and markets;
. explain and apply Yip’s framework for international business
drivers;
. explain the importance of strategic groupings in competitive
strategy.
Introduction
The strategy of any organization will be shaped in part by its own capabilities
and competences, and in part by its competitive environment.The
micro or competitive environment consists of the industry and markets in
which the organization carries out its business.Industries are concerned
with the production of goods and services, while markets are concerned
with the demand side of the economic ‘equation’.
In this chapter we introduce Yip’s globalization driver framework to
explain the factors in the environment that stimulate the increased globalization
of industries and markets.This is important when seeking to
understand why some competitive situations are globalized, while others
are more regional or localized in nature.
Two key frameworks for understanding competition in industries are
then explained.First, Michael Porter’s five-forces framework can be used
to understand the competitive forces at work in industries.The five-forces
framework suggests that competitive advantage depends on how strongly
an organization is positioned with regard to the five competitive forces.
Second, the resource-based view school of thought is introduced.This
suggests that competitive advantage rests more on how well the organization
captures and develops resources into competences which can then be
exploited in markets.The features of markets as they influence competitive
behaviour are discussed.
Finally, the importance of strategic groupings is discussed.Competition in
any industry will be at its most intense between the competitors in such a
group and we discuss what factors come together to form such a grouping.
The nature of the business environment
The importance of environmental analysis
Analysis of the external business environment is a major factor in determining
the strategy adopted by a business.For businesses that are international,
this stage in strategic analysis is even more important.
Factors in the environment, the industry and the market will drive the
enterprise toward one type of international strategy – either one that is fully
global or one that makes concessions to localized customer needs.Environmental
analysis is therefore a key element of the strategic process, yet it is
probably the stage of the process about which there is greatest ambiguity.
This ambiguity arises from the problem of gaining external information that
is reliable and based on which the business can make decisions about its
strategic future.
One way of conceptualizing the external environment is as a network of
macro and microenvironments, all of which are related to each other.Every
international enterprise operates within one or more industries and one or
more markets which are found in more than one country.National and
global industries and markets all interact with each other and are interdependent
to varying degrees.Similarly, industries and markets exist in
the context of global and national macrobusiness environments that also
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interact with each other.These global and national macrobusiness environments
are important in shaping individual industry and market characteristics
at both national and global levels.Changes in the macroenvironment
at both global and national levels cause changes in customer needs,
products and production techniques, competition, and industry and
market structures.Managers must therefore be aware of both the global
and national contexts in which their business operates and the complex
network of relationships between each of these environments.
The macroenvironment
The macroenvironment (sometimes called the far or remote environment)
consists of the forces at work in the general business environment which
will shape the industries and markets in which an organization competes.
Analysis of the macroenvironment is concerned with changes and trends in
social and cultural, demographic, political, legal, technological, economic
and financial factors.The effects of such changes on international
industries and markets is assessed and on the businesses who compete
within them.
The macroenvironment can be further subdivided into both global and
local (or national) elements:
. the global macroenvironment – this is concerned with global trends;
. the national macroenvironment – this is concerned with trends and
changes at the level of the individual country.
The forces at work in these two subdivisions fall into the same categories
and are often linked.Their magnitude and direction may well differ at the
global and national levels.
The microenvironment
The microenvironment (sometimes called the near environment) is the
competitive environment facing a business.It consists of the industries
and markets in which the organization conducts its business.The microenvironment
can also be subdivided:
. the global microenvironment – concerned with global industry and
market trends;
ANALYSIS OF THE COMPETITIVE ENVIRONMENT
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. the national or regional microenvironment – concerned with national
industry and market trends.
The microenvironment will be largely shaped by the forces at work in the
global and national macroenvironments.The near environment is the part
of the environment over which the business is likely to be able to exercise
some direct influence and control through its corporate strategies.
There are several techniques available for analysing the microenvironment.
Porter’s ‘five-forces’ model (Porter, 1980, 1985) is the most widely
used in strategic management texts, but Yip’s globalization drivers (Yip,
1992) is a useful model in the context of studying global businesses.This
chapter will consider both of these models, but we begin with exploring the
key concepts of industries and markets – the two major components of
the microenvironment.
Industries and markets
Identifying industries and markets
Some strategic management texts wrongly use the terms ‘industry’ and
‘market’ interchangeably.Kay (1995) pointed out that to confuse the two
concepts can result in flawed analysis of the competitive environment and,
hence, in flawed strategy.Matters are sometimes complicated because
many businesses operate in one or more industries and in one or more
markets.Each will have its own distinctive structure and characteristics
which will have particular implications for the formulation of corporate
strategy.Kay (1993) also pointed out that a distinctive capability, or core
competence, ‘becomes a competitive advantage only when it is applied in
a market or markets.’ Industries are centred on the supply of a product,
while markets are concerned with demand.It is essential, therefore, to
understand and analyse both industry and market when undertaking
microenvironmental analysis.
The industry
An industry consists of a group of businesses producing similar outputs
(goods or services).Although there is no precise way of defining an
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industry, all of the businesses in a particular industry might be expected to
share the following related features:
. skills and competences;
. technology;
. processes and value-adding activities;
. materials (especially input stocks);
. supplier channels;
. distribution channels;
. products.
Analysis of these features of an industry will inform the process of strategy
formulation.The players in a given industry may produce products for
more than one market (e.g., businesses in the ‘white goods’ industry
produce both washing machines and refrigerators).The materials, technology,
skills and processes employed in the manufacture of both products are
very similar.The materials used are obtained from similar suppliers and the
products are sold to consumers through the same distributors.There is
therefore clearly a ‘white goods’ industry.Yet both products (washing
machines and refrigerators) satisfy very different customer needs, are
used for entirely different purposes and are therefore sold in separate
markets.One make of washing machine competes with another, while
one make of refrigerator competes with another.
The market
We generally think of a market as comprising the demand side of an
economic system (the industry is the supply side).Unlike an industry, a
market is defined in terms of shared:
. products or services;
. customers;
. customer requirements;
. distribution channels;
. competitors.
Thus a market centres on products or services which meet a specific set
of consumer requirements.Given that their needs are met, the skills
involved in the production of the product or service are generally of little
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consequence to consumers.It is important to note that businesses operate
within two distinct groups of markets: those where they sell their products
and services and those where they acquire their resource inputs.In addition,
markets for substitute products and services will have an important
bearing on the attractiveness of a particular market.Whereas understanding
the industry is concerned with skills, technology and so on, understanding
the market is centred on awareness of customers and their needs.
The importance of the distinction between industry
and market
Businesses gain competitive advantage by developing core competences
within an industry which are then deployed in markets to satisfy customer
demands.An industry may well produce more than one product and may
serve more than one market or group of customers (e.g., the players in the
chemical industry can produce a variety of products like pharmaceuticals,
fertilizers, paints, etc.). These are then sold in completely separate markets.
Similarly, a market may be served by more than one industry (e.g., the
transport needs of commuters are met by the automobile industry, the
railways and bus companies).While there is a world automobile industry,
there are still several distinct markets for automobiles.Despite the fact that
consumer needs have converged in recent years, their preferences in the
North American market remain significantly different from those of their
European counterparts.
The distinction between industry and market is important to make, as the
success of a business will depend on its competitive position in both areas
of operation – as a supplier of outputs and as a buyer of inputs.
Understanding the nature of the industry and markets in which a business
conducts, or may potentially conduct its business, allows its managers to
determine the most effective ways to exploit its resources, competences
and technology in the context of existing and potential markets.The ability
of a business to achieve competitive advantage depends on the development
of company-specific competences and capabilities, and the identification
of those markets to which they may give access.Such awareness is
provided by internal and external analysis of the business and its environment.
Internal analysis helps to identify the core competences of the
business, while external analysis, particularly of the microenvironment,
assists in identifying those industries and markets where the competences
can be applied.
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Globalization of industries and markets
Industries and markets differ vastly in the extent to which they are
globalized.The consumer electronics industry and its markets are largely
globalized.On the other hand, both the market for personal banking and
the associated industry providing banking services are still largely localized
(in that they operate in limited geographical regions).Yet, as deregulation
of financial services develops throughout the world, both banking industry
and market are becoming increasingly globalized.
The dynamic nature of the business environment means that the trend
toward globalization is gaining momentum both in terms of the number of
industries and markets which are becoming global and the extent to which
they are globalized.There are a number of notable examples, however,
where industries are largely globalized, but whose markets remain locally
differentiated in terms of customer needs, product specifications, legal
requirements, branding, advertising and other factors.In the paint industry,
for example, the processes of making paint and the products of the paint
industry are almost completely standardized, but the packaging, advertising
and brand names are often adapted for both linguistic and cultural reasons.
Yip’s globalization drivers
The four categories of drivers
Yip (1992) provided the most widely used framework for assessing the
extent of, and potential for, industry and market globalization.Yip’s research
suggested that there are four categories of drivers (market, cost,
government and competitive) which must be analysed in order to determine
the degree of globalization within an industry.The strength of each of
these drivers will vary from industry to industry and from market to market.
It is important not to regard any industry or market as being either entirely
global or local.In the case of a specific industry, certain drivers may be
strongly indicative of globalization and the others more suggestive of localization.
In such a situation it is appropriate for a transnational strategy that
incorporates both global and local features matched to the industry drivers.
There is a strong relationship between the factors at work in the macroenvironment
and the globalization drivers.This relationship is illustrated in
Figure 4.1. Changes in the macroenvironment will affect both the general
extent of globalization and the degree of globalization in specific industries.
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For example, cultural convergence and developments in transport and
communications technology have been important factors in increasing
the strength of the market, cost and competitive drivers that push toward
globalization in a number of industries.Yip’s framework therefore establishes
linkages between the macro and microenvironments and the extent
to which changes in the macroenvironment cause globalization of the
microenvironment.
Each of the drivers must be analysed in detail in order to assess the extent
of the pressures on an industry and market for globalization or localization.
Table 4.1 shows aspects of the drivers which are indicative of globalization
or localization potential.By such detailed analysis it is possible to match
transnational strategy to each of the drivers.Equally, the transnational
strategy of a business will seek to modify the drivers so that they match
its core competences and distinctive capabilities.
Market globalization drivers
The extent to which customers, customer needs, distribution channels and
marketing strategy are global will together determine the extent of market
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Competitive
drivers Market
drivers
Government
drivers
Potential
for
globalization
Cost
drivers
Social and
demographic
factors
Technological
factors
Economic
and
financial
factors
Political
and legal
factors
Figure 4.1 The macroenvironment and globalization drivers
Adapted from Yip (1992)
globalization or localization.The role of ‘lead’ countries in promoting the
globalization of industries and markets is also an important determinant.
Customer needs
Similarities and differences in customer needs for a product or service will
depend on similarities and differences in culture, economic development,
climate, physical environment and whether countries are at the same stage
in the product’s life cycle.Cultural and economic convergence are causing
customer needs to converge in many markets (Levitt, 1983).
Customers and channels
Some customers – often global organizations themselves – purchase goods
and services on a global basis.They seek those suppliers who can offer the
best worldwide product, service and price package.These businesses often
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Table 4.1 The globalization drivers
Driver Pressure for globalization Pressure for localization
Market Customers Global customers Local customers
Channels Global channels Local channels
Marketing Transferable marketing Differentiated marketing
Countries Lead countries No obvious lead countries
Cost Economies of scale High fixed costs Low fixed costs
Experience curve Steep learning curve Shallow learning curve
Sourcing Centralized purchasing Decentralized purchasing
Logistics Low transport costs, High transport costs,
perishable products, no perishable products,
need to locate near need to locate near
customers customers
Country costs Differences in costs Similarities in costs
Product development costs High Low
Technological change Rapid Slow
Government Trade policies Low trade barriers High trade barriers
Technical standards Compatible Incompatible
Marketing regulations Common Different
Government ownership Government-owned Government-owned
Competitors present Competitors absent
Host government concerns Policies that favour global Policies that hinder global
businesses businesses
Competitive Volume of exports and High exports and imports Low exports and imports
imports
Competitors Competitors from different Local competitors
continents
Competitors globalize
Interdependence of Countries largely Countries largely
countries interdependent independent
demand inputs that are globally standardized.The leading motor vehicle
manufacturers, for example, source components globally.The world’s
largest motor manufacturer, General Motors, spends about UK£44 billion
(US$70 billion) per annum on components.These are sourced globally
from a smaller and smaller number of larger and larger suppliers, so as
to ensure both lower costs and consistent quality.The increasing number of
global businesses, of course, has increased the number of global customers,
as such businesses increasingly co-ordinate their activities globally including
purchasing decisions.
Although global distributors who buy on a global basis are less common,
they exist on a regional basis in large numbers.Major supermarket chains in
Europe co-ordinate their purchasing largely within the EU, but they
demand uniform product standards.
Marketing
In an increasing number of markets, like fashion clothing, global brand
names and marketing mixes have been established.In others, product
names and advertising are varied locally.For example, the Ford Mondeo,
as it is known in Europe, is badged as the Ford Contour and the Mercury
Mystique in the USA.Similarly, the advertising campaign for the Renault
Clio in the UK featuring ‘Nicole and Papa’ was not used in France.In those
markets where standardized marketing is possible, it clearly indicates the
existence of a global market.
Lead countries
Certain countries take the lead in product innovation in certain industries,
and it is essential that global competitors compete in such lead countries.It
is Japan that leads in consumer electronics, the USA in computer software
and Italy in ceramic tiles (Porter, 1990).Such countries tend to set global
standards for the products and services in which they are leaders, creating
global markets.
To summarize, globalization is stimulated by common customer needs,
global customers, the presence of lead countries and transferable marketing
messages.
Cost globalization drivers
Those industries where fixed costs are high will tend to be global, so that
such costs can be diluted by higher sales volumes.Higher sales volumes
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reduce unit fixed costs as the organization benefits from greater scale
economies.
Economies of scale and scope
When a national market is not large enough for the players in an industry to
achieve economies of scale, then they will be driven to enter global
markets.Similarly, the desire to obtain economies of scope (advantages
gained by providing two or more distinct goods or services together
rather than providing them separately) has pushed industries toward
globalization.
Scope economies often arise because products share the same distribution
outlets or because consumers require a group of goods to be packaged
together.For example, many travel agents provide currency exchange and
insurance services alongside their normal travel services.This is thought to
attract customers requiring the full range of travel-related services rather
than because they possess any particular competitive advantage in the
provision of such goods.Indeed, global economies of scope drive an
industry toward globalization.Yip (1992) gave the example of household
products like detergent and toothpaste whose manufacture gives little
scope for economies of scale.In spite of this, the industries that produce
these things are dominated by global companies like Unilever, Procter &
Gamble, and Colgate-Palmolive.This suggests that global economies of
scope derived from marketing, consumer needs and research are the
drivers toward globalization rather than economies of scale.
Experience curve
If there are substantial learning and experience effects in an industry, then
global operation is likely to produce substantial competitive advantages.
Sourcing
There may be cost and quality advantages to be obtained by centralizing
the acquisition of supplies and services on a global basis.Global customers
like Ford and other large motor manufacturers source components so as to
reduce costs and ‘Such cost advantages are often multiplied by the fact that
big component specialists supply more than one carmaker giving them
greater economies of scale’ (Simonian, 1996).Global sourcing will drive
an industry toward globalization.
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Logistics
If transport costs are low and products are non-urgent and non-perishable,
then there are advantages to be gained from global concentration of
production.
Country costs, productivity and skills
Countries differ considerably in terms of production costs, productivity
levels, infrastructure and availability of skilled labour.There are sometimes
global cost advantages to be obtained by concentrating activities in countries
where productivity is high and costs are relatively low.
Product life cycles and product development costs
The speed with which new products are required is increasing and, at the
same time, the development costs of new products are high.In order to
cover these costs it is necessary to sell such products in global markets
because national markets are not sufficiently large to provide the necessary
returns (again, especially if the business has relatively high fixed costs).
Government globalization drivers
Government policies, legislation and regulation can also drive an industry
toward globalization.
Trade policies
The increasing liberalization of world trade (with falling barriers to trade)
has greatly increased the potential for globalization, even though in some
countries there are still substantial government-imposed trade barriers.
Technical standards
If technical standards for a product are common between countries, then
this will drive an industry toward globalization, while incompatible standards
will tend to fragment the market.In the 1970s, technical standards for
telecommunications tended to be different from country to country,
although the digitization of the 1990s increased compatibility.The resultant
compatibility was one of the most important stimulants behind global communications
media, such as the Internet.
Marketing regulations
Marketing regulations like those governing advertising tend to vary from
country to country, which can sometimes inhibit the use of global advertis-
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ing.Yet, even in this case there is a tendency toward global standards.As a
consequence, major companies like Nike and Coca-Cola have been able to
design advertising campaigns that meet advertising standards across the
world such that the advert’s ability to offend in some cultures is minimized.
Government-owned competitors
Yip argued that the existence of government-owned competitors in an
industry can spur an industry toward globalization.Government subsidies
and protection of home markets encourages such businesses to seek
foreign customers, and this can increase global competition.
Government-owned customers
Government-owned customers tend to reduce globalization potential as
they often tend to favour domestic suppliers for local political reasons.
Host government concerns
Global businesses will seek those countries where national conditions are
the most favourable.Governments can advance globalization business by
policies that encourage global businesses to locate value-adding activities
within their national boundaries.
Competitive globalization drivers
The existence of global competitors from several countries, high levels of
exports and imports, and interdependence between countries are all
indicators of global competition.
Exports and imports
The level of exports and imports will indicate the extent of globalization
of an industry.The higher their levels the greater the potential for the
industries and markets to become globalized.
Competitors
The greater the number of competitors from different countries and
continents the greater will be the level of global competition.A business
that faces global competitors making use of global strategies will, almost
inevitably, be forced to compete globally itself.If competitors are largely
domestic, then a business will not be forced to adopt a global strategy and
can continue to operate within its national boundaries.
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Interdependence of countries
If there is a high level of interdependence in an industry between countries,
then this will also stimulate global competition.In most industrial sectors,
both markets and industries are becoming increasingly interdependent.
A summary of the drivers
Analysis of the extent of globalization in industries and markets will require
examination of the strength of Yip’s four drivers: market, cost, government
and competitive drivers.There are several advantages to be gained by
using Yip’s framework:
1. it allows identification of those drivers that are global and those that are
local, so that the attributes of transnational strategy can be tailored to
match the drivers;
2. it can be used to analyse both industry and market;
3. it can be mapped onto Porter’s five forces;
4. changes in the drivers can be indicated by macroenvironmental
analysis;
5. it assists in the identification of the critical success factors of a global
industry and market.
The influence of government globalization drivers in
the airline industry
Economic restructuring through the philosophy of ‘economic disengagement’
by governments in many parts of the world has had a
major impact on many industries including the airline industry over
the last two decades.This philosophy influenced by the widespread
adoption of the ‘theory of contestable markets’ (which advocated the
removal of restrictive market entry barriers) from the early 1980s
(Baumol, 1982; Baumol et al., 1982) manifested itself as deregulation
and privatization.The Chicago Convention of 1944 established the
bilateral system of air service agreements (between pairs of national
governments) which have since governed international air transport.
The international market that developed was characterized by national
airlines from each country serving routes, airlines charging the same
fares, and often sharing markets and revenues.Some bilateral agreements
also stipulate conditions governing responsibility for such
matters as ground handling.The terms of the bilateral agreements
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reflected the negotiating power and current aviation policies of the
countries involved, and the resulting productivity was often low and
costs high.
Deregulation of domestic services occurred in the USA in 1978,
followed by Canada, the UK, Australia and New Zealand in the
1980s and the completion of deregulation within the EU in April
1997.However, parallel liberalization in international air services has
taken place much more slowly.Notwithstanding the change that has
occurred in some markets, even the liberalized structures are often
restrictive in terms of market entry.Requirements for designated airlines
to be owned by nationals of the states involved are common and
airport congestion and allocation of take-off and landing slots often
further impede effective market entry.
Another, and linked, aspect of ‘economic disengagement’ is the
worldwide movement toward the privatization of state-owned airlines.
However, despite this gradual process many international airlines
remain publicly owned or have major government shareholdings.
Controls on foreign ownership remain in most markets, but some
foreign ownership now exists and with planned privatizations this
will increase.
The EU’s third air transport package (implemented from April 1997),
for instance, sets no limit on the stake an EU national or EU airline can
hold in an airline registered in another EU state.With limited
exceptions, however, non-EU investors cannot hold a majority stake
in any EU airline.In the USA, foreign shareholdings of up to 49% of
equity under certain circumstances and 25% of voting stock is possible,
although the US government also imposes an ad hoc control test to
determine whether the foreign shareholder would substantially influence
decision making irrespective of equity held.
Liberalization, privatization, foreign ownership and transnational
mergers have had a major impact on the structure of the airline industry
(and will continue to do so), but many regulatory and ownership
barriers remain in force worldwide.As a result alternative methods of
strategic development (namely, internally generated growth and
mergers and acquisitions) are often precluded as viable growth
strategies for international airlines, and consequently the formation of
strategic alliances is, in many cases, the only available form of market
entry.
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Industry analysis
Industry analysis aims at establishing the intensity and nature of competition
in an industry and the competitive position of the individual
business with it.Industry dynamics are, in turn, affected by changes in
the macroenvironment.For example, ageing populations in many developed
countries have significantly affected the need to develop drugs
suitable for treating the ailments of older people.There is a danger that
industry analysis will be treated as a one-off activity, but, on the contrary, it
is usually important that it is given a dynamic perspective and repeated on a
regular basis.The framework developed by Porter (1980) is the most
widely used in industry analysis.It is explained in this section.
Porter’s five-forces framework
According to Porter (1979):
Every industry has an underlying structure, or set of fundamental
economic and technical characteristics that gives rise to . . . competitive
forces. The strategist wanting . . . to influence that environment in the
company’s favour, must learn what makes the environment tick. The
state of competition in an industry depends on five basic forces, the
collective strength of which determines the ultimate profit potential of
the industry.
The competitive forces in question are (Figure 4.2):
1. threat of new entrants to the industry (i.e., the height of barriers to
entry);
2. threat of substitute products;
3. bargaining power of customers;
4. bargaining power of suppliers;
5. rivalry among current competitors in the industry.
Porter (1980) argued that it is the strength of these forces in an industry
which determines its potential for profitability and which strongly influences
its structure.
This view was challenged by Baden-Fuller and Stopford (1992) who
observed that ‘There is little difference in the profitability of one industry
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versus another.’ Their argument is based on the research of Rumelt (1991)
which suggested that company-specific factors like preferred strategy were
of much greater importance in determining the profitability of a business
rather than its competitive environment.
There are two reasons why Rumelt’s argument should not deter managers
from undertaking industry and market analysis.First, whether or not industry
structure determines profitability, managers must understand the
environment in which they operate to assist in the choice of strategy.
Second, McGahan and Porter (1997a) carried out a broader and more
rigorous study than that of Rumelt and concluded that industry structure
influences profitability alongside company-specific factors.
The strength of each of the five forces will differ within an industry over
time and between different industries.Equally, it is true that each of the
forces will be of different strengths.In fact, it is likely that just one or two of
the forces will be of critical importance within a particular industry at a
given point in time.The analysis of an industry will therefore seek to
identify the nature and relative strength of each of the forces over time.
Analysis must begin with an explanation of the nature of each of the forces
and will culminate in an assessment of:
. the relative strength of each force;
. any changes likely to occur in the future.
The analysis of each of the five forces is now considered in detail.
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Intensity of rivalry in the industry
Threat of substitute
products
Bargaining power of
suppliers
Bargaining power of
buyers
Threats from new
entrants
Figure 4.2 Porter’s five-forces framework
Adapted from Porter (1979), (1980) and (1985)
Force 1: the threat of new entrants
The more easily new competitors can enter an industry the greater will be
the level of competition.The threat from new entrants will depend on the
‘height’ of the barriers to entry to an industry.Barriers to entry consist of:
. the economies of scale which existing businesses in the industry already
enjoy which give them a cost advantage over new entrants;
. product differentiation and brand loyalty which make it difficult for new
players to attract customers from existing competitors;
. the start-up capital required to enter the industry;
. switching costs incurred by customers which deter them from buying
from new entrants;
. difficulty in accessing supply or distribution channels which may make it
difficult for new entrants to gain key inputs or to provide their products
to the customer;
. government policy which may restrict entry;
. the resistance offered by existing players like price cuts and advertising
campaigns which may deter customers from switching to new entrants.
The greater the height of the entry barriers for a particular industry the
fewer competitors will be in the industry and, hence, the higher the potential
profits available to the businesses within it.As a consequence, one
objective of corporate strategy will be to create and increase barriers to
entry.
Force 2: the threat of substitute products
A substitute is the product of (usually) another industry which meets very
similar customer needs to those of the product of the industry in question.
The threat from substitutes will depend on the number available and how
readily they can be substituted for the product in question (i.e., what the
switching costs are).For example, butter, margarine and low-fat spreads are
all produced in different ways but satisfy the same customer needs.They
are very close substitutes for each other, so resulting in a high level of
competition between them.When there are few close substitutes for a
product the level of competition will be reduced (such as for patented
medicines).The degree of competition from substitutes will depend on:
. how effectively they meet the specific customer need;
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. their relative price and performance;
. the cost of switching to the product for buyers;
. the willingness of buyers to substitute.
A business can reduce the competition from substitutes by taking action to
differentiate its product, to enhance its performance and to increase switching
costs for consumers.
Force 3: the bargaining power of buyers (customers)
The customers purchasing a product can include manufacturers, service
businesses, retailers, wholesalers and distributors as well as retail consumers.
Such customers have, to varying degrees, the power to bargain
with the players in an industry over price, product features, availability, etc.
The extent of buyer or customer power will depend on factors such as:
. the number of large and powerful customers that there are for a product;
. the ease with which customers can switch to substitute products;
. the ability of the customer to threaten to take over any of the businesses
supplying the particular product by backward integration;
. the skills of the customer in negotiating price with the suppliers in the
industry;
. the ability of customers to act collectively when dealing with the industry;
. the availability of information to customers.
In short, customers are powerful if individually they are large purchasers of
the industry’s product, switching costs are low or they pose a credible threat
of backward integration, etc.The businesses in an industry will obviously
try to reduce the power of their customers by differentiating their products
and taking other action to increase actual or perceived switching costs.
Force 4: the bargaining power of suppliers
The suppliers to an industry include providers of raw materials, components,
labour, energy, plant and equipment, finance, etc.Their power will
depend on:
. the size and power of individual suppliers compared with the size and
power of the businesses in the industry (who, in this case, are the
buyers);
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. the importance of suppliers’ products to the businesses in the industry;
. the costs for the players in the industry of switching to alternative
suppliers;
. the importance of the buyers in the industry as customers of the
suppliers;
. the threat of forward integration by the suppliers.
Supplier power will be greatest when they are few in number and large in
size, their products or services are important to the industry, when switching
costs are high, when the industry is unimportant as a customer and
when there is a threat of forward integration by suppliers.There are several
ways in which supplier power can be reduced, such as by locating alternative
sources of supply.
Force 5: the rivalry among existing competitors in
the industry
Rivalry among the players in an industry can take several forms.The most
common are price competition, product development, product differentiation,
promotion and advertising.The intensity of rivalry can be related to a
number of factors:
. the number of competitors in the industry;
. similarity of the size of the competitors;
. the overall rate of industry growth;
. the extent of differentiation and brand loyalty among consumers;
. the costs to competitors of exiting the industry (exit costs).
Rivalry will be greatest when there are a large number of roughly evenly
sized businesses, when industry growth is limited, when brand loyalty is
low and when exit costs are high.
Such competition may have both positive and negative effects on the
industry.If competition results in enhanced innovation, it may cause the
industry to expand.It is just as possible, however, that competition may
result in reduced levels of profit.
Use of the five-forces framework
The five-forces framework can be used as either a tool for understanding
industry structure and dynamics or as a means of identifying and understanding
the key forces at work in the industry (or both).
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Some criticisms can be made of the five-forces framework as an analytical
tool.There seems to be an assumption that the threat of substitutes, the
power of buyers and the power of suppliers will be equally important to all
of the competitors in an industry.In reality, some of the players in an
industry may be able to manage the effects of the forces more effectively
than others.
Managers must seek to establish the strength of the five forces in relation
to their business as well as for the industry as a whole.This analysis will
help in determining how the business’s strategy can modify competitive
forces in its favour without providing similar benefits to the competitors in
the industry.Finally, the framework has been criticized as being static
when, in reality, environmental analysis must be undertaken on an
ongoing basis.
Globalization drivers and the five forces
Synthesizing the two frameworks
The strength of the globalization drivers can affect the strength of the competitive
forces at work within an industry.The potential relationships are
illustrated in Table 4.2.
Although the effect of the drivers will differ from industry to industry, it is
evident that globalization will increase competition in almost all cases.At
the same time, however, there is also potential for the growth of global
businesses who can compete with smaller businesses who are locally and
nationally based.The smaller businesses usually suffer in such a competitive
situation – often to the point of going out of existence.
Ulcer treatments and the international development
of Glaxo
In the late 1970s a number of breakthroughs were made in the treatment
of stomach and duodenal ulcers.The company then called
SmithKline French developed cimetidine (trade name: Tagamet)
which worked by encouraging ulcers to heal by reducing the level of
acidity in the stomach.This became widely used, but it was the development
a few years later of a similar but improved medicine called
ANALYSIS OF THE COMPETITIVE ENVIRONMENT
[ 123 ]
ranitidine (trade name: Zantac) by Glaxo that was to signal a period of
sustained international growth – especially for Glaxo.
In the late 1970s Glaxo was a relatively successful but not very
internationalized British pharmaceuticals company.The development
of Zantac thrust Glaxo onto the international stage because of a
number of interrelated factors.First, Glaxo was able to protect its
new innovation (in this case a molecular formula) by patent – a legal
instrument enforceable in almost all countries in the world.The £100
million it took to develop Zantac (it takes a great deal more than that
figure to develop a new medicine today) could be recovered and a
profit made, because Glaxo knew it could protect its new drug from
would-be generic producers because of the patent protection.The
patent did not expire until 1997.Substitution was thus legally forbidden
for almost 20 years.
Second, Zantac had a clinical superiority over its rival ulcer treatments.
With fewer side effects than Tagamet and more effective than
other treatments then on the market, Zantac’s therapeutic effect
required that patients took the medicine every day if the ulcers were
to be certain not to return.The effect of this was that a Zantac patient
tended to remain a Zantac patient (i.e., customer) for life. ‘Loyalty’ to
the product among its users was thus very high.
Third, the drug could be assumed to have more or less globally
homogeneous demand.While the distribution of ulcer patients was
not globally equal (many diseases have higher and lower incidences
in different parts of the world), the effectiveness of Zantac as an ulcer
treatment where ulcers were discovered was equal.This is simply
because human physiology is the same regardless of race, nationality
or region of residence.The fact that regional adjustment was not necessary
meant that Glaxo could enjoy global scale economies on the
product.
These factors combined to make Zantac the best selling prescription
drug of all time and helped to make Glaxo the worldwide company it
became.At its height in the late 1990s, worldwide sales of Zantac
exceeded £2.5 billion. It is difficult to overstate the importance of
Zantac for Glaxo.That one product alone accounted for 70% of
Glaxo’s profits, and using the revenue flows from it Glaxo was able
to establish itself as a global player with many new innovative products
including anti-AIDS products and treatments for asthma and migraines.
It helped to place Glaxo in a position to be able to finance the
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merger with Wellcome plc in the mid-1990s and later the merger with
SmithKline Beecham to form Glaxo SmithKline plc which, in 2003, was
the largest pharmaceuticals company in the world.
Market analysis
Market identification
Besides developing an appreciation of the forces at work within their
industry, strategic decision makers must also develop an understanding
of the markets in which they sell their products.Unless they can sell the
organization’s products at a profit the business cannot succeed.
Kay (1993) pointed out that it is only when core competences or
distinctive capabilities are applied in the context of one or more markets
that they become sources of competitive advantage.Markets are based on
customer needs, so that success in the marketplace is largely dependent on
a business being customer-driven.In addition to meeting existing customer
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Table 4.2 Globalization drivers and Porter’s five forces.
Competitive force Globalization driver impact
Threat of entry Common customer needs increase threat of entry.
Global economies of scale reduce threat of entry.
Global marketing reduces threat of entry.
High product development costs reduce threat of entry.
Global competition increases threat of entry to national markets from global
competitors.
Threat of substitutes Threat of substitutes is increased by presence of lead nations.
Threat of substitutes is increased by research and development of global
businesses who use innovation as means of competition.
Power of buyers and Existence of global customers can weaken supplier power.
suppliers Existence of global suppliers can counteract the power of global customers.
Competitive rivalry Common customer needs make it difficult for businesses to differentiate
themselves which increases competition.
Global customers increase competition as businesses compete to supply them.
Economies of scope increase competitive rivalry.
Global sourcing increases competitive rivalry.
Compatible technical standards and favourable trade policies increase
competitive rivalry.
Increased number of businesses operating across national boundaries
increases competition.
needs, this implies that a business must also seek to create new ones.Sony,
for example, created a customer need for the personal hi-fi when it
launched the Walkman concept.An organization can attempt to shape
the needs of its customers through new product development and advertising.
Similarly, market research attempts to identify and test out ideas for
new products.It is evident that the major aim of market analysis is an
increased understanding of customers and their needs.Equally, markets
are defined in terms of competitors and distribution channels, so that
analysis also endeavours to increase understanding of these facets of the
market.
Customers and their needs
Customer analysis attempts to develop knowledge of customer groupings
(segmentation analysis), customer motivations and the unmet needs of
customers (Aaker, 1992).We consider each of these below.
Market segmentation analysis
This analysis seeks to identify the largest and most profitable customers and
to group them according to shared characteristics.Such shared characteristics
will cause specific customer groups to have different needs and to act
and behave differently to other customer groups.Fundamentally, segmentation
means subdividing a market into customer subgroupings, each with
its own distinctive attributes and needs.Customer groups are commonly
segmented according to factors like age, sex, occupation, socio-economic
grouping, race, lifestyle, buying habits, geography (i.e., where they live),
etc.Where the customers are other businesses, they can be grouped by the
nature of their business, organization type and by their size.Each segment
is then analysed for its size and potential profitability, for customer needs
and for potential demand, based on ability and willingness to buy.
Segmentation analysis assists in the formulation of strategy by identifying
particular segments and consumer characteristics which can be targeted.
Computer games, for example, are largely targeted at young males between
the ages of 11 and 25.This is not to say that other groups and individuals do
not play computer games, but the segment identified is easily the largest
and most profitable.
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Customer motivations
Once market segments have been identified they must be analysed to
reveal the factors that influence customers to buy or not to buy products.
It is particularly important to understand factors affecting customer motivations.
These include:
. sensitivity to price;
. sensitivity to quality;
. the extent of brand loyalty.
Differences in customer motivations between market segments can be
illustrated by reference to the market for air travel.The market can be
segmented into business and leisure travel.Customers in each group
have very different characteristics and needs.Business travellers are not
particularly price-conscious but are sensitive to standards of service, to
scheduling and to the availability of connections.Leisure travellers are
generally much more price rather than service-conscious and are less
sensitive to scheduling and connections.Market research has an important
role in building understanding of customer needs so that they can be
targeted by appropriate product or service features.
Unmet needs
Aaker (1992) defined an unmet need as ‘a customer need that is not now
being met by the existing product offerings.’ There are many relevant examples
in markets for pharmaceutical products.There are many illnesses
for which there is no current cure and often, when a cure exists, treatment
has undesirable side effects.Cancer, for example, is often incurable and
even where a cure is possible, it sometimes involves a number of unpleasant
side effects.Clearly, a cure which was successful in a greater
number of cases, and which eliminated harmful side effects, would both
meet patient needs and, as a result, be potentially very profitable.The
identification of unmet customer needs, as a basis for future product development,
is a vital function of market research.
In addition to analysis of market segmentation, customer motivations and
unmet customer needs, Porter’s five-forces framework ‘can also be applied
to a market or submarket within an industry’ (Aaker, 1992).Although the
framework is designed primarily for industry analysis, it can also be useful
in the analysis of competition within an organization’s markets.
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Strategic group and competitor analysis
What are strategic groups?
Although businesses compete within industries and markets, they face
the strongest competition from businesses possessing similar core competences,
pursuing similar strategies and satisfying similar customer
demands.Strategic group analysis (Porter, 1980) attempts to compare an
organization with the group of businesses which are its closest competitors.
A strategic group consists of organizations that:
. possess similar core competences;
. pursue similar strategies;
. serve a similar customer group and similar market segments;
. employ similar technology;
. utilize similar distribution channels;
. produce similar products or services of comparable quality.
The importance of each of these attributes in circumscribing the strategic
group will differ from industry to industry.It is necessary to decide which
attributes are the most significant for the industry under analysis in defining
its strategic groupings.In the motor industry, for example, businesses like
Porsche, Ferrari, Aston Martin and Lotus fall into the same strategic group
for which technology, quality and customer group are probably the most
definitive characteristics.In the brewing industry, businesses like Heineken,
Carlsberg and Kronenberg fall into the same group which is best characterized
by their similarity of product range and distribution channels.
While the similarities between the businesses are used to define the
group, it is the purpose of strategic group analysis to facilitate analysis of
direct competitors and to highlight differences as well as similarities.In
other words, the businesses that constitute a particular strategic group can then be compared in terms of a range of indicators which include:
. shared or similar objectives;
. core competences;
. strategies;
. markets and segments served;
. market share;
. profitability;
. cost structure;
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. price structure;
. access to finance;
. product quality;
. customer loyalty;
. approach to marketing;
. organization of value-adding activities;
. suppliers and distribution channels;
. organizational culture;
. research, development and innovation.
Information on competitors can be obtained from several sources
including:
. company accounts and annual reports;
. market research reports;
. suppliers;
. the government and other regulators;
. the press.
Strategic group and competitor analysis make it possible for the managers
of an organization to better understand their own position and that of their
competitors, in the context of both industry and market.Such knowledge is
essential because it:
. identifies and focuses on an organization’s closest competitors;
. assists in assessing competitive potential;
. highlights opportunities for development;
. provides external performance benchmarks;
. helps to identify critical success factors.
Globalization trends in the pharmaceuticals industry
The pharmaceutical industry, previously considered to be only a part of
the chemical manufacturing sector, emerged into a defined industry
sector in the middle years of the 20th century.The development of
many medicine types marked milestones in the human fight against
disease and in the development of the modern way of life.It is difficult
to overstate the importance of the pharmaceutical industry’s contribution
to modern society.The top pharmaceutical companies are among
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the largest businesses in the world by market value and are driven by
their respective ranges of high value, research-driven products.
Although highly regulated, pharmaceuticals was always a profitable
industry and returns on sales are rarely lower than 20%, and can be as
high as 35%.Throughout the 1970s and 1980s, pharmaceutical companies
enjoyed rising sales and high profit margins.Profitability was
based on a consistent and straightforward research-based strategy.
Since the beginning of the 1990s, health care cost containment has
become a key issue within the industry as the need to control rapidly
spiralling national health care costs became apparent, especially to
national governments that ended up with increasing medicine bills in
their respective health services.
Irrespective of the vast market size for pharmaceutical products, no
single company has ever dominated it, although there is evidence of
increased supply side concentration – the top 10 companies account
for 50% of global industry sales.To maximize shareholder value,
pharmaceutical companies needed to achieve a critical mass in their
operations.What followed was pharmaceutical consolidation in the
form of multiple mergers and acquisitions, particularly after 1990.
In terms of the international growth of the pharmaceuticals industry,
a number of important trends were relevant.
From a demographic point of view, in both absolute and relative
terms, the elderly population has been growing significantly and is
set to continue doing so.While in 1990 the over-60s constituted
approximately 18% of the combined EU, Japanese and US populations,
by 2020 they are forecast to account for as much as 27%.While the
ageing population does offer some economic advantages for some
countries as working lifetimes are lengthened, the incidence of
diseases associated with old age are expected to increase.
The apparently continual emergence of new and varied forms of
disease offers another opportunity for pharmaceutical companies.
Prior to 1980, HIV and AIDS, for example, were unheard of, but
these conditions and others have triggered massive R&D efforts,
while at the same time yielding substantial returns on investment for
pharmaceutical companies.The internationalization of the industry has
in part been driven by the fact that many new and variant diseases have
arisen in the Far East and Africa.
Customers have become increasingly informed with regard to the
usage and types of drug treatments.This has led to a partial shift in
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the balance of power in the pharmaceutical marketplace toward the
purchaser and away from the manufacturer.
This has intensified the need for cost containment on the part of the
companies in the industry, owing to the fast introduction of new
products, thus shortening the life cycle of some products.Increased
competition among the leading R&D-driven companies has meant that
the time available for the recovery of the massive development costs of
each new product have been greatly reduced.This, in turn, has placed
a greater and greater emphasis on truly global coverage for a company.
Achieving product roll-out in as many markets as possible in as short a
time as possible has become strategically vital for the success of any
new product launch.
Other factors that drove globalization have arisen from within the
industry itself.Technology has affected supply chain relationships
through the use of networks for the electronic exchange of
research, compliance and product information, and integration with
manufacturer, packaging supplier and backwards supplier systems.
Customer relationships for over the counter products have been
altered due to increased market understanding of medicines and
their purposes.Relationships with doctors, pharmacists and patient
groups have changed since the introduction of e-detailing.
The approximate annual growth rate of 8% of the world pharmaceuticals
market suggests that sales could amount to $400 billion by
2005.This growth rate is significantly higher than the 2% underlying
growth rate in most developed countries.It is partly because of this
growth rate and partly because the industry is so profitable that most
countries welcome investment by pharmaceuticals companies.The
trend toward globalization of the pharmaceuticals industry is expected
to continue.
A resource-based approach to
environmental analysis
Limitations of traditional frameworks
This chapter has concentrated on explaining the traditional strategic management
frameworks employed in analysis of the competitive environment.
The resource-based approach to strategic management, which emphasizes
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the importance of core competence in achieving competitive advantage,
employs a different approach to analysis of the competitive environment.
We suggest that there are several limitations to existing frameworks:
. they do not integrate external and internal analysis (Sanchez and Heene,
1997);
. they emphasize the competitive and not the collaborative behaviour of
businesses;
. they emphasize product and service markets rather than those where
organizations obtain resources;
. they do not adequately recognize the fact that businesses themselves
may alter their own competitive environments by their competence
leveraging and building activities;
. they do not adequately recognize that organizations currently outside of
an organization’s industry and market may pose a significant competitive
threat, if they possess similar core competences and distinctive
capabilities;
. similarly, they do not recognize that the leveraging of existing competences
and the building of new ones may enable businesses to compete
outside their current competitive arenas.
Understanding the framework
A resource-based framework for analysis of the business and its competitive
environment is shown in Figure 4.3. Analysis is divided into five interlinked
areas:
1. the organization itself;
2. the industry;
3. product markets;
4. resource markets;
5. competing industries.
The organization itself
The internal features of the organization itself as it relates to the resourcebased
view is discussed in Chapter 3.To introduce these themes again here
would be unnecessary duplication.
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The industry
The industry consists of a group of businesses producing similar products,
employing similar capabilities and technology.Analysis of the industry
therefore examines over time:
. the skills and competences of the companies in the industry;
. the organization of their value-adding activities;
. the technology that they employ;
. the number of competitors in the industry;
. ease of entry to and exit from the industry;
. strategic groupings.
Product markets
Product markets are those in which businesses sell their products.A business
may operate in one or more product markets.Each of these markets
will have its own characteristics and each market will typically be analysed
in terms of:
ANALYSIS OF THE COMPETITIVE ENVIRONMENT
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Resource markets:
suppliers of human
resources, technology,
finance, materials,
services, etc.
Product markets:
customers, customer
needs, distributors,
competitors
The industry:
competitors in
resource and
product markets,
strategic groups
Competing industries:
substitute products,
firms with similar
competences
capabilities,
The
organization
itself:
resources,
core competences,
distinctive
knowledge,
value-adding
activities
Collaboration Competition
Co-ordination Intelligence
Figure 4.3 The competence-based competitive environment
. the number of businesses in the market and their relative market shares;
. the number of customers and their relative purchasing power;
. segments and their profitability;
. customer motivations;
. unmet customer needs;
. access to distribution channels;
. potential for collaboration with customers.
Resource markets
Resource markets are those where organizations obtain finance, human
resources, materials, equipment, services, etc.It is evident that businesses
will normally operate in several such markets, each with its own characteristics,
depending on the company-addressable resources that they require.
Resource markets need to be analysed in terms of:
. the resource requirements of businesses;
. the number of actual and potential resource suppliers;
. size of suppliers;
. supplier capabilities and competences;
. potential for collaboration with resource suppliers;
. access by competitors to suppliers.
Competing industries
Competing industries are those that produce substitute products or services.
These must be analysed for:
. substitutability of the product – how close the substitute is to satisfying
the same consumer demands as the original product or service;
. key competences of the businesses in the industry;
. the number and size of the businesses in the industry.
Critical success factors (CSFs) and
core competences
What are CSFs?
Analysis of the industry, market and competitive position provide the
means for managers to identify CSFs.CSFs are those factors that are
fundamental to the success of all businesses in a particular industry and
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associated markets.CSFs will dictate the skills which a business must
possess to ensure survival in the context of its competitive environment.
Competitive advantage, however, depends on the possession of companyspecific
attributes that are superior to and distinctive from those of competitors.
These are known as core competences and distinctive capabilities.
CSFs will differ from industry to industry and from market to market.For
example, in the financial services industry, a reputation for reliability,
attractive interest rates and an extensive salesforce are essential, while in
the motor vehicle industry research and development of new models,
efficient and cheap supply of components, extensive dealer networks
and heavy advertising are essential.
CSFs are not only shaped by the competitive environment in which the
organizations operate but are also influenced by the way in which
individual businesses develop their core competences.They are heavily
influenced by customer demands and by the actions of competitors.It is
therefore essential to understand the competitive environment and its effect
on CSFs.
Review and discussion questions
1. Define and distinguish between the following: industry; product
market; resource market; strategic group.
2. Discuss the extent to which the personal computer market is globalized
using Yip’s framework.
3. Discuss the extent to which the profitability of a business is due to
industry-dependent or business-specific factors.
4. Why is analysis of the competitive environment so important?
5. Explain the major forces that may cause the competitive environment to
change.
6. Discuss the major similarities and differences between the traditional
and resource-based approaches to analysis of the competitive
environment?
7. Define and distinguish between CSFs and core competences.
References and further reading
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NJ: Prentice Hall.
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Arthur, W.B. (1996) ‘Increasing returns and the new world of business’. Harvard Business Review, 74,
July/August.
Baden-Fuller, C.and Stopford, J.(1992) Rejuvenating the Mature Business.London: Routledge.
Baumol, W.J. (1982) ‘Contestable markets: An uprising in the theory of industry structure’. American
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Chakravarthy, B.(1997) ‘A new strategy framework for coping with turbulence’. Sloan Management
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Chakravarthy, B.S. and Perlmutter, H.V. (1985) ‘Strategic planning for a global business’. Columbia
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Kay, J.(1993) Foundations of Corporate Success.Oxford, UK: Oxford University Press.
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Yip, G.S. (1992) Total Global Strategy.Englewood Cliffs, NJ: Prentice Hall.
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Columbia Journal of World Business, Winter.
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ANALYSIS OF THE GLOBAL
MACROENVIRONMENT 5
Learning objectives
After studying this chapter students should be able to:
. describe the nature of the macroenvironment;
. define and distinguish between continuities and discontinuities in
the business environment;
. explain each of the factors to be analysed in a STEP analysis;
. describe why macroenvironmental analysis is more complex for
international businesses;
. explain how national circumstances can affect global strategy;
. describe the stages in carrying out a STEP analysis.
Introduction
Strategic planning is made more difficult by the rate of change,complexity
and associated uncertainty in the environment. Sanchez and Heene (1997)
stated that ‘In dynamic environments,building and leveraging competences
requires flexibility in acquiring and deploying new resources effectively in
changing circumstances.’ It is evident therefore that successful strategy and
associated competence development must be informed by a detailed
understanding of the business environment.
In Chapter 4 we examined the importance of industry analysis. In this
chapter we look outside of the industry to learn about those forces at work
that are outside an organization’s control and with which the business must
usually learn to ‘cope’. A thorough macroenvironmental analysis is an
ambitious task for a non-internationalized business,but for a global
company the task is made all the more complex because of the number of
industries,markets and countries in which it may operate.
Change in the business environment
The nature of environmental change
The global business environment may be described as possessing three
important characteristics:
. it is dynamic – this describes the rate of change (environmental factors
tend to change with increasing dynamism as time passes);
. it is complex – the forces at work in the environment are numerous,
difficult to understand individually and the relationships between them
are increasingly intricate;
. it is turbulent – the changes taking place are variable in direction,uneven
in magnitude and do not always conform to a recognizable or predictable
pattern.
Change in the network of business environments can be regarded as either
continuous or discontinuous:
. continuous change is a series of minor developments in technology,the
world economy,political alignments and societies which is constantly
taking place;
. discontinuous change describes major developments in the global
business environment which arise almost at random and which may
cause major alterations in the way that business is conducted. They
tend to be ‘one-off ’ occurrences,but they can precipitate significant
change in business strategies.
The effects of discontinuities on governments and businesses can bring
about changes in the balance of power in society,such is their potential
influence. The oil crisis of 1974 brought about a large increase in the price
of crude oil in Western economies. The effect of this was recession,very
high inflation and numerous business failures. Similarly,the demise of
communism in Eastern Europe (an example of a political change)
opened up these countries,their markets and their industries to the rest
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of the world. In Europe,the creation of the Single European Market in 1992
eliminated many of the barriers to trade between member countries.
Discontinuities can also result from ‘industry breakpoints’ (Strebel,1992;
Turner,1996) which can be ‘caused by a revolutionary product or by
fundamental changes in process or distribution channels.’ Strebel identified
the major indicators of breakpoints as falling demand for standardized
products,availability of new sources of supplies or technologies, the
breaking down of traditional customer segment groups and convergence
of separate industries.
Organizations must respond to continuous and discontinuous changes in
their environment if they are to compete and survive. It may be tempting to
assume that it is impossible to make sense of the chaos which sometimes
comprises the modern business environment,but such a negative approach
is unlikely to result in commercial success. It may be impossible to predict
some discontinuities,but awareness and understanding of the environmental
forces at work increase the likelihood of prompt and appropriate
organizational responses.
Change and prescriptive strategy
For the planning or prescriptive school of strategists,environmental analysis
is supposed to allow the prediction of future events so that strategic
plans can be formulated accordingly. The fact that the complexity and
turbulence of the environment make accurate prediction problematic
may suggest that environmental analysis is of little value. However,even
the incrementalists (Lindblom,1959) and the logical incrementalists (Quinn,
1980; Mintzberg and Waters,1985) acknowledged the need for business to
anticipate and respond to changes in the environment. Chakravarthy (1997)
and D’Aveni (1994) argued that businesses should actively seek to modify
their environment,constantly challenging and changing the rules of the
game. Analysis of the environment is therefore vital,whether it is to act
as the basis of a long-term plan,to inform incremental modifications to
strategy or to increase understanding of those ‘rules’ that the business
may wish to change.
The complex and chaotic nature of the global business environment rules
out (in most cases) a rigidly planned approach to strategic management.
Complexity theory,however,advocates that organizations foster cultures
that are flexible and experimental,and that place an emphasis on learning
(Turner,1996). Both individual and organizational learning imply the
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[ 141 ]
acquisition of information and knowledge. In consequence,monitoring and
analysis of the business environment can be regarded as fundamental to
organizational learning within the global enterprise.
The complexity of the global environmental means that the process of
analysis must attempt to structure,simplify and summarize events so as to
facilitate their evaluation prior to management decision making. The
dynamics of the environment and the pace of change mean that external
analysis must be a continuous process. The frameworks employed in
environmental analysis provide the means to order and relate seemingly
random and isolated events in a format that is understandable to the
managers of international enterprises. Managers must,however, continue
to recognize the imperfections of the analytical frameworks that they
employ and the often incomplete and inaccurate nature of the information
on which they base their decisions. Environmental analysis can never
remove risk from business activities,but it provides a means of understanding
the nature and extent of the risks involved. The next section of this
chapter explores the major forces at work in the macroenvironment (in
contrast to the microenvironment which was considered in Chapter 4).
The macroenvironment
STEP analysis
The macro (or ‘far’) environment is the part of the environment over which
the business can rarely exert any direct influence but to which it must
respond. Conventionally,it is analysed by categorizing environmental
influences at the macro-level into broad groupings. In this context the
most commonly used framework is STEP (sociological,technological,economic
and political factors). This chapter uses an alternative categorization
of forces which is more appropriate for global analysis. The forces at work
in the macroenvironment are grouped under the headings of social and
cultural,demographic,political,legal,technologica l,economic and financial.
Each of these forces must be considered at both global and national
levels. Global trends in these forces will significantly affect national trends,
but there will frequently be differences in magnitude and direction at the
global and national levels. For example,the information revolution has
transformed global business activities,but its effects on individual countries
have been uneven.
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Table 5.1 shows the major groupings of forces at work in the macroenvironment
and the variables associated with them. It is essential that
information on these forces and associated variables is gathered continuously
both globally and within each country of operation. The information
must then be assessed for relevance to industry and markets.
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Table 5.1 Macroenvironmental forces
Social and cultural Legal (vary between countries)
values,attitudes and beliefs; contract law;
lifestyle and tastes; employment law;
ethics; trade union law;
working practices and attitudes; monopoly and restrictive practices legislation;
levels of education and training; consumer protection legislation;
language; tax law;
ecological and environmental concern; company law;
religion and moral dispositions; corruption law;
health and related issues; international law.
openness (to international products and new
technology);
individualism versus collectivism (in national
culture).
Demographic Technological
size and growth of population (birth and death research and development;
rates); information technology and communications
composition of population (age,sex,ethnic systems;
mix); communications systems;
geographic distribution and population transport systems and infrastructures;
movements (internal migration,emigration production technologies;
and immigration). design technologies and new products;
levels of technology,adoption rates and
availability of technology.
Political Economic and financial
constitutional issues in the country; economic systems – market,centrally planned,
national parties and groupings; mixed;
stability (or lack of ); size of economies (usually measured by GDP);
international groupings and trading blocks; structures and structural changes;
government economic intervention; cyclical changes – recessions,booms, etc.;
levels of taxation; growth rates and levels of economic development;
availability of government subsidies; levels and distribution of income;
levels of trade protectionism. price/inflation levels;
cost levels (labour,energy, transport, materials);
employment levels;
currency and exchange values;
interest rates;
levels of investment and capital markets;
international groupings;
banking systems.
Global and national macroenvironments
The process of analysis of the global macroenvironment is concerned with
global movements in culture and society,demography,politics,international
law,economics and technology. It is such movements that can
create the conditions for breakpoints (Strebel,1992) which may,in turn,
drastically alter competitive conditions either in favour of,or against,
countries,industries and organizations.
International enterprises operate within several national environments.
Each country in which a business operates presents a different set of
environmental influences at the macro,industry and market levels. It is
therefore necessary to monitor the macroenvironmental situation in each
country of operation,as national trends will differ from those taking place
in the global environment in terms of pace,size and direction. Again the
national macroenvironment must be analysed in terms of the social,
cultural,demographic,political,legal,technologica l,economic and financial
forces at work.
The relationship between global and
national macroenvironments
The global macroenvironment will influence the development of individual
national conditions,but each nation will have its own unique set of
macroenvironmental conditions related to its history and development.
Trends in the global macroenvironment will play a major part in shaping
the global industry and market for particular products. Similarly,the
national macroenvironment will substantially shape national industry and
market conditions.
A major purpose of macroenvironmental analysis is to identify both the
similarities and differences that exist between countries. Levitt (1983) emphasized
the advantage that can be gained by concentrating on national
similarities. There are two dangers,however,in overemphasizing similarities
between countries as a source of competitive advantage. First,while
there are benefits to be gained by concentrating on similarities in global
customer requirements,there are also advantages to be gained by remaining
responsive to differences in customer needs (Prahalad and Doz,1986).
Such thinking is at the heart of transnational strategy. Second,exploitation
of national differences in relation to core business activities can be important
as a source of competitive advantage. Porter (1990) stressed the role of
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national circumstances in fostering competitive advantage. Differences in
wage and price levels,availability of skilled labour and the availability of
government assistance can all be important sources of competitive advantage.
The ability to exploit both national similarities and differences is
central to international competitive advantage. Analysis of international
business environments makes it possible to identify where potential
sources of competitive advantage can be found both in terms of actual
and potential markets,and the location of value-adding activities.
The role of national circumstances in
international business
Porter (1990) argued that global competitive advantage ‘results from an
effective combination of national circumstances and company strategy.’ It
is therefore useful to examine those factors that are likely to make a country
attractive as a market and as a base for value-adding activities. In other
words,national circumstances may be important in determining the success
of a business that chooses to locate certain of its activities in a country. It is
therefore important to consider what factors constitute the major determinants
of national competitive advantage.
Determinants of national competitive advantage
Porter (1990) identified four sets of circumstances (represented in Porter’s
Diamond – see Figure 5.1) which are crucial in determining national
competitive advantage.
(a) Factor conditions
Factor conditions refer to the quality and availability of the key inputs to a
business’s processes. Typically,this includes an analysis of the quality and
quantity of the nation’s human,physical,knowledge, capital technological
and capital resources,and the national infrastructure. The stock of factors is
important in determining national competitiveness,but more important still
is the rate at which the factors are created,upgraded and made more
specialized in particular industries. As well as the role of businesses in
factor creation and improvement,the government can also have an important
role to play via its policies on education,training and industry.
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(b) Demand conditions
The quantity and quality of home demand for an industry’s product will
also help to determine national advantage in that industry. If domestic
buyers are sophisticated and demanding,and if domestic demand is
internationalized,this will stimulate competitive advantage as domestic
businesses will be forced to innovate faster and will be more accustomed
to catering for international preferences.
(c) Related and supporting industries
Supporting industries refer to suppliers or downstream buyers,while
related industries describe those industries that interlink with the industry
in question such that there is some degree of reciprocal advantage. If these
industries are stronger in some countries than others,then such regions will
tend to have more competitive industry. For example,many Japanese car
companies benefit from the fact that Japanese component manufacturers (a
supporting industry) are extremely competitive in international markets.
(d) The business’s strategy, structure and rivalry
The context in which businesses are established,organized and managed
as well as the nature of domestic rivalry will also help to determine national
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Firm strategy,
structure and
rivalry
Factor
conditions
Related and
supporting
industries
Demand
conditions
Government
Chance
Figure 5.1 Determinants of national competitive advantage – Porter’s diamond
Adapted from Porter (1990)
competitive advantage in specific industries. Factors like attitudes to risk
taking and commitment to goals are important. Similarly,vigorous domestic
rivalry,both price and non-price,produces companies that are likely to be
able to compete in international markets. Technological rivalry is also
important as it will help to create technological superiority.
As well as these four factors there are two others that can play an
important role in national competitive advantage: chance and government.
(e) The role of chance
Chance can also affect national competitive advantage. Events like major
technological discontinuities,wars,political decisions by foreign governments,
significant shifts in world financial markets or exchange rates can all
create or destroy national advantages. The problem with chance events is
their inherent unpredictability.
(f) The role of government
Porter argued that government can affect national competitiveness by
influencing the other four factors. Factor conditions are affected by government
subsidies,policies toward education,capital markets,the setting of
product standards,etc. Governments provide the framework within which
businesses compete and formulate their structures and strategies,hence
playing a significant role in determining national advantage.
Prudential: factor conditions in Reading, UK and
Bombay, India
In September 2002 the UK-based insurance giant,Prudential,announced
plans to cut 850 UK jobs as part of a move to create a new
call centre operation in India. The new Bombay call centre would
result in staff numbers at Reading,UK being reduced by 850 to
around 1,400. Prudential expected to save £16 million a year from
the switch,which will see Indian graduates paid an estimated onetenth
of the salary of their UK counterparts.
A prominent trade union,Amicus,pledged to fight the proposals. Its
general secretary Roger Lyons said: ‘This is a despicable act by Prudential.
Selling 850 UK call centre jobs to India is disgraceful. The only
reason being given is an 80% saving on wages,but no thought has
been given to customer impact or the devastation this will cause to
those affected.’
ANALYSIS OF THE GLOBAL MACROENVIRONMENT
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Prudential’s chief executive,Mark Wood said that staff in India would
be well paid by local standards and trained to a high degree. He went
on to explain that the labour market was one reason for the change:
‘The UK market for trained,experience d financial services staff is very
competitive. There’s a much larger pool of graduate staff in India,and
in Bombay,than in the UK.’ Salaries for Indian graduates can start at
only £2,500 – at least £10,000 less than the equivalent in Britain and
firms do not have to pay national insurance or pension contributions.
Porter’s Diamond
Porter’s Diamond is a way of conceptualizing the six circumstantial
influences that are relevant in determining national competitiveness.
These determinants,individually and collectively, create the context in
which a country’s businesses are born and compete. The factors and the
relationships between them are illustrated in Figure 5.1. Nations are most
likely to succeed in industries or segments where the combination of
factors is most favourable. Similarly,from the perspective of the individual
business,those countries with the most favourable combination of circumstances
are likely to be chosen as markets and as locations for value-adding
activities by global businesses.
The analytical process
Stages in the process
At each stage of analysis of the macro and microenvironments a number of
activities are carried out. Ginter and Duncan (1990) argued that environmental
analysis ‘consists of four interrelated activities – scanning,monitoring,
forecasting and assessing.’ The process of analysis,which must be
applied to all the global and national environments in which the organization
conducts business,may alternatively be conceived as comprising three
stages.
1. information gathering – identification of sources of information and
obtaining relevant information from those sources;
2. information processing – organization of information into a manage-
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able and meaningful format that identifies indicators of change,trends
and patterns;
3. knowledge generation – the assessment of information to identify and
prioritize those external events that are critical to the success of the
organization,the creation of models and scenarios that are used to
evaluate different possibilities so as to augment organizational learning
and inform strategic decision making.
We will now consider each of these stages in turn.
Information gathering
Data and information about the environment can be obtained from a variety
of sources which must be constantly scanned and monitored for changes
that may affect markets,competition and industry structures. Two major
problems exist with regard to information gathering.
The number and variety of sources
There are so many diverse sources of data and information that it is
extremely difficult to monitor them all,so that it may be necessary to be
selective. This carries the danger of missing some vital information.
The accuracy, relevance and reliability of sources
It is very difficult to gauge the accuracy,relevance and reliability of sources,
particularly as much of the information may be speculative in nature. In
both cases experience and judgement are essential to the selection process.
Information processing
Once the information has been gathered it must be processed into a usable
format. There are many methods of processing the data once gathered
(Table 5.2). These will often require the use of information technology
(IT) to manipulate,summarize,tabulate,model and graph data. Database
and spreadsheet software is helpful,but in recent years developments in
decision support systems,expert systems and intelligent databases have
transformed the ability of managers to generate the quality of information
required to support decision making.
ANALYSIS OF THE GLOBAL MACROENVIRONMENT
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Knowledge generation
The more rapid the pace of change the greater is the need for accelerated
learning by both the individual and the organization. In such a dynamic
environment,it is those organizations that learn rapidly and generate organizational
knowledge which survive and outperform their rivals. The boundaries
between information processing and knowledge generation have
become increasingly blurred as a result of the major developments that
have taken place in IT. IT greatly assists knowledge generation by allowing
the development of sophisticated models and the ability to simulate a range
of situations.
Turbulence in the environment makes the process of knowledge generation
uncertain,but scenario analysis,game theory and computer simulations
make it possible to explore a range of possibilities in terms of both
change in the environment and appropriate organizational responses. As
Boettcher and Welge (1994) put it,‘the diagnosis of strategic information by
globally dispersed organizations has been identified as a largely neglected
but extremely relevant field of inquiry.’
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Table 5.2 Data sources in international strategic analysis
Type of data source Examples
World organizations (reports and statistics) OECD,World Bank,IMF,UN
Computerized sources Internet,commercial databases both online and on
CD-ROM (e.g.,Datastream , Mintel,Extel,FAME)
Government sources National government reports and statistics
General and academic publications Quality newspapers and magazines (e.g., The
Economist and associated publications, Financial
Times,etc.), international academic journals
Business publications Market research reports (Neilsen’s,etc., The
Economist,banks, trade journals, Financial Times,
national and international market research
agencies,commerc ial bank reports)
Directories International Directory of Marketing Research
Agencies,Market Research Society, London and
International Directory of Marketing Research
Houses and Services,American Marketing
Association,Chicago.
Summary – analysis of the global
macroenvironment
The links between the micro and macroenvironments
Analysis of the macroenvironment is a fundamental prerequisite to the
formulation of global strategy. The macroenvironment plays a vital role
in shaping industry and market structures. Consequently,the process of
analysis must begin with definition of the industry and markets in which
the business operates,so that analysis of the macroenvironment is focused
and the dynamic relationships between the macro and microenvironments
are highlighted.
As has been shown,changes in social,demographic,political,legal,
technological,economic and financial factors can create new industries
and markets and can drastically alter existing ones. Additionally,it is
important to understand the interaction between global and national business
environments at the micro and macro-levels. Global trends may affect
each country,industry and market differently, thus changing the balance of
competitive forces between different nations and creating a complex set of
opportunities and threats for global business organizations.
The process of analysis seeks to gather information and to process it in
such a way as to enhance organizational learning and knowledge,thus
adding to the organization’s stock of strategic assets. Although such knowledge
is inevitably imperfect because of the complexity and turbulence of
the environment,it is invaluable in the process of managing risk. Sanchez
(1995) and Heene and Sanchez (1997) argued that ‘in dynamic
environments,creating ‘‘higher order’’ capabilities like organisational learning
that improve the strategic flexibility of an organisation becomes critical
to building,leveraging,and maintaining competences.’ Such competence
development and flexibility are essential to successful global strategy in a
complex and rapidly changing environment.
In Chapter 4 we discussed the links between the micro and macroenvironments
with particular emphasis on globalization drivers. We can
also develop a framework that shows how changes in the macroenvironment
affect the five forces in Porter’s model of the competitive environment.
This enables us to predict how trends in the macroenvironment will change
industry profitability.
An example of such a link is the trend toward reduction of tariff and nontariff
trading barriers between trading nations. This reduces the barriers to
ANALYSIS OF THE GLOBAL MACROENVIRONMENT
[ 151 ]
entry into formerly protected national or regional industries and hence the
threat of new entrants into such industries is increased. The increased
threat,in turn,is likely to apply a downward pressure on the prices
charged by the industry and thus lower the profitability of the industry as
a whole.
Review of the key stages
Despite the emphasis in the literature on competences and capabilities as
internal sources of competitive advantage,environmental analysis is still of
vital importance to strategy formulation. Organizations must assess both
their current and potential capabilities,and the competitive,and sometimes
collaborative,global context in which they must conduct their business.
In terms of specific stages,we suggest that a thorough environmental
analysis for an international business will involve the following:
. definition of industry and market,and identification of their chief
characteristics;
. analysis of the macroenvironment at both global and national levels;
. an understanding of the role of nations in competitive advantage;
. analysis of the globalization drivers affecting the industry and market;
. analysis of industry and market structures (product and resource);
. identification and analysis of strategic groupings;
. identification of critical success factors.
The main output of the analysis is identification of the opportunities and
threats facing the business and the factors that are critical to success in the
business environment. It is important to remember that such analysis must
be undertaken on a continuous basis because of the dynamic and turbulent
nature of the business environment. Similarly,such analysis must be recognized
as inherently imprecise. Nevertheless,knowledge of the environment
in which it operates is essential to the learning process of an intelligent
organization.
External analysis also forms the basis of the assessment of how well the
capabilities of a business are matched to its environment. It may demonstrate
that there are opportunities,or requirements,for an organization to
develop new competences or leverage existing ones,if it is to succeed in
the future.
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Discussion and review questions
1. Explain the importance of the macroenvironment in shaping competition
and global strategies.
2. Discuss the major trends that are forcing the globalization of industries
and markets. Illustrate your answer with examples.
3. Explain the difference between an industry and a market.
4. Discuss the effects of changes in the macroenvironment in an industry
you know about (such as in the fast food industry).
References and further reading
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D’Aveni,R.A. (1994) Hypercompetition: Managing the Dynamics of Strategic Manoeuvring. Free
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Heene,A. and Sanchez,R. (1997) Competence-based Strategic Management. New York: John Wiley &
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Mintzberg,H. (1973) ‘Strategy-making in three modes’. California Management Review, 16.
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PARTIII
GLOBAL AND
TRANSNATIONAL STRATEGY6
Learning objectives
After studying this chapter students should be able to:
. define the terms ‘competitive advantage’ and ‘sustainability’ and
explain how the two concepts are linked;
. describe how transnational strategy can be formulated;
. explain how the competitive positioning, core competence and
knowledge-based schools contribute to our understanding of
global strategy and competitive advantage;
. describe and critically evaluate the knowledge and core competence
approaches to understanding global strategy;
. describe and critically evaluate Porter’s generic strategy framework
for understanding superiority in global strategy;
. understand how the three schools of thought can be seen as
mutually enriching rather than mutually exclusive;
. explain the essential elements of transnational strategy;
. describe the concept of ‘total’ global strategy.
Introduction
In many ways this chapter is the core of the book. It links with subsequent
chapters on international and global business management and links back
to Chapters 2–5 which examined the most important influences on global
strategy (namely, core competences, industry/market characteristics –
especially the extent of globalization) and the global vision and philosophy
of the business.
This chapter focuses on the competitive strategies of global businesses
and is pivotal to the rest of the book, drawing together analysis of the global
business and its environment with global management. Global and transnational
strategies are developed on the basis of analysis of global
knowledge-based competences, activities and the global environment.
The choice of strategy is by no means simple. Industries and markets
cannot be classified as either entirely global or entirely multidomestic.
Yip’s research (1992) showed that an industry or market may simultaneously
possess both global and local characteristics, based on the relative strength
of each element of each of the four types of globalization driver. It is likely
that most industries and markets will be both global and local in some
respects. On this basis, a global and transnational strategy must be ‘a flexible
combination of many elements’ (Yip, 1992). That is to say, the strategy of a
global business must be tailored to match each element of each globalization
driver, being in part global and in part adapted to local requirements, as
conditions dictate. The use of the term ‘global strategy’ could be seen as
slightly misleading when describing a complex strategy that combines
global and local components. For this reason, we use the term ‘transnational
strategy’ to describe a worldwide strategy based on core competences,
integrating both global and local elements.
Transnational strategies and global competitiveness
Sustainability and competitive advantage
One of the key objectives of any business strategy is to achieve competitive
advantage that is sustainable. This implies two things: first, it implies that a
strategy will lead to superior performance in an industry; and, second, that
the superior performance can be sustained over time (i.e., not just for a
limited period of time).
Competitive advantage
The strategy literature makes a number of observations with regard to
competitive advantage. It tends to be explained in terms of a number of
interlinked concepts:
. superior performance – there is no precise measure, but this is often
measured in terms of above average profit returns against sales or in-
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vestment, higher unit revenue, lower unit costs, higher market share,
etc.;
. strategy – the plan or course of action by which the business hopes to
achieve competitive advantage;
. core competences/distinctive capabilities – the distinctive knowledge,
skills and organization of activities which make the corporation different
and superior to its competitors, acting as the basis of its generic strategy;
. innovation – the pace of change in the global business environment
means that firms must constantly seek to develop new knowledge and
core competences, so as to innovate more quickly than competitors;
. configuration/architecture – the way in which the value-adding activities
of the organization are configured on an international or global basis
(they may be geographically concentrated or dispersed);
. co-ordination/integration – how the value-adding activities are coordinated
on a transnational or global basis;
. responsiveness – the ability of the organization to respond to local needs
(at another level this may also imply responsiveness to a rapidly
changing environment).
Sustainability
This is best considered as the time period over which superior performance
is maintained. The extent to which competitive advantage is sustainable will
usually depend on a number of organizational features:
. its ability to build and leverage knowledge-based core competences,
build an architecture and develop strategies that are superior to those
of competitors and that are difficult to emulate;
. its ability to co-ordinate and integrate its worldwide activities more effectively
than its competitors;
. its ability to continuously innovate and improve strategies, knowledge,
competences, architecture and co-ordination.
Sustainability will also depend on the ability of competitors (or lack of
ability) to imitate or surpass a business that has achieved a superior level
of performance. Finally, it will depend on changes in the business environment,
like technological change, which may be beyond the control of the
leading competitor and which may enhance or reduce its competitive
advantage.
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[ 159 ]
Transnational, global and international business strategies
A successful international strategy must create and then sustain competitive
advantage across national boundaries whether on a regional or worldwide
basis. Global, regional and multidomestic strategies were once perceived as
the only international strategic alternatives. A key concept to emerge in the
late 1990s, however, was that of transnational strategy. This is a concept
that combines the efficiency gains of a global strategy (with its scale
economies) with the advantages of local responsiveness.
The next section considers the various theories that seek to explain how
competitive advantage is created and sustained. Figure 6.1 is illustrative of
the process of formulating a transnational strategy. It incorporates the
various approaches to global strategic management. The approach is
both ‘inside out’ and ‘outside in’ (see Chapter 3), in that the importance
of simultaneous, continuous and iterative internal and external analysis of
the business and its environment are recognized as inseparable from the
process of developing core competences, generic and transnational
strategy.
Note: core competences are entirely dependent on organizational
knowledge.
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Analysis of the global
business
Analysis of the global
business environment
Identification
of core competences
Value-adding activities
Leverage and build core
competences and
build collaborative ventures
Identification
of generic strategy
Markets
Competitive
scope:
– broad
– narrow
Geographic
scope:
– global
– local
Configuration
– Concentration
– Dispersion
Co-ordination
– Integration
– Responsiveness
Where and how can
competences be exploited?
Transnational Strategy
Figure 6.1 Global and transnational strategy formulation
Strategies – the choice
Various authors have developed typologies of global strategy which
provide the focus of this section. Broadly speaking, the various typologies
can be divided into three main categories:
1. those that centre on the organization’s generic strategies and its
competitive positioning as the sources of competitive advantage;
2. those that focus on knowledge, resources, capabilities and competences
as sources of sustained superior performance;
3. those that emphasize the co-ordination and integration of geographically
dispersed operations in the pursuit of global competitiveness.
This chapter integrates all three approaches into a framework for evaluating
the transnational strategies of global organizations.
There are three well-established frameworks that explain the ways
in which sustainable competitive advantage can be achieved. These
approaches are summarized in the next three subsections.
Competitive positioning
This approach is based largely on the work of Porter (1980, 1985) on
industry analysis, value chain analysis and generic strategy (see Chapters
3 and 4). Industries are assessed for their potential profitability, valueadding
activities are assessed for their effectiveness and efficiency and a
generic strategy is developed which creates a strategic fit between the
opportunities and threats in the environment and the strengths and weaknesses
of the business itself. According to the competitive-positioning
school of thought, it is the ability of the business to select the appropriate
generic strategy for its industry, and to configure its value-adding activities
in support of it, which will generate competitive advantage.
Knowledge and competence-based strategy
The core competence approach is based on the work of theorists including
Penrose (1959), Prahalad and Hamel (1990), Stalk et al. (1992), Kay (1993)
and Sanchez and Heene (1997). In this model of strategy, businesses are
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viewed as open systems interacting with their environments to acquire
resources and deliver outputs (products). According to this school of
thought, superior performance is based on the ability of the business to
develop core competences that are not possessed by its competitors and
that create perceived benefits for consumers. Existing core competences
can be leveraged, and new competences can be built in order to generate
competitive advantage in both new and current markets. Additionally,
competitive advantage can result from collaboration with suppliers, customers
and even competitors. For Prahalad and Hamel (1990) core
competences are based on the collective learning (or knowledge) of the
organization.
More recently, attention has focused on knowledge as the key element of
core competences (Grant, 1997; Stonehouse and Pemberton, 1999; Nonaka
et al., 2000; Stonehouse et al., 2001). Knowledge, in an organizational
context, can be regarded as ‘principles, facts, skills, and rules which
inform organizational decision-making, behaviour and actions’ (Stonehouse
and Pemberton, 1999). This knowledge will form the basis of all the
organization’s activities, competences, products and services. Competitive
advantage depends on the ability of the organization to develop new
knowledge, and hence core competences, more quickly or effectively
than its competitors.
Global strategy
Writers on global strategy, including Porter (1986a, b and 1990), Bartlett and
Ghoshal (1987, 1988 and 1989), Prahalad and Doz (1986) and Yip (1992)
argued that in international business there are significant advantages to be
gained from the global scope, configuration and co-ordination of a firm’s
international activities. Yip argues that global strategy must be tailored to
match each of the globalization drivers in an industry.
Although they are often seen as alternative approaches, the competitive
positioning and resource-based approaches are viewed as being complementary
to each other in this book. By drawing on all three approaches it is
possible to develop a comprehensive overview of all the strategic alternatives
available to a global business.
In the remainder of this chapter we discuss each of these schools of
thought in more detail.
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Knowledge and competence-based strategy
The emphasis on the organization itself
We introduced the ideas behind competences when we discussed internal
analysis in Chapter 3. In this chapter we consider the competence-based
idea of strategy as it relates to competitive success.
The knowledge and resource-based approach to strategy focuses on
the business itself, rather than the industry, as the primary source of
competitive advantage (in contrast to the competitive positioning school).
Within any global industry or market, those businesses that perform exceptionally
do so because they possess qualities that make them both
distinctive from, and superior to, their competitors. These qualities are
known as core competences (Prahalad and Hamel, 1990) or distinctive
capabilities (Kay, 1993) and are based on superior knowledge (Stonehouse
and Pemberton, 2001). This section explains what constitutes a core competence
or distinctive capability, the knowledge on which they are based,
how knowledge can be created and managed, and, finally, how such
competences can be deployed as the essence of a successful transnational
strategy.
In Chapter 3 we learned that to distinguish between competences and
core competences was an important starting point in understanding this
approach. While competences are abilities possessed by all competitors
in an industry, core competences are possessed only by those who
achieve superior performance.
Prahalad and Hamel (1990) argued that a core competence might:
. provide potential access to a wide variety of markets;
. make a significant contribution to the perceived consumer benefits of the
end product;
. be difficult for competitors to emulate.
The components of core competences
Core competences have three essential components: resources, capabilities
and perceived consumer benefits. This make-up of a core competence is
illustrated in Figure 3.2.
Resources
The first two of these, resources and general competences, were
introduced in Chapter 3. Resources – the inputs into an organization’s
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processes – include human, financial, physical, technological, legal and
informational resources. They can be both tangible and intangible, but
are much easier to identify and evaluate than capabilities and competences,
which may be invisible. The quality, cost and availability of resources to a
business will affect its ability to compete, but the same or similar resources
can often be acquired by competitors. Accordingly, resources alone are
unlikely to create a core competence or sustainable competitive advantage.
Nevertheless, resources contribute to core competences.
Human resources in particular are important in forming core competences.
In addition, human resources can significantly affect an organization’s
ability to co-ordinate its activities and to learn from its experiences.
Thus, according to Prahalad and Hamel (1990) ‘the value of human capital
in the development and use of capabilities and core competencies cannot
be overstated.’
In a dynamic environment, businesses must be flexible and ‘a firm’s
strategic flexibility can be increased by acquiring resources that are flexible
(i.e., can be switched among a range of different uses quickly and at low
cost)’ (Sanchez and Heene, 1997). Resources are valuable in creating core
competences when they are superior to those of competitors, when they
are not accessible to competitors, when they cannot be substituted and
when they cannot be copied. Resources are both generated within the
business and are obtained from external suppliers. The importance of a
resource to the development of a core competence ‘depends on the way a
firm combines, co-ordinates, and deploys that resource with other firmspecific
and firm-addressable resources’ (Sanchez and Heene, 1997).
General competences and capabilities
Competences or capabilities are assets that are essential to the operation of
the competitors within an industry. Capabilities are specific skills, relationships,
organizational knowledge and reputation. Capabilities are much less
tangible and visible than resources. A capability may or may not be ‘core’.
This will depend on the extent to that it is a capability that is possessed by
competitors. In other words, all core competences stem from an organization’s
capabilities, but not all capabilities are core competences. A core
competence will be a capability that is unique to the individual business
and that adds value to its products. A capability must therefore meet certain
criteria before it is regarded as a core competence (see below).
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Core competences and distinctive capabilities
‘Owning’ core competences
Core competences, or distinctive capabilities, are a combination of resources
and capabilities which are unique to a specific business and
which generate its competitive advantage.
Resources and capabilities form core competences when they create
sustainable competitive advantage for a business. This will arise when a
combination of resources and capabilities:
1. adds to perceived customer value of the product – the product is
perceived as possessing advantages over those of competitors;
2. is superior – it adds greater value than capabilities possessed by
competitors;
3. is complex, difficult to imitate and durable – this will prevent competitors
from identifying the characteristics of the capability and
copying it;
4. is unique – it is not available to competitors;
5. is non-substitutable – it cannot be substituted by other resources and
capabilities;
6. is adaptable – it can be leveraged to give competitive advantage in
other markets.
A business will create a core competence when it combines its resources
and capabilities in such a way that the competence produced meets the
criteria above.
Core competences and collaboration
Core competences are also often based on unique external and/or collaborative
relationships. Marks & Spencer’s competitive advantage is, in part,
due to its unique relationships with its manufacturers and suppliers who
contribute to its core competence as a retailer. This is largely based on its
reputation for high quality and reliability. Collaboration can add to competitive
advantage by:
. combining the core competences of two different organizations to add
greater value and to increase complexity, so reducing the danger of
imitation;
. allowing the partners to specialize on a smaller number of competences;
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. denying access to resources for competitors;
. increasing strategic flexibility.
Cravens et al. (1997) demonstrated the benefits of collaboration in producing
competitive advantage through the example of the sportswear company
Tommy Hilfiger:
A network organisation linked with independent global suppliers and
marketers, Hilfiger designs its own products and licences its name to
other organisations for products such as fragrances and jeanswear.
Innovative versions of traditional casual wear clothing, high quality
products and efficient production enables Hilfiger to appeal to the price
segment between Polo and The Gap. Sales and net product growth
have been impressive. Remarkably, the company has less than 500
employees, generating about $1 million in sales per employee compared
with only $55,000 per employee for a leading competitor
(Cravens et al., 1997).
Prahalad and Hamel (1990) cited numerous examples of core competence
producing competitive advantage. Philips’ development of optical media,
notably the laser disc, has spawned a whole new range of products.
Honda’s engine technology has led to advantage in car, motorcycle, lawnmower
and generator businesses. Canon’s mastery of optics, imaging and
microprocessor controls has allowed it to compete in diverse markets
including copiers, laser printers, cameras and image scanners.
Prahalad and Hamel (1990) went on to argue that global leadership in a
market is likely to be based on no more than five or six competences. These
competences will allow an organization’s management to produce new and
unanticipated products and to be responsive to changing opportunities
because of production skills and the harnessing of technology. Given the
turbulence of the global business environment, such adaptability is essential
if competitive advantage is to be built and sustained.
Knowledge, core competences and global
competitive advantage
Knowledge is the sole source of core competence and hence sustainable
competitive advantage. It is Sony’s knowledge of consumer electronic
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technology, Nike’s knowledge of consumer attitudes, marketing and supply
chain management which give rise to their respective core competences. As
a consequence of the pace of change in the business environment, competitive
advantage can only be achieved and sustained by the creation of
new knowledge at a faster rate than competitors. Knowledge creation
involves individual and organizational learning, so that organizations must
develop behaviours, systems and structures (a social architecture or organizational
context) which will enable them to create and manage knowledge
more effectively than their competitors (Senge, 1990; Stonehouse and
Pemberton, 1999; Nonaka et al., 2000).
Knowledge
As indicated earlier, organizational knowledge can be defined as ‘a shared
collection of principles, facts, skills, and rules which inform organisational
decision-making, behaviour and actions’ (Stonehouse and Pemberton,
1999). Organizational knowledge concerns any aspect of its activities
(e.g., R&D, sourcing, production, marketing, distribution) and is also
embodied in its core competences, processes, technology, products and
services, so as to deliver superior performance. It is new knowledge that
produces improved behaviours and performance, and thus competitive
advantage. Knowledge can be considered as explicit or tacit. Explicit
knowledge is knowledge whose meaning is clearly understood and its
details can be readily recorded and stored. This explicit knowledge is
articulated in the procedures and processes which allow an organization
to function efficiently and effectively. Examples of explicit knowledge
include accounting procedures, business manuals, training manuals and
so on. Tacit knowledge, on the other hand, is expert knowledge, derived
from experience. It is by nature difficult to record and store, but, equally, it
can be an essential source of competitive edge. Table 6.1 gives a comparison
of the main features of explicit and tacit knowledge.
Both explicit and tacit knowledge contribute to competitive advantage
through their interaction, but tacit knowledge is of greater value at one level
as it gives rise to sources of competitive advantage that are intangible and
difficult for competitors to emulate. Paradoxically, it is this same intangibility
which makes it difficult for organizations to convert it from individual
knowledge into organizational knowledge.
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Knowledge creation and management
Knowledge creation and management require an organization to become
‘knowledge-centric’ by creating an ‘organizational context’ (Stonehouse
and Pemberton, 1999) or ‘social architecture’ (Senge, 1990) which facilitates
the rapid development of new knowledge. This organizational context,
or social architecture, comprises the organization’s leadership, culture,
structure and infrastructure (technology and systems).
The organizational context in a knowledge-centric organization is likely
to display the following characteristics:
. leadership – a vision and leadership style which facilitate learning and
innovation and which foster an organizational culture, structure and
infrastructure conducive to individual and organizational learning;
. culture (organizational) – fosters experimentation and the sharing of
ideas, and values learning and knowledge highly;
. structure – encourages the sharing of ideas by concentrating expertise
together and at the same time has substructures and systems which allow
ideas to be shared across the whole organization (network or matrix
structures, project teams and task groups);
. infrastructure – the configuration and use of information and communications
technology and systems to store and share knowledge.
The ability to transform individual knowledge into organizational knowl-
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Table 6.1 Explicit and implicit knowledge
Explicit Tacit (implicit)
Format Codified (tangible) Uncodified (intangible)
Recording Recorded in documents, procedure, Stored in the memory of an
processes individual
Objectivity Objective (independent of the Subjective (dependent on the
individual) individual)
Context Context-free, widely accepted Context-specific, not widely
understood
Communication Through written, spoken, Difficult, depends on experience
multimedia formats
Emulation/Imitation Easily emulated, copied Difficult to emulate
Contribution to business Essential to the operation of the Often the essence of
operation/competitive business, interacts with tacit competitive advantage
advantage knowledge
edge is vital to competitive advantage in a changing environment because
‘knowledge is . . . one of the few assets that grows most – usually exponentially
– when shared’ (Quinn, 1992).
Sharp Corporation N a knowledge-centric
organization
Adapted from Nonaka and Takeuchi (1995) among many others
Sharp Corporation is a large and very successful producer of electronics
products. Its founder was an inventor named Tokuji Hayakawa
who gradually moved into the manufacture of radios and in postwar
years became one of the first and leading manufacturers of television
sets. The business has always recognized the importance of knowledge
as the essence of its business success. In fact, Hayakawa had told his
employees from the beginning: ‘Don’t imitate. Make something that
others want to imitate’ (Nonaka and Takeuchi, 1995). He thus fully
recognized the need for knowledge creation as the basis of competitive
advantage from the outset of the business.
Since the 1980s the organization has sought to institutionalize the
creation of knowledge through its culture, structure and systems. The
‘Corporate R&D Group’ is responsible for long-term technology and
product development, the ‘Business Group’ deals with medium-term
developments and the ‘Business Division Laboratories Group’ deals
with short-term developments. The Corporate R&D Group develops
concepts and prototypes, the Business Group and Business Division
Laboratories Group are responsible for commercializing the ideas. The
Business Division Laboratories Group brings together engineering,
production and marketing functions to share knowledge and ensure
that new products are commercially viable. Regular conferences are
held throughout the organization to both co-ordinate knowledge creation
and to ensure that knowledge is shared effectively. In addition, an
‘Urgent Project System’ brings together multidisciplinary project teams
to develop strategic projects when developments are required without
delay.
Organizational learning
Organizational learning can be categorized as ‘single loop’ (adaptive) or
‘double loop’ (generative) (Argyris, 1977, 1992; Senge, 1990). Single loop or
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adaptive learning is concerned with organizations adapting behaviour in
response to changes in their environment. Double loop or generative learning,
on the other hand, is concerned with both building new knowledge, so
as to do business in new ways, and with modifying the organization, so that
it is truly knowledge-centric. As Quinn (1992) put it, ‘By concentrating on
key elements of the learning process companies can leverage intellect
enormously.’
Knowledge creation and management in transnationals
Transnational business activity brings an extra dimension to knowledge
creation and management. On the one hand, differences in language,
culture, political and economic conditions can complicate knowledgebased
processes, but at the same time transnational operation provides
greater opportunities for knowledge-creating synergies.
Transnationals often concentrate their value-adding activities in certain
locations on the basis of availability of highly specific knowledge. For
example, Silicon Valley in the USA is a focus for expertise in computing
while fashion design centres on Milan, Paris, London and New York.
Quinn (1992) also points out that knowledge grows exponentially when
it is shared. Such knowledge sharing can take place within and between
organizations, and within and across national boundaries. It is the synergies
created through knowledge sharing which give rise to the exponential
growth of knowledge identified by Quinn. In short, the major benefits of
knowledge sharing are faster creation of knowledge through its exponential
growth, prolonged competitive advantage through the creation of core
competences that are difficult to emulate and knowledge synergies.
Competence building and leveraging
Key to the success of organizations possessing knowledge-based core
competences is the extent to which they can build new ones to account
for changes in their environments and the extent to which they can be
leveraged to establish an advantage in another market. When international
markets are concerned, this ability can be one of the most crucial of all:
. competence building is the development of new competences through
organizational learning which are required to compete either in an
existing market that is changing or in a new market;
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. competence leveraging is the application of existing competences in a
new market.
Entry to a new market will often require both competence leveraging and
competence building. Similarly, collaboration between organizations may
well provide access to new markets by combining the core competences of
different businesses.
Global organizations must develop core competences that provide the
organization with the ability to access a range of global markets. Many of
the leading fashion design houses like Ralph Lauren and Calvin Klein have
exploited their core competence in fashion by entering the global market
for fragrances.
The process of gaining competitive advantage through global competences
involves the organization in:
1. identification of its resources, capabilities and competences;
2. identification of the need for competence leveraging and building
within existing markets to preserve or enhance competitive position;
3. identifying industries and markets where core competences may give
competitive advantage;
4. identifying the need for competence leveraging and competence building
to enter new markets.
Implicit in the processes of competence building and leveraging is analysis
of the environment (macroenvironment, industry, market, competitors and
strategic group) to identify the need or opportunity for competence development
(leveraging or building). In particular, organizations seeking to
leverage competences and actually seeking the opportunities that the
strategic analysis throws up.
Globalization of business activities provides several opportunities that
relate to a business’s core competences:
1. core competences can be exploited globally in a large number of
countries and markets;
2. new sources of resources can be identified and exploited, making use
of localized advantages to potentially strengthen core competences;
3. value-adding activities can be reconfigured to enhance core competences.
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Summary of knowledge and competence-based strategy
In overview, competence-based (or resource-based) strategic management
emphasizes the importance of an ‘inside out’ approach to the development
of transnational strategy. A transnational strategy must be based on core
competences that provide access to global markets. Adopting a transnational
approach also provides opportunities for competence strengthening,
building and leveraging. A number of factors can contribute to a global
core competence. Each one needs to be distinctive and unique in order to
achieve competitive advantage:
. products and relationships to distributors and customers;
. resources and relationships to suppliers;
. company-specific information, knowledge and organizational learning;
. collaboration with businesses with complementary core competences;
. configuration or architecture of global internal and external activities;
. methods of co-ordinating global activities;
. culture of the organization;
. technology and the way that it is employed.
Alternative approaches to resource-based strategy
Stalk et al. (1992) advanced similar ideas on what they called ‘capabilitiesbased
competition’. They suggested four basic principles on which such
competition should be based. By focusing on these four factors, they
argued that these would, in turn, enhance the organization’s ability to
achieve a superior performance:
1. corporate strategy consists of a focus on business processes rather than
products and markets (superior processes will, in turn, result in superior
products);
2. competitive success depends on transforming a company’s key processes
into strategic capabilities that consistently provide superior
value to the customer;
3. companies create these capabilities by making strategic investments in
a support infrastructure that links together and transcends traditional
strategic business units and functions;
4. because capabilities necessarily cross functions, the champion of a
capabilities-based strategy is the CEO.
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A capability, in the context of Stalk et al.’s meaning of the term, is a set of
business processes whose strategic importance has been understood. In
other words, organizations must identify which of their processes are of
strategic importance and must focus on them.
Distinctive capabilities
Kay (1993) developed the concept of capability and that of the value chain
a stage further. He argued that the achievement of competitive advantage
relies on distinctive capability. This idea of distinctive capability is similar to
that of core competence. In both cases the organization acquires competitive
advantage by possession of attributes that make it superior to its
competitors. These attributes may be features of products or services, or
may result from the way that activities are organized. According to Kay
(1993), distinctive capability depends on:
1. architecture – the networks of relationships both within and outside a
business which are critical to determining its success;
2. reputation – this is based on product quality and characteristics, but
equally as important is how effectively the information is conveyed to
consumers;
3. innovation – the ability to successfully develop and market new
products;
4. strategic assets – these are advantages based on dominance or market
position and include natural monopoly, cost advantages and market
restrictions like licensing.
Although resource-based strategy can be viewed as an alternative to the
generic strategy or competitive positioning approach, there are advantages
in viewing strategy from both perspectives in seeking to identify sources of
competitive advantage.
Manchester United and superior performance
One of the most successful football clubs of all time is Manchester
United. With a turnover (total sales) in 2003 of over £150 million,
Manchester United was also the biggest football club, in business
terms, in the world. Many rival managers and fans have long looked
to Manchester United for clues as to what has been the source of its
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continued success, but as with all successful businesses the sources of
its superior performance are complex.
The club was first formed in 1878, under the name Newton Heath
LYR (Lancashire and Yorkshire Railway). When the football league was
first formed in 1888, Newton Heath did not consider itself good enough
to become a founder member alongside the likes of Blackburn Rovers
and Preston North End. How things were to change in later years.
It won its first domestic championship title in 1908 (the old first
division), its first FA challenge cup in the following year and, since
those early successes, went on to win the domestic championship
(first division and premiership) a total of 15 times. This is in addition
to 10 FA Cup wins, two European Champions’ Cup wins and a handful
of other honours. Since the Premiership was formed in 1992,
Manchester United have won it seven times.
As with many other football clubs in its ‘league’, Manchester United
has the key resources of a good quality stadium, a squad of players, a
loyal support base and a number of sources of revenue with which to
build and strengthen the team. For those seeking to understand the
club’s continued success, however, other internal factors need to be
explored. Observers have long noticed that the club seems not only to
be able to attract the best players to the club through the transfer
system but it has also brought some of the best players in the world
up through its youth network. The reputation of the club as one of the
most successful teams in Europe means that top players are keen to
play for the team, and the strong revenue flows through the loyal fan
base, the club-owned television station and many club shops mean that
the club is one of the richest when it comes to affording transfer fees.
Its stadium, Old Trafford, is thought to be one of the best in Europe and
is capable of accommodating over 67,000 fans.
Since Sir Matt Busby built a top Manchester United team in the 1950s
and 1960s (capable of winning its first European Cup in 1968), the club
has continued to enjoy success, with one or two short exceptional
seasons, partly because of its succession of successful managers. The
club’s ability to select and develop managers has been noted by rival
clubs and the appointment of Alex (later Sir Alex) Ferguson in 1986
brought about the most sustained period of success in the club’s
history.
One doesn’t need to be a fan of the club to observe and understand
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the reasons for its continued success. Other clubs have, to varying
degrees of success, sought to emulate parts of its winning strategy,
and in most respects such activities are about obtaining and developing
resources to help achieve competitive success. Its knowledge gap
advantage is more difficult to describe, but may lie partly in networks,
contacts, ability to recruit and retain fans and its understanding of
strategy and tactics in both managing players and in playing the
game itself.
Competitive positioning – Porter’s generic strategies
The generic strategy framework
The competitive-positioning school of thought is the second major way in
which competitive advantage is explained. Porter (1985) argued that competitive
advantage depends on selection of the most appropriate generic
strategy for achieving business objectives in the context of the competitive
environment. This generic strategy can be one of, or a combination of,
three types – cost leadership, differentiation and focus (Figure 6.2).
Although we introduce these strategies here, the global and international
variants are explored later in this chapter. Although Porter’s work has been
criticized (Cronshaw et al., 1990; Kay, 1993; Sanchez and Heene, 1997), it is
still a very widely used model of competitive behaviour.
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Cost leadership
Cost focus Differentiation focus
Differentiation
Low cost Differentiation
Broad
Narrow
Strategic scope
Figure 6.2 The generic strategy framework
Adapted from Porter (1985)
Cost leadership strategy
A cost leadership strategy implies that a business endeavours to be the
lowest cost producer within an industry. The main advantages of such a
strategy to a business are twofold. First, there is the potential to earn profits
above the industry standard while charging a price comparable with the
average for the industry. Second, the strategy places the business in a
position where it is able to compete effectively on the basis of price,
both with existing competitors and with potential new entrants to the
industry. Value chain analysis (see Chapter 3) is central to identification
of where cost savings can be made at various stages in the value chain and
its internal and external linkages.
To establish a position as cost leader depends on the organization of
value chain activities so as to:
. advertise and promote the product to achieve large volume sales;
. achieve economies of scale in the production process;
. invest in and utilize the latest production technology, thus lowering
production costs;
. achieve the highest levels of productivity, thus reducing labour costs;
. copy designs rather than producing originals;
. acquire cheaper raw materials (as measured on a unit cost basis);
. reduce distribution costs;
. obtain locational cost advantages;
. secure government assistance;
. exploit organizational knowledge and experience.
A cost leadership strategy will normally entail charging a price equal to or
slightly lower than competitors so as to increase sales, although the real aim
is to charge a price roughly equivalent to the industry norm, selling a similar
volume to competitors but earning higher than normal profits because unit
costs are lower. Such a strategy can be most effective in a situation where
price elasticity of demand for the product is high. In this situation a slightly
lower price than competitors will result in a more than proportionate gain
in sales.
It is often used as the strategy for entering a new market. For example,
some of the major Japanese car and motorcycle manufacturers initially
entered overseas markets on the basis of low-cost and low-price strategies
(see ‘Hybrid strategies’ below), often coupled to focus on a particular
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market segment (see ‘Focus strategies’ below). Similarly, international
markets provide the opportunity for the large-volume sales that are essential
to the success of a cost leadership strategy.
Differentiation strategy
A differentiation strategy seeks to distinguish a company and its products
from its competitors by establishing characteristics for the company and its
products which are perceived as both unique and desirable by customers.
The aim is to reduce the price elasticity of demand for the company’s
product so that higher prices can be charged without significant reductions
in demand (because consumers perceive the product as superior to those
of competitors).
Differentiation can be achieved in a variety of ways including creating
distinctiveness in brand name, technical superiority, quality, packaging,
distribution, image or after-sales service. A business can create differentiation
by organizing activities so as to:
. provide superior service relative to price;
. innovate continually providing the technical superiority to stay ahead;
. make customers perceive and believe that the product is superior by
branding and advertising of products and services.
The differences between a company’s product and those of its competitors
may be real (e.g., in design) or perceived (they may be created by advertising
and brand image). Levi jeans, for example, may be of high quality, but
the ability of Levi’s to charge a premium price may well be more to do with
the perception of consumers that they are also a fashionable brand name.
Consumer perceptions are the decisive influence in such a situation.
Focus strategy
In some situations, businesses choose to target only certain segments of the
market in which they operate. This is termed a focus strategy. This can
imply focus on a specific geographical segment or concentration on a
particular group of buyers within the market. To compete with other companies
within the chosen market segment, businesses may employ a cost
focus strategy that is essentially cost leadership confined to one market
segment. Alternatively, they may utilize a differentiation focus strategy
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whereby they seek to differentiate themselves and their product from other
products within the chosen market segment.
A good example of differentiation focus is that of Porsche, the German
sports car manufacturer. It focuses on the performance car segment of the
automobile market and does not produce cars for other segments of the
market. Its cars are sold on the basis of brand name, based on consumer
perceptions that its products are technically superior to those of competitors,
are better designed, have superior performance and are more
reliable than those of their competitors.
Focus strategy is based on identification of a market segment with distinct
characteristics and selecting a strategy that matches those characteristics.
There are two possibilities for strategy based on segmentation:
. focus – on a single segment;
. multifocus – focus on a number of segments (a variation of the same
generic strategy will be used in each segment of the market to match its
characteristics).
A focus strategy is most suitable for a business that is not large enough to
target the whole market, so that targeting only one segment is the most
viable possibility. It is also appropriate in markets where distinct segments
can be clearly identified. This makes it possible to minimize costs and/or to
achieve differentiation.
Hybrid strategies
Porter argued that to acquire sustainable competitive advantage a business
must select one of the generic strategies. To attempt to be cost leader and to
differentiate simultaneously will (he argued) result in the organization
being ‘stuck in the middle’. This, according to Porter, is unlikely to result
in competitive advantage that is sustainable.
Both the underlying assumptions of the generic strategies and the idea of
being ‘stuck in the middle’ have been criticized. In the case of cost leadership,
low cost itself does not establish competitive advantage, as it does
nothing to promote sales of a product. Low price may, however, encourage
sales. Thus the combination of low cost and low price may jointly produce
competitive advantage. In the case of differentiation, Porter emphasized
that it allows the company to charge a premium price. Differentiation,
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however, also presents the alternative of charging a price comparable with
that of competitors so as to increase sales volume and augment market
share. Equally, there is evidence to support the view that many companies
pursue a strategy that combines very low costs with differentiation to
produce competitive edge. The Japanese automobile manufacturer
Nissan is a good example of a business broadly adopting such a strategy.
A strategy that combines elements of low cost, price and differentiation is
known as a hybrid strategy (Johnson and Scholes, 1993). The extent of each
of these elements in the strategy will depend on the nature of the market in
which the business is operating. In markets where consumers show a preference
for quality the emphasis will then be less on price and costs, while in
markets where demand is price-sensitive the emphasis will be on keeping
both price and costs as low as possible. A hybrid strategy can be successful
but only where it is a conscious decision. Being stuck in the middle because
of lack of awareness is usually a recipe for failure. Mintzberg (1991) made
the point that, ‘price can be viewed as simply another way of differentiating
a product.’ A business that uses price as a major element of its strategy must
also concentrate on keeping costs low.
The generic and hybrid strategy frameworks provide an alternative
explanation of the sources of competitive advantage to those provided
by competence theory. It must be accepted that there is a difference of
emphasis between the two approaches, but there are also linkages. The
success of the generic strategy adopted by a business is dependent on its
ability to configure its value-adding activities in a way that appropriately
supports the strategy. Similarly, there are strong relationships between
resources, capabilities, core competences and configuration and coordination
of value-adding activities. In this way the two approaches
provide different but complementary perspectives on the various sources
of competitive advantage.
Knowledge, core competence and generic strategy –
a synthesis
Drawing the threads together
Different strategies require different configurations of value chain activities
and are associated with different areas of core competence. For example, a
differentiation strategy is likely to place a strong emphasis on design and
GLOBAL AND TRANSNATIONAL STRATEGY
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marketing activities. Core competences in these areas are likely to be
distinctive from those of competitors. In this way the value chain provides
the bridge between generic strategy and core competence. Porsche pursues
a focus differentiation strategy. Its core competences in design, technology
development and marketing underpin its brand name, which is the basis
of its differentiation. Its value-adding activities emphasize design, technology
development and marketing, so as to enhance its reputation.
Thus Porsche’s core competences are rooted in its value-adding activities.
The relationship between generic strategies, core competences and valueadding
activities is illustrated in Table 6.2.
Grant (1991) presented a similar line of argument stating that ‘capabilities
are developed in functional areas.’ Table 6.3 illustrates the capabilities
associated with the functional areas of several businesses.
Clearly, differentiation strategies will rely on knowledge and core competences
centred around design, marketing and distribution, while cost or
price-based strategies will be more dependent on production, purchasing
and marketing. Having reviewed the strategy alternatives generally
available to all businesses it is now necessary to explore those specific to
transnational businesses.
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Table 6.2 Generic strategies and core competences
Generic strategy Associated value Associated areas of knowledge and core
chain activities competence
Differentiation Design Innovation to deliver improved product quality,
new products and new product features.
Marketing Strong brand identity created through reputation,
advertising and promotion, and design features.
Distribution Product available to target consumer groups.
Distributors add value to the product.
Service Superior service adds to product differentiation.
Cost leadership/price-based Production Lowering of production costs through use of
latest technology.
Marketing Market on basis of price to achieve economies of
scale. Knowledge of customer’s price preferences.
Purchasing Purchase in volume and use cheaper materials.
Collaborative relationships with suppliers.
Global and transnational strategy
Domestic and global strategies have much in common. They are both based
on core competences, generic strategies and the way in which value-adding
activities are organized. Equally, however, global strategy differs from
domestic strategy in the following respects:
. the scale and scope of activities are greater;
. there are far more alternatives for the configuration of value-adding
activities;
. there are not only greater difficulties in co-ordinating global activities but
also greater scope for competitive advantage if activities are effectively
co-ordinated;
. the strategy must take account of cultural and linguistic similarities and
differences;
. national economic and factor conditions differ and can be harnessed to
give competitive advantage.
Porter’s work (1986a, b, 1990) focused on global generic strategies and
the possibilities for global configuration and co-ordination of activities.
Prahalad and Doz (1986) examined the importance of integration and
responsiveness in global strategy. Yip (1992) and Bartlett and Ghoshal
(1987, 1989) presented the models for global strategy and transnational
organization from which the model of transnational strategy in this book
is drawn.
GLOBAL AND TRANSNATIONAL STRATEGY
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Table 6.3 Capability development in functional areas
Functional area Capabilities Examples
MISs Data-processing skills American Airlines
Marketing Promoting brand name Nike
R&D Innovation Honda
Manufacturing Rapid change in product lines. Miniaturization of components Benetton
and products Sony
Adapted from Grant (1991). MIS ¼ management information systems
Porter’s model of global strategy – the value system
Porter (1986a) proposed a model of international global strategy based on
the generic strategy framework. He argued that the generic cost leadership
or differentiation strategies can be operated on a global scale as either
global cost leadership or global differentiation – targeting either an entire
global market or a particular global segment. In other words, the scope of
the strategy can be either broad or narrow but on a global scale. The
success of such global strategies will depend on the market being global.
When global market conditions do not exist a country-centred strategy can
be implemented based on responsiveness to local needs.
Of much greater significance is Porter’s work (1986a, b, 1990) that advanced
two unique options, based on the value chain concept, which are
available to enhance corporate strategy in global markets. These choices
are:
. configuration – where and in how many nations each activity in the
value chain is performed;
. co-ordination – how dispersed international activities are co-ordinated.
The decisions of the business relating to these two choices are the key to
international competitive advantage.
Configuration
The way in which a business configures its upstream, downstream and
internal value-adding activities presents several alternatives. A business
may choose to concentrate its manufacturing activities in one nation and
to export and market in a range of countries. Alternatively, a global business
may decide to disperse its value-adding activities to several nations. In
both cases the advantages of alternative locations for each activity will
influence the architecture of value chain activities which is finally selected.
It is important to note that changes in technology may well lead to changes
over time in the configuration that gives greatest competitive advantage.
Organizations must constantly strive for the optimal configuration of their
international operations showing flexibility in dynamic conditions.
There are two broad directions of configuration of value-adding
activities – concentration or dispersal.
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(1) Concentrating activities
In some industries there are advantages to be obtained from concentrating
activities in a small number of nations and exporting to foreign markets.
This is true when locational factors are important and regional advantages
may be gained.
(2) Dispersing activities
Competitive advantage may arise from dispersing activities in several
nations. Dispersed activities involve foreign direct investment (FDI). It is
best to disperse activities when:
. transportation, communication or storage costs are high;
. factors like exchange rates and political risk are important;
. national markets differ because of culture;
. governments exert influence via tariffs, subsidies and nationalistic
purchasing (governments tend to favour location of the whole value
chain in their country).
Dispersed global strategies involving FDI are typical in such industries as
services, health care, telecommunications, etc.
Co-ordination
In addition to adopting the optimum configuration, competitive edge can
be gained by the efficient and effective co-ordination of diverse activities
that are located in a number of different nations. According to Porter (1990),
‘Co-ordination involves sharing information, allocating responsibility, and
aligning efforts.’ It is differing linguistic, cultural, political, legal, technological
and economic factors, coupled to geography and distance, which
pose the problems that beset multinational co-ordination. It is the global
businesses that overcome these problems most effectively who will gain the
greatest competitive advantage from a global strategy.
Figure 6.3 shows the various alternatives that exist for global organizations
from a country-based strategy with widely dispersed activities,
requiring minimal co-ordination to what Porter called purest global strategy.
In this purest global strategy, activities are concentrated and extensive
co-ordination is in evidence. The configuration chosen, and the extent of
global co-ordination of activities, will depend on the nature of the industry
and markets in which the business operates.
GLOBAL AND TRANSNATIONAL STRATEGY
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Integration and responsiveness
Prahalad and Doz (1986) reached conclusions that are in some respects
similar to those of Porter (1986a, b, 1990). Prahalad and Doz identified three
major characteristics of global management.
(1) Global integration of activities
This is the centralized management of geographically dispersed activities
which is necessary to reduce costs and optimize investment. In striving to
reduce costs, corporations may use low-wage labour in South East Asia,
shipping products to well-developed markets in Europe and America. Thus
there is a need to manage across national boundaries.
(2) Global strategic co-ordination
This is the strategic management of resources across national boundaries.
It includes co-ordination of R&D, pricing and technology transfer to subsidiaries.
Prahalad and Doz argued that ‘The goal of strategic co-ordination
is to recognise, build and defend long-term competitive advantages.’
(3) Local responsiveness
This requires that decisions be taken locally by subsidiaries where local
market conditions dictate the need for local responsiveness. Such markets
are not global in nature.
To summarize, Prahalad and Doz (1986) suggested that corporate success
at an international level is dependent on the ability of the business to co-
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High co-ordination of
activities
High foreign investment in
dispersed activities with a
high degree of co-ordination
among subsidiaries
Country-centred strategy for
company with several
national subsidiaries, each
operating in only one country
Purest global strategy (with
extensive co-ordination
and concentration)
Strategy based on
exporting of product/service
with decentralized marketing
in each host country
Geographically
dispersed
Geographically
concentrated
Configuration of activities
Low co-ordination of
activities
Figure 6.3 Configuration and co-ordination for international strategy
Adapted from Porter (1986)
ordinate and integrate global activities, while at the same time retaining
responsiveness to the demands of local markets and changing circumstances
when necessary.
Pressures for and against increased global co-ordination
Stimulating forces
Pressures for global strategic co-ordination include:
. importance of multinational customers – dependence on customers on a
worldwide basis make it necessary to co-ordinate activities globally;
. presence of multinational competitors – global competition demands
global co-ordination;
. investment intensity – where investment costs are high (e.g., R&D costs),
the need to recoup investment costs increases the need for global
co-ordination;
. technology intensity – where technology encourages businesses to
manufacture in only a few locations to control quality and product
development;
. pressure for cost reduction – often stimulates global integration of activities
to intensify scale economies;
. universal consumer needs – lead to standard global products requiring
integration;
. access to raw materials and cheap energy – often means that manufacturing
has to be concentrated in a single area remote from other activities,
thus necessitating integration and co-ordination.
Restraining forces
While the above forces work in favour of increased global co-ordination of
value-adding activities, some factors act to partly offset them. These are
factors that stimulate local responsiveness and include:
. differences in customer needs – when these differ between countries,
local responsiveness is required;
. differences in distribution channels – when such differences exist
between countries, local responsiveness is required in relation to differences
in pricing, promotion and product positioning;
. availability of local substitutes – if local substitutes with different specifications
exist, then there is a need to adapt products in order to compete;
GLOBAL AND TRANSNATIONAL STRATEGY
[ 185 ]
. market structure – where local competitors are important and there is a
high concentration, then businesses must respond locally;
. host government demands – when such governments promote selfsufficiency
a business may be forced to be more locally responsive.
Prahalad and Doz (1986) represented the relationships between these
factors on an integration responsiveness matrix (see Figure 6.4).
The conclusions reached by Prahalad and Doz’s research are remarkably
similar to those of Porter. Both emphasize the need for global co-ordination
and integration of activities when a global strategy is adopted and the need
for local responsiveness when conditions dictate.
Regional strategies
Under certain circumstances a business may elect to adopt an international
regional strategy as opposed to a multidomestic, global or transnational
strategy. A regional strategy focuses on one or more geographical regions
of the world rather than on an entire world market. Prahalad and Doz
(1986) argued that, although businesses must be multimarket competitors,
they may benefit from choosing to operate in certain ‘critical markets’.
These are markets that, at the minimum:
. are reliable ‘profit sanctuaries’ of the key competitors in that market;
. provide volume and include state-of-the-art customers;
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Figure 6.4 The integration responsiveness matrix
Adapted from Prahalad and Doz (1986)
. have a competitive intensity that allows suppliers to achieve reasonable
margins.
International businesses may therefore choose to adopt a regional strategy
for a variety of reasons. These reasons include:
. the existence of critical markets (as described above) which make
regional operation viable;
. the removal of barriers that have inhibited cross border trade within a
region. Such customs unions as the EU and NAFTA (North American Free
Trade Area) have assisted in this;
. the size and importance of certain regional markets (which tend to be
those where trade barriers have been reduced);
. the limited importance of cultural differences within a particular regional
market in comparison with the more important differences that exist
between certain regions;
. limited business resources and objectives which confine the operations
of the business to a regional scale.
Within a region the organization faces several strategic alternatives. The
regional strategy may be little more than a multidomestic strategy. This
will be the case when there are one or more of the following distinctions
between the national markets within the region: political, cultural, linguistic
or legal. Such distinctions will inhibit the possibilities for standardization
and increased economies of scale. On the other hand, the less such distinctions
exist within a region the greater the opportunities for standardization,
co-ordination and integration of strategies, products and operations.
Total global strategy
Development of total global strategy
For Levitt (1983) globalization implied that the focus of a global strategy
ought to be standardization of products and marketing. In reality, globalization
is far more complex than this and requires the development of more
complex strategies to reflect this. Yip (1992) argued that an industry may be
more or less global in several respects, according to the strength of each of
its globalization drivers. Chapter 4 shows how the extent of globalization of
an industry can be assessed by analysis of the extent to which its market,
GLOBAL AND TRANSNATIONAL STRATEGY
[ 187 ]
cost, competitive and government drivers are global. Global strategy must
then be tailored to match each of the drivers. Yip’s concept of total global
strategy is, therefore, not rooted in the idea of global standardization but
rather in the idea that global strategy must be flexible.
Yip (1992) stated that a total global strategy has three separate components
or stages:
1. developing the core strategy – this is the basis of the organization’s
global competitive advantage;
2. internationalizing the core strategy – the international expansion of
activities and the adaptation of the core strategy;
3. globalizing the international strategy – integrating the strategy across
countries.
Yip’s three stages are considered below.
Stage 1
The core business strategy is viewed as consisting of several elements:
. types of products or services that the business offers;
. types of customers that the business serves;
. geographic markets served;
. major sources of competitive advantage;
. functional strategy for each of the most important value-adding activities;
. competitive posture, including the selection of competitors to target;
. investment strategy.
Stage 2
Internationalizing the core business involves:
. selecting the geographic markets in which to compete;
. adapting products.
Stage 3
Globalizing the core business requires:
. identification of the areas of strategy to be globalized (based on the
globalization drivers);
. integration of activities.
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Global strategy levers
The business must then identify its ‘global strategy levers’ that determine
the way in which the global strategy is used. They are:
. global market participation (which markets and countries in which to
participate);
. global products (standardized products);
. global location of activities;
. global marketing;
. global competitive moves.
The extent to which each of these aspects of strategy is global will depend
on the relative strength of the globalization drivers. A global strategy can
give benefits in terms of reduced costs, improved quality, enhanced
customer preference and competitive leverage.
Transnational organizations
There is a further dimension to global management – that of transnational
strategy. These are strategies that, although global in nature, incorporating a
global configuration and a high degree of co-ordination, allow the business
to retain local responsiveness. Bartlett and Ghoshal (1987, 1988, 1989)
found that managers often oversimplified the choices available to them.
They found such erroneous management attitudes as a belief that it had
to be:
. global strategy versus local responsiveness;
. centralized versus decentralized key resources;
. strong central control versus subsidiary autonomy.
They went on to argue that the transnational business strategy ought to
incorporate the following features:
. strong geographical management to allow responsiveness to local
markets based on sensitivity to local needs;
. strong business management based on global product responsibilities so
as to achieve global efficiency and integration through product standardization,
manufacturing rationalization and low-cost global sourcing;
. strong worldwide functional management to develop and transfer its core
competences via organizational learning.
GLOBAL AND TRANSNATIONAL STRATEGY
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Bartlett and Ghoshal (1989) argued that strong geographical management,
business management and worldwide functional management incorporating
a differentiated organization with extensive co-ordination would enable
the business to develop multiple strategic capabilities to adapt to local and
global needs. Such an organization can be said to have transnational
capability – an essential ingredient of a transnational strategy that is at
the same time global and locally responsive. In fact, there is much in
common between Yip’s approach and that advocated by Bartlett and
Ghoshal.
Global and localized elements of transnational strategy
A transnational strategy combines the benefits of global scope, configuration
and co-ordination with local responsiveness (Figure 6.5). Certain
components of the strategy will be essentially global while others will be
more or less global according to the pressures for globalization or localization.
These pressures are assessed through the normal procedures of
macroenvironmental analysis and an analysis of how the globalization
drivers affect the business.
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Pressures
for
globalization
Global strategy options Local strategy options
Centralized decision making
Concentration of key valueadding
activities
Global sourcing
Standardization of key
product features
Standardization of key elements
of marketing strategy
Global brands and advertising
Locally responsive decision making
Dispersion of certain valueadding
activities
Local sourcing
Local product variations
Local variations to
marketing strategy
Local brands and advertising
Global vision and mission
Global core competence/distinctive capability
Global generic strategy
Integration and co-ordination of
global activities
Differentiated architecture
Participation in key
markets
Transnational strategy
Pressures
for
localization
Those drivers that
are global from:
Those drivers that
are local from:
market
competition
costs
government
market
competition
costs
government
Figure 6.5 Transnational strategy
Globalized components of transnational strategy
The following elements of a transnational strategy are always likely to be
global:
. global vision – this determines the outlook of the business which will
always be to take a global perspective on business activities;
. global knowledge-based core competences – these are core competences
that can be built, enhanced and leveraged to enter global markets;
. global generic strategy – the generic strategy, based on core competences,
will be applied globally;
. global co-ordination – global value-adding activities will be co-ordinated
on a worldwide basis;
. differentiated architecture – activities will be structured so as to maximize
global advantages, but this is likely to mean that some activities are
concentrated while others are dispersed (structures will be adapted to
accommodate this);
. participation in key markets – the transnational organization will always
view the whole world as a potential market but may choose only to target
key markets.
Activities that can be global or localized components in
transnational strategy
Certain components of transnational strategy can be globalized or localized
according to changes in the macroenvironment and to the globalization
drivers:
. decision making – conditions may dictate that decisions are made centrally
or are devolved when local responsiveness is required;
. value-adding activities – may be dispersed or concentrated, or some
combination of the two, according to locational advantages;
. products – may be standardized or adapted when conditions dictate;
. marketing strategy – may be global or local according to consumer and
product characteristics;
. branding – may be global or local according to consumer and product
characteristics;
. sourcing – resources may be globally or locally sourced according to
locational advantages.
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McDonald’s Inc. N an example of
transnational strategy
In recent years McDonald’s has adopted the global vision of becoming
the world’s largest and best fast food restaurant chain. Some of
McDonald’s key objectives emphasize global standardization, as in
the statement: ‘Expand our global mindset by sharing best practices
and leveraging our best people resources around the world.’
McDonald’s restaurants are a mix of company owned and independently
owned franchised restaurants that sell McDonald’s products
(almost) exclusively. The extensive use of franchising lowers expansion
costs and keeps owners motivated to provide high-quality service
so as to earn high profits. McDonald’s itself owns many of the
restaurants with city centre locations. This allows the company direct
control over quality and keeps control of the most profitable locations.
McDonald’s strategy is based on achieving low costs and prices
along with reliable quality and value for money, based on the
McDonald’s brand. The company’s strategy is based on knowledge
of modern lifestyles, young people’s tastes, food production processes
and service levels. Coupled with this is constant product innovation
and effective marketing tools including the twin arches logo and
constant new promotional campaigns. Aspects of McDonald’s global
strategy emphasize standardization in terms of key products and
product features, food production systems, staff training, service
levels and so on. McDonald’s entry to new national markets is
always preceded by an exercise to identify local suppliers who can
meet the company’s stringent quality standards. Such suppliers are
expected to comply fully with McDonald’s recipes and procedures.
The recent restructuring of McDonald’s into five geographical
divisions, while continuing to support the company’s quality and
service standards, has been accompanied by a reduction in central
control, greater local autonomy and by greater variations in product
and service offerings in different parts of the world. For example,
salads and beer are offered in restaurants in continental Europe,
chicken is served on the bone in China and in Greece they have
recently introduced the ‘Greek Mac’, a burger accompanied by
Greek salad, served in pitta bread. As well as indicating McDonald’s
recognition to adapt to the needs of local markets, this strategy
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represents the company’s attempt to transform itself through innovation.
McDonald’s intends to innovate through new product offerings
and restaurant designs. The development of McCafes, following the
global trend for coffee shops, is an example of recent strategic
innovation.
Discussion and review questions
1. Explain what is meant by sustainable competitive advantage.
2. Explain the factors that determine the choice of a global or locally
responsive strategy.
3. What will determine the competitive scope of the strategy of a global
business?
4. Explain and critically evaluate Porter’s generic strategy framework.
What does the concept of the hybrid strategy add to the debate?
5. What are the major differences between domestic and international
strategies?
6. Provide an example of a global business, in each of the three categories
(at least in part of its activities), that:
e adopts a differentiation strategy;
e adopts a cost leadership strategy;
e adopts a cost focus strategy;
e adopts a differentiation focus strategy;
e adopts a hybrid strategy.
7. Explain the significance of each of the following to a transnational
business:
e knowledge;
e core competence/distinctive capability;
e configuration/architecture;
e co-ordination/integration;
e responsiveness.
8. Discuss the nature of the relationships between:
e generic strategy, knowledge and core competence;
e core competence and configuration/architecture;
e configuration/architecture and co-ordination/integration.
9. Explain the similarities and differences between regional, global and
transnational strategies.
GLOBAL AND TRANSNATIONAL STRATEGY
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GLOBAL AND
TRANSNATIONAL
MARKET-SERVICING
STRATEGIES 7
Learning objectives
After studying this chapter students should be able to:
. explain what is meant by market servicing and market entry;
. describe the market entry options in international business;
. describe the factors that are relevant when selecting a mode of
entry;
. explain how market-servicing strategies are relevant to a global
business;
. understand the nature of collaborative arrangements as they relate
to market entry.
Introduction
An important element of the global strategy of a transnational organization
is its market-servicing strategy. This is the method of entry and operation
chosen by a business for a particular overseas market. A business can select
from a wide range of alternative strategies for servicing foreign markets.
Possible strategies include exporting,licensing,joint ventures,wholly
owned subsidiaries,etc. Each alternative may be suitable under particular
circumstances,but each is subject to limitations. The choice of strategy from
the alternatives available has been described as a ‘frontier issue’ in international
business. This is because the method of market servicing is one of
the most important factors influencing company performance in foreign
markets.
Given its importance,it is not surprising to learn that the issue of foreignmarket-
servicing strategies has been extensively covered in the international
marketing literature (see Brooke,1986; Root,1987; Young et al.,
1989). Literature on the subject of foreign market-servicing strategies
concentrates on methods for selecting the most efficient alternative for a
particular market. Choice of servicing strategy will depend on the characteristics
of the market and on the global strategy of the organization.
Alternative foreign market-servicing strategies
What is market servicing?
Foreign market-servicing strategies can be regarded as one of a series of
linked decisions which any company must make in the process of internationalization
and globalization. In an ‘ideal’ international marketing plan
(as shown in Table 7.1 and in the simplified schematic in Figure 7.1),
businesses would first of all decide the strategic reasons for internationalization.
Environmental scanning would then take place to identify external
threats and opportunities,and internal strengths and weaknesses. Following
this,international marketing opportunities would then be identified,
taking into account product suitability for foreign markets and country
market choice. Once the firm has decided ‘which product in which
foreign market’,it would then need to examine the best way of entering
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Table 7.1 An ‘ideal’ international marketing plan
Stage Focus
1 Deciding to go abroad: reasons for internationalization
2 Scanning the international marketing environment (opportunities/threats,strengths/
weaknesses)
3 Product suitability and choice of products for foreign markets
4 Country market choice
5 Choosing the foreign market entry and development strategy
6 Designing the international marketing mix
7 Financing international operations
and developing that market. This final stage,that of deciding on the mode
of market entry,is the essence of market-servicing analysis.
Market-servicing options
An organization seeking to develop activities in international markets has a
number of options open to it. We consider each one in turn (see Young,
Hamill,et al.,1989).
(1) Direct exporting
Exporting normally begins as domestic sales of a product begin to slow
down due to home market saturation. Exporting usually begins by simply
shipping a product on receipt of payment,but as sales expand an export
office may be set up in the domestic office,then sales offices may be set up
overseas. At its simplest the product is manufactured in the home country
and then marketed abroad.
The costs of exporting may be reduced by ‘piggyback’ distribution (i.e.,
by using an already established distribution network in the overseas
country like a chain of stores).
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Deciding to operate abroad:
reasons for internationalization
Scanning the international
environment for opportunities
and threats
Choice of country
Choice of market entry and
servicing strategy
Figure 7.1 Stages in the market servicing and entry decision
Direct exporting may be carried out using a local agency. This has the
benefit of exploiting local knowledge and links,but will mean that a
commission has to be paid which will reduce profitability (Table 7.2).
(2) Contractual agreement type 1: licensing
Licensing involves a producer renting out certain intellectual property rights
to a licensee. Payment is made to the licensor (the licence holder) on the
basis of an agreed licensing contract,possibly on the basis of pro rata with
profits earned on the use of the intellectual property or against sales. For
the licensor this can be a low-cost but effective way of setting up an
operation overseas while retaining control over the product. It protects
the technology and know-how of the licensor and can also help to circumvent
protectionist measures imposed by host governments. There may,
however,be problems including the danger that the licensee may
become a competitor when the license expires. Licensing is used in
industries where branding is important (such as food FMCGs [fast-moving
consumer goods] like soft drinks),in scientific industries (such as pharmaceuticals)
and in brewing (Table 7.3).
(3) Contractual agreement type 2: patents
Patenting is a method of safeguarding an innovation against illegal copying
by competitors. It involves patenting the exporting company’s product in
the domestic home and in the foreign countries in which it hopes to do
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Table 7.2 Pros and cons of exporting
Advantages of exporting Disadvantages/Potential problems
Least expensive Remote from customers
Least complicated Lack of market knowledge
Profits do not have to be shared Difficult to control remotely
Risk is limited to the value of the shipment Distribution arrangements can be complex
Table 7.3 Pros and cons of licensing
Advantages for licensor Disadvantages/Potential problems
Little capital outlay Limited contact with customers
Some control of operations No direct control of operations
Risks are shared and limited Profits must be shared with licensee
Licensee has local knowledge
business. Patent rights are protected by the Patent Co-operation Treaty,
the European Patent Convention and the European Community Patent
Convention. These can help to protect the products of an exporter from
competition,but there are many less developed countries where the patent
laws do not apply. It is used in industries where competitors are technically
able to copy,but must be prevented from doing so (such as in pharmaceuticals)
(Table 7.4).
(4) Contractual agreement type 3: franchising
Franchising is similar in concept to licensing. In licensing the licensor
allows the licensee to use a piece of intellectual property,such as a
brand name,a formulation, recipe or similar. In franchising the franchisor
allows a franchisee,possibly in a foreign country,to use an entire business
idea,including a brand,an ‘image’ (if appropriate) and a set of procedures
and systems that have proven themselves to have worked previously by the
franchiser.
In most franchise situations,the franchisee is encouraged to maintain the
same business format as the franchiser. It becomes a rather more complicated
situation if the franchisee deems it to be necessary to make some
modifications to the franchise idea in order to accommodate national or
regional differences in lifestyles,tastes,socio-cultural factors and legal
requirements.
Franchising tends to work best in retailing industries and is widely used in
multiple chains,such as fast food,hotels,specialist chains and car hire
(Table 7.5).
International expansion through franchising N
Holiday Inn
Franchising is one of the most popular methods of growth,especially in
the service industries. It is a growth method involving two parties: the
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Table 7.4 Pros and cons of patenting
Advantages of patenting Disadvantages/Potential problems
Prevents copying Different laws in different countries
Protects product standards Laws not enforced in some countries
Protects profits
Protects technology
franchisor and the franchisee. In return for gaining access to the image,
marketing and other support (such as procurement,training and
systems) from the franchisor,the franchisee usually takes a substantial
portion of the financial risk and pays ongoing fees to the franchisor.
Franchising has facilitated the rapid international growth of many
well-known brands (such as McDonald’s and KFC [fast food] and
Avis and Hertz [car rental]) and many international hotel companies
(such as Radisson and Marriott). Such companies are able to use the
strength of their brand attributes to expand while the investment capital
is provided and the associated risk is borne by another party (i.e.,the
franchisee). Since growth is less restrained by having limited access to
capital resources,many companies adopting franchising for international
growth have been able to expand very quickly as they roll
out a tried and tested product across new territories.
The international hotel brand,Holiday Inn,has expanded rapidly
around the world in the last few decades largely through franchising.
An American entrepeneur,Kemmons Wilson,opened the first Holiday
Inn hotel in 1952 in Memphis,Tennessee,after he returned from a
family holiday discouraged over the lack of family and value-oriented
lodging. At the Holiday Inn children stayed free and the hotel offered a
swimming pool,air conditioning and restaurant on the property.
Telephones,ice,and free parking were standard as well. Although
commonplace today,these services were revolutionary at the time
and set a standard for the hotel industry.
The company became a pioneer of franchising and rapidly expanded
the Holiday Inn system,primarily through utilizing this method of strategic
growth. The brand was almost literally rolled out across the USA,
following the US interstate highway system’s growth across the
country. On the heels of this domestic success,the brand soon found
investor interest in Europe and Asia,becoming the largest single hotel
brand in the world. By the late 1980s the Holiday Inn brand could be
found in many parts of the world.
In 1990 the InterContinental Hotel Group plc,which has its corporate
headquarters in London (part of what was the then known as Bass plc),
acquired Holiday Inn and moved the hotel headquarters from Memphis
to Atlanta. Atlanta offered the corporate infrastructure,worldwide
transportation access and international presence Bass felt was necessary
for the company to succeed as a global business. Holiday Inn,
together with its complementary brands (which include Holiday Inn
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Express,Crowne Plaza and Intercontinental Hotels) now operate
approximately 3,100 hotels, accounting for about 500,000 rooms.
Approximately,2, 700 of the hotels are franchised.
The franchise strategy pursued by Holiday Inn was later emulated by
other hotel companies. However,franchising is not without risk for the
franchisor. In managing franchise relationships,especially in an international
context,it can be extremely difficult to ensure that consistent
standards are maintained when managers are having to cope with
various languages,cultures and regulatory environments and having
to communicate across time zones. One way of trying to ensure consistent
standards are maintained is to standardize the product as much
as possible,so that it becomes easier to manage and business problems
are predictable. However,in standardizing the product there is a
risk that the product fails to adapt to local conditions and cultural
environments.
In the case of the hotel industry,many visitors travel in order to
experience diversity and want the hotel to reflect local climate,traditions
and culture. In recent years companies such as Holiday Inn – in
attempting to deliver consistency of standards across a global network –
have been accused of being dull and predictable,which may be
reassuring to many business travellers,but may fail to attract more
discerning leisure travellers who seek a diversity of product offerings,
reflecting local conditions.
Table 7.5 Pros and cons of franchising
Advantages for the franchisor Disadvantages/Potential problems
Little capital outlay Limited contact with customers
Some control of operations No direct control of operations
Risks are shared and limited Profits must be shared with franchisee
Franchisee has local knowledge
(5) Contractual agreement type 4: contract manufacturing
This involves a business entering a foreign market by contracting local
organizations in the foreign country to produce all or some portion of a
product. This reduces the amount of direct investment required,but still
allows the business to retain control of its product and technology.
(6) Contractual agreement type 5: management contract
Under this arrangement a business provides the management functions for
another. Many major airlines including PanAm,BA,etc. supply maintenance
and technical services to smaller airlines in this way. The same is true
of civil engineering and construction management consultancies which
manage construction projects abroad,such as dams and bridges.
(7) Contractual agreement type 6: turnkey operations
This arrangement involves a foreign business constructing an entire production
facility,such as a chemical plant, in a host country. On completion
the facility is duly handed over to the recipient who then operates it. The
majority of recipients of turnkey operations are governments of developing
countries. Because of the high costs involved,payments are made in
instalments with the last payment being made on satisfactory completion.
(8) Local assembly
The components are imported to the host country and are assembled into
the finished product which is then marketed and distributed in the host
country (i.e.,the foreign country), and perhaps in other markets in that
region (Table 7.6).
(9) Local manufacture
The product is manufactured,either partly or wholly in the host country
and sold in the host country,and perhaps in other markets. It is the next
stage in terms of commitment after local assembly (Table 7.7).
(10) Co-production
A domestic and a foreign business may enter into an arrangement to produce
a certain product using both domestic and foreign components. The
advantages of this are economies of scale,use of specialist technologies,
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Table 7.6 Pros and cons of local assembly
Advantages Disadvantages/Potential problems
Possibility of lower labour costs May be difficult to obtain skilled labour
Reduced transport costs Difficult to control quality standards
Creates local jobs More expensive to set up than some other options
due to transport costs
May avoid import restrictions in host country
local materials and experience. The development of the Eurofighter in the
1990s was an example of co-production,with different parts of the aircraft
being built by various companies throughout Europe.
(11) Establishing foreign subsidiaries
This is the case when a parent company has total control of its overseas
operations,decision making and profits. Wholly owned subsidiaries may
however give rise to opposition from the foreign government and there
may also be labour relations problems (Table 7.8).
(12) Joint ventures and strategic alliances
The joining of two or more separate businesses for a mutually beneficial
project is a relatively common arrangement in domestic business. When it is
used in international business,cultural and political differences can partly
offset the opportunities it presents.
Two or more companies from different countries contribute resources to
carry out certain activities without forming a new company. Each partner
contributes a specialized resource or skill. We consider this arrangement in
some detail in Chapter 14 (Table 7.9).
(13) Mergers and acquisitions
In a merger,two companies join to form a new business entity. In an
acquisition,one company purchases a controlling interest in another.
Both are used in international business (the two parties in the arrangement
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Table 7.7 Pros and cons of local manufacture
Advantages Disadvantages/Potential problems
Possibility of lower labour costs Difficult to obtain skilled labour
Reduces transport costs Difficult to control quality standards
Creates local jobs
May avoid import restrictions in host country
Table 7.8 Pros and cons of foreign subsidiaries
Advantages Disadvantages/Potential problems
Retain central control Possible opposition from host government
Provides sensitivity to local conditions Possible labour relations problems
Creates local jobs May be conflict between HQ and local managers
May avoid import restrictions in host country
are from different countries). Again,we consider this matter in detail in
Chapter 14 (Table 7.10).
(14) Global business
Many large companies configure their business in such a way as to spread
their activities around the world so as to maximize the locational advantages
to be obtained from each of their activities.
The sportswear producer Nike is an example of a global business in this
regard. The company bases its design and development in the USA. Manufacturing
is concentrated primarily in the Far East to meet high-quality
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Table 7.9 Pros and cons of international joint ventures and strategic alliances
Advantages Disadvantages/Potential problems
Synergy Conflicts of interest
Shared knowledge,expertise and skills Some partners gain more than others
Shared technology Difficult to sustain in long run
Shared costs and benefits Competitive instincts prevail
Mutual profits Decision making is slower
Knowledge of local markets
Existing business contacts can be used
Reduces political risks
Less costly than a merger
Table 7.10 Pros and cons of foreign mergers and acquisitions
Advantages of mergers and acquisitions Disadvantages/Potential problems
Synergy between the two parties Costs are higher than most other modes of entry
Shared knowledge,expertise and skills May create resentment in host country
Shared technology May take over a business with poor local reputation
Full operational control can be gained in an May take over a business whose image does not
acquisition (less so in a merger) match
Control of quality May take over a business with problems
Knowledge of local markets Financial exposure is much higher than for
exporting,licensing,etc. as an investment is made
abroad which may be lost
Existing business contacts can be used
Reduces political risks as partner company
will alredy be established
Locally known trading name
standards while maintaining low unit costs (especially for labour).
Marketing and distribution is spread around the world to allow maximum
flexibility and responsiveness to local markets.
A summary of the modes of entry
Companies should consider the costs and benefits of the above strategies in
relation to the foreign market to select the most appropriate. Table 7.11 is
an example of how this might be done.
The range of alternative foreign-market-servicing strategies available is
summarized in Appendix 7.1 at the end of this chapter. Various attempts
have been made to classify these alternatives. Brooke (1986),for example,
distinguished between exporting,knowledge agreements and foreign investment
as shown in Figure 7.2.
Root (1987) adopted a similar classification that distinguished between:
a. export entry modes including indirect exporting,direct exporting
through agents and distributors,and direct branch/branch subsidiary
exports;
b. contractual entry modes including licensing,franchising,technical
agreements,service contracts,management contracts,construction/
turnkey contracts,contract manufacturing, co-production agreements;
and
c. investment entry modes including new plants,acquisitions and joint
ventures.
Luostarinen’s (1979) classification (see Figure 7.3) distinguished foreignmarket-
servicing strategies according to three main dimensions,namely:
. the location of production whether domestic or overseas (e.g.,domestic
production in exporting,overseas production in licensing,foreign direct
investment [FDI],etc.);
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Table 7.11 Costs and benefits of alternative modes of entry (4 is highest,1 is lowest)
Criteria Exporting Contractual agreements Joint ventures and Wholly owned
(e.g.,licensing) alliances subsidiary
Cost of capital 2 1 3 4
Potential revenue 3 1 2 4
Political risk 2 1 3 4
Revenue stability ? 4 ? ?
Corporate control 2 1 3 4
. whether FDI occurs or not (i.e.,direct investment versus non-direct
investment operations); and
. the type of activity undertaken,whether manufacturing,marketing or the
transfer of know-how.
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The decision to operate or expand abroad can
be implemented through
Export of goods
and services
Investment
direct
or
portfolio
Knowledge agreements
including licensing,
franchising, management
contracts, contract
manufacturing, technical
assistance agreements,
construction contracts
Figure 7.2 International business options
According to Brooke (1986)
Non-direct investment
marketing operations
. Indirect goods
exports
. Direct goods
exports
. Service exports
. Know-how exports
. Partial project
exports
Direct investment
marketing operations
. Sales promotion
subsidiaries
. Warehousing units
. Service units
. Sales subsidiaries
Non-direct investment
marketing operations
. Licensing
. Franchising
. Contract
manufacturing/
international
subcontractinga
. Turnkey operations
Direct investment
marketing operations
. Assembly
. Manufacture
Wholly owned
joint ventures
Minority holding
‘Fade-out’
agreements
_
_
Production in home market Production overseas
Figure 7.3 Luostarinen’s (1980) forms of international market entry and developmentb
Reproduced from Acta Academica Oeconomicae Helsingiensis. aAssuming that international subcontracting takes
place between independent companies in home and overseas markets. bExcludes industrial
co-operation agreements and the range of forms of contractual joint ventures because of their variety.
Selection of mode of entry
Choosing the most appropriate mode of entry
A range of factors will influence the choice between these alternative
modes of entry. Particularly important will be the costs,risks and control
considerations of each option. The various modes can be considered to
exist on a continuum ranging from low cost,low risk,low control (such as
indirect exporting) to high cost,high risk,high-control modes,such as FDI.
Other factors influencing strategic choice regarding market entry and
development modes include the following.
The nature of the product provided
Certain entry and development modes are more appropriate for certain
products or services than others. Thus,exporting would not be an appropriate
supply mode for products where transportation costs are high as a
proportion of value added. Similarly,subcontracting arrangements are
more appropriate in labour-intensive products,such as in the textile
industry and certain parts of the electronics industry. For technologyintensive
products the business may wish to retain control over access to
know-how,thus favouring a higher control option,such as a foreign wholly
owned subsidiary.
Management commitment
For small to medium-sized companies the range of alternative supply
modes may be limited because of restrictions to managerial time and
resources.
Host country legislation
Depending on the political leanings of host governments,some countries
make impositions,such as import controls,restrictions on profit and royalty
payments,controls on technology transfer through licensing,incentives and
disincentives for foreign investors.
Marketing objectives
Supply mode choice will vary depending on the organization’s objectives in
the foreign market. Where market share is important,more direct forms of
entry may be desirable. Alternatively,a company that wishes to skim a
number of foreign markets may prefer less direct modes,such as franchising,
etc.
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Culture
More direct forms of involvement may be encouraged where there are
cultural similarities between the foreign and domestic markets,since this
reduces the risk of cultural clashes.
Criteria for choosing mode of entry
Various models have been developed to assist companies in choosing
between alternative foreign market entry and development strategies.
These can be classified into three different approaches.
The economic approach
This emphasizes the rate of return or profitability of different entry and
development modes. After considering the return profile of each option,
the one offering the highest return is chosen regardless of any other considerations.
The stage of development approach
This approach relates the entry and development mode decision to the
internationalization process. Different entry/development modes are ‘best
suited’ at different stages of internationalization (exporting,for example,is
typically the first foray that a business makes into international business).
The business strategy approach
This approach relates the entry and development mode to the strategic
motivations to be achieved and to the internal environmental and external
environmental factors influencing the decision (see Figure 7.4).
Global market-servicing strategies
Literature summary
While there is an extensive literature on foreign market entry mode choice,
there has been little attempt to incorporate such decisions into the wider
context of global strategy. The existing literature tends to view marketservicing
decisions as specific to each new market entered. They largely
ignore the interdependencies that may exist between operations across
borders. This is a major weakness in the literature from the perspective
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of this book with its emphasis on the co-ordination and integration of
geographically dispersed operations. Thus,it may reasonably be expected
that the overall global strategy of a business may be an important determinant
of the choice of foreign market-servicing mode. Decisions regarding
the mode of entry must be consistent with and support the overall strategic
development of the business in global industries.
The importance of global strategic considerations in the choice of
market-servicing modes is only beginning to be recognized in the literature.
Kim Hwang (1992),Porter (1986a),Yip (1992) and Young et al. (1989)
extended the traditional approach to market entry choice (as discussed in
the previous section) to include aspects of global strategy. In addition to the
environmental and transaction-specific variables extensively covered in the
previously cited literature,entry mode decisions are influenced by three
global strategic variables: global concentration,global synergies and global
strategic motivations.
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Target country
environmental
factors
Target country
market factors
Target country
production
factors
Home country
factors
Foreign market
entry mode
decision
Company product
factors
Company
resource/
commitment
factors
External factors
Internal factors
Figure 7.4 Factors in the entry mode decision
Adapted from Root (1987)
Three key variables
Global concentration
Many global industries have become highly concentrated with a high level
of competitive or oligopolistic interdependence. In other words,the actions
taken by one company in one national market will have repercussions in
other national markets. This leads to the hypothesis that,when the global
industry is highly concentrated,companies will favour high-control entry
modes.
Global synergies
This refers to the synergies that can arise from the shared utilization of core
competences among strategic business units (such as Honda’s transfer of
advanced engine technology from motorcycles to automobiles). The
achievement of such synergy requires a degree of hierarchical control.
This,in turn,leads to the hypothesis that businesses will demand higher
levels of control over foreign operations as the extent of potential global
synergies between the subsidiary and other sister business units increases.
Global strategic motivations
Companies entering or developing a particular foreign market may have
strategic motivations that are wider than simply choosing the most efficient
entry mode. These global strategic motivations are set at corporate level for
the purpose of overall corporate efficiency maximization rather than
efficiency of individual national markets. Foreign business units,for
example,may be established as a strategic outpost for future global expansion,
as global sourcing or to attack a competitor. To successfully achieve
these global strategic motivations requires tight co-ordination across global
business units. This leads to the hypothesis that businesses exercising
global strategic motivations will favour high-control entry modes.
Collaborative arrangements
Collaboration rather than competition
Collaborative networks or strategic alliances are arrangements between
businesses to co-operate with the express purpose of gaining competitive
advantage. The conventional model of business behaviour is that of
competition,but collaborative relationships have become increasingly
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important as a means of acquiring competitive advantage for the businesses
who are members of the collaborative network. The basis of collaborative
behaviour can be related to conventional theories explaining sources of
competitive advantage.
Porter (1986a,b, 1990) stressed the importance of configuration of business
activities and their co-ordination as a means of achieving competitive
advantage.
Kay (1993) identified distinctive capability as the source of competitive
edge. Distinctive capabilities rest on architecture,reputation,innovation
and strategic assets (see Chapter 6).
Prahalad and Hamel (1990) argued that an international business must
identify and build on its core competences. Core competences are ‘the
collective learning in the organisation, especially how to co-ordinate
diverse production skills and integrate multiple streams of technologies ’
(Prahalad and Hamel,1990). Three criteria can be applied in identifying
a core competence:
. it provides potential access to a wide variety of markets;
. it should make a significant contribution to the perceived consumer
benefits of the end product;
. it should be difficult for competitors to emulate.
Core competence should lead to core products that in turn should lead to
competitive advantage.
A study by Prahalad and Doz (1987) of a number of multinationals,
spanning a decade,reached similar conclusions to those of Porter
(1986a,b, 1990). They found that corporate success at an international
level was dependent on the ability of the multinational to co-ordinate
and integrate global activities,while at the same time retaining responsiveness
to the demands of local markets and changing circumstances.
Achieving competitive advantage will therefore require:
. identification of the core competences of the organization;
. identification and focus on activities that are critical to the core competence
of the organization and outsourcing those that are not;
. achieving the internal and external linkages in the value/supply chain
which are necessary for effective co-ordination of activities and which
permit responsiveness.
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The literature has for many years stressed the competitive elements of the
behaviour of organizations in achieving competitive advantage. More recently
research has pointed to collaboration between companies as a
potential source of competitive edge.
The nature and rationale of collaboration
Partners for collaboration
Collaboration may take place between an organization and any of the
following:
. suppliers;
. customers;
. financiers;
. competitors;
. governments and other public organizations.
Taken to one extreme,collaboration may lead to mergers and acquisitions
(see our discussion of this in Chapter 14). More often it can take place
between businesses who retain their separate identities but who collaborate
in a network on a short or long-term basis.
Reasons for collaboration
Contractor and Lorange (1988a) identified several rationales for collaboration:
. risk reduction (e.g.,of investment exposure);
. the sharing of different but linked core competencies;
. economies of scale and/or rationalization;
. complementary technologies and patents;
. blocking competition;
. overcoming government-mandated investment or trade barriers;
. initial international expansion;
. vertical quasi-integration – access to materials,technology,labour,
capital,distribution channels,buyers,regulatory permits.
In addition,we suggest that collaboration can enable each party to bring
unique core competences to the alliance. By combining their core competences,
partners can enjoy synergy. In this regard,collaboration can provide
similar benefits to a business to outsourcing – taking advantage of another
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business’s core competences to add value more effectively than could be
accomplished in-house.
Reve (1990) identified two explanations of what holds alliances together:
1. The economic approach which states that alliances exist between businesses
because the parties involved see the possibility of increased
profits. Such relationships depend on safeguards to protect the interests
of the participants,and the relationship is therefore ‘impersonal and
unstable’.
2. The behavioural approach which says that there is value attached to the
relationship between the parties involved,social ties are built,there is
trust and integrity and personal contacts are important. Such alliances
are usually longer lasting and more stable.
Potential problems
There are,however,problems associated with collaboration:
. the initial rationale for collaboration may shift over time (e.g.,technology
changes or one partner has a reduced need for the other);
. language problems;
. cultural differences (differences in values and norms);
. incompatibilities between management styles and systems;
. co-ordination and integration problems;
. an increase in competitive pressures,which changes the competitive
environment for one or both parties;
. changes in the market.
Horizontal and vertical collaboration
Horizontal relationships
Horizontal collaboration is an arrangement involving two or more companies
at the same stage in the supply chain. It usually takes place
between competitors (although rarely on anything other than a limited
scale). They can serve to strengthen the participating companies against
outside competition,possibly an aggressive (and larger) competitor.
The nature of collaboration necessitates sharing between the partners.
This can be shared technology,skills, costs (say,of an overseas investment)
or risks. It can also increase scale economy benefits to both parties,thus
giving vertical advantage over suppliers.
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Vertical relationships
These can be upstream in the supply chain (toward suppliers) or
downstream (toward distributors and customers). Collaboration in either
direction can enable a business to gain cost or price advantage against its
competitors. If the upstream or downstream partner is in another country,
the arrangement can be used to circumvent local import or export
restrictions.
Benefits
Both horizontal and vertical relationships offer benefits:
. improved responsiveness;
. each partner in the alliance can concentrate on its core competences and
thus add greater value at lower cost;
. create barriers to entry (the two act in concert and thus are effectively
one when attacked by a would-be new entrant);
. produce logistical economies of scale;
. superior information on activities at all stages of the supply chain;
. ties in suppliers and customers to the focal business;
. the creation of synergy between partners and a lowering of unit costs.
Alliances
An alliance is one type of collaborative arrangement (see Chapter 14 for a
detailed discussion of this topic). With regard to considering alliances as a
market-servicing strategy,the participants must consider a number of
issues:
. deciding which activities and assets are core and should therefore be
carried out by the business itself (configuration);
. deciding which activities are of medium specificity and should be
obtained via alliances and outsourcing (configuration);
. deciding which activities are of low specificity and should be obtained
through the market (configuration);
. integration of core and alliance activities (co-ordination);
. management and operation of the alliances (co-ordination).
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Summary – advantages of collaborative arrangements as
modes of entry
Collaborative networks have the potential to deliver sustainable competitive
advantage by:
. enhancing core competence and distinctive capability;
. making possible and improving organizational architecture;
. creating new organizational assets;
. creating synergy;
. reducing unit costs;
. increasing efficiency;
. increasing flexibility.
The survival and prosperity of a collaborative relationship depends on:
. its ability to co-ordinate intra-organizational activities;
. its ability to integrate business strategies;
. external contracts and motivations to foster the alliance;
. its ability to adapt to a changing environment and changing network
relationships.
Appendix 7.1 Some additional notes on
foreign-market-servicing strategies
Adapted from Young et al. (1989)
Firms can choose from a wide range of alternative strategies when entering
and developing foreign markets. These include (a) export entry and development
modes; (b) contractual entry and development modes; and (c)
modes of entry and development involving direct investment abroad.
Exporting
This involves the transfer of goods and/or services across national boundaries
from a domestic production base. Exporting may be either indirect
(which involves little effort on the part of the firm itself ) or direct (which
involves a greater internal commitment). The main forms of indirect and
direct exporting include:
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. Indirect exporting f Direct exporting
. Export houses f Agents
. Confirming houses f Distributors
. Trading companies f Company export salesmen
. Piggybacking f Overseas sales subsidiaries
Contractual agreements
This covers a wide range of alternatives,as outlined in the following seven
subsections.
Licensing
Contracts in which the licensor provides licensees abroad with access to
one or a set of technologies or know-how in return for financial compensation.
Typically,the licensee has rights to produce and market a product
within an agreed area in return for royalties.
Franchising
Contracts in which the franchisor provides the franchisee with a ‘package’,
including not only trademarks and know-how but also local exclusivity and
management,and financial assistance and joint advertising. Management
fees are payable.
Management contracts
An arrangement under which operational control of an enterprise,which
would otherwise be exercised by a board of directors or managers elected
and appointed by its owners,is vested by contract in a separate enterprise
which performs the necessary management functions in return for a fee.
Turnkey agreements
A contractor has responsibility for establishing a complete production unit
or infrastructure project in a host country – up to the stage of the commissioning
of total plant facilities. Payment may be in a variety of forms
including countertrading. ‘Turnkey plus’ contracts include product in
hand and market in hand contracts.
Contract manufacturing or international subcontracting
A company (the principal) in one country places an order,with specifications
as to conditions of sale and products required,with a firm in another
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country. Typically,the contract would be limited to production, with
marketing being handled by the principal.
Industrial co-operation agreements
Conventionally applied to arrangements between Western companies and
government agencies or enterprises in the Eastern Bloc,including licensing,
technical assistance agreements,turnkey projects and contract manufacturing,
as well as contractual joint ventures and tripartite ventures.
Contractual joint ventures
Formed for a particular project of limited duration or for a longer term cooperative
effort,with the contractual relationship commonly terminating
once the project is complete. May relate to co-production, co-R&D, codevelopment,
co-marketing plus co-publishing and consortium ventures
by banks to finance large loans,etc.
Foreign direct investment
The three main types of foreign-market-servicing strategy involving direct
investment abroad are:
. the establishment of wholly owned,greenfield subsidiaries;
. cross-border acquisitions;
. equity joint ventures.
Toyota N FDI greenfield development in the UK
Toyota is Japan’s largest motor manufacture and it occupies the third
position (by volume) in the world. Toyota’s worldwide output amounts
to almost 5 million vehicles a year. Operating in 150 countries,the
company has 29 manufacturing plants in 22 countries,sells its vehicles
through over 7,000 dealerships and employs more than 100,000
people.
In the early 1960s Toyota made its first incursions into the European
market by exporting cars to Denmark. Its growth in the EU since then
has been substantial. By 1992 Toyota was selling vehicles in 22
European countries through 3,500 dealerships.
The market potential for sales in the EU,as one of the legs of the
‘triad’ (the Far East,North America and Europe),proved too tempting
GLOBAL AND TRANSNATIONAL MARKET-SERVICING STRATEGIES
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an opportunity to miss for Toyota,and in 1989 it announced plans to
make a direct investment in a manufacturing plant in the EU. After
much discussion the company chose two sites in the UK and one in
Belgium. Toyota’s initial investments in the UK – at Burnaston in
Derbyshire and at Deesside,North Wales – amounted to £840
million. Its investment at Diest,Belgium,was in a European parts
centre and came to £26 million. Construction of the two UK plants
commenced in 1990 and the first British Toyotas left the production
line in December 1992.
Unlike other Japanese motor companies that have invested in the
UK,Toyota did not develop a single ‘super-site’. The plant in North
Wales is dedicated to the production of engines,while the company’s
plant in Derbyshire produces passenger cars for the European market
using Deesside-produced engines.
In common with other manufacturers who have made sizeable
inward investments into the EU,one of Toyota’s key objectives in its
direct investment manoeuvre was to overcome the import restrictions
that the EU places on imports from outside its borders. By producing
from within the EU,the cars produced were British as far as sales to
other EU states were concerned – not Japanese. Of course,direct
investment also means that transport costs to other EU states from
the UK are significantly less than they would be from Japan.
Philip Morris N foreign acquisitions in the former
communist states of central and eastern Europe
Philip Morris Inc. is the largest cigarette manufacturer in the world and
the world’s third largest brewer. Its tobacco brands occupy 47% of the
USA’s 500 billion cigarettes per year market and 30% of the EU’s total
cigarette consumption. The company’s 3,000 brands also include a
wide range of food products. It is the largest worldwide producer of
consumer-packaged goods and one of the world’s largest trading companies.
Its best known brands include Marlboro,L&M and Chesterfield
cigarettes,Miller beers and a wide range of food products including
Post cereals,Kraft foods (e.g.,Philadelphia, Maxwell House,etc.) and
the confectionery brands Toblerone,Suchard and Terry’s of York.
The company is based in the USA and sells its products in over 170
countries,employing around 155,000 people in its worldwide opera-
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tions. European,Middle Eastern and African operations are controlled
from the Philip Morris offices in Lausanne,Switzerland.
During the 1990s Philip Morris pursued a strategy of direct investment
in the tobacco industries of the former communist countries of
central and eastern Europe. Central Europe’s cigarette consumption is
around 600 billion cigarettes per year,which,unlike demand in some
parts of the world,is relatively stable (i.e., it is not in decline). The
decentralization of the economies in these states has provided investment
opportunities for Western companies who,for such reasons as
above,wish to gain a market presence in these parts of the world.
Philip Morris has had links,through licensing agreements,with companies
in central and eastern Europe for over 20 years,so the demise of
communism in these countries offered a unique opportunity for expansion
(by means of FDI) into these national markets.
Some of its major acquisitions include:
Review and discussion questions
1. Why do organizations seek to develop markets abroad?
2. What are the market entry options open to a business seeking to service
foreign markets?
3. Which market entry option carries the highest risk?
4. Summarize the criteria for selecting a market entry strategy.
5. Why might an organization seek to develop a collaborative arrangement
as a mode of foreign market entry?
6. Distinguish between vertical and horizontal relationships.
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Foreign interest Date Country Value Shareholding
Tabak A.S. 1992 Czech Republic $400 million Majority (>77%)
Newly built factory in 1992 Russia Undisclosed Majority
St Petersburg
Klaipeda State Tobacco 1993 Lithuania $50 million 62.5% (including a
Company newly built factory)
Krasnodar Tobacco Factory 1993 Russia $60 million Majority
Almaty Tobacco Kombinat 1993 Kazakhstan $200 million Majority
Kharkov Tobacco Factory 1994 Ukraine Undisclosed Majority
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GLOBAL PRODUCTION AND
LOGISTICS MANAGEMENT 8
Learning objectives
After studying this chapter students should be able to:
. explain what is meant by production and logistics in the context of
international business;
. review the most relevant literature as it relates to global operations
strategy;
. describe Dicken’s four production strategies;
. explain the factors that influence where transnational businesses
locate their production facilities;
. describe the issues surrounding procurement decisions for international
businesses;
. explain how logistics is managed by multisite transnational
businesses.
Introduction
The core of any global strategy is the use of a company’s international
scope as a key competitive weapon in global industries. This implies
a degree of central co-ordination and integration of geographically
dispersed operations, and involves complex decisions across a range of
functional management areas. Nowhere is this more important than in
the co-ordination and integration of global production and logistics
management – the focus of this chapter.
Global production and sourcing is concerned with the what, where and
how of worldwide production. In other words, it is concerned with global
management decisions relating to the number, size and location of production
facilities throughout the world; plant roles and specialization (by either
products or markets); and interplant relationships. Especially important is
the extent of co-ordination and integration of production facilities in
different countries. Global logistics is concerned with the physical movement
of final goods (and services) from producer to end-user and the flow
of intermediate products, parts and components between plants (i.e., both
external and internal logistics).
Production strategy and competitive advantage
The critical success factors in operations
An efficient, co-ordinated and integrated global production and logistics
system can be an important source of competitive advantage in global
industries. Co-ordinated global production can provide advantages in
terms of costs (production and transportation), production flexibility and
market responsiveness.
The major sources of value added in external logistics relate to:
1. place – the availability of a product in a location that is convenient to
customers;
2. time – the availability of a product at a time that fulfils a customer’s
needs; and
3. information – that answers questions and communicates useful product
and applications knowledge to customers (Keegan, 1995).
An efficient internal logistics network is essential to achieve the benefits of
plant specialization and integration.
The overall global competitive strategy of the business will have a major
impact on production and logistics management. The latter needs to be
consistent with and integrated in the former. The major influence on production
and logistics management in transnationals adopting countrycentred
strategies will be the requirement of national responsiveness.
Global strategies, on the other hand, imply greater co-ordination and
integration of worldwide production and logistics. Global strategies were
defined by Doz (1986) as the ‘specialisation of plants across countries into
an integrated production and distribution network involving substantial
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cross border flows of components or products.’ Similarly, Porter’s (1986)
definition of global strategy emphasized the configuration (location) and
co-ordination (control) of value-added activities throughout the world. This
chapter is largely concerned with configuration and co-ordination issues as
they relate to global sourcing and distribution.
The issues raised in this chapter have become highly topical in recent
years as a consequence of the globalization of markets and the emergence
of global competition. Globalization has reduced the need for a market by
market approach to sourcing and distribution, and has provided the
international business with greater strategic flexibility in this area. The
emergence of global competition has forced many companies to reassess
their sourcing and distribution strategies aimed at greater cost-effectiveness.
As a consequence of these two trends, a number of international businesses
have rationalized their sourcing and distribution systems by consolidating
activity into fewer, larger plants serving multicountry markets.
Global production strategies
The ‘big’ decisions in production strategy
This section examines global production strategies taking into account the
issues involved, the alternative strategies available and the important links
between global strategy and production strategy.
In designing its global production strategy, an international business
needs to make decisions in a number of important areas:
1. The number and location of plants throughout the world, with plant
location in turn being determined by a number of factors including
costs, risks, return and government regulation.
2. Plant roles and inter-plant relationships including decisions regarding
plant specialization and integration. Important issues here are whether
to establish largely self-contained manufacturing plants or assembly
plants which rely on a high proportion of bought-in parts and components;
whether these bought-in components are from related or
unrelated concerns; the product line of the plant; and markets to be
supplied. The three main strategic options in terms of plant roles are:
e to operate a number of plants each producing the same product for
different markets;
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e to operate a number of factories each producing non-competitive
products for the same market;
e to have plants specializing in component manufacture with assembly
being undertaken elsewhere.
3. Transnational procurement policies where three types of purchasing
policy are possible – central purchasing, autonomous subsidiary
purchasing and partial central purchasing.
Plant roles and inter-plant relationships
Reference has already been made in previous chapters to the different
classifications of companies in international business where a distinction
can be made between international, multinational and global companies
(see Chapter 1). Keegan (1995) used this distinction to classify the alternative
production/sourcing strategies available to global businesses. The
three alternatives are described below.
‘International’ sourcing
This relies heavily on home country manufacturing, with foreign markets
being mainly served through exports from a domestic production base. The
main advantage of this strategy is that it reduces the requirement for international
transfers of know-how and manufacturing capability.
‘Multinational’ sourcing
This establishes production operations in each foreign market. The three
main advantages of this strategy are that it can overcome any barriers to
market entry (e.g., import controls), it takes advantage of local factors of
production and shortens supply lines, and production is more responsive to
country customer needs and wants. The main disadvantage is that multiple
production facilities limit the possibilities of economies of scale.
‘Global’ sourcing
In this strategy, production activities are located in such a way as to maximize
quality and availability while minimizing costs. Global sourcing
implies considerable co-ordination and integration of worldwide manufacturing
and distribution.
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Research in global productions strategy
The issue of global production involving cross-border co-ordination and
integration of activity has attracted significant attention in the academic
literature. We review the work of three of the most important thinkers in
this area: Doz (1978), Starr (1984) and Dicken (1998).
Doz – opportunities from relaxations in trade restrictions
One of the earliest attempts to examine the process of manufacturing
rationalization in international businesses was that by Doz (1978). Although
published in the late 1970s, the study remains highly relevant, especially in
the context of the development of trading blocks and customs unions (such
as the European single market and NAFTA [North American Free Trade
Area]).
The main argument developed by Doz was that reduction of tariffs and
other trade barriers and the emergence of free trade zones in Western
Europe during the 1970s provided an opportunity for international businesses
to specialize and integrate their European manufacturing plants.
Instead of multiproduct–multistage plants autonomously serving national
markets, it had become feasible and economic to develop plants that manufacture
only one model or one product line, or are involved in only certain
stages of the production process for worldwide markets. This represents a
shift from local for local plants (local production for local markets) to an
integrated network of large-scale production-specialized plants serving
world markets. The process of manufacturing rationalization is particularly
important for companies with less differentiated (standardized) products;
where production costs are high in relation to total costs; where major
economies of scale can be derived from plant specialization; and for
companies facing strong competition from strong competitor nations.
The above factors were then incorporated by Doz into a framework that
helps to (a) diagnose the need for rationalization and (b) to manage the
rationalization process itself. This is shown in Table 8.1.
Manufacturing rationalization is most needed in mature industries with
significant price competition and where there are unexploited economies
of scale (the European automobile industry is given as an example). Even
when the benefits of rationalization are diagnosed clearly, there will be
major problems in the implementation of rationalization strategies arising
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from the conflict between analytical (i.e., the diagnostic need for rationalization)
and behavioural issues. The latter refer to social and political
difficulties within the international business which hinder the start of
rationalization.
The major pitfalls to rationalization implementation include a lack of
perception of the new competitive forces, the search for local solutions
by local managers and subsidiary opposition to rationalization. To
overcome these difficulties, a number of guidelines are suggested (deriving
from examples of successful rationalizations) for managing the rationalization
process. These fall into three main groups covering start-up,
implementation of changes in the management process and actions by
corporate management to support rationalization. To start up the process
an initial inventory of redundant product types and plants should be established.
The process then shifts to gaining the co-operation of subsidiary
managers to rationalization through co-ordination and strategic planning
groups to facilitate social interaction. The process overall can be greatly
assisted by clear communications from the corporate centre and a clear
commitment to the need for rationalization. The process of manufacturing
rationalization has accelerated considerably in recent years in response to
the pressures of global competition.
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Table 8.1 A framework for managing the rationalization process
Diagnosis Product/market maturity; price competition; unexploited economies of scale.
Start-up Product type inventory; co-ordination group; staff experts; co-ordinators.
Changes in the Marketing co-ordination; export co-ordination and sourcing control;
management process logistics; overall market share; production programming; technical
co-ordination; funding for R&D and capital expenditure.
Corporate management Communication of purpose; planning integration; changes in
actions to support measurement, evaluation and reward systems; changes in career paths
rationalization and management development.
Pitfalls Lack of perception of new competition; autonomous subsidiary structure
favours national responses rather than diagnosis of rationalization need;
rationalization may be opposed by national subsidiary managers’
diagnosis; too assertive co-ordinator; too little top management support of
co-ordinators; co-ordinators subordinate to group of subsidiary managers;
too many subsidiaries; joint ventures; wrong timing; inappropriate
sequencing; poor choice of co-ordinators; lack of top management visible
support; continuation of country-based evaluation and compensation
schemes; poor choice of country managers.
Source: Doz (1978)
Starr’s network
Starr (1984) provided an exposition of the strategic considerations
important to the development of a successful global production operation.
This is defined to include global sourcing, fabrication, assembly, marketing
and distribution. A global network model is developed to illustrate the
alternative strategies available in this respect. The network shows the
various connections (links) between suppliers, fabricators, assemblers
and marketers (nodes). In most cases the network will involve complicated
arrangements (and various combinations) between domestic and international
nodes. According to the author, the choice of network will
depend on a cost/benefit analysis of the alternatives. Important issues to
consider include the costs of various suppliers, the effects of exchange rate
movements, inflation rates in different countries which can affect purchasing
as well as production and marketing decisions, the quality of supplies
and proximity to markets.
Dicken and international value adding
The view of global production as a network of relationships was developed
in more detail by Dicken (1998). Two sets of relationships are explored:
1. the internal network of relationships within the global business;
2. the network of external relationships with independent and quasiindependent
businesses (large, small, transnational and domestic).
The basic building block to understand both internal and external networks
is the model of the production chain shown in Figure 8.1, where the term
‘production’ is used in its widest sense to include the provision of services
as well as physical production.
This model shows the whole range of activities (value-added activities in
Porter’s, 1985 terminology) performed within the production system (i.e., a
chain of linked functions: see Chapter 3 on the value chain). The way in
which the chain of transactions is organized and co-ordinated determines
the international business’s internal and external network of relationships.
At one extreme, the chain of transactions can be performed entirely within
the business itself (i.e., internalization). At the other extreme, each function
could be the responsibility of individual, independent businesses (i.e.,
externalization). A wide variety of relationships may exist between these
two extremes.
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In terms of the transnational business’s internal production network,
Dicken (1998) drew on Porter’s (1986) configuration and co-ordination
alternatives (see Chapter 3) to identify the alternatives available. Four
main types of internal production strategy are identified, as summarized
in Figure 8.2.
Dicken’s four production strategies
Globally concentrated production
This is the simplest case, where the business concentrates all production in
one central location and supplies world markets through its marketing and
sales network. This is consistent with Porter’s (1986) purest global strategy
of geographically concentrated and highly co-ordinated operations.
Host market production
According to Dicken (1998) this has become a common production strategy
among global businesses. It is essentially local production for local markets
consistent with Porter’s (1986) multidomestic strategy of geographically
dispersed and unco-ordinated (autonomous) operations.
Product specialization for a global or regional market
This is a strategy of production as part of a rationalized product or process
strategy (i.e., specialization of production in a few plants supplying multi-
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Figure 8.1 The basic production chain
Source: Dicken (1998)
country markets). According to Dicken (1998) this strategy is becoming
increasingly popular, especially in large regionally integrated markets,
such as the EU.
Transnational vertical integration of production
This is a strategy of specialization by process or by semi-finished products
(rather than by final products as in product specialization above) and is
consistent with Porter’s (1986) strategy of high FDI (foreign direct investment)
with extensive co-ordination among subsidiaries. A particularly
important aspect of this strategy according to Dicken (1998) is the
increasing use of offshore processing as part of a vertically integrated
global production network. Two main types of activities are particularly
suited to offshore sourcing:
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Figure 8.2 Some major ways of organizing the geography of transnational production units
Source: Dicken (1998)
1. products at the mature stage of the product life cycle, in which technology
has become standardized, long production runs are needed and
semi-skilled or unskilled labour costs are very important;
2. there are certain parts of the production process of newer industries
(e.g., electronics) which are labour-intensive and amenable to the
employment of semi-skilled and unskilled labour, even though the
industry as a whole is capital and technology-intensive.
Selecting the most appropriate strategy
The choice between Dicken’s alternatives involves a balance between the
economies of scale to be achieved through plant specialization against the
extra costs of moving products either between plants or from plants to
markets. Other factors requiring consideration are the risks associated
with plant specialization, whether local manufacturing is required for
product adaptation and government policy regarding investment incentives
or disincentives and import regulations. The internal production network is
also highly dynamic and subject to rapid change due to both changes in the
organization’s external environment and internal pressures that may necessitate
reorganization and rationalization.
In addition to the internal network discussed above, Dicken (1998) also
stressed the importance of external networks. International businesses are
often engaged in many external interconnections with other businesses.
The linkages can be with domestic companies (large and small) or public
and private organizations as shown in Figure 8.3.
Plant location decision making
Decision criteria
For transnational companies that have decided to manufacture abroad
through FDI, a complex decision on plant location must be made. Scully
and Fawcett (1993), in their study of 103 US companies with international
operations, found that the level of formal planning for facility location was
greater than that for overall planning, production systems and logistics
decisions. They suggested that this may be ‘the result of the many mathematical
models and software programs which exist to assist in making this
decision.’
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There are a number of factors that have to be taken into consideration in
making the location decision. Dunning (1980), as part of his ‘eclectic’
theory of international production, identified five major location-specific
factors derived from FDI considerations:
1. markets – size, growth, type of products/services demanded, degree of
competition;
2. resources – availability of raw materials and services, availability of a
workforce with appropriate skills (or which is ‘trainable’);
3. production costs – labour and productivity, raw materials, transportation,
energy, currency exchange;
4. political conditions – attitude of host government to FDI (e.g., restrictions
on ownership, tax rates, incentives, trade barriers, government
and economic stability [the degree of risk], employment legislation);
5. cultural and linguistic affinities – product attractiveness and other marketing
issues, similar ways of doing business, no need to communicate
in a different language, attractiveness of host country to parent
company nationals.
The perceived relative importance of these factors will not only vary from
one industry to another but will also depend on the type of production that
the individual business intends to use in the host country. Dunning (1993)
described six types of production with the main location-specific advantages
for each. These are summarized in Table 8.2.
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Figure 8.3 Major organization segments within a global economic system
Source: Dicken (1998)
The most frequently used criteria
The majority of FDI has been for the first three types of production. Dicken
(1998) discussed these in terms of market, supply and cost-oriented
production.
Market-oriented production
In the first case, businesses aim to supply an overseas market by locating
production within that market, often to circumvent such trade barriers as
tariffs and quotas. In simple terms, the major factors to be considered are
market size and growth. A crude estimate of these can be made by examining
GNP per capita and how it is changing. In these terms, the USA and
Western Europe are the most attractive markets. However, the picture is
more complex – the type of products demanded vary with GNP per capita,
with poorer countries requiring more basic goods while richer countries
spend more income on ‘higher order’ goods and services.
Supply-oriented production
Supply-oriented production is the dominant form of production for businesses
dependent on natural resources for their output, such as those in the
extractive industries. However, Dicken (1998) argued that only some of the
operations of such companies may be located at the source of supply; for
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Table 8.2 Factors affecting location decisions for each type of intentional production
Type of international production Location advantages sought
Natural resource seeking Possession of natural resources and related transport and
communications infrastructure; tax and other incentives.
Market seeking Material and labour costs; market size and characteristics;
government policy (e.g., with respect to regulations and to
import controls, investment incentives, etc.).
Efficiency seeking
(a) of product (a) Economies of product specialization and concentration.
(b) of processes (b) Low labour costs; incentives to local production by host
governments.
Strategic asset seeking Any countries from the first three that offer technology, markets
and other assets in which the business is deficient.
Trade and distribution (import Source of inputs and local markets; need to be near customers;
and export merchanting) after-sales servicing, etc.
Support services Availability of markets, particularly those of ‘lead’ clients.
Source: adapted from Dunning (1993)
example, some oil companies transport crude oil relatively long distances
to refineries located in countries considered to be more attractive for such
investment.
Cost-oriented production
Cost-oriented production has accounted for many of the global shifts in
production in the last 30 years, away from the developed to the less
developed countries whose labour costs were much lower. For manufacturing
industries where labour inputs are a relatively high proportion of
costs, there are major potential savings by locating production in low-wage
areas. Dicken (1998) compared the changes in patterns of production of the
textiles and clothing industries. In both cases there was been a decline in
production in the industrialized countries and a growth in production in the
developing countries. The shift, however, was more marked for clothing
manufacture where automation has been less successful in replacing
manual labour. Although variations in labour costs are well documented
it is also necessary to consider variations in productivity levels, workforce
adaptability and workforce ‘manageability’ between different countries.
Dornier et al. (1998) questioned both market and cost orientation as
viable long-term reasons for locating overseas. They found that the notional
advantages of proximity to market are often offset by government restrictions
on domestic content, technology transfer and domestic ownership
which can severely limit the control that the parent has over its subsidiary.
Furthermore, wage rates change as today’s newly developing countries
become tomorrow’s industrialized nations. In addition, the recent collapse
of Far Eastern economies has created major uncertainties on future exchange
rates and government policies toward FDI. Dornier et al. (1998)
argued that the key to successful location overseas is a commitment to
strategic planning. Once FDI has been made, the development of the facility
must be guided by strategic, rather than operational thinking.
The location decision
The way in which the decision is made depends on many company-related
factors, such as experience in FDI, type of production, inter-plant relationships
and type of product. Many production and operations management
textbooks describe analytical methods of determining optimal locations for
new investment. Most of these involve the calculation of tangible costs and
returns followed by a factoring in of other intangible variables through
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some kind of weighting. Such approaches are probably more suited to costoriented
production than market-oriented production. One approach is to
use a hierarchical screening of options, beginning with continent followed
by country then actual site.
Choice of continent
For a business with a wide spread of international manufacturing plants, the
choice of continent may be a significant one, as the company may have to
decide between competing proposals from subsidiaries in various parts of
the world. In such a case, the company should be able to compare the
expected costs, returns and risks of the alternative proposals. In cases
where the company has a narrow spread of international investment,
some form of broad screening will be required based on the type of
production required.
Choice of country
Unless the business is present in a large number of countries already, it will
probably limit consideration to a few obvious candidates that either have an
attractive market or offer low-cost manufacturing. However, in a major
trading bloc such as the EU, a much more detailed country by country
comparison may be made, particularly if different incentives are offered
by host governments.
Choice of site
A much more detailed investigation is required to examine such factors as
labour availability, transport infrastructure, regional incentives, other
related industries and general attractiveness of the area. The analytical
methods mentioned earlier may be used to rank the shortlist. Large businesses
investing in the EU are likely to have a shortlist of 2–3 sites in
different countries with the final decision coming down to the most attractive
financial package being offered by the host government.
Procurement and transnational business
Procurement policy
Procurement policies are closely linked to the plant roles and inter-plant
relationships discussed earlier in the chapter. The policies are linked to the
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overall global strategy of the business, and the issues affecting procurement
can be discussed in terms of a number of variables:
. in-house manufacturing versus external purchasing/subcontracting;
. corporate versus third party suppliers;
. domestic versus other country purchasing;
. single versus multiple sourcing.
Birou and Fawcett (1993) in a survey of US companies identified a range of
perceived benefits of international sourcing (Table 8.3).
Types of purchasing policy
Broadly speaking, three types of purchasing policy are possible: central
purchasing, autonomous procurement and a mixture of these two
extremes.
Central purchasing
In the most extreme case, a single part of the corporation is responsible for
carrying out all purchasing for all parts of the company with the objective of
gaining economies of scale and uniformity of quality. Purchasing is carried
out on a global basis and is mainly of standard products, such as electronic
components. Subsidiaries are then required to buy from (usually through a
quasi-market or transfer-pricing arrangement) the central purchasing organization.
In less extreme cases, groups of plants located in a particular region
may set up their own regional purchasing organizations.
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Table 8.3 Benefits obtained from international sourcing.
Rating is on a seven-point Likert scale with 7 ¼ greatest benefit
Rank Benefits from international sourcing Rating
1 Access to lower priced goods 5.56
2 Enhanced competitive position 5.29
3 Access to higher quality goods 4.89
4 Access to worldwide technology 4.49
5 Better delivery performance 3.48
6 Better customer service 3.38
7 Increased number of suppliers 2.76
8 Helps meet countertrade obligations 2.60
Source: Birou and Fawcett (1993)
Autonomous purchasing
Individual plants are responsible for their own procurement. This may be
forced on the business because of government policies on local sourcing or
it may be part of a corporate country-centred policy. The plant will still
have to ensure that vendors meet the company’s agreed standards of
quality, cost and delivery, particularly in cases of transnational vertical
integration.
In many cases a mixture of the two extremes is used with central purchasing
for standard components and local procurement for more specialized
components.
Global logistics
The ‘flow’ of materials
‘Logistics’ is defined (Slack et al., 1998) as activities concerned with the flow
of material from supplier to production and from production to the
customer. The meaning has extended, however, to include reverse flows
of material (e.g., returned or faulty goods, packaging, etc.) and flows of
information. This wider definition reflects the greater emphasis on logistics
as part of the overall global strategy of a business. This view of logistics as
linking the operations of the business is summarized in Figure 8.4.
Logistics is thus the means through which the competitive advantage
sought by globalized business will be realized. Conversely, weaknesses
in logistics may undermine that competitive advantage through the creation
of ‘blockages’ in the organization’s primary value-adding activities (Porter,
1985 – see our discussion on this in Chapter 3).
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Collecting
Recovery
After-sales
Production
Procurement
Conception
Disposal
Destruction
Physical
distribution
Production
Procurement
Conception
Disposal
Renovation
Collecting
Recovery
Physical
distribution
sales
support
Figure 8.4 Operations and logistics flows
Source: Dornier et al. (1998)
Logistics and strategy
The type of global production strategy adopted will have important implications
for logistics management. Decisions will be made concerning both
internal logistics (i.e., the flow of intermediary products, parts and components
between subsidiaries) and external logistics (i.e., the flow of final
goods from producer to end-user).
In transnationals adopting country-centred or multi-domestic strategies,
logistics management will be concerned mainly with distribution within
countries since production is located in the markets being served. Companies
adopting ‘purest’ global and export-based strategies, on the other
hand, will be concerned more with international (cross-border) logistics,
given that dispersed foreign markets are supplied through centralized production
facilities. The most complicated arrangement arises in companies
adopting strategies of high FDI with extensive co-ordination among
subsidiaries. In addition to within-country and cross-border product
flows, this involves the global co-ordination and integration of worldwide
production and distribution into a global logistics network.
Scully and Fawcett (1993) analysed the comparative costs of production
and logistics in different regions of the world for a number of US companies.
They noted that, while management time tends to be concentrated
on seeking production locations that offer cost advantage, there is relatively
little time spent on the co-ordination of the organization’s dispersed productive
operations. They also found that some areas that offered very
advantageous production costs also suffered from comparatively high
logistics costs. The reasons for this are that areas that offer lower labour
costs tend to have less well-developed infrastructures and management
practices.
Scully and Fawcett also showed that, for US-based companies, any move
out of the USA resulted in higher logistics costs. This can be explained by
considering that over 90% of logistics costs come from documentation,
stock and transport costs. Documentation costs, despite attempts to
reduce them within trading blocs such as the EU and NAFTA, are invariably
higher than when all operations take place in a single country. Stock costs
rise because companies tend to carry more stock when distribution lines
are lengthened in order to guard against delays and stock-outs. Finally,
longer distances raise transport costs.
A further study by Ghosh and Cooper (1997) of the impact of NAFTA on
US companies showed that, while logistics in Mexico were expected to
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improve as a result of NAFTA, customs inefficiencies, poor transport
infrastructure and different management practices were still likely to be a
significant barrier to increased trade between the USA and Mexico.
Managing logistics
The complexity of managing logistics for organizations with global operations
can be immense and the potential for problems correspondingly large.
Companies have identified a number of techniques to manage and reduce
logistics lead times. Fawcett (1992) listed a number of examples including:
. developing partnership relationships with providers of transportation
services;
. developing partnership relationships with domestic and foreign suppliers
of sourced components;
. reliance on third-party transportation companies;
. use of advanced information systems such as EDI to track and/or
expedite shipments.
The emphasis on partnerships and alliances, a growing feature of global
business, is discussed further in Chapter 14, and the use of information
systems to co-ordinate activities is discussed in Chapter 10.
Discussion and review questions
1. What are the critical success factors that enable production strategy to
contribute to competitive advantage?
2. Explain how the three types of materials sourcing can help a business’s
strategy.
3. What features of a business’s strategy would influence the choice
between Dicken’s four production strategies?
4. Explain the key decision criteria when deciding on plant location.
5. Define and distinguish between central and autonomous purchasing.
6. Define and distinguish between internal and external logistics.
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PART IV
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Starr, M.K. (1984) ‘Global production and operations strategy’. Columbia Journal of World Business,
18(4), Winter.
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GLOBAL LEADERSHIP AND
STRATEGIC HUMAN
RESOURCE MANAGEMENT 9
Learning objectives
After studying this chapter students should be able to:
. understand the nature of, and relationships between, leadership
and management;
. recognize the issues involved in transnational leadership;
. understand the need for, and basis of, a strategic approach to
human resource management (HRM);
. understand the benefits of global approach to HRM;
. identify and evaluate strategies for managing in culturally diverse
transnational organizations;
. identify the link between the transnational company’s value
system and global strategy, and its human resource strategy.
Introduction
Human resources play a central role in determining the success of global
and transnational strategy. Human resources are of singular importance
because they:
. provide the leadership and management of the organization;
. play a unique part in organizational learning and competence building;
. pose particular questions in a global context, in terms of their management;
. are crucial in converting strategies into action.
Heijltjes et al. (1996) stated that, ‘Human resource management (HRM)
carries the promise that, if people are regarded and managed as strategic
resources, it can help the firm to obtain a competitive advantage and
superior performance.’
The implementation of effective leadership and management strategies
within transnational business is complicated by variations in culture, value
systems, language, business environment and industrial relations systems
between countries. Cultural diversity and national physioeconomic differences,
while presenting unquestionable challenges, also give rise to
significant capability in terms of creativity, skills, aptitudes and resources.
In approaching transnational human resource strategy, consideration must
be given to:
. the means by which the human resource strategy is determined and the
extent to which it is integrated with global and transnational strategy;
. leadership and management issues in culturally diverse and geographically
dispersed organizations.
These issues are discussed in this chapter.
Leadership and management in transnationals
Definitions
Leadership and management are two distinct but related sets of behaviours
and activities. The growth of globalization and the accelerating rate of
change in the business environment have led to an increasing focus on
the role and importance of leaders and leadership in organizations.
Management is primarily concerned with planning, organizing, directing,
budgeting, maintaining stability and controlling. Management activities are
closely integrated into the structure and systems of the organization and are
centred on its effective and efficient operation. Leadership, on the other
hand, centres on the strategic development and transformation of the
organization. In other words, leadership looks toward the future, creates
a vision and seeks to move people and the organization toward it. Leadership
involves developing a vision and strategic intent for the organization,
creating shared values, developing people and the organization, creating
change, and moving the organization toward the aspirations encapsulated
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in the vision statement. Despite these distinctions between management
and leadership, leaders are often required to manage and managers to lead.
The need for leadership has emerged because the paradigm within which
business operates has been transformed from an industrial age to the era of
knowledge-based business. The industrial age emphasized manufacturing
and production in a comparatively stable environment, characterized by
competition and management control. The new era of knowledge-based
business is exemplified by complexity, diversity and change, requiring
continuous learning and innovation, based on people, empowerment and
customer service.
The nature of leadership
There are many definitions of leadership, but in essence it is the ability of
one person to influence the behaviour and actions of other people toward
achieving the goals of an organization. There are also several theories that
seek to explain the nature of leadership:
. qualities or traits theories – conceptualize leadership in terms of the traits
that leaders possess;
. functional or group theories – consider leadership in terms of the
functions that leaders carry out;
. behavioural theories – categorize leadership in terms of the behaviours
of leaders;
. style theories – examine the nature of the approach adopted by leaders to
their role;
. situational approach and contingency models – explore leadership in
terms of the organizational and environmental context in which it takes
place;
. transitional or transformational theories – examine the impact of leadership
on the development of the organization.
None of these theoretical models excludes the others. In fact, they simply
represent different, but equally valuable insights into the nature of leadership.
It is important to consider two recent, related trends that have led to a
rethinking of approaches to leadership. First, the importance of vision the
leadership has gained, increasing recognition. Competitive advantage
depends on the creation of new and distinctive knowledge based on a
unique, demanding but achievable vision. Second, the importance of
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informal leadership behaviours has been recognized. In the past, leaders
were considered as few in number, concerned with goal setting, directing,
supervising, controlling, resolving conflicts and developing managers.
Today, it is recognized that leadership is required at all levels of the
organization and that they must provide vision, leading to the development
of new and distinctive knowledge-based competences, which deliver
competitive advantage because the people within the organization are
empowered, through flatter organizational structures, to deliver customerfocused
services. Leadership is concerned with the mentoring, motivation
and development of subordinates, the sharing of knowledge, and the
development of learning organizations that create and manage knowledge
more effectively than their competitors. Leaders are, therefore, change
agents who transform organizations and develop future leaders through
coaching and knowledge sharing.
Leaders are not ‘born’, nor is there a single set of characteristics or
behaviours which characterize ‘good’ leaders. Consider the differences in
personality and behaviour between successful leaders like Bill Gates
(Microsoft), Jack Welch (GE), Anita Roddick (Body Shop) and Richard
Branson (Virgin). Whereas Bill Gates would characterize himself as something
of a computer ‘nerd’, the success of his leadership is comparable with,
and even surpasses that of, more flamboyant characters like Welch and
Branson who might well be conceived as more typical leadership types.
Leadership can be developed and will involve:
. the ability to develop an innovative and distinctive vision for the future;
. the capability to learn and develop new knowledge-based competences;
. risk taking based on judgement informed through knowledge;
. the ability to develop, empower and motivate others by communicating
the vision to others;
. the capacity to combine task orientation (concern with the objectives of
the organization) with people orientation (concern for the development
and motivation of people);
. the development of a culture and shared values which support the
leader’s vision and encourage trust and sharing, risk taking, and team
working.
Senge (1990) argued that leaders in a learning organization must be:
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. designers – designing the vision, strategies, policies and structures of the
organization;
. teachers – facilitating learning so people take a new view of reality;
. stewards – developing people and the organization.
GE N the newleadership paradigm
A good example of the new requirements of leadership is provided by
the defence and electronics group, General Electric (GE). GE is a large,
diversified transnational organization facing hypercompetitive and
rapidly changing environments in all its spheres of operation. Yet, in
every market in which it competes it has successfully developed and
maintained a position in the top three providers and producers. While
the traditional paradigm of leadership regards the CEO as the strategic
leader, developing vision and strategy, and the remainder of people as
doers and implementers, the approach in GE represents the new
paradigm of leadership within which there are many leaders within
the organization. The new paradigm presents leadership as spread
throughout the organization and based on delegation, sharing,
collaboration and teamwork.
The dilemma for leadership in a huge, diversified transnational like
GE is combining the management necessary for control and integration
with the leadership and entrepreneurship necessary for change and
innovation. GE has attempted to resolve this dilemma through the
creation of strategic business units (SBUs) that are long term-focused,
customer-oriented and that have considerable autonomy in terms of
decentralized decision making.
When Jack Welch became CEO of GE in 1981 there began an era
which tried to build visionary leadership throughout the organization.
Welch aimed to be a visionary, setting a clear challenging vision for the
whole organization, and, coupled to this, a communicator and
organizer, providing strategic thinking rather than strategic planning.
Managers at lower levels throughout the organization were empowered
to become entrepreneurial leaders, not bureaucrats. Welch set
long-term goals for all the business units which were benchmarked
to be stretching, but achievable. The emphasis was on achieving
long term rather than short-term goals, through the strategic thinking
and innovation of managers within the SBUs.
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Leadership and cultural issues
The new leadership paradigm, which has gained widespread acceptance in
Western developed economies, must be considered alongside differing
national cultural characteristics. The new paradigm encapsulates a style
of leadership which involves participation, consultation, mentoring and
coaching, sharing of knowledge, and empowerment of individuals and
groups to question ways of working and take the initiative in decision
making. Such values and behaviours, however, conflict with those found
in certain national cultures. For example, in many Asian cultures, respect for
authority is paramount and the questioning of leadership decisions is
unacceptable. Similarly, subordinates expect senior managers to make
decisions with which they will comply. Attempts to consult and empower
workers in such circumstances may give rise to difficulties that are rooted in
national culture. Similarly, Schneider and Barsoux (2003) pointed out the
conflict between Western approaches to leadership and the expectations of
Russian managers for tough directive leadership, obedience of rules and
compliance with job descriptions.
There is strong evidence that many organizations succeed with modes of
leadership which differ from the new Western paradigm. This may be
because the alternative paradigms that they adopt are more resonant
with the national culture within which they are found. Equally, culture is
not a static phenomenon. It evolves over time, so that leadership styles are
likely to evolve in a similar manner and pattern to national culture. The
message is simply that leaders in transnational organizations must be
sensitive to cultural differences and may need to adapt leadership styles
in different cultural settings.
Body Shop: embracing a newmanagement ‘ethos’
The case of changing leadership at Body Shop provides an example of
how different management styles are sometimes appropriate at
different points in an organization’s development. Anita Roddick’s
leadership in the earlier years of the company’s history included a
pledge to ‘campaign passionately’ for the social and environmental
priorities she believed in. A later change in management, however,
led to the adoption of a new management ethos that embraces
greater financial accountability and responsibility, instilling in its staff
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a strong financial performance ethic, previously given less emphasis
under the leadership of the Roddicks.
Founded in Brighton in 1976 by Anita Roddick, the single store
operation went on to become an international organization operating
in 50 countries with almost 1,700 outlets. Mrs Roddick stepped down as
chief executive in 1998 after Body Shop’s financial performance slid
and subsequently resigned as co-chairman in February 2002 to focus
on her campaign work. She was succeeded by a new management
team consisting of Peter Saunders as CEO, while Peter Ridler joined
as managing director for the UK and Ireland, having held a similar role
at stationery group Staples.
The revamp has included a marketing shake-up, reorganization of
the supply chain and development of new products particularly in the
popular Body Butter range. From the outset, Saunders was prepared to
tackle some of the key themes that had made Body Shop successful in
the past. In denouncing the chain’s signature decor, he said that, ‘the
traditional Body Shop green box is tired.’ The company began its
journey on the road of better performance based on ‘better execution
and operations’. The company improved its stock control and cash
flow through more efficient processes and through the installation of
new computer systems in its UK business. Saunders said that these
changes enabled the company to have a more effective customer
service while focusing on better and more professional execution.
The move from the entrepreneurial leadership of Mrs Roddick to the
more business-focused leadership of Mr Saunders appeared to pay off.
The moves saw pre-tax profits surge 76% to £20.4 million for the year
ending 2003, despite a drop of 1% in like for like sales. Retail analyst
Richard Ratner of analysts Seymour Pierce said, ‘the new management
team are very good, very strategic and know exactly what has to be
done and they are doing it.’
Leading and managing cultural diversity in
transnational organizations
Cultural differences clearly exist at a number of levels – national, regional,
industrial, organizational, etc. – and they exist within organizations. In fact,
departments within the same organization may also develop distinctive
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subcultures. The nature of transnational business is that activities will span
national boundaries and national cultural differences. Such cultural differences
will pose challenges to leaders and managers, but, equally, cultural
diversity can offer opportunities in terms of complementary competences
and alternative approaches to business.
Tayeb (2000), drawing on the work of Perlmutter (1969), identified three
alternative approaches to cultural differences available to transnational
managers for dealing with cultural differences:
1. an ethnocentric policy – this implies imposing the culture and practices
of the home country and parent organization on all its overseas subsidiaries,
ignoring local cultural differences;
2. a polycentric policy – this implies following the culture and practices of
each host country and adapting completely to local conditions (this is a
multinational or multidomestic approach);
3. a global policy – this involves devising a global company-wide policy
to shape global organizational culture, which will combine different
cultural approaches.
We suggest, however, that a fourth option exists which combines an overall
global approach with some local adaptations:
4. a transnational or hybrid policy – this incorporates both global integration
of culture, to produce worldwide norms to guide activity toward
a common set of goals, and differentiation of culture, to allow it to be
adapted where necessary to local differences (Bartlett and Ghoshal,
1989; Prahalad and Doz, 1986). The optimum combination of integration
and differentiation of culture and practices will vary from company
to company depending on their individual circumstances.
Shaping culture in transnational organizations
Leaders will inevitably wish to create a coherent culture within their organization.
The intangibility of culture makes it extremely difficult to shape and
change. Successful cultural change involves the learning of new values,
attitudes and behaviours within the organization which will entail:
. determining the desired values, attitudes, norms and behaviours which
are to form the new organizational culture;
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. unfreezing the existing culture to make members of the organization
receptive to change;
. building the new culture;
. refreezing the new culture once the desired change has been achieved.
Leaders can seek to promote desired cultural change through:
. a vision that is communicated throughout the organization;
. education and training to foster organizational learning;
. new organizational and power structures which support devolved
decision making;
. new reward systems that promote the behaviours desired within the
organization;
. creating new stories, myths and symbols which emphasize desired values
and actions.
Strategic human resource management
The importance of human resources
Probably the single most important determinant of the success of global
strategy is the leadership and management of a transnational’s human
resources. HRM, according to Beer et al. (1984), ‘involves all management
decisions and actions that affect the nature of the relationship between the
organisation and its employees – its human resources.’ People have a
crucial role to play in devising and implementing strategy, in strategic
decision making and in making strategy successful. Strategic HRM has
been defined as: ‘a strategic and coherent approach to the management
of an organisation’s most valued assets: the people working there who
individually and collectively contribute to the achievement of its objectives
for sustainable competitive advantage.’ (Armstrong, 1992). Strategic HRM is
therefore concerned with making the most effective use of people in
determining and operationalizing strategy. It is important to note that
leadership, as distinct from management, is just as critical an issue in
relation to transnational HRM.
It is also concerned with ensuring that HR strategy is fully congruent
with corporate strategy. When the business is globalized, the importance
of arriving at an appropriate HR strategy is very great. Global and
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transnational HR strategy is not only more complex but it offers more
strategic alternatives. Human resources are central to achieving global competitive
advantage, so they must be managed strategically by ensuring that
an organization has an HRM strategy that is fully integrated with its global
and transnational strategy. Walker (1992) made the following case for
adopting a strategic approach to HR management:
1. it defines the opportunities for and barriers to achievement of business
objectives;
2. it prompts new thinking about issues, orientates and educates participants,
and provides a wider perspective;
3. it tests management commitment for actions and creates a process for
allocating resources to specific programmes and activities;
4. it develops a sense of urgency and commitment to action;
5. it establishes selected long-term courses of action considered high
priority over the next two to three years;
6. it provides a strategic focus for managing the business and developing
management talents.
Features of HR strategy
Anthony et al. (1993) listed six key features of an HR strategy:
1. recognition of the impact of the external environment – need to take
advantage of opportunities and to minimize the effects of threats;
2. recognition of the impact of competition and the dynamics of the
labour market – organizations compete for employees and must
recognise the forces affecting local, regional and national labour
markets (labour market dynamics of wage rates, unemployment
levels, working conditions, minimum wage legislation, benefit level,
competitor reputation all affect or are affected by strategic HR
decisions);
3. long-range focus – a time frame of three to five years is normal;
4. choice and decision-making focus – strategy implies choosing between
alternatives and making major decisions about HR which commit the
organization’s resources toward a particular direction;
5. consideration of all personnel – the value of all employees from top
level management to unskilled workers is seen as being important;
6. integration with corporate strategy and functional strategies – HR
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strategy must be fully integrated with both corporate strategy and the
strategies of the other functional areas of the business.
As well as these general characteristics of a strategic approach to HR, it is
important to consider the impact of core competence and generic strategy
on the organization’s HR strategy.
HR strategy, core competences and organizational learning
Globalization, turbulence and hypercompetition in markets demand
increased organizational flexibility and accelerated organizational learning.
In addition, a customer focus is also an essential element of sustained
competitive advantage. These twin needs for responsiveness and customer
orientation have profound implications for global strategic HRM.
We learned in Chapter 6 that a global business can adopt a competencebased
approach to strategic management. This, in turn, implies the adoption
of an open systems perspective to human resources which looks across
and beyond organizational boundaries. Furthermore, the development of
core competences is often based on organizational learning and knowledge
building. Organizational learning and knowledge building are based on
individual knowledge and learning, which is stored and shared.
The importance of human beings in the development of both individual
and organizational knowledge is as evident as it is paramount. Strategic
HRM, therefore, has a pivotal role to play in knowledge management and
development, and in competence building. Hagan (1996) argued that a
competence-based HR strategy ‘will demand major changes in the way
we organise, the way we structure work, the importance we place on
learning and innovation, and the way we approach the management of
our employees.’ Hagan proposed 12 hypotheses believed to govern a
competence-based approach to strategic HRM (see Table 9.1).
Integration of HRM with corporate strategy and
functional strategies
The importance of congruence
A common assumption made in American models of HRM is that the
corporate strategy of an organization drives its functional strategies. In
other words, an organization determines its overall strategy and then sets
functional strategies in order to implement it. However, the functional
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strategies can also impact on corporate strategy in that senior management
must consider existing functional strategies when setting corporate strategy.
For example, current HR strategy and capabilities will be important
considerations when developing the corporate strategy of a transnational
business. Brewster (1994) suggested that, ‘the development of strategy is in
fact a complex, iterative and incremental process, so that it is difficult to
define a point at which the corporate strategy can be finalised sufficiently to
allow the HRM strategy to be created.’
Accordingly, human resource must be acutely aware of overall corporate
strategy and how HR strategy aligns with it. Furthermore, they must be
aware of functional strategies and endeavour to integrate HR strategy
with them. In aiming to integrate HR strategies with business strategies,
the HR strategy can be modelled on the business strategy and can use it
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Table 9.1 Strategic human resource management – implications of a core
competence approach
Job design 1. Greater technical knowledge will be required for individual jobs. Project teams
and rotation of jobs will be used to foster the sharing of knowledge.
2. Jobs will increasingly combine thinking and doing.
Staffing issues 3. Most challenging positions will be filled by internal transfers. Externally hired
employees will be mainly at entry level.
4. Businesses will enter relationships with educational institutions to obtain
suitably qualified employees.
5. Personality and attitudinal tests will be used to assess the potential of
individuals.
Training and 6. Investment in training and development programmes will increase to facilitate
development personal and organizational development.
7. Training and development of personnel will increasingly be decentralized to
operating departments.
8. Training and development will move away from traditional skills building to
development.
9. Performance review will be used to assess the contribution of employees
rather than to determine pay. This will be based on feedback from peers and
customers rather than supervisors and subordinates.
Rewards systems 10. A greater proportion of pay will be based on group or organizational
outcomes.
11. Traditional hierarchical pay plans will be replaced by broader banding of jobs.
Job evaluation will shift from a quantitative to a qualitative focus.
12. Compensation systems will become flexible.
Adapted from Hagan (1996)
as a starting point. Table 9.2 illustrates some of the possible relationships,
and Table 9.3 gives some examples of organizational and HR strategies.
Problems of integrating HRM with global and transnational strategies
A number of problems are commonly encountered when attempting to
integrate HR strategy with transnational strategy:
1. An organization will have a number of business strategies, especially if
it operates in a variety of product markets. Therefore, different
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Table 9.2 Human resource implications of business strategy
Business strategy questions Human resource implications
What industry and markets are we in? What people do we need?
Are organizational culture, structure and value How do we change them?
systems appropriate or inappropriate?
Strategic direction Who will we need in the future?
New businesses and new markets What systems and procedures might be developed?
Strengths, weaknesses, opportunities, threats To what extent are they related to existing use of
human resources?
Demand and supply in the labour market?
Critical success factors To what extent do these depend on employees
rather than other factors?
Table 9.3 Examples of organizational strategies and associated human resource strategies
Corporate strategy Example company Human resource strategies
(strategic direction)
Retrenchment General Motors Layoffs, wage reduction, productivity increases, job
(cost reduction) redesign, re-negotiated labour agreements
Growth Intel Aggressive recruiting and hiring, rapidly rising
wages, job creation, expanding training and
development
Renewal Chrysler Managed turnover, selective layoff, organizational
development, transfer/replacement productivity
increases, employee involvement.
Niche focus Kentucky Fried Chicken Specialized job creation, elimination of other jobs,
specialized training and development.
Acquisition General Electric Selective layoffs, transfers/placement, job
combinations, orientation and training, managing
cultural transitions
Source: Anthony et al. (1993)
approaches to HR might be needed for each. This is particularly true of
global and transnational businesses.
2. If business strategy changes, it might be difficult to change HR strategy
because it involves the internal structure and culture of the organization.
Softer features of organizations like culture are notoriously difficult
to change to a desired state.
3. HRM is often qualitative, meaning that it is not easy to prove the
relationship between HRM and the performance of the organization.
4. HRM is often long term and large scale but can easily be subverted. For
example, a change in culture can be undermined by quick fix management
decisions or by a management that only pays lip service to
change.
Criticisms of the concept of strategic HRM
The concept of HRM and the strategic approach originated in the USA, but
there has been criticism of the view that American models of HRM can be
applied universally, particularly in European literature on the subject. Some
of the main criticisms of the American concept are that it:
. lacks clarity and precision;
. is too prescriptive and normative;
. lacks supporting empirical evidence;
. is difficult to distinguish from traditional personnel management;
. is too derivative in its approach to HRM strategy, which is seen as being
driven by corporate strategy, rather than contributing to it;
. is overly prescriptive with regard to industrial relations history and
practice in Europe (and perhaps in other continents as well).
European and American approaches to HRM
Two common elements of American models of HRM are the ideas of:
. organizational independence and autonomy; and
. the integration of HRM and business strategy.
A survey of HRM policy and practice in Europe (Brewster and Hegewisch,
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1994) found important differences between the USA and Europe in respect
of these two elements.
(1) Organizational autonomy is more restricted in Europe because of:
. Culture and legislation – US culture is more individualistic and
achievement-oriented. HRM in Europe is influenced and determined to
a greater degree by state regulations.
. Patterns of ownership in the private sector vary between Europe and the
USA. For example, in Germany a network of a small number of large
banks owns most of the major companies. Public ownership is more
extensive in Europe.
. Trade unions and workforce communication – Europe is more heavily
unionized and union influence is still strong (in most European countries
more than 70% of employers recognize trade unions for the purpose of
collective bargaining).
. The controlled labour market – In Europe, higher levels of state support
in the external labour market enable European organizations to develop
both internal and external labour market strategies with a lower degree
of risk (although employers are also faced with restrictions in recruitment
methods, for example).
(2) HRM and business strategy
Brewster and Hegewisch (1994) argued that there is little evidence of the
integration of HRM and business strategy in the USA, but there appears to
be a higher degree of integration of HRM at the top levels of organizations
in Europe.
A transnational model of HRM
Brewster (1994) proposed ‘a model of HRM which places HR strategies
firmly within, though not entirely absorbed by, the business strategy.’
The model (Figure 9.1) shows that the business strategy, HR strategy and
HR practice are all affected by, and interact with, an external environment
of national culture, legislation, patterns of ownership, employee representation,
education, etc.
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Porter’s global strategy and HR strategy
Congruence between HR and corporate strategy
Several references have already been made in this chapter to the link
between the global and transnational strategy of a company and its HR
strategy. Porter’s global strategy model can be employed to indicate
various aspects of a transnational’s HR strategy (Figure 9.2).
According to Porter, there are two key dimensions to a global as opposed
to a domestic strategy: configuration and co-ordination. The former refers
to the location of activities, the latter to the extent of co-ordination between
locations. The combination of configuration and co-ordination options
gives rise to Porter’s four categories of international strategy (see Figure
9.2).
HRM problems will vary with the type of international strategy adopted.
Thus, in country-centred businesses, the need for national responsiveness
is more important than global co-ordination and direction. This implies a
predominance of host country nationals in key management positions at
subsidiary level and only limited cross-national transfers of personnel.
Thus, country-centred businesses may have little need for well-defined
expatriate or international management development policies. The need
for national responsiveness also implies that industrial relations decision
making will be decentralized at subsidiary level and that subsidiary indus-
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Sector
Organisation: size, structure, culture
Corporate
Strategy
HR Strategy HRM Practice
Global Business Environment
• Culture
• Legislation
• Ownership patterns
• Trade Union representation
• Employee involvement
• Communication
• Bargaining arrangements
• Labour markets
• Education and training
• Working practices
Figure 9.1 A transnational model of HRM
Adapted from Brewster (1994)
trial relations practices will be based on host country customs and practices.
A similar approach may be expected in businesses adopting an exportbased
strategy of concentration and minimum co-ordination.
The opposite approach to HRM may be expected in geographically
dispersed but highly co-ordinated transnationals (high foreign investment/
extensive co-ordination). Here the need for global co-ordination
and direction outweighs the need for national responsiveness. This may
necessitate the employment of home country nationals at subsidiary level
and a significant cross-national exchange of personnel. Effective expatriate
policies will therefore be needed to ensure the smooth exchange of staff.
The achievement of global co-ordination and direction also requires a pool
of internationally experienced executives, which requires an extensive
international management development programme. In the labour area,
highly co-ordinated businesses must ensure that labour problems at one
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High co-ordination strategies Dispersed activities/high degree Purest global strategy (with
Lowlocal responsiveness of co-ordination extensive co-ordination and
concentration)
HR strategy requiring high degree of co-ordination:
f may necessitate the employment of home country nationals at
subsidiary level;
f significant cross-national exchange of personnel;
f effective expatriate policies needed to ensure smooth exchange of
staff;
f a pool of internationally experienced executives;
f extensive international management development programme;
f labour problems at one location must not affect operations elswhere;
f standardization of employee benefits between subsidiaries is
necessary;
f significant transfer of parent country industrial relations practices to
subsidiaries.
Lowco-o rdination strategies Country-centred strategy Strategy based on exporting of
High local responsiveness Dispersed activities/little product with decentralized
co-ordination marketing in each host country
HR strategy requiring local responsiveness:
f predominance of host country nationals in key management
positions of subsidiary level;
f limited cross-national transfers of personnel;
f little need for well-defined expatriate or international management
development policies;
f industrial relations decision making will be decentralized at
subsidiary level;
f subsidiary industrial relations practices will be based on host
country customs and practices.
Geographically dispersed Geographically concentrated
activities activities
Configuration of activities
Figure 9.2 Human resource strategy and degree of co-ordination of global activities
Source: based on Porter (1986)
location do not affect operations elsewhere. Similarly, some standardization
of employee benefits between subsidiaries will also be necessary. This
implies active parent company involvement in subsidiary industrial relations
issues and a significant transfer of parent country industrial relations
practices.
Review and discussion questions
1. Discuss the reasons for and nature of the modern paradigms of
leadership.
2. Explore the cultural issues that must be addressed in relation to leadership
in transnational operations.
3. Explain the relationship between a business’s transnational and HR
strategies.
4. Describe the basis of a ‘strategic’ approach to global HRM.
5. Explain the relationships between a business’s core competences and
HR strategy, and those between generic strategy and HR strategy.
6. Explain the relationship between an organization’s global strategy
(using Porter’s model) and its expatriate and management development
policies and practices.
References and further reading
Anthony, W.P., Perrewe, P. and Kacmar, K.M. (1993) Strategic Human Resource Management. New
York: Dryden Press/Harcourt Brace Jovanovich.
Armstrong, M. (1992) Human Resource Management: Strategy and Action. London: Kogan-Page.
Bartlett, C. and Ghoshal, S. (1989) Managing Across Borders: The Transnational Solution. Boston:
Harvard Business School Press.
Beer, M., Spector, B., Lawrence, P.R., Quinn, M.D. and Walton, R.E. (1984) Managing Human Assets.
New York: Free Press.
Brewster, C. (1994) ‘European HRM: Reflection of, or challenge to, the American concept?’ In: P.S.
Kirkbride (ed.) Human Resource Management in Europe. London: Routledge.
Brewster, C. and Hegewisch, A. (eds) (1994) Policy and Practice in European Human Resource
Management: The Price Waterhouse Cranfield Survey. London: Routledge.
Chakravarthy, B.S. and Perlmutter, H.V. (1985) ‘Strategic planning for a global business’. Columbia
Journal of World Business, Summer, 3–10.
Desatnick, R.L. and Bennett, M.L. (1977) Human Resource Management in the Multinational
Company. Aldershot, UK: Gower Press.
Doeringer, P.B. and Piore, M.J. (1971) Internal Labour Markets and Manpower Analysis. Lexington,
MD: D.C. Heath & Co.
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Edwards, P., Ferner, A. and Sisson, K. (1996) ‘The conditions for international human resource
management: Two case studies’. International Journal of Human Resource Management, 7(1),
February, 20–40.
Fombrun, C.J., Tichy, N.M. and Devanna, M.A. (1985) Strategic Human Resource Management. New
York: John Wiley & Sons.
Gunnigle, P. and Moore, S. (1996) ‘Linking business strategy and human resource management: Issues
and implications’. Personnel Review, 23(1).
Hagan, C.M. (1996) ‘The core competence organisation: Implications for human resource practices’.
Human Resource Management Review, 6(2), 147–164.
Hamill, J. (1984) ‘Labour relations decision-making within multinational corporations’. Industrial
Relations Journal, Summer.
Hamill, J. (1989) ‘Expatriate policies in British multinationals’. Journal of General Management, 14(4),
Summer.
Harris, P. (1979) ‘The unhappy world of the expatriate’. International Management, July.
Heijltjes, M., van Witteloostuijn, A. and Sorge, A. (1996) ‘Human resource management in relation to
generic strategies: A comparison of chemical food and drink companies in the Netherlands and
Great Britain’. International Journal of Human Resource Management, 7(2), May, 383–412.
Heller, J.E. (1980) ‘Criteria for selecting an international manager’. Personnel, May/June.
Holmes, W. and Piker, F. (1980) ‘Expatriate failure – Prevention rather than cure’. Personnel Management,
December.
Howard, C.G. (1984) ‘How relocation abroad affects expatriates’ family life’. Personnel Administration,
November.
Lanier, A. (1979) ‘Selecting and preparing personnel for overseas transfers’. Personnel Journal, March.
Mahoney, T.A. and Deckop, J.R. (1986) ‘Evolution of concept and practice in personnel administration/
human resource management’. Journal of Management, 12(2), Summer.
Ohmae, K. (1990) The Borderless World. London: Collins.
Ondrack, D.A. (1985) ‘International transfers of managers in North American and European MNEs’,
Journal of International Business Studies, Fall.
Perlmutter, H.V. (1969) ‘The tortuous evolution of the multinational corporation’. Columbia Journal of
World Business, January/February.
Perlmutter, H.V. (1984) ‘Building the symbolic societal enterprise: A social architecture for the future’.
World Futures, 19(3/4), 271–284.
Porter, M.E. (1986) Competition in Global Industries. Boston: Harvard Business School Press.
Prahalad, C.K. and Doz, Y.L. (1986) The Multinational Mission: Balancing Local Demands and
Global Vision. New York: Free Press.
Reynolds, C. (1979) ‘Career paths and compensation in multinational corporations’. In: S. Davis (ed.),
Managing and Organizing Multinational Corporations. New York: Pergamon Press.
Schneider, S.C. and Barsoux, J.C. (2003) Managing Across Cultures. London: Financial Times/Prentice
Hall.
Senge, P. (1990) ‘Building learning organizations’. Sloan Management Review, Fall.
Tayeb, M. (2000) International Business – Theories, Policies and Practices. London: Financial Times/
Prentice Hall.
Toyne, B. and Kuhne, R.J. (1983) ‘The management of the international executive compensation and
benefits process’. Journal of International Business Studies, Winter.
Tung, R.L. (1982) ‘Selection and training procedures of US, European and Japanese multinationals’.
California Management Review, Fall.
Tung, R.L. (1984) ‘Strategic management of human resources in the multinational enterprise’. Human
Resource Management, Summer.
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Tung, R.L. (1988) The New Expatriates: Managing Human Resources Abroad. Cambridge, MA:
Ballinger.
Van Den Bulcke, D. and Halsberghe, E. (1984) Employment Decision-Making in Multinational
Enterprises: Survey Results from Belgium. Geneva: International Labour Organization.
Walker, J.W. (1992) Human Resource Strategy. London: McGraw-Hill.
Young, S., Hood, N. and Hamill, J. (1985) Decision-Making in Foreign-Owned Multinational Subsidiaries
in the United Kingdom (ILO Working paper No. 35). Geneva: International Labour
Organization.
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GLOBAL TECHNOLOGY
MANAGEMENT 10
Learning objectives
After studying this chapter students should be able to:
. describe the linkages between technology and strategy;
. explain how technology can be defined and employed as a
strategic asset;
. describe how technology can be used to enhance competitive
advantage;
. describe how technology needs to be managed to enable it to be
used to enhance global competitive advantage;
. explain what ICT is, how it has stimulated globalization and how it
can be used in a company’s technology strategy.
Introduction
The scope of what we refer to as ‘technology’ is too large to be considered
in detail in a single chapter of a book of this type. The many ways in which
the word is used is testimony to the plethora of ways in which it can impact
on business strategy. Technology can be found in electronics, chemicals,
aerospace, telecommunications, design, production, logistics and many
other fields – and in most cases, one technology is highly interconnected
with other types. So, while we might think of technology as describing
computers and robots (which it certainly does), we should not forget that
the same management skills required in these sectors are also required in
every other area of technology: in pharmaceuticals, petrochemicals, automobiles
and in hundreds of other contexts.
This chapter seeks to explain the key themes of technology strategy as
they relate to international business. Much of the literature in this field has
stressed the growing influence of technology on the competitiveness of
international business. Harris et al. (1984) focused on the influence of
‘technology-driven events’ causing a lack of competitiveness in US industry.
They correctly forecast that technology would continue to trigger major
market shifts. Hence, the need for transnational businesses to adroitly
manage technology is difficult to overstate.
Technology and strategy
A powerful force drives the world toward a converging commonality,
and that force is technology. It has proletarianized communication,
transport and travel. It has made isolated places and impoverished
peoples eager for modernity’s allurements. Almost everyone everywhere
wants all the things they have heard about, seen, or experienced via
the new technologies (Levitt, 1983).
Technology is, without doubt, one of the most important contributory
factors underlying the internationalization and globalization of
economic activity (Dicken, 1998).
The impact of technology on strategy
Theodore Levitt’s (1983) prescient paper on market homogenization captured
the enormous impact that technology has and will continue to have
on markets and businesses. Although other authors (e.g., Douglas and
Wind, 1987) have pointed out weaknesses in Levitt’s arguments, we can
now look back and see how right he was to highlight the significance of
technology in shaping the markets that the transnational deals with as well
as the way in which the company is organized.
The effects of technology have however sometimes been different to
those that Levitt discussed. For example, while communication technologies
such as satellite television have continued to encourage a convergence
of demand, flexible manufacturing technologies have enabled
businesses to offer a much greater variety of product designs without
sacrificing economies of scale. Similarly, while the dramatic improvements
in information technologies have enabled businesses to operate on a global
scale, they have also enabled a move away from the old style multinational
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corporation with central control to the transnational with information
shared throughout the organization.
Technology is one of the major factors behind the increased turbulence
in the environment of many business sectors. The shortening of the
new product design cycle through, for example, sophisticated CADCAM
(computer-aided design, computer-aided manufacture) technologies has
increased the rate of product obsolescence. Businesses have less time to
respond to new developments and must make strategic decisions where
the future becomes less and less predictable. The emergence of new,
competing technologies and the acquisition of existing technologies by
competitors can also increase the complexity of the environment. This
complexity is even greater for the transnational facing both global and
local competitors.
The general impact of technology on the macroenvironment has already
been discussed in Chapter 5. The purpose of the present chapter is to
examine how the transnational can ‘manage’ technology as part of its
corporate strategy. To do this we shall first consider the role of technology
as a strategic asset and how it differs from more conventional assets;
second, we shall review the elements of a technology strategy – how the
business responds to the challenges and opportunities posed by new
technology; finally, we shall examine the special cases of information
and communication technologies (ICTs) and their impact on the strategy
and operations of the transnational.
Technology as a strategic asset
Defining technology
‘Technology’ is a word that is often used but not often explained. In this
chapter we shall use the dictionary definition of the application of science
to industry or commerce. There is an important distinction here: by
‘science’ we mean the results of fundamental academic investigations,
while by ‘technology’ we mean the application of science. This distinction
is important when we consider how businesses acquire new technologies.
The importance of technology to a business lies in the fact that possession
of a technology can give a competitive advantage. Technology can be
therefore regarded as a strategic asset. Furthermore, we can also say that a
business’s ability to manage and exploit its technology can represent a core
competence. There is also a close link between a company’s ability to
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manage technology and its capacity to innovate. We shall now examine
more closely how technology can give a competitive advantage through its
products and production processes. The contribution that information and
communication technologies can make to a business’s operations will be
discussed later in the chapter.
Technology and products
Technology can enhance a company’s product portfolio in a number of
ways:
New functions
A new product can be developed which allows the user to perform tasks
that were hitherto not possible or else very difficult. An example of this is
the development of the satellite telephone that allows the user to communicate
from almost anywhere on the Earth’s surface. Some customers are
willing to pay high prices to own such a product. Such products are
likely to be highly innovative requiring major investments in new
technology.
New features
An existing product can be modified to make it more useful while the basic
function remains the same (e.g., the development of compact satellite
telephones that require almost no setting up). Companies continually
seek innovations to differentiate their products from that of competitors.
Although such innovations may be minor, over time these can add up to
represent a significant advance in technology.
Greater reliability
As the technology becomes more mature, product reliability becomes a key
factor in product differentiation. Design improvements and different assembly
techniques will focus on performance and quality (e.g., increased use of
specialized integrated circuits can make the product easier to assemble and
more robust).
Lower costs
As the product matures, technology development focuses more on cost
reduction. The use of specialized integrated circuits, mentioned above,
which are expensive to design but in mass production offer huge cost
advantages over discrete components offer a tremendous advantage to
the businesses that can master this technology.
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Technology is one of the underlying reasons for the existence of a
product life cycle. Product performance tends to follow an ‘S’-shaped
curve as shown in Figure 10.1.
When the technology is new, developments are rapid and product
performance rises quickly. As the technology becomes mature, the rate
of change of performance tends to level off as the technological limits
are reached. At some point, a new technology may be developed and
incorporated in the product. At first, product performance is lower than
that of the existing technology. But as the invading technology is developed,
product performance overtakes that of the current technology, and
eventually the old product/technology becomes obsolete.
As an example, consider the technology in wristwatches. The basic
mechanism of the wristwatch was established around 1765. By the early
20th century the watch was a sophisticated piece of precision mechanical
engineering, but there was relatively little rate of improvement in accuracy.
When the electronic quartzmovement was developed in the 1970s, the
inherent accuracy was much greater than conventional mechanical
movements. Since the quartzmovement was also much cheaper to
mass-produce, the old mechanical technology was soon obsolete, with
dramatic effect in the Swiss watch industry. The lesson here is that the
invading technology can come from other industry sectors and other
countries – and the time between initial launch and annihilation of the
current product/technology can be quite rapid.
Technology and production
The section above has indicated that product design is a major factor in
production cost. However, the technologies used in the production process
itself can lead to competitive advantage.
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Time
Performance
Established product
Invading product
Figure 10.1 Performance of invading product compared with that of established product
Source: Abernathy and Utterback (1978)
Shorter lead times
The use of CADCAM systems has dramatically reduced lead times from
initial design to full-scale production. In many industries, components
can be designed on computer and a prototype generated within a few
hours. After testing is complete the computer-generated design can be
used directly in the manufacturing process. Design information can be
electronically transferred from one location to another.
Increased quality
The use of automated assembly, with robots as a leading example, can not
only increase throughput but can also reduce errors in complex, repetitive
processes. Automation can also increase production flexibility; changes to a
process can be introduced by reprogramming which is faster and cheaper
than hardware changes.
Reduced cost
The higher throughput and increased reliability offered by new technologies
can also lead to reduced unit costs. With flexible manufacturing
techniques large production runs are no longer required to keep unit costs
low.
An example of technological change was the development by Pilkington
Brothers of the float glass process. The traditional method of manufacturing
flat glass was to pass molten glass through a series of rollers until it was the
correct thickness; the glass has then to be polished on both sides. In the
float process the glass flows in a continuous process across a bath of molten
tin and emerges as a perfectly flat sheet at the other end with no rolling or
polishing required. Although the development of the new process required
a huge financial outlay it revolutionized the economics of flat glass production
and put Pilkington in an unassailable competitive position.
Patterns of technological innovation
The pattern of technological innovation outlined above has been shown to
apply to many product types. Abernathy and Utterback (1978) described a
model of innovation summarized in Figure 10.2.
In the early stages of the product’s life, innovation dominates. The emphasis
of technological development is on improving product performance,
stimulated by information on user needs. The product design is ‘fluid’ with
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frequent major changes, together with flexible and inefficient production.
Organizational control tends to be informal and entrepreneurial.
At some point a ‘dominant design’ emerges which all manufacturers
adopt as a basic standard. The emphasis moves toward process innovation
with the objective of reducing costs and improving quality. Changes are
incremental and cumulative, and products tend to be very similar. Production
processes are efficient and capital intensive. Organizational control
tends to be based on structure, goals and rules.
The significance of this for any business is that the nature of technological
development and how it is managed changes greatly over the life of a
product.
Differences between technology and other assets
Like other assets (except for some fixed assets), technology can be transferred
from one location to another; it can be acquired and it can be
considered as having value. The difference from other assets is that the
form that the technology takes can vary. The clearest distinction is that
between tangible and intangible technology. We can illustrate this difference
in one way by considering how the technology appears to the user of
the company’s products.
Tangible technology
In the example mentioned above of the satellite telephone, the technology
is embodied in the product itself and made available to the user. It would
be possible for the user to ‘reverse-engineer’ the telephone and acquire the
company’s technology to design and build his or her own telephones. Of
course, reverse-engineering complex integrated circuits and software is
very difficult but most businesses make some attempt to examine their
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Fluid pattern Transitional pattern Specific pattern
Rate of major innovation
Process innovation
Product innovation
Dominant
design
Figure 10.2 Patterns of innovation
Source: Abernathy and Utterback (1978)
competitors’ products to see if any secrets can be learned. The company
must therefore find some means of protecting its technology.
Intangible technology
On the other hand, the user of glass manufactured by the float process
would not be able to deduce from the product itself anything about the
manufacturing process. The technology is not embodied in the product; this
helps the company to protect its secrets from competitors. This technology
in its purest form is intangible. The knowledge of how something is made
may reside in the heads of a few key employees. It is much more difficult to
talk about acquiring this kind of technology and even more difficult to
value it. We shall consider this later in the sections on technology transfer
(pp. 278 and 280).
Technology and global competitiveness
Design technology
Many examples can be given of the link between technology and
international competitiveness. In the consumer electronics industry, for
example, international competitiveness depends to a significant extent on
the continual introduction of new products incorporating new technology
(e.g., VCRs, digital audio tapes, personal computers, electronic calculators,
personal hi-fi systems, remote control and flat screen TVs). Similarly, in the
pharmaceutical industry, the development and introduction of new drugs is
a major determinant of transnational competitiveness – as in the case of
Glaxo with its anti-ulcer drug Zantac and Hoffman-La-Roche with its antidepressant
drugs valium and librium.
Process technology
International competitiveness is also closely linked to new process developments,
with one of the earliest examples being the pioneering of mass
production technology by Ford. In the textile and clothing industry, producers
in developed countries have responded to the flood of low-cost
textile imports from developing countries by introducing increasingly
automated production techniques.
Some businesses are more capable of generating a stock of proprietary
information than they are of achieving commercial success. Others discover
that their technology is more readily exploited by others who learn from
their errors. In other cases, the company’s international investment is
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largely motivated by the desire to acquire technology skills as a basis for a
future stream of innovations.
Technology strategy
The components of a technology strategy
In order to exploit the opportunities and counter the challenges posed by
technology, many transnational companies develop a technology strategy.
Many businesses have some sort of ‘IT strategy’ that is rather limited in
scope; here we suggest that this should be linked with a wider strategic
approach to managing technology as a strategic asset. As with any other
functional strategy (such as a human resource strategy), a technology
strategy should be consistent with the overall corporate strategy and the
objectives underlying that strategy. The components of the strategy will
vary from one business to another but in general will include:
. technology audit;
. sourcing new technology;
. exploiting technology;
. protecting the competitive advantage.
We consider each of these components in turn.
Technology audit
This activity is similar to the general internal analysis of the business
described in Chapter 3. The purpose of such an audit (also known as an
innovation audit) is to identify the specific technological competences
within the business and match these against the opportunities the business
intends to pursue in its corporate strategy. The outcome of the audit should
be an estimate of the potential of the business to obtain a competitive
advantage from the technology in one or more of the ways described
earlier in this chapter. The audit should also identify technology ‘gaps’
that have to be filled. This information will be used to determine the
level of investment in technological development required to meet
corporate objectives and where that investment should be directed.
Goodman and Lawless (1994) described three systematic approaches to
carrying out an audit that, when taken together, can present a useful picture
of the business.
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Technological innovation process audit
The aim of this is to construct a risk profile for existing and new projects by
assessing the length and depth of the company’s experience in its chosen
technologies, its markets, project organization, the far environment and the
industry structure. This can assist management in deciding which technological
areas are more likely to be successful and which should perhaps be
avoided, as the risk of failure may be considered unacceptable.
Innovative comparison audit
This is an analysis of the business’s innovative abilities compared with
competitors. It requires an examination of the company’s track record in
new products, R&D staff capabilities, R&D performance, idea generation,
time to commercialize (i.e., time to market), costs/benefits of R&D and
relationships between R&D and other key functional areas.
Technological position audit
This reviews the technologies needed by the business and places them in
one of four categories as shown in Table 10.1. For each category, the table
shows a suggested level of investment that might be appropriate.
Sourcing new technology
Development or transfer?
Having identified weaknesses or gaps in its technology capabilities, management
has a number of options to build new capabilities. The basic
decision is to develop in-house or look externally. Some authors have
discussed how the decision should be made; one example is the discussion
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Table 10.1 Technology categories
Category Description Investment level
Base Technological foundation of business; widely available to Needs little
competitors.
Key Technologies with the greatest impact on competitive Systematically built
performance.
Pacing Technologies in early development which have the Selective investment
demonstrated potential to alter the basis of competition.
Emerging Technologies with long-term promise to alter the basis of Monitored
competition.
Source: adapted from Goodman and Lawless (1994)
in Roberts and Berry (1985). The key variable is the familiarity of the
company with the technology, ranging from already making some use of
the technology to simply being aware of the technology but without
any practical experience. Figure 10.3 summarizes the recommended
approaches.
Roberts and Berry (1985) noted that joint ventures were often between a
large business with an established market position and a small business
with a new technology seeking entry to market. It is interesting to note that
acquisition is not a recommended method when the company is unfamiliar
with the technology – failure rates tend to be high in such circumstances.
For most large transnationals (especially those operating in technologyintensive
industries), new technology emerges mainly from the results of
internally generated R&D. It is important to be aware, however, that there
are a range of alternative sources of technology available to a business
where a distinction is made between internal and external sources, both
domestic and foreign. While large transnationals may rely mainly on internal
R&D, smaller and non-dominant transnationals may focus on external
sources of technology transfer and accumulation, since these will reduce
the high capital expenditures involved.
Recent years have seen a rapid growth in the use made of these alternative
forms of technology acquisition and development given the pace of
technology change, shortening product life cycles and the intensity of
global competition. For example, foreign acquisitions of US companies
have increased rapidly (in both number and value) since the late 1970s.
Although motivated mainly by the need to gain access to US markets and
existing distribution outlets, many US acquisitions have been motivated (at
least in part) by the desire to acquire US technology (Hamill, 1988). Similarly,
recent years have seen the growing importance of joint government/
industry-sponsored research initiatives, mainly in the electronics industry
and in various forms of international collaboration between organizations
of different nationalities, including strategic alliances.
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Decreasing familiarity with technology
•Internal
development
•Acquisitions
•Internal
development
•Acquisitions
•Licensing
•Joint ventures
Figure 10.3 Optimum entry methods for new technologies
Source: adapted from Roberts and Berry (1985)
While the objectives of these various options are similar (i.e., technology
development and transfer), the management implications of internal and
external forms of technology acquisition differ significantly.
Some of the major management decisions that need to be taken in the
case of internally generated R&D include:
. the level of R&D expenditure;
. the focus of R&D effort;
. the location of R&D (i.e., the centralization/decentralization issue);
. the nature of R&D undertaken at subsidiary level;
. the transfer and diffusion of R&D results throughout the global network.
External forms of technology involve partnerships and collaboration
between unrelated concerns. The major managerial issues involved, therefore,
relate to the planning, negotiation and organization of collaborative
agreements (this issue is examined in more detail in Chapter 14).
Problems with technology transfer
The problems associated with the successful transfer of technology into an
organization are closely related to those in any merger or acquisition and
require careful management. We have already mentioned that technology
can exist both as a tangible and as an intangible asset. Simply acquiring a
few product samples and manufacturing drawings does little more than
permit the company, at best, to manufacture a copy of the original
product. If the acquiring business is unfamiliar with the technology, it is
also necessary to acquire the underlying knowledge that went into the
design of the product. Only then can the business expect to be able to
continue the product and process innovations discussed earlier that are an
essential part of achieving a sustainable competitive advantage. The business
therefore needs to have available the key technologists in the source
organization either as new employees of the business or on some kind of
consultancy basis to educate the current employees.
Another problem can be caused by the acquiring company not having
the appropriate expertise to manufacture the product in a reliable way.
Once again the acquirer may have to go through a substantial learning
period. The difficulties may be increased if the source company is small
and entrepreneurial; as we have already seen, production processes in such
companies may be inefficient and poorly documented.
A further problem in technology transfer is caused by the nature of
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technology itself – something between science and its practical application.
The relationship is shown schematically in Figure 10.4.
The nature, location and timescales of the three types of activity can be
very different. Acquisition of a technology that is still in the experimental
stage is risky; there may be culture clashes between the technologists in the
business and the scientists who carried out the original research. The problems
are similar to the clashes that may occur between technologists in an
R&D department and the engineers in a manufacturing department. All
parties need to have a good understanding of each others’ needs and
problems for the transfer to be successful.
Exploiting new technology
The process of technology development and acquisition (discussed in the
previous section) represents only the first stage in effectively managing
technology within the transnational business. There are many companies
who have successfully generated new proprietary technology, but who
have failed to exploit such know-how commercially. In order to commercially
exploit new technology know-how, two other stages need to be
covered in the company’s technology strategy.
First, effective organizational channels need to be established for
transferring technology throughout the transnational network. Second,
the organization needs to determine the most effective foreign market
entry and development strategy for exploiting the newly acquired technology
know-how. This (second point) involves an assessment of the relative
merits of exporting, licensing, joint ventures, FDI (foreign direct investment),
etc. (see Chapter 7).
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Science
Technology
Practical
need + use
Body of
knowledge
State of
the art
Utilization
Time
Figure 10.4 Science, technology and the utilization of their products
Source: Allen (1984)
The two key issues relating to the process of technology diffusion within
the transnational are the location of R&D activity and the organizational
structure.
Location of R&D activity
Most transnationals adopt a qualified policy of centralization in R&D.
Where decentralization does occur, overseas R&D units tend to take the
form of technology transfer units to assist in the transfer of technology from
parent to foreign subsidiary (Hakanson, 1983; Ronstadt, 1977, 1978). The
importance of these units is that technology can rarely be transferred
without some form of modification. There is evidence (Davidson, 1980)
to suggest that the speed, rate and extent of technology transfer have
accelerated over time, reflecting the transnational’s need to apply new
technology throughout the international network almost immediately in
order to obtain (even a brief ) competitive advantage. In these circumstances,
the transnational’s competitive position is enhanced if its key
subsidiaries have some development capability and can handle much of
their own adaptation. As a result, this is perhaps one of the strongest
motivations for a measure of R&D decentralization in recent years.
Structure and technology exploitation
The organizational structure of the transnational plays an important role in
its ability to transfer technology. Davidson (1983), for example, found that
the transfer performance of companies organized along matrix lines was
superior to those with alternative organizational structures, especially those
with global product divisions. He argued that, in this context, accumulated
experience and information is better exploited in more centralized structures.
Thus, global matrix companies tend to transfer new products more
rapidly and more extensively to foreign subsidiaries.
Systems to support technology exploitation
There have been a number of attempts to address the question of
appropriate systems for the management and transfer of technology
within the business. One of the earliest and most comprehensive, by
Burns and Stalker (1961), noted the need to move from mechanistic to
organic models of organization of work in the transfer into new technologies.
Many transnationals are frequently, if not constantly, in that
change process. Gresov (1984) captured this position quite effectively for
transnationals. Recognizing that the successful management of technology
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involves the two distinct processes of innovation and implementation, he
observes two organizational dilemmas. Where the business is centralized,
implementation is usually improved at the expense of innovation; with a
complex organizational design the converse is true.
Similarly with an organization’s culture. A homogeneous culture favours
implementation at the cost of innovation, with the reverse holding true for a
heterogeneous organizational culture. Gresov (1984) suggested that it may,
for instance, be possible to compensate for the poorer adoptive capacity of
the centralized structure by encouraging and promoting cultural heterogeneity.
Similarly, by extending aspects of homogeneous organizational
culture, the implementation weaknesses of the complex structural form
might be improved. The resulting trade-off may produce a solution that
improves the company’s overall capacity to manage its technology.
Protecting the competitive advantage
If possession and application of one or more key technologies give a
business a significant competitive advantage, the business needs to consider
how it can ensure that such technologies remain proprietary for as
long as possible. We mentioned earlier that it is easier for process technologies
to be kept secret than for technologies that are embedded within
the final product. Even so, the company would be wise to consider how it
can maintain the value of its intellectual property. The business has two
main courses of action: it can apply for a patent or it may choose to keep
the technology as a trade secret.
Patents
If the technology and its application are considered sufficiently novel, the
company may be granted a patent that gives the company exclusive rights
to the benefits of the technology for a certain period (20 years in the USA).
There are, however, some disadvantages in gaining a patent:
. In return for the patent, the company must publish openly a detailed
explanation of the technology and its application. This information is
freely available to competitors who may use it to develop alternative
forms of technology that they themselves can patent. Once the patent
expires no further protection is possible.
. Although 20 years may seem a long time the actual time during which the
company can profit from the technology may be much less (e.g., it can
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take several years after the patent is filed for new compounds developed
by pharmaceutical companies to enter the market).
. If the patent is contested by another company the cost of patent litigation
can be high.
. The cost of filing an application and keeping the patent in force in
several countries can be high; however, for a transnational of any size
this should not be a serious problem.
. Different countries have different patent systems, so each patent
application may have to be adapted. This problem is being reduced by
increasing co-operation between governments (e.g., only one application
is necessary for protection in all the member countries of the EU).
. It is not possible to gain such protection in some countries, so
competitors there are free to sell goods using the technology in such
countries.
However, the benefits in owning a patent are considerable. The protection
offered by the patent means that it has measurable value. This means that it
can be used as an instrument of negotiation (e.g., the company may grant a
licence to a competitor allowing it to use the technology in return for
royalty payments). This was the approach used by Pilkington after it
developed the float glass technology in the 1960s. The company received
substantial payments from competitors throughout the world for many
years without having to make substantial capital investments itself.
However, this approach was later criticized as being too risk-averse
(Stopford and Turner, 1985).
When patents expire
The patent on the world’s best-selling drug expired in July 1997. The
patent was taken out by the product’s developers (British drug
company Glaxo) in 1977, although because of the development time
the product wasn’t actually launched until 1983. The legal patent
enabled Glaxo (and Glaxo in its later guises, including after 1995
Glaxo Wellcome) to enjoy sole manufacturing and distribution rights
on the drug throughout the world. All forms of legal substitution were
prohibited and the superior performance of Zantac against other antiulcer
treatments made it the best-selling drug up to that point with
annual sales exceeding £2.5 billion.
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Several firms attempted to challenge the patent before its expiry.
Most notably, Canadian generic drug manufacturer Novopharm
appealed to the legal authorities in the USA in the early 1990s to manufacture
a form of the drug’s basic molecule, ranitidine hydrochloride.
Glaxo spent a lot of money fighting off this legal challenge and,
although it was technically successful in doing so, Novopharm did
begin producing its generic form several months before the final
expiry of the patent. Other firms sued by Glaxo for patent infringement
included Geneva Pharma (a Novartis group company), Roxane (part of
Boehringer Ingelheim) and Torpharm.
These four generic firms were geared up to start producing ranitidine
in the summer of 1997. Because ranitidine was protected under patent,
its molecular structure and pharmacokinetic mechanism were not
secret – they were disclosed as part of initial patent application.
When generic production started, competition was described as ‘cutthroat’.
As a profit earner for Glaxo, ranitidine had had its day but it was
relaunched at half strength (75-mg tablets as opposed to 150-mg
tablets) as a treatment for heartburn (Zantac 75).
Trade secrets
If the company believes that it can keep the technology secret for a substantial
length of time, then it can obtain the benefits of the technology
without the drawbacks of the patent approach. This approach is particularly
useful when the company can bring the product to market rapidly, so that
even if competitors can copy the technology the company still has a
substantial lead. However, the company should maintain certified records
to prove that it developed the technology first to prevent a competitor
obtaining a patent for themselves.
Comparisons of transnational
technological performance
Comparing USand Japanese performance
Transnationals have differential rates of success in maintaining technological
advantage. Over recent years there has been much discussion
about different levels of innovation and their influence on competitiveness.
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Much of this has been motivated by the decline in US and European
competitiveness in many fields and by the growth of Japanese exports.
While some of the explanations for these changes lie at the macro-level,
managers of transnationals are increasingly sensitive to company-specific
dimensions.
On national comparisons, Johnson (1984) compared the R&D strategies
of Japanese and US companies to determine whether differences in them
had contributed to different competitive positions. He noted that Japanese
businesses:
. invested more heavily in applied research and product development
(and less in basic research projects);
. concentrate more on building pre-existing products and technologies
developed by other companies in the same or related industries than
on the development of new, unproven products of technologies; and
. they tended to follow the products or technologies of other businesses,
rather than trying to be first.
This pattern of difference is by now well established, of course, and
Johnson showed that over the period 1965–81 Japanese companies pursuing
such strategies had a substantially higher private rate of return than their
US counterparts. In seeking explanations for this, he emphasized the
importance of differential government subsidiaries and tax incentives for
R&D in the two countries. He also indicated that the US government’s strict
enforcement of the patent system has deterred many US companies from
taking advantage of opportunities to build on the products and technologies
of their foreign competitors.
Commentary on different home nation support environments for
technology has become an increasingly important dimension of this
debate. Daneke (1984), for example, contrasted US and Japanese policy
approaches using illustrations from the biotechnology industry. Japanese
businesses have benefited from their government’s policy of making biotechnology
a national priority, providing direct public financing for private
sector R&D and the commercialization of its output, compared with the
(less effective) US motivation of tax incentives. Daneke believed that US
governmental policy will effectively drive a wedge between the successful
and entrepreneurial aspects of biotechnology, allowing Japanese and European
transnationals to take the lead.
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Learning good practice
Another important aspect of comparative work has inevitably been that of
the identification of lessons from practice at a corporate level. Here again
there are illustrations from the literature. Maidique and Hayes (1984)
examined a large sample of US high-technology companies, including
many transnationals, in an endeavour to trace the origins of their successful
technology management.
They found that five themes emerged, and while none of the companies
showed excellence in all areas at any one time, neither was any one of
them less successful in all of them:
. Business focus. This was clearly related to success, with the examples of
IBM, Boeing, Intel (integrated circuits), Genentech (genetic engineering)
being cited as among those whose sales were largely in single or clearly
related product groups.
. Adaptability. Having a long-term focus, but also with the capability for
rapid change. Not strategically immobile.
. Organizational cohesion. Widely regarded as critical in successful hightechnology
companies. Reflected for example, in Hewlett-Packard’s 50
divisions; Texas Instruments with some 30 divisions and 250 tactical
action programmes.
. Sense of integrity. Desire to maintain positive stable associations with all
interest groups.
. ‘Hands-on’ top management. Deep involvement in the assessment
process of technological advance.
Information and communication technologies
The effects of ICT
Technological change, particularly the development of ICT, has been
among the most important driving forces behind globalization. While
developments in transport have played a major role in internationalizing
industries and markets, by making it possible to transfer resources and
goods between countries and continents, it is ICT probably more than
any other single factor which has caused globalization. Developments
like satellite television have helped to bring about convergence of customer
wants and needs. ICT has had an even more significant impact on the
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ability of businesses to co-ordinate value-adding activities across national
boundaries in remote geographical locations while still permitting local
responsiveness when and where it may be required.
The key to successful global strategy can often be found in ICT. The
technology is important because of the role that it plays in the processes
of organizational learning and in knowledge management (Stonehouse and
Pemberton, 1999). ICT is both a powerful competitive weapon and a major
integrating force for the business. ICT can assist in building and leveraging
core competences, in reducing costs and in differentiating products. The
impact of ICT has not however been entirely positive, and it is cited as a
major cause of hypercompetition and environmental turbulence (Chakravarthy,
1997).
Ironically, it is ICT in the context of organizational learning and knowledge
management which offers the best hope to businesses seeking to
acquire and sustain competitive advantage in turbulent environments
(Stonehouse and Pemberton, 1999). This section examines the changes
that have taken place in ICT and their impact on the global strategies of
transnationals.
Developments in ICT
ICT alone has not driven the globalization of business activity, but without
recent developments in ICT it is difficult to see how globalization could
have developed to such an extent. For many years, the level of technology
was a major factor for inhibiting those businesses seeking to achieve
superior performance through their distinctive global architecture and coordination.
According to Dicken (1992) ‘both the geographical and organizational
scale at which any human activity can occur is directly related to
the available media of transport and communication.’ The physical barriers
to the movement of materials and products have been substantially reduced
by improvements in transport technology. They have revolutionized
logistics and resulted in global shrinkage, opening up the possibility of
new configurations to transnationals.
Of even greater significance to the globalization of business activity have
been the developments in ICT. In this context, ‘convergent IT’ (Hall and
Preston, 1988), or the integration of computers and telecommunications
into a unified system for the processing and interchange of business information,
has been of singular importance. This convergence has opened
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new opportunities to transnationals for the acquisition of global competitive
advantage.
The two most important contributions to the development of convergent
IT have been in the areas of computing power and connectivity. There has
been a ‘radical change in information architecture’ (Laudon and Laudon,
1991). There has been a move from centralized to distributed processing via
PCs and workstations. Most of these have processing display and storage
capabilities well in excess of some of their mainframe predecessors. Helms
and Wright (1992) predicted that by the year 2000 over 15 million personal
computers will be installed in businesses with 40% connected through farreaching
networks. In fact, this figure was greatly exceeded, such is the
pace of change in ICT. The average personal computer has immeasurably
more processing power and speed than the most powerful mainframe in
the 1970s and at a tiny fraction of the cost. Thus, not only has computing
power increased beyond recognition in the last 30 years, but information
and knowledge have also become relatively cheap and far more accessible
as resources.
Accompanying developments in software have the potential to empower
individual managers and at a price that is no longer prohibitive. Spreadsheets,
databases, word processors and the like have made powerful
business software accessible to all managers. One of the major problems
faced by managers in international enterprises is the volume and complexity
of data which have to be analysed before decisions can be made. In this
respect, decision support systems (DSS), expert systems, neural networks,
multimedia, intelligent databases and artificial intelligence all have an
important role to play. Parsaye (1989) stated that ‘The implementation of
intelligent databases was inconceivable prior to the implementation of
hypermedia systems, advanced microcomputer workstations and expert
systems. Now that these technologies have matured, intelligent databases
can be used to respond to the needs of data rich and information poor
users.’ Software developments, allied to hardware, are at the root of executive
information systems (EIS) and strategic information systems (SIS). From
complex, conflicting and incomplete data such systems help to produce the
information and knowledge which support improved decision making
and enhance organizational responsiveness in increasingly chaotic and
hypercompetitive environments.
The value of this individual power has been augmented by developments
in connectivity. Local area networks and wide area networks are the basis
of this connectivity. Developments in telecommunications, like satellite and
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cable links, have drastically improved inter and intra-company communications.
They have made possible increased co-ordination of geographically
dispersed organizations. Equally, they have improved linkages in the value
chain between businesses, their suppliers and distributors. It is these developments
that have made possible the development of the Internet, which
has already had a dramatic impact on business activity, particularly on the
links between businesses and their customers.
ICT and transnational strategy
The technological developments in ICT, particularly those that have
improved networking and connectivity, have important implications for
the architecture of transnational organizations, for the management of
knowledge and for co-ordination of activities and for flexibility and
responsiveness. According to Frankovich (1998) ‘Any business seeking to
globalise its operations has a major IT challenge on its hands. Never has the
intelligent application of technology been more important to improving
business performance.’
In Chapter 6 we identified several potential sources of global competitive
advantage centred on the core competences, generic and transnational
strategies of the organization. Knowledge and information have become
the major resources underpinning competitive advantage (see Chapter 15).
ICT plays a vital role in the collection of information, its manipulation,
analysis, storage and interpretation and in the generation of new organizational
knowledge which forms the basis of core competences. ICT has
provided the infrastructure needed to support network organizational
structures that can be important to both organizational learning and transnational
business (Bartlett and Ghoshal, 1995; Stonehouse and Pemberton,
1999).
Core competences can be based on knowledge of customers and their
needs, knowledge of technology and how to employ it in distinctive ways,
knowledge of products and processes, etc. Microsoft’s core competences
are based on its knowledge of how to build and market operating systems
and software. Equally, Microsoft’s competitive advantage is based on its
knowledge of computer hardware and networking, and its knowledge of
the companies that produce those products. Microsoft has leveraged its
competences in personal computer operating systems and software, and
built new associated competences in order to build competitive advantage
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in computer networking and Internet software. Such competence building
and leveraging is largely knowledge-based.
ICT has also assisted the process of building collaborative business networks
that are also a valuable source of competitive advantage. Network
members can concentrate on their individual core competences, and by
pooling them together in network activities synergy is created. ICT has
made it possible to integrate network activities far more effectively and
efficiently, leading to the development of what are often called virtual
corporations (Davidow and Malone, 1992). In the airline industry, alliances
use ICT to co-ordinate and integrate flight schedules, bookings and prices.
As we saw in Chapter 6, according to Porter’s model of global strategy
(Porter, 1986a, 1990) competitive advantage is viewed as arising from the
configuration of organizational activities (i.e., where and in how many
nations each activity in the value chain is performed) and co-ordination
(how dispersed international activities are co-ordinated). ICT has
transformed the ability of transnationals to co-ordinate their activities in
geographically remote locations. This has increased the range of alternative
configurations of activities available to them, thus making it possible to gain
global competitive advantage by choosing distinctive configurations for
value-adding activities. In addition, ICT has made it possible to achieve
co-ordination and integration at the same time as maintaining a high
degree of flexibility and responsiveness.
Configuring ICT for transnational business
According to Frankovich (1998), IT in global business is typically configured
in four basic ways:
. Centralised: strong control from headquarters;
. Replicated: identical country systems;
. Autonomous: dissimilar and uncoordinated country systems;
. Integrated: compatible and co-ordinated systems.
There is no ideal configuration for ICT and the configuration chosen
will depend on the transnational strategy of the organization. The globalization
drivers (Yip, 1992) will dictate the extent to which local responsiveness
is required. A centralized configuration will suffer from lack of
flexibility and is likely to hinder responsiveness. A replicated configuration
will include unnecessary duplication. When responsiveness is the priority,
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an autonomous configuration may well be chosen, but this will hinder the
co-ordination of global activities. A truly transnational strategy is likely to be
associated with an integrated configuration where there is co-ordination
combined with a degree of local variation to allow for local responsiveness.
Discussion and review questions
1. Define what is meant by the word ‘technology’.
2. How can technology make products more competitive?
3. Explain how technology can assist in making production more
competitive.
4. What is a technology audit and what does it contain?
5. Define and distinguish between technology development and technology
transfer.
6. When might a company, having made a technological innovation, use a
patent and when might it keep its development secret?
7. What is included in ICT and how has it contributed to globalization?
8. What is convergent IT and why has it been a major cause of
globalization?
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GLOBAL AND
TRANSNATIONAL
MARKETING
MANAGEMENT 11
Learning objectives
After studying this chapter students should be able to:
. understand the role of marketing in global strategy and global
competitiveness;
. explain the alternative global marketing strategies available to
global businesses;
. describe the importance of global market segmentation and positioning
strategies;
. describe the important issues arising in the global management of
marketing mix variables;
. understand the links that exist between global marketing management
and the overall global strategy of the business;
. describe the impact of the Internet on global marketing.
Introduction
Global marketing strategy is primarily concerned with the global scope and
co-ordination of marketing activities, and the extent of standardization and
adaptation of products, brands, and promotion and advertising. A global
and transnational marketing strategy does not imply global standardization
of all aspects of the strategy. Rather, it implies a global perspective, seeking
to combine the benefits of global and local features. Marketing strategy is
based on the appropriate global segmentation and positioning strategies,
accompanied by a global marketing mix that is based on a global perspective
of products, brands, advertising and promotion combined with local
adaptation where it gives marketing advantages.
Global marketing strategy is based on analysis of the extent of globalization
of various aspects of the market environment, like similarities and
differences in consumer tastes, cultural similarities and differences, technical
standards, levels of income, legislation and availability of advertising
media.
The Internet has an increasingly important role to play in the marketing
strategy and operations of global business organizations. It has the potential
to transform relationships with customers, suppliers, agents and distributors
on a worldwide basis.
The role of marketing in global and
transnational strategy
Marketing and strategy
The study and practice of marketing have broadened considerably, from an
emphasis on marketing as a functional management issue to a wider focus
on the strategic role of marketing in overall corporate strategy. This broadening
of the marketing concept, to include strategic as well as operational
decisions, has resulted in an overlap between marketing and strategic
management and has generated considerable controversy over the role
and position of marketing in corporate strategy.
One view of strategy argues that strategic planning is the reserve of
directors and corporate planners, managers who can take a broad-based
view of the company’s operations. In this context, marketing is seen as only
one of several functional management areas providing important inputs
into the strategic planning process. The primary role of marketing is to
provide marketing information as an input into planning and the development
of the tactical marketing mix.
Not surprisingly, the leading marketing authors dispute this view, arguing
for a more central role for marketing in the determination of corporate
strategy. For example, Baker (1985) argued for the adoption of a strategic
marketing orientation:
It is my belief that while general managers do not see themselves as
marketing managers, they should be just that, in the sense that they
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ought to subscribe to the philosophy of business encapsulated in the
marketing concept. . . . Similarly, corporate strategists must be marketing
strategists, for without a market there is no purpose for the corporation
and no role for a corporate strategist (Baker, 1985, p. 29).
Toyne and Walter’s (1993) perspective
The controversy regarding the role of marketing in corporate strategy has
also emerged in global business. Toyne and Walters (1993), in their
book Global Marketing Management: A Strategic Perspective, adopted a
traditional view of marketing as a functional management area providing
important inputs into the strategic planning process (and this despite the
subtitle of the book A Strategic Perspective).
Marketing is seen as fulfilling the following roles in the overall global
strategy of the business:
. identifying and making recommendations about future trends and
opportunities in the markets where the company is already active;
. identifying and making recommendations about new marketing
opportunities;
. providing estimates of the marketing resources (budget and staff )
needed to exploit these opportunities;
. developing and implementing marketing strategies that are consistent
with the overall strategic direction of the company in global markets.
Global marketing co-ordination
The second main perspective on the role of marketing in global strategy
emphasizes the competitive advantages that can be derived from coordinating
marketing on a global basis. Michael Porter’s (1986a) work on
the global configuration and co-ordination of value-added activities was
reviewed in Chapter 6. Within the framework adopted, marketing is seen
as an important source of value added which performs three important
roles in the overall global strategy of the business:
. marketing configuration, which refers to the location of various
marketing activities throughout the world (geographically concentrated
or dispersed);
. marketing co-ordination, which refers to the extent of standardization or
adaptation of the marketing mix globally;
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. the strategic role of marketing, especially the link between marketing and
the other value-added activities of the company (e.g., design, technology
development, manufacturing).
Marketing and competitive advantage
According to Takeuchi and Porter (1986), significant competitive advantages
can be achieved in each of these areas. Taking the first, the need
to perform marketing in all countries implies a high level of geographical
dispersion of activity. Important competitive advantages can be derived,
however, by concentrating certain marketing activities globally, when
conditions permit, including: the production of promotion material;
central salesforce; central service support; centralized training; and global
advertising.
There are a number of ways in which geographically dispersed marketing
activities can be co-ordinated to gain competitive advantage, including:
. performing marketing activities using similar methods across countries;
. transferring marketing know-how and skills from country to country;
. sequencing of marketing programmes across countries; and
. integrating the efforts of various marketing groups in different countries.
Finally, the greatest leverage from taking a global view of marketing is its
links to other upstream and support activities in the value chain. In particular,
global marketing can allow significant economies of scale and
learning in production and R&D, through uniform products for global
markets.
The work of Takeuchi and Porter (1986), therefore, suggests a more
central role for marketing in global business strategy. While recognizing
its importance, marketing is seen as only one of several sources of competitive
advantage, and the hypotheses concerning the role of marketing
are secondary to the main argument concerning global configuration and
co-ordination of all value chain activities.
Ohmae’s (1989) viewof marketing
Takeuchi and Porter’s (1986) work can be contrasted with the work of
Ohmae (1989), who argued that marketing is the core of any global strategy.
Three distinct phases in the evolution of global business are identified.
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Incremental multinational expansion
In the initial phase of multinational expansion, foreign markets were
entered incrementally (according to Vernon’s, 1966 international product
life cycle model) through clone-like subsidiaries of the parent company in
each new country of operation. These subsidiaries repatriated profits to the
parent company, which remained the dominant force at the centre.
Competitor-focused expansion
This model of multinational expansion gave way by the early 1980s to a
competitor-focused approach to globalization, associated mainly with the
work of Michael Porter. According to Ohmae, this competitor-driven phase
of globalization has been superseded by a customer-driven phase.
Customer-driven expansion
The needs and preferences of customers have globalized; that is why
businesses need to globalize. Delivering value to customers, rather than
pre-empting competitors, is the only legitimate reason for thinking global.
Yip (1992) contended that global marketing can bring about four major
benefits:
1. enhanced knowledge of customer preferences;
2. increased competitive leverage;
3. improved product quality; and
4. cost reduction.
To summarize these views, global marketing strategy is an essential
element of an overall transnational strategy. It will be both customer and
competitor-based and will be both globally and locally oriented.
Globalization of markets and marketing research
Customer needs, and therefore markets, are becoming increasingly global
for many goods and services, but the extent of globalization varies
considerably from market to market. Even in a market where customer
needs are similar on a global basis there may be elements of the marketing
mix (these being considerations over product design, price, place [i.e.,
segment], and promotion) which must be varied locally.
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A global marketing strategy and the associated marketing mix must take
account of the following factors in the market environment:
. customer needs – the extent to which they are global or to which there
are specific local needs;
. culture – the products, brand names or advertising may have to be varied
on a local basis to account for regional cultural differences;
. language – may require local variations in packaging, labelling, brand
name and advertising;
. technology – the level of technology in a country or differing technical
standards may require variations in product;
. legal factors – may demand variations in packaging, advertising, product
features and so on.
In addition, analysis using Yip’s globalization drivers (Chapter 4) will give
an indication of which aspects of marketing strategy can be global and
which must be varied locally. Global marketing research will indicate the
extent to which aspects of marketing strategy can be standardized or the
extent to which local variations must be introduced. The impact of these
various factors on a global and transnational marketing strategy are
explored further in the remainder of this chapter. Finally, marketing strategy
(along with all other ‘functional’ strategies) must be an integral part of the
overall transnational strategy of the organization.
Global marketing strategies
Different perspectives
Chapter 6 examined a number of approaches to global and transnational
strategy which had been developed by different authors, from both a
competitor and customer-oriented perspective. Global marketing strategy
must also adapt to these perspectives. Drawing on Porter (1986a), a global
marketing strategy must incorporate an appropriate degree of co-ordination
and integration of geographically dispersed or concentrated marketing
activities.
Although developed from a competitor-oriented perspective, Porter’s
view has important implications for global marketing. Hamel and Prahalad
(1985) attributed the success of Japanese companies in global markets to
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their long-term strategic intent of global brand domination. Doz(1986)
analysed the extent of global product standardization versus adaptation
and found that success depends to a large extent on the type of global
strategy adopted – multinational integration, national responsiveness and
multifocal strategies.
In the same way that aspects of global marketing strategy have been
developed from a competitor-oriented perspective, other authors have
developed perspectives more closely based on customer orientation. This
section examines three such typologies based on the work of Douglas and
Craig (1989), Leontiades (1986) and Toyne and Walters (1993).
Douglas and Craig’s (1989) typology
An important feature of global marketing strategy is the co-ordination and
integration of marketing on a worldwide basis in the pursuit of global
competitive advantage. The importance of co-ordination and integration
issues were emphasized by Douglas and Craig (1989) who related global
marketing to the evolution of global strategy over time. They identified
three main phases in the evolution of global marketing with each stage
presenting new strategic challenges and decision priorities to the firm.
Phase 1
Phase 1 represents the initial stage of international market expansion where
the main strategic decisions facing the business include the choice of
country to enter, the mode of entry adopted (see Chapter 7) and the
extent of product standardization or adaptation.
Phase 2
Once the company has established a ‘beachhead’ in a number of foreign
markets, it then begins to seek new directions for growth and expansion,
thus moving to phase 2 of internationalization. The focus in this stage is
mainly on building market penetration in countries where the company is
already located. In consequence, the expansion effort is mainly directed by
local management with marketing strategy being determined on a country
by country or national responsive basis.
Phase 3
It is the third evolutionary phase that is the most important in the context
of global marketing. In phase 3 the business moves toward a global
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orientation. The country by country approach to marketing is replaced by
one in which markets are viewed as a set of interrelated and interdependent
entities. These are increasingly integrated and interlinked worldwide,
and co-ordination and integration of global marketing becomes essential to
fully exploit the competitive advantages to be derived from the company’s
global scope. According to Douglas and Craig (1989) there are two key
strategic thrusts in phase 3.
First, the drive to improve the efficiency of worldwide operations through
co-ordination and integration. This will not only cover marketing activities,
such as product development, advertising, distribution and pricing, but also
related production, sourcing and management. Standardization of product
lines globally, for example, will facilitate the development of a globally
integrated production and logistics network (see Chapter 9).
The second key strategic thrust is the search for global expansion and
growth opportunities. This will involve a range of activities including:
opportunities for transferring products, brand names, marketing ideas,
skills and expertise between countries; identification of global market
segments and target customers; and worldwide product development
aimed at global markets.
Leontiades’ (1986) perspective
While Douglas and Craig (1989) focused on the evolution toward global
marketing, Leontiades (1986) focused more on the competitive marketing
strategies of international businesses, identifying four generic international
competitive marketing strategies (Figure 11.1).
Global high-share strategies
These strategies involve pricing, promotion, product and other elements of
the marketing mix being geared toward the high-volume segments of
global markets. The essence of global high-share strategies is the worldwide
co-ordination of company resources behind global objectives. The
global scope of marketing creates opportunities for competitive advantage
through: lower costs and economies of scale; providing a global service;
international sourcing; experience transfers; promoting an international
corporate image; global resource focus; and improving the risk/return
characteristics of the company’s international business portfolio.
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Global niche strategies
These involve specialization by product, technology, stage of life cycle,
market segment, etc. They avoid head-on competition with companies
pursuing global high-share strategies.
National high-share strategies
These involve the use of nationally based competitive advantages, with
marketing and production geared toward achieving high volume and
lower costs relative to other national competitors.
National niche strategies
These involve specialization on a national scale to avoid competition with
both global and national high-share companies.
Only the first two of these marketing strategies can be classified as being
global. While Leontiades (1986) focused on the overall generic strategies of
companies in global markets, Toyne and Walters (1993) provided a more
comprehensive coverage of the main components of global marketing.
Four stages in a global marketing strategy
The development of a global marketing strategy involves four main stages:
. defining the global marketing mission;
. the global segmentation strategy;
. the competitive market-positioning strategy;
. the global marketing mix strategy.
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Scope
Global Global high-share strategy Global niche strategy
National National high-share strategy National niche strategy
High Low
Configuration of activities
Figure 11.1 Four generic international marketing strategies
Source: Leontiades (1986)
Global marketing mission
The global marketing mission defines the major target markets to be
attacked, the way these markets are to be segmented and the competitive
position to be adopted in each market. In other words, the mission
establishes the general parameters within which global marketing strategy
decisions are made.
Segmentation strategies
In terms of global segmentation strategies, the three main alternatives
identified are:
. Global market segments – where markets are segmented according to
variables that largely ignore national boundaries (e.g., demographic,
buying practices, preferences). The strategy concentrates on identifying
similarities in customer needs across countries rather than emphasizing
country/cultural differences. Some techniques for achieving this are
examined in the next section.
. National market segments – which involves serving the same market
segments in multiple markets but on a national basis. Segmentation is
on the basis of geography/nationality, which emphasizes the cultural
differences rather than similarities between countries.
. Mixed market segments – which is largely a combination of the first two.
Some national markets may be of a sufficient size to warrant individualization.
Others may be clustered into similar market segments.
Deciding on competitive position and marketing mix
Once the broad segmentation strategy has been established, the global
company must decide on its competitive position within each market and
its marketing mix strategy (see marketing mix strategy below).
Yip’s (1992) view is that a global marketing strategy must be part of a
global business strategy. A global strategy will be appropriate when
customer needs are globally common, there are global customers and
channels, and when marketing is globally transferable. In addition, cost
drivers are likely to favour a global approach to marketing by creating
economies of scale and scope. There are also competitive advantages
(Table 11.1) to global marketing (e.g., through global branding). Yip did
not advocate a marketing strategy that is global in every detail, rather one
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that is global where there are evident advantages and local where necessary:
So global marketing is not a blind adherence to standardisation of all
marketing elements for its own sake, but a different, global approach
to developing marketing strategy and programs that blends flexibility
with uniformity (Yip, 1992).
In essence then, a global or transnational marketing strategy is concerned
with devising a strategy that is global in scope and that is globally coordinated.
The extent of globalization of each element of the strategy will
be dependent on the transnational strategy of the organization, the relative
advantages of globalization or localization based on such factors as
customer needs.
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Table 11.1 Potential advantages and limitations of a global marketing strategy
Advantages of global marketing Comments
Unit cost reduction Consolidation of the global-marketing function,
economies of scale, experience curve economies,
dilution of R&D and other fixed costs, etc.
Improved quality of products and programmes Through concentration on key marketing activities,
uniform products, etc.
Enhanced customer preferences Through global customer knowledge of products,
global availability, global serviceability, etc.
Increased competitive leverage By focusing resources and unifying the approach
to competition.
Risk reduction Through reduced dependency on local demand,
wider access to capital.
Global knowledge and information transfers Transfer of experience, practice, etc.
Limitations of global marketing Comments
Company-specific factors For example, lack of resources, lack of global
orientation, higher costs of co-ordination.
Environment factors Linguistic, cultural, technological and legal factors.
Market factors Customer need differences, channel differences,
etc.
Product factors Overstandardization can result in products that
satisfy nobody.
Responsiveness Overcentralization reduces responsiveness.
Source: derived from Toyne and Walters (1993) and Yip (1992).
Global market segmentation and
positioning strategies
The key to successful global co-ordination and integration of marketing is
effective market segmentation and product-positioning strategy. If the
globalization hypothesis of Levitt (1983) and its ‘converging commonality’
of customer needs were accepted, then it could be seen as removing the
need for market segmentation and product-positioning strategies, in that
completely standardized products could be sold worldwide. Yet, it is
evident that there remain important national differences between markets
that require segmentation and positioning.
Segmentation bases
The traditional approach to international marketing segmentation was to
segment a market on a country basis to take account of national differences
in demand conditions. Kale and Sudharsham (1987), however, suggested a
different approach for segmenting international markets which is more
compatible with the requirement for global marketing co-ordination. The
approach makes customers and their needs the basis for segmentation. It
has the advantage of being consumer-oriented, while allowing global
co-ordination of marketing, since it focuses on similarities rather than
differences across groups of consumers in different countries. The basis
of this approach is the ‘strategically equivalent segmentation’ (SES) of consumers.
This is the identification of transnational segments of consumers,
with similar needs, who will respond similarly to a given marketing mix.
Four main stages are involved in identifying SES:
1. the criteria to be used in segmenting markets – develop qualifying and
determining dimensions;
2. country screening – using qualifying dimensions to narrow down the
list of countries as viable entry candidates;
3. identifying market segments in each country – develop microsegments
in each qualified country;
4. measuring segments – develop factor score representation of microsegments
and clustering analysis for SES.
The initial stage is the identification of qualifying criteria for identifying
market segments (e.g., age, sex, income, etc.). This is followed by
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country screening to identify the relative size of the segments in each
country. After these filtering processes to identify which segments in
which countries are to be targeted, the target market segment is then
aggregated across countries to provide the total market. The major
advantage of this approach is that it permits a business to adopt a global
marketing strategy in strategically equivalent segments without assuming
the complete cultural convergence of countries. Examples of products
which are offered in strategically equivalent segments across the world
include Nike trainers, Calvin Klein jeans and Ferrari automobiles.
Market positioning
A useful review of the issues involved in global marketing positioning can
be found in Perry (1988). Two main types of positioning are identified. First,
market positioning which refers to the competitive position of a product in
the market (e.g., market leader, strong number two, etc.). Second, product
positioning which refers to the attributes of a product in comparison with
other products or to consumer needs. These two types of positioning can
occur at two levels: first, the marketplace and, second, in the consumers’
mind. The first emphasizes the importance of competition; the second,
customer orientation. A combination of these alternatives gives the model
shown in Table 11.2. The importance of this to global marketing is that
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Table 11.2 Positioning concepts and their meaning
Market position Product position
(competitive standing) (profile attributes)
Measurements – marketplace Market share Comparison of attributes
Consumer’s mind Reputation Image (perceptual map)
Possible positions Leader (lion) Product category
Challenger (tiger) Price/quality vector
Leaper (frog) Main features
Nicher (groundhog)
Follower (ant)
Imitator (mouse)
Possible strategies Enlarge Reinforce
Concur Reposition
Advance
Protect
Withdraw
Source: derived from Perry (1988)
different positioning strategies can be adopted in different country markets
in terms of market and product position.
There are advantages in having a common global perception of positioning.
Nissan Motors, for example, is seen as a producer of good quality,
reliable, reasonably priced products on a global basis. This is also linked
to many standardized aspects of its marketing mix. There are, however,
occasions when companies adopt different positions globally. Stella Artois
is regarded as a standard beer in Belgium, but in some other markets it is
positioned as a premium lager. In each case the advantages of uniform
position have to be weighed against the advantages of differentiated positioning.
Businesses adopting the same positioning strategy in all markets
have adopted a global-positioning strategy, while those who vary position
across markets are said to have adopted a mixed-positioning strategy.
Global marketing management
The adoption of global marketing strategies involving co-ordination and
integration of worldwide marketing raises a large number of important
issues concerning global management of the marketing mix. These are
examined in this section covering global products, pricing, promotion
and distribution. It should be noted that the issues involved are complex
and varied, and all that can be attempted in the confines of this section is to
present a brief overview of issues, together with a slightly more detailed
discussion of some of the more important topics. Readers requiring a more
comprehensive coverage should consult the further reading references at
the end of the chapter.
Marketing mix strategy
Toyne and Walters (1993) identified four main categories of marketing mix
strategy based on the global segmentation and positioning strategy of the
business (Figure 11.2). The four options for marketing strategy are:
. ideal global marketing strategy – the marketing of a standard product to
a global market segment using uniform marketing programmes;
. ideal national marketing strategy – the marketing mix is specifically
tailored to meet the requirements of each national market;
. hybrid I marketing strategy – the standardization of products but the
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adaptation of other elements of the marketing mix to reinforce the
product strategy;
. hybrid II marketing strategy – the standardization of one key element of
the marketing mix but the adaptation of others.
Yip (1992) argued the case that any elements of the marketing mix can be
standardized or varied as part of a global marketing strategy, according to
the requirements of the global market.
The following sections consider the impact of alternative global or
transnational marketing strategies on elements of the marketing mix. The
emphasis of global marketing, however, remains focused on the identification
of similarities between customer needs in particular market segments
across countries rather than emphasizing differences. Thus the strategy of
companies like McDonald’s is centred on a core formula for its restaurants
and food products but a degree of customization is allowed to meet different
needs. For example, alcohol is served in McDonald’s stores in some
countries but not in others. The extent of standardization and customization
of marketing strategy will depend on the competences of the business, the
nature of its products, the nature of its markets and the importance of
cultural, legal, technological and other factors.
McDonald’s N globally homogeneous?
It is a myth that McDonald’s assumes the world to have homogeneous
demand for its standard products. In fact, it adapts its product offerings
widely throughout the world to account for local taste and cultural
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Product strategy
Global product Hybrid I marketing
strategy
Ideal global marketing
strategy
National product Ideal national marketing
strategy
Hybrid II marketing
strategy
National market segments Global market segments
Segmentation strategy
Figure 11.2 The global marketing strategy mix matrix
Source: adapted from Toyne and Walters (1993)
preferences. Some of these are down to social culture while others are
driven by religious and historical factors. Other parts of its format,
retailing formula and marketing activity are the same throughout the
world (e.g., the double arches logo, the restaurant layout and ‘feel’,
etc.), but the product offering is sometimes modified to account for
local tastes and sensibilities. In this respect, McDonald’s can be said to
pursue a hybrid II approach to global marketing. The following table
describes a few of these local adaptations to illustrate the point.
Country Example of ‘unique’ products
Chile McNı´fica is a sandwich that includes tomato, ketchup,
mayonnaise, onions, lettuce and cheddar cheese.
Cyprus McNistisima is the promotional name for the Lenten
period products offered to customers during the fasting
period before Easter and Christmas. During this period,
McDonald’s customers can choose from a selection of
Lent products, such as veggie burgers, country potatoes,
shrimps and spring rolls.
India McDonald’s entered the market without the Big Mac,
and local religious diet restrictions meant the company
had to make a commitment not to introduce beef or
pork products into its menu. Instead, products similar
to the Big Mac with mutton and chicken patties were
introduced (the Maharaja Mac and Chicken Maharaja
Mac, respectively). With the large vegetarian population
in mind, an entire vegetarian range was introduced
including products using eggless mayonnaise.
Ireland The Shamrock Shake – special shakes available for a
period around the St Patrick’s Day celebrations.
Israel All meat served in McDonald’s restaurants in Israel is
100% kosher beef. McDonald’s operates kosher
restaurants and non-kosher restaurants. Their
non-kosher restaurants serve Israeli customers who do
not keep strictly kosher and want to visit McDonald’s on
Saturdays and religious holidays. McDonald’s Israel’s
seven kosher restaurants, where the menu does not
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include any dairy products and all food is prepared in
accordance with kosher law, are not open on the
Sabbath and all religious holidays.
Italy A range of Mediterranean salads.
Japan The Teriyaki McBurger – a sausage patty on a bun with
teriyaki sauce.
South Korea Bulgogi Burger – 100% pork patty on a bun with bulgogi
sauce and lettuce.
Netherlands The McKroket – 100% beef ragout with a crispy layer
around it, topped with a fresh mustard/mayonnaise
sauce.
Pakistan The three McMaza meals (Chatpata Chicken Roll,
Chicken Chutni Burger and Spicy Chicken Burger) –
spicy and tangy tastes, developed keeping in mind the
local palate.
Turkey Ko¨fteBurger – made of a spicy meat patty inside a
specially prepared, flavoured bun enriched with a
special yogurt mix and spiced tomato sauce. Also
Ayran – a traditional Turkish soft drink.
UK McBacon Roll – a breakfast product made with back
bacon and traditional special brown sauce, served in a
maize-topped roll.
Global products
The importance of product decisions
Product decisions are probably the most important element of a company’s
marketing mix. They can have a major impact on the performance of the
whole business in global markets. Products represent the most visible
aspect of the company in foreign markets. Product design, quality, performance,
etc. have a very significant effect on the global image and reputation
of the company. In addition, other elements of the global marketing mix
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(pricing, promotion and distribution) need to be designed and developed
on the basis of product decisions:
To a very important degree, a company’s products define its business.
Pricing, communication, and distribution policies must fit the
product. A firm’s customers and competitors are determined by the
products it offers. Its research and development requirements depend
upon the technologies of its products. Indeed, every aspect of the
enterprise is heavily influenced by the firm’s product offering
(Keegan, 1989).
Decisions on product strategy
A wide range of decisions need to be taken in the area of global product
policy, including:
. product range decisions concerning the number, range and type of
product sold throughout the world;
. new product development for global markets, including the process of
research and development;
. global product diffusion and adoption concerning the rate of transfer
and acceptance of new products in different markets;
. managing the international product life cycle which may be at different
stages in different markets;
. product standardization or differentiation questions;
. generic product strategies which may be based on core competences and
associated cost leadership, differentiation, hybrid or focus;
. packaging, branding, after-sales service, etc., decisions.
It is not possible to consider all of these issues in detail in this section.
Indeed, two of these decisions – standardization versus differentiation and
global market segmentation and positioning – were examined in the previous
section. The remainder of this section focuses in more detail on one
of the most important global product decisions facing any company:
namely, that of global branding.
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Global branding
A brand was defined by Thomas (1986) as ‘a name, term, sign, symbol,
mark, lettering or design (or any combination thereof ) intended to differentiate
a product from its competitors.’
Successful branding strategies can be an important source of competitive
advantage in some marketplaces by differentiating the product from that of
competitors, maintaining product quality and image, achieving strong
brand loyalty and sustained consumer commitment, and erecting barriers
to entry. Brands tend to be most important in consumer rather than
industrial or intermediate markets. Whereas brands tend to cultivate confidence
among consumers in FMCG (fast-moving consumer goods) or
consumer durables sectors, intermediates such as petrochemicals, energy,
aggregates and other industrial goods tend to be bought much more on the
basis of technical specification or price.
The advantages of successful branding will be particularly important in
global marketing given the intensity of the competitive environment in
consumer goods sectors. One of the most important issues in branding
for global markets is the choice between global or multiple country
brands (i.e., whether a standardized global brand is sold worldwide or
whether the brand is adapted to local market differences). The world’s
top brands are shown in Table 11.3.
It is noteworthy that few names appear in all four lists. Coca-Cola is one
of the few names which does. There are some interesting omissions from
the list, including Nike, Reebok and some others. These brands are undoubtedly
well recognized on a global basis, particularly among groups of
consumers in the global market segments that they serve. It is therefore a
mistake to assume that global brands are insignificant. There are few
people in the global consumer groups who purchase training shoes who
are not aware of the Nike and Reebok brand names.
Advantages and constraints
There are several advantages to be gained from a global brand name. Brand
names are often associated with consumer perceptions of quality, reliability,
performance and other positive product features. Perhaps the most
important advantage, therefore, is the positive perception that consumer’s
have of products associated with the brand name. Other major advantages
to be derived from global branding are marketing efficiency through
economies of scale, promotion of a global image and reputation and
global consumer loyalty.
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The extent of global branding, however, is constrained by several factors,
including:
. Legal constraints – in some developing countries, for example, foreign
brands may be either banned or taxed more heavily.
. Language and cultural factors – which may lead to misleading connotations
of certain brand names, requiring brand adaptation. In the
automobile industry, for example, manufacturers have long tailored
their product/brand names to individual countries or regions. The
Volkswagen Golf is standard throughout most of Europe, Asia and
Africa. In the USA, however, it is known as the Rabbit, as it is in Latin
America and the Caribbean.
. Consumer homogeneity – the extent to which global branding is possible
obviously depends on the extent of consumer homogeneity between
markets or, to use Levitt’s (1983) terminology, the extent of ‘converging
commonality’.
. Counterfeiting – this is one of the most serious problems faced by global
branders. Pirating of video films, computer software, music recordings
and designer clothing cost global business millions of dollars each year
(see Kotabe and Helsen, 1998 for a detailed discussion).
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Table 11.3 The world’s top 20 brands by triad region and world
World USA Europe Japan
Coca-Cola Coca-Cola Coca-Cola Sony
Sony Campbell’s Sony National
Mercedes-BenzDisney Mercedes-Benz Mercedes-Benz
Kodak Pepsi-Cola BMW Toyota
Disney Kodak Philips Takashimaya
Nestle´ NBC Volkswagen Rolls-Royce
Toyota Black & Decker Adidas Seiko
McDonald’s Kellogg’s Kodak Matsushita
IBM McDonald’s Nivea Hibachi
Pepsi-Cola Hershey’s Porsche Suntory
Rolls-Royce Levi’s Volvo Porsche
Honda GE Colgate Kirin
Panasonic Sears Rolls-Royce Hotel New Otani
Levi’s Hallmark Levi’s Fuji TV
Kleenex Johnson & Johnson Ford Snow Brand Milk
Ford Betty Crocker Jaguar Imperial Hotel
Volkswagen Kraft Fanta Coca-Cola
Kellogg’s Kleenex Nescafe´ Mitsukoshi
Porsche Jell-O Black & Decker Japan Travel Bureau
Polaroid Tylenol Esso Disney
Source: Owen (1993)
Key branding decisions
The strategic decisions facing companies in global branding have been
examined by Onkvisit and Shaw (1983). Four main strategic decisions are
discussed, namely:
1. whether to brand or not to brand – which depends on whether the
product has salient attributes that can be differentiated;
2. whether to use the manufacturer’s own brand or the distributor’s/
retailer’s private brand;
3. whether to use global or local brands – which depends on the extent of
intermarket differences;
4. whether to use single or multiple brands in the same market.
These decisions are summarized in Figure 11.3. The main advantages and
disadvantages of each of these strategic options are listed in Table 11.4. The
figure and table should be considered in conjunction with each other as
they assist in the brand decision-making process. Particular attention should
be paid to the advantages and disadvantages of worldwide branding. The
framework can be used as the basis of analysis of the branding strategy of a
particular business in global markets.
Some research (Kashani, 1997a; Rosen et al., 1989; Landor Associates,
1990) has cast doubts on the significance of brand names as a means of
attracting customers. Some of the doubts are the result of research that
targeted general consumers rather than consumers from the segments
where brands are known. Kashani (1997) argued that successful brands
can still be built and that brand building must involve:
. getting lean – pruning weak brands and concentrating resources on
successful and potentially successful brands;
. investment – particularly in product innovation;
. listening – to consumers and understanding their needs.
It is evident that the decision to brand globally or locally is not simple.
Many businesses therefore adopt a hierarchy of global, regional and local
brands (Kotabe and Helsen, 1998) to combine the benefits of global and
local branding. The Swiss company Nestle´ has, for example:
. 10 global corporate brands, including Nestle´, Carnation, Perrier;
. 45 global strategic brands, including Kit Kat, Polo, Smarties, After Eight;
. 140 regional strategic brands, including Macintosh, Vittel Contadina;
. 7,500 local brands, including Texicana, Rocky, etc.
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Global pricing
Pricing decisions
Like branding and advertising, price is an important element of a global
marketing strategy. While price is heavily influenced by the overall strategy
of the business, there is a need to ensure that it is sensitive to local market
conditions. Price determination in international marketing is significantly
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1. Branding versus no brand decision
Does the product have production
consistency and salient attributes
which can be differentiated?
2. Manufacturer’s own brand versus
private brand decision
Is the manufacturer the ‘least
dependent person’?
3. Global brand versus local brands
decision
Are there intermarket differences
(demographic and/or psychological)?
4. Single brand versus multiple brand
decision
Are there intermarket differences
(demographic and/or psychological)
Branding
Manufacturer’s own brand
Local brands
Market segmentation and multiple brands
Yes
Yes
Yes
Yes
Unbranded commodity
Private brand
Global brand
Single brand
No
No
No
No
Figure 11.3 Branding decisions – from a manufacturer’s perspective
Source: Onkvisit and Shaw (1983)
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Table 11.4 Branding perspectives
Advantages Disadvantages
Lower production cost No brand Severe price competition
Lower marketing cost Lack of market identity
Lower legal cost
Flexible quality and quantity control
Better identification and awareness Branding Higher production cost
Better chance of product differentiation Higher marketing cost
Possible brand loyalty Higher legal cost
Possible premium pricing
Better margins for dealers Private brand Severe price competition
Possibly larger market share Lack of market identity
No promotional problems
Better price – greater price inelasticity Manufacturer’s Difficult for small manufacturers with
brand unknown brand or identity
Better bargaining power Requiring brand promotion
Better control of distribution
Market segmented for varying needs Multiple brands Higher marketing cost
Creating competitive spirits (in one market) Higher inventory cost
Avoiding negative connotation of Loss of economies of scale
existing brand
Gain more retail shelf space
Not hurting existing brand’s image
Marketing efficiency Single brand Assuming market homogeneity
Permitting more focused marketing (in one market) Existing brand’s image hurt when trading
up/down
Eliminator of brand confusion Limited shelf space
Good for product with good reputation
(halo effect)
Meaningful names Local brands Higher marketing cost
Local identification Higher inventory cost
Avoidance of taxation on international Loss of economies of scale
brand
Quick market penetration by acquiring Diffused image
local brand
Allowing variations of quantity and
quality across markets
Maximum marketing efficiency Worldwide Assuming market homogeneity
Reduction of advertising costs brands Problems with black and grey markets
Elimination of brand confusion Possibility of negative connotation
Good for culture-free product Requiring quality and quantity
consistency
Good for prestigious product
Easy identification/recognition for Less developed country opposition and
international travellers resentment
Uniform worldwide image Legal complications
Source: Onkvisit and Shaw (1983)
more complex than in domestic marketing as a result of such factors as
variations in market demand and competitive conditions abroad, transport
and distribution costs, tariffs and other government price controls,
exchange rate fluctuations, etc. The need to integrate pricing with global
strategy suggests that there should be global co-ordination of pricing policy,
but the need to be locally responsive suggests variation in pricing. This
section examines co-ordination and integration issues in relation to global
pricing. Two of the most important issues in this respect are the locus of
decision making regarding price determination and transfer pricing.
One of the most important price-related decisions in global marketing is
the need for pricing policy to be developed within the context of the
company’s overall strategic objectives in global markets, and this is a
powerful argument in favour of centralized co-ordination of pricing decisions.
At the same time, however, prices need to be responsive to local
environmental and market conditions in different countries, and this
favours a decentralized approach, with pricing decisions being the responsibility
of foreign subsidiaries. Decentralizing pricing decisions, on the other
hand, may lead to intersubsidiary price competition.
Toyne and Walters (1993) identified three major groups of factors affecting
international pricing:
. company-specific factors – these include the transnational strategy of the
company, local variations to its strategy, research and development costs,
and marketing and distribution costs;
. external market-specific factors – these include consumer tastes and
behaviour, government regulations, the competitive environment,
market structure and exchange rate fluctuations;
. product-specific factors – the stage of the international product life cycle,
etc.
Becker (1980) identified four main factors as affecting international pricing:
. costs that establish a ‘price floor’;
. demand and market factors which set a ‘price ceiling’;
. market structure and competition which help to set a ‘realistic price’;
. environmental constraints, such as government price controls.
Yip (1992) made the point that, ‘Charging the same absolute price can be
very difficult because of inherent international differences in market price
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levels, laws, and the role of price, as well as differences in the business’s
market position and delivered costs.’
As an alternative to charging the same absolute price, businesses can opt
to charge ‘the same prices relative to their competitors in each market’ (Yip,
1992). This, Yip argued, can help the business to maintain a consistent
position in its markets.
Keegan (1989) identified three alternative pricing policies in global
marketing:
. the extension/ethnocentric pricing policy, involving the uniformity of
prices worldwide;
. the adaptation/polycentric pricing policy, where prices are determined
by local subsidiaries and are responsive to local market needs;
. the invention/geocentric pricing policy, with prices determined in relation
to the company’s overall global marketing strategy.
The advantages and disadvantages of alternative pricing strategies are
important to consider. Highly decentralized pricing has the advantage of
being fully responsive to local market conditions. The main disadvantage is
that decentralized prices may not be consistent with the overall global
market objectives of the company and may encourage intersubsidiary
price competition. This, in turn, may lead to opportunities for arbitrage
and ‘grey market’ activities. The main advantage of centralized pricing is
consistency with global strategy. The main disadvantage is that centrally
determined prices may not take adequate account of local market
conditions.
There are two intermediary situations between the two extremes of
centralized, uniform pricing and decentralized, local market pricing. First,
under the centralized pricing policy with decentralized price determination
strategy, each national subsidiary is responsible for determining its own
prices, but overall pricing policy is determined centrally. This may
include decisions regarding rates of return to be achieved, market share
and product-positioning objectives, etc. Second, prices may be determined
decentrally but only within clearly defined limits laid down by the
corporate centre.
Cross-subsidization is an important and controversial issue in global
pricing. This occurs when a transnational or global company uses profits
made in one country to subsidize prices elsewhere to gain market share.
Thus, some Japanese companies have been accused of using surplus profits
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made in the protected Japanese market to subsidize prices on entry into the
US and European markets, leading to accusations of ‘dumping’ (such as in
the case of some semiconductors).
Toyne and Walters (1993) identified three alternative approaches (Table
11.5) to global pricing:
. standard world pricing – uniform pricing throughout the world;
. market-differentiated pricing – prices are customized for each market;
. dichotomous pricing – standardized foreign prices, separate from the
domestic market price structure.
Toyne and Walters (1993) went on to argue that, subject to central coordination,
a market-differentiated approach should be adopted in many
cases, because:
. environmental factors affecting prices often vary significantly from
market to market;
. pricing policy should be used proactively to achieve local market goals;
. the advantages of price uniformity are generally small;
. many of the drawbacks of price differentiation can be anticipated and
managed.
Differentiated pricing can however create significant problems as it did in
the late 1990s within the EU, where supermarket chains have used the ‘grey
market’ to obtain and sell designer goods at lower prices. At the same time,
many American products are sold in Europe for higher prices than in the
USA.
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Table 11.5 Pros and cons of different pricing strategies
Advantages Disadvantages
Standardized world pricing Simple Lack of responsiveness to local economic
Equitable and demand conditions
Removes possibility for
arbitrage
Market-differentiated pricing Market responsiveness Creates opportunities for arbitrage and
‘grey marketing’
Dichotomous pricing Worst of both worlds
Source: adapted from Toyne and Walters (1993)
Transfer pricing
The question of transfer pricing is an important and controversial one in
global marketing. Transfer prices are the prices charged on intra-group
trade. It occurs when there is a movement of parts, components, machinery,
technology, etc., from one part of the global business network to
another. The flow of goods and services is one-way; the flow of payment
for these goods/services is the other way. The question then arises – what
price is to be charged on such intra-group trade?
At this stage, it is worth pointing out the importance of the transferpricing
issue since between 35 and 40% of all international trade takes
the form of intra-company trade. The internal prices set for such trade
can have a major effect on the value of exports and imports and, hence,
on the balance of payments accounts of host and home countries. Keegan
(1989) identified four main approaches to transfer pricing:
. transfer at direct cost;
. transfer at direct cost plus apportioned overhead and margin;
. transfer at a price derived from end market prices;
. transfer at an ‘arm’s length price’ (i.e., a price that would have been
negotiated by unrelated parties).
The crucial issue here is that international business can derive a number of
benefits from the manipulation of internal transfer prices. These include
reduced tax liability, circumventing restrictions on profit repatriation, reducing
exchange risk and avoidance of import tariffs. The global tax liability of
the business can be reduced by shifting declared profits from high-tax to
low-tax countries. One way of achieving this is to manipulate transfer prices
in order to increase the profits of subsidiaries in low-tax countries. Similarly,
restrictions on profit repatriation may be overcome by ‘overcharging’ subsidiaries
for goods and service transfers. Thus, money may be remitted from
the country as payment for goods and services rather than as profits. In the
same way, foreign exchange risk can be mitigated by manipulating transfer
prices to siphon funds from countries where local currency depreciation is
expected. Finally, where import tariffs are charged as a proportion of the
value of goods, these can be reduced by artificially reducing the value of
imports to subsidiaries through manipulating transfer prices.
Transfer pricing is also important in relation to management of exchange
rate risk. This issue is discussed in Chapter 12 on global finance.
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Pricing decisions – a summary
The major issues in global pricing are:
. factors affecting global pricing;
. co-ordination of pricing;
. standardized versus differentiated pricing;
. transfer pricing;
. exchange rate risk and pricing.
Global pricing must be consistent with transnational strategy and with other
elements of marketing strategy. Just as other elements of strategy can be
standardized or localized, so can pricing. This allows the benefits of global
strategy to be combined with those of local flexibility.
Global promotion
Marketing communications
Global promotion is defined here to include all forms of marketing
communications that seek to influence the buying behaviour of existing
and potential customers, including advertising, personal selling, direct mail,
point of sale displays, literature, publicity and word of mouth communications
(Keegan, 1989). Marketing texts have referred to these promotions as
above-line (media promotions), below-line (more focused non-media
promotions) and direct selling.
The major objectives of global promotion, as with domestic marketing,
are ‘to enhance the company’s image vis-a`-vis its competitors and/or to
inform, educate, and influence the attitudes and buying behaviour of the
individuals, companies, institutions, and/or government agencies that make
up a target market’ (Toyne and Walters, 1993).
Despite sharing the same objectives, global promotion is far more
complex than domestic promotion due to the complexity of the global
environment. This section explores:
. the extent of standardization of global promotion;
. the ways in which global promotion is organized and controlled
(centralization versus decentralization);
. management of global promotional campaigns;
. the role and growth of global advertising agencies.
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Standardization of global promotion
A concise summary of the arguments for and against the standardization of
global advertising can be found in Mooij and Keegan (1991), summarized in
Table 11.6. One of the most important factors constraining global advertising
standardization is the relationship between the centre and subsidiary
managers. This point was reinforced by Peebles (1989), who argued that
the main obstacle to global advertising and the reason so many global
campaigns fail is not because of cultural differences around the world,
but rather because of interpersonal relationships between foreign subsidiaries
and corporate headquarters (i.e., the ‘not invented here’ syndrome
that can create subsidiary opposition to centrally designed campaigns).
Organization and control of promotions
Organization and control issues, therefore, are central to the debate on
global advertising and have been well covered in the literature. Centralization
of advertising decisions allows for greater co-ordination and integration
of worldwide promotion, with the associated benefits listed in Table 11.6.
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Table 11.6 Global advertising standardization
Arguments in favour of standardization Arguments against standardization
Costs savings through economies of scale in The heterogeneity of countries in terms of culture,
promotion. mentality and product usage.
Promotion of uniform brand and corporate The ‘not invented here’ syndrome (i.e., the desire
image. of each country to create its own campaign).
Utilization of global media. Differences in the media scene.
Simplified promotional planning through uniform Legal and regulatory constraints.
objectives and simplified co-ordination and
control.
Maximum use of good ideas, transmission of Competitive position in different markets.
know-how and continuous exchange of ideas.
The tendency for global business to be Product may be at different stages of its life cycle
centrally managed. in different countries.
Better use of management abilities and resources. Danger of being regarded as a foreign enterprise.
Universal guidelines and quality standards. Higher co-ordination costs that need to be
balanced against economies of scale.
Better access to stored know-how and
experience of other countries, and improved
ways of identifying global opportunities.
Source: derived from Mooij and Keegan (1991)
Decentralization, on the other hand, will allow greater flexibility and
responsiveness to local market needs.
The extent to which a business standardizes global promotion is governed
by several external and internal factors. The major external factors
are:
. language differences which may affect the translation of the advertising
message and the appropriateness of trade names, brands, slogans, etc.;
. cultural differences which may affect behaviour patterns, values, tastes,
fashions, etc.;
. social differences, especially the general attitude of society toward
advertising;
. economic differences, including the stage of development of the country
and its effects on education, levels of literacy, possession of radio, TV,
etc.;
. competitive differences and the promotional campaigns of competitors;
. promotion infrastructure differences – the relative importance of different
promotion channels can vary significantly between countries;
. legal and regulatory controls, including codes of practice and legislation,
can vary considerably.
The most important internal factors are the overall global strategy of the
business and the relationship between headquarters executives and foreign
subsidiary management. The scope for global promotion is far greater
when transnational strategy places greater emphasis on co-ordination of
activities rather than when a locally responsive approach is adopted.
Similarly, the greater the degree of centralized control the greater the
standardization of promotion. When decision-making power is decentralized,
then there is greater scope for local variations in promotion.
The choice of promotional strategy is, of course, not a simple choice
between total standardization and complete local adaptation. As with
other aspects of transnational strategy, it is more likely that a company
will adopt an approach that combines a high degree of uniformity with
local variations. Yip (1992) quoted the example of the Coca-Cola ‘little boy
gives Coke to sports hero’ campaign. In the USA the hero was ‘Mean’ Joe
Green of the Pittsburgh Steelers, in Latin America it was Diego Maradona so
as to give an element of local appeal. At the same time, however, the major
theme of the advertisement was globally consistent.
Mooij and Keegan (1991) and Toyne and Walters (1993) identified three
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broadly similar alternative options in relation to the decision as to the extent
to which promotion should be centralized or decentralized:
. the centralized organization – centralization of all promotional decision
making at corporate headquarters;
. the decentralized organization – decentralization of promotional
decision making;
. the mixed organization – combining elements of centralized and decentralized
promotional decision making.
Several factors will influence the choice between these three alternatives:
. corporate and marketing objectives – where global objectives predominate,
promotion will tend to be centralized;
. the uniformity of the product – the greater the uniformity of the product
the greater the centralization of promotion;
. the appeal of the product or brand – where this is widespread, decentralization
will be increased;
. legal constraints – decentralization may be necessary to take account of
different national regulations;
. cultural aspects – may dictate decentralization;
. socio-economic conditions – different tastes, habits and preferences may
require decentralization;
. the competitive situation – where this differs from country to country
promotional decisions will need to be at least partially decentralized.
Existing decision-making processes in global businesses vary considerably.
Companies adopting global strategies (e.g., Coca-Cola, IBM, Sony, etc.) will
be significantly more centralized in promotional decision making than
nationally responsive ones. Generally speaking, however, the two extremes
of complete centralization or complete decentralization are rare in practice,
with most businesses adopting a variation of the mixed organization.
Generally, corporate (at the centre) staff are responsible for developing
the core promotional objectives and core campaigns, and for providing
advice and expertise to foreign affiliates. Decisions regarding the detailed
implementation of core campaigns in foreign markets are often best left to
subsidiary managers to achieve local flexibility. Certain local decisions,
however, may still require the ultimate approval of the parent company.
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The role of corporate headquarters in global advertising was examined in
detail by Mooij and Keegan (1991), where a distinction was drawn between
the professional and management role. The former refers to the role of
headquarters in creating and placing advertising. The latter refers to the
importance of ensuring co-operation between headquarters and subsidiary
and for evaluating campaign effectiveness. The role of corporate headquarters
in these two areas is summarized in Figure 11.4.
The role of corporate headquarters in global advertising was also
examined by Quelch and Hoff (1986). The main responsibilities of the
centre included product/brand positioning and effect measurement.
Foreign subsidiaries, on the other hand, were mainly responsible for
media planning and media buying. Decisions that were jointly determined
by both headquarters and foreign subsidiaries included advertising agency
selection, concept development, execution and marketing research.
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(a) Professional role:
. positioning;
. stragety development;
. creative concept development and judgement;
. assisting local management in selecting the right target groups;
. giving an insight into the degree to which specific products and product attributes must be
emphasizedin local campaigns or in adapted campaigns;
. providing an insight into what kind of advertising is most effective in which country;
. selecting the media types to be used, both locally and internationally;
. drawing up procedures for reporting and internal communication between subsidiaries
andhead office;
. cultivating a feeling for cultural differences and thus increasing the possibilities of standardizing
a creative approach;
. evaluating international media;
. co-ordinating advertising research and measurement of effect.
(b) Management role:
. providing worldwide planning systems, including worldwide production outlines or
guidance;
. organizing worldwide co-ordination of local advertising plans;
. setting global budgets, dividing them according to region or country, evaluating country
budgets and checking whether they meet the company’s requirements;
. assisting with the selection of local advertising managers;
. developing documentation systems for registering successful multinational campaigns in
order to help local subsidiaries develop their own campaigns;
. selecting advertising agencies (local, multinational or global);
. evaluating agency relationships andremuner ation arrangements.
Figure 11.4 The role of corporate headquarters in global advertising
Source: derived from Mooij and Keegan (1991)
The management of global promotional campaigns
Toyne and Walters (1993) distinguished between strategic issues in promotion
planning and management issues. The six main strategic issues are:
. the market segment at which the promotion is directed – in global
marketing this refers mainly to the territorial boundaries or geographical
scope of the campaign whether national, regional or global;
. the objectives of the promotion campaign – where a distinction can be
made, for example, between building a global brand and increasing
market share in a particular country;
. the message(s) communicated and whether this should be the same
across countries;
. the allocation of expenditure to the campaign and the total budget;
. the allocation of the total budget across promotional mix elements –
media, geographical areas, products and over time;
. procedures for monitoring the performance of the campaign.
The major managerial issues involved in implementing a campaign include:
. the organization and control dimension – as discussed in the previous
section;
. choosing an advertising agency – where alternatives include using a
domestic agency, using an agency with branches overseas, using local
agencies in foreign markets or some combination of these alternatives.
The choice between these alternatives will be influenced by three broad
categories of factors including:
e corporate factors, such as the extent of the company’s internationalization,
organizational structure and standardization policy;
e market-specific factors, such as sociocultural, economic and legal
differences; and
e characteristics of the agency itself including its market coverage,
quality and reputation.
Mooij and Keegan (1991) identified 10 steps in planning worldwide
advertising:
1. situation analysis – analysis of the forces influencing promotional
decisions, including organizational structure, brand portfolio, the
extent of standardization, market share abroad and brand positioning;
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2. marketing communications strategy and objectives – whether a brand
is to be developed globally or multilocally;
3. deciding on the target groups – identifying similar market segments in
each country (see the previous discussion on SESs);
4. setting the total communications budget – whether it is set centrally or
locally, determine the basis on which the budget is determined (e.g.,
past experience, objectives);
5. the message – the choice between standardized and locally varied;
6. the means of communication and their integration – choices on sales,
promotion, PR, media advertising, sponsorship and the interrelationships
between these methods;
7. centralized or decentralized control of the means of communication –
decisions governing who controls promotion;
8. budget allocation – between different promotional media and communications
channels;
9. organization and implementation – of the strategy, including managing
agency arrangements;
10. control and evaluation – measuring the effectiveness of the campaign
in each country.
Choosing an advertising agency
The globalization of business and the attention focused on the opportunities
for global promotion has resulted in a rapid internationalization of the
advertising industry itself. Most of the early international advertising
agencies originated from the USA, with expansion abroad being a
gradual process in response to the internationalization of client companies.
Since the mid-1980s, internationalization of the advertising industry has
accelerated at an unprecedented rate, with the emergence of a number
of global, ‘mega’-agencies. This has mainly been a consequence of the
wave of cross-border mergers and acquisitions which have swept the
industry in recent years.
The rapid internationalization of the advertising industry and the emergence
of global, ‘mega’-agencies can be attributed to three main causes:
1. Globalization – some agencies have explicitly adopted the globalization
hypothesis of Levitt (1983). Indeed, Theodore Levitt was appointed
to the board of Saatchi & Saatchi in 1986. Once the premise of
‘converging commonality’ has been accepted, the opportunities for
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global promotion become apparent. To exploit such opportunities,
agencies have established geographically dispersed subsidiaries
throughout the world – sometimes through establishing new branches,
but more commonly through mergers and acquisition.
2. The benefits of size – closely related to the advantages of globalization
are the benefits of size. Global ‘mega’-agencies, due to their size and
geographical scope, can exert considerable influence over media
groups and can achieve considerable economies of scale in operations.
3. Synergy – a third factor in the emergence of global ‘mega’-agencies has
been the view that substantial benefits can be derived from the provision
of an integrated marketing communications service to clients.
Thus, most of the rapidly expanding agencies have diversified their
operations to include not only advertising and promotion but also
other services including public relations, market research, consultancy,
design, executive recruitment, etc.
Jaben (1994) suggested that ‘think globally, act locally’ is still the ‘dominant
strategy of international advertisers but with a slight revision: ‘‘think
globally, act regionally’’.’ This implies that the global headquarters has a
central role to play in ensuring a globally consistent message while regional
managers must have the autonomy to adapt advertising to local markets.
ICT and global marketing
It has been claimed that ‘Commercialisation of the WWW will revolutionise
the study and practice of international marketing’ (Hamill, 1997). Certainly,
the Internet has the potential to revolutionize many aspects of global
marketing and strategy. Hamill (1997) identified three main strategic applications
of the Internet in the context of internationalization:
. a communications tool supporting network relationships with overseas
customers (actual and potential), agents, distributors, suppliers, etc.;
. a low-cost export market research resource;
. a global marketing and promotions tool through the design and effective
marketing of company websites and the development of integrated
Internet-supported strategies.
The Internet is potentially useful to both large and small companies
operating in or wishing to enter global markets. It is a valuable tool for
GLOBAL AND TRANSNATIONAL MARKETING MANAGEMENT
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communicating both with customers and with other businesses. It is inexpensive
to use and is therefore of particular value to small and
medium-sized enterprises wishing to operate internationally. Table 11.7
summarizes the most significant effects of the Internet on global marketing
strategies.
One thing is certain. The impact of the Internet on global marketing has
increased and will increase further, particularly among small and mediumsized
enterprises. As we have seen, it is likely to influence global promotion,
pricing, logistics and distribution. Indeed, it permeates most aspects of
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Table 11.7 Ten effects of the Internet on global marketing
Effect Comment
1. Improved global communications with The Web allows businesses greater opportunity
customers to communicate directly with their customers all
over the world.
2. Improved global communications with other Suppliers and distributors all over the world can
businesses be contacted electronically. Materials, etc. can be
globally sourced via the Web at low cost.
3. Improved internal communications The Internet can be used to provide cheap and
quick worldwide internal communications within
a global business.
4. Improved corporate image The website of a business can be used to present
its corporate image.
5. Finding new global customers New customers can be attracted by the
company’s website. Additionally, new customers
can be approached directly via the Web on a
worldwide basis.
6 Reduced market entry costs for small Small businesses were often deterred from
businesses entering global markets on the basis of the costs
of market research, agents charges, etc. The
Internet has reduced these costs substantially.
7. Global price standardization Marketing on the Internet increases the
advantages of and need for global price
standardization.
8. Global market niche strategies Niche markets can be accessed through groups
on the Web. Customers are also more able to
access specialist services and products by
searching the Web.
9. Global-marketing research tool Access to information sources available on the
Internet.
10. Reduced importance of traditional-marketing Agents, etc. will be of less value to businesses
intermediaries entering international markets.
Source: adapted from Hamill and Gregory (1997)
global marketing. Managers in global businesses must assess the potential
role of the Internet in their global marketing strategies.
Axis Communications Inc. N the Internet and
global marketing
Axis communications has its headquarters at Lund in Sweden. It develops
and manufactures a range of products designed to support
network-centric computing. The company’s flagship products, the
StorePoint CD Network CD-ROM Server and the NetEye 200
Network Camera, are part of the first wave of network and Web
appliances designed to increase productivity by enabling users to
access and share computer resources more efficiently. The company,
which in year 2000 employed 200 people, has experienced an average
annual sales growth of 43% since its foundation in 1984. In 1995–96 its
sales were $49 million and it had an installed base of 500,000 products
worldwide. Major customers include ‘Fortune 500’ companies, such as
Ford, GM, AT&T, Pepsi, ABC News, Microsoft, GE and Boeing, and
many more smaller organizations worldwide.
The rapid growth of the company has been to a large extent dependent
on the establishment of ‘strategic technology relationships’ with
customers and with leading hardware vendors and software developers,
such as Hewlett-Packard, IBM, Canon, Fujitsu, Sony, Xerox,
Microsoft, Netscape, Oracle and Sun. Maintaining good relationships
and communications with their existing customer base is vital for Axis.
Despite its success, Axis remains a relatively small company in global
terms, and this has created two major challenges: how to support its
existing global customer base and how to achieve greater global brand
awareness and sales volume on a small promotion budget compared
with major global competitors. Axis sees the Internet as providing a
low-cost solution to both problems and one that is highly relevant to
the changing nature of procurement in the IT industry.
Axis’s website has become central to its global marketing strategy. It
contains full and comprehensive product information, sales contacts by
region, corporate news, new product developments and a jobs-vacant
section. The site is fully interactive and the company relies heavily on
email to support existing customers and to develop relationships with
new ones. An innovative feature of the Axis website is the Axis electronic
newsletter that is widely accessible and provides new product
GLOBAL AND TRANSNATIONAL MARKETING MANAGEMENT
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information to existing and potential customers around the world. The
ultimate aim of the site is to create a virtual community of customers,
distributors, resellers and suppliers in order to supply the Axis brand
globally.
Reviewand discussion questions
1. Explain what you understand by the term ‘global marketing’. What are
the major potential advantages and drawbacks of adopting a global
marketing strategy?
2. Why are many markets becoming more global? How is the extent of
globalization of a market assessed?
3. Choose a market with which you are familiar. Assess the extent to
which it is globalized and the extent to which it is localized.
4. What is meant by a ‘strategically equivalent segment’? How can one be
identified?
5. Select a product that is globally available. What are the limitations on its
standardization?
6. Why are global products often not sold at a globally standardized price?
What are the major factors affecting the pricing decisions of a global
business?
7. What factors affect the extent of globalization of promotion of a good or
service? What are the relative advantages and disadvantages of global
promotion?
8. Explain the growth and importance of global advertising agencies.
9. Discuss the impact of the Internet on global marketing.
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GLOBAL FINANCIAL
MANAGEMENT 12
Learning objectives
After studying this chapter students should be able to:
. understand the basic concepts of international financial management
and relate these to earlier chapters;
. understand the role of finance management in global competition;
. understand the various components of financial strategy (i.e.,
financing foreign operations, capital budgeting, remittance strategy
and operational policies);
. describe how political risk and exchange rate fluctuation can be
managed by international companies.
Introduction
The purpose of the chapter is to discuss the major financial issues faced by
a global business and to relate these to other aspects of international
management reviewed elsewhere in this book. It is assumed that the
reader is familiar with the basic finance topics that can be found in many
elementary textbooks. Readers who wish to learn in detail about the international
monetary system, foreign exchange markets and how businesses
can reduce the associated risks should consult an up-to-date textbook on
international finance, such as Eiteman et al. (1998).
Finance, as one of the key resources under management of a global or
transnational business, is one of the key strategic areas to address in the
implementation of strategy and in internal analysis. Financing investments
and working capital can be complicated in domestic business, but, for
international companies, factors such as political uncertainty and exchange
rate fluctuations mean that certainty can be even more elusive. This has
implications for all parts of international business strategy because operational
investments and changes to the stock of fixed assets all require
significant input from the financial function.
Finance management and the global enterprise
The key issues in international financing
In other parts of this book we have seen that all functions within a business
are affected by the overall strategy of the business in international markets.
Lessard (1986) examined some international finance activities within a
business to show how they would differ between a US-based business
following an export/import strategy, a multidomestic strategy and a pure
global strategy (Table 12.1).
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Table 12.1 Global competitive strategy and international finance functions
Function Export/Import Multidomestic Global
Investment evaluation Domestic perspective; Yes/No decision to Mutually exclusive
few ‘foreign’ enter market or change global choices; currency
considerations mode to serve local and taxissues central
market
Funding operations Meet domestic norms Meet local norms Match global
competitors’ cost of
capital
Exchange risk Focus on exposure of Focus on exposure of Focus on exposure of
management foreign currency converting foreign home and foreign profits
contracts profits into dollars to competitive effects of
exchange rate shifts
Output pricing No change in home No change in local Change in home and
responses to exchange currency price currency price local price to reflect
rate movements global competitive
position
Performance Measure all operations Measure foreign Measure all operations
measurement in dollars at actual operation in local relative to standards that
exchange rates currency reflect the competitive
effects of exchange rate
changes
Source: Lessard (1986)
Investment evaluation
While the business following a multidomestic strategy can take decisions in
one country which have little or no effect on its operations in another
country, the global company is faced with a complexand interdependent
set of choices. For example, the decision to locate a plant in China to take
advantage of low labour (and hence production) costs must also take into
account the associated logistical costs of shipping to other markets as well
as strategic issues, such as locating in that country before competitors and
the potential for organizational learning.
Funding operations
A global enterprise has (by definition) access to a wide range of sources of
finance with lower costs than domestic sources as well as opportunities to
reduce taxation through the use of ‘creative’ transfer pricing. Access to
lower cost of capital can be a source of competitive advantage, but the
company may be restricted by the degree of choice available to it. Host
government legislation, for example, may prevent the use of resources from
other parts of the business in other countries. While this may not be a
significant drawback for the multidomestic company, it does limit the
ability of the global company to achieve the lowest possible costs of capital.
Exchange risk management: output/pricing responses to exchange
rate movements
Changes in the exchange rate for a country will affect the operating costs
and the revenues of the company’s subsidiary in that country. Lessard
(1986) pointed out that for the company following a multidomestic strategy,
the costs and revenues move together because most of the value-adding
costs are locally incurred and the revenues are locally generated. Thus,
profits move in simple proportion to the exchange rate. On the other
hand, the sourcing costs, value-adding activities and revenues of the
global enterprise may be associated with a number of countries. Thus a
change in the exchange rate of one country will have a much more
complexeffect on the profits of the global business.
Foreign exchange risk management at
British Airways (BA)
The overall foreign exchange position of a company may be complex,
as illustrated by the position of British Airways. BA does business in
GLOBAL FINANCIAL MANAGEMENT
[ 341 ]
approximately 140 foreign currencies, which account for approximately
60% of group revenue and approximately 40% of operating
expenses (the rest being UK sterling). The group generates a surplus
in most of these currencies (i.e., revenues are greater than costs). The
principal exceptions are the US dollar and the pound sterling in which
BA has a deficit, arising from capital expenditure and the payment of
some leasing costs, together with expenditure on fuel, which is payable
in US dollars, and the majority of staff costs, central overheads and
other leasing costs, which are payable in pounds sterling.
BA consequently has a highly complexforeign exchange position,
but it is imperative to the profitability of such a company that this
exposure to foreign exchange rate movements is recognized and
managed appropriately. In all cases, risk attributed to foreign exchange
rate movements arises out of uncertainty about the future exchange
rate between two currencies. This risk would be minimized if it were
possible to predict future rate movements. Unfortunately, however, it is
not possible to do so with any degree of accuracy, and for a company
to try to do so it can be financially dangerous. Therefore, given that
foreign exchange rates cannot be predicted, another option might be to
pass on to the customer the effects of any adverse movements in
exchange rates and, hence, the company would incur no impact. In
most cases, however, the highly competitive nature of international
business prevents higher costs being passed on to the customer in
this way.
The broad spectrum of currencies in the business, many of which are
linked in their movements to the US dollar and the pound sterling,
gives BA a measure of protection against exchange rate movements
and reduces the overall sensitivity of the company’s results to exchange
rate fluctuations. Nonetheless, BA can experience adverse or beneficial
effects. For example, if the pound sterling weakened against the US
dollar and strengthened against other major currencies, the overall
effect would be likely to be adverse, while the reverse would be
likely to produce a beneficial effect. The company seeks to reduce
its foreign currency exposure arising from transactions in various
currencies through a policy of matching, as far as possible, receipts
and payments in each individual currency. Surpluses of convertible
currencies are sold either immediately (spot) or forward for US
dollars and pounds sterling.
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Performance measurement
The financial performance of a global or transnational company can be
measured in terms of the host country currency or the currency of the
parent country. Operational performance can be partly masked by exchange
rate changes during the accounting period, making it difficult for
the global enterprise to compare performance in different countries. Global
strategic financial targets and control systems are usually therefore set up in
such a way as to permit the effect of rate changes to be removed, thus
exposing the underlying financial performance. Lessard and Lorange (1977)
advocated a system where budgets are established based on the projected
exchange rate over a period and performance is tracked using the same
projected rate. This does not shield the business from unexpected
exchange rate changes, but does at least provide a fair measure of the
effectiveness of the operating managers.
Centralization versus decentralization of the
finance function
Different approaches to decentralization
As with all the functions of an international business, a compromise has to
be found between the need for global co-ordination (implying centralization)
and local responsiveness (implying decentralization) of the finance
function. The above discussion of multidomestic and global strategy helps
us to understand how the function should be organized depending on the
strategy the company is pursuing. According to Asheghian and Ebrahimi
(1990) there are three approaches used (based on the EPRG [ethnocentric,
polycentric, regiocentric, geocentric] framework – see Chapter 2).
Polycentric approach
Decision making is decentralized to the subsidiaries with the parent company’s
role limited to decisions on financing new projects. This is most
likely to be used by companies following a multidomestic strategy.
Ethnocentric approach
Strategic decision making and operational control are centralized and
remain the responsibility of the parent company. This is the approach
adopted by the business following a purely global strategy. While this
approach can optimize the financial performance of the company as a
GLOBAL FINANCIAL MANAGEMENT
[ 343 ]
whole, it can have an adverse effect on the apparent performance of individual
subsidiaries. This approach can also create difficulties in meeting
local financial-reporting requirements.
Geocentric approach
Each subsidiary is treated differently according to factors such as the local
financial environment, the quality of local management and the nature of
the business. This approach could be compared with the transnational
strategic approach in that the centre is permitting some adaptation to suit
local conditions while maintaining a degree of central co-ordination.
In practice, as suggested by Table 12.1, different parts of the financial
function tend to be centralized (e.g., capital budgeting) while other parts
tend to be decentralized.
In order to look more closely at the different elements of the financial
strategy of an international business, we will examine the four fundamental
decision areas (see Figure 12.1).
Decision area 1:financing foreign operations
The options
The global or transnational business, like any other company business that
wants to grow, needs access to funds to finance land, plant and equipment
as well as the additional working capital required for the day to day operations
of the business. The three main sources of funds are:
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•Equity
•Debt
•Intracompany
funds
Financing foreign
operations
•MNE strategic
objective and
other long-term
objectives
•Global strategy
•Capital budgeting
Resource
allocation
•Working capital
management
•Cash flow
management
•Accounts
receivable
management
•Inventory control
•Foreign exchange
risk management
Operational
policies
•Profits
•Dividends
•Interest
•Royalty fees
•Transfer pricing
Remittance
strategy
Feedback
Figure 12.1 Fundamental decisions in financial strategy
Source: Asheghian and Ebrahimi (1990). MNE ¼ multinational enterprise
1. equity capital raised by selling shares on the stock exchange;
2. debt capital raised by borrowing from a lender;
3. internal funds generated through the normal operation of the business
(retained profits).
The options of sources of funds to choose from are summarized in
Figure 12.2.
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Funds generated internally by
the foreign affiliate
Funds from within
the corporate
family
Funds from sources
external to
the corporate
family
Joint venture partners
Third country currency debt
Individual local
shareholders
Eurocurrency debt
Local currency debt
Securities markets or
money markets
Banks and other
financial institutions
Affiliate borrowing with parent guarantee
Leads and lags in paying
Intra-company accounts
Cash loans
Retained earnings
Depreciation and other
non-cash charges
Cash
Real goods
Equity
Investment
Local equity
Funds from
parent
corporation
Funds from
sister
affiliates
Borrowing from
sources in
parent country
Borrowing
outside of
parent country
Leads and lags in paying
Intra-company accounts
Cash loans
Figure 12.2 Potential sources of capital for financing foreign operations
Source: Eiteman et al. (1998)
Equity capital
The international company has the opportunity to raise capital not only on
its home stock exchange but also through cross-listing (i.e., listing its shares
on other stock exchanges). The underlying objective of listing on additional
stock exchanges is to lower the weighted average cost of capital. The main
drawback to obtaining additional listings is that other stock exchanges, in
particular the New York Stock Exchange, may require the company to
disclose much more detail about its financial operations that its home
stock exchange requires. An alternative approach is to raise capital by
selling shares directly to foreign investors. This can include the sale of
rights issue stock to a joint venture partner based in the host country in
which the company wishes to invest. Table 12.2 summarizes the advantages
and disadvantages of raising equity capital through the parent
company and through host country sources.
Debt (or loan) capital
There are a number of possible sources of debt capital for foreign investment
(Asheghian and Ebrahimi, 1990).
Development banks and government agencies in the host country
These sources are most relevant for developing countries. There are often
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Table 12.2 Advantages and disadvantages of different sources of equity capital for
international companies
Sources of equity Advantages Disadvantages
financing
Parent company Possibility of enhancing debt Higher foreign exchange exposure
capacity of overseas subsidiaries. risks.
Higher parental controls on Higher risks for remittance of earning
subsidiary operations. and repatriation of invested capital.
Higher risks for expropriation and
nationalization.
Host country Lower foreign exchange exposure Less parental control on overseas
risks. operations.
Stronger identity with host country
and local interest groups.
Source: Davidson (1982)
restrictions on what may be purchased (e.g., the subsidiary may be constrained
to source from local suppliers).
Investment and commercial banks in host countries
The interest rate chargeable on debt capital varies between countries, and it
can sometimes be preferable to borrow locally if monetary pressure is
lower in the host country. One of the advantages of international development
is the ability to borrow in a range of countries, depending on the
attractiveness of interest rates at the time the finance is needed.
Financial markets
There is a wide range of sources for finance as well as a wide range of
instruments through which the loan may be raised. The three major sources
of funding are international bank loans, the Euronote market and the
international bond market. The last of these ‘sports a rich array of innovative
instruments created by imaginative investment bankers, who are
unfettered by the usual controls and regulations governing domestic
capital markets’ (Eiteman et al., 1998).
Table 12.3 summarizes the advantages and disadvantages of domestic
and host country sources of debt financing for international businesses.
From this we can see that a company has to balance the opposing
factors of exchange rate risks and political risks.
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Table 12.3 Advantages and disadvantages of home versus host sources of funding
for financing
Source of debt financing Advantages Disadvantages
Home base (parent Tax deductions on interest paid. Higher foreign exchange exposure
company, home country) Ease in remittance and risks.
repatriation.
Access to low-cost funds.
Host country Low political risk. Availability of capital.
Taxdeduction on interest paid. Less control over subsidiary
Elimination of foreign exchange operations.
exposure risks.
Possibility of establishing a good
relationship with local
businesses and other financial
institutions.
Source: Davidson (1982)
Decision area 2:resource allocation and
capital budgeting
Uncertainties constraining the certainty of choice
Any business needs to plan how it is going to invest its capital in order to
meet its long-term objectives. New opportunities for investment may come
from a variety of sources inside and outside the business. One of the key
activities of the finance function is to evaluate the financial aspects of each
proposal to determine, first if they meet company set criteria for the return
generated and, second, to rank the proposals so that the most attractive can
be identified. The standard tools used in such evaluations include calculation
of the net present value (NPV) or the internal rate of return (IRR). A
company using the latter approach will specify a ‘hurdle rate’ for all investment
decisions; any project with an IRR below this rate will not be considered
further.
Investment decisions for international businesses are made in a similar
way to those for domestic companies; differences are mainly caused by the
greater complexity present in the international environment. Asheghian
and Ebrahimi (1990) identified the following causes of this additional
complexity:
. political risks are higher and more varied;
. variations in the sources and forms of financing;
. foreign exchange rate fluctuations;
. restrictions on capital, exchange and profit flows in many countries;
. differences in taxation systems between home and host countries;
. differences in the economic systems and conditions between countries;
. differences in inflation rates;
. varying interest and discount rates;
. uncertainty in the estimation of salvage value (the value of project assets
at the end of the project).
Because investment appraisal for international business can be more
complexthan for purely domestic decisions, a number of ‘softer’ criteria
are sometimes applied to the decision. Non-financial criteria can be applied
to an investment proposal and such tools as impact analysis and cost/
benefit analysis can provide information as useful as the financial calculations
that are often based on unreliable projections of revenue flows.
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The conclusions reached by these three approaches could be different.
Multiple evaluations do not necessarily make decision making any easier,
but at least the final decision should be made on the basis of a wider range
of information than the basic NPV approach. A further important factor in
the decision is how the company is able to address the risks posed by
political and exchange rate uncertainties – problems very commonly encountered
by global and transnational businesses.
Political risk
The political environment has already been discussed in Chapter 5. Political
factors vary by country, by industry and by individual business. The
greatest risk that any international business faces is the expropriation,
without compensation, of assets held in a foreign country. This threat is a
major deterrent to investment in late developing countries. There are other
ways in which host governments can directly influence the operations of
global companies; the imposition of currency restriction introduced by the
Malaysian government in 1998 following the collapse of the ‘tiger’
economies is a dramatic example of this. Kobrin (1982) defined two
different types of political risk:
1. country-specific (macro) risks that apply to all foreign businesses in that
country;
2. company-specific (micro) risks that apply to an industry, a particular
company or even a particular project.
Figure 12.3 summarizes the various components of political risk.
Assessing and forecasting political risk
Two different types of risk have to be assessed – macro-risk and micro-risk.
Macro-risk
The international business will need to know the degree of political stability
in a host country and the current attitude of the various political forces
toward foreign investors. Some estimates of this can be gained from
examining the country’s history as well as such sources as radio, television
and newspapers. However, in countries where the media is controlled by
political forces, an incomplete or (at worst) totally misleading picture may
GLOBAL FINANCIAL MANAGEMENT
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be gathered. Alternative sources of information are professional analysts,
recent visitors and business contacts within the country. The problem is that
political change can be very sudden and overwhelming, as events such as
the break-up of the USSR demonstrated.
Micro-risk
Even if some degree of accuracy can be made in forecasting political
events, the impact of these on specific companies or industries may be
even harder to predict. Eiteman et al. (1998) suggested that international
companies with significant exposure to micro-risk are likely to employ inhouse
political analysts who understand the industry well and can focus
their attention on each country. Knickerbocker (1973) suggested that, in
many cases, international companies make little attempt to make independent
risk assessments, but instead will tend to watch what other companies
do and then copy them.
Dealing with political risk
It is demonstrably obvious, then, that political risk cannot be avoided. For
companies seeking to expand in other countries, strategy formulation is
more concerned with finding appropriate approaches to dealing with the
risk. An obvious way to minimize such risk is to invest only in those
countries that have a historically low level of risk. Unfortunately, this may
deprive the company of the opportunity to invest in many countries where
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Expropriation
(directed toward
ownership of
foreign firms)
Macro-risk
(affects all
foreign firms)
Micro-risk
(affects specific
firms/industries)
Ethnic strife
(foreign firms are
only bystanders
but get hurt)
Goal conflict
(reasonable goals
of government and
firms diverge)
Corruption
(a ‘way of life’
in many
countries)
Political risk
Figure 12.3 Macro/Micro decomposition of political risk
Source: Eiteman et al. (1998)
the potential returns are very high. An alternative approach is to accept that
risks are present and plan investment and operations in such a way that the
consequences of unexpected political changes can be minimized. Such
plans might include:
. negotiating investment agreements with the host country government,
covering as many aspects as possible (the implication here is that a
compromise must be reached which offers acceptable benefits for the
investor and the host country government; this does not of course eliminate
the possibility of a new government ignoring agreements made
with its predecessor);
. adapting to host country goals and cultural norms, so that the investor is
seen as a benefit to the country rather than an exploiter;
. planning disinvestment, so that ownership of the project will be acquired
by the host government after an agreed period of time;
. employing operating strategies, such as local sourcing, keeping ownership
of key technologies, building market control, investing using funds
sourced from the host country, etc. to strengthen the company’s bargaining
position.
Decision area 3:operational policies
Working capital and cash flow management
Working capital has the value of assets required for the normal operations
of the business. In practice, this means the value of stock, creditors (including
trade creditors and short-term debts), debtors and cash-in-hand.
Businesses need working capital to ensure that the day-to-day operations
of the business are properly financed. There is usually a lag between the
purchase of the input stocks and the recovery of the added value through
payment by customers for the final product.
Businesses will hold cash balances (and other liquid assets) in order to
fund the normal day-to-day operations of the business (transaction motive)
and as a buffer against unexpected variations in cash requirements (precautionary
motive). However, all working capital is an asset tied up in the
business which is not earning a useful return (the opportunity cost of
working capital). Thus the purpose of cash flow management is to
ensure that while the business has sufficient cash to cover the transaction
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and risk motives, it does not hold excess cash that might be better employed
elsewhere in the system and in another form.
All businesses, whether domestic or international, engage in some form
of cash flow management. The international business must deal with a
more complexsituation because of the additional uncertainties posed by
exchange rate changes, government restrictions on the flow of funds in and
out of the country, differences in taxsystems and the costs and other
difficulties involved in transferring funds across national boundaries. It
may not therefore be able to make the maximum use of such opportunities
as transfer of cash into stronger currencies or into areas with more favourable
taxsystems.
Eiteman et al. (1998) summarized the main differences between domestic
and international business cash management.
Planning
An international business usually prepares three cash budgets – one for
each individual national entity, one for each currency used within the
system and one for the parent company as a whole. In order for the last
of these budgets to be prepared, the company must use a forecast set of
exchange rates.
Collection
Delays between customer payment and the cash being actually available to
the company should be minimized. The availability of a multinational
banking system with a presence in each host country can facilitate this
process.
Repositioning
Funds collected have to be transferred to where they are of most use to the
business. The international business may face restrictions (see above) in its
ability to do this to maximum effect. A variety of direct and indirect techniques
may be used to effect transfers and reduce restrictions, including
intra-company transfer pricing.
Disbursement
This is similar to the collection of cash; the aim is to keep the cash within
the business for as long as possible while ensuring that it reaches the
recipient at the agreed time. Again, the selection of an appropriate
banking system is important.
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Covering cash shortages
Cash shortage at a subsidiary can be covered either by the subsidiary itself
borrowing locally or by an internal transfer of funds from another part of
the parent company. The opportunity here is that other parts of the business
may be able to borrow at much more favourable rates of interest than
others.
Investing surplus cash
The various parts of an international business may hold cash in local
currency which represents a surplus generated from normal operations.
Subsidiaries may have responsibility for managing this surplus themselves,
but many companies accumulate these surpluses into a ‘pool’ and may then
set up a financial subsidiary to manage the pool effectively.
Foreign exchange exposure
There are three main types of risk associated with unexpected foreign
exchange rate movements which are faced by an international company
with subsidiaries in several countries. One of the objectives of the finance
department is to estimate the potential of such movements to affect the
profitability and other key measures of financial performance (in other
words, gain an estimate of the company’s exposure) and to take steps to
ensure that these key measures are maximized.
Transaction exposure
If the company agrees to some sort of financial transaction where payment
will be made some time after the agreement, then the value of the transaction
will change as the exchange rate changes. For example, a British
company may agree to purchase machinery from an American supplier for
$150,000 with delivery in sixmonths. If the exchange rate at the time of the
agreement is £1 ¼ $1.50, then the value of the transaction is £100,000. If in
sixmonths the rate rises to £1 ¼ $2.00, then the value of the transaction will
be only £75,000 which is a significant saving. On the other hand, if the rate
drops to £1 ¼ $1.00, the value of the transaction will rise to £150,000 which
would make the deal much less attractive. Thus, transaction exposure arises
from cash flows generated by current financial obligations.
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Operating exposure
This is also related to cash flows but in a much wider sense; unexpected
changes in exchange rates will affect not only a company but also its
suppliers, customers and competitors. This, in turn, could affect the
company’s international competitiveness, future sales and costs. Thus,
operating (or economic) exposure is a measure of how much the present
value of the company is altered by unexpected rate changes.
Translation exposure
A global or transnational business with subsidiaries in several countries
must prepare consolidated accounts in its domestic currency. In order to
accurately report figures in the financial statements, they must all be translated
into the domestic currency. Exchange rate changes may therefore
have a significant effect on the value of the shareholders’ equity. Note
that this is only an accounting change and not a realized gain or loss.
Reducing exposure
There are many methods that can be used to reduce the exposure of a
business to exchange rate changes; the reader is referred to any standard
textbook on international finance for details. One technique that is commonly
used to reduce risk is hedging. If we return to the example above,
the business may consider the risk of the sterling price increasing to
£150,000 unacceptable. It may therefore buy $150,000 immediately the
deal is agreed. The drawback with this is the opportunity cost of tying up
this amount of capital for sixmonths.
An alternative is to buy $150,000 in the forward market for delivery in six
months at the six-month forward rate – say, £1 ¼ $1.20. The company’s
capital is not tied up during this time and the company knows exactly how
much it will have to pay for the machinery. Thus, hedging places an upper
limit on the detrimental effect that adverse changes of exchange rates will
have on the company’s cash flows. One drawback is that the business
cannot benefit from favourable exchange rate movements. It is up to the
finance function to determine which method(s) of managing the company’s
exposure are most appropriate.
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Decision area 4:remittance strategy
Types of funds transfer
In the above discussion on operational policies we referred to the movement
of cash between different parts of an international company. A
remittance strategy refers to the company’s policies and procedures for
implementing the flow of funds around the business and, in particular,
the repatriation of funds to the parent company. Table 12.4 summarizes
the conduits that an international business has for moving funds.
Problems with transferring funds
Unlike a purely domestic company the global or transnational company
may face a number of restrictions that impede its ability to freely transfer
funds around the organization.
Political constraints
Just as an exporter may face tariff and non-tariff barriers to trade, so an
internationalized business may be subject to direct and indirect constraints.
The currency may become unconvertible or else the government may
impose a fixed exchange rate which makes conversion to the home
country’s currency impossible or not economically viable. Governments
may also place limits on the total amount of funds that may be transferred
out of the country. Less obvious limitations may be present through the
imposition of complexand time-consuming processes that must be followed
in order to gain permission to transfer funds.
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Table 12.4 Conduits for moving funds
Type of funds flow Methods of performing the flow
Flows as compensation for invested capital Payment of dividends, interest payment on
inter-company loans, principal repayment on
inter-company loans.
Flows for goods and services received Payment for purchased materials and components,
payment for purchase or services, royalty payments,
licence fees, management fees, overhead
compensation
Flows for both categories Leading or lagging of payments.
Source: Eiteman et al. (1998)
Tax constraints
In addition to foreign exchange losses, the international company can be
subject to taxation in the host country and any other country whose borders
the funds cross. Even within countries there may be regional taxation in
addition to national taxation which causes extra complexity. The threat by
the State of California to taxlocal subsidiaries of foreign-based companies
on the profits of the parent rather than the subsidiary is an interesting
example of this. Some companies establish subsidiaries in tax havens in
order to defer the payment of taxes.
Transaction costs
Even when exchange rates themselves are not a constraint, the conversion
from one currency to another incurs a cost. Although for a single conversion
the cost is only a small percentage of the total value of the transaction,
these costs can become significant if funds are repeatedly converted. The
effects can be reduced by planning funds flow so that instead of going from
subsidiaries to the parent then back to subsidiaries, the funds flow directly
between subsidiaries. Another approach is to use netting: instead of several
unconnected exchanges of funds between a parent and a subsidiary, the
transactions over a period are grouped together so that only one transfer of
funds, representing the net value of all the transactions, is required.
Liquidity needs
We mentioned above the need for each subsidiary to hold funds for transaction
and precautionary motives. The level of funds held by the subsidiary
will vary from one country to another due to local conditions and may
sometimes have to be somewhat higher than the optimum level for the
company as a whole.
Blocked funds
If exchange or other controls severely restrict the normal movement of
funds out of a country, then the business may still be able to effect a transfer
through indirect means. Eiteman et al. (1998) described a number of
alternatives.
‘Unbundling’ services
Instead of repatriating profits the company can split the transfers up into a
number of categories as shown in Table 12.4. Host governments may be
more willing to permit at least some of these payments.
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Transfer pricing
If a parent company wishes to relocate funds from a subsidiary, it can
charge artificially high prices for goods and services purchased from the
parent by the subsidiary. This may, however, result in additional taxcomplications.
Leading and lagging payments
The parent can delay payments to the subsidiary (lag) but accelerate some
payments by the subsidiary to the parent (lead). This has the effect of a
temporary transfer of funds to the parent, but some countries set limits on
the timings that may be used.
Reinvoicing centres
This could be viewed as a method of implementing the first three
approaches. Intra-company transfers of goods and services are all made
through a reinvoicing centre, a separate corporate entity that buys from the
supplier in the supplier’s home currency and then resells to the buyer in
the buyer’s home currency. The main use of this technique is to manage the
company’s exposure to movements in exchange rates. Where there are
restrictions on funds transfers, the reinvoicing centre can handle the unbundling,
transfer pricing and lead/lag methods discussed above with the
added benefit of masking the ultimate destination of funds transferred out
of the subsidiary.
Fronting loans
Loans from a parent to a subsidiary are made through a financial intermediary
(usually a large international bank) and interest payments from
the subsidiary are made to that intermediary. The idea is that foreign
governments are less likely to restrict payments to a large international
bank than to the parent.
Unrelated exports
The blocked funds are used to pay for goods or services used by other parts
of the business and provided by the host country. Eiteman et al. (1998) gave
the example of an international company’s employees using the host
country’s state airline for international flights. The tickets are paid for in
the host country’s currency using the blocked funds. Other more sophisticated
techniques, such as bartering and countertrade (Hennart, 1990), have
GLOBAL FINANCIAL MANAGEMENT
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also been used. The underlying theme is finding ways to improve the host
country’s economy whose poor state was the original cause of the block.
Discussion and review questions
1. When might a decentralization of financial decision making be preferable
to centralization?
2. What are the options available to international companies seeking to
find finance for foreign investment?
3. Describe the pros and cons of the three options for financing foreign
investment.
4. Why might an international company have an advantage over a
domestic business when raising debt finance in an overseas country?
5. Why is an international company more vulnerable to political risks than
purely domestic producers?
References and further reading
Aharoni, Y. (1966) The Foreign Investment Decision Process. Boston: Harvard University Press.
Asheghian, P. and Ebrahimi, B. (1990) International Business, Economics, Environment, Strategies.
New York: Harper & Row.
Brigham, E. and Gapenski, L.C. (1985) Financial Management: Theory and Practice (4th edn).
Hinsdale, IL: Dryden Press.
Buckley, A. (1986) Multinational Finance. Oxford, UK: Philip Allan.
Chakravarthy, B.S. and Perlmutter, H.V. (1985) ‘Strategic planning for a global business’. Columbia
Journal of World Business, Summer, 3–10.
Davidson, W.H. (1982) Global Strategic Management. New York: John Wiley & Sons.
Eiteman, D.K., Stonehill, A.I. and Moffett, M.H. (1998) Multinational Business Finance (8th edn).
Reading, MA: Addison-Wesley.
Fayerweather, J. (1978) International Business Strategy and Administration. Cambridge, MA:
Ballinger.
Hennart, J.-F. (1990) ‘Some empirical dimesions of countertrade’. Journal of International Business
Studies, second quarter, 243–270.
Knickerbocker, F.T. (1973) Oligopolistic Reaction and Multinational Enterprise. Boston: Harvard
Business School Press.
Kobrin, S.J. (1979) ‘Political risk: A review and recommendations’. Journal of International Business
Studies, Spring/Summer, 69–80.
Kobrin, S.J. (1982) Managing Political Risk Assessment: Strategic Response to Environmental Change.
Berkeley: University of California Press.
Lessard, D.R. (1986) ‘Finance and global competition: Exploiting financial scope and coping with
volatile exchange rates’. In M.E. Porter (ed.), Competition in Global Industries. Boston: Harvard
Business School Press.
Lessard, D.R. and Lorange, P. (1997) ‘Currency changes and management control: Resolving the
centralization/decentralization dilemma’. Accounting Review, July, 628–637.
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Murrenbeeld, M. (1975) ‘Economic factors for forecasting foreign exchange rate changes’. Columbia
Journal of World Business, Summer, 81–95.
Robbins, S. and Stobaugh, R. (1973) Money in the Multinational Enterprise. New York: Basic Books.
Robock, S.H. (1971) ‘Political risk: Identification and assessment’. Columbia Journal of World
Business, July/August, 6–20.
Robock, S.H. and Simmonds, K. (1989) International Business and Multinational Enterprises (4th
edn). Homewood, IL: Richard D. Irwin.
Rummel, R.J. and Heenan, D.A. (1978) ‘How multinationals analyse political risk’. Harvard Business
Review, January/February, 67–76.
Shapiro, A. (1986) Multinational Financial Management (2nd edn). Boston: Allyn & Bacon.
GLOBAL FINANCIAL MANAGEMENT
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ORGANIZATIONAL
STRUCTURE AND
CONTROL IN GLOBAL
AND TRANSNATIONAL
BUSINESS 13
Learning objectives
After studying this chapter students should be able to:
. describe two key variables that distinguish forms of organizational
structure from each other;
. explain the contingency and configuration approaches to determining
structure;
. explain the types of structure adopted by international and global
businesses;
. describe the routes by which structures develop, particularly into
complex forms such as matrix structures;
. describe the influences behind, and forms of, transnational
structures;
. explain how performance measures can be used to appraise the
performance of transnational businesses.
Introduction
Chapter 13 is important to the main themes of the book since it provides
the link between global strategies, global management, strategy implementation
and global competitiveness.There are particularly strong links,
therefore, between this chapter and those on global strategy, human resource
management and networks.The chapter explores the determinants
of organizational structure, summarizes the alternative organizational
structures available to international organizations, introduces recent alternative
configurations and examines the important links that exist between
global strategies and organizational structure and control.
The essence of a global and transnational strategy is the co-ordination
and integration of geographically dispersed operations in the pursuit of
global competitive advantage.This chapter examines the complex interrelationships
between global strategy and the organization, and control
issues associated with its implementation.
Some essentials of organizational structure
Key variables
Organizational structure concerns the shape adopted by the business in the
pursuit of its strategic objectives.For international businesses the importance
of structure is brought into focus because of the distances between
the various parts and the need to co-ordinate activities between them.
Structures are usually distinguished according to two variables:
1. the height and width of the structure;
2. the extent to which hierarchical management is observed.
Before we begin our discussion of the importance of structure in global and
transnational businesses, we will review these two key themes in general
terms.
‘Height’ and ‘width’ of structures
Height of structures
It is perhaps obvious to say that different organizations adopt different
‘shapes’.‘Height’ refers to the number of layers that exist within a structure.
Larger organizations are higher than smaller ones.The guide to how high
an organizational structure should be depends on the complexity of the
tasks that a proposed strategy entails.A small, single site manufacturer will
typically be involved in competing in one industry, sometimes with a
single product type.This scenario is much less complex than a transnational
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chemical company that competes in many national markets, in several
product types and with a high dependence on research and legal
regulations.
Height facilitates the engagement of specialist managers in the middle of
an organization who can oversee and direct the many activities that some
large organizations are involved in.Not all organizations have this requirement,
and it would be more appropriate for such organizations to have a
flatter structure.Companies with a high requirement for specialist professional
staff often have several layers of management (thus increasing its
height), and, accordingly, civil engineering consultancies, accountancy
firms, chemical and specialist engineering companies often have this
feature.
Width of structures
The ‘width’ of organizational structures refers to the extent to which the
organization is centralized or decentralized.A decentralized organizational
structure is one in which the centre elects to devolve some degree of
decision-making power to other parts of the organization (see the EPRG
[ethnocentric, polycentric, regiocentric, geocentric] framework in Chapter
2).A centralized organization is one in which little or no power is devolved
from the centre.In practice, a continuum exists between the two extremes,
along which the varying extents of decentralization can be visualized (see
Figure 13.1). Transnational business tend toward the right-hand side of the
continuum.
As with the height of structures, there is a trade-off between the costs and
benefits of width.The advantages of centralization are mainly concerned
with the ability of the centre to maintain tighter direct control over the
activities of the organization.This is usually more appropriate when the
organization is smaller and engages in few product or market segments.
Some degree of decentralization is advantageous when the organization
operates in a number of markets and localized specialized knowledge is
an important determinant of overall success.
ORGANIZATIONAL STRUCTURE
[ 363 ]
Increasing power exerted by the centre Fully decentralized
Power is entirely
devolved to the divisions
Increasing devolution of power to the divisions
Fully centralized
All decisions are made
by the centre
_
_
Figure 13.1 The centralization–decentralization continuum
Hierarchical configuration of structures
It would be wrong to assume that all organizations observe a strict form of
structural hierarchy.Strict hierarchy is not always an appropriate form of
organization, especially when it cannot be automatically assumed that
seniority guarantees superior management skill.
In some contexts, formal hierarchy is entirely appropriate in implementing
strategy.In others, however, allowing employees to act with some
degree of independence can in fact enable the organization to be more
effective in its various spheres of activity.The use of matrix structures, for
example, can result in the organization being able to carry out many more
tasks than a formal hierarchical structure.Many companies go ‘halfway’ in
this regard by seconding employees into special task forces or crossfunctional
teams which are not part of the hierarchical structure and
which act semi-independently in pursuit of its brief.
Determinants of organizational structure
Mintzberg’s determinants
According to Mintzberg (1979; Mintzberg et al., 1998) there are two basic
approaches to the formation of organizational structure, the contingency
approach and the configuration approach.
According to the contingency approach, the structure of an organization
will depend on factors like the nature of its business and its strategy, its size,
the geographical span of its activities, its age and history and the nature of
its environment.Mintzberg argued that, rather than adopting a contingency
approach, it is sometimes better to base structure on a configuration
approach.Factors like spans of control, the need for formalization, centralization
or decentralization, and planning systems should be logically
configured into internally consistent groupings.
Peters and Waterman (1982) argued that ‘excellent’ organizational
performance depends on strategy, systems, culture (shared values), skills,
leadership, staff and structure (drawing on what has become known as
the McKinsey 7S framework).As these organizational features are interdependent,
each was thought to play an important part in determining
the others, so that structure will be affected by strategy, systems, culture,
etc.Equally, structure will help to shape strategy, culture and systems.It is
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therefore evident that there are many complex factors shaping the structure
of organizations.
The contingency approach
Contingency theory (as it relates to organizational structure) suggests that
the most important determinants of organizational structure will include a
number of factors.The key point with contingency theory is that the
structure adopted will depend.This is in contrast to the configuration
approach which seeks to proactively determine.
The structure that an organization adopts (which may be a domestic or
internationalized business) will depend on several determining factors:
. the nature of the business;
. the environment of the organization;
. the global strategy of the business;
. the age and history of the organization;
. the size of business and limitations of span of control;
. the level of technology in the organization;
. the geographical span of activities;
. the culture of the organization;
. leadership and leadership style.
We will briefly consider each of these determining factors in turn.
The nature of the business
Businesses whose value-adding activities are largely repetitive, and which
may be centred on a production line, are likely to adopt hierarchical
structures with centralized decision making.Hierarchical structures are
better suited to standardization of procedures.Organizations whose
activities are diverse, creative or innovative are more likely to be based
on flatter structures that encourage horizontal communication and devolve
decision-making powers.
The environment of the organization
The more dynamic, turbulent and complex the environment the more
adaptable the organization will usually need to be.In these circumstances,
decision making is likely to be decentralized so as to increase responsiveness.
On the other hand, Mintzberg (1979) argued that organizations will
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tend to centralize decision making under conditions of extreme environmental
hostility.In the international environment, a market that is globally
homogeneous will permit greater centralization of authority while diversity
of market conditions will increase the need for local responsiveness and
will require decentralized decision making.
The global strategy of the business
When a business has a globally standardized strategy its structure will tend
to concentrate power at the centre as this facilitates global co-ordination
and integration of activities.A strategy that is centred on local responsiveness
will require devolution of power to local managers.A transnational
strategy, combining global co-ordination with local responsiveness, will
require a complex structure allowing a degree of global control to be
combined with the ability to respond locally.Developmen ts in information
and communications technology have made possible new organizational
structures designed to achieve these dual, but somewhat conflicting, objectives
(see Chapter 10).
The age and history of the organization
Mintzberg (1979) found that older organizations and businesses in mature
industries tended to have more formalized structures.Few structures are
designed ‘from scratch’ and, consequently, most structures evolve alongside
the business itself.Accordingly, a small, new organization will have
little need for a formal or complex structure, but, as an organization grows,
the need for formalization and the observance of hierarchy increases.
The size of business and limitations of span of control
Larger organizations have more formalized and complex structures with
greater specialization of tasks and clearly defined methods of communication.
Tasks will be clustered into related groupings and the relationships
between these groupings will be well established.The size of any cluster of
activities will be dictated by the limitations of a manager’s effective span of
control (i.e., the number of subordinates he or she can directly control).
Activities are often typically grouped by functional area, so that marketing
and sales-related activities will be grouped together, and activities like
recruitment, training and payroll are often grouped under the banner of
human resources management.
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The level of technology in the organization
Information and communications technology (ICT) has widened the potential
span of control of an individual manager, making possible flatter organizational
structures.Similarly, ICT makes it possible to centrally co-ordinate
activities while simultaneously allowing decentralization of decision
making, assisting local responsiveness.Before the advent of ICT, most
international businesses operated on a multinational basis – allowing
considerable autonomy to national subsidiaries because it was almost
impossible to co-ordinate activities across boundaries with such constraints
on effective communication.
The geographical span of activities
The greater the geographical span of an organization’s activities the greater
the need for formalization and complexity of structure.Again, ICT has
increased the ability of organizations to increase the geographical span of
their activities.Developments in telecommunications, like satellite and
cable technology, have been critical in allowing businesses to integrate
and manage their activities on a worldwide basis.
The culture of the organization
The values, attitudes and beliefs of the members of the organization will
play an important part in moulding organizational structure.Thus a creative
organization like a software house or an advertising agency will often have
a flexible structure (less observance of hierarchy), whereas a productionbased
manufacturing company is likely to have much more precisely
defined and formalized groupings of activities with a much firmer observance
of hierarchy.Organizational culture also often has its origins in the
national culture of the country of origin of the business.The organizational
culture of many Japanese businesses, for example, is often strongly influenced
by values, attitudes and beliefs like loyalty and obedience which are
prominent features of traditional Japanese society.
Leadership and leadership style
Larger organizations with strong leadership will tend to adopt structures
that concentrate power at the centre of the organization.Smaller organizations
have structures that spread from the leader at the centre.There will
also be a close relationship between leadership style and organizational
culture.
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The configuration approach to organizational design
Although the factors discussed in the previous section contribute to understanding
of how organization structures evolve, Mintzberg (1979; Mintzberg
et al., 1998) proposed a ‘configuration approach’ to organizational design.
The configuration of an organization (according to Mintzberg) must take
account of the following design parameters:
1. job specialization – to logically divide up the tasks of the organization;
2. behaviour formalization – standardization of work processes;
3. training – instructional programmes to provide employees with the
skills and knowledge to do their jobs;
4. indoctrination – to inculcate organizational norms in workers;
5. unit grouping – according to (i) business function (e.g., marketing,
finance, production, etc.) and (ii) market served (these may conflict
with each other as grouping by business function centres on the efficiency
of the processes of the organization, while grouping by market
increases organizational flexibility but encourages duplication, in turn
reducing efficiency);
6. unit size – the number of positions contained in a single unit of the
business;
7. planning and control systems – used to plan and control the activities
of the organization;
8. liaison and integrating devices – devices like task forces and committees
can integrate the units of the business (the logical conclusion of
such devices is a matrix structure);
9. the need for centralization or decentralization – the extent to which it
is necessary or desirable to diffuse decision-making power.
In addition, it is important to consider both the horizontal and vertical
communication requirements and systems within the organization.In an
international business unit grouping, particular importance is attached to
planning and control systems, integrating devices, the need for centralization
or decentralization, and indoctrination.The way in which units are
grouped is one of the most significant decisions to be made in the design
of international organizations.It is not simply a decision between grouping
by functional area or by market, but rather how to integrate the two.The
structures of global organizations must also take account of the need to coordinate
and integrate geographically dispersed activities, at the same time
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as making possible local responsiveness where and when it is required.
The matrix and the transnational (Bartlett and Ghoshal, 1987) are alternative
forms of organization which attempt to resolve these conflicting
requirements.
There is no ideal organizational structure.There are several commonly
found types of structure which incorporate the parameters above and
which reflect the range of internal and external factors that influence the
evolution of organizational structure.
Types of international organizational structure
International businesses can theoretically choose from a range of alternative
organizational structures, as summarized in Table 13.1. Each structure
has its own inherent strengths and weaknesses.
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Table 13.1 Types of transnational organizational structure
International structures Characteristics
Export department Responsibility for foreign sales transferred from domestic product
divisions to a separate export department reporting directly to the
group CEO.
Mother–daughter structure Parent company acts as holding company for largely autonomous
foreign subsidiaries.Subsidiar y management report directly to CEO, but
on an informal and personal basis.Subsid iaries are granted substantial
operating freedom subject to satisfactory performance evaluation.
International divisional Responsibility for all foreign operations transferred to a separate
structure international division based at the corporate centre.Foreign
subsidiaries report directly to the international centre.
Global structures Characteristics
Functional Responsibility for foreign operations allocated to functional line
managers at the centre.Foreign subsidiaries report directly to
functional executives at the centre (production, marketing, human
resources, finance, etc.).
Product Responsibility for foreign operations allocated to product divisions
based at the centre.Foreign subsidiaries report directly to product
divisions.
Geographic/Regional Responsibility for foreign operations allocated to area executives.
Foreign subsidiaries report directly to geographic/regional division
based at the centre or abroad.
Matrix Responsibility for foreign operations divided between product and
geographic divisions.Foreign subsidiaries report directly to both
product and geographic centres.
International structures
Export departments
The establishment of a separate export department to control and coordinate
foreign sales is most frequently found in companies in the early
stages of internationalization where foreign production is minimal and
foreign markets are supplied mainly through domestic production and
exports.The creation of a separate export department allows a greater
degree of control and co-ordination of the export drive by concentrating
knowledge of foreign markets in a single department and by ensuring that
foreign sales are included in the planning process.
Export departments, however, suffer from two main weaknesses.First,
conflicts of interest may arise between domestically oriented product
divisions and the export department regarding the relative importance of
foreign as opposed to domestic sales.The export department will be
dependent on domestic product divisions for both products and technology.
Since the latter are mainly concerned with domestic sales, less
attention may be devoted to enhancing foreign markets.Second, export
departments are ill-suited to further foreign market expansion through
licensing, subcontracting and FDI (foreign direct investment) because of
the lack of expertise in managing foreign operations as opposed to foreign
sales.Largely because of the second of these disadvantages, most export
departments are relatively short-lived.Continued foreign market expansion
through FDI has led most international businesses to replace their export
departments with international divisions, or, in the case of some European
businesses, with mother–daughter structures.
Mother–daughter structures
This type of structure is particularly suited to two types of international
enterprise: first, new foreign investors, where foreign operations are not
of crucial importance to the parent company; second, businesses with
extensive FDIs, but limited central resources, as with some European businesses.
The main advantage of the mother–daughter structure is that it
encourages subsidiary innovation and motivation by substituting subsidiary
autonomy for centralized control.Its main disadvantage, on the other hand,
is the lack of global planning and co-ordination of activity.
International divisional structures
The majority of US businesses (and some European and Japanese
businesses) have used this type of structure at some stage in their inter-
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nationalization.The strengths and weaknesses of the international division
are similar to those of export departments.Thus, the international division
provides a focal point for the growing foreign involvement of the company
(through FDI) by concentrating international knowledge and expertise in a
single division.This allows greater control and co-ordination of foreign
operations as well as ensuring that the interests of foreign subsidiaries
are taken into account in the corporate planning process.On the negative
side, however, the same conflict of interest evident between domestic
product divisions and export departments will also exist in the relationship
between the former and the international division.International divisions
are also usually short-lived in most international companies.Indeed, the
very success of the international division in stimulating FDI may sow
the seeds of its own destruction.The continued foreign expansion of the
company through FDI will result in the need for closer control and planning
of foreign activities by the parent company.This has led most international
organizations to replace their international divisions with global structures
aimed at providing a greater degree of co-ordination and integration of their
worldwide activities.Such global structures may be organized on functional,
product or geographical lines of responsibilities.
Global structures
Functionally based structures
Global organization along functional lines is rare among US companies,
although it has been used successfully by some European and US
international businesses with extremely narrow product lines (e.g., oil
companies).The global functional organization allows tight control over
specific functions worldwide, which may be of particular importance to
businesses whose competitive strengths lie in superior technology,
marketing or personnel practices.Such advantages, however, are often
outweighed by the disadvantages of this type of structure.First, coordination
of functions is difficult, leading to the potential separation of,
for example, production and marketing.Second, subsidiaries will be
reporting to several different divisions at the corporate centre, resulting
in the duplication of effort and a possible breakdown of communications.
Finally, the structure is unsuitable for multiproduct or geographically
dispersed organizations.As a consequence of such disadvantages, most
international companies have incorporated functional responsibilities
within global divisions based on product or geographical lines.
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Product-based structures
Under the global product organizational structure, product divisions at the
corporate centre are given worldwide responsibilities for their own products
and services, including both functional and geographical responsibilities.
The global product structure is particularly suited for global businesses
with diverse product lines, when products go to a variety of end uses and
when a high degree of technology capability is required.Organization by
product may also permit significant economies of scale to be achieved
through the co-ordination and integration of production in different
countries.It also allows the business to respond quickly to the actions of
competitors.The principal weaknesses of global product divisions relate to
the lack of emphasis placed on international or geographical planning.
Global product divisions may be staffed by executives with particular
product expertise but with limited knowledge of international/geographic
markets.Thus, the emphasis of the division may be on the domestic market
to the detriment of foreign markets.Similarly, the lack of international
knowledge may create difficulties in assessing changes in environmental
and political conditions in overseas markets, leading to lost opportunities
for expansion.Finally, co-ordination and integration of the subsidiary companies
in a particular geographical area is difficult to achieve under global
product divisions.
Geographic/Regionally based structures
The problems associated with the lack of regional co-ordination can be
overcome by adopting global regional/geographic structures.Under this
structure, subsidiary companies (regardless of product line) report directly
to corporate executives responsible for a particular geographical area.Each
area division has both product line and functional responsibilities for all
operations within its area.Such area divisions may be based at the centre.
More commonly, however, separate regional headquarters will be established
in the relevant areas.Many US companies, for example, have
established separate regional headquarters based in Europe.
A survey by Daniels (1986) identified various reasons for the establishment
of such offices, including:
. pooling of resources – the provision of specialist staff support to operating
divisions;
. product rationalization – the management of product integration on a
European basis;
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. size of reporting structures – to reduce the number of subsidiaries reporting
directly to the parent company;
. day-to-day control – to exert greater operating control over subsidiaries
than is possible from a distant parent company;
. management development – the regional headquarters is used to
develop a cadre of highly trained managers with global orientations;
. unification of external relations – the consolidation of public relations
efforts.
The global regional/geographic structure is particularly suited for international
companies with narrow product lines but with geographically
dispersed operations.The structure allows co-ordination and integration
of activities within particular regions, as well as allowing greater responsiveness
to local or regional market conditions.The concentration of
knowledge of particular regions within a separate division may allow
scope for the further development of the organization’s operations in that
area.Many global businesses have established separate regional head
offices for Europe since the development of the single market in 1993.
The weaknesses of the global regional/geographic structure relate to the
lack of integration of product lines and the possible duplication of functional
and product specialists at each regional headquarters.
Matrix structures
In order to preserve the strengths of each of these international structures
and to overcome their disadvantages, many global businesses adopted
global matrix structures that attempted to co-ordinate and integrate worldwide
functional, product and area responsibilities.Under this structure,
responsibility for foreign operations is divided between global product
and regional divisions with subsidiary managers reporting to two bosses
(thus confusing the hierarchy of the organization).Co-ordination and
integration of product and area responsibilities is achieved through
frequent interchanges between the product and regional divisions and
through the CEO.The drawbacks of the global matrix structure are that it
can be difficult to manage because of conflicts of interest between product
and regional groupings.Decision-making procedures are also complex
because decision making is a group process.The advantages and disadvantages
of global matrix structures are examined in more detail in the next
section.
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The development of global and transnational
matrix structures
Stimuli to matrix development
The link between corporate strategy and corporate structure has become
firmly established in the literature since the pioneering work of Chandler
(1962) who showed that as a company’s product/market strategy changed
so too did its organizational structure to support implementation of the new
strategy.The work of Stopford and Wells (1972) established patterns of
development found in the structures of many multinational businesses.
When only a limited range of products are sold abroad and when foreign
sales are only a small proportion of sales, many companies initially manage
their overseas activities through an international division.Organizations
that then broaden the range of products offered abroad tend to establish
a worldwide product division.Those that expand sales abroad without
broadening product range will often do so by establishing an area division
structure.When sales abroad reach a high percentage of total sales and a
broad range of products are offered for sale, then businesses often opt
for a matrix structure.These developments in structure are illustrated in
Figure 13.2, which shows Stopford and Wells’ ‘international structural
stages model’.
According to the Stopford and Wells model, development through path 1
or path 2 will culminate in the development of a global matrix structure.
The extent to which global matrix structures provide a solution to the
complex organizational and control problems of transnationals has been
the subject of the extensive debate that is explored below.
Global matrix structures
At some point in the internationalization process, the introduction of global
structures becomes necessary to achieve co-ordination and integration of
geographically dispersed activities.One possible approach to this situation
is the global matrix structure, which is one means of achieving global coordination
and local responsiveness.
Benefits of a matrix structure
One of the key benefits of a matrix structure is that co-ordination and
integration of activity on a global scale can be achieved through global
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product divisions.Local responsiveness can be achieved through global
regional or geographic structures.Thus, global matrix structures that
combine both product and geographic divisions can achieve both global
co-ordination and national responsiveness simultaneously.The main
advantage of matrix compared with strict hierarchical structures is that
they are able to accommodate managers with worldwide (product) responsibilities
for particular businesses and country managers responsible for
specific area markets.
Disadvantages of matrix structures
Bartlett and Ghoshal (1995) observed that many companies that had
previously adopted matrix structures like Dow Chemical and Citibank
have now abandoned them.This is because of the problems inherent in
managing through such structures that include:
. overlapping responsibilities;
. reporting duplication with managers reporting to two or more bosses,
often with conflicting objectives;
. survival of the fittest with one decision-making centre emerging as
dominant;
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Diversity of foreign product range
Foreign sales as a percentage of total
l
International
division
Worldwide
product division
Geographical
area division
Global matrix
structure
Path 1
Path 2
Figure 13.2 International structural stages model
Source: adapted from Stopford and Wells (1972)
. excessive time spent on reaching compromise decisions;
. duplication of information, communications and activities;
. increased administrative costs.
The development of the transnational
organizational structure
National influences on structural form
The weakness of traditional organizational structure in an international and
global context gave rise to Bartlett and Ghoshal’s view that ‘formal structure
is a powerful but blunt instrument of strategic change’ (1995).They argued
that to ‘develop multidimensional and flexible strategic capabilities, a
company must go beyond structure and expand its fundamental organizational
capabilities.’ Bartlett and Ghoshal (1987, 1988, 1989, 1992, 1995)
developed the concepts of the transnational business and transnational
management, which are explained in this section.
European businesses
A company’s organizational structure is shaped by its tasks, its environment
and its administrative heritage or the history that, in turn, has shaped its
culture (Bartlett and Ghoshal, 1995).European businesses, which expanded
abroad in the 1920s and 1930s in a time of protectionism and
limited transport and communications technology, developed as decentralized
federations.Within these federations, headquarters provided capital
investment, while national subsidiaries were integrated business units with
considerable management autonomy.
American businesses
American businesses which experienced their greatest period of growth in
the 1950s and 1960s, based on technological superiority, developed as
co-ordinated federations where knowledge was passed to subsidiaries,
structures were rigid and centralized planning prevailed.Subsidiaries
were allowed limited freedom to modify products to reflect local market
differences.
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Japanese businesses
Japanese companies, internationalizing in the 1970s, grew as centralized
hubs because their strategies depended on cost advantages requiring tight
centralized control of activities.
Limitations of the three forms
Each of these solutions to the problems of international structure has
disadvantages.The decentralized federation achieved local responsiveness
but at the cost of duplication of activities and a failure to gain the
efficiencies possible with international co-ordination of activities.At the
other extreme, centralized hubs realized the advantages of co-ordination
but at the expense of local responsiveness.The failure of the matrix to
reconcile these problems meant that an alternative solution had to be
sought.
‘Anatomy’ and ‘physiology’
As global and transnational strategies became more sophisticated, the
problem became one of organizational incapacity to implement such
sophisticated strategies.In other words, strategic thinking has far outdistanced
organizational capabilities.The main problem facing global
companies is not one of designing appropriate global strategies.Rather, it
is one of organizational incapability to implement complex strategies.
Matrix structures provide no solution since they can sometimes result in
excessive conflict and confusion.
The key organizational task, therefore, is not to design ever more elegant
and complex structures, but to capture individual capabilities and motivate
the entire organization to respond co-operatively to a complicated and
dynamic environment.To achieve this, Bartlett and Ghoshal (1995) suggested
a reversal in the traditional organizational sequence that emphasizes
organizational anatomy (formal structure), physiology (communications
and decision processes) and psychology (corporate beliefs and norms
that shape managers’ perceptions and actions).
Rather than searching for the ‘ideal’ organizational anatomy (structure),
the first task is to alter organizational psychology; then to enrich communications
and decision processes through improvements in organizational
physiology.Only then should these changes be consolidated and
confirmed by realigning organizational anatomy through changing the
formal structure.The companies that respond most successfully to the
complexities of the global business environment are those that emphasize
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the need to change organizational psychology in the broad corporate
beliefs and norms that shape managers’ perceptions and actions.These
changes can be reinforced by changing organizational physiology by enriching
and clarifying communications and decision processes.Only then
should these be consolidated by realigning organizational anatomy (i.e., the
formal structure).
Features of transnational structures
Bartlett and Ghoshal (1995) made the case that industries have changed
from being international, multinational or global to being ‘transnational’.In
such an environment, organizations themselves must become transnational.
According to Bartlett and Ghoshal (1995), successful international
corporations must ‘optimize efficiency, responsiveness and learning simultaneously
in their worldwide operations.’ The difficulty is to achieve ‘a three
way balance of organizational perspectives and capabilities among
product, function and (geographical) area’ (Bartlett and Ghoshal, 1987).
The issue is not whether to be globally integrated or locally responsive
but how to be both simultaneously.Authoritative global corporate management
is required to integrate activities and ensure global efficiencies are
obtained.Corporate managers must determine the overarching strategy of
the organization, stress the interdependence of its functional and geographical
parts, and co-ordinate its activities.The development and transfer of
core competences requires capable functional management.Functional
managers must facilitate learning and innovation within their domain of
the business.Strong geographical management is required to ensure local
responsiveness to national and regional markets.Local managers, in turn,
must develop locally determined competences that must then contribute to
company-wide competences.Only a multidimensional organization can
provide these three strands of management simultaneously.Accordingly,
the transnational is multidimensional by ensuring that:
. tasks are systematically differentiated by treating different businesses,
functions and areas differently and by allowing them to be organized
differently;
. relationships between the different parts of the business are based on
interdependence rather than independence;
. co-ordination and co-option of differentiated and interdependent
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organizational units are achieved through shared vision and integrative
mechanisms.
The transnational model
Bartlett and Ghoshal (1995) gave several examples of organizations that
were, at that time, becoming transnational:
. Unilever adopted a differentiated organization of tasks.In Europe, activities
were closely integrated (recognizing the similarities between
national markets), while in Latin America there was greater local autonomy
to cater for greater market diversity.In other words, Unilever moved
from being an organization that is symmetrical to one that is differentiated
in terms of product, function and geography.
. NEC developed co-ordination of its activities through a clearly communicated
global vision and strategy rather than through tight management
controls.
In both these cases, creating a transnational is more concerned with
creating an organizational culture based on a global vision, emphasizing
differentiation and co-ordination, rather than a specific structure that
incorporates tight controls.
Bartlett and Ghoshal (1995) developed the transnational model further by
suggesting that transnationals possess integrated networks with three major
characteristics:
1. multidimensional perspectives;
2. distributed, interdependent capabilities;
3. flexible integrative processes.
We will briefly consider each of these characteristics.
Multidimensional perspectives
The cultural diversity and increasing volatility of the international business
environment have increased the need for organizations to sense and
respond to environmental changes.This depends on developing strong
global, subsidiary and functional management without domination by any
one of these groups.Strong subsidiary management is required to identify
the changing needs of local customers.Strong global management is
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required to respond to the global strategies of competitors and to
co-ordinate an appropriate response.Strong functional management is
required to provide focus for areas of organizational knowledge and to
ensure its transfer among units of the organization.
Distributed, interdependent capabilities
In devising its response to changes in the environment, a transnational
seeks to avoid the problems of other international configurations.The
global centralized hub makes it difficult to respond to diverse local
demands while the decentralized federation results in duplication, inefficiency
and barriers to organizational learning.Within a transnational it is
not seen as necessary to centralize activities that require global scale or
specialized knowledge.Global scale can be achieved by making a local
plant into a global production centre serving all the company’s worldwide
markets.A particular research and development centre can become the
centre of excellence for the whole business.A local marketing group
with proven expertise may be given the role of developing a global marketing
strategy for a particular product.In this way the company becomes an
integrated network (Figure 13.3(d)) of distributed but interdependent
capabilities that benefit the whole organization.
Flexible integrative processes
Once the network of distributed and integrated capabilities has been
created alongside the management groups that represent the multiple
perspectives of the organization’s environment, then flexible integrative
management processes are required that integrate these diverse perspectives
and capabilities.These processes must be flexible to allow differentiated
operating relationships, adaptable operating relationships and
functional decision-making roles which can change over time in response
to changing circumstances.This flexible integration is achieved by three
separate but interdependent management processes:
. centralization – which is sensitive to the groups within the organization
but allows senior management to intervene in certain decisions to ensure
co-ordination;
. formalization – which allows different parts of the organization to have
influence on key decisions;
. socialization – which is a set of cultural norms and procedures which
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ORGANIZATIONAL STRUCTURE
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(a) Decentralized federation
Mainly financial flows – capital out
and dividends back
Loose, simple controls; strategic
decisions decentralized
(b) Co-ordinated federation
Mainly knowledge flows – technology,
products, processes, systems
Formal system controls – planning,
budgeting, replicating parent company
administrative system
Figure 13.3 Organizational configuration models
Reproduced from Bartlett and Ghoshal (1995)
(c) Centralized hub
Mainly flows of goods
Tight, simple controls – key strategic
decisions made centrally
(d) Integrated network model
Distributed, specialized resources and
capabilities
Large flows of components, products,
resources, people and information
among interdependent units
Complex process of co-ordination
and co-operation in an environment
of shared decision making
provides the framework for delegated decision making in the context of
the overall organization.
There is no prescribed structure for a transnational.Rather, there are a set of
principles which guide the managers of global businesses in the design and
configuration of their organizations.These principles assist in achieving
simultaneous global co-ordination and local responsiveness, alongside
organizational learning and competence building.
Decision making and control in
international business
Decentralization and control
The issue of decision making within the transnational is closely related to
the discussion of organizational structures presented above.In traditional
multinationals, for example, decision making is largely decentralized at
the level of the foreign subsidiary.In global structures, on the other
hand, greater centralization of decision making may be expected, although
this will vary between different businesses and across functional areas.
In a transnational corporation the issue is how to combine centralization
and decentralization so as to achieve global co-ordination and local
responsiveness.
Too much centralization may prevent the utilization of local initiative and
have an adverse effect on the motivation of local management.Overcentralized
decision making may also result in a lack of adaptation to local
market needs and may create political problems with host country governments.
Decentralizing certain decision making to the local subsidiary may
overcome many of these difficulties.By granting subsidiary autonomy the
transnational may encourage the use of local initiative and the flexibility of
the subsidiary to changes in local market conditions.Pressures on the
corporate centre are also reduced as are the potential tensions with host
country governments.The identification of a ‘local’ image may also be
important in a number of industries.National units can develop new
products and new techniques locally which can then be used throughout
the transnational.
Centralization of some decision making may be necessary to achieve the
benefits of global co-ordination through global economies and efficiencies.
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In the transnational model this centralized decision making would include
representation of different local, functional and business areas rather than
only central management.Typically, the centre of any organization is concerned
with establishing its overall vision, mission and its broad strategy.At
the same time, within a transnational the centre plays an important role in
co-ordinating activities, improving efficiency through benchmarking and
setting standards, promoting innovation and encouraging a learning and
interdependent culture.
Empirical studies
Several studies have investigated the centralization/decentralization of
decision making within transnationals (Brooke and Remmers, 1976;
Goehle, 1980; Hedlund, 1981; Young et al., 1985). The general conclusion
emerging from these studies is that the locus of decision making varies
significantly across functional areas and between different transnationals.
A survey of 154 foreign-owned subsidiaries operating in the UK highlighted
the variation in decision-making procedures across functional areas,
with financial decisions being the most centralized and personnel decisions
the most decentralized (Young et al., 1985). Production and marketing
decisions generally fell within these two extremes, with strategic
production/marketing decisions being more centralized than operational
decisions.Research and development decisions were also closely
controlled by the parent company in a large proportion of the sample
companies.Such variations in the locus of decision making across functional
areas can be explained in terms of the relative importance of each
decision to the parent company.Decisions that draw on or directly affect
central resources (e.g., most financial decisions), decisions that constitute
long-term obligations for the transnational (e.g., the introduction of new
products and entry into new markets) and decisions that attempt to standardize
and establish a common framework of organizational routines and
procedures (e.g., the setting of financial targets and rates of return on
investment) are the most likely to be centralized.
In addition to establishing appropriate organizational structures and
decision-making procedures, transnationals must also establish evaluation
and control procedures for assessing subsidiary performance and ensuring
the conformity of the subsidiary to corporate objectives.Internal benchmarking
of performance is an important feature of a transnational organization.
It is one means by which best practice can be spread throughout
ORGANIZATIONAL STRUCTURE
[ 383 ]
the organization from one geographical area to another and from one
functional area to another.
Evaluating performance
Performance evaluation within the transnational serves a number of
functions (Hedlund and Zander, 1985):
. Ensuring the co-ordination and integration of strategy.Global and local
strategy are integrated.
. Assisting in the internal benchmarking of performance.This acts as a
mechanism to spread best practice throughout the organization.
. Ensuring a realistic level of profitability.Performance of parts of the
organization may be measured against some target variable (e.g.,
actual profit, return on investment, etc.).
. Early identification of problems.Failure to meet targets provides an early
warning system in order that corrective action may be taken.
. Resource allocation.Limited resources channelled into areas of highest
return.
. Information.The performance evaluation system provides essential
information on the operations of the different parts of the business.
. Long-run planning.Information acts as an input into strategic planning.
. Motivation.Performance evaluation used to motivate management in
different parts of the organization.
. Communications.Performance evaluation stimulates discussion between
different parts of the organization regarding performance, problems,
long-run trends, etc.
While each of these functions may be important, surveys by the BIC (1982)
and Hedlund and Zander (1985), covering both US and European transnationals,
showed that the three most important functions performed by the
evaluation procedure are:
1. ensuring subsidiary profitability;
2. identifying potential problems; and
3. facilitating resource allocation.
Hedlund and Zander (1985) also suggested that the importance of these
three objectives varies with the nature of the international involvement of
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the company.Large, geographically dispersed transnationals emphasized
the problem identification and resource allocation roles, while early internationalizers
emphasize profitability as an objective.
In terms of the actual performance measures used, the transnational has
the same alternatives available as a domestic company, including return on
investment, income/profit contribution, market share, cash flow measures,
etc.The use of these measures, however, is usually more difficult in a
transnational due to exchange rate variations, differences in accounting
procedures, variations in national inflation rates and tax rates, transfer
pricing and restriction on remittances (see Chapter 12).
Global and transnational strategies, organization
and control
Several references have already been made in this chapter to the link
between corporate strategy and the internal management and control of
the transnational.This final section examines this relationship in more detail
by linking the discussion in this chapter to Chapter 6 on global strategy.
Many factors influence the internal management and control systems
adopted by transnationals.The most important are:
. the global or transnational strategy of the organization;
. the strategic predispositions and value systems of the transnational as
identified in the EPRG profile (see Chapter 2);
. the geographical extent of its operations;
. the nature of its international business environment.
The influence of strategy on structure and control systems
According to Porter’s (1986, 1990) classification of international strategies,
the organizational and control challenge facing the transnational is the
need to balance the conflicting forces of country responsiveness and
global direction.The relative importance of these and the impact on
organization and control will vary with the type of international strategy.
Thus, country-centred strategies (geographically dispersed operations with
minimum co-ordination) imply an organizational structure that is countryresponsive,
such as a geographic divisional structure, with considerable
decision-making autonomy being devolved to the local subsidiaries.
ORGANIZATIONAL STRUCTURE
[ 385 ]
Performance evaluation within international businesses with countrycentred
strategies will normally be confined to ensuring subsidiary
profitability.
In geographically dispersed but highly co-ordinated businesses, on the
other hand, the need for global planning and co-ordination will be reflected
in the organizational structure that will be based on factors like global
product, geographic or matrix systems.This, in turn, will depend on the
company’s product range and its geographical spread of activities.Similarly,
authority over a range of both strategic and operational decisions will be
transferred to a higher level in the organization which has a global perspective.
Decision making, therefore, will be highly centralized, with a
hierarchical chain of command between subsidiary and parent.Finally,
performance evaluation within such organizations will serve several functions
relating to resource allocation, problem spotting and planning, in
addition to the short-run measurement of subsidiary profitability.
In the Yip (1992) model of ‘total global strategy’ and the model of
transnational strategy presented in this book, co-ordination and responsiveness
are both viewed as essential to the achievement of competitive
advantage.In this context it is necessary to build an organization that is
‘transnational’.This will imply, as discussed in the previous sections of this
chapter:
. strong global, subsidiary and functional management and multidimensional
perspectives;
. distributed, interdependent capabilities; and
. flexible integrative processes.
Discussion and review questions
1. Discuss the contributions made by contingency theory and the configuration
approach to our understanding of organizational structures.
2. Discuss the major organizational and control problems specific to
international businesses.
3. Explain the international structural stages model (Stopford and Wells,
1972).Is the matrix structure the inevitable outcome of the process?
4. Why are export departments and international divisions unlikely to be
structures permanently adopted by an international business?
5. What are the problems inherent in simply adopting a global functional
or product division structure?
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6. To what extent does a geographical structure solve the problems
inherent in a global functional or product division structure?
7. Explain the relative advantages and disadvantages of the decentralized
federation, the co-ordinated federation, the centralized hub and the
integrated network.
8. Explain what Bartlett and Ghoshal meant by the ‘transnational solution’.
What are the main characteristics of a transnational? What are its advantages
and disadvantages compared with a global matrix structure?
Give examples in support of your answer.
9. Explain the functions of performance evaluation systems in transnationals.
10. What is the relationship between global and transnational strategy and
organizational structure?
References and further reading
Bartlett, C.A. and Ghoshal, S. (1988) ‘Organizing for a worldwide effectiveness. The transnational
solution’. California Management Review, 30, 54–74.
Bartlett, C.A. and Ghoshal, S. (1989) Managing Across Borders: The Transnational Solution.Boston:
Harvard Business School Press.
Bartlett, C.A. and Ghoshal, S. (1987) ‘Managing across borders: New organizational responses’. Sloan
Management Review, Fall, 45–53.
Bartlett, C.A. (1981) ‘Multinational structural change: Evolution versus reorganisation’. In: L. Otterbeck
(ed.), The Management of Headquarters – Subsidiary Relationships in Multinational Corporations
(Chapter 6).Aldersho t, UK: Gower Press.
Bartlett, C.A. and Ghoshal, S. (1990) ‘Matrix management: Not a structure, a frame of mind’. Harvard
Business Review, July/August, No.4, 138–145.
Bartlett, C.A. and Ghoshal, S. (1992) ‘What is a global manager?’. Harvard Business Review, 70(5),
124–132.
Bartlett, C.A. and Ghoshal, S. (1995) Transnational Management: Text, Cases and Readings in Crossborder
Management.Homewo od, IL: Richard D.Irwin.
BIC (1981) New Directions in Multinational Corporation Organisation.Clichy, France: Business
International Corporation.
Brooke, M.Z. and Remmers, H.L. (1976) The Strategy of Multinational Enterprise.London: Pitman.
Chandler, A.(1962) Strategy and Structure.Cambridge , MA: MIT Press.
Daniels, J.D. (1986) ‘Approaches to European regional management by large US multinational firms’.
Management International Review, 26(2).
Davidow, W.and Malone, M.(1992) The Virtual Corporation.London: Harper Business.
Franks, L.G. (1976) The European Multinationals.New York: Harper & Row.
Ghertman, M.(1984) Decision-making in Multinational Enterprises: Concepts and Research
Approaches (ILO Working Paper No.31).Geneva: International Labour Organization.
Goehle, D.G. (1980) Decision-making in Multinational Corporations.Ann Arbor, MI: UMI Research
Press.
ORGANIZATIONAL STRUCTURE
[ 387 ]
Hedlund, G.(1981) ‘Autonomy of subsidiaries and formalisation of headquarters – Subsidiary relationships
in Swedish MNCs’.In: L.Otterbeck (ed.), The Management of Headquarters – Subsidiary
Relationships in Multinational Corporations.Aldershot, UK: Gower Press.
Hedlund, G.(1984) ‘Organisation in-between: The evolution of the mother–daughter structure of
managing foreign subsidiaries in Swedish multinational corporations’. Journal of International
Business Studies, Fall.
Hedlund, G.and Aman, P. (1983) Managing Relationships with Foreign Subsidiaries – Organisation
and Control in Swedish MNCs.Stockholm : Sveriges Mekunforbund.
Hedlund, G.and Zander, U.(1985) Formulation of Goals and Follow-up of Performance for Foreign
Subsidiaries in Swedish MNCs (Institute of International Business RP 85/4).Stockholm: School of
Economics.
Hulbert, J.M. and Brandt, W.K. (1980) Managing the Multinational Subsidiary.New York: Holt,
Rinehart & Winston.
Jarillo, J.C. (1993) Strategic Networks: Creating the Borderless Organisation.Oxford, UK: Butterworth-
Heinemann.
Jennings, D.and Seaman, S.(1994) ‘High and low levels of organisational adaptation: An empirical
analysis of strategy, structure and performance’. Strategic Management Journal, 15(6), 459–475.
Johnson, G.and Scholes, K.(1999) Exploring Corporate Strategy.Englewoo d Cliffs, NJ: Prentice Hall.
Journal of International Business Studies (1983) Special issue on management and culture in the
transnational, Fall.
Miller, D.(1987) ‘The genesis of configuration’. Academy of Management Review, 12(4), 686–701.
Miller, D.(1990) ‘Organisational configurations: Cohesion, change and prediction’. Human Relations,
43(8), 771–789.
Mintzberg, H.(1979) The Structuring of Organizations.Englewoo d Cliffs, NJ: Prentice Hall.
Mintzberg, H.(1983) Power in and around Organizations.Englewoo d Cliffs, NJ: Prentice Hall.
Mintzberg, H.(1984) Mintzberg on Management: Inside Our Strange World of Organizations.New
York: Free Press.
Mintzberg, H., Quinn, J.B. and Ghoshal, S. (1998) The Strategy Process (revised European edn).
Englewood Cliffs, NJ: Prentice Hall.
Mullins, L.(1996) Management and Organisational Behaviour.London: Pitman.
Naylor, T.H. (1985) ‘The international strategy matrix’. Columbia Journal of World Business, 20(2),
Summer.
Otterbeck, L.(ed. ) (1981) The Management of Headquarters – Subsidiary Relationships in Multinational
Corporations (Chapter 6).Aldersho t, UK: Gower Press.
Perlmutter, H.V. (1969) ‘The tortuous evolution of the multinational corporation’. Columbia Journal of
World Business, January/February.
Peters, T.and Waterman, R. (1982) In Search of Excellence.New York: Harper & Row.
Pitts, R.A. and Daniels, J.D. (1984) ‘Aftermath of the matrix mania’. Columbia Journal of World
Business, 19(2), Summer.
Porter, M.E. (1986) ‘Changing patterns of international competition’. California Management Review,
28(2), Winter.
Porter, M.E. (1990) The Competitive Advantage of Nations.New York: Free Press.
Prahalad, C.K. and Doz, Y.L. (1986) The Multinational Mission: Balancing Local Demands and
Global Vision.New York: Free Press.
Rugman, A.M., Lecraw, D.J. and Booth, L.D. (1985) International Business: Firm and Environment.
London: McGraw-Hill.
Stopford, J.M. and Wells, L.T. (1972) Strategy and Structure of Multinational Enterprise.New York:
Basic Books.
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Yip, G.S. (1992) Total Global Strategy – Managing for Worldwide Competitive Advantage.Englewoo d
Cliffs, NJ: Prentice Hall.
Young, S., Hood, N. and Hamill, J. (1985) Decision-making in Foreign-owned Multinational Subsidiaries
in the United Kingdom (ILO Working Paper No.35).Geneva: International Labour
Organization.
ORGANIZATIONAL STRUCTURE
[ 389 ]
MANAGING GLOBAL
MERGERS,
ACQUISITIONS AND
ALLIANCES 14
Learning objectives
After studying this chapter students should be able to:
. define and distinguish between the portfolio and core competence
perspectives on integrations and alliances;
. describe the main types and ‘directions’ of integrations and
alliances;
. define and distinguish between a merger, acquisition, strategic
alliance and joint venture;
. explain the motivations behind and potential problems with
mergers and acquisitions;
. describe the factors behind successful integrations;
. explain the motivations for forming strategic alliances and describe
the various types of alliance;
. explain the concept of the ‘focal’ business in the management of
successful international alliances.
Introduction
Sirower (1997) made the point that ‘The 1990s will go down in history as
the time of the biggest merger and acquisition wave of the century.’ At the
same time as this boom in mergers and acquisitions, there was a similar
increase in the numbers of strategic alliances and collaborative business
networks involving international organizations.In this chapter we begin by
explaining the motivations that underlie international mergers and acquisitions
and collaborative business networks.We then explore the reasons for
the success and failure of such ventures before considering how global
managers can seek to increase the chances of successful integration or
collaboration.
An overview of integrations and alliances
Perspectives on external growth
De Wit and Meyer (1998) presented an interesting review of the factors
underlying merger and collaborative activity from two opposing perspectives:
the portfolio perspective and the core competence perspective.
The portfolio perspective
The portfolio perspective stresses that the major benefits of integration are
the leveraging of financial resources, entry to new businesses and markets,
and the spreading of risks.Successful management of a diversified business
will accordingly depend on responsiveness.There is, therefore, an emphasis
on devolving responsibility for strategy to each of the strategic business
units that comprise the corporation so as to increase their ability to respond
flexibly to changes in the environment.
The core competence perspective
The core competence perspective is based on the view that mergers,
acquisitions and alliances improve performance by creating synergy
between the businesses involved.This synergy arises from the leveraging
of resources and core competences between the businesses.For example,
the reputation or brand name of a company can produce shared benefits.
The involvement of the German Volkswagen Group in Skoda of the Czech
Republic helped to improve the latter’s reputation.Similarly, the sharing of
Volkswagen’s knowledge, skills and technology improved Skoda’s
productivity, quality and products.De Wit and Meyer (1998) listed the
other potential sources of resource leveraging as increased bargaining
power in relation to customers and suppliers, improved linkages to
distributors, shared marketing, shared finance, etc.
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From a core competence perspective, a successful merger or collaborative
agreement must create greater value through synergy and coordination
than the value lost through reduced responsiveness.In fact, it
is not the case that increased co-ordination will necessarily result in decreased
responsiveness.In the case of horizontal or diversified integration
and alliances, there may well be some resultant loss of responsiveness to
the business.Vertical integration or alliances between a business and its
suppliers and distributors is likely to increase responsiveness due to more
reliable access to inputs and outlets (this being a major factor in many justin-
time alliances between businesses and their suppliers).The advent of
information and communications technology and its impact on organizational
learning (Stonehouse and Pemberton, 1999) has further enhanced
the ability of networks of collaborating or integrated organizations to
sustain responsiveness at the same time as achieving synergy through coordination.
Types of integrations and alliances
A major factor in the boom in the 1990s in integrations and collaborative
ventures was their increasing importance in the global and transnational
strategies of many businesses.Despite the potential benefits of competence
leveraging and synergy, improved co-ordination and responsiveness, crossborder
deals suffer from a very high failure rate (20–50% according to some
empirical studies).It is, therefore, important to consider the possible
reasons for the success and failure of integration and collaboration.
Although there are many similar concerns in the setting up and management
of integrations (mergers and acquisitions) and alliances, there are also
many differences.These arise from the fact that alliances involve collaboration
between two or more organizations who may continue to compete in
one form or another as well as collaborating in global markets.Integration
and collaboration can be split into four distinct categories (Figure 14.1):
Vertical backward or upstream integration or collaboration
Such integrations and alliances take place when a business engages with its
suppliers.The major motivations for vertical backward integration or
upstream collaboration are mainly related to resource leveraging by
improving access to and control of resources and better supply chain
MANAGING GLOBAL MERGERS, ACQUISITIONS AND ALLIANCES
[ 393 ]
linkages.Many motor vehicle manufacturers, for example, are involved in
vertical alliances with suppliers.Collaboration with suppliers improves
access to materials and parts.This, in turn, allows greater control of
quality and delivery.
Vertical forward or downstream integration or collaboration
This form of integration or alliance takes place when a business engages
with its distributors or customers.Collaboration with distributors provides
improved access to customers and allows greater marketing synergies
between a business and its distributors.
Horizontal integration or collaboration
When two companies at the same stage of the supply chain or value system
collaborate or integrate, it is horizontal in direction.Thus the collaboration
between Honda and Rover or the later acquisition of Rover by BMW are
classified as horizontal collaboration and a horizontal acquisition, respectively.
Here the major advantages relate to synergy rather than responsiveness.
There are opportunities for competence leveraging through brand
names, shared finance, etc.
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Global/
Transnational
business
Suppliers
Distributors/
Customers
Competitors
Producers of
substitutes or
unrelated products
Upstream
alliance
Vertical
backward
integration
Downstream
alliance
Vertical
forward
integration
Horizontal
alliance
Horizontal
integration
Diversified
alliance
Diversified
integration
Figure 14.1 A categorization of integration and collaboration
Diversified integration or collaboration
Diversified integrations and collaborative ventures take place between a
business and other businesses in other industries.Here the major advantages
also relate to leveraging of brand names and access to finance.
Transnational mergers and acquisitions
The key definitions
It is important to begin by understanding the terms merger, acquisition and
integration.In a merger, two organizations agree to join together and
pool their assets in a new business entity.Both of the previous entities
‘disappear’ into the new organization.Shares in the previous entities are
commuted into new stock, usually revalued to account for the new market
value.In practice, the two partners in a merger are usually of comparable
size and, importantly, they are entered into willingly by both parties.
An acquisition is a joining of unequal partners.A large organization
purchases all (or a controlling share interest in) a smaller business and
then subsumes it into its structure.Acquisitions can be either agreed or
hostile, depending on the attitude of the smaller company:
. An agreed acquisition is one where the directors of the target company
accept that the offer for the shares are in the best interests of the shareholders
and they accordingly recommend that shareholders accept the
price offered.
. A hostile acquisition (sometimes called a hostile takeover in the press) is
an attempt to acquire a controlling shareholding in a public limited
company which is not recommended by the target company’s directors.
In this case, acceptance of the offer price by shareholders represents a
difference of opinion between directors and shareholders, and questions
are often raised as to the extent to which directors are or are not acting in
the shareholders’ best interests.
Whichever of these routes is taken, the result is a larger and more financially
powerful company.The word integration is the collective term used
to describe these growth mechanisms.
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[ 395 ]
Motivations for transnational M&As
Transnational M&As are motivated by a range of business considerations
and will depend on the strategic intent and transnational strategy of the
business.The more common motivations include:
. market entry – M&As are often used as a method for entering and
servicing a new national market;
. market share – M&As can increase market share by combining the
market shares of the two businesses (in addition the selling power of
the two businesses is likely to be increased resulting in further increases
in market share, especially in the case of horizontal integrations);
. product and market portfolio – M&As can be used to increase an
organization’s product portfolio, thus rendering the business more
robust in the event of trauma in one or more of its product or market
sectors;
. reduction of competition – competition can be reduced if the integration
target is a competitor;
. leveraging of core competences – control can be gained of key inputs
and brand names can be leveraged;
. access to supply or distribution channels – backward and forward integration
can improve access to resources and customers, respectively;
. product development – new products can often be acquired more
rapidly than could be achieved by the internal R&D function;
. technology acquisition – new technology can be acquired, such as that
employed in production or IT applications;
. economies of scale and scope – these can be achieved, especially if the
integration involves an increase in capacity;
. resource utilization – resources can be successfully and fruitfully
deployed, such as underused cash deposits;
. reputation enhancement – reputation can be enhanced if the acquisition
or merger is with a business of some repute in a key market or with a key
stakeholder group.
Each separate integration will have its own specific objectives at the strategic
level.For many transnationals the major motivations are access to new
markets or to resources, competences and skills.
Synergy is intended to facilitate an enhancement in the value-adding
capability of the business.Kay (1993) made the point that, ‘Value is
added, and only added, [in an integration] if distinctive capabilities or
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strategic assets are exploited more effectively.A merger adds no value if all
that is acquired is a distinctive capability which is already fully exploited, as
the price paid will reflect the competitive advantage held.’ Accordingly,
integrations that do not enable the ‘new’ organization to produce higher
profits or consolidate a stronger market position are usually deemed to
have been relatively unsuccessful.
Hoechst and Rh^one-Poulenc merge to form Aventis,
a new global leader in life sciences
On 1 December 1998 the CEOs of France’s Rhoˆne-Poulenc and
Germany’s Hoechst Atkiengesellschaft announced a merger that
would create one of the largest life science companies in the world.
On 15 December 1999 the merger actually came about.It was claimed
that the new company, Aventis, would create a worldwide leader in
pharmaceuticals and agricultural businesses with combined annual
sales of US$20 billion.In addition, it was hoped that the merger
would provide a platform for sustainable growth through combining
R&D resources, the creation of a robust product pipeline and the
employment of powerful emerging technologies and synergies in
global marketing.By the time of the merger in 1999, the combined
management team was reported to have already identified to drive new
strategy and required culture change.
The merger appealed to the boards of both companies because they
believed it would create an innovation-driven leader in life sciences.
Neither Hoechst nor Rhoˆne-Poulenc could have achieved such a
position alone in a similar time frame.The combination of Hoechst
and Rhoˆne-Poulenc was expected to provide a foundation for increased
value for the shareholders of both companies, particularly
because of the hoped-for improvements in profitability that would
accrue by taking advantage of a broader product portfolio and stronger
product pipeline, enlarged marketing and salesforce, and the realization
of operational efficiencies.
Hoechst and Rhoˆne-Poulenc, both of which had prominent positions
in the pharmaceutical and crop science industries, believed that in the
turbulent global business environment the only life science companies
that would succeed in maintaining global leadership positions were
those that:
MANAGING GLOBAL MERGERS, ACQUISITIONS AND ALLIANCES
[ 397 ]
1 had a high innovation potential and broad access to new technologies;
1 were able to rapidly develop and launch new products worldwide;
and
1 had a strong global marketing and distribution network for marketing
products worldwide.
In the late 1990s the life science industry was experiencing two significant
trends, both of which would affect the future composition of
the industry.First, new companies with innovative products and
smaller companies with positions in niche markets were emerging at
a rapid pace.Second, rising R&D, sales and marketing costs and faster
product obsolescence made it increasingly difficult for existing companies
to maintain a leading position in life sciences solely on the basis
of their own resources.This led to an intense consolidation within the
pharmaceutical and crop science industry.
1994 – American Home Products (USA) acquired American Cyanamid
(USA);
1995 – Glaxo (UK) acquired Wellcome (UK) to form Glaxo Wellcome;
1995 – Upjohn (USA) merged with Pharmacia (Sweden) to form
Pharmacia & Upjohn;
1996 – Sandoz (Switzerland) merged with Ciba-Geigy (Switzerland) to
form Novartis;
1997 – Roche (Switzerland) acquired Boehringer Mannheim
(Germany);
1999 – Zeneca (UK) merged with Astra (Sweden) to form Astra-
Zeneca;
1999 – Sanofi (France) merged with Synthe´labo (France) to form
Sanofi-Synthe´labo.
Such a restructuring of the industry placed enormous pressures on
smaller companies to merge and thereby gain the scale economies in
R&D and marketing enjoyed by the other players in the industry.This
was an important motive in driving the merger between Hoechst and
Rhoˆne-Poulenc.
Problems with integration
A number of academic studies have been undertaken with regard to the
successes and failures of external growth, and the balance of evidence is
CHAPTER 14
[ 398 ]
that more fail than succeed (e.g., Porter, 1985; Ravenscraft & Scherer, 1987;
Kay 1993).Many acquisitions ended in subsequent disposal because performance
of the post-integration organization was not as hoped.Of those
integrations that did survive, Kay (1993) found that when profitability
before and after the integration were compared, a ‘nil to negative effect’
was achieved.
What causes failure?
We suggest that there are six reasons why some integrations fail to add
value and become subject to subsequent ‘divorce’:
1. lack of research into the internal and external environmental features of
the target company (and hence incomplete knowledge);
2. cultural incompatibility between the acquirer and the target –
especially important when the two parties are in different countries;
3. lack of communication within and between the two parties;
4. loss of key personnel in the target company after the integration;
5. paying too much for the acquired company and hence overexposing
the acquiring company to financial risk;
6. assuming that growth in a target company’s market will continue
indefinitely – market trends can fall as well as rise.
A seventh reason for failure, albeit one that is outside the control of the
organization, is legislative or regulatory frameworks that prevent the
integration from happening or from fully performing as it might.Most
developed economies have frameworks in place to regulate M&A activity.
Article 86 of the Treaty of Rome 1957 (the primary legislation of the EU) is
one such instrument.It enables the EC to review proposed M&As resulting
in a combined national market share of 25% or when the combined turnover
in EU markets exceeds a certain financial figure (which at 1998 was
ECU 250 million).The UK has similar legislation (the Fair Trading Act,
1973).
Successful M&As
The high failure rate of M&As (Sirower, 1997) obviously indicates that
managers of transnationals must evaluate potential mergers and acquisitions
carefully before entering into them.Once the decision to merge or
acquire has been taken, it is then necessary to plan the integration process
carefully.
MANAGING GLOBAL MERGERS, ACQUISITIONS AND ALLIANCES
[ 399 ]
The chances of successful integration are increased when seven ‘success
factors’ are observed:
1. find a suitable target partner;
2. fully evaluate the target’s competitive position;
3. fully evaluate the target’s management and culture for compatibility
with the initiator;
4. investigate the compatibility of the two companies’ structures;
5. ensure that key resources (including key human resources) can be
locked in after the integration;
6. ensure the price paid for the target’s stock is realistic;
7. plan the post-merger process carefully.
Sources: based on Payne (1987), Shelton (1988) and Sirower (1997)
Each of these success factors is discussed below.
Finding a suitable target
First, success depends on the identification of a suitable ‘target’ candidate
with whom to merge or acquire.This is often problematic as the initiating
organization – with specific strategic intentions in mind – may have to wait
for many years or consider international M&A in order to find such a
partner.In practice, some compromise is necessary.
Evaluation of the target’s competitive position
Second, a preparation for an approach should involve a detailed evaluation
of the target company’s competitive position.This would typically comprise
a survey of its profitability, its market share, its product portfolio, its competitiveness
in resource markets, etc.Key success factors are identified and
the core competences of key competitors are addressed.
Cultural compatibility
Third, consideration should be given to the compatibility of the two
companies’ management styles and cultures – a process that may require
significant preintegration discussions.As integrations often involve the
merging of the two boards of directors, it is usually important that the
directors from the two companies are able to work together.In addition,
the cultures, if not identical in character, should be able to be brought
together successfully.
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Structures
Fourth, there should be the possibility of a successful marriage between the
two corporate structures.Integrations work best where the two structures in
question are comparably decentralized and have similar ‘height’ and
‘width’.
Locking in resources
Fifth, any key resources that the target company has must be guaranteed to
still be available post-integration.Key human resources who helped to
build the target’s core competences must be locked in so that their use
can be continued after the integration.In many organizations these key
resources will be human, but in others they may also be key locations,
processes, patents, brands or sources of finance.
Valuing the stock price
Sixth, the initiating company will need to be certain that its valuation of the
target company is reasonable in so far as it will enable a satisfactory return
to be made on the investment.This is one of the most difficult matters to
sort out in advance of an integration.While the balance sheet value of a
company can be easily ascertained, attention will need to be given to the
value of the target’s goodwill – a figure over and above the balance sheet
value to take account of its future prospects and a valuation of its intellectual
resources (brands, patents, licences, etc.). For large acquisitions, the
value of goodwill is often the matter of intense debate between the parties.
Accordingly, the importance of detailed information gathering before the
integration cannot be overemphasized.The acquisition of Wellcome plc by
Glaxo (Holdings) in the mid-1990s was one in which the majority of the
price paid was goodwill.Although Wellcome’s balance sheet value was
ca £2.5 billion, Glaxo paid around £9 billion for the target company.
While some of this £6.5 billion difference can be accounted for by asset
revaluation, the majority was goodwill, reflecting Wellcome’s capabilities in
promising pharmaceutical areas such as virology and its product range
which contained some of the most important drugs in the world.
Planning the integration
Finally, the post-merger process must be carefully planned.Olie’s (1990)
study identified poor integration of merged businesses as the major cause
of poor performance.Obstacles to successful integration were found to
include resistance to change, a focus on personal security rather than
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organizational goals, culture shock and resentment of management.Olie
concluded that even when a merger was initially flawed, it could then be
made successful by effective management of the post-merger process.
DaimlerChrysler
With the breakdown of international trade barriers, transnational
mergers are becoming commonplace, and, yet, they remain among
the most poorly understood phenomena in the business world.On
the outside, the newly merged colossi pose as robust giants with the
market power to strike fear into the hearts of the competitors they
dwarf.On the inside, however, they are often turbulent with strong
cultural identities fighting for supremacy.Car manufacturers, furthermore,
are viewed in a highly symbolic way as instruments of national
prestige.The case of the DaimlerChrysler merger (which resulted in the
formation of a company with a turnover of over $150 billion per
annum) represented not only the winners and losers in the 1939–45
war but also the winners and losers in post-war motor production.The
merger also served to demonstrate some of the cultural complexities of
transnational mergers.The German company Daimler, represented by
famous and successful brands such as Mercedes, had exhibited consistent
international growth, whereas the American company Chrysler
was very much the third-ranked US manufacturer despite a relatively
successful performance during the 1990s.Newspaper articles pointed
to the cultural differences of the two companies often resorting to
stereotypical images of Germans and Americans and questioning
their ability to work harmoniously.
In agreeing to the merger that took place in 1999, Chrysler’s CEO
Robert Eaton named a ‘non-negotiable’ condition – the company must
be a ‘merger of equals’.DaimlerChry sler would have two chief executives
for three years and its board would consist of executives from
both companies.From the beginning, industry experts viewed this plan
with scepticism.Daimler was contributing 57% of the stock market
value to the merger and Chrysler 43%, and so analysts’ expectations
were that Daimler would control the new entity.This prediction turned
out to be true – Daimler called the shots in terms of the new company’s
logo, the company’s headquarters would be in Stuttgart and Daimler-
Chrysler would be a German ‘AG’ and not an American ‘Inc.’. One after
another, all the members of the Chrysler team that led Chrysler in the
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1990s left.To Americans, it seemed obvious that Daimler’s Germans –
contrary to their promises – had taken over Chrysler despite adopting
English as the company’s primary language.
By 2002 it had become clear that the Chrysler part of the company
had grown bloated and inefficient.The company’s production costs in
the former Chrysler plants were too high and too few new products
were introduced.Financial commentators again alluded to the cultural
tensions.Was this a case of the Americans being duped into selling one
of their prize companies to a ruthless German predator, or on the
contrary had the Germans been tricked into paying too much in
order to acquire an ailing American company?
The truth seems to have been that there was indeed a cultural
problem but that it was rather different to the story that had often
been portrayed by the press.It was precisely because the Daimler
executives feared being seen in the USA as arrogant, ‘know-it-all’
Germans that they failed to intervene in the Chrysler operation in
time.For two years the German executives failed to become fully
involved with the Chrylser operations in the belief that the Americans
must know what they were doing, despite the high-level departures
from the company.Because they were so eager to do the right thing
they were hesitant to intervene.Their belated and hurried intervention,
when it did come, appeared authoritarian and to some sections of the
media, ‘typically German’.Before a successful turnaround was
achieved by decisive management actions initiated in the German
headquarters in Stuttgart, the company’s managers had underestimated
the situation not only economically but also culturally.
Collaborative ventures and strategic alliances
What are collaborative ventures and strategic alliances?
The terms collaborative venture and strategic alliance are used to describe
a family of arrangements between two or more organizations to collaborate
across organizational boundaries with the express purpose of gaining
mutual competitive advantage.Conventiona l models of business behaviour
have tended to emphasize the role of the individual business in gaining
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competitive advantage.Some core competence theorists (Heene and
Sanchez, 1997) identified collaboration between businesses as an important
potential source of competitive advantage.
According to Contractor and Lorange (1988a), it is important to view a
transnational business as a member of various open and shifting coalitions,
each with a specific strategic purpose, rather than as a closed internalized
system that straddles national boundaries.Competitive advantage can
result from the effective management of such international and global
coalitions.
As we saw in Chapter 6 resource-based strategy theory argues that
superior performance is based on the development and deployment of
core competences and distinctive capabilities.Quinn et al.(1990) suggested
that it is best for a company to concentrate on activities that are directly
related to its core competences and that other non-core activities can be
outsourced to other businesses for whom those activities are core.According
to Quinn et al.(1990), ‘outside vendors can supply many important
corporate functions at greatly enhanced value and lower cost.Thus many
of those functions should be outsourced.’ Consequently, outsourcing is
often associated with collaborative behaviour.
Porter (1986, 1991) stressed the importance of configuration of business
activities and their co-ordination to achieving global competitive advantage.
Collaboration has made it possible for businesses to adopt new
configurations that are difficult for competitors to emulate and that can
also sometimes enhance organizational responsiveness.
In broad terms, then, the acquisition of competitive advantage through
collaborative ventures and strategic alliances will require:
. identification of the core competences of the organization;
. identification and focus on activities that are critical to the core competence
of the organization and outsourcing those that are not to
collaborating businesses;
. achieving the internal and external linkages in the value/supply chain
which are necessary for effective co-ordination of activities and which
permit responsiveness.
The remainder of the chapter explains the different categories of alliance
that exist, the motivations behind them and how such alliances can be best
managed.
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Motivations for forming strategic alliances
It is possible to identify several rationales for collaboration (Contractor and
Lorange, 1988a):
. the sharing of different but linked core competences;
. international expansion and market entry;
. vertical quasi-integration – access to resources, skills, materials, technology,
labour, capital, distribution channels, buyers, regulatory permits;
. sharing of risks;
. the acquisition of economies of scale and scope;
. access to complementary technologies and technology development;
. the blocking or reduction of competition;
. overcoming government-mandated investment or trade barriers.
The second of Contractor and Lorange’s motivations is the most important
in the context of this book.As organizations seek out new markets for their
products, many recognize skill or knowledge deficiencies where an indepth
knowledge of a foreign market is required.The need to develop
local knowledge is increased if overseas production (with an overseas
alliance partner) is being considered to meet market demands.While
local knowledge can be hired (say, through a local importing agent), it is
often quicker and more reliable to seek assistance from an already established
producing organization of the host country.It should also be noted
that a legal requirement of many countries is that foreign organizations
must have host partners before they can trade, thus making a collaborative
agreement a prerequisite for market entry.
Types of strategic alliance and collaborative venture
Directions of alliances
Like M&As collaborative ventures can be categorized as vertical backward
(or upstream), vertical forward (or downstream), horizontal or diversified.
Vertical backward or upstream alliances are between a business and its
suppliers.Vertical forward or downstream alliances are between a
company and its distributors or customers.Horizontal alliances are
between a business and other companies at the same stage of the value
system, while diversified alliances are between companies in industries
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[ 405 ]
which are not closely related to each other.Collaborative ventures are
always entered into willingly and all participating parties expect the alliance
to work toward their own specific strategic purposes.They vary from highly
formal, long-term agreements linking two or more organizations, to shortterm
consortia of organizations engaged together in a relatively short-term
project.
The legal status of an organization need not be a barrier to its participation
in an alliance.While many are between two business organizations,
many countries have witnessed an increase in alliances between governmental
bodies and privately owned companies.In the UK, for example, the
Private Finance Initiative (PFI) has been responsible for collaboration in the
building of roads, hospitals and other public sector investments.The
channel tunnel between Britain and France was constructed by a number
of companies working together in an alliance referred to as a consortium.
In some circumstances, collaboration between companies can result in the
creation of a new and jointly owned enterprise.Cellnet, for example, was
founded as a jointly owned mobile telephone business by two British
companies, BT and Securicor.
Strategic alliances can therefore assume a number of different forms
depending on the participants’ structures, the mechanism of decision
making, the nature of the capital commitment, the apportionment of
profit and the legal status of the venture.Some exist for a particular
project only and are short-term in timescale, while others are more permanent.
The choice of arrangement will depend on the specific objectives that
the participants have at the time.
Horizontal networks and alliances
Alliances between businesses at the same stage of the value system are
generally intended to strengthen the participating companies against
outside competition.Partners in such alliances can benefit from:
. shared skills and competences;
. shared technologies;
. access to some new market segments;
. reduced risks;
. reduced costs, particularly development costs;
. increased entry barriers and reduced danger from new entrants;
. forces that create synergy;
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. advantages in vertical relationships (e.g., a voluntary retail group can
obtain discounts from suppliers for bulk buying).
The company must always retain control of its core strategic assets and
activities but can outsource other activities to partners.From a portfolio
perspective, this form of alliance gains synergy through leveraging shared
financial resources.
Diversification alliances
Alliances between businesses in unrelated areas are often used by one or
more of the businesses to take them into a new competitive arena.This
form of alliance is viewed as important from a portfolio perspective in so far
as the key advantage of diversification is to broaden product and market
portfolio in order to reduce the risk of trauma in any one sector.
Vertical networks and alliances
These can be upstream in the supply chain toward suppliers or downstream
toward distributors and customers (see Figure 14.1). These alliances
produce the following potential benefits:
. the ability for each collaborating business to concentrate on its own core
competence, while at the same time benefiting for the core competences
of the other businesses in the alliance, creating synergy;
. improved responsiveness if just-in-time management techniques are
employed;
. creation of new barriers to entry;
. production of logistical economies of scale;
. generation of superior information on activities at all stages of the supply
chain;
. tying in of suppliers, distributors and customers to the business.
The extent and timescale of collaboration
There are several other methods that can be used to distinguish alliances.
The extent of co-operation – focused and complex alliances
It is possible to distinguish alliances by where they are positioned in respect
to the number of areas in which the parties co-operate with each other.
Some alliances are set up between businesses in order to collaborate in
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[ 407 ]
only one area of activity, such as joint purchasing, shared research or
shared distribution.A continuum exists between the two extremes of
fully focused (collaboration in one activity only) and complex (collaboration
in all activities – the parties act in concert to the point where they
appear to be one single organization).As with all continua, the majority of
real life cases fall somewhere between the two extremes.
Timescales of the collaboration
The second way in that we can subdivide strategic alliances is by asking
how long they are intended to last.Some are set up for a specific project
only, and we tend to refer to these as ‘joint ventures’ – time-limited arrangements
for the joint accomplishment of a shared aim or project.Others can
last for many years and are intended to enable both (or all) parties to
intensify the strength of their strategic position on an ongoing basis.
Longer term alliances tend to be more common when the partners are
from different countries, as the interpenetration of markets can take
many years to achieve and consolidate.
Consortiums
One particular type of (usually) short to medium-term alliance is the consortium.
Consortiums are often created for time-limited projects, such as
civil engineering or construction developments.The channel tunnel was
constructed by a number of construction companies in a consortium that
was called Trans Manche Link (TML).TML was dissolved on completion of
the project.Camelot, the first UK National Lottery operator was another
example of a consortium.
Choosing the most appropriate type of alliance
The form of alliance chosen by the parties will depend on several factors.
The complexity of the alliance will depend on the objectives that the two
parties are pursuing.Alliance partners tend to seek co-operation on the
minimum number of areas that are needed in order to avoid overexposure
to the risk of one of the parties leaving abruptly or ‘finding out too much’.
The selection of partners for a consortium will depend on matching the
resource and skill requirement of the project with those organizations that
are willing to contribute to the effort.Organization s with previous experience
of projects of the type proposed will obviously be among the most in
demand as consortium participants.
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Collaborative strategy in the international
airline industry
The airline sector has a long history of working in partnerships,
exemplified by the International Air Transport Association’s (IATA)
annual conference bilateral agreements (which split markets equally
between pairs of national airlines).Under the auspices of IATA, on a
global scale, a tradition of co-operation between airlines has been built
up, and on individual routes co-operation has commonly included
revenue-pooling agreements between the carriers operating a route.
Airlines have, in recent years, rushed to form alliances in the fear of
being left behind, and the stage has now been reached where the
international airline sector is coalescing into a small number of large
alliance groupings, such as the Star Alliance which includes Lufthansa,
United Airlines and Scandinavian Airlines System (SAS); the Oneworld
Alliance which includes British Airways, American Airlines and Qantas;
and the long-standing alliance between KLM (of Holland) and Northwest
Airlines.It is not only the number of airline alliance agreements
being made that is significant but also the deepening relations between
partners in these alliances.
The development of airline strategic alliances is one of the most
fundamental developments in the airline industry over recent years.
After the initial rush to form alliances, many companies later
changed their partners as they became more sophisticated at identifying
the potential ‘strategic fit’ between partners.To some degree,
alliance formation can be viewed as an inevitable result of the regulatory
framework within which the international airline industry operates.
Regulatory and legal restrictions often prevent the full ownership of
airlines by foreign companies, and, in consequence, alliances have
often been perceived as the only viable market entry mechanism, at
least in the short to medium term.
Indeed, some observers have viewed strategic alliances as inherently
unstable and as transitory forms of organization – a ‘second-best’ solution
that is disturbingly likely to break up under commercial pressure.
Porter (1990), for instance, suggested that alliances rarely result in a
sustainable competitive advantage being established, whereas Hamel
(1991) viewed them as a race to learn, in which the winner will
eventually establish dominance in the partnership thereby leading to
instability.Certainly, the airline industry has been subject to a number
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of examples of failed alliances and alliances that have been discussed,
but never actioned.
However, the commercial logic for airlines to form alliances, at least
in the short to medium term, seems to have been established as a range
of drivers exert pressure on companies:
1 The existence of ‘economies of scope,’ related to the size and nature
of operations, which help to explain the growing market concentration
and the move toward alliances.Economies of scope occur when
the cost of producing two (or more) products jointly is less than the
cost of producing each one alone.Such economies can be achieved
if alliance partners link up their existing networks, so that they can
provide connecting services for new markets, and if marketing costs
can be shared between alliance partners who may have strong,
entrenched positions in certain markets.In forming alliances, airlines
are seeking to maximize their ‘global reach’, in the belief that those
that offer a global service (with a competitively credible presence in
each of the major air travel markets) will be in the strongest competitive
position.
1 Specific resource, skill or competence inadequacy or imbalance can be
addressed by collaborating with partners who have a different set of
such attributes and can therefore compensate for internal deficiencies.
The regulatory framework of ‘bilateral agreements’ between governments
(concerning landing rights) and congestion at certain airports
means that airlines possessing licenses to operate on a route and slots
at congested airports have important and marketable assets that are
attractive to alliance partners.Alliances can thus offer relatively easy
access to a route through allowing access to a partner’s assets which
may have been established over prolonged periods and which may
have been protected by government intervention.
1 Strategic alliances are seen as an attractive mechanism for hedging
risk because neither partner bears the full risk and cost of the alliance
activity.The need to spread the costs and risks of innovation has
increased as capital requirements for development projects have
risen.Developing new or existing routes, for instance, becomes far
less risky if the partners operating the routes have firmly entrenched
marketing strengths in the two markets at either end of the routes.
1 Strategic alliances may be used as a defensive ploy to shape
the competitive environment by reducing competition, since an
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obvious benefit of strategic alliances is converting a competitor into a
partner.Furthermore, relatively weak airlines may view alliances as
the only viable way in which to compete with larger more sophisticated
rivals.
1 Consumers receive several benefits from those alliances that are
successful in producing integrated products.Consumers are provided
with an enhanced choice of destinations through the marketing
of alliance partners’ route networks.Schedule co-ordination
between partners often produces shorter transfer times between
connections, and co-ordination of flight timings can avoid bunching
of flight schedules.Additionally, consumers benefit from: one-stop
check-in for passengers (although they are taking an onward
connecting flight provided by the partner airline); the pooling of
frequent flyer programmes; shared airport lounge facilities; groundhandling
arrangements and the improvement in technical standards
brought about through the sharing of expertise.
Successful alliances
The success of an alliance is attributed to a number of factors, some of
which are similar to the factors present in a successful integration (M&As).
The failure of an alliance often results from problems, like incompatibility of
objectives, the ending of the basis for the collaboration as a result of competitive,
environmental or organizational change, cultural differences and
problems of co-ordination.
Faulkner (1995) suggested that the following factors are critical to the
success of collaborative ventures:
. complementary skills and capabilities of the partners;
. the degree of overlap between the parties’ markets be kept to a
minimum;
. a high level of autonomy, with strong leadership and commitment from
the parent organizations (if appropriate);
. the need to build up trust and not to depend solely on the contractual
framework of the relationship;
. recognizing that the two partners may have different cultures.
Researchers in this area have noted that alliances seem to work best when
the partners are from related industries (or the same industry) or when the
MANAGING GLOBAL MERGERS, ACQUISITIONS AND ALLIANCES
[ 411 ]
objective of the alliance is the development of a new geographical region.
Success is further enhanced when the parties are of a similar size and are
equally committed (in resource terms) to the alliance.Strict adherence
to the initial objectives of the alliance can often limit its success, as
modification of the original purpose may become necessary if the business
environment changes.There is thus a need to continually reappraise the
parameters of the agreement.Reve (1990) argued that alliances are more
likely to succeed when a behavioural approach is adopted which emphasizes
the value of the relationship to the parties and which places a high
value on trust and personal contacts.An economic approach, emphasizing
only a profit motive, is likely to create a much less stable alliance.
Brouthers et al.(1993) advanced a more succinct version of Faulkner’s
success factors in the ‘three Cs’ of successful alliances.The two parties
should have:
. complimentary skills;
. compatible goals;
. co-operative cultures.
The termination of an alliance should of course not always lead us to
conclude that it has been a failure.For fixed-term alliances, such as joint
ventures for the purposes of a research or marketing project, the conclusion
date may have been set at the start of the alliance.Similarly, consortium
partners, such as those who form an alliance for a large civil engineering
project, will dissolve the alliance on successful completion of the project.
The success of the venture should be judged in terms of the extent to
which it improves the performance of the partner businesses over its lifetime.
Similarly, not all partners in an alliance will benefit from it equally.
Nevertheless, it can be viewed as successful if they realize benefits from the
alliance in terms of improved performance.
The strategic management of networks
and alliances
The concept of the ‘focal’ business
Many collaborative networks are centred on what can be regarded as a
focal business.Toyota, for example, is at the heart of a network of suppliers
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and distributors and can be regarded as the focal business in its arrangements.
It is the strategy of the focal business which will have the greatest
influence in determining the overall strategy of the network and the other
businesses which will comprise it.
According to Reve (1990), the focal business will have three major elements
to its strategy.The first element is the strategic core which consists of
core skills that are high in specificity and are managed internally.Such
activities are central to the core competences of the organization and are
managed via internal contracts and organizational incentives.The second
element of strategy consists of the strategic alliances in which the focal
business is involved.These are used to acquire complementary skills of
medium asset specificity but which are not viewed as central to core
competencies.Such activities are managed by external contracts governed
through alliances.
Finally, all assets of low specificity are obtained through the appropriate
markets.Strategic management within a network or alliance is therefore
concerned with:
. determining which activities and assets are core and should therefore be
carried out by the focal business;
. determining which activities are of medium specificity and should be
obtained via alliances and outsourcing;
. determining which activities are of low specificity and should be
obtained through the market;
. co-ordination and integration of core and alliance activities;
. management and operation of the alliances.
Information and communications technology has played an important role
in improving the management of collaborative networks (see Chapter 10)
by improving co-ordination and responsiveness and by facilitating learning
across organizational boundaries.As network relationships change over
time, the survival of a strategic alliance will depend on its ability to coordinate
activities and adapt relationships.
Discussion and review questions
1. Define and distinguish between a merger, an agreed acquisition and a
hostile acquisition.
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2. What is the difference between the horizontal and vertical directions for
integrations and alliances?
3. What is a consortium?
4. Explain the strategic reasoning behind a horizontal integration and a
forward vertical arrangement.
5. What preintegration practices, if adopted, might reduce the failure of
the integration?
6. Why is the identification of the focal business important in understanding
alliances?
References and further reading
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Bishop, M.and Kay, J.(1993) European Mergers and Merger Policy.Oxford, UK: Oxford University
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Bleek, J.and Ernst, D.(1993) Collaborating to Compete.New York: John Wiley & Sons.
Bowerson, D.J. (1990) ‘The strategic benefits of logistics alliances’. Harvard Business Review, 90(4),
36–47.
Brooke, M.Z. (1986) International Management: A Review of Strategies and Operations.London:
Hutchinson.
Brouthers, K.D., Brouthers, L.E. and Wilkinson, T.J. (1993) ‘Strategic alliances: Choose your partners’.
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Buckley, A.(1975) ‘Growth by acquisition’. Long Range Planning, August.
Buckley, P.J. and Casson, M. (1988) ‘A theory of co-operation in international business’. In: F.J.
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GLOBAL BUSINESS N
PRESENT AND
FUTURE TRENDS 15
Learning objectives
After studying this chapter students should be able to:
. identify the key themes in future trends in the global business
environment;
. explain the impact of such changes on transnational businesses;
. identify future potential sources of global competitive advantage;
. describe the principles of knowledge management;
. describe the potential of e-commerce in global business;
. explain what a ‘virtual’ corporation is and the benefits of such a
concept to competitive strategy.
Introduction
In the future, global strategy will continue to be centred on new sources of
competitive advantage for transnational organizations. The acquisition of
competitive edge will depend on the ability of businesses to build and
leverage new competences in the context of a rapidly changing global
business environment. This chapter therefore examines potential developments
in the forces that shape the global environment, their effect on
transnationals and the means by which they compete. First, the future of
globalization and its limitations are explored before potential new sources
of competitive advantage including knowledge, collaborative networks and
e-commerce are considered.
The global business environment N limits
of globalization
The real state of homogenization
Levitt (1983) presented his seminal vision of a ‘global village’, characterized
by standardized products and services, and global strategies built on
economies of scale and scope. There are a growing number of industries
and markets that display some of the characteristics thought to typify a
global market. At the same time, Segal-Horn (1992) argued that there is
actually little evidence of the homogenization of markets, rather ‘the
differences both within and across countries are far greater than any
similarities which may exist.’
The question for the future is whether the differences that currently exist
between national markets will continue or whether there will be ultimate
convergence into a series of global markets for goods and services. Parker
(1998) presented a discussion of factors that he argued will always inhibit,
and indeed prevent, convergence of markets. His argument is based on
physioeconomic theory.
Physioeconomic theory
Physioeconomic theory dates back to the 18th century and the work of
Adam Smith (1723–90) and the French philosopher Montesquieu (1689–
1755). Its roots are in natural history which recognizes that there is a
hierarchy of phenomena. For example, solar climate precedes and determines
physical climate, while the natural resources that a country possesses
place a theoretical limit to its ultimate wealth. As Parker (1998) put it, ‘Each
level in the hierarchy is a necessary condition for the next: culture depends
upon the existence of terrestrial life, which depends upon the existence of
marine life, which depends on a particular climate.’ Physioeconomic
theories use both physiological and physiographic (physical-geographic)
factors to explain differences between cultures, tastes and needs. To put
this another way, similarities and differences in human behaviour will
depend on similarities and differences in climatic conditions, terrain and
endowments of natural resources which will help to predetermine cultural,
political and economic conditions.
According to Parker (1998), ‘solar climate alone . . . has a stronger correlation
than income per head with many economic behaviours that are usually
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thought of as ‘‘development driven’’.’ Milk, cereal, flour, coffee and cigarette
consumption per head are better explained by solar climate than by
income per head. People in colder climates consume more alcohol than
those in warmer climates. Furthermore, ‘Physiological adaptations across
populations affect dietary preferences . . ., housing preferences (heating,
insulation, architecture) and clothing preferences . . .; overall they influence
30–50% of total household consumption in developed economies and up to
90% in less developed economies (Parker, 1998). Climatic differences also
explain differences in consumption of psychological products like entertainment
products, which are more strongly demanded in colder climates.
In essence, physioeconomic theory suggests that, although countries with
similar physioeconomic characteristics like climate, terrain and natural
resources, will tend to converge in economic and social terms, those
facing different physioeconomic conditions will preserve many of their
differences. Thus, although cultures may converge in some respects,
physioeconomic factors will ensure that differences between many national
markets persist. There are therefore natural limitations to globalization.
Challenging the presuppositions
As well as forces beyond the control of humankind, there are other factors
that challenge some of the assumptions on which globalization is based.
For Levitt (1983) organizations must sell high volumes of standardized
products on a global scale so as to enjoy the benefits of economies of
scale. Yet, ‘Developments in factor automation allowing flexible, lower
cost, lower volume, high variety operations are challenging the standard
assumptions of scale economy benefits by yielding variety at lower costs’
(Segal-Horn, 1992). When this is coupled to the fact that consumers in
many markets are becoming increasingly fickle, some of the perceived
benefits of globalization to business seem to disappear. According to
Martin (1997) the increasing volatility of markets means that there may
be advantages in dispersion of manufacturing activities rather than concentration.
Having a manufacturing facility located near to a market increases
responsiveness and, while concentration of activities may bring the benefits
of economies of scale, it may be at the cost of local adaptability.
Even some of the supposed benefits of globalization are not so great as
might be assumed. While the OECD argued in 1996 that globalization
‘gives all countries the possibility of participating in world development
and all consumers the assurance of benefiting from increasingly vigorous
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competition between producers’, the argument fails to take into account
that consumers are also producers. From the viewpoint of producers,
increased competition drives down prices, wages and, potentially,
employment.
Further, Elliot (1996) made the point that ‘Liberalisation and globalisation
in industrial countries have not resulted in increased growth, nor are they
likely to do so.’ In fact, it is often the case that those countries that have
prospered most in recent years have been those with high levels of government
intervention (such as Germany, Japan and Korea). Professor Alit Singh
of Cambridge University made the point in Elliot’s (1996) article that records
for growth, employment, living standards and investment were much
poorer in the period from the mid-1970s to mid-1990s than they were
between 1945 and 1973 when interventionism based on the Keynesian
economic model was common practice.
At the level of the individual business there are also drawbacks in being
global. Global companies are sometimes blamed for many of the world’s
ills. Jackson (1997) gave the examples of oil companies like Exxon being
blamed for the world’s pollution problems after the Exxon Valdez sank in
1989, McDonald’s for rainforest destruction and Nike for exploiting child
labour. These accusations are often unjust but arise because the names of
these businesses are known globally.
A global approach to strategy and management?
There have been various attempts to make the case that the management
philosophy and techniques of one country or region are superior to those
of others. For example, American and Japanese techniques are often held
up as examples of good practice. If this were the case, then it might be
reasonable to assume that some form of global approach to management
might develop. There are certainly global trends in management theory like
total quality management, knowledge management and others, but there
remain fundamental differences in approach between managers.
Doyle (1996) argued that the focus of international management varies
from country to country. American and British managers emphasize
seeking to maximize ‘shareholder value’, which is achieved when an attractive
rate of return on capital expenditure is achieved. This differs from
Japanese, German and Korean companies who tend to place greater
emphasis on achieving market leadership by seeking to build customer
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satisfaction with their products. There are therefore important differences in
the way that strategy is determined in businesses in these two groups. In the
Anglo-American group, the approach adopted focuses on arriving at the
financial budget necessary to achieve the target return on capital employed.
This has been criticized as representing a short-term approach to business
strategy. In the other group, businesses emphasize the importance of R&D,
innovation, brand building and supply chain management so as to increase
customer satisfaction. In other words, it is patently obvious that there is not
a single global approach to management and strategy in businesses around
the world.
Martin (1997) pointed out that, ‘Going global is not the only possible
approach to the 21st century business challenge. It is also feasible to
build a company strategy around defending a home market.’ For the transnational
business, the strategic challenge of the 21st century is to combine
global scope with the responsiveness and flexibility necessary to compete
with local domestic producers. Further, it is necessary to balance the
pressures for globalization resulting from the benefits of economies of
large-scale production against the need to respond flexibly to increasingly
erratic customer preferences. On the other hand, companies that choose to
defend their domestic positions rather than going global will only do so
successfully if they remain alert to the changes taking place at a global
level.
There are many examples of global players facing successful local competitors.
In the global fast food market McDonald’s faces strong local
competition in France and Belgium from Quick and in Greece from
Goody’s who hold a significant share of the market but who are by no
means a global competitor. Similarly, Coca-Cola and Pepsi-Cola face competition
in Scotland from Barn’s Irn Bru soft drink which holds a 25%
market share but which is virtually unknown outside of the UK. It may
therefore be necessary to make local variations to strategy to cope with
local competitors.
Global competitive advantage in the future
The increasingly turbulent and hypercompetitive business environment has
made it correspondingly difficult to generate and, even more importantly,
sustain competitive advantage. Companies must develop and leverage core
competences that meet the realized and unrealized needs of customers. At
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the heart of such core competences is organizational learning. To put this
another way, core competence is normally founded on organizational
knowledge. The pace of change means that knowledge changes rapidly
over time so that organizations must ‘learn’ in order to build new knowledge.
Organizations must become ‘intelligent’ and remain focused on the
creation and management of knowledge that forms the basis of competitive
advantage (Stonehouse and Pemberton, 1999).
Knowledge-based strategy:the intelligent organization
As the pace and unpredictability of change in the global business environment
increase, flexibility and adaptability become more and more critical to
sustaining a competitive edge. Responsiveness and proactivity are dependent
on the ability of both individuals and organizations to learn more
quickly than their rivals. Organizations must become ‘intelligent’ by actively
attempting to learn about their internal and external environments and
the relationships between them. In order to learn more quickly than
competitors, it is necessary to develop understanding of the nature and
processes of organizational learning and knowledge management.
Stonehouse and Pemberton (1999) developed a model of knowledge
management and organizational learning (Figure 15.1). As organizational
learning is not linear (Argyris, 1977, 1992), it is represented in a series of
loops. Organizational learning and knowledge are based on individual
knowledge, which must be formalized and stored in appropriate formats
for dissemination and diffusion throughout the organization. Knowledge
management in an ‘intelligent organization’ will be founded on a culture,
structure and infrastructure which encourage and support the creation and
development of knowledge.
Types of knowledge
Organizational knowledge can be defined ‘as a shared collection of principles,
facts, skills, and rules that inform organizational decision making,
behaviour and actions’, forming the basis of core competences. Raising the
level of knowledge in the organization will increase its competitiveness.
Knowledge can be either explicit or implicit.
Explicit knowledge is knowledge whose meaning is clearly stated, details
of which can readily be recorded and stored. Implicit or tacit knowledge
(Demarest, 1997) is often unstated and is based on individual experience. It
is difficult to record and store but is often a vital source of competitive edge.
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One of the major challenges of knowledge management is the transformation
of individual and tacit knowledge into organizational knowledge. A
second major challenge is creating an organizational context that encourages
and facilitates the development of new knowledge through
organizational learning. The process of knowledge management is
highly contingent on organization culture, structure and infrastructure. An
important factor to be borne in mind when attempting to build a learning
organization through knowledge management is that ‘knowledge is . . . one
of the few assets that grows most – usually exponentially – when shared’
(Quinn, 1992). For this reason an intelligent organization must create a
context in which learning and sharing of knowledge throughout the organization
are supported.
Managing knowledge in an intelligent organization
Knowledge management is therefore concerned with the following
processes:
GLOBAL BUSINESS N PRESENT AND FUTURE TRENDS
[ 425 ]
Individual
learning
Organizational
learning
Organization
• Culture
• Structure
• Infrastructure and
communications
Knowledge
• Explicit
• Implicit/tacit
Organizational
knowledge
Core
competence
Formalization
Storage
Generation
Group exposure
Diffusion
Co-ordination
Generation
Figure 15.1 The intelligent organization – knowledge management and organizational
learning loops
Source: Stonehouse and Pemberton (1999)
. the generation of knowledge – individual and organizational learning;
. the formalization of knowledge – development of principles, rules and
procedures which will allow knowledge to be shared;
. the storage of knowledge – determining the appropriate medium for
storage which permits sharing;
. the diffusion of knowledge – sharing of knowledge within the organization
and limiting sharing across organizational boundaries;
. the co-ordination and control of knowledge – ensuring that organizational
knowledge is coherent and applied consistently.
The organizational context of such activities is vital to effective knowledge
management. This context consists of:
. Organizational culture – this must encourage experimentation, the
sharing of ideas and must place a high value on learning and knowledge;
. Organizational structure – this must allow experts to share ideas but
must also be holistic, allowing ideas to be shared across the whole
organization. It favours a network structure or the use of project teams
and task groups (see Chapter 13 where organizational structure is
discussed);
. Organizational infrastructure and communications – this will depend
on the efficient and effective use of information and communications
technology (ICT), particularly networks (internal and external, the
Internet), expert system neural networks and multimedia. ICT has an
important role to play in the storage and diffusion of knowledge (see
Chapter 10 where technology strategy is discussed).
Core competences and knowledge
Core competences must be distinctive, complex, difficult to imitate, durable
and adaptable if they are to be a source of sustained superior performance.
Knowledge can be an important source of these characteristics. Knowledge,
particularly tacit or implicit knowledge, is both complex and difficult
to imitate. Organizational learning can make knowledge a durable and
adaptable source of competitive advantage. There are numerous examples
of the ways in which knowledge acts as the foundation for competence
building and leveraging. Microsoft’s competitive advantage in the software
sector, for example, is largely knowledge-based (Stonehouse and
Pemberton, 1999).
The number of organizations seeking to become ‘intelligent’ by fostering
organizational learning through knowledge management is increasing.
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Grant (1997) pointed out that ‘companies such as Dow Chemical, Andersen
Consulting, Polaroid and Skandia are developing corporate wide systems to
track, access, exploit and create organisational knowledge.’ The distinctive
features shared by these organizations are that they encourage questioning
and creativity, and place a high value on trust, teamwork and sharing. At the
same time, they have created infrastructures that support learning, which
assist in the storage and controlled diffusion of knowledge and which coordinate
its application in creating and supporting core competences.
The idea of knowledge as an important source of competitive advantage
is not new, but renewed interest in it is partly due to rapid change in the
macroenvironment, turbulence and hypercompetition. Collectively, these
factors mean that organizations must learn more quickly than their rivals
if they are to stay ahead in the competitive game. Knowledge that is
distinctive is vital to the building and leveraging of core competences. In
these circumstances it is inevitable that managers in transnational businesses
will be seeking better ways of fostering learning through knowledge
management.
The ‘virtual’ corporation
The 1990s witnessed an increase in interest in the potential of collaboration
between businesses, coupled with the use of ICT as a potential source of
competitive edge. This interest is again linked to the rise of the core
competence school of thought in strategic management. The development
of core competences within an organization requires a degree of specialization
so as to focus the development of knowledge and skills which are
relevant to a particular form or aspect of business. Collaboration allows
businesses to share knowledge and core competences so as to create
synergies and new sources of competitive advantage. The development
of ICT and e-commerce has further increased possibilities for collaboration
both between businesses and between businesses and their customers.
Davidow and Malone (1992) were among the first to highlight the role of
information and ICT in the management of collaborative activities, stressing
the improved service flexibility and responsiveness made possible by the
sharing of information. Since their article in 1992 the rapid expansion of the
Internet and developments in e-commerce have sparked a revolution in
the use of technology to support business in general and collaboration in
particular. For these reasons, information technology is hailed as having
given birth to the virtual corporation.
GLOBAL BUSINESS N PRESENT AND FUTURE TRENDS
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The virtual corporation can be viewed as a collaborative network comprising
of a focal business, its suppliers and customers whose activities are
integrated and co-ordinated by the extensive use of ICT. There are several
key characteristics that may be viewed as essential to the existence of a
virtual corporation:
. a network of collaborative businesses and customers centred on a focal
business;
. concentration on core business activities by individual network
members;
. shared complementary goals;
. alignment of network business strategies;
. integration of business and information strategies;
. shared technology which often includes computer networks, satellite or
cable communications, common software standards and electronic data
interchange.
The truly virtual corporation will be centred on a focal business that shows
a high degree of integration of internal activities with considerable blurring
between functional business areas. The external linkages of the focal
organization will also demonstrate a high degree of integration, both upstream
with suppliers and downstream with customers and distributors, in
the value system.
The potential benefits to the network include more effective coordination
of activities, reduced costs, greatly enhanced responsiveness,
ability to compete more effectively on the basis of time and, equally as
importantly, information that leads to superior knowledge of customers,
products and markets. Thus, ICT, while usually not the major underlying
motivation for a network, has the ability to transform its competitive
performance from the acceptable to the exceptional.
Discussion and review questions
1. Discuss the potential for further globalization of business activity. What
limitations are there on globalization?
2. What impact might limitations on globalization have on the strategies of
transnational organizations?
3. Why is there increasing interest in knowledge as a source of competitive
advantage?
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4. What factors must be taken into account in building an intelligent
organization?
5. Explain the main features of a virtual corporation.
References and further reading
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October, 115–125.
Argyris, C. (1992) On Organizational Learning. Cambridge, MA: Basil Blackwell.
Argyris, C. and Schon, D. (1978) Organization Learning: A Theory of Action Perspective. Reading, MA:
Addison Wesley.
Chakravarthy, B. (1997) ‘A new strategy framework for coping with turbulence’. Sloan Management
Review, Winter, 69–82.
Davidow, W.H. and Malone, M.S. (1992) Structuring and Revitalizing the Corporation for the 21st
Century – The Virtual Corporation. London: Harper Business.
Demarest, M. (1997) ‘Understanding knowledge management’. Long Range Planning, 30(3), 374–384.
Doyle, P. (1996) ‘The Loss from Profits’. Financial Times, 25 October.
Elliot, L. (1996) ‘Putting Trade in its Place’. The Guardian, 27 May.
Financial Times (1997) ‘Non-global Markets’, 27 September.
Graham, G. (1997) ‘The Difficulty of Banking on the World – Is there a Life for the Non-gobal’.
Financial Times, 29 October.
Grant, R.M. (1997) ‘The knowledge-based view of the firm: Implications for management practice’.
Long Range Planning, 30(3), 450–454.
Hilgard, E.R. and Bower, G.H. (1967) Theories of Learning. New York: Appleton-Century-Crofts.
Inkpen, A.C. and Crossan, M.M. (1995) ‘Believing is seeing: Joint ventures and organisation learning’.
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Jackson, T. (1997) ‘Facing up to Challenging Opposition’. Financial Times, 31 October.
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Planning, 30(3), 385–397.
Rushde, D. and Oldfield, C. (1999) ‘E-mania’. Sunday Times, 19 September.
Sanchez, R. and Heene, A. (eds) (1997) Strategic Learning and Knowledge Management. New York:
John Wiley & Sons.
Segal-Horn, S. (1992) ‘Global markets, regional trading blocs and international consumers’. Journal of
Global Marketing, 5(3).
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Senge, P. (1990) ‘Building learning organizations’. Sloan Management Review, Fall.
Stonehouse, G.H. and Pemberton, J.D. (1999) ‘Learning and knowledge management in the intelligent
organisation’. Participation and Empowerment: An International Journal, 7(5), 131–144.
Turner, I. (1996) ‘Working with Chaos’. Financial Times, 4 October.
Volberda, H.W. (1997) ‘Building flexible organisations for fast-moving markets’. Long Range Planning,
30(2), 169–183.
Whitehill, M. (1997) ‘Knowledge-based strategy to deliver sustained competitive advantage’. Long
Range Planning, 30(4), 621–627.
CHAPTER 15
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MCDONALD’S AND
ITS INTERNATIONAL
EXPERIENCE Appendix1
A brief history
It is thought that the first meat burgers (minced or ground meat formed into
flat ‘pats’) were developed in 1904 for a World Fair exhibition in St Louis,
Michigan. The idea of a burger as a fast and convenient food, especially
when served in a bun, caught on in America and a number of entrepreneurs
opened mobile stands at various events and in some city centres.
By 1943 Wimpy (named after a character in the children’s comic strip,
Popeye) was the US market leader. Also in 1943 the ‘Big Boys’ chain was
credited with developing the double burger and the drive-through. It was in
the post-war climate (i.e., after 1945), however, that the whole idea of fast
food took off.
During the late 1940s, while much of Europe was still under reconstruction
and enduring food rationing, Southern and Central California were
beginning to enjoy the benefits of mass car ownership. For the first time,
people’s lives began to revolve around their cars and the idea of ‘nipping
out’ for a meal became possible. The concept of the drive-through was ripe
for the time. The drive-throughs of the time involved driving into a parking
area and a waitress (a ‘car hop’) would take the order and then bring out
the food (perhaps more like a ‘drive-in’ than the way we understand ‘drive
throughs’ today). These grew out of California and across the USA as car
ownership increased and other drive-ins and drive-throughs became a
feature of American life (e.g., the drive-in movie). The growth of edge-oftown
housing developments and the development of the American
suburban culture around the time were also conducive to the fast food
industry.
Brothers Dick and Maurice McDonald were two entrepreneurs who, in
1948, opened a hamburger ‘stall’ in San Bernardino, California. Their idea
was to sell their food cheaper than competitors by saving on the ‘car hops’
and persuading customers instead to go to a counter to order their food.
This also made for a faster turnround for the customer (it saved the time of
the ‘car hop’ going back and forward to the car, and the food ‘queueing’ in
the kitchen). This simple innovation proved popular with customers and
Dick and Maurice soon realized they were taking business off the other
local drive-through businesses.
Later observers pointed out that the McDonald brothers were pioneers in
their industry by employing a ‘Fordist’ approach to the production of hot
food. They saw burger cooking as a production line rather than a kitchen
task, and on a good day, in contrast to conventional restaurant cooking, the
burgers were effectively produced on a production line. Staff became
committed to one task at a time – cutting buns, flipping burgers, packing
burgers, serving customers, etc.
The McDonald brothers were not especially ambitious, however, and it
took Chicago-based businessman Ray Kroc to take the business on to its
next stage of development. Kroc was a risk taker by nature and had
previously remortgaged his home and invested his entire life savings to
become the exclusive distributor of a five-spindled milkshake maker
called the Multimixer. In 1954, when he was 52, he heard about the
McDonald brothers’ burger stand and that it ran eight Multimixers at a
time. He went to San Bernardino to see the McDonald’s business for
himself.
Kroc later reported that he had never seen so many people served so
quickly than those at the McDonald’s stall. It quickly dawned on him that if
there could be more stalls like the McDonald’s one, each running eight
Multimixers, then he could become very wealthy, very quickly. When
Kroc suggested the idea of opening other McDonald’s stalls, Dick and
Maurice told Kroc it wouldn’t be possible because they were already too
busy running the one they already had. Kroc saw the opportunity and
volunteered to run the first new outlet himself, paying Dick and Maurice
a royalty for the use of their business idea.
Ray Kroc opened his McDonald’s outlet in Des Plaines, Illinois in 1955 (in
the north-eastern part of the USA – a long way from San Bernardiino). His
first day’s takings of $366.12 soon grew and Kroc saw his investment grow
not only through the sale of burgers but also through the Multimixers. By
paying Dick and Maurice for the use of their business idea, Kroc’s store
was, in effect, a franchise, and it became the first of many.
Kroc differed from Dick and Maurice in many ways in addition to his
more aggressive and risk-taking attitude. It was he who realized that small
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things were often valued more by customers than some of the other
restaurant chains of the time had realized. ‘If you’ve got time to lean,
you’ve got time to clean,’ Ray Kroc said to his employees in Des Plaines.
Cleanliness, he suggested, was not only good for hygiene, it also showed
customers that McDonald’s was a business that cared about detail. By way
of example, Kroc himself was sometimes seen sweeping up in the car park.
Kroc’s initiative soon meant that he became the franchise manager for
what was fast becoming a medium-sized business. As Kroc sold more
franchises in the USA, he became the effective founder of what we now
know as McDonald’s. Ted Turner became a McDonald’s franchisee in 1956
and Kroc soon realized that Turner was a man he could deal with. Together
they built McDonald’s into an international business.
Kroc and Turner realized that the key to success was rapid expansion.
The best way to achieve this, they realized, was not through direct investment
from the company itself but rather through offering franchises. This
was also the way that both men had become involved in the idea, and it
would involve private individuals or other (smaller) businesses putting up
the capital for each new store and bearing the risk of failure in each case.
By using this approach, they realized that the potential for expansion was
almost limitless.
The major domestic (i.e., in the USA) growth of McDonald’s began in the
1960s. It is likely that, among others, one cause of the increased demand for
cheap takeaway food at the time (Kentucky Fried Chicken was also
ascendant at that time) was a decline in the real (i.e., after inflation)
value of the US minimum wage. Beginning in 1968 the decline had the
effect of reducing the minimum wage by 40% in real terms over the next 20
years. Because McDonald’s was from the outset a mass market product, the
falling disposable incomes of the large numbers of unskilled and manual
workers worked in McDonald’s favour and against the more mid-priced
restaurants and food outlets.
The McDonald’s product range grew steadily throughout the 1950s, 1960s
and 1970s with many product ideas coming from the growing numbers of
franchisees. The ‘Big Mac’ was launched in 1968 (the brainchild of Jim
Delligatti, one of Ray Kroc’s earliest franchisees, who by the late 1960s
operated a dozen stores in Pittsburgh) and the ‘Egg McMuffin’ was introduced
in 1973 (the idea of another franchisee, Herb Peterson). The ‘Happy
Meal’, a product aimed particularly at children, was introduced in 1979. This
included an appropriately portioned burger, fries and drink together with
one of a range of small toys in the hope that customers would be tempted
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to ‘collect the set’ through repeat visits. Throughout the development of the
menu, however, an emphasis was placed on a limited choice of products
that could, over time, become familiar to customers. This became increasingly
important as the company internationalized.
McDonald’s and franchising
The franchise concept has been key to McDonald’s worldwide success.
This has ensured consistency of quality and uniformity of product
from location to location and country to country. As the arrangement
developed over the years, the nature of the agreement between franchisor
(McDonald’s) and the franchisee developed and changed. Through
observing both successes and some failures, an agreement was eventually
developed that involved McDonald’s itself having a large influence on store
location, while the normal term for a franchisee was limited in the first
instance to 20 years. The franchisees, in exchange, agreed to:
. use McDonald’s recipes and specifications for menu items;
. comply to specific standards of operations, including systems of inventory
control, financial record keeping and marketing;
. display and use of McDonald’s trademarks and other registered logos and
marks;
. meet McDonald’s standards for such things as restaurant and equipment
layout and display signage.
From the outset, McDonald’s made franchises expensive. This was partly
not only to guarantee that each new store development would be of a
quality and in a situation consistent with the company’s reputation but
also to ensure that the amount risked by each franchisee was sufficient to
guarantee a lot of effort to make the franchise a success. The costs included
an initial fee paid to McDonald’s at the commencement of the franchise, a
refundable deposit as security for faithful performance of the franchise,
costs while the franchisee and staff underwent initial training and the
costs of establishing the restaurant in terms of fixtures, fittings and landscaping.
Such a cost was beyond the reach of the casual investor and
required a detailed financing package to be drawn up and presented, possibly
involving elements of both private and borrowed capital.
In exchange, the franchisee would benefit from the parent company in
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terms of the provision of the fabric of the building (i.e., franchisees rarely
owned the building itself ), advice on the various aspects of the McDonald’s
‘way’ and a very high chance that the venture would be a success, drawing
as it did on the proven McDonald’s business formula and marketing.
Despite the reciprocal advantages of franchising, McDonald’s adopted a
dual approach to its expansion. While the majority (about 70%) of stores
were franchised, the company chose to operate some (the remainder) as
directly controlled operations from its national centres.
International growth
By 1970 there was at least one McDonald’s store in each of the 50 states of
the USA. This amounted to about 1,000 stores in the USA.
International expansion occurred steadily rather than in a ‘big bang’. The
most obvious first candidate for foreign expansion was Canada (in the late
1960s), and by the early 1970s McDonald’s had made its first forays into
Europe. The UK, as a country traditionally open to symbols of American
culture, was one of the first overseas targets for McDonald’s. During the
1960s, when fish and chips was the staple takeaway food, the Wimpy brand
had become established. The first McDonald’s in the UK was opened in
1974 in Woolwich, South London and, spreading initially in the southeast,
restaurants were eventually rolled out across the UK to reach a total
(as at 2003) of 1,200. Other early overseas ‘targets’ were Germany (1971),
Netherlands (also 1971) and Sweden (1973).
From a slow start, international expansion accelerated in the 1980s and
1990s. One explanation for this was that McDonald’s had saturated its home
markets – there was a McDonald’s restaurant at most intersections and in all
town centres in the USA and many in Canada. Future growth could only
come through finding new national markets and through finding new
markets for McDonald’s products within existing national markets. In the
UK, for example, McDonald’s started to grow out of town centres into
suburbs and onto its motorway network (replacing the traditional ‘transport
cafe’ as the choice of refreshment stop for many people).
McDonald’s continued to develop internationally (Table A1.1). In some
regions of the world, the franchise became not only a useful mode of
market entry but also an important part of the company’s reputation management.
The fact that McDonald’s had become a symbol of American
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APPENDIX 1
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Table A1.1 Selected international McDonald’s developments
Country First store opened Number of stores Employees Percent
as at 2003* franchised
Europe
Austria 1977 159 7,350 90
Belgium 1978 57
Croatia 1996 16 800
Cyprus 1997 13 600
Czech Republic 1992 68
Finland 1984 93
France 1979 900 35,000
Germany 1971 1,152
Greece 1991 48 1,500
Hungary – 69 3,700
Ireland 1977 60 3,000
Italy 1985 230 10,000
Netherlands 1971 193 15,000
Poland 1992 200 10,000 21
Portugal 1991 106 45
Romania 1995 48 2,300
Serbia 1988 16 700
Slovenia 1993 17 600
Sweden 1973 220
Switzerland 1976 115 5,900
Turkey 1986 98 3,500
UK 1974 1,200 68,000 34
South and Central America
Argentina 1986 173 11,000
Bolivia 1997 8 850
Brazil 1978 530 53
Chile 1990 70 3,000
Colombia 1995 25 1,000
Guatemala 1974 27 2,000
Mexico 1985 270 11,000
Paraguay 1996 6
Peru 1996 10
Uruguay 1991 20
Middle East
Bahrain 1994 9 100
Egypt 1994 50 3,000 100
Israel 1993 80 3,000 100
Jeddah 1994 100
Kuwait 1994 34 100
Oman 1994 4 100
Qatar 1995 7 100
Saudi Arabia 1993 71 100
UAE 1994 25 100
Pacific Rim
Australia 1971 680
Hong Kong 1975 158 9,000
Japan 1971 2,400
New Zealand 1976 147 6,000
Singapore 1979 129 6,000
culture in many parts of the world represented both an opportunity and a
threat. Where American culture was seen as glamorous and exciting, the
company was able to choose between granting franchises and operating
the stores directly. In other regions, however, where America was perceived
less favourably, the local marketing initiatives stressed the local
ownership and management of restaurants. In the Islamic Middle East in
particular, where America’s support for Israel had made it unpopular with
some Muslim and Arab communities, it was stressed that all McDonald’s
were owned and operated by local nationals. All McDonald’s in the region
were franchised to enable this claim to be made.
The idea that a standard product range could be offered in all countries
came under strain early in the company’s international development. While
it remained an objective to offer a standard range as far as possible (to
support global marketing and scale economies in production and supply),
national, cultural and religious differences necessitated some product
variations in some countries (Table A1.2). One such problem was in the
make-up of the company’s major product. Despite its name, the standard
American ’hamburger’ was actually made by McDonald’s of 100% beef. In
India, for example, where cattle are sacred to the Hindu majority, a
variation on the product was devised using lamb and with a greatly
enhanced vegetarian menu. In Israel, with its Jewish majority, products
were introduced which conformed to the kosher rules of diet and food
preparation. Where local taste preferences were a factor, additions to the
standard menu were made to cater for them. Similarly, McDonald’s stores
in some countries sold alcoholic beverages, while in other countries
they did not.
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Table A1.1 (cont.)
Country First store opened Number of stores Employees Percent
as at 2003* franchised
North America
Canada 1969* 1,200 77,000
USA 1954
Asia
India 1996 34
Korea (South) 1988 270
Pakistan 1998
Russia 1990 90
* Approximate or estimated. In total there are more than 30,000 McDonald’s restaurants in 121 countries (as at 2003)
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Table A1.2 Examples of variations on the menu
Country Example of ‘unique’ products
Chile McNı´fica is a sandwich that includes tomato, ketchup, mayonnaise, onions, lettuce
and cheddar cheese.
Cyprus McNistisima is the promotional name for the Lenten period products offered to
customers during the fasting period before Easter and Christmas. During this period,
McDonald’s customers can choose from a selection of lent products, such as veggie
burgers, country potatoes, shrimps and spring rolls.
India The market was entered without the brand’s flagship product, the Big Mac. Keeping
in mind the religious sentiments of the local population, a commitment was made
not to introduce beef or pork products into the menu. Instead, a product similar to
the Big Mac with mutton and chicken patties was created and christened the
Maharaja MacTM and Chicken Maharaja MacTM, respectively. With the vegetarian
population in mind, an entire vegetarian range in the menu was created. Also
developed was an eggless mayonnaise that made the vegetable burgers vegetarian
in the true sense of the term.
Ireland Introduced in 1970 the Shamrock Shake is a unique item for Ireland. These special
shakes are only available for a period around the St Patrick’s Day celebrations.
Israel All meat served in McDonald’s restaurants in Israel is 100% kosher beef.
McDonald’s operates kosher restaurants and non-kosher restaurants. The
non-kosher restaurants serve Israeli customers who do not keep strictly kosher and
want to visit McDonald’s on Saturdays and religious holidays. McDonald’s Israel’s
seven kosher restaurants, where the menu does not include any dairy products and
all food is prepared in accordance with kosher law, are not open on the Sabbath
and all religious holidays.
Italy A range of Mediterrannean salads.
Japan If meeting the demands of local culture means adding to its regular menu,
McDonald’s will do it. In Japan it added the Teriyaki McBurger . . . a sausage patty
on a bun with teriyaki sauce.
South Korea The Bulgogi Burger was the first adaptation of the McDonald’s menu to meet the
demands of local Korean culture. The burger consists of a 100% pork patty on a
bun with bulgogi sauce and lettuce. Another sandwich unique to Korea is the
Tukbul Burger with two, 100% pork, patties and cheese on a bun with bulgogi
sauce and lettuce.
The Netherlands The McKroket is a McDonalized version of a unique Dutch product. The burger
is made of 100% beef ragout with a crispy layer around it. It’s topped with a
fresh mustard/mayonnaise sauce.
Pakistan The three McMaza meals are Chatpata Chicken Roll, Chicken Chutni Burger and
Spicy Chicken Burger, all three are served with Aaloo fingers and a regular drink.
The spicy and tangy taste of the meals has been specially developed, keeping in
mind the local palate. The combination of local taste and great value for money
makes these meals very popular.
Turkey In addition to the standard products of McDonald’s, Ko¨fteBurger is also offered
for those who are looking for a different and local flavour. Ko¨fteBurger is made of a
spicy meat patty inside a specially prepared flavoured bun enriched with a special
yogurt mix and spiced tomato sauce for those McDonald’s customers seeking
variety. Ayran is a traditional soft drink which is offered as another local taste at
McDonald’s restaurants in the country.
UK The McBacon Roll is a popular breakfast product made with back bacon and
traditional special brown sauce, served in a maize-topped roll. Fish fingers are
available with children’s Happy Meals.
NIKE INC. Appendix2
Company development
In 1998, with sales exceeding $9 billion and a market share of 33%, Nike
was the brand leader in the global training shoe market. These figures
represented an increase of 5% compared with its market share figure of
28% in 1995. This figure of 28% was 10 percentage points ahead of
Reebok’s 18% share and was more than double that of Adidas’s 11%
share. Nike faced continued competition from Reebok and faced increased
competition from a revived Adidas. Nevertheless, Nike remained the
market leader and its ‘swoosh’ trademark was the most recognized in the
industry ahead of the famous three stripes of Adidas.
Since its foundation by Phil Knight, Nike’s record of growth has been
strong. For the first 10 years of its history, its sales grew at an average rate of
82% a year, while its profits doubled every year. Accordingly, by 1980 it had
overtaken Adidas as the largest seller of sports shoes in the USA. The 1980s
and early 1990s saw the internationalization of Nike, and by 1993 20% of
sales were outside the USA, mainly in Europe where Nike held the largest
market share at 20% ahead of Reebok (17%) and Adidas (16%). Sales in the
Far East also increased, so that by 1996 Nike had a 12% share of the
Japanese market, while Nike products also became widely available in
the former Soviet Union. Nike was very much an American brand that
became global.
Nike began life as Blue Ribbon Sports in 1957 selling cheap, but technically
advanced, running shoes out of the back of a van. The company’s
founders, Phil Knight and Bill Bowerman, met at the University of Oregon,
where Knight was a student and moderate middle-distance athlete and
Bowerman was his coach. Bowerman had developed the practice of modifying
his athlete’s shoes because he felt the original products were poorly
designed. Knight capitalized on this idea and developed a business plan
while at Stanford Business School, deciding that rather than manufacturing
his own product, he would buy and market Japanese-made running shoes.
This was a particularly bold idea as, at the time, Japanese products had a
reputation for poor quality.
The Nike product concept
The brand name Nike was launched in 1972 at the US Olympic track and
field trials where Knight and Bowerman sold running shoes targeted at
serious athletes. The name Nike was taken from that of the Greek
goddess of victory, and the ‘swoosh’ trademark was introduced as a
symbol of speed and the achievement of excellence. Initially, success
came slowly, but, when in the mid-1970s Nike invented the impactabsorbing
sole, there followed a sizeable increase in sales among both
serious athletes and joggers. It was this development that allowed Nike
to replace Adidas as the number one sports shoe company in the USA by
1980.
Since this time, product design and development has remained at the
heart of Nike’s competitive strategy. Large sums are spent on developing
materials that will wear for longer and absorb the damaging impacts of
sporting activity on the body. The original concept of the impact-absorbing
sole was further enhanced with the development of the air principle, based
on a sole and heel which incorporated an air cushion. Although the benefits
of this system may be questioned, it quickly became very popular with
athletes and with fashion-conscious youth.
Product design and development take place at Nike’s headquarters in
Portland, OR on its 75-acre World Campus. So well known is Nike’s trademark
that there is no nameplate on the entrance to the Campus. A red
swoosh is the only sign identifying the site’s occupants. The swoosh also
appears on the door handles and is even engraved into the after dinner
chocolates served in the executive restaurant! There are 2,500 employees
on site, working primarily in R&D and marketing. Nike is reported to take
good care of the workforce at its headquarters, which features state-of-theart
sports facilities, lakes, woods, restaurants, a hairdresser, a cobbler, a
cashpoint and a nursery for employee’s children. So strong is the loyalty
to the company that some employees have a swoosh tattooed on their
body.
Nike has always regarded itself as a business run by athletes for athletes.
For this reason, product development has always been regarded as vital.
Teams of designers work in informal and picturesque surroundings to
develop new concepts to keep the company ahead of its rivals. There
are laboratories and test tracks to test out new products. The product
range expanded from running shoes into a range of high-performance
sports shoes covering most sporting activities. In addition to shoes, it
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began to produce a full range of sports apparel, including shorts, T-shirts,
tracksuits, etc. As the training shoe and sports apparel became fashion
items, sales of all these products quickly expanded. More importantly,
Nike accepted that the training shoe market has matured and embarked
‘on a strategy to transform itself from a shoemaker into a global sports and
fitness company.’1
Nike is proud of its claim to be the technological leaders in the industry.
Continuous product development is considered necessary because Knight
believes that there are seven-year brand cycles in the industry. Accordingly,
Nike continuously innovates to stay ahead. Nike’s success followed that of
Converse and Adidas. It has not always been plain sailing; Nike lost direction
in the mid-1980s when Reebok took over from Nike as market leaders
in 1986. This was seen as the height of the crisis. It was this that galvanized
Nike into action and led to the launch of the Air Jordan range of products
linking ‘shoes, colours, clothes, athlete, logo and television advertising.’2
Such is Nike’s commitment to R&D that some commentators have suggested
that trainers could eventually measure the runner’s pulse when
running and cool the feet at the same time. The Independent newspaper
(25/06/96) reported that ‘it is Nike’s designs that are the most sought after
by trainer connoisseurs.’
Vertical linkages and outsourcing
Although Nike briefly flirted with the idea of manufacturing its own products,
it quickly realized that the main source of its competitive advantage
lay in the design, development, marketing and distribution of sport apparel,
rather than in manufacture. The products are manufactured more cheaply
and to a higher quality standard in countries other than the USA. Once a
new product has been designed and developed in Portland, its manufacture
is then outsourced to countries like Taiwan, China and Brazil (Figure A2.1).
Nike imposes stringent quality control standards on its manufacturers.
Nevertheless, Nike, Adidas and Reebok have come in for criticism of the
allegedly low wages paid to workers in the factories producing their shoes,
particularly when these are compared with the sums paid to the athletes
promoting these products. This was highlighted by a report completed by
Christian Aid, which drew attention to ‘the plight of many of the workers in
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1 International Business Week, 17 June 1996.
2 Katz, D. (1993) ‘Triumph of the Swoosh’. Sports Illustrated, 16 August.
these subcontracting factories. Its survey of conditions for workers in China,
the Philippines and Thailand found that discrimination against trade unions,
forced overtime, poor health and safety provision, and low wages were
recurring problems.’3 In response, Nike pointed to the fact that the wages in
the factories were well above average earnings in other occupations in the
same countries and that it insisted on health care programmes for workers
in its factories.
Nike also carefully vets the retailers who are allowed to sell its products.
Not only are retailers checked for creditworthiness they are also for their
expertise in sportswear. This is because Nike values its reputation as an
authentic sportswear company and believes that retailers must be able to
advise knowledgeably on Nike products. This expertise is felt necessary to
strengthen the Nike brand image. Nike is valued by retailers not only
because its products are popular among consumers but also because of
the service that Nike provides to the retailers. Nike representatives have
computers that provide information on the entire range of Nike products
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Independent
retailers
Nike shops
within shops Nike shops
Nike HQ
Research and development
Co-ordination
Nike distribution
network
USA, Europe, etc.
Nike-developed
components(e.g.,
air soles)
Specialist Nike products
Developed partners
Exclusive relationship with Nike
Outsource to component suppliers
Locations: Taiwan, South Korea,
Thailand, China, Indonesia
Volume products
Volume producers
Standardized products
Additional capacity for Nike
Non-exclusive relationship
Location: South Korea
Internally developed
materials and components
Locally subcontracted materials
and components
Subcontracted subassembly
flows of goods
communications
Key
Figure A2.1 Nike’s value system – the production and supply network
Source: Adapted from Dicken (1998)
3 Ethical Consumer, 1 February 1996.
and the advertising campaigns that support them. Although Nike products
command a premium price, a ‘generous’ proportion of this premium price
goes to the retailer as well as to Nike itself. This is designed to encourage
retailers to promote Nike products over other brands. Retailers also benefit
from Nike’s association with top athletes and the large-scale advertising
campaigns to promote the products.
In recent years Nike has ventured into retailing itself. It opened a number
of Nike Town Stores throughout the USA. There are a growing number of
such superstores that exclusively sell Nike products. Those in Chicago and
New York bear a strong resemblance to theme parks. They are heavily
decorated with sports memorabilia and feature video walls showing
famous sports events with prerecorded crowd noises. These stores are
devoted to Nike products and are based on the twin themes of Nike’s
history and that of its athletes. They include high technology and feature
Nike’s Ngage laser machine which not only measures the size of a customer’s
foot to the nearest millimetre but also indicates which Nike
products would be most suitable for the foot size. Nike Town Stores
have expanded beyond the USA. London was the site of the first European
branch. Nike Town Stores are regarded as the ‘temples’ of the business and
are ‘shrines’ to its products. As Nike extended its product range and entered
new market segments, influence over the retailing of its products was seen
as vital to preservation of the reputation of the brand.
Promotions and endorsements
Marketing, promotion and brand name are as important to Nike’s success as
are product development and quality. Nike signed a number of top athletes
to endorse and promote its products. In the USA, Michael Jordan is the
supreme example of a Nike athlete but other top names like John McEnroe
and Andre Agassi are also endorsees. In Europe, footballers Ian Rush and
Eric Cantona were among those signed by Nike. Such athletes are paid
substantial sums to wear and promote Nike products. This approach has
shown some signs of success as, in the USA, 265 out of 320 NBA players
wear Nike shoes. A sign of the loyalty of Nike’s athletes, or perhaps of the
sums of money paid to them, is illustrated by an incident at the Barcelona
Olympics when Nike-endorsed athletes refused to wear Reebok shoes (the
official shoes of the US team) when they went to collect their medals. It is
also interesting to note that Nike did not seek out the most ‘clean-cut’
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athletes but tended to opt for controversial characters like McEnroe and
Cantona who, Nike believed, would generate more interest in its products,
particularly among young people. There is evidence to support this view –
Nike’s UK advertisements were found to be the most popular among the
key age range of 7 to 16-year-olds.
As well as endorsements from athletes, Nike used slogans and television
advertising to enhance its brand identity. The best known of its advertising
campaigns is the ‘Just do it’ slogan, and more recently ‘Think global – dunk
local.’ The company spends substantial sums on television and other media
advertising. Nike’s campaigns often generate controversy. The campaign
timed to coincide with the Euro ’96 football championships showed Eric
Cantona leading a team of humans to victory over a team of demonic
monsters. The evidence suggests that the controversy generated as much
publicity for Nike as the campaign itself. A survey by British Market
Research Bureau suggested that many people believed that Nike was an
official sponsor of Euro ’96 when it was not. This is a convincing demonstration
of the success of Nike’s publicity machine.
In 1996 Nike launched a new campaign based around its top athletes
using the Iggy Pop song Search And Destroy, while in 1998 it sponsored
Ronaldo and Brazil in their World Cup campaign. Once again Nike was
perceived as sponsors of the tournament in France when in fact it was not,
but arch rivals Adidas were. In the late 1990s Nike sponsored such personalities
as Tiger Woods, Michael Schumacher and Pete Sampras. In 1997 the
company spent $5.6 billion on marketing and $4 billion on individual
sponsorships. Michael Jordan alone was paid $70m.
Markets and structure
Saturation of the US market was a major factor in stimulating Nike’s expansion
overseas. Nike’s internationalization into Europe initially entailed the
establishment of virtually autonomous subsidiaries. Each subsidiary had
marketing, sales, distribution, IT and accounting functions. Each subsidiary
also had a warehouse from which Nike products, obtained from factories
mainly in Asia, were distributed to retailers throughout the country in
question. Products offered to retailers varied from country to country
and there was considerable variation in operational strategies between
countries.
In the 1990s, however, the company brought in control procedures that
APPENDIX 2
[ 444 ]
allowed for much greater central control from the USA of both strategy and
operations. At the same time, greater centralization of activities within
Europe itself was introduced, reflecting the increasing similarity of the
markets in which Nike operated. The company aimed to reduce the
number of European distribution warehouses from 32 in 1994 to 5 by
1997, with European headquarters in the Netherlands and a main distribution
warehouse in Belgium. Product ranges were also more standardized as
were advertising and promotion. It is interesting to note, however, that
there were still variations between the product ranges offered in Europe
and the USA, and to some extent between the advertising and promotional
campaigns. These differences reflected differences in the popularity of
different sports between Europe, where soccer is the number one sport,
and America, where it is still a minority game. There were also differences
in the athletes signed to endorse Nike’s products, reflecting the popularity
of different athletes within Europe as compared with the USA.
Changes in the 1990s
It has not always been plain sailing. In 1997 Nike issued two poor profit
warnings and made 1,000 redundancies among US employees. This downturn
had a number of causes. There was evidence of a shift in demand
away from training shoes to ‘brown shoe goods’. These hybrid walking/
training shoes were manufactured by companies like Caterpillar, Timberland
and Rockport. Rockport had a turnover of $500m in 1997 and,
ironically, was owned by Reebok who lost the training shoe wars with
Nike. There was also evidence that the sports apparel and training shoe
markets had also become saturated.
Accordingly, Nike found itself with large quantities of unsold stock with
the inevitable consequence that stock had to be sold at heavily discounted
prices. To make matters worse, sales of Nike products on the ‘grey market’
increased. Tesco began to import Nike shoes into the UK to sell them at a
reduced rate. Its advertisements added insult to injury for Nike by parodying
Nike’s ‘Just do it’ slogan with ‘Just do it for less’.
Nike’s troubles were exacerbated by economic problems in Asia where
the majority of Nike’s products were manufactured. There had been some
bad publicity surrounding the conditions of employment of the workers
employed by factories producing goods for Nike in the Asian region. There
were claims that employees, including children, were forced to work for up
APPENDIX 2
[ 445 ]
to 14 hours a day for subsistence wages. Moreover, there were reports that
workers suffered beatings at the hands of their employers. ‘Anti-Nike’
groups referred to ‘The curse of the swooshstika.’ These reports severely
damaged Nike’s image among young and middle-aged people who had
become increasingly concerned about allegations of exploitation in the
Third World.
The problems were not all of external origin. The size of the company
had begun to cause communication problems and there was some evidence
of low morale. Many employees felt that they had little say in the
running of the business and felt that they had become remote from its
management. There was also some evidence that Nike’s American managers
interfered rather too much in the running of the business in other
parts of the world, particularly in Europe. For example, when Nike installed
its new information systems in Europe, its American managers took over
the project because they were unhappy with the progress being made by
their European counterparts.
Nike at the end of the 1990s
Despite these problems, Nike had regained its market leadership by the
turn of the millennium. Its swoosh logo ranked alongside the red can of
Coca-Cola and the twin arches of McDonald’s as the three most globally
recognized logos. In fact, so well recognized was the logo that Nike sometimes
used it without the name itself. It became perceived as the most
fashionable sportswear company in the world.
The threat from Adidas increased in the late 1990s, particularly when Mel
C of the Spice Girls regularly appeared wearing Adidas products. Nike was
seemingly taken by surprise and reacted relatively slowly. Nevertheless,
Nike reacted to this challenge and to the other threats to its business.
The company lost a little of what some observers perceived as its arrogance
and it made attempts to recultivate its workforce’s goodwill. Nike also
sought to improve the working conditions of workers in Asia and began
to exert far greater control over its suppliers, forcing them to become model
employers in their regions.
Nike once more became highly design-oriented and took advantage of
the blurring between the markets for sportswear and fashion wear. It
became successful in the growing fashion market which is no longer confined
to those below 30 years of age. So strong is the Nike name that
APPENDIX 2
[ 446 ]
Americans often refer to their ‘Nikes’ rather than their training shoes. There
are both advantages and dangers associated with Nike’s entry into the
fashion market. The market is characterized by the built-in obsolescence
of its products, and this has the advantage that new products can regularly
be designed and sold at higher prices and that competition is more based
on design and brand than on price. The danger arises from the fact that
fashion changes rapidly and a brand can become unfashionable very
quickly. At the same time, development costs of new products are high.
Perhaps to counteract this problem, Nike sought to regain its association
with its grassroots athletes by introducing the Alpha range which represented
the most scientifically designed and high tech of its products centred
on the new Air Zoom Citizen trainer. Nike even changed its logo for these
products. Alongside the swoosh were five circles to denote excellence of
performance. This symbolized a return to the core values of the business,
which has always represented itself as the athlete’s company. There was
also a softening of the message conveyed in its advertising slogans from the
harsher ‘Just do it’ to the more gentle slogan ‘I can’.
Nike looked set to retain its position as a world market leader having
fought off successive challenges from Reebok and Adidas. There were
plans to expand the scope of Nike’s business both geographically and in
terms of the range of its activities. Phil Knight said that ‘sport is the culture
of the United States’ and that ‘before long it will define the culture of the
entire world.’ This may prove to be an accurate extension of the concept of
cultural convergence. Equally, it may be indicative of the kind of cultural
arrogance that can precede the decline of such a business.
References and further reading
Dicken, P. (1998) Global Shift – Transforming the World Economy. London: Paul Chapman.
Jones, D. (1998) ‘No More Mr Nike Guy’. Sunday Times, 23 August.
APPENDIX 2
[ 447 ]
INDEX
Aaker, D.A. 127
Abernathy, W.J. 273, 274–5
above-line promotions 324–5
achievingcultures 61
acquisitions 205–6, 214–15, 391–414
see also mergers . . .
definition 395
hostile acquisitions 395
motivations 214–15, 392–7
problems 393, 396–7, 398–9, 401–2
Adidas 84, 439–41, 446, 447
advertising7, 52–3, 68, 112, 120, 190–1,
298, 320, 324–31, 443–4
see also marketing; promotions
agencies 329–31
concepts 324–31
affective cultures 61
Africa 11, 14, 46
Agassi, A. 443
aid benefits 15
airline industry 116–17, 409–11
Alexander, M. 25
alliances 52, 215–17, 244, 279–80, 291,
391–5, 403–13
see also collaboration
airline industry 409–11
behavioural approaches 412
choice 408–11
concepts 215–17, 244, 279–80, 391–5,
403–13
extent 407–8
ICT 413, 427–8
legal forces 405–6
management 412–13
motivations 214–15, 392–7, 405, 406–11
overview 392–5, 403–5
problems 411
successes 411–12
technology sourcing 279–80
terminations 412
timescales 407–8
types 393–5, 405–12
analysis 28, 31–2, 73–137, 139–54, 171–2,
277–8
see also external . . .; internal . . .
continuous scanning28, 87, 100, 104–6,
141–2, 148–50
environment 28, 31–2, 73, 87, 100,
103–37, 139–54, 171–2, 210
global business 73–154, 171–2
M&As 399–403
macroenvironment 139–54, 171–2
markets 125–7, 171–2
Porter’s five forces 23–4, 30, 104, 106,
116, 118–25, 127, 151–2
products 74, 91–100
resource-based approaches 131–4,
171–2
segmentation analysis 126–7, 297–8,
305–9
stages 148–9, 152
Yip’s globalization drivers 109–17, 123–5,
152, 302
anatomy, organizations 377–8
Andersen Consulting427
Ansoff, H.I. 22
Anthony, W.P. 258, 261
architecture, distinctive capabilities 79, 159,
167, 173–5, 190–1, 213, 396–7
Argyris, C. 169, 424
Armani 5, 9
Armstrong, M. 257
artificial intelligence 289
ascribingcultures 61
Asheghian, P. 343–4, 346, 348
Aston Martin 128
audits
resources 76–8
technology 277–8
Australia 117
automobile industry 9, 64–5, 79, 108, 112,
128, 166, 176–80, 219–20, 276, 309
autonomous purchasingpolicies 242
Aventis 397–8
Avis 202
Axis Communications Inc. 332–4
BA see British Airways
Baden-Fuller, C. 118
Baker 298–9
banks, fundingsources 346–7
Barn’s Irn Bru 423
barriers to entry, industries 111, 114, 120,
151–2, 406–7
Barsoux, J.C. 254
Bartlett, C.A. 4, 8, 32, 162, 181, 189–90, 256,
290, 369, 375–81
Bass plc 202
BAT 95–7
BCG see Boston ConsultingGroup
Becker, H. 320–1
Beer, M. 257
behavioural approaches, alliances 412
Belgium 220, 310, 423
below-line promotions 324–5
benchmarkingexercises 76–7, 98–9, 129,
383–4
concepts 76–7, 98–9, 383–4
resource audits 76–7
Benetton 42, 79
Berry, C.A. 279
best practice 99, 383–4
biotechnology 286
Birou, L.M. 241
blocked funds, financial management
356–8
BMW 64–5, 394
Body Shop 252, 254–6
Boeing287, 333
Boettcher, R. 150
bonds 347
Boston ConsultingGroup (BCG) 92–5
Bowerman, B. 439–40
BP Amoco 89–90
brands 7, 112, 120, 127, 177–8, 191, 200–3,
298, 302–3, 314–19, 423, 442–7
advantages 314–19
concepts 314–19
constraints 315–17
counterfeitingproblems 316–17
decision making317–19
definition 315
strategy 314–19
top brands 315–16, 442–7
Branson, R. 252
Brazil 441
bread products 40, 41
brewingindustry 128
Brewster, C. 260, 262–3
British Airways (BA) 204, 341–2
Brooke, M.Z. 207–8
Brouthers, K.D. 412
budgeting decisions 348–52
Burger King 5
Burns, T. 282
Busby, M. 174
business culture
see also cultural issues
concepts 53–5
businesses
see also organizations
globalization 7–8, 420–2
CAD see computer-aided design
Calvin Klein 5, 9, 309
CAM see computer-aided manufacture
Cambodia 10
Camelot 408
Canada 117, 285, 435
Canon 166, 333
Cantona, E. 443
capabilities 20–1, 24–6, 30–2, 74–100, 106,
125, 152, 161–96, 380
concepts 74–100, 125, 152, 163–73,
180–1, 380
definition 75–80, 164–5, 173
distinctive capabilities 75–80, 125, 133–4,
159–75, 190–1, 213, 396–7, 404, 426–7
functional areas 180–1
transnational capabilities 190–1
capabilities-based strategy 172–3
capital
budgeting decisions 348–52
financial management 339–58
fundingoptions 340–1, 344–7
workingcapital 339, 351–4
Carlsberg128
cash cows, BCG matrix 93–5
cash flow management 351–5
Caterpillar 445
INDEX
[ 450 ]
central purchasingpolicies 241–2
centralization 4, 189–91, 282–3, 291–2, 300,
320–1, 325–31, 343–4, 363–9, 382–5
concepts 363–9, 382–5
decision making4, 189–91, 282–3, 291–2,
320–1, 325–31, 363–9, 380–6
definition 363–4
financial management 343–4
marketing300, 320–1, 325–31
centralized hubs, concepts 377, 380–1
Chakravarthy, B.S. 141
chance factors, national competitive
advantages 147–8
Chandler, A. 374
change 22, 27–8, 47–9, 89, 105–6, 109–10,
139–42, 150–2, 159, 256–7
complexity 22, 27, 47–9, 79, 86, 89,
139–42, 151–2, 251, 365–6, 427
concepts 48–9, 89, 109–10, 139–42,
150–2, 159, 256–7
cross-currents 48–9
cultures 256–7
currents 48–9
environment 22, 27–8, 47–9, 89, 105–6,
109–10, 139–42, 150–2, 159, 365–6,
379–80, 427
flexibility needs 7, 22, 27–8, 89, 91,
141–2, 150–2, 159, 164, 188–9, 217,
287, 291–2, 307, 379–80, 427
prescriptive strategies 141–2
types 140–2
Channel Tunnel 406, 408
chaos 22, 27, 47–9, 142
children 13, 15
Chile 312
China 40, 47, 60–1, 341, 441–2
Chrysler 261, 402–3
Citibank 375
climatic factors, cultural issues 68–70
CNN 50
co-option concepts 378–9
co-ordinated federations, concepts 376,
380–1
co-ordination issues 8, 16–20, 24–6, 32–3,
44, 85–6, 133–4, 159–64, 181–6, 190–1,
211–16, 264–6, 291, 362, 372–9, 428
see also management . . .
core competences 85–6, 133–4, 159–64,
213–14, 216, 378–9, 428
EDI systems 244, 428
ICT 17, 21–6, 29, 33, 43–8, 149–50,
168–9, 269–92, 413, 427–8
logistics 227–9, 234–6, 242–4, 332
marketing299–300, 302–3, 308–34
pressures 185–6
pricingdecisions 320
production 227–46
promotions 324–31
value-added activities 86–7, 159, 181–6,
190–1, 213–14, 216, 228–9, 234–6, 288,
299–300
co-production
concepts 204–5
market-servicingstrateg ies 204–5, 207–9,
219
Coca-Cola 5, 8, 50, 315–16, 327–8, 423, 446
Colgate-Palmolive 113
collaboration 21–30, 52, 77, 84, 132, 162–6,
172, 212–17, 244, 279–80, 291, 391–5,
403–13, 427–8
see also alliances
benefits 212–17, 427–8
choice 408–11
competitive advantages 212–17, 291,
403–13, 427–8
concepts 25–6, 27, 29–30, 84, 132, 165–6,
172, 212–17, 391–5, 403–13, 427–8
core competences 165–6, 172, 212–17,
291, 392–4, 403–13, 427
economic issues 214–16
extent 407–8
focal businesses 412–13, 428
horizontal collaboration 214–16, 394–5,
405–7
ICT 413, 427–8
legal forces 405–6
management 412–13
market-servicingstrateg ies 212–17,
281–3
motivations 214–15, 392–7, 405, 406–11
nature 214–15
problems 215, 411
stakeholders 214
successes 411–12
terminations 412
timescales 407–8
types 393–5, 405–12
value chains 84, 165–6, 393–5, 405–6
INDEX
[ 451 ]
vertical collaboration 214–16, 393–5, 405,
428
virtual corporations 17, 21, 25–6, 291,
427–8
collectivism 56–60, 70
Hofstede’s framework 56–9
individualism 56–60, 70
commercial banks, fundingsources 347
communications see information and
communications technology
competence-leveraging methods 170–2
competition
collaboration 212–17, 291, 403–13, 427–8
globalization 16–17, 109–17, 158–96
hypercompetition problems 288, 289,
427
information 129
M&A motivations 396–7
Porter’s five forces 23–4, 30, 104, 106,
116, 118–25, 127, 151–2
resource-based approaches 132–4,
161–96
strategic groups 128–31
strategy 157–96
Yip’s globalization drivers 109–17, 123–5,
187–9, 190–1, 301–2, 305–6
competitive advantages 8, 20–9, 48–9,
74–86, 100–8, 125, 144–8, 159–96, 315,
403–13, 419, 423–8
collaboration benefits 213–17, 291,
403–13, 427–8
concepts 22–9, 48–9, 74–80, 85, 100,
106–9, 125, 144–8, 158–72, 181, 290–2,
315, 403–13, 419, 423–8
generic strategies 23, 30, 159–63, 175–82,
290, 304–5
human resources 249–50, 257–8
hybrid strategies 178–9, 256, 310–11
ICT 288–92, 427–8
knowledge-based approach 22, 26–9,
32–3, 159–96, 251–2, 290–2, 424–8
logistics 242–3
marketing300–34
national competitive advantages 144–8,
152, 181
performance issues 158–63
Porter’s diamond 30, 145–8
Porter’s five forces 23–4, 30, 104, 106,
116, 118–25, 127, 151–2
Porter’s generic strategies 175–82
production 228–9
resource-based approaches 132–4,
161–96, 404
sustainability 158–62, 166–72, 178–9,
423–8
technology 271–92, 427–8
trends 419, 423–8
competitive-positioningapproach, strategic
management 20–1, 23–4, 30, 99–100,
104, 161–96, 305–10
complex alliances, concepts 407–8
complexity 22, 27, 47–9, 79, 86, 89, 139–42,
151–2, 251, 365–6, 427
computer-aided design (CAD) 271, 274
computer-aided manufacture (CAM) 271,
274
concentratingactivities, configuration
choices 182–3, 229, 234–6, 264–6, 291,
299–300, 304–5, 376–81
concentration issues, market-servicing
strategies 211–12, 234–6
configuration choices
concentratingactivities 182–3, 229,
234–6, 264–6, 291, 299–300, 304–5,
376–81
dispersal activities 182–3, 234–5, 264–6,
291, 299–300, 376–81, 421–2
ICT 291–2
structure issues 365, 368–9, 376–81
value-added activities 86–7, 159–63,
181–6, 213, 216, 229, 234–6, 264–6,
291, 299–300, 404–6
Confucianism 70
connectivity developments, ICT 288–90
consortiums, concepts 406, 408
consumer credit 44–5
consumers see customers
contingency approach, structure issues
364–9
continuous changes 140–2
continuous improvements 98–100
contract manufacturing
concepts 203–4
market-servicingstrateg ies 203–4, 207–9,
218–19
Contractor, F.J. 214, 404–5
INDEX
[ 452 ]
collaboration (cont.)
control systems 67–70, 326–8, 361–89
concepts 67–70, 326–8, 361–89
cultural web 67–70
decentralization 382–5
decision making382–6
promotions 326–8
span of control 366–7
controversies, strategic management 20–2
converging commonality, customer needs
308, 316–17
Cooper, M. 243
core business 188–9, 213
core competences 16–17, 20–33, 50, 67,
73–108, 125, 132–4, 152, 158–96, 213,
378–9, 392–4, 403–13, 423–8
co-ordination issues 85–6, 133–4,
159–64, 213–14, 216, 378–9, 428
collaboration 165–6, 172, 211–17, 291,
392–4, 403–13, 427
concepts 24–7, 31–2, 67, 74–100, 106,
108, 125, 132–4, 152, 159–62, 170–2,
179–81, 213, 378–9, 392–4, 403–13,
423–8
CSFs 134–5, 152
customers 79–80, 163–72
definition 24, 75–80, 163–6, 213
development benefits 28, 32–3, 67,
79–80, 100, 108, 125, 161–4, 170–2,
423–8
evaluation criteria 79–80
generic strategies 179–82, 290
globalization 171–2, 423–8
human resources 164, 258–62
ICT 290–2, 427–8
integration perspectives 392–6
internal analysis 73–100, 108, 132–4,
277–8
knowledge 162–96, 252, 290–2, 405,
424–8
M&A motivations 392–7
organizational culture 67, 163–72
performance issues 73–4, 161–72
technology 271–2, 277–8, 290–2
transnational strategy 158, 189–96
unique competences 76, 79, 163–72
value chains 81–6, 87, 159–62, 180
core strategies 188–9
corporate culture see organizational culture
corporate strategy
see also strategy
marketing298–9
corruption problems 15
cost leadership, Porter’s generic strategies
175–82
cost-oriented production, concepts 238–40
cost/benefit analysis, investment
evaluations 348–9
costs
barriers to entry 120, 406–7
FDI considerations 237–40
fundingoperations 340–1, 344–7
globalization benefits 9–10, 12, 109–17
logistics 242–4, 332
market-servicingstrateg ies 207–10,
216–17
new products 114, 130–1, 180, 272–3
Porter’s generic strategies 175–82
switchingcosts 120–1
technology 272–5
transfer pricing323–4, 341, 357
value-added activities 80–100
Yip’s globalization drivers 109–17, 123–5,
187–9, 190–1, 301, 305–6
counterfeitingproblems, brands 316–17
Craig303–4
Cravens, D.W. 166
critical markets, concepts 186–7
critical success factors (CSFs) 32, 77, 129,
134–5, 152
core competences 134–5, 152
production 228–9
cross-currents, change 48–9
CSFs see critical success factors
cultural issues 39–70, 74, 87–91, 237–8,
252–7, 263, 302, 364–7, 379–81,
399–403
background 39–72, 87–91, 252–7, 263,
302, 379–80, 399–403
brand constraints 316–19
change 256–7
characteristics 55–6
concepts 51–70, 237–8, 252–7, 263, 302,
364–7, 379–81, 399–403
customers 62–70, 302
definitions 65–6, 90–1
determinants 66–70
diversity benefits 64–5, 251, 255–7
European/USA approaches 259, 262–3
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