Multi-national corporations by virtue of their ‘global’ presence are top-of mind reference points when one thinks of international businesses. Management experts have also favoured pan-globe brand positions. However, a closer examination reveals that not all firms enjoy an equitable penetration of markets around the world. Infact the ‘core’ triad (North America, Europe and Asia) contribute to a significant portion of sales / revenue for most large global firms, thereby suggesting that these are more regional than global in orientation. Ofcourse, the question here is that shouldn’t there be more to globalization than mere sales dispersion / regional delineation? Is it not just as important to review firm-specific advantages to garner a better understanding of why some firms have succeeded and some have not?
The Triad Power Concept
According to Kenichi Ohmae (1985), author of ‘Triad Power’, very few firms (Coca-Cola and IBM among them) have tasted success as triad powers. These firms have not only been able to achieve equal penetration and exploitation capabilities in each of the triad regions, they have also successfully managed to steer clear of ‘blind spots’ (Hamel and Prahalad (1985). Ohmae also suggests going along the consortia-JV route to capture non-home triad markets. For firms looking to become triad powers on their own, Ohmae puts forth an ‘Anchorage’ perspective – a head quarter that is mentally equi-distant from the core triad bases, This prescription finds resonance in the Perlmutter’s (1969) recommendation of the need for firms to develop a mind-set of operating thru regional headquarters to leverage benefits / strengths in those markets rapidly and at a lower cost. Ohmae also suggests looking for an additional (fourth) region, outside the home triad.
In today’s context of a relatively broad triad (NAFTA, the extended EU and Asia), penetrating regional markets is seemingly an easy task and hence one is tempted to assume that more firms should have successfully implemented Ohmae’s recommendation to become triad powers. The question is have they? And if no, have these firms faced any critical loss?
Two crucial cases in point are McDonalds and Nike, with strong sales penetration in North America and Europe, but relatively lower penetration in Asia. However, both these firms have a business model that allows them to stay well ahead of competition. Nike, for instance, sources almost all its products from Asia but this is not why it is successful. All its competitors also outsource the bulk of their production for cheap labour. The reason behind Nike’s advantage is its brand name that represents quality and stylish sports shoes and apparel. So clearly, market success for international firms is not a mere function of them being ‘global’ as defined by Ohmae.
A lot has been said about global marketing and the ease with which multi-national firms can market their products and services in the worldwide marketplace, courtesy a standardized strategy (product, price, distribution and promotion) (Jain, 1989). The issue of standardization has been researched in depth and there have been many views such as there are two aspects to standardization – process and program (Sorenson and Wiechmann, 1975), there are differing degrees of standardization (Quelch and Hoff, 1986), to views that point in the direction of standardization being inconceivable (Killough, 1978) and dependent on factors (Wind and Douglas, 1986; Peebles, Ryan and Vernon, 1978).
Subhash Jain (1989) in his framework (see figure below) espouses that there are numerous factors that influence the standardization of strategy. But finally it is the economic payoff that determines the go / no-go decision. Concern for financial performance has long been emphasized (Buzzell, 1968; Keegun, 1969) and continues to be the all-important factor (Levitt, 1983; Henzler and Rall, 1986). In the same vein, Robinson (1984), Hamel and Prahalad (1985) and Porter (1986) recommend evaluating the decision to standardize strategy on the basis of competitive impact and the advantage it provides.
Regional vs. Global Strategies
An oft asked question has been ‘Is international business global or regional?’ Debatable for sure, but the question also makes one ponder that what is it about international strategy that makes it any different from domestic or regional strategy?
Results of a study conducted by Alan Rugman and Alan Verbeke (2004) among 380 Fortune 500 firms (data was collected for 365 firms), threw up some interesting statistics â€¦ only 9 firms (38%) were ‘global’ with not less than 20% and not more than 50% of sales contribution from each of the triad regions. 80% of the firms were ‘home-region oriented’. Similar studies / analyses conducted by Rugman and Girod (2003) and Rugman and Brain (2003) have also reported a strong tilt towards home-region oriented firms. In the Rugman-Girod study, only one retail MNE out of forty nine in the Fortune 500 list (LVMH – Louis Vuitton Moit Hennessy) was found to be global. In the Rugman-Brain study of the 20 most transnational companies in the world, only Philips emerged as ‘global’.
Country level papers have cited strong evidence about the regional focus of multi-national firms. Daniele Cerrato in his examination of the international sales of small to medium sized Italian businesses found that their expansion was pan-Europe and not really global. Ditto for a study on Korean firms by Hyeock Lee, who also found support for a home region orientation. Chang Hoon Oh, Elitsa Banalieva, Deepak Sethi and Walid Hejazi are some other authors whose examination of the performance of multi-national enterprises adds credence to the strong regional orientation of their activities.
Proponents of regional strategy consider it to be a balanced approach to simultaneously exploit globalization benefits and address localization challenges. (Morrison, Ricks and Roth, 1991; Morrison and Roth, 1992).
Strategic Options for International Firms
Stephen B. Tallman and George S. Yip (1999) suggest that international business involves resolving issues pertaining to ‘internalization’ (geographic spread), ‘responsiveness (local adaptation), ‘globalization’ and strategic international alliances / M&A’s.
While initial literature looked at exports as the base / minimum and FDI as key (Dunning, 1998) as the first step towards internalization, in the current context it is more about the intent than the actual means. Amazon.com is a great example of a firm selling to international customers long before it had even customized its non-US portals.
There are two strategic choices that a firm has in terms of geographic spread – choice of country to enter and type of entry. On the former, there are many techniques such as BCG’s growth-share matrix (Henderson, 1979), among others. But in an era where expansion sought is across rather than sequential, as demonstrated by Microsoft while launching Windows 95, firms also need to consider countries based on their standalone attractiveness. Competitive opportunities may vary across markets (Hamel and Prahalad, 2001). Mode of entry on the other hand, has also seen a departure from the export, ally and invest route (Johanson and Vahlne, 1977) to a careful mapping of industry context, the overall international strategy, parent firm strengths and the role envisaged for the subsidiary (Tallman, 1992).
Strategic choices for local adaptation lies in leveraging or underplaying the ‘country of origin’ (Johannson, 1989). While firms need to pay close attention to customer preferences, needs and the most effective way of reaching out to them via marketing communications, they also need to steer clear of total local adaptation, as what Philips learned a couple of decades ago when its businesses were all running as autonomous units with little synergy and the firm had to grapple with huge overheads.
Strategic options for multi-country operations are multi-dimensional â€¦ market participation, product standardization, activity location and uniform marketing. Across numerous case-studies and white papers on the subject of global strategies of individual companies, the message is that it is a combination of local and global elements that contribute to a successful strategy.
Porter (1990) suggests that there are four crucial determinants in home country ‘diamond’ conditions that have a bearing on international competitiveness – production, demand, related and supporting industries, and strategy, structure and rivalry. There have been others (Cartwright, 1993; Dunning, 1996; Moon et al., 1998; Rugman and D’Cruz, 1993; Rugman and Verbeke, 1993; Rugman et al., 1995) who have followed-up on Porter’s perspective. The underlying sentiment seems to be that International Business research needs to focus on how and why the home country diamond can / cannot be used to expand internationally. Also, one needs to fathom the implications across firms originating in large and small economies. In the case of the former, firms would need to reassess the attractiveness of smaller markets in the home triad region and take stock of their real potential to penetrate. In the case of smaller ‘country of origin’ firms, they should to focus on capitalizing on the demand in adjacent, large economies that are part of the home region. Regional integration thus helps create efficiencies on the supply side as well as boosts market integration on the demand side.
Hamel and Prahalad (2001) advocate that companies must distinguish competitive effectiveness from cost effectiveness. And the first step in doing so is to identify the competitor and understand their strategic intent, be it building global presence and / or defending domestic dominance and / or overcoming national fragmentation. Hamel and Prahalad have used this framework to analyze the global television industry and mapped the strategies of Japanese players in building a global presence vs. the strategies of US players like GE, RCA and Zenith in defending domestic dominance, and those of CSF Thomson and Philips in overcoming national fragmentation.
Their empirical evidence demonstrates how the Japanese astutely moved beyond leveraging twin advantages of labour and scale to creating distribution and brand strengths that would become entry barriers to new competitors. American television manufacturers, on the other hand, vulnerable to the Japanese onslaught continue to face a daunting task of understanding the strategic intent of their Japanese rivals and coming up with effective retaliation tactics, albeit defensive. Philips, despite low-cost manufacturing and international distribution strengths, is vulnerable due to its inability to integrate disparate country / market teams into a united team that can effectively gauge global competition.
Today, a global strategic perspective calls for organizations to look at their organization structures and define the roles of headquarters and subsidiaries. Hamel and Prahalad advocate a high involvement of the subsidiaries in providing competitive intelligence, and develop systems that help the organization to flesh out strategic and tactical decisions. They also suggest looking for new ways to competitive advantage via both cost and price, and investing in newly industrialized countries.
Going Global – What it takes
Competing globally calls for adoption of unconventional approaches keeping in mind the competitive payoff. It calls for formulation of a long-term strategy for the company as a whole and orchestrating the same at the subsidiary level (Hout, Porter and Rudden).
There is enough empirical evidence that shows how world-class firms like Caterpillar, Honda, Ericsson, IBM, Dupont, etc. changed the rules of the game. Caterpillar via economies of scale through commonality of design, made it impossible for any competitor to match its costs or profits. Ericsson through its innovative modular technology created a cost advantage and barrier for competition. Honda effectively used marketing innovations to leverage economies of scale.
What is important to note in all the above cases is that all of them used their position in one market to strengthen position in other markets. Caterpillar leveraged commonalities in design and centralized facilities to augment its already favorable cost structure. Ericsson’s shared modules saw costs falling each time a sale happened in another market. Honda drew on its scale economies and marketing and distribution experience in the U.S. to replicate success in Europe.
Also, these firms used timing, financial investments and identification of competitors it wanted to challenge. Honda got a head-start over Yamaha and Kawasaki, by exploiting the global opportunity (US and Europe) first. Caterpillar set up shop in the Far East with a dual objective of local sourcing and keeping tabs on Komatsu.
There are two crucial moves that can help improve a company to be a key global player. One of these is taking a leading position in newly industrialized countries where trade barriers are classically high and going and taking the route of a local subsidiary can lead to challenges. Siemens’s circuit breaker operation in Brazil is a good illustration of an astute strategy. When its West German capacity for some key components had outgrown, the company grabbed the opportunity for investments in the heavy electrical equipment industry in Brazil. Siemens currently has a significant production base for components in Brazil, exchanges them for other components made in Europe, and is the lowest-cost and leading supplier of finished product in Brazil.
Another move that is also very crucial is to establish a solid position with ones biggest customer block and prevent current or prospective competitors from eating into the revenue / sales these customers generate. BSR, a British company,
and the world’s largest producer of automatic record changers, faced a business problem in the 1970s, when it feared loss of market share in the US and Europe, in the face of Japanese exports. By redesigned its product to Japanese specifications and offering aggressive price discounts and inventory support to distributors, BSR stalled the market entry of the Japanese and also moved ahead of its existing competitor, Garrard.
There are also some additional guidelines for success in a global market. These include differential pricing across countries, based on its impact in protecting and expanding the business base; and organizational structuring. From an organization reporting and structuring perspective, a central product-line organization is recommended. However, it is just as important to keep reporting lines and structures flexible to change depending upon the nature of international business changes. And finally, global strategy in capital allocation is about financial control at two levels â€¦ a profit and cost center for self-contained projects; and a strategy center for tracking interdependent efforts and competitors’ performance and reactions.
International business research has focused on regions (home and host), activities (upstream and downstream), and sources of competitive advantage. While there is undoubtedly a lot of learning from the practices of leading international firms, and a plethora of strategy frameworks, clearly each firm has to evaluate its own strengths, identify its competitors, understand their strategic intent, decide on its markets of focus and then plan its mode of entry / survival. The issue of performance is clearly central – has been, will continue to be.
International business strategies can be challenging as they represent a totally different environment vis-à-vis a domestic market. Firms looking at going international have to pay heed to competitive political, technological, legal, financial and other macro-economic differences that can vary dramatically across regions. Also, in current times of forward-thinking competitors, reliance on historic / generic strategies will be a folly. Firms must actively anticipate competitor moves, especially the use of cross-subsidization to undermine seemingly strong market positions.
“The key question for firms is no longer ‘Should we be international?’ but has become ‘Why should we not be â€¦ and when, how, and with what resources do we go about it?’ “(Tallman and Yip, 1999).