Global strategy : harnessing news markets to extent advantage pot

CHAPTER OUTLINE CASE 1 The Boeing Company CASE 2 The Coca-Cola Company Strategies for Global Expansion Global Strategy Multidomestic Strategy Benefits of Global Expansion Market Growth a

CHAPTER OUTLINE

CASE 1 The Boeing Company

CASE 2 The Coca-Cola Company

Strategies for Global Expansion

Global Strategy Multidomestic Strategy

Benefits of Global Expansion

Market Growth and Expansion Recovery of Investment Costs Creating a Strong Image Accelerated Learning

WHAT YOU WILL LEARN

• Why companies need to developstrategies to expand across nationalborders

• The key environmental factors thatpromote the need to expand intooverseas markets

• The two basic strategies used forexpanding overseas, including globalstrategy and multidomestic strategy

• Balancing the benefits and costs ofoverseas expansion

• How companies can continue togrow by becoming global players

Throughout the 1990s, the world’s largest commercial aircraft

manufacturer, Boeing, has also been the leading U.S exporting

company Boeing’s wide line of famous aircraft, such as the

737, 747, 757, and 767 jets, are used by most nations’

com-mercial airlines From the 1970s and up to the present, Boeing

stands as a symbol of this country’s industrial might in what is

perhaps one of the most global industries around It has

remained America’s number one exporter for the past five

years and derived more than half of its total $45 billion in 1997

sales from customers outside the United States Despite

grow-ing competition from its major European competitor, the

Air-bus Industries consortium, Boeing was able to post record

earnings of $1.6 billion, while continuing to invest enormous

sums (6 percent of sales) in R&D for new aircraft Although

Boeing’s dominance in the commercial aircraft industry

remains significant, the company is beginning to feel the

com-petitive heat from a revitalized Airbus in many of its large

air-craft market segments (e.g., 747 and the new 777 airair-craft).

Still, Boeing appears to command roughly 60 percent of the

world market for large jets By the end of 1996, Boeing had

delivered over 7,000 aircraft to more than 400 customers

worldwide Its wide range of aircraft models enabled it to win

customers in every part of the world This aspect of Boeing’s

strategy—competing in global markets—is the focus of our

interest here.

Since its beginnings in 1916 and throughout its long

his-tory, Boeing has consistently spent large sums to maintain the

high pace of innovation required for designing successful

air-craft During the 1970s and 1980s Boeing’s overriding

cor-porate objective was to remain the dominant force in every

segment of the commercial aircraft industry Boeing’s

air-frame families include the 727 and 737 aircraft for

short-range flights, the 757 and 767 for medium-short-range flights, and

the widely successful 747 for intercontinental flights During

the 1980s and early 1990s, however, Boeing has faced a

series of growing competitive challenges from both Airbus

and McDonnell-Douglas, two companies that aspire to loosen

Boeing’s grip over global markets Airbus, with the ongoing

assistance of sponsoring European governments, has steadily

increased its market position at Boeing’s expense by winning

several key customers’ orders for state-of-the-art aircraft that

utilize new fly-by-wire controls with advanced electronics.

On the other hand, as the global aircraft industry continues to

consolidate, Boeing took the bold step of purchasing its other

U.S rival, McDonnell-Douglas, in a complex transaction that required government approval through much of 1997 McDonnell-Douglas has traditionally sought to challenge Boeing’s dominance of the medium-range aircraft market, but now its expertise in this area greatly complements Boeing product line to fight Airbus for smaller and medium-sized air- craft for customers in emerging and developing markets Still, with the steady rise of Airbus and potentially new entrants from Japan, China, and elsewhere, Boeing is raising the stakes by investing carefully in new technologies that will enable it to retain the lead in designing new generations of aircraft Boeing realizes that maintaining its technological and market dominance requires a forward-looking global strategy to enter and serve new markets, particularly as more nations want to establish their own national airlines and industries to support them To accomplish its cherished goal

of industry dominance, Boeing identified several critical tors that are the pillars of its global strategy: R&D invest- ment, economies of scale, focused global marketing, and product enhancement.

fac-Investments in R&D The cost of designing and developing a

new generation of aircraft is rising exponentially Every new plane costs more than double its predecessor to commercialize successfully Since 1970, Boeing has consistently spent well over $1 billion per year in designing and testing new models of aircraft, such as its famous 747s, 757s, and 767s Boeing’s newest line of aircraft, the huge 777, cost the company more than $4 billion and four years’ development effort before a sin- gle plane was built in 1995 These huge development expendi- tures serve as a nearly insurmountable barrier to entry and keep competitors from entering this industry on their own More important, Boeing’s commitment to learning and deploying state-of-the-art R&D and advanced technologies enables the company to learn and use the latest developments in computer- aided design (CAD), metallurgy, electronics, and low-cost assembly techniques, which are invaluable in reinforcing Boe- ing’s unique competence in tackling extremely complex engi- neering problems.

Economies of Scale in Manufacturing A second pillar vital to

supporting Boeing’s global dominance of commercial aerospace

is the firm’s centralization of production activities to achieve low-cost economies of scale in production Manufacturing and

assembly of key aircraft components are highly capital-intensive

operations whose costs need to be spread over a wide base of

air-craft models To ensure both high quality and low assembly cost,

Boeing has concentrated most of its key component, assembly,

and systems integration operations near its main plant in

Wash-ington All assembly operations take place in Boeing’s plant in

Everett, Washington, which covers more than 40 square acres of

factory and laboratory space This one plant alone can assemble

more than 400 planes a year, or about 65 percent of total world

demand.

Even though Boeing has consistently managed its costs

carefully, the company remains dedicated to investing in the

latest manufacturing and testing technologies to further

strengthen its hold over the global market In 1992, a number

of additional cutting-edge manufacturing facilities started

operations For example, an extremely advanced development

and machining center for new aircraft wings opened up in

Tacoma, Washington Using the latest in computer-aided

man-ufacturing techniques, Boeing can now build new wing panels

for its wide-body aircraft in ten days, as opposed to eighty days

in the past In the same location, a similarly advanced

devel-opment center devoted to applying new composite materials

for airframe bodies has also commenced operations

Compos-ite materials are new substances designed to replace metal

beams and parts in constructing the aircraft’s frame These new

materials are much lighter than metal, while offering

substan-tially more strength and reinforcement to the crucial parts of

the airframe In addition, Boeing opened up an expanded

facil-ity in late 1996 (originally opened in 1992) that is dedicated to

improving systems integration of the aircraft’s electronics.

Using the latest testing equipment, this facility will enable

Boeing to fully test new control systems before they are

actu-ally installed in its aircraft, thus saving the company from

costly refits Since late 1996, Boeing is currently engaged in

the midst of a major reorganization and reengineering of its

manufacturing activities, with greater emphasis placed on

assimilating new technologies The company is in the midst of

learning and implementing just-in-time (JIT) management of

inventory, flexible product designs and tighter management of

close relationships with suppliers These techniques, learned

by benchmarking the best practices of competitors in the

auto-mobile industry, allow for faster customization of aircraft

mod-els according to specific customer’s needs while lowering costs

simultaneously.

Global Marketing The third pillar supporting Boeing’s

global strategy is its dedication to aggressive and highly

focused marketing Boeing prides itself on having developed

aggressive global marketing teams These teams are able to

match any customer’s needs with Boeing’s wide line of craft, while also providing generous financing terms and pric- ing to win the customer The choice of a particular aircraft model is vital to the customer, since it commits the buyer not only to the operating range of the aircraft, but also to the parts, service, and maintenance costs that are needed to keep the plane afloat Effective marketing of aircraft requires a highly sophisticated, knowledgeable, and well-trained sales force To keep Airbus and newly emerging rivals (e.g., Embraer, Bombardier) at bay, Boeing attempts to reach poten- tial new customers before its rivals Equally important, Boe- ing works closely with each and every customer in terms of customer satisfaction, aircraft pricing, leasing costs, and ser- vice requirements Financing the aircraft (e.g., purchase vs long-term leasing) has become a critical lever in the firm’s global marketing efforts Boeing’s sterling reputation in pro- viding immediate, worldwide service is another key competi- tive advantage Service is key to keeping customers satisfied since down-time with maintenance failures or lack of parts means huge costs for the customer With the world’s most prestigious airlines, Boeing will go to almost any length to make sure that it retains their business For example, with such well-known global carriers as British Airways, Lufthansa, and Japan Airlines, Boeing has even set up satel- lite offices near these airlines’ headquarters to make sure they receive the latest technical developments and immediate ser- vicing of their aircraft.

air-Continuous Product Improvement The fourth pillar

sup-porting Boeing’s global strategy is continuous improvement and product quality enhancement To maintain its market posi- tion, Boeing constantly searches for new ways to upgrade its aircraft models to accommodate the changing needs of its cus- tomers For example, Boeing has several variations of its widely popular 737 line of short-range aircraft to meet the special needs of regional low-cost carriers such as Southwest Airlines The acquisition of McDonnell-Douglas’s MD-80 line of smaller aircraft enables Boeing to fill out its product line with streamlined aircraft designed for short and medium- haul markets Variations of each aircraft model offer advanced features, but without sacrificing the commonality of design that makes for easy servicing and parts requirements Offering product enhancements and upgrades enables Boeing not only

to experiment with new aircraft derivatives, but also to stand more closely and provide for its customers’ special needs In addition, Boeing has implemented continuous improvement programs that further reduce the costs, waste, and delays associated with designing and improving new air- craft models.

under-Perhaps no product is more global than Coca-Cola, or Coke.

Customers from St Louis to Sao Paulo to St Petersburg and

the world over love the taste of Coca-Cola and are

demand-ing more of it Yet, the secret behind Coca-Cola’s enormous

popularity and market success lies in the Coca-Cola

Com-pany’s continuing efforts to innovate new products and to

enter new markets, no matter how prohibitive they seem

ini-tially If one product comes close to setting the standard and

symbol for a truly global product, Coca-Cola must surely

rank near the top.

The Coca-Cola Company (also known as Coke) is one of

the world’s most profitable beverage companies In 1997, its

$18.8 billion in total sales earned nearly $4.1 billion in

prof-its for the company, making Coke one of the most profitable

large U.S companies in recent history What is more startling

about Coke is that nearly 75 percent of its profits come from

overseas, with Japan as its biggest profit center Worldwide,

Coke employs more than 700,000 people in its value-creation

and distribution system (with some 37,000 in the United

States) Coke has more than 8 million wholesalers, retailers,

and distributors selling a broad range of cola and other soft

drink products From giant, mega-store retailers to individual

vendors and vending machines, Coke is distributed in almost

every way imaginable The company can produce in excess of

28 billion cases of soft drinks a year, and is seeking to expand

this capacity by 5 percent to 10 percent in its newly growing

markets such as Eastern Europe, China, Latin America, and

parts of the former Soviet Union Coca-Cola products are

clearly stunning successes, but what is equally remarkable is

that the company itself has grown its market value to its

shareholders by more than 20 percent a year since 1989, with

a staggering valuation of $185 billion at the end of 1997

(mak-ing it the second most valuable company in the S & P 500 list

of companies at that time).

Unlike its archrival PepsiCo, Coke has remained extremely

focused on its beverage businesses While PepsiCo has

restructured its international operations, divested its restaurant

units (KFC, Taco Bell, and Pizza Hut are now in newly

cre-ated spin-off known as Tricon) and invested more heavily in

its snack food (Frito-Lay) operations, Coke now avoids

enter-ing businesses that do not relate to beverages At one point

Coke owned a 49 percent stake of Columbia Pictures but sold

its holdings to Sony Corporation in 1989 for a large profit.

Earlier, in the mid-1980s, Coke attempted to enter the wine

and coffee businesses, but found that they did not fit Coke’s style of marketing and strategic mission.

Coke defines its strategic mission as making sure that its products are “within an arm’s reach of desire,” no matter where that customer may be This overriding strategic direc- tion forms the basis of its far-reaching global strategy Coke believes globalization is the key to its future because of the five billion people (or customers in Coke’s view) who can share in the quality and message that Coke brings What makes Coke’s globalization push so potent is that its late chairman and CEO, Roberto Goizueta, personally exempli- fies and embodies Coke’s strong global flavor A chemical engineer born in Cuba, Mr Goizueta worked in a Coca-Cola plant prior to his arrival in the United States in the early 1960s Until Mr Goizueta’s untimely death in 1997, Coke has continuously pushed the frontier and aggressively entered newly developing markets Even now under a new leadership, Coke stays remarkably patient in developing new products and entering new markets In China, for example, Coke com- mitted over twenty years and several million dollars before it became a major presence and turned a profit In fact, Coke sees serving the developing markets of China, India, Russia, and Eastern Europe—about half the world’s population—as pivotal to its future success Most of these regions have only just begun to open up their economies to the global market More important, Coke sees itself not only as the producer and distributor of soft drinks, but also as a messenger of good feelings, such as joy and laughter, refreshment, fun, a new start, sports, and music As such, the cornerstone of Coke’s global strategy is to do whatever it takes to create opportuni- ties to reach customers with exciting new products that fit their tastes, however they may want them Crucial elements

of Coke’s global expansion include (1) a unifying message, (2) global distribution, (3) new products, and (4) community involvement.

A Unifying Message Coke believes that success in the

global marketplace demands not only high-quality, instantly visible products, but also a central theme, symbol, or idea that binds together its products with its customers and distributors For American travelers going to new places, Coke symbolizes

a friendly reminder of home For people in newly developing markets, Coke represents a potential avenue and opportunity

to enjoy prosperity The image of Coca-Cola as a beverage,

outlined by flowing white letters in a red background,

sym-bolizes instant refreshment and awareness, no matter where

you are in the world Yet, Coke sees its trademark as more

than simply a medium for advertising; the Coca-Cola label

ought to convey a deeper message of fun, refreshment, and

joyful memories to people who consume it.

Global Distribution and Business Systems Central to

Coke’s mission of being within arm’s reach of its customers is

its globe-spanning distribution system The global Coca-Cola

distribution system functions as a well-oiled machine, in

which 700,000 employees work together to produce and

dis-tribute Coca-Cola products in every market Coke’s

distribu-tion system relies heavily on a combinadistribu-tion of both wholly

owned subsidiaries and long-standing partnerships with local

bottlers and distributors that share the same common passion

toward Coke’s products Coke’s distribution system varies

across every country and region that it serves, although the

company prefers to own as many of its facilities where

possi-ble to improve timely delivery and logistical concerns Most

important, Coke tries to achieve the maximum market

pene-tration in every market through extensive market research,

inventory control, and ownership of key bottling and

distribu-tion channels No outlet is considered too small to sell

Coca-Cola products In Japan, for example, Coke has advertised in

local retailing trade magazines and even presented seminars to

mom-and-pop stores on the virtues and profits of selling

Coca-Cola As such, marketing activities, with the exception

of the company’s corporatewide image, tends to be managed

locally Coke’s distribution pipeline includes everything from

concentrate and bottling plants to vending machines,

restau-rant sales, grocery stores, and even soft drink stands in every

conceivable market.

Coke tends to rely heavily on dedicated local managers

and personnel to oversee significant distribution operations.

In the United States, for example, Coca-Cola Enterprises is a

separate company that handles distribution of all Coke and

affiliated products throughout the country Coca-Cola

Enter-prises, in turn, franchises many local bottlers and distributors

to handle the flow of Coke products through the system In

overseas markets, Coke has aggressively bought or

estab-lished new bottling facilities to further extend its reach and to

deny access to its rival Pepsi Most recently in late 1996,

Coke was able to break Pepsi’s once strong position in

Venezuela by acquiring new bottlers in that critical growth

market Franchising is important, especially in Coke’s more

distant locations, where local managers and owners are better

attuned to their markets’ specific needs In newly developing

markets such as China and Eastern Europe, Coke relies on a

combination of company-owned bottlers and distributors and local joint ventures to understand and to serve more distant customers better.

New Products and New Variations Coke spends large sums

annually to conduct market research to locate unserved kets Successful market research in every major country or region of the world allows Coke to carefully match the taste of its products with local preferences Market research also enables Coke to produce numerous variations of its underly- ing beverage products For example, in Europe, Coke devel- oped Coke light to compete not only with its own mainstream Coke products, but also with new soft drink products from Pepsi and other producers In Spain, Coca-Cola is often used

mar-as a mixer for wines In Japan, Coke introduced such new products as Georgia Ice Coffee and Cafe Au Lait Premium products to enter a new market segment Also, Coke intro- duced betacarotene-enriched VegitaBeta and Bonaqua fla- vored mineral water in Japan during 1992 Through the early 1990s, Coke introduced two new drinks tailored specifically for the Australian market—Lift and Skysurfer In Indonesia, Coke sells strawberry, pineapple, and even banana-flavored sodas Coke also sports a broad range of soft drink products, such as Sprite, New Coke, Coke light, Fanta, Diet Coke, and Mello Yellow in the United States, as well as Minute Maid orange juice Amazingly, Coca-Cola USA represents less than

a third (33 percent) of total worldwide sales Yet, in all of these and other markets, regular Coke in its familiar red-and- white label is always available to serve as the basis for the company’s worldwide recognition.

In addition to offering such a wide variety of tastes, Coke offers an incredible array of beverage sizes, ranging from the omnipresent two-liter bottles to aluminum cans and glass bot- tles of varying sizes By offering a countless assortment of sizes and tastes of its broadly expanding product line, Coke keeps local store shelves, vending machines, and other distri- bution outlets well stocked Paradoxically, offering a wide variety of tastes and sizes keeps the product price low to the customer and limits the effective actions of other beverage competitors.

Community Involvement A key pillar to Coke’s global

strat-egy is its strong belief in local community involvement Coke believes good marketing goes beyond traditional advertising and distribution Coke’s distribution system is committed to making Coca-Cola products part of every community This means that Coke, its local bottlers, and many of its distributors are active supporters of community activities ranging from sports and holiday celebrations to local charities.

This chapter focuses on how firms can develop strategies for global expansion thatextend their competitive advantage to worldwide markets For firms in almost everyimaginable industry, the need to think about strategies for global expansion and opera-tions is rising fast In fact, in some industries (high fashion and Hollywood movies andInternet-driven, on-line businesses, for example) where products are in such highdemand, the need to think about global expansion begins on day one Rapidly changingtechnologies, the growth of computer networks that make the Internet ever-more perva-sive around the world, the rise of new competitors from newly developed markets, theglobal desire for exciting new products and services, and the availability of new sources

of production make global strategy issues a critical consideration for senior managers inall types and sizes of companies Business leaders from North and South America, theFar East, and Europe all agree that going global is essential to their future business suc-cess Yet, few managers actually agree on which factors are most important in pursuingsuccessful global expansion strategies.3In other words, the term globalization often con-

jures up different images in the minds of people from different industries In this book,

we define globalization as viewing the entire world as a potential market or source of

inputs for the firm

The issue of globalization is a complex one Firms operating in many national marketsface different strategic considerations and issues than do firms operating solely in theirhome market Developing effective global expansion strategies requires managers to thinkbeyond their home market and into many markets When carefully understood andmatched to their firm’s products and practices, global expansion strategies can dramati-cally help firms extend their distinctive competence and sources of competitive advantage

to new markets

We begin by examining the environmental changes and factors that accelerate thetrend toward globalization in many industries Second, we focus on the broad types ofglobal expansion strategies that firms can undertake to expand their operations overseas.Third, we look at the benefits and costs that underscore global operations and examinehow managers can balance the risks and rewards inherent in each type of global strategy.Finally, we examine some of the ethical issues that surround globalization As firmsmove to set up operations abroad, managers begin to realize that other cultures some-times have their own interpretation of what constitutes sound business practices andethics

ENVIRONMENTAL FACTORS THAT ACCELERATE GLOBALIZATION

Throughout the 1980s and into the 1990s, companies in a growing range of industrieshave looked overseas to expand their operations Industries ranging from semiconduc-tors to consumer electronics, automobiles, computers, watches, tools, medical equip-ment, aerospace, and others have also seen global competitors from other nations makeserious inroads into the United States Some of the most important environmental fac-tors that promote globalization within and across industries are the following: (1) nar-rowing of demand characteristics among countries and regions, (2) escalating costs ofR&D, (3) pressures for cost reduction and higher economies of scale, (4) the rise ofgovernment “industrial” policies that promote globalization, (5) reduction of factor—capital and labor—costs in many markets, (6) the availability of new distribution chan-nels, and (7) reduction in transportation, communication, and storage costs.4 (SeeExhibit 7-1.)

globalization: viewing the

world as a single market for

the firm; the process by

which the firm expands

across different regions and

national markets On an

industry level, globalization

refers to the changes in

economic factors, such as

Narrowing of Demand Characteristics Across Markets

One of the most important factors promoting faster globalization is the rising level of

incomes and awareness of new products and services in regions around the world Since

the 1970s, rising prosperity in countries such as Brazil, Chile, South Korea, Taiwan,

Sin-gapore, South Africa, Saudi Arabia, Greece, and Turkey has vastly increased the amount

of disposable income available for purchasing new products In addition, more mature

markets, such as Europe, North America, and Japan, have been experiencing steadily

ris-ing incomes as well, albeit at a slower rate Even though many countries still exhibit

vary-ing rates of economic development, the rise of new middle classes in once

underdevel-oped nations has opened up new markets for products such as Sony Walkmans, Levi’s

jeans, McDonald’s restaurants, Coca-Cola, and even Motorola cellular phones and

pagers Entirely new markets are being created over a span of a few years Products and

services that once were confined primarily to wealthier people in the United States and

Europe (financial services, luxury automobiles, commercial banking, golfing equipment,

tennis rackets, cellular phones) are now available to anyone, anywhere around the world

who can afford them In fact, rising prosperity around the world is opening up huge new

markets annually—to firms willing to enter and serve them—populated by millions of

wealthier people In the new millennium, even greater opportunities may abound The fast

growth rates of China, the opening up of Eastern Europe, and the massive growth of new

middle classes in Indonesia, India, and Southeast Asia are all contributing to the marked

rise of incomes, aspirations, and business opportunities for designing and selling new

products

Increasing demand worldwide has direct and more specific effects on the competitive

nature of many industries In some industries, globalization of demand means a leveling

of demand patterns, whereby people’s desires for products and services are becoming

steadily more homogeneous Homogeneity of demand means that regardless of where

customers are physically located, buyers are likely to want the same kind of product or

service with certain similar features In other words, customers are becoming increasingly

similar in some industries where tastes, preferences, and desires for certain product

attrib-utes are converging into one larger, more homogeneous market Demand characteristics

in one region are likely to be nearly if not identical to those characteristics found in

another region For example, in the cellular phone and paging industry, companies such

as Motorola of the United States, Fujitsu of Japan, and Nokia of Finland are designing,

producing, and selling hundreds of thousands of these devices to customers worldwide,

Factors Promoting the Globalization of Industries

• Narrowing of demand characteristics

• Escalating costs of R&D

• Cost reduction pressures and economies of scale

• Government industrial policies

• Reduction of factor costs (e.g., labor, capital)

• Rise of new distribution channels

• Reduction of transportation, communication, and storage costs

with few substantive changes in the way the products look or function Perhaps the bestexample of the growing homogeneity of demand in the consumer electronics industry isthe Sony Walkman Consumers in New York, Nanking, and Nairobi are all likely to bewearing the same style of headsets and listening to music from a radio/cassette player that

is interchangeable across markets However, a product does not necessarily have to betangible to be wanted by millions of global consumers For example, blockbuster moviesand television shows produced by Hollywood studios are clearly hits wherever they areshown worldwide See Exhibit 7-2 for examples of products with worldwide markets andincreasingly shared tastes and uses

Homogeneity of demand, however, is perhaps more prevalent in industries that

pro-duce and sell products that serve as components to some other product or cannot be truly

differentiated in their use For example, semiconductors, telecommunications ment, and other electronic devices are clearly designed to serve the same purpose andfunction, no matter where the end user is located Microprocessors run computers, tele-phones, and even automobile engines, regardless of where the end product is located.Fiber optics transmit telephone calls across regions, countries, and continents, no matterwhat language is spoken Commercial aircraft, such as the Boeing 747 and 777, servethe same purpose of carrying passengers and freight, whether they are sold to AmericanAirlines, Air France, or Aerolineas Argentinas Homogeneity of operating standards,such as software and word-processing systems, also contributes to rising globalization

equip-of these industries Witness the impact equip-of Microsequip-oft’s various operating systems (DOS,Windows 95, Windows 98, Windows NT) in shaping the evolution of future add-on soft-ware, video games, and other programs by other software design companies throughoutthe world Other industries exhibiting a growing convergence of tastes and demand char-acteristics include certain types of automobiles (luxury, four-wheel drive, and sportysegments), soft drinks (Coke vs Pepsi), and even high fashion to some degree (theprevalence of Italian cut suits in Europe, Asia, and the Americas), where a growing com-mon desire for high-quality products transcends languages, ethnic differences, politicalsystems, and religions

e x h i b i t (7-2) Examples of Growing Homogeneity of Demand

Escalating Costs of Research and Development

The exponentially rising costs of research and development (R&D) in some industries

make it absolutely essential for companies in these industries to sell their products

glob-ally For example, Boeing, Airbus, and McDonnell-Douglas face costs up to $4 billion to

design a new model or line of commercial aircraft In this industry, neither Boeing nor its

competitors can afford to design a line of aircraft solely for manufacture and distribution

in its home markets; the R&D costs involved are too high High R&D costs mean that

firms must leverage their R&D costs across a greater volume of products that inevitably

must be sold across many markets For example, Boeing’s new 777 line of aircraft has been

so expensive to develop that the company first had to secure orders from various national

airlines before a single plane was built

The semiconductor, biotechnology, pharmaceutical, and composite materials industries

also face a similar economic imperative of rising R&D costs Developing a new generation

of memory chip, for example, can easily exceed $1 billion, as IBM, Toshiba, Motorola, and

Siemens found out before they even committed to joint production of the 256-megabit chip

Intel, for example, routinely spends over $2.5 billion a year on R&D to design advanced

gen-erations of microprocessors Intel must sell vast quantities of its Pentium II and Pentium III

lines of chips to global computer manufacturers before it can recoup its development costs

fully Its next generation Merced chip, developed in conjunction with Hewlett-Packard, will

similarly cost the two companies over $1.5 billion in total R&D expenditures alone In the

biotechnology and pharmaceutical industries, designing a new line of anticancer drugs is a

costly proposition The research and development costs of testing, developing, and finally

commercializing new medications can easily exceed $500 million to $600 million, so selling

globally as fast as possible is a must Companies that manufacture “new wave” materials,

such as hybrid composites used in tennis rackets (graphite), golf clubs (titanium, tantalums,

and carbon fibers), engineering structures (super strong composite metals), and new

syn-thetic fibers (advanced polyester blends) must also amortize their R&D costs over a global

volume of business For example, graphite tennis rackets are expensive to develop and sell,

but few people in one market alone are likely to buy enough of them to justify a firm’s

ini-tial investment in that business Companies in this and other industries must view the entire

world as their market before they can undertake costly product development Thus, firms in

industries that face rising R&D costs accelerate the broader trend towards globalization See

Exhibit 7-3 for examples of global, R&D-intensive industries

Examples of R&D-Intensive Industries

Rising Economies of Scale and Cost Pressures

Many industries are currently exhibiting rising levels of economies of scale in production.For example, the steel industry is characterized by a high minimum efficient scale (MES)

Minimum efficient scale refers to the production volume at which a plant must operate to

achieve full efficiency New integrated steel mills that turn out high-quality, continuouslycast steel face rising levels of MES to the point where a brand new steel mill must be able

to produce a sizable fraction of total world demand before it breaks even South Korea’snewest integrated steel mill, owned and operated by the Pohang Iron and Steel Company(POSCO), can produce high-quality steel for export at 75 percent of the cost of compara-ble U.S integrated mills However, POSCO’s plant is so huge that it must produce approx-imately 3 percent of total world demand before it achieves full efficiency Thus, higheconomies of scale in production mandate high-volume exports to other nations, thusaccelerating globalization of the industry

Global economies of scale can also promote related experience curve effects in tion Experience curve effects resulting from global volume production are important,because they can help firms to reduce costs even further In technologies where costs declinefrom both cumulative volume and learning, firms may be more inclined to sell more prod-ucts across different regions As costs decline, the company will be better able to price itsproduct to penetrate new markets In addition, faster learning and experience means that thecompany will be able to remain at a lower cost position than its rivals for an extended period.The economies of scale and cumulative experience effects gained by Japanese automakers,such as Toyota, Honda, and Nissan, have helped these companies penetrate both the U.S andEuropean markets, while sustaining the momentum of global volume production SeeExhibit 7-4 for examples of products in industries with rising economies of scale

produc-Role of Government Policy

Government policy can often accelerate the trend towards globalization in one or a group

of industries For example, the rise of Japanese integrated steel producers during the1960s and 1970s was largely due to the coordination and preferential tax treatment (par-ticularly in depreciation) accorded to steelmakers by the government Companies such

as Nippon Kokan, Nippon Steel, Sumitomo Metal, and others were encouraged by thegovernment to share their technological innovations and to build steel mills that exhib-ited ever higher minimum efficient scale (such policies can, of course, have very mixedblessing when these industries enter a protracted cyclical downturn) In turn, many ofthese steel companies started to export to the United States, where older mills owned by

e x h i b i t (7-4) Examples of Rising Economies of Scale/Cost Pressures

production volume that a

factory must reach before it

achieves full efficienty.

a variety of existing and previous firms, such as U.S Steel, Bethlehem Steel, Jones and

Laughlin, and National Steel, could not compete as effectively

Numerous tools of government policy, such as subsidies, preferential tax treatment, and

other support for critical industrial sectors can accelerate the trend towards globalization

South Korea’s government provides generous subsidies or indirect loans to its electronics

companies, such as Samsung, Daewoo, and Lucky-Goldstar, who in turn are able to invest

in newer equipment and larger plants for export Europe’s numerous government-sponsored

collaborative projects in semiconductors, aircraft, and other industries (such as JESSI and

Airbus Industries) have spurred the rise of pan-European global competitors that are

seek-ing to challenge U.S and Japanese strongholds in a number of industries Thus,

govern-ment policy can accelerate the rise of new global competitors in industries by removing

some of the initial impediments to globalization Exhibit 7-5 presents some industries in

the United States, Japan, and Europe that have been the recent focus of

government-backed initiatives or industrial policies

Conversely, government policy can impede the trend toward globalization in some

industries Subsidies to weak domestic producers, protectionist measures such as tariffs,

quotas, and other import limitations can actually prolong the decline of certain industries

that are ripe for global competition For example, many governments protect their

domes-tic producers of agriculture, textiles, steel, electronics, and other businesses that in many

cases would ordinarily have been subject to global competitive pressures earlier were it not

for protective policies

Change in Factor Costs around the World

One of the most important factors that have accelerated the globalization of different

indus-tries is the prevalence of low-cost labor and resources in different parts of the world

Low-cost labor attracts companies from other countries to set up operations in the hope of

lower-ing the cost of their end products Durlower-ing the 1960s and 1970s, many U.S companies such

as General Electric, United Technologies, Westinghouse Electric, Ford, Texas Instruments,

General Motors, and others established factories and other production facilities throughout

the Far East and Latin America to take advantage of lower labor costs to manufacture

con-sumer electronics and automotive components Many textile, small appliance, housewares,

and toy manufacturers have also opened up overseas operations because of low labor costs as

well Toy companies, such as Mattel and Hasbro, and garment makers/retailers Liz Claiborne,

Evan Picone, and Bloomingdale’s have significant production and sourcing operations in the

Far East that enable them to offer high-quality goods at lower cost The presence of these

companies has also helped stimulate the development of local economies, which, in turn,

Examples of Government Initiatives to Promote Industrial Development

Japan

Europe

Sematech (semiconductors) Steel, Computers, Autos, Artificial Intelligence, Advanced Materials, Aerospace

Semiconductors, Aerospace, Automobiles, Advanced Lasers, Optics, Defense

e x h i b i t (7-5)

have become important customers and competitors in different industries The continuedpresence and attraction of low-cost, skilled labor in China, India, Indonesia, and other South-east Asian countries have recently encouraged many Japanese producers to build factories inthis region, since labor has now become a scarce and high-cost commodity in Japan.Lower costs of energy and other resources can also accelerate globalization Metalsmelting and fabrication costs for aluminum, copper, iron, and other resources are highlysensitive to processing costs Dramatically cheaper costs of energy may encourage minersand producers of these metals to shift their value-adding functions to cheaper locations.For example, the mining of bauxite (the ore that becomes aluminum) takes place globally,but its processing into higher, value-added metal parts and components occurs closer toaluminum’s end markets, where energy, transport, and distribution costs are lower ManyU.S firms are locating some of their most sophisticated operations according to wherethey can find abundant sources of highly skilled, technical personnel Countries such asTaiwan, India, and Israel are becoming important engineering and development centers forkey skills such as software and computer design For example, Texas Instruments (TI) hasestablished a state-of-the-art software development site in Bangalore, India, to work with

a rich source of exceptionally skilled technical expertise TI’s engineers in India nicate with their U.S and European counterparts by way of the company’s proprietarysatellite transmission system that offers real-time communication This trend will likelycontinue and even accelerate as companies further invest and implement new internal com-puter networks that use the Internet to link up their disparate subsidiaries into a cohesive,real-time information system Motorola, Intel, and other U.S semiconductor firms have set

commu-up R&D facilities in Israel to accelerate new product design and testing activities Taiwan

is fast becoming the center of PC production and development expertise for such nies as Compaq, Gateway, and other U.S firms

compa-Rise of New Distribution Channels

The rise of new distribution channels can also accelerate globalization of product trends.For example, the rise of hypermarts—huge supermarkets—in Germany and other parts ofEurope has greatly increased the availability of American-made products (Tex-Mex food,for example) that ordinarily would have had a much more limited market presence Newdistribution channels that supplement or replace more costly existing channels may indi-rectly act to stimulate demand for newer products For example, the rise of the Toys“R”Uschain in Japan not only lowered the cost of Japanese-made toys for the local population,but also brought in competing imports from U.S and other Far Eastern toy makers Therise of department store chains (Sears and J C Penney in Brazil and Mexico), discounthouses (Wal-Mart in Canada and K-Mart in Eastern Europe), and specialized, low-cost dis-tributors (Toys“R”Us in Japan) is hastening the convergence of tastes and the demand fornew global products that are made elsewhere

Overall Reduction in Transportation, Communication, and Storage Costs

The expanding availability of lower-cost transportation has helped stimulate the ization of many industries For example, few people probably realize that the United States

global-is the largest importer of fresh flowers and tulip bulbs from South America and the lands Although fresh-cut flowers would seem to represent the one product least subject toglobal shipment and export (because of perishability), the ability to mass produce and toship flowers on airplanes overnight to the United States has instantly transformed thegrowing of flowers and plants into a new global business Custom-made Swiss chocolates

Nether-and cNether-andies are now often shipped directly from SwitzerlNether-and to the United States to serve

niche markets in New York and other cities The greater availability of low-cost, overnight

transportation is not limited to specialty products either Caterpillar, the leading U.S

man-ufacturer of construction equipment, routinely promises and delivers replacement parts to

its distributors anywhere around the world in under 48 hours More broadly, the long-run

decline in real costs of transportation over the past thirty years has been a fundamental,

although subtle, factor that has accelerated globalization across every type of industry

Communication costs also decline each year Perhaps the single greatest accelerating

fac-tor that promotes globalization and homogeneity of demand is the rise of the Internet in every

corner of the globe The massive proliferation of personal computers, state-of-the-art

com-munication networks using fiber optics, the World Wide Web, new satellites, electronic mail

and broadband-based video communications connects the world more tightly than could

have ever been imagined as recently as five years ago Fiber optics that transmit voice, video,

and data over telephone lines and the electromagnetic spectrum in frequencies in the next

century clearly enhance the prospect of making the world even smaller Communications

technology has advanced to the point where semiconductor manufacturers are now actively

designing voice-recognition chips able to translate languages over the telephone without the

need for a translator, while new search engines (e.g., Infoseek, Lycos, Yahoo!, Alta Vista, and

Netscape) on the Internet allow for multiple accessing of information from a variety of

dif-ferent global and domestic sources using multiple languages This technology is already

beginning to overtake conventional mail in terms of commercial application this past year

Storage costs have also declined along with transportation and communication costs in

recent years Improvements in inventory control, such as just-in-time (JIT) production and

scheduling, and innovations in containerization and intermodal shipping have contributed

to the decline in storage cost for durable products Merchant ships now routinely carry

boxed “containers” that are then directly hooked on to the back of trucks or loaded onto

specialized railway flatcars This simplification of transportation and storage of products

across vast reaches of ocean and land contributes greatly toward faster globalization

Exhibit 7-6 summarizes some of the key triggers that have lowered the costs of

trans-portation, communications, and storage over the past decade

Examples of Declining Transportation, Communication, and Storage Costs

• More global long distance carriers

• Better ways to transmit voice, video data

STRATEGIES FOR GLOBAL EXPANSION

Firms need to address two basic questions when thinking about developing effective

strategies for competing globally: (1) How can we extend our advantage by competing

across many markets? and (2) How do we minimize our vulnerabilities and maximize our opportunities when competing globally? The first question focuses on the issue of

leveraging a critical resource, distinctive competence, or competitive advantage fromone market to another In the examples of Boeing and Coca-Cola, even though the prod-ucts are vastly different, both companies realize that competing globally is an effectiveand necessary way to extend and reinforce their multiple sources of competitive advan-tage Thus, the underlying issue behind global expansion is similar to that of expandingacross industries in corporate strategies Global expansion strategies concentrate onmatching the firm’s distinctive competence and line of products with the markets it willserve

The second question addresses a different issue Here, the focus is on building and aging global operations in a way to counter the actions and moves of other global com-petitors Since global competition by its very nature involves strategies and actions that cutacross multiple markets, the actions of a competitor in one market could present both vul-nerabilities and opportunities in other markets Individual global expansion strategies willthus require particular practices and ways of managing operations to deal with competi-tors’ actions

man-In other words, the issues surrounding global expansion strategies are similar to rate strategy issues discussed in the preceding chapter In corporate strategy, the decision

corpo-to enter new activities, industries, and businesses should be based on the extent corpo-to whichenlarging the firm’s scope of operations reinforces and extends its distinctive competence.That issue was summarized in the question: Does a firm’s presence in one set of activities

or businesses benefit from expansion into another set? When examining globalization, a

similar question exists: To what degree does expansion into different regional markets help

extend and reinforce the firm’s distinctive competence?

Global expansion involves creating and running large operations in markets outside thefirm’s home base We now focus on two fundamentally different global expansion strate-gies for competing across multiple markets One of the most important strategic choicesfirms must make is deciding whether to compete on a global basis or a multidomesticbasis.5Firms pursue a global strategy when they seek to operate with worldwide consis- tency and a highly standardized approach across different markets Firms pursue a mul-

tidomestic strategy when they adjust their products and operations according to each

country or market they serve Each strategy, to a large extent, is shaped by the economicrequirements of the industry and the product

Global Strategy

Over the past decade, many companies have adopted global strategies because theirmarkets have moved toward increasing standardization Popular images of firms pursu-ing a global strategy, for example, include huge Japanese firms acting as economic jug-gernauts seeking to dominate every market in which they compete, or legendary IBM(Big Blue) controlling all of the computers used in the world In reality, a number ofspecific industry-driven factors have prompted firms from around the world to develop

a global strategy These factors include growing homogeneity of demand, risingeconomies of scale, increasing technological intensity of new products, the pressure toamortize high costs of R&D or other proprietary investments, and the need to avoid

global strategy: a strategy

that seeks to achieve a high

level of consistency and

standardization of products,

processes, and operations

around the world;

coordination of the firm’s

many subsidiaries to achieve

high interdependence and

mutual support.

multidomestic strategy: a

strategy that seeks to adjust

a firm’s products, processes,

and operations for markets

and regions around the

world; allows subsidiaries

to tailor their products,

marketing, and other

activities according to the

needs of their specific

markets.

duplication of critical value-adding activities These industry drivers oblige the firm to

compete along a highly standardized and consistent manner across different markets

A global strategy emphasizes operating with worldwide consistency and

standardiza-tion at low relative cost Firms pursuing a global strategy view all of their markets and

sub-sidiaries as being highly interdependent and mutually supporting to achieve a high level of

internal cohesion and consistency Key to pursuing a global strategy is an integrated view

of building and extending sources of competitive advantage that link up all of the firm’s

operations to create a unified value-adding delivery system Firms undertaking a global

strategy view each market in which they compete as a platform to learn new skills and

techniques that are then applied in other markets This approach enables firms to maximize

the benefits of exploiting worldwide economies of scale, rising technology intensity of

new products, and growing homogeneity of demand Moreover, a global strategy helps

firms extend their distinctive competences to build leverage across markets The mutually

interdependent, systemwide view of a global strategy is shown in Exhibit 7-7 Firms

pur-suing global strategies tend to undertake the following actions to build leverage across

markets: (1) standardize products as much as possible, (2) build their plants and factories

in locations that maximize systemwide global competitive advantage, (3) leverage their

technology across many regional markets, (4) coordinate marketing and sales worldwide,

and (5) compete against other global competitors through cross-subsidization (See

Exhibit 7-8.)

Global Strategy of Expansion

HQ

• Systemwide approach to competing worldwide

• Mutually interdependent subsidiaries

• Centralized control and reporting of activities

• Facilitates cross-subsidization policies across markets

e x h i b i t (7-7)

Product Standardization. Global firms seek to standardize their products and designs

as much as possible In a full-blown global strategy, a high level of product tion is essential not only to sell aggressively to markets that are increasingly homogeneousbut also to capture low-cost economies of scale in production Standardized products oftenconvey the image of design excellence, global acceptance, and world-class quality, asdemonstrated by such highly regarded products as Sony Trinitron television sets, Minidisc-mans, Walkmans, Citizen and Seiko watches, Panasonic VCRs, Motorola cellular phonesand pagers, Nokia phones, Hewlett-Packard calculators and desktop laser printers, Toyotaand Ford automobiles, and Caterpillar and Komatsu heavy construction equipment Com-panies seek a high level of product design standardization (with some minor adaptation orvariation according to local power requirements, laws, or sizes) because it enables them toproduce global volumes at low cost Moreover, well-conceived and standardized productdesigns do much to increase the firm’s marketing image A strong image eases the firm’sentry task of producing another line of products to serve the same markets in later periods

standardiza-In the case of Boeing, standardization of product designs is a predominant feature ofthe commercial aircraft industry Although Boeing may produce different models of its

737, 747, 757, and other lines of aircraft, each aircraft line is manufactured and assembled

in sequenced lots according to standardized product specifications Components are fullystandardized and shared across different aircraft wherever possible Moreover, the demandfor commercial aircraft tends to be highly uniform across buyers Although individual air-craft may exhibit small differences—the design of the insignia for different national carri-ers and the layout of the first-class and coach cabins—these differences do not compro-mise Boeing’s ability to produce its aircraft at low cost according to standardized airframedesigns Boeing’s reputation for product excellence and durability, highly refined assem-bly techniques, and commitment to global service enhances its prospects to open addi-tional markets for its aircraft

Locating Plants to Maximize Systemwide Advantage. Another central facet of aglobal strategy is to maximize the total systemwide competitive advantage of the firmacross multiple regional markets Global strategy firms must invest in the newest produc-tion technologies to reap the benefits of economies of scale from serving all of its markets.Key to doing so is locating plants, factories, laboratories, facilities, and other crucial infra-structure in those worldwide sites that maximize the firm’s sources of global leverage andscale economies In other words, the decision to build plants and factories is based not only

on the economics of serving individual local markets but also on maximizing the firm’scompetitive advantage and economies of scale across all of its subsidiaries and markets.For example, firms may locate some plants in low-cost countries to further reduce laborcosts (as is the case with the textile industry); they may locate their most sophisticatedplants closest to their most important markets (cellular phone companies); or they may

e x h i b i t (7-8) Key Characteristics of a Global Strategy

• Standardized products

• Global economies of scale in key components and activities

• Leverage technology across many markets

• Global coordination of marketing and sales systemwide

• Cross-subsidization policies to respond to competitive moves by other global strategy firms

build only one or two giant, world-scale plants to serve the entire global market (steel and

semiconductor companies) Thus, the decision to locate plants and laboratories globally is

predicated on a systemic view of extending and leveraging the firm’s scale-driven

produc-tion base across all of its key markets, as opposed to scattering plants across many

mar-kets in a host of countries

Ford Motor Company, for example, centralizes the production of many standardized

engines and components in the United States but builds many of its transmissions and

drive-train parts in Brazil, where the cost of engineering and building such complex parts

is lower On the other hand, some of Ford’s newest multivalve engines come from Ford

factories in Japan, where a greater abundance of multivalve technology and advanced

pro-duction techniques is available Cars that are to be sold in the United States are assembled

here, while cars destined for Europe are assembled in locations throughout Britain and

Germany Thus, Ford’s decisions to build and locate plants and facilities around the world

are based on maximizing the firm’s overall objective of being competitive and a low-cost

producer for each critical component of the car

IBM also pursues a global strategy in its various computer, networking, multimedia,

and semiconductor operations Many of IBM’s mainframe computers are designed and

built in the United States, but its most advanced laptop, notebook-sized computers are built

in IBM facilities located in Japan, where there is an abundance of skills and expertise in

manufacturing flat-panel display screens On the other hand, IBM’s line of personal

com-puter products is built in several key locations in Korea, Taiwan, the United States, and

Japan to take advantage of greater expertise and lower production costs for such core

com-ponents as monitors, hard disk drives, operating software, and power packages

Con-versely, IBM also supplies key components to a number of other PC firms as well, thus

helping it gain economies of scale in semiconductors, disk drives, displays and power

sys-tems These components are actually more profitable for IBM than the PC itself In the

Boeing example, all of Boeing’s manufacturing and assembly operations take place in its

flagship plant in Everett, Washington, where 65 percent of total world demand for

com-mercial aircraft can be assembled in one location The size and sophistication of this plant

exemplify Boeing’s commitment to economies of scale in component manufacture and

final airframe assembly Advanced machining and metal-cutting operations needed for

air-craft wings are located in nearby supporting plants, while centralized development

labora-tories and facilities provide new composite materials and testing procedures that help

fur-ther reduce the weight and eventual cost of operating the plane Also central to Boeing’s

enormous base of production expertise is the company’s commitment to total quality

man-agement and continuous improvement Boeing is constantly searching for new techniques

that steadily improve the cost, quality, and durability of its airframes Novel assembly

tech-niques are continuously explored and tested to see if they can further reduce waste to speed

up development time

Leveraging Technology Across Multiple Markets. Rising technological intensity of

new products makes them correspondingly more expensive to develop and commercialize

High R&D costs that accompany more sophisticated products mean that global production

volumes are necessary to recoup the firm’s initial outlays R&D represents a huge fixed

cost in which large amounts of money and time are spent to test and finally develop a new

product Only by selling to the entire world can firms recoup their development costs

Thus, firms possessing highly proprietary technologies or distinctive, hard-to-imitate R&D

skills and facilities often seek to blitz the world with their products

For example, Honda Motor Company of Japan retains a distinctive technological

capa-bility in small combustion engine design and manufacture Because of its expertise, Honda

has been able to design and market engines for use in outboard boats, generators, mowers, motorcycles, snowblowers, and, of course, its best-selling line of cars in theUnited States and Japan The existence of a technological competence or skill encouragesthe firm to develop a full-blown global strategy, in which new applications of the underly-ing skill help build reputation, market share, and a global presence.

lawn-In highly scientific industries, such as pharmaceuticals and advanced composite rials, firms possessing highly proprietary technologies or patents on their products havealso pursued a global strategy Patents give the firm a temporary monopoly over its prod-uct, and thus entering worldwide markets greatly raises the firm’s earnings potential

mate-In the commercial aircraft industry, Boeing pursues a global strategy because the cost

of developing each new generation of aircraft is enormous For example, the new 777—for which orders were taken before a single plane was manufactured—is equipped withextremely advanced technical features, such as fly-by-wire controls and avionics that per-form many electronic control functions Equally important, all of the parts and componentsfor the 777 were designed and tested on computer before a single prototype of the planewas built Instead of building costly and time-consuming models, Boeing used computers

to electronically preassemble all of the plane’s components It also used digital imaging tolocate the problem areas within the plane that could become difficult for mechanics toservice The advanced R&D and proprietary computer-assisted design (CAD) techniquespossessed by Boeing provide it the capability to serve markets around the world

Worldwide Marketing Efforts. Most marketing efforts by their very nature must becarried out within individual local markets Marketing requires close contact with cus-tomers to ensure that the firm meets their needs Yet, some marketing activities lend them-selves well to supporting a global strategy The most obvious case would be a centralized,global marketing team or sales force that specializes in selling highly sophisticated, expen-sive products that are purchased infrequently In some industries, a common sales forcetravels the globe in providing customers with specifications, costs, and individual features

of the products For example, in the power-generation equipment industries, General tric, ABB, Toshiba, and Mitsubishi use global marketing and sales teams to compete withone another in selling large nuclear plants or steam turbines that are used in hydroelectricand coal-burning electricity plants The sales task is often highly complex, in that itinvolves discussing the specifications of the project with the customer over a lengthyperiod Moreover, the number of people who have the detailed, technical knowledgebehind such complex products and projects is few This scarcity compels companies such

Elec-as General Electric and ABB to rely on the same marketing team to travel the world insearch of customers for power generation equipment

Boeing and other commercial aircraft manufacturers have centralized their marketingefforts as well Whether the customer is in Saudi Arabia, China, Brazil, or Japan, Boeingwill send the same team that is knowledgeable about Boeing aircraft and their specifica-tions to meet with potential customers In this way, Boeing spreads the fixed costs of ahighly sophisticated, technically fluent sales force over its many markets

Competing by Cross-Subsidization. Firms pursuing a global strategy often engage in a

policy known as cross-subsidization Cross-subsidization refers to using the financial

resources and technological skills learned from one market to fight a competitor in another.Cross-subsidization is a powerful process that enables firms competing globally to buildleverage across markets by transferring funds, skills, low-cost production, or marketinsights from one market to another Cross-subsidization, in its most sophisticated form, isthe deployment of resources and products across markets to maximize opportunities to

cross-subsidization: using

financial, technological,

and marketing resources

from one market to fight a

competitor in another;

involves extensive use of

“parry and thrust” tactics to

gain new market positions.

build leverage The presence of several large, global firms competing for the same market

often indicates a strong potential for cross-subsidization For example, Japanese and South

Korean consumer electronics firms practice cross-subsidization in the sale of televisions

and VCRs globally The earnings they receive from their home market often allow them to

fund expensive promotion efforts in the United States and Europe Simultaneously, the

marketing skills and techniques they learn from selling in one overseas market help them

refine their techniques to enter another Thus, cross-subsidization, when carried out

effec-tively, enables firms pursuing a global strategy to build upon success in one market to

pen-etrate and fight competitors in another Some authors have termed this type of global,

cross-subsidization fight as “parry and thrust,” which is also the phrase used to describe

how fencers maneuver around one another when searching for weakness and advantage.6

The careful coordination of the actions of its subsidiaries through cross-subsidization

allows firms to achieve a systemwide view of competition and market share

Cross-subsidization is a vital tool that enables firms to deal with the second issue of

global expansion: How do we minimize our vulnerabilities and maximize our

opportuni-ties against the actions of similarly minded competitors? Cross-subsidization is directly

concerned with the actions of competitors across shared markets The actions and earnings

of Sony in the European television market, for example, may have direct effects on the way

it will compete in the U.S market Sony could use the potentially high profits earned from

Europe to develop a new line of less-costly televisions to penetrate the U.S market even

further, thus escalating its fight with other firms jockeying for the American market Based

on Sony’s capability to use cross-subsidization in this manner, existing competitors in the

U.S market such as Toshiba, Sanyo, Sharp, Lucky-Goldstar, Samsung, General Electric,

and Matsushita have reason to watch and monitor Sony’s moves in Europe and all of its

other markets Conversely, Sony needs to keep a watchful eye on Matsushita, which may

seek to build share in both the United States and adjacent markets Matsushita’s large

domestic market in Japan and growing presence in Latin America will give Matsushita a

source of funds that it could use to battle Sony elsewhere, perhaps in Southeast Asia or the

Middle East Thus, the competitive moves of firms that practice cross-subsidization

resem-ble a global game of chess, whereby a move anywhere on the board (world markets) will

eventually have ripple effects elsewhere

Boeing’s early 1990s strategy against global competitors Airbus and

McDonnell-Douglas shows how cross-subsidization applies even when an industry has only three

com-petitors Both Boeing and Airbus sought to build market positions around the world, while

McDonnell-Douglas was largely concerned with protecting its U.S market base Boeing

frequently offers superior financing, servicing, and other buying incentives to its vital

European customers, such as Lufthansa and Air France A strengthened position in Europe

gives Boeing more room to maneuver against Airbus in its home base By selling more

planes to European customers, Boeing squeezes Airbus’s cash position and market share

On the other hand, Airbus is likely to offer its own set of superior and possibly more

attrac-tive financing terms to its customers in North America, such as United Airlines and

Amer-ican Airlines If Airbus is successful—as it has been in several cases—then it gains a

valu-able beachhead from which to penetrate Boeing’s home market with other types of aircraft

in the future Thus, Boeing and Airbus are engaged in constant parrying and thrusting into

each other’s markets Note that McDonnell-Douglas, a weak third player in the 1980s and

early 1990s, was largely unable to move against Boeing or Airbus successfully, since its

excessive reliance on the U.S commercial market gives it little leverage against either firm

elsewhere Thus, it is no accident that both Airbus and Boeing gained strength at the

expense of McDonnell-Douglas, since its lack of a global presence handicaps it against

better armed competitors Boeing’s recent acquisition of McDonnell-Douglas occurred at

a time when McDonnell-Douglas could no longer afford to commit vast sums of moneyinto development expenditures for a market base that was increasingly squeezed by twolarger competitors practicing cross-subsidization.

Thus, global strategies are designed to link the firm’s operations in many markets into

a systemwide perspective for building and extending competitive advantage Global egy seeks to exploit technologically driven sources of leverage Leverage results when thefirm can extend and transfer its skills and resources across markets that are interdependentand mutually reinforcing When pursued successfully, global strategy maximizes a firm’sopportunities to transfer its products, processes, and competences from one market toanother

strat-Multidomestic Strategy

A multidomestic strategy is often the preferred way to compete when regional marketscontrast with one another in terms of consumer tastes and preferences and competitiveconditions The more diverse the regional or national market conditions, the greater is theappeal of the multidomestic strategy A multidomestic strategy is really a collection ofcountry or region-based strategies, where each region or country (defined by the firm’seconomic reach and organizational approach) possesses its own set of value-adding activ-ities or value chains Popular images of firms pursuing a multidomestic strategy, for exam-ple, include various sizes and tastes of Maxwell House coffee or Snapple teas in China,India, and other locales where these offerings are considered new and perhaps exotic prod-ucts Nestle’s assortment of chocolate candies that are mixed to suit varying tastes in dif-ferent countries also represents a multidomestic strategy A number of economic andindustry-driven factors promote the use of multidomestic strategies for a given industry.These industry drivers include heterogeneous demand patterns across markets, feweconomies of scale in production, high product transportation costs, variations in distribu-tion channels across markets, and the need to source products locally because of perish-ability, legal requirements, or specific types of ingredients or components

Firms pursuing a multidomestic strategy adjust and tailor their products and practices

to the individual needs of each market As opposed to a global strategy, a multidomesticstrategy treats each market independently and separately Firms pursuing multidomesticstrategies also view competitive challenges in the context of local conditions and therefore

do not attempt to form a completely unified, systemwide approach to building and ing competitive advantage Key to a successful multidomestic strategy is treating eachmarket as a unique arena from which to differentiate the firm’s products as much as pos-sible from those of local producers or other multidomestic competitors Thus, value chains

extend-in one market may be significantly different from value chaextend-in configurations designed foranother market with very different economic or environmental settings The lack of suffi-cient economies of scale across multiple markets is a critical industry factor that promotes

a multidomestic strategy The multidomestic strategy’s independent and separate treatment

of markets and subunits is shown in Exhibit 7-9

Although firms undertaking a multidomestic strategy can sometimes transfer what theyhave learned from one market to another, this transfer is difficult to do on a consistent basisbecause of the numerous value chains dedicated to each market Because the individualmarkets are often so unlike one another, the firm must essentially retrace its steps to buildcompetitive advantage in each market, making it difficult to leverage highly tangible skills

or resources across markets Firms pursuing a multidomestic strategy tend to exhibit thefollowing practices to build competitive advantage in each market: (1) adapt and changetheir products frequently, (2) conduct key value-adding activities and operations in each

market locally, (3) coordinate marketing and sales within individual markets, and

(4) leverage a brand name or reputation globally to build image (See Exhibit 7-10.)

Frequent Product Adaptation. Central to the multidomestic strategy is frequent

prod-uct adaptation and modification to match the specific tastes and consumer preferences of

a firm’s individual markets In stark contrast to a global strategy, in which product

stan-dardization often conveys the image of quality, frequent product adaptation in a

multido-mestic strategy is required because the product or service does truly differ along some

crit-ical attribute across markets Superior quality in such products as food, beverages,

banking, clothing, and even some categories of industrial goods and supplies is not based

Multidomestic Strategy of Expansion

HQ

• Competitive advantage built in each separate national or regional market

• Markets and subunits treated independently from one another

• Controls of activities are decentralized, reporting back to headquarters

e x h i b i t (7-9)

Key Characteristics of a Multidomestic Strategy

• Customization or frequent adaptation of products for each separate market

• Few systemwide opportunities for economies of scale

• Value-adding activities performed and duplicated in each market

• Coordination of marketing and sales within each market

• Quality and image across markets are important sources of competitive advantage

e x h i b i t (7-10)