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Stages of global development.

INTERNATIONAL MARKETS BECKON CORPORATIONS WITH PROMISES OF SUCCESS, BUT STRATEGIC CHALLENGES AWAIT. BUILDING A BEACHHEAD STEP BY STEP CAN HELP THE GLOBAL-MINDED MAKE THE TRANSITION.

A company that only operates in its home market today can't simply decide to be global tomorrow. No matter where the adventure begins, it is inevitable that the company will go through a gradual transformation on the way to becoming a truly global organization.

A strategy of localization--building competitive advantage and market leadership in a series of carefully selected local markets--can be the route to globalization.

How do you evaluate your company's current position? How do you change as you move from domestic to global status? What steps need to be taken to build a superior position vis-a-vis the competition?

A.T. Kearney first developed the framework called "Stages of Global Development" while researching the trade and investment climate in Japan. A 1992 research project, "Capturing the Asian Potential: Insights for Western Multinationals," augmented and refined this framework. The findings described here are derived from that research. Kearney surveyed European and U.S. multinationals operating in 10 Asian countries, not including Japan. They represented four industry sectors: automotive and automotive parts, electronics, consumer products, and chemicals and pharmaceuticals.

Our purposes were to assess their investment strategies across key economies and to identify which companies were successful in which countries and why.

We defined globalization as "the process of building, reinforcing, and leading an organization toward establishing and maintaining competitive positions based on the company's distinctive strengths across a selected set of geographically dispersed markets." From that starting point, we developed our premise that a strategy of localization, or global buildings blocks, is essential to move toward full globalization.

KEY FACTORS DRIVING GLOBALIZATION

We found that companies in certain industries seeking a competitive advantage have a greater need to expand globally, for example, in Asia. The key factors influencing investment are:

* Top-line opportunities. A number of economies have grown large enough to support critical mass operations. As these economies move up the economic development continuum, customers in these markets demand higher product quality and performance at world-class standards.

* Economic leverage. Accessing world markets to leverage large capital and development investments to reduce unit costs to competitive levels is required in many industries, such as semiconductors, pharmaceuticals, and telecommunications.

* Competition. Competitors are not standing still, but also are investing to build scale in world markets. Leaving them alone to reap the rewards of "safe sanctuary" in their home or other strategic markets is competitive suicide.

* Decreasing frictional costs. Transaction costs are declining worldwide, including tariffs, logistics, regulations, and other non-tariff barriers.

* Increasing interdependencies. As economies develop complementary resource endowments, prospective investors are encouraged to formulate investment strategies that recognize the interdependence among nations.

Attaining economies of scale often accelerates globalization, but not all companies must be global to compete effectively. It is important to recognize each one has a unique set of markets and internal requirements that govern the pace of globalization.

The goal is to pick the right markets--the key markets in each region for the company--and become the leading competitor in each one. Effective localization is the starting point.

LOCALIZATION AND GLOBALIZATION

Localization is based on identifying and addressing the differentiated needs of customers in the local markets while leveraging the strengths of the organization worldwide. Success in a foreign country requires the company to adapt to local demands in product or service offerings, business processes used, and technology applied. As the definition presented above shows, globalization is the result of successful localization, or local building blocks strategy.

Localization and globalization efforts are not an either/or proposition. Instead, as our research demonstrates, companies should maximize their strengths in each local market by creating a sustainable competitive advantage. It doesn't mean simply playing by the local rules, but sometimes working to change the rules to help create the advantage.

The successful companies in the "Capturing the Asian Potential" study spent considerable time, effort, and capital to become insiders in their selected markets. We found they addressed the following localization objectives:

* To create customer value that differentiates them from the competition.

* To develop and sustain an advantaged competitive position in each market.

* To access and leverage comparatively advantaged resources, such as material, labor, and technology.

* To access, leverage, and develop local supplier chains and distribution channels to support in-country operations.

* To help establish barriers against competitors entering the market that are favorable to one's own organization (e.g., participating in making rules or influencing standards).

GLOBAL DEVELOPMENT FACTORS

A.T. Kearney's "Stages of Global Development" provides a framework for evaluating a company's global profile and identifying areas that require action. The stages are based on four global development factors:

Offerings. The approach a company takes to offering its products or services in a foreign market often translates directly to the degree of marketplace acceptance. The more the offerings mirror standards of the foreign market--in terms of criteria, including features, packaging, quality, and service support--the more likely they will be accepted.

Business processes. As companies become more familiar with foreign markets, they tend to perform more business processes overseas, shifting resources to the optimal location for each. Such processes include sales, distribution, logistics, production, R&D, strategy development, capital investment decision making, and human resources planning. Companies that move toward more complex operations in a country find they must increase the functional breadth of the organization that supports local operations.

Management. Management's orientation toward a company's foreign operations has a direct impact on success and global development. When companies are domestically focused in their approach, and executives have little foreign experience or interest, foreign operations suffer. Typically, senior management visits once a year, decrees policies and objectives, and leaves local management to "raise" the corporate offspring.

Results. Less sophisticated companies are primarily concerned with simple cost and margin measures with a short-term focus. Globally oriented companies are more flexible in performance requirements and focus on longer-term results, such as market penetration, building the business for the future, and accepting a strategically adjusted return on investment.

STAGES OF GLOBAL DEVELOPMENT

The four stages of global development are described below and on the accompanying chart, which shows how the 55 companies in the Asian survey were analyzed with respect to each of the factors.

Stage I companies are opportunistic exporters. The domestically designed and manufactured products of these companies find their way to overseas markets through standard export channels. They have little or no presence or investment outside their home market. They make no efforts to differentiate their product or service geographically. These companies typically have a foreign agent or licensee that handles their products once they leave the boat.

Stage I companies typically see an opportunity to leverage an underutilized asset and to test foreign markets on a variable-cost basis using existing technology.

Stage II companies, or international enterprises, want to be in foreign markets. They recognize the advantages of tailoring a product to foreign markets. They are slow to fully adapt local designs, to manufacture in other countries, or to make other major investments. They approach major investments--such as significant product modification, local manufacturing sites, and human resource commitments--slowly and with extreme caution. These organizations tend to be "plodders" in their approach to localization. Top executives of such companies generally speak the language of international business, but not fluently.

Stage III companies are usually large multinationals with extensive experience in a number of markets (although they tend to become involved in cultures similar to that of their home country). They can fulfill local service needs and have established bases for marketing, manufacturing, and/or R&D in several foreign countries. However, they still generate and maintain critical strengths in their home markets and roll them out to foreign subsidiaries.

Stage IV companies are global. They are local players in a diverse mix of foreign markets and have extensive foreign experience in tailoring products to overseas markets, manufacturing and/or conducting some technical development activities in foreign countries, and locally fulfilling all service needs. They are country neutral, but they are at home and competitively advantaged in their key markets. They have developed an interdependent and geographically dispersed organization that creates, maintains, and shares strengths in the company. Resources are fluid and exchanged efficiently.

We found a significant correlation between companies ranked as more advanced in their global development and those reaping greater returns from their investments in Southeast Asia. However, most companies were inconsistent in their approach to creating a global business, which kept them from fulfilling all the Stage IV characteristics, as the table indicates.

MATCHING GOALS TO REALITY

Before diagnosing where a company is and where it should be, it is well to remember that every firm does not need to be a Stage IV company. Businesses can succeed and gain competitive advantage at any stage, depending on variables, such as the nature of their product or service, distribution, cost structure, and competitive environment.

Not every company is cut out to compete at Stage IV. And not every industry is optimized by truly global companies. Different industries and businesses need different strategies and time frames in terms of global development.

In construction equipment, for instance, two major worldwide competitors control 70 percent of the world market. These companies do not need to be Stage IV companies across all descriptors to keep their competitive positions. They are probably Stage IV for service, but Stage II or III for other factors. Global scale is not an issue because bulldozers are not produced in huge runs.

For most companies, it is important to link goals at each stage of global development with the company's objectives--global scale, global effectiveness (scope and scale of value-added activities that the company localizes in specific markets), and in-country performance versus competitors.

Companies just entering Stage I--those that are considering actions outside the domestic economy--will do well to look at the possible benefits of export strategies. After all, the international market is more than four times larger than the U.S. market, and growth rates in some overseas markets far exceed those in the U.S.

Lumber firm Louisiana-Pacific, headquartered in Portland, OR, took advantage of its export potential and is selling wood to Japan by the boatload. But first, the company talked to its customers to find out what they needed. Louisiana-Pacific now makes 3-by-6 paneling favored by Japanese customers in addition to the standard 4-by-8 paneling favored in the U.S.

There are many other examples of companies that are pursuing carefully planned Stage I export strategies. Dean Foods, a $2 billion dairy and vegetable processing company based in Illinois, exports non-dairy powdered creamer, and canned and frozen vegetables to Europe and Asia. In addition, the company recently started selling liquid milk in Mexico. But its strategy does not provide for operating production facilities overseas. Dean Foods executives have decided they don't want to take on the problems of setting up complicated distribution systems in underdeveloped countries.

Companies such as Dean Foods, which deals with highly perishable products, may find they can succeed at Stage I for many years --and they may move gradually into Stage II. They have analyzed their distinctive strengths and their international markets, and gained a good understanding of their global position.

AST Research, a computer company in Irvine, CA, is a good example of a company moving from pre-Stage I into Stage II. In 1984, AST had 150 employees and no overseas sales. Today it has 2,200 employees, only half of them in the U.S. Exports make up 35 percent of sales. AST began by marketing its IBM-compatible personal computer enhancement board in Europe, and sales took off. Eventually the company added two overseas plants and marketing units in 11 countries. Domestic employment has continued to grow as the company expands overseas.

These examples of companies that begin as opportunistic exporters exemplify Stage I companies. Louisiana-Pacific, a Stage I exporter, is taking its first tentative steps toward localization by determining the needs of its Japanese customers. And Dean Foods is a successful Stage I exporter--and may remain at that stage.

Whether companies are at Stage I or IV--or somewhere in between--tangible results are the most important measures of global success. But there are also intangible benefits to an effective global strategy. For instance, as companies become global operators, they learn to choose markets and suppliers without regard to national boundaries and to become more alert to competitive threats wherever they operate. Their executives generally become more sophisticated managers and more relaxed citizens of the global village.

Over time, these global executives move through their own stages of global development.
COPYRIGHT 1993 Chief Executive Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Publication:Chief Executive (U.S.)
Date:Jan 1, 1993
Words:2104
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