Toward a new global strategy.
While no one would argue that the key for survival for U.S. companies is their ability to globalize, the rules of the game have changed. Conventional wisdom for international business - that companies should adapt their strategies to each country in which they do business - has been debunked by falling trade barriers, improved transportation and communications, and converging consumer tastes. Companies now need globally integrated strategies that maximize commonality and standardization across all countries, while minimizing the cost of local adaptation. This means, for example, designing products that are global from the start rather than adapting a home country product to each new foreign market.
This new global strategy does not mean one approach for every company. Different industries have different global needs, and a company's competitive position and internal resources also influence its global strategy. Developing a new global strategy often means restructuring a company's domestic and international divisions to compete with international competitors - and for American companies, change often doesn't come easily.
Take Black & Decker, now a $5 billion, Towson, MD-based manufacturer of power tools, which faced formidable competitive pressures to globalize in the late 1980s. At the time, Black & Decker's market share was being eroded by a Japanese competitor, Makita, whose own strategy to produce and market globally standardized products worldwide made it the low-cost producer. Internally, Black & Decker's international fiefdoms combined with national chauvinism to stifle product development and new product introductions. The company's solution was to embark on a major program coordinating new product development worldwide to develop core standardized products that could be marketed globally with minimal modification. Streamlining R&D also offered economies of scale and less effort duplication, reducing cycle times. The company strategically emphasized design, eventually becoming a leader in design management. Black & Decker consolidated worldwide advertising by using two principal agencies, giving the company a more consistent worldwide image. It also strengthened the functional organization by giving functional managers a larger role in coordinating with company management. Finally, Black & Decker purchased General Electric's small appliance unit, giving it world scale economies in manufacturing, distribution, and marketing.
Black & Decker's globalization strategy originally faced skepticism and resistance from management. The chief executive, Nolan D. Archibald, took a visible leadership role and made management changes to move the company toward globalization. By 1994, eight years after the globalization effort began, the company's revenues had tripled, and profitability had improved even more.
Developing and maintaining a customized global strategy requires managers to make many choices, among them:
* Products/services. Should a company offer the same or different products in different countries?
* Location of value-added activities. Where should the company locate each of the activities that comprise the entire value-added chain - from research to production to customer service?
* Marketing. Should a company use the same or different brand names, advertising, and marketing elements in different countries?
While locally adapted products and services offer the advantage of matching local needs and tastes, companies are recognizing the benefits of standardization rather than localization.
Globally standardized products offer the benefits of cost reduction in both development and production, enhanced customer preference from being the same around the world (e.g., Coca-Cola, Club Med vacations, and computer software), and even improved quality from having fewer products to support (e.g., Toyota's renowned product quality stems in part from its focus on a few standardized models, in contrast to General Motors' proliferation of different models for different regions of the world).
But standardized, global products can still allow for local touches. The trick is to select those with the greatest local appeal while adding the least cost. For example, beverage cup holders - introduced in Toyota cars - are much prized by car drivers in the U.S. but not elsewhere. Adding this feature costs little, so most carmakers in this country followed Toyota's innovation.
For services, such local adaptation can be extremely easy. By changing supplementary services rather than the core one, companies can tailor services for foreign customers for little or no additional cost. United Airlines customizes its trans-Pacific service simply by replacing some of its American cabin attendants with Asian ones.
The classic multinational strategy has been to reproduce activities - particularly production - in many countries by setting up factories and other manufacturing assets overseas. The classic export-based strategy has been to locate as much of the value chain as possible back home, while locating overseas only downstream activities - such as selling, distribution, and service - that have to be performed close to the end customer. A global strategy involves a third approach: locating each individual activity in the one (or few) countries most appropriate for that activity. So a business pursuing a global activity strategy might locate research in the United Kingdom, development in Germany, raw material processing in Mexico, sub-assembly in the U.S., final assembly in Ireland, and so on. The key principles in locating the value chain are to minimize duplication and cost, maximize learning, and retain flexibility.
Texas Instruments now maintains a major software development in Bangalore, India, connected via satellite to a global network. American Express has consolidated much of its back-office work force in Europe from 16 regional centers in major - and expensive - cities to one suburban town in southern England. In the most extreme case of global specialization, Nike does not own any factories, but subcontracts all production to partners in Southeast Asian countries. Kodak, IBM, Hewlett-Packard, and Texas Instruments all conduct research in Japan to tap into that country's technical innovations. Conversely, Japanese companies such as Nissan and Mazda maintain design facilities in California.
Multinational companies increasingly use global marketing by taking a uniform approach to some elements of their worldwide marketing - and some have been highly successful. Consider Nestle with its brand name applied to many products in all countries, Coca-Cola with its global advertising themes, and Xerox with its global leasing policies.
Every element of the marketing mix - product design, product and brand positioning, brand name, packaging, pricing, advertising strategy, advertising execution, promotion and distribution - is a candidate for globalization. Within each element, some parts can be globally uniform and others not. For example, a "global" pack design may have a common logo and illustration in all countries, but a different background color in some countries. Recognizing the need for global uniformity in its advertising, IBM consolidated its $500 million in worldwide advertising at one advertising agency in 1994.
Not all products need a global brand name: Products that are not bought when consumers are outside their home countries or to whose advertising or packaging they are not exposed are often better off with local names. Unilever, for example, uses global advertising but local brand names for one fabric softener product.
On the other hand, pricing for products increasingly needs to be globally uniform to avoid unauthorized transhipment and gray markets. In contrast, the non-transportability of most services allows wide price variations in most categories.
Smaller companies need to choose between a local niche strategy, thereby avoiding the global giants, or going toe-to-toe in global strategy. The conventional wisdom is that smaller companies are better off playing the local game. But such an approach is self-limiting, and localization may be insufficient protection against the scale and consistency advantages of larger companies with global strategies.
Smaller companies have some advantages of their own. First, businesses with a small global market share can focus on a standardized approach to satisfy a small market segment. Mercedes-Benz automobiles, Louis Vuitton accessories, and other luxury products typify the global strategy approaches of small-share businesses. Second, smaller companies do not have the globally dispersed organizations that make it more difficult to implement global strategy. Third, smaller companies do not have the resources to fragment their efforts across a large number of local products and operations.
Formulating a strategy is only one piece of the puzzle for companies to become truly global. Equally important are the strategy's implementation and the development of an internal organization that allows for international coordination. Without all three working in concert, a global strategy cannot be successful.
George S. Yip is an adjunct professor at the Anderson Graduate School of Management, UCLA, where he teaches business strategy and global marketing. He is the author of "Total Global Strategy: Managing for Worldwide Competitive Advantage," (Prentice Hall, 1992) and many articles on global strategy.
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|Title Annotation:||B-School Brain Trust/Advice from Anderson|
|Author:||Yip, George S.|
|Publication:||Chief Executive (U.S.)|
|Date:||Jan 1, 1996|
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