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After reviewing the staff list when looking into training for various roles, you discover the company employs only one person who has identified as having a disability. Given approximately 15% of the population has a disability, you think the company is missing an opportunity to benefit from diversifying its workforce by leveraging this relatively untapped talent pool. You also realize that hiring additional staff with a visible disability will help spread awareness of the need for digital accessibility throughout the company. You make the following recommendation to the accessibility committee: The company should make an effort to hire an accessibility quality-assurance person to test products for accessibility, provide input on the company’s accessibility practices, and help expose staff to people with disabilities to raise awareness of the need for digital accessibility. You suggest hiring a qualified person, who is blind and uses a screen reader to access the web and other digital information, into a new office support role.
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Addressing Myths About Hiring People with Disabilities
Although there are many well-educated, skilled people with disabilities in Canada and in other countries around the world, they continue to be unemployed, or underemployed at a rate more than twice that of the general adult population. In fact according to Human Resources and Skills Development Canada, more than 50% of people with disabilities have high school diplomas, and over one third of these have completed a post-secondary program.
In Ontario, the unemployment rate for people with disabilities is about 8% higher than the general population, as reported by the Ontario Chamber of Commerce (OCC). According to the OCC, this is in part due to systemic and cultural discrimination based on misperceptions of people with disabilities. People with disabilities are often perceived as less productive, more likely to take time off, too costly to accommodate, and more likely to be a burden on employees who do not have disabilities. In fact the opposite is true for all these points. Because people with disabilities have more difficulty finding work, they are likely to value employment more than typical fully abled workers.
The Ontario Chamber of Commerce has put together a list of eight myths about hiring people with disabilities, and the OCC challenges those myths with facts. Take a few moments to read through “8 Myths About Hiring People with Disabilities.”
Readings & References:
Accessible Hiring Practices
In Ontario, the employment standards of the AODA describes requirements for accessible employment practices, from recruitment procedures, to employee accommodations, to performance management, and more. As of January 1, 2017, all organizations in Ontario, including small ones, must meet the AODA employment standards’s requirements. These requirements are summarized below:
1. Notify employees and the public about the availability of job accommodations for applicants with disabilities.
2. Ensure that the methods being used to advertise employment vacancies are inclusive, with alternative formats available where appropriate.
3. Notify prospective applicants that interview accommodations are available upon request.
4. If an applicant requests accommodation, consult with the applicant on suitable ways to provide those accommodations.
5. Upon making a job offer, and upon start of employment, notify candidates of policies for accommodating employees with disabilities.
6. Upon request, provide information in accessible formats to employees needed to perform their job, as well as information generally available to employees.
7. Provide personalized emergency-response information that takes into account employees’s disabilities, and to a designated assistant if one is required. Review emergency-response information if an employee moves or changes jobs.
8. Have a process in place to document individual accommodation plans (other than small organizations).
9. Upon return to work due to disability, develop an accommodation plan for employees returning after an absence.
10. During performance reviews, take into account employee disabilities, accessibility needs, and individual accommodation plans.
11. When career development is provided, take into account employee disabilities, accessibility needs, and individual accommodation plans.
12. When redeployment is provided, take into account employee disabilities, accessibility needs, and individual accommodation plans.
Readings & References: AODA Employment Standards
Employee Accommodation
For employees with disabilities, employed in a role that involves consuming or producing digital information, accommodations typically include supplying assistive technologies that provide access to a computer. If employees with disabilities do not already have a preferred means of accommodation, they will often receive a workplace accommodation assessment, typically conducted by an occupational therapist (OC). The OC will recommend adjustments to workspaces to accommodate a disability, as well as assistive software or hardware to make possible or aid with tasks associated with particular roles that involve using a computer.
The following is a list of potential accommodations that may be required by people with disabilities. In most cases accommodation will cost less than \$1000, sometimes much less.
People who are blind
People who are blind will typically require a screen reader to access a computer, which reads aloud the information on a computer screen. If they are deafblind, or for blind users who read Braille, they may also require a refreshable Braille display working along with a screen reader to turn text on a computer screen into raised dots on a finger pad that refreshes while navigating through the text.
People with low vision
People with low vision may or may not require a screen reader. Some will require magnification software, while others will rely on magnification built into the operating system or web browsers they may be using.
People who are deaf or hard of hearing
For those with loss of hearing, they may not require assistive technology beyond hearing aids. They may, however, require audio content in alternative formats, typically written, and they may require accommodations for meetings, either a scribe to take notes or use instant messaging, or perhaps voice recognition software to transcribe spoken words to a computer screen. Real-time captioning services may be an option, connecting by phone or internet to a service that types what is heard to be displayed on a computer screen.
Some people who are Deaf will be able to read lips. For this to be effective, others need to be trained to be aware when they speak, that their lips are in view for the person who is lip reading.
TTY (text telephone or teletypewriter) may also be required if a person who is Deaf will be communicating by telephone. Video-relay services, similar in nature to real-time captions, have a remote interpreter listen and interpret to sign language, displayed on a computer screen.
In some cases, particularly where ASL is the person’s first language, a sign-language interpreter may be required. This can be an expensive option, however. Augmentative communication devices might be used as an alternative to sign-language interpreting, used to translate English into ASL.
People with cognitive disabilities
Cognitive disabilities can be quite varied. Assistive technologies are less likely to be required. Rather job accommodations may be needed, aligning work duties with the capacity to comprehend and complete those duties effectively. People with cognitive disabilities may be well suited to take on entry level duties that are often not challenging enough for others.
Other’s with cognitive disabilities such as autism, Asperger’s Syndrome, and other pervasive developmental delays (PDDs), can be quite intelligent in some respects, while having difficulties with social interaction. They may be able to take on highly complex, specialized tasks, but may need privacy or routine to function effectively.
People with learning disabilities
People with learning disabilities are typically as intelligent as others, some more than average. They typically have difficulties in a specific area, such as reading, or mathematics, or interpreting visual input. In some cases, no accommodations are needed. For others, they may required text-to-speech technology to read text aloud.
People with fine-motor disabilities
For those who have limited use of their hands, perhaps due to a spinal-cord injury, or perhaps an inability to hold their hand steady enough to handle a keyboard or mouse, a variety of assistive technologies may be employed.
Speech recognition may be required by some, allowing them to speak commands to a computer, or dictate text to a document. For those who cannot handle a mouse or keyboard, technologies such as eye tracking, or a head mouse, might be required to allow them to control a mouse pointer, and press a large button switch that take the place of a mouse click.
Some may require a keyboard with large keys, that are easier to target with a shaky hand. Others may be accommodated with low-tech solutions such as a keyboard cover with holes over each key that prevent adjacent keys from being pressed.
People using a wheelchair
People using a wheelchair to accommodate loss of movement in their legs typically do not need any assistive technology when interacting with a computer. For those who have loss of movement in the arms and legs, technologies like those described for fine-motor disabilities may be required.
Readings & References:
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In terms of web accessibility, it is the web developer who must be knowledgeable in implementing accessibility in web content. As much as others may understand how and where barriers can affect access, it is the developer who makes accessibility happen. A web developer usually has a university-level computer science degree and/or special training in developing for the Web.
Currently, there are few formal technical programs that provide anything more than cursory coverage of web accessibility. As such, web developers who are qualified to implement accessibility are often self-taught. Finding a web developer with expert accessibility skills can be a challenge, and it may mean settling for a person who simply knows the basics about web accessibility. If you plan to hire a web/IT accessibility specialist, hiring web developers with knowledge of accessibility is less of an issue, since the specialist can oversee the work of the developers and guide or train them (see the next page for further details).
Web Developers’ Accessibility Skills
In addition to the skills that might be part of a standard job description for a web developer, an Accessible Web Developer should also have these characteristics:
• Skilled use of HTML, CSS, and JavaScript
• Good understanding of WCAG 2.0, or local accessibility guidelines
• Knowledge of WAI-ARIA (preferably skilled use of)
• Ability to effectively use JAWS or another screen reader
• Familiarity with mobile screen readers
• Familiarity with automated web-accessibility checking tools
• Familiarity with browser-based accessibility-testing tools (plugins, etc.)
• Knowledge of accessibility issues in technologies such as Flash and Java
• Knowledge of cross-browser accessibility considerations
If you can find a web developer with expert understanding and all the skills needed to implement accessibility, hire that person. But, chances are you will find people with some, but not all of these characteristics. Hire the ones with the broadest backgrounds who are resourceful enough to find answers to accessibility problems based on familiarity with web accessibility as a whole.
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6.06: Web and IT Accessibility Specialist
The web/IT accessibility specialist has a key role in the development of organizational accessibility culture. This person is often a manager with a technical background or a web developer, knowledgeable of accessibility and disability issues, whose role it is to oversee an organization’s web and IT accessibility efforts.
Much like web developers with accessibility expertise, accessibility specialists can also be difficult to find and they are often self-taught. They come from varied backgrounds and through experience working with people with disabilities and assistive technologies, they develop a unique awareness of accessibility and what that means from technical, social, economic, political, and educational perspectives.
Accessibility Specialist Knowledge and Skills
The range of skills and knowledge will vary from specialist to specialist, though there are some core characteristics to look for, and a range of additional skills that will be outlined here. Duties may also vary, depending on the organization’s requirements. The following is a generic list of duties and potential characteristics for a web/IT accessibility specialist. A variation of these characteristics may apply in different circumstances, whether you are working in the business or corporate world, in education, in government, or in the accessibility services field.
Duties
• Manage and/or implement web accessibility efforts throughout the organization
• Accessibility quality control of documents, websites, and IT systems
• Train staff from varied backgrounds (e.g., customer service, sales, developers, and managers)
• Develop documentation and training materials for diverse groups within the organization
• Report accessibility/research efforts to senior management/stakeholders
• Provide assistive technology guidance for clients or staff with disabilities
• Present accessibility/research efforts at relevant conferences or meetings (this item is more specific to the educational sector)
• Write and publish accessibility/research efforts (this item is more specific to the educational sector)
• Participate in international standards working groups that promote accessibility
Minimum Core Knowledge
• Strong background in web development
• Expert knowledge of WCAG 2.0
• Project management skills
• Functional knowledge of WAI-ARIA (expertise would be an asset)
• Knowledge of accessibility features across a full range of operating systems
• Experience teaching or training adult learners
• Familiarity with mobile and desktop screen readers
• Familiarity with automated accessibility checkers
• Graduate degree or better, in a related field or equivalent practical experience
• Ability to interact effectively with junior and senior staff, government and the public
• Strong oral communication skills
• Technical writing skills
Additional Skills
• Knowledge of a range of assistive technologies and devices
• Knowledge of UI design, implementation and testing
• Knowledge of disabilities, and disability sensitivity
• Functional knowledge of ATAG 2.0 and UAAG 2.0 specifications
• Familiarity with international accessibility and disability regulations
• Well networked with the global accessibility community
• Qualitative research background (user studies)
Readings & References: For examples of web/IT Accessibility Specialist job descriptions, review the following resources:
6.07: Self-Test 8
1. When hiring a new graduate web developer, they should list at least one course they took on web accessibility.
1. True
2. False
2. Workplace accommodations for a person who is blind would typically include which of the following technologies? Choose all that apply.
1. Screen reader
2. Voice recognition
3. Trackball
4. Text-to-speech
5. Screen magnification
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When hiring staff, you can question them about their general accessibility knowledge during the interview process. Though typically not a requirement for most jobs, accessibility knowledge and skills should be an asset when considering candidates. For most roles, except perhaps web developer or procurement roles, role-related accessibility knowledge and skills can be learned with a little training. Web developers and purchasers will require a much broader understanding than most other roles.
Below are examples of the types of questions that might be asked, grouped by the knowledge area or skill type, with suggested answers. This is not an exhaustive list.
Disability Sensitivity
(Also see Customer Service section below)
When a blind person using a white cane, enters your store, how should you approach that person, and/or offer assistance?
If the person appears to be be having difficulty, ask first “Can I help you?” If the person answers yes, ask “How can I help you best?” and follow their lead. Never assume a blind person, or any other person with a disability, needs help. Some people will not want to be helped, preferring independence.
When a blind person enters your store with a service dog, how should you address the dog entering your store or restaurant?
The dog is working, and should be ignored. Do not pet the dog, or address the dog directly unless the person suggests you may. The dog must be allowed in the store or restaurant, though may be denied access to food-preparation areas.
You catch yourself saying “we’ll see each other later” to a blind person, or you catch yourself saying “we have to run” to a person in a wheelchair. How should you respond to these sayings?
You do not need to respond. Phrases like these are a natural part of daily life, and people with disabilities will not be offended by them. They may, however, be offended by apologizing for the phrase.
Organizational Requirements (Basic)
What accessibility regulations affect businesses in Ontario (or some other location)?
In Ontario, candidates should mention AODA. Bonus if IASR is mentioned or the standards that make up this regulation.
In the U.S., mention section 508 of the Rehabilitation Act and the Americans with Disabilities Act (ADA).
Refer to International Digital Accessibility Regulations in Unit 2, for regulations in other parts of the world.
When are organizations in Ontario (or elsewhere) with 50+ employees required make their websites accessible?
In Ontario, they should mention January 1, 2014, bonus if they mention Level A, added bonus if they mention Level AA by 2021.
Organizational Requirements (Detailed)
Which standard of the IASR (AODA) governs digital accessibility requirements?
The Information and Communication Standard.
What standard are the web accessibility requirements of The Information and Communication Standard, and other regulations around the world, typically governed by?
The W3C Web Content Accessibility Guidelines (WCAG 2.0)
For organizations over 50 employees, what are the reporting requirements under AODA?
Section 4 of the regulation requires each obligated organization to establish and implement a multi-year plan describing how it will achieve its accessibility requirements under the regulation, and post that plan to their website (if they have one). Plans must be reviewed and updated every five years.
Customer Service
When a person who is deaf is communicating with you through a sign interpreter, how should you reply?
Reply directly to the person, not to the interpreter. Reply like you would reply to any person, looking directly at the person with your mouth clearly in view. Enunciate words clearly and, if requested, slow speech slightly to allow those who can lip read to more easily visually interpret.
If approached by a person with a prosthesis on their right arm, how should you shake hands with that person?
Shaking the left hand would be appropriate, or wait for the person to extend a hand. If a person is unable to shake hands, touch them lightly on the shoulder or arm to greet them.
An adult person with a cognitive impairment (e.g., Down syndrome) asks you for help. How should you respond?
Respond to that person as you would any other adult customer. You may want to slow your speech slightly and speak clearly. Do not speak to the person as if they were a child. Do not speak through a family member who might be with the person.
A person in a wheelchair has approached you asking about a particular product that requires an extended description. What might you do to provide a respectful answer?
Talk to the person like any other adult. If there is an opportunity to sit, pull up a chair and address the person eye to eye.
A person with a speech impairment is asking you in a stuttered voice, about the prices for a number of items, but is having difficulty getting the words out. How should you respond?
Be patient, and allow the person to finish speaking their question. Do not attempt to finish their sentences for them. Do not pretend to understand if you don’t. It is okay to say “I’m not sure I understand.” If they try again and you are still unable to understand, ask if the person would like to write the question, if the person is able.
Basic Web Accessibility
How would you make an image in a web page accessible to someone who is blind?
Add alt text to the image HTML to describe the meaningful elements of the image and, if necessary, provide a more detailed description in a caption or in the surrounding text.
When writing an article for the Web, how would you go about structuring the document to make it usable by someone using a screen reader?
Use proper HTML headings to organize sections and subsections, instead of using large bold text. Use proper list HTML to organize items arranged in a list, rather than using asterisks or separating items with a new line.
Document Accessibility
When preparing a Microsoft Word document, what can be done to make the document accessible to people who are blind?
Provide text descriptions for images. Arrange content using proper headings. Use table headers when presenting data in tables.
How would you make a PDF document accessible to a blind person, reading it with a screen reader?
If exported from Microsoft Word, make the Word document accessible first. Open the exported PDF in a current version of Adobe Acrobat Pro, and use its accessibility features to adjust the document. Use the reading order feature in Acrobat Pro to adjust the order in which the parts of each page are read, if necessary.
Role-Based Knowledge
What accessibility knowledge is needed by staff who are producing documents for public distribution?
Be able to use the accessibility test tools in Word or in Acrobat Pro, for example, to test and make adjustments to documents. Must be aware of accessibility features in document authoring tools, such as how to add alt text for images or create table headers.
When hiring counter/sales staff, what knowledge of accessibility/disability is needed?
They must be sensitive to people with disabilities. Speak to people with disabilities like you would speak to anyone else. Ask before attempting to help. Sit, if possible, when having a conversation with a person in a wheelchair. Do not interact with service animals. Speak directly to the person with a disability, not through their support person. Must be familiar with local customer service accessibility laws.
What accessibility knowledge or skills is needed by a person being hired for a web development position?
Web developers must be familiar with WCAG (specifically, principles, levels, success criteria, and techniques). Should be able to name a screen reader or two for accessibility testing (e.g., JAWS, NVDA, Window Eyes, ChromeVox, and others). Must be familiar with accessibility testing tools (and name a few, and what they are used for). Should be familiar with WAI-ARIA, used when developing interactive elements in websites or web applications. Understanding issues associated with mouse and keyboard access. Must be familiar with the types of barriers people with different types of disabilities encounter.
When hiring a manager, what accessibility knowledge do they need?
They must be familiar with the local accessibility laws and be able to describe the legislation and its requirements. They should understand the types of accessibility knowledge that should be possessed by the people reporting to them. They should be familiar with accessibility tools and resources their staff can access.
When hiring a marketing and communications person, what do they need to know about accessibility?
They should have a basic understanding of web and document accessibility, such as providing alternatives for visuals, structuring documents, using tools to test for accessibility. Must understand issues associated with using colour in an accessible way (e.g., contrast, alternatives for colour with meaning).
When hiring a human-resource person, what do they need to know about accessibility?
Human-resource people should be aware of role-based accessibility knowledge required for an organization’s various roles.
Accessible Employment Practices
What can be done to ensure that people with disabilities have an equal opportunity to apply for jobs as their able peers?
Employers should inform applicants that accommodations are available on request in relation to materials and processes used.
If accommodations are requested, the employer must consult with the applicant on suitable accommodations that account for the applicant’s disability.
If hired, the hiring notification sent to the applicant will take into consideration the applicant’s disability and include the organization’s policy for accommodating employees with disabilities.
Multimedia
What potential accommodations can be included with video to ensure it is accessible to people with disabilities?
To accommodate people who are deaf, captions can be included.
To accommodate people who are blind, audio description, or extended audio description can be added to video that describe actions or the context, that might otherwise not be understood by listening to the audio track of a video.
What potential accommodations can be included with audio to ensure it is accessible to people with disabilities?
To accommodate people who are deaf, a transcript can be included with audio.
Universal Design
In what ways does universal design address web accessibility for people with disabilities, while at the same time improving usability for everyone?
This can potentially be a long list. These are some examples:
• Create link text that is meaningful, avoiding links like “click here.” Able and disabled people can scan links of a page more easily without having to follow links to see where they lead.
• Prevent errors from occurring using effective prompting, feedback messaging, and data validation. Ensures everyone is prevented from submitting incorrect data.
• When presenting visual content, also include text describing the meaningful element of the visual. Provide a text description for those who cannot see and describe the visual for those who might not understand the meaningful elements of the visual.
• Use relative measures to size elements in web content so it easily adapts to magnification, and to a variety of device screen sizes.
• Include redundant modalities, such as including a visual cue, like a flash, when an audio cue, like a beep, is presented, for those who cannot hear, or those who have audio turned down.
Procurement
When purchasing software to be used on a website, when is it appropriate to use software that may not be accessibility compliant?
When no accessible alternative exists.
When the cost is excessive and would create undue hardship for the organization.
Otherwise, when comparable products are available to choose from, the more accessible option should be procured.
What questions should be asked in a Request for Proposals (RFPs), when purchasing software to be used on the Web?
This can potentially be a long list. These are some examples:
• Can the software be used effectively without the need to use a mouse?
• Can the software be magnified to at least 200% (and 400%) using browser settings, without information being lost off the side of the screen?
• Does contrast between text and background throughout the user interface meet WCAG 2 requirements?
• What testing was done to ensure the user interface of your application will be usable by people using assistive technology?
• What processes do you have in place to address accessibility issues, should they be discovered after we have licensed your software?
In addition to asking for accessibility in RFPs, what other things must be considered when purchasing software?
This can potentially be a long list. These are some examples:
• Evaluate vendor responses critically. Some may provide answers without experience or knowledge of specific requirements.
• Complete your own testing of the software to confirm vendor claims. Or, ask for an unbiased third party accessibility review.
• Ensure that contractual arrangements address ongoing maintenance of accessibility, for instance, during upgrades or software updates, or when previous undetected accessibility issues are discovered. | textbooks/biz/Business/Advanced_Business/Digital_Accessibility_as_a_Business_Practice/06%3A_Hiring_Accessibility_Staff/6.08%3A_Accessibility_Interview_Questions.txt |
Hiring an accessibility professional and putting together a job description for their position is likely to be an activity an organization will need to undertake in its efforts to develop a culture of accessibility. When you are developing your own accessibility job description, it can be helpful to see what other organizations are looking for in an accessibility professional.
Spend a few moments with your favourite search engine and try to locate examples of job postings for accessibility professionals. Select one or two positions and write up a short summary of them. Include information like the location, company name, salary, years of experience needed, etc.
Here are a few search terms you can use to get started. Use your imagination to come up with other potential search terms that would turn up similar positions. Try adding a city name to your search terms to find positions close to you.
Search Terms
• IT Accessibility Specialist
• Web Accessibility Specialist
• Web Accessibility Engineer
• Accessibility Expert
• Accessibility Analyst
• Accessibility Program Manager
Note: If you have difficulty locating job postings, but find in your search that you discover profiles of people currently working in the field, take note of those.
Hint: Search LinkedIn
6.10: Hiring Accessibility Staff- Takeaways
In this unit, you learned that:
• Companies are missing out on a significant talent pool of highly educated and skilled workers when they exclude people with disabilities in their hiring practices.
• Few formal technical training programs focus on developing accessible web content, creating self-taught specialists, each having some common knowledge as well as informal personal skill sets related to accessible content.
6.11: Final Project
1. Activity: Create the Sharp Clothing Company’s Digital Accessibility Policy
2. Challenge Test 9
Activity: Create the Sharp Clothing Company’s Digital Accessibility Policy
This final activity will bring together all that you have learned throughout the materials here. Think of it as a culminating activity. A digital accessibility policy should be written as a guide that management and staff can use to understand what they need to be doing to meet the organization’s accessibility requirements.
The following is a list of potential sections for a policy document. You can start with these, add or remove sections or subsections, provide text for each section explaining the what, how, and/or who the section of the policy applies to, and organize it in a coherent way.
• Background
• Company commitment
• Accessibility committee
• Scope and responsibilities
• Authority and enforcement
• Support
• Guidelines and standards
• Website development
• Web content
• Documents and communications
• Multimedia
• Third-party content
• Hiring equity and employment accommodation
• Training and awareness
• Digital accessibility resources
• Procurement
• Accessibility auditing and quality assurance
• Monitoring and periodic reviews
• Reporting
• Policy review
Note: Here is one possible version of the policy: Answer Key.
Challenge Test 9
1. Described in Accessibility Awareness Requirements in Other Organizational Roles, it is important for Management to have the following accessibility related knowledge. Choose all that apply.
1. Knowledge of local and relevant international accessibility related regulations
2. Knowledge of accessibility policy
3. Knowledge of disabilities, and associated barriers
4. Document accessibility (e.g., invoices, receipts, product specifications)
5. User Interface accessibility design
2. Which of the following would be a typical accommodation for a person with fine-motor impairment. Choose all that apply.
1. Speech recognition software
2. Eye tracking hardware
3. Button switch hardware
4. Large-key keyboard
5. Screen reader software
6. Screen magnification software
7. Head mouse hardware
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To most of us, globalization—as a political, economic, social, and technological force—appears all but unstoppable. The ever-faster flow of information across the globe has made people aware of the tastes, preferences, and lifestyles of citizens in other countries. Through this information flow, we are all becoming—at varying speeds and at least in economic terms—global citizens. This convergence is controversial, even offensive, to some who consider globalization a threat to their identity and way of life. It is not surprising, therefore, that globalization has evoked counter forces aimed at preserving differences and deepening a sense of local identity.
Yet, at the same time, we increasingly take advantage of what a global economy has to offer—we drive BMWs and Toyotas, work with an Apple or IBM notebook, communicate with a Nokia phone or BlackBerry, wear Zara clothes or Nike sneakers, drink Coca-Cola, eat McDonald’s hamburgers, entertain the kids with a Sony PlayStation, and travel with designer luggage. This is equally true for the buying habits of businesses. The market boundaries for IBM global services, Hewlett-Packard computers, General Electric (GE) aircraft engines, or PricewaterhouseCoopers consulting are no longer defined in political or geographic terms. Rather, it is the intrinsic value of the products and services that defines their appeal. Like it or not, we are living in a global economy.
01: Competing in a Global World
In 1983, Theodore Levitt, the late Harvard Business School professor and editor of the Harvard Business Review, wrote a controversial article entitled “The Globalization of Markets.” In it, he famously stated, “The globalization of markets is at hand. With that, the multinational commercial world nears its end, and so does the multinational corporation… The multinational operates in a number of countries, and adjust its products and processes in each, at high relative cost. The global corporation operates with resolute constancy… it sells the same things in the same way everywhere” (Levitt (1983, May–June)).
Levitt both overestimated and underestimated globalization. He did not anticipate that some markets would react against globalization, especially against Western globalization. He also underestimated the power of globalization to transform entire nations to actually embrace elements of global capitalism, as is happening in the former Soviet Union, China, and other parts of the world. He was right, however, about the importance of branding and its role in forging the convergence of consumer preferences on a global scale. Think of Coca-Cola, Starbucks, McDonald’s, or Google. (Ghemawat (2007a), p. 9).
More than 20 years later, in 2005, Thomas Friedman, author of The World is Flat: A Brief History of the Twenty-First Century, had much the same idea, this time focused on the globalization of production rather than of markets. Friedman argues that a number of important events, such as the birth of the Internet, coincided to “flatten” the competitive landscape worldwide by increasing globalization and reducing the power of states. Friedman’s list of “flatteners” includes the fall of the Berlin Wall; the rise of Netscape and the dot-com boom that led to a trillion-dollar investment in fiber-optic cable; the emergence of common software platforms and open source code enabling global collaboration; and the rise of outsourcing, offshoring, supply chaining, and in-sourcing. According to Friedman, these flatteners converged around the year 2000, creating “a flat world: a global, web-enabled platform for multiple forms of sharing knowledge and work, irrespective of time, distance, geography and increasingly, language.” (Friedman (2007), p. 50). And, he observed, at the very moment this platform emerged, three huge economies materialized—those of India, China, and the former Soviet Union, and “three billion people who were out of the game, walked onto the playing field.” (Friedman (2007), p. 205).
Taking a different perspective, Harvard Business School professor Pankaj Ghemawat disputes the idea of fully globalized, integrated, and homogenized future. Instead, he argues that differences between countries and cultures are larger than is generally acknowledged and that “semiglobalization” is the real state of the world today and is likely to remain so for the foreseeable future. To support his contention, he observes that the vast majority of all phone calls, web traffic, and investment around the world remains local; that more than 90% of the fixed investment around the world is still domestic; that while trade flows are growing, the ratio of domestic to international trade is still substantial and is likely to remain so; and, crucially, that borders and distance still matter and that it is important to take a broad view of the differences they demarcate, to identify those that matter the most in a particular industry, and to look at them not just as difficulties to be overcome but also as potential sources of value creation. (Ghemawat (2007b)).
Moore and Rugman also reject the idea of an emerging single world market for free trade and offer a regional perspective. They note that while companies source goods, technology, information, and capital from around the world, business activity tends to be centered in certain cities or regions around the world, and suggest that regions—rather than global opportunity—should be the focus of strategy analysis and organization. As examples, they cite recent decisions by DuPont and Procter & Gamble to roll their three separate country subsidiaries in the United States, Canada, and Mexico into one regional organization. (Moore and Rugman (2005a); see also Moore and Rugman (2005b)).
The histories of Toyota, Wal-Mart, and Coca-Cola provide support for the diagnosis of a semiglobalized and regionally divided world. Toyota’s globalization has always had a distinct regional flavor. Its starting point was not a grand, long-term vision of a fully integrated world in which autos and auto parts can flow freely from anywhere to anywhere else. Rather, the company anticipated expanded free-trade agreements within the Americas, Europe, and East Asia but not across them. This reflects a vision of a semiglobalized world in which neither the bridges nor the barriers between countries can be ignored. The Toyota, Wal-Mart, and Coca-Cola examples are taken from Ghemawat (2007a), chap. 1.
The globalization of Wal-Mart illustrates the complex realities of a more nuanced global competitive landscape (see the Wal-Mart minicase). It has been successful in markets that are culturally, administratively, geographically, and economically closest to the United States: Canada, Mexico, and the United Kingdom. In other parts of the world, it has yet to meet its profitability targets. The point is not that Wal-Mart should not have ventured into more distant markets, but rather that such opportunities require a different competitive approach. For example, in India, which restricts foreign direct investment in retailing, Wal-Mart was forced to enter a joint venture with an Indian partner, Bharti, that operates the stores, while Wal-Mart deals with the back end of the business.
Finally, consider the history of Coca-Cola, which, in the late 1990s under chief executive officer Roberto Goizueta, fully bought into Levitt’s idea that the globalization of markets (rather than production) was imminent. Goizueta embarked on a strategy that involved focusing resources on Coke’s megabrands, an unprecedented amount of standardization, and the official dissolution of the boundaries between Coke’s U.S. and international organizations. Fifteen years later and under new leadership, Coke’s strategy looks very different and is no longer always the same in different parts of the world. In big, emerging markets such as China and India, Coke has lowered price points, reduced costs by localizing inputs and modernizing bottling operations, and upgraded logistics and distribution, especially rurally. The boundaries between the United States and international organizations have been restored, recognizing the fact that Coke faces very different challenges in America than it does in most of the rest of the world. This is because per capita consumption is an order of magnitude that is higher in the United States than elsewhere.
This mini case study was first published in de Kluyver and Pearce (2009), chap. 8.
In venturing outside the United States, Wal-Mart had the option of entering Europe, Asia, or other countries in the western hemisphere. It realized that it did not have the resources—financial, organizational, and managerial—to enter all of them simultaneously and instead opted for a carefully considered, learning-based approach to market entry. During the first 5 years of its globalization (1991 to 1995), Wal-Mart concentrated heavily on establishing a presence in the Americas: Mexico, Brazil, Argentina, and Canada. This choice was motivated by the fact that the European market was less attractive to Wal-Mart as a first point of entry. The European retail industry was already mature, which meant that a new entrant would have to take market share away from an existing player. There were well-entrenched competitors such as Carrefour in France and Metro AG in Germany that would likely retaliate vigorously. Moreover, European retailers had formats similar to Wal-Mart’s, which would have the effect of reducing Wal-Mart’s competitive advantage. Wal-Mart might have overcome these difficulties by entering Europe through an acquisition, but the higher growth rates of the Latin American and Asian markets would have made a delayed entry into those markets extremely costly in terms of lost opportunities. In contrast, the opportunity costs of delaying acquisition-based entries into European markets were relatively small. Asian markets also presented major opportunities, but they were geographically and culturally more distant. For these reasons, as its first global points of entry, Wal-Mart chose Mexico (1991), Brazil (1994), and Argentina (1995), the countries with the three largest populations in Latin America.
By 1996, Wal-Mart felt ready to take on the Asian challenge. It targeted China, with a population of more than 1.2 billion inhabitants in 640 cities, as its primary growth vehicle. This choice made sense in that the lower purchasing power of the Chinese consumer offered huge potential to a low-price retailer like Wal-Mart. Still, China’s cultural, linguistic, and geographical distance from the United States presented relatively high entry barriers, so Wal-Mart established two beachheads as learning vehicles for establishing an Asian presence. From 1992 to 1993, Wal-Mart agreed to sell low-priced products to two Japanese retailers, Ito-Yokado and Yaohan, that would market these products in Japan, Singapore, Hong Kong, Malaysia, Thailand, Indonesia, and the Philippines. Then, in 1994, Wal-Mart formed a joint venture with the C. P. Pokphand Company, a Thailand-based conglomerate, to open three Value Club membership discount stores in Hong Kong.
Once Wal-Mart had chosen its target markets, it had to select a mode of entry. It entered Canada through an acquisition. This was rational because Canada was a mature market—adding new retail capacity was unattractive—and because the strong economic and cultural similarities between the U.S. and Canadian markets minimized the need for much learning.
For its entry into Mexico, Wal-Mart took a different route. Because there were significant income and cultural differences between the U.S. and Mexican markets about which the company needed to learn, and to which it needed to tailor its operations, a greenfield start-up would have been problematic. Instead, the company chose to form a 50-50 joint venture with Cifra, Mexico’s largest retailer, counting on Cifra to provide operational expertise in the Mexican market.
In Latin America, Wal-Mart targeted the region’s next two largest markets: Brazil and Argentina. The company entered Brazil through a joint venture, with Lojas Americana, a local retailer. Wal-Mart was able to leverage its learning from the Mexican experience and chose to establish a 60-40 joint venture in which it had the controlling stake. The successful entry into Brazil gave Wal-Mart even greater experience in Latin America, and it chose to enter Argentina through a wholly owned subsidiary. This decision was reinforced by the presence of only two major markets in Argentina. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/01%3A_Competing_in_a_Global_World/1.01%3A_How_Global_Are_We.txt |
The rapid emergence of a number of developing economies—notably the so-called BRIC countries (Brazil, Russia, India, and China)—is the latest development shaping the global competitive environment. The impact this development will have on global competition in the next decade is likely to be enormous; these economies are experiencing rates of growth in gross domestic product (GDP), trade, and disposable income that are unprecedented in the developed world. The sheer size of the consumer markets now opening up in emerging economies, especially in India and China, and their rapid growth rates will shift the balance of business activity far more than did the earlier rise of less populous economies such as Japan and South Korea and their handful of “new champions” that seemed to threaten the old order at the time.
This shift in the balance of business activity has redefined global opportunity. For the last 50 years, the globalization of business has primarily been interpreted as the expansion of trade from developed to emerging economies. Today’s rapid rise of emerging economies means this view is no longer tenable—business now flows in both directions and increasingly from one developing economy to another. Or, as the authors of “Globality,” consultants at the Boston Consulting Group (BCG), put it, business these days is all about “competing with everyone from everywhere for everything.”Sirkin, Hemerling, and Bhattacharya (2008).
The evidence that this latest shift in the global competitive landscape will have seismic proportions is already formidable. Consider, for example, the growing number of companies from emerging markets that appear in the Fortune 500 rankings of the world’s biggest firms. It now stands at 62, mostly from the BRIC economies, up from 31 in 2003, and is set to rise rapidly. What is more, if current trends persist, emerging-market companies will account for one-third of the Fortune list within 10 years.
Look also at the recent sharp increase in the number of emerging-market companies acquiring established rich-world businesses and brands, proof that “globalization” is no longer just another word for “Americanization.” For instance, Budweiser, the maker of America’s favorite beer, was bought by a Belgian-Brazilian conglomerate. And several of America’s leading financial institutions avoided bankruptcy only by being bailed out by the sovereign-wealth funds (state-owned investment funds) of various Arab kingdoms and the Chinese government.
Another prominent example of this seismic shift in global business is provided by Lenovo, the Chinese computer maker. It became a global brand in 2005, when it paid around \$1.75 billion for the personal-computer business of one of America’s best-known companies, IBM, including the ThinkPad laptop range. Lenovo had the right to use the IBM brand for 5 years, but dropped it 2 years ahead of schedule, such was its confidence in its own brand. It just squeezed into 499th place in the Fortune 500, with worldwide revenues of \$16.8 billion last year and growth prospects many Western companies envy.
The conclusion is that this new phase of “globality” is creating huge opportunities—as well as threats—for developed-world multinationals and new champions from developing countries alike.
1.03: Globalization Pressures on Companies
Gupta, Govindarajan, and Wang identify five “imperatives” that drive companies to become more global: to pursue growth, efficiency, and knowledge; to better meet customer needs; and to preempt or counter competition. (Gupta, Govindarajan, and Wang (2008), p. 28).
Growth
In many industries, markets in the developed countries are maturing at a rapid rate, limiting the rate of growth. Consider household appliances: in the developed part of the world, most households have, or have access to, appliances such as stoves, ovens, washing machines, dryers, and refrigerators. Industry growth is therefore largely determined by population growth and product replacement. In developing markets, in contrast, household penetration rates for major appliances are still low compared to Western standards, thereby offering significant growth opportunities for manufacturers.
Efficiency
A global presence automatically expands a company’s scale of operations, giving it larger revenues and a larger asset base. A larger scale can help create a competitive advantage if a company undertakes the tough actions needed to convert scale into economies of scale by (a) spreading fixed costs, (b) reducing capital and operating costs, (c) pooling purchasing power, and (d) creating critical mass in a significant portion of the value chain. Whereas economies of scale primarily refer to efficiencies associated with supply-side changes, such as increasing or decreasing the scale of production, economies of scope refer to efficiencies typically associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution by entering new markets or regions or by increasing the range of products and services offered. The economic value of global scope can be substantial when serving global customers through providing coordinated services and the ability to leverage a company’s expanded market power.
Knowledge
Foreign operations can be reservoirs of knowledge. Some locally created knowledge is relevant across multiple countries, and, if leveraged effectively, can yield significant strategic benefits to a global enterprise, such as (a) faster product and process innovation, (b) lower cost of innovation, and (c) reduced risk of competitive preemption. For example, Fiat developed Palio—its global car—in Brazil; Texas Instruments uses a collaborative process between Indian and U.S. engineers to design its most advanced chips; and Procter & Gamble’s liquid Tide was developed as a joint effort by U.S. employees (who had the technology to suspend dirt in water), the Japanese subsidiary (who had the cleaning agents), and the Brussels operations (who had the agents that fight mineral salts found in hard water). Most companies tap only a fraction of the full potential in realizing the economic value inherent in transferring and leveraging knowledge across borders. Significant geographic, cultural, and linguistic distances often separate subsidiaries. The challenge is creating systematic and routine mechanisms that will uncover opportunities for knowledge transfer.
Customer Needs and Preferences
When customers start to globalize, a firm has little choice but to follow and adapt its business model to accommodate them. Multinationals such as Coca-Cola, GE, and DuPont increasingly insist that their suppliers—from raw material suppliers to advertising agencies to personnel recruitment companies—become more global in their approach and be prepared to serve them whenever and wherever required. Individuals are no different—global travelers insist on consistent worldwide service from airlines, hotel chains, credit card companies, television news, and others.
Competition
Just as the globalization of customers compels companies to consider globalizing their business model, so does the globalization of one or more major competitors. A competitor who globalizes early may have a first-mover advantage in emerging markets, greater opportunity to create economies of scale and scope, and an ability to cross-subsidize competitive battles, thereby posing a greater threat in the home market. The global beer market provides a good example of these forces at work. Over the past decade, the beer industry has witnessed significant consolidation, and this trend continued during 2008. On a pro forma basis, beer sales by the top 10 players now total approximately 65% of total global sales, compared to less than 40% at the start of the century. In recent major developments, the division of Scottish and Newcastle’s business between Carlsberg and Heineken was completed during the first half of 2008, while InBev acquired Anheuser-Busch in November 2008. SABMiller and Molson Coors combined their operations in the United States and Puerto Rico on July 1, 2008, to form the new MillerCoors brewing joint venture.
Minicase: Chocolatiers Look to Asia for Growth (Fishbein (2008, January 17))
Humans first cultivated a taste for chocolate 3,000 years ago, but for India and China this is a more recent phenomenon. Compared to the sweet-toothed Swiss and Brits, both of whom devour about 24 lbs (11 kg) of chocolate per capita annually, Indians consume a paltry 5.8 oz and the Chinese, a mere 3.5 oz (165 g and 99 g, respectively).
Western chocolate makers hungry for growth markets are banking on this to change. According to market researcher Euromonitor International, in the past 5 years, the value of chocolate confectionery sales in China has nearly doubled, to \$813.1 million, while sales in India have increased 64%, to \$393.8 million. That is a pittance compared to the nearly \$35-billion European chocolate market. But while European chocolate sales are growing a mere 1% to 2% annually, sales in the two Asian nations show no sign of slowing.
European chocolatiers are already making their mark in China. The most aggressive is Swiss food giant Nestlé, which has more than doubled its Chinese sales since 2001 to an estimated \$91.5 million—still a relatively small amount. It is closing in on Mars, the longtime market leader, whose sales rose 40% during the same period to \$96.7 million.
Green Tea Kisses
Nestlé’s Kit Kat bar and other wafer-type chocolates are a big hit with the Chinese, helping the Swiss company swipe market share from Mars. Italy’s Ferrero is another up-and-comer. It has boosted China sales nearly 79% since 2001, to \$55.6 million, drawing younger consumers with its Kinder chocolate line, while targeting big spenders with the upscale Ferrero Rocher brand. Indeed, its products are so popular that they have spawned Chinese knockoffs, including a Ferrero Rocher look-alike made by a Chinese company that Ferrero has sued for alleged counterfeiting. Despite those problems, the privately owned Ferrero has steadily gained market share against third-ranked Cadbury Schweppes, whose China sales have risen a modest 26% since 2001, to \$58.6 million.
Until now, U.S.-based Hershey has been a relatively small player in China. But the company has adopted ambitious expansion plans, including hooking up with a local partner to step up its distribution and introducing green-tea-flavored Hershey Kisses to appeal to Asian tastes.
Attractively Packaged
Underscoring China’s growing importance, Switzerland’s Barry Callebaut, a big chocolate producer that supplies many leading confectioners, opened a factory near Shanghai to alleviate pressure at a Singapore facility that had been operating at capacity. The company also inaugurated a nearby Chocolate Academy, just 1 month after opening a similar facility in Mumbai, to train local confectioners and pastry chefs in using chocolate.
Unlike China’s chocolate market, India’s is dominated by only two companies: Cadbury, which entered the country 60 years ago and has nearly 60% market share, and Nestlé, which has about 32% market share. The two have prospered by luring consumers with attractively packaged chocolate assortments to replace the traditional dried fruits and sugar confectioneries offered as gifts on Indian holidays, and by offering lower-priced chocolates, including bite-sized candies costing less than 3 cents.
The confectionary companies have been less successful, though, at developing new products adapted to the Indian sweet tooth. In 2005, Nestlé launched a coconut-flavored Munch bar, and Cadbury introduced a dessert called Kalakand Crème, based on a popular local sweet made of chopped nuts and cheese. Both sold poorly and were discontinued. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/01%3A_Competing_in_a_Global_World/1.02%3A_Global_Competitions_Changing_Center_of_Gravity.txt |
One could argue that a global company must have a presence in all major world markets—Europe, the Americas, and Asia. Others may define globality in terms of how globally a company sources, that is, how far its supply chain reaches across the world. Still other definitions use company size, the makeup of the senior management team, or where and how it finances its operations as their primary criterion.
Gupta, Govindarajan, and Wang suggest we define corporate globality in terms of four dimensions: a company’s market presence, supply base, capital base, and corporate mind-set.Gupta, Govindarajan, and Wang (2008), p. 7 The first dimension—the globalization of market presence—refers to the degree the company has globalized its market presence and customer base. Oil and car companies score high on this dimension. Wal-Mart, the world’s largest retailer, on the other hand, generates less than 30% of its revenues outside the United States. The second dimension—the globalization of the supply base—hints at the extent to which a company sources from different locations and has located key parts of the supply chain in optimal locations around the world. Caterpillar, for example, serves customer in approximately 200 countries around the world, manufactures in 24 of them, and maintains research and development facilities in nine. The third dimension—globalization of the capital base—measures the degree to which a company has globalized its financial structure. This deals with such issues as on what exchanges the company’s shares are listed, where it attracts operating capital, how it finances growth and acquisitions, where it pays taxes, and how it repatriates profits. The final dimension—globalization of the corporate mind-set—refers to a company’s ability to deal with diverse cultures. GE, Nestlé, and Procter & Gamble are examples of companies with an increasingly global mind-set: businesses are run on a global basis, top management is increasingly international, and new ideas routinely come from all parts of the globe.
In the years to come, the list of truly “global” companies—companies that are global in all four dimensions—is likely to grow dramatically. Global merger and acquisition activity continues to increase as companies around the world combine forces and restructure themselves to become more globally competitive and to capitalize on opportunities in emerging world markets. We have already seen megamergers involving financial services, leisure, food and drink, media, automobile, and telecommunications companies. There are good reasons to believe that the global mergers and acquisitions (M&A) movement is just in its beginning stages—the economics of globalization point to further consolidation in many industries. In Europe, for example, more deregulation and the EU’s move toward a single currency will encourage further M&A activity and corporate restructuring.
1.05: The Persistence of Distance
Metaphors such as “the world is flat” tend to suggest that distance no longer matters—that information technologies and, in particular, global communications are shrinking the world, turning it into a small and relatively homogeneous place. But when it comes to business, that assumption is not only incorrect; it is dangerous.
Ghemawat analyzes distance between countries or regions in terms of four dimensions—cultural, administrative, geographic, and economic (CAGE)—each of which influences business in different ways. (Ghemawat (2001)).
Cultural Distance
A country’s culture shapes how people interact with each other and with organizations. Differences in religious beliefs, race, social norms, and language can quickly become barriers, that is, “create distance.” The influence of some of these attributes is obvious. A common language, for example, makes trade much easier and therefore more likely. The impact of other attributes is much more subtle, however. Social norms—the set of unspoken principles that strongly guides everyday behavior—are mostly invisible. Japanese and European consumers, for example, prefer smaller automobiles and household appliances than Americans, reflecting a social norm that highly values space. The food industry must concern itself with religious attributes—for example, Hindus do not eat beef because it is expressly forbidden by their religion. Thus, cultural distance shapes preference and, ultimately, choice.
Administrative or Political Distance
Administrative or political distance is created by differences in governmental laws, policies, and institutions, including international relationships between countries, treaties, and membership in international organizations (see Chapter 11 for a brief summary). The greater the distance, the less likely it is that extensive trade relations develop. This explains the advantage that shared historical colonial ties, membership in the same regional trading bloc, and use of a common currency can confer. The integration of the European Union over the last half-century is probably the best example of deliberate efforts to reduce administrative distance among trading partners. Bad relationships can increase administrative distance, however. Although India and Pakistan share a colonial past, a land border, and linguistic ties, their long-standing mutual hostility has reduced official trade to almost nothing.
Countries can also create administrative and political distance through unilateral measures. Indeed, policies of individual governments pose the most common barriers to cross-border competition. In some cases, the difficulties arise in a company’s home country. For companies from the United States, for instance, domestic prohibitions on bribery and the prescription of health, safety, and environmental policies have a dampening effect on their international businesses. More commonly, though, it is the target country’s government that raises barriers to foreign competition: tariffs, trade quotas, restrictions on foreign direct investment, and preferences for domestic competitors in the form of subsidies and favoritism in regulation and procurement.
Geographic Distance
Geographic distance is about more than simply how far away a country is in miles. Other geographic attributes include the physical size of the country, average within-country distances to borders, access to waterways and the ocean, topography, and a country’s transportation and communications infrastructure. Geographic attributes most directly influence transportation costs and are therefore particularly relevant to businesses with low value-to-weight or bulk ratios, such as steel and cement. Likewise, costs for transporting fragile or perishable products become significant across large distances. Intangible goods and services are affected by geographic distance as well, as cross-border equity flows between two countries fall off significantly as the geographic distance between them rises. This is a direct result of differences in information infrastructure, including telephone, Internet, and banking services.
Economic Distance
Disposable income is the most important economic attribute that creates distance between countries. Rich countries engage in proportionately higher levels of cross-border economic activity than poorer ones. The greater the economic distance between a company’s home country and the host country, the greater the likelihood that it must make significant adaptations to its business model. Wal-Mart in India, for instance, would be a very different business from Wal-Mart in the United States. But Wal-Mart in Canada is virtually a carbon copy of the U.S. Wal-Mart. An exception to the distance rule is provided by industries in which competitive advantage is derived from economic arbitrage, that is, the exploitation of cost and price differentials between markets. Companies in industries whose major cost components vary widely across countries, like the garment and footwear industries, where labor costs are important, are particularly likely to target countries with different economic profiles for investment or trade. Whether or not they expand abroad for purposes of replication or arbitrage, all companies find that major disparities in supply chains and distribution channels are significant barriers to business. This suggests that focusing on a limited number of geographies may prove advantageous because of reduced operational complexity. This is evident in the home-appliance business, for instance, where companies—like Maytag—that concentrate on a limited number of geographies produce far better returns for investors than companies like Electrolux and Whirlpool, whose geographic spread has come at the expense of simplicity and profitability.
Minicase: Computer Keyboards Abroad: QWERTZ Versus QWERTY
Anyone who has traveled to Austria or Germany and has used computers there—in cybercafes, offices, or at the home of friends—will instantly recognize this dimension of “distance”: their keyboards are not the same as ours. Once-familiar letters and symbols look like strangers, and new keys are located where they should not be. http://german.about.com
Specifically, a German keyboard has a QWERTZ layout, that is, the “Y” and “Z” keys are reversed in comparison with the U.S.-English QWERTY layout. Moreover, in addition to the “normal” letters of the English alphabet, German keyboards have the three umlauted vowels and the “sharp-s” characters of the German alphabet. The “ess-tsett” (ß) key is to the right of the zero (“0”) key. (But this letter is missing on a Swiss-German keyboard, since the “ß” is not used in the Swiss variation of German.) The u-umlaut (ü) key is located just to the right of the “P” key. The o-umlaut (ö) and a-umlaut (ä) keys are to the right of the “L” key. This means, of course, that the symbols or letters that an American is used to finding where the umlauted letters are in the German version turn up somewhere else. All this is enough to bring on a major headache.
And just where the heck is that “@” key? E-mail happens to depend on it rather heavily, but on the German keyboard, not only is it NOT at the top of the “2” key but it also seems to have vanished entirely! This is surprising considering that the “at” sign even has a name in German: der Klammeraffe (lit., “clip/bracket monkey”). So how do you type “@”? You have to press the “Alt Gr” key plus “Q” to make “@” appear in your document or e-mail address. Ready for the Excedrin? On most European-language keyboards, the right “Alt” key, which is just to the right of the space bar and different from the regular “Alt” key on the left side, acts as a “Compose” key, making it possible to enter many non-ASCII characters. This configuration applies to PCs; Mac users will need to take an advanced course. Of course, for Europeans using a North American keyboard, the problems are reversed, and they must get used to the weird U.S. English configuration. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/01%3A_Competing_in_a_Global_World/1.04%3A_What_Is_a_Global_Corporation.txt |
Even with the best planning, globalization carries substantial risks. Many globalization strategies represent a considerable stretch of the company’s experience base, resources, and capabilities.This section draws on Behrendt and Khanna (2004). The firm might target new markets, often in new—for the company—cultural settings. It might seek new technologies, initiate new partnerships, or adopt market-share objectives that require earlier or greater commitments than current returns can justify. In the process, new and different forms of competition can be encountered, and it could turn out that the economics model that got the company to its current position is no longer applicable. Often, a more global posture implies exposure to different cyclical patterns, currency, and political risk. In addition, there are substantial costs associated with coordinating global operations. As a consequence, before deciding to enter a foreign country or continent, companies should carefully analyze the risks involved. In addition, companies should recognize that the management style that proved successful on a domestic scale might turn out to be ineffective in a global setting.
Over the last 25 years, Western companies have expanded their activities into parts of the world that carry risks far greater than those to which they are accustomed. According to Control Risks Group, a London-based international business consultancy, multinational corporations are now active in more than 100 countries that are rated “medium” to “extreme” in terms of risk, and hundreds of billions are invested in countries rated “fairly” to “very” corrupt. To mitigate this risk, companies must understand the specific nature of the relationship between corporate globalization and geopolitics, identify the various types of risk globalization exposes them to, and adopt strategies to enhance their resilience.
Such an understanding begins with the recognition that the role of multinational corporations in the evolving global-geopolitical landscape continues to change. The prevailing dogma of the 1990s held that free-market enterprise and a liberal economic agenda would lead to more stable geopolitical relations. The decline of interstate warfare during this period also provided a geopolitical environment that enabled heavy consolidation across industries, resulting in the emergence of “global players,” that is, conglomerates with worldwide reach. The economy was paramount; corporations were almost unconstrained by political and social considerations. The greater international presence of business and increasing geopolitical complexity also heightened the exposure of companies to conflict and violence, however. As they became larger, they became more obvious targets for attack and increasingly vulnerable because their strategies were based on the assumption of fundamentally stable geopolitical relations.
In recent years, the term “global player” has acquired a new meaning, however. Previously a reference exclusively to an economic role, the term now describes a company that has, however unwillingly, become a political actor as well. And, as a consequence, to remain a global player today, a firm must be able to survive not only economic downturns but also geopolitical shocks. This requires understanding that risk has become an endemic reality of the globalization process—that is, no longer simply the result of conflict in one country or another but something inherent in the globalized system itself.
Globalization risk can be of a political, legal, financial-economic, or sociocultural nature. Political risk relates to politically induced actions and policies initiated by a foreign government. Crises such as the September 11, 2001, terrorist attacks in the United States, the ongoing conflict in Iraq and Pakistan, instability in the Korean peninsula, and the recent global financial crisis have made geopolitical uncertainty a key component of formulating a global strategy. The effect of these events and the associated political decisions on energy, transportation, tourism, insurance, and other sectors demonstrates the massive consequences that crises, wars, and economic meltdowns, wherever and however they may take place, can have on business.
Political risk assessment involves an evaluation of the stability of a country’s current government and of its relationships with other countries. A high level of risk affects ownership of physical assets and intellectual property and security of personnel, increasing the potential for trouble. Analysts frequently divide political risk into two subcategories: global and country-specific risk. Global risk affects all of a company’s multinational operations, whereas country-specific risk relates to investments in a specific foreign country. We can distinguish between macro and micro political risk. Macro risk is concerned with how foreign investment in general in a particular country is affected. By reviewing the government’s past use of soft policy instruments, such as blacklisting, indirect control of prices, or strikes in particular industries, and hard policy tools, such as expropriation, confiscation, nationalization, or compulsory local shareholding, a company can be better prepared for potential future government action. At the micro level, risk analysis is focused on a particular company or group of companies. A weak balance sheet, questionable accounting practices, or a regular breach of contracts should give rise to concerns.
Legal risk is risk that multinational companies encounter in the legal arena in a particular country. Legal risk is often closely tied to political country risk. An assessment of legal risk requires analyzing the foundations of a country’s legal system and determining whether the laws are properly enforced. Legal risk analysis therefore involves becoming familiar with a country’s enforcement agencies and their scope of operation. As many companies have learned, numerous countries have written laws protecting a multinational’s rights, but these laws are rarely enforced. Entering such countries can expose a company to a host of risks, including the loss of intellectual property, technology, and trademarks.
Financial or economic risk in a foreign country is analogous to operating and financial risk at home. The volatility of a country’s macroeconomic performance and the country’s ability to meet its financial obligations directly affect performance. A nation’s currency competitiveness and fluctuation are important indicators of a country’s stability—both financial and political—and its willingness to embrace changes and innovations. In addition, financial risk assessment should consider such factors as how well the economy is being managed, the level of the country’s economic development, working conditions, infrastructure, technological innovation, and the availability of natural and human resources.
Societal or cultural risk is associated with operating in a different sociocultural environment. For example, it might be advisable to analyze specific ideologies; the relative importance of ethnic, religious, and nationalistic movements; and the country’s ability to cope with changes that will, sooner or later, be induced by foreign investment. Thus, elements such as the standard of living, patriotism, religious factors, or the presence of charismatic leaders can play a huge role in the evaluation of these risks.
1.07: Points to Remember
1. Although we often speak of global markets and a “flat” world, in reality, the world’s competitive structure is best described as semiglobal. Bilateral and regional trade and investment patterns continue to dominate global ones.
2. The center of gravity of global competition is shifting to the East, with China and India taking center stage. Russia and Brazil, the other two BRIC countries, are not far behind.
3. Global competition is rapidly becoming a two-way street, with new competitors from developing countries taking on traditional companies from developed nations everywhere in every industry.
4. Companies have several major reasons to consider going global: to pursue growth, efficiency, and knowledge; to better meet customer needs; and to preempt or counter competition.
5. Global companies are those that have a global market presence, supply-chain infrastructure, capital base, and corporate mind-set.
6. Although we live in a “global” world, distance still very much matters, and companies must explicitly and thoroughly account for it when they make decisions about global expansion.
7. Distance between countries or regions is usefully analyzed in terms of four dimensions: cultural, administrative, geographic, and economic, each of which influences business in different ways.
8. Even with the best planning, globalization carries substantial risks. Globalization risks can be of a political, legal, financial-economic, or sociocultural nature. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/01%3A_Competing_in_a_Global_World/1.06%3A_Global_Strategy_and_Risk.txt |
“Going global” is often described in incremental terms as a more or less gradual process, starting with increased exports or global sourcing, followed by a modest international presence, growing into a multinational organization, and ultimately evolving into a global posture. This appearance of gradualism, however, is deceptive. It obscures the key changes that globalization requires in a company’s mission, core competencies, structure, processes, and culture. As a consequence, it leads managers to underestimate the enormous differences that exist between managing international operations, a multinational enterprise, and managing a global corporation. Research by Diana Farrell of McKinsey & Company shows that industries and companies both tend to globalize in stages, and at each stage, there are different opportunities for and challenges associated with creating value. (Farrell (2004, December 2)).
02: The Globalization of Companies and Industries
In the first stage (market entry), companies tend to enter new countries using business models that are very similar to the ones they deploy in their home markets. To gain access to local customers, however, they often need to establish a production presence, either because of the nature of their businesses (as in service industries like food retail or banking) or because of local countries’ regulatory restrictions (as in the auto industry).
In the second stage (product specialization), companies transfer the full production process of a particular product to a single, low-cost location and export the goods to various consumer markets. Under this scenario, different locations begin to specialize in different products or components and trade in finished goods.
The third stage (value chain disaggregation) represents the next step in the company’s globalization of the supply-chain infrastructure. In this stage, companies start to disaggregate the production process and focus each activity in the most advantageous location. Individual components of a single product might be manufactured in several different locations and assembled into final products elsewhere. Examples include the PC industry market and the decision by companies to offshore some of their business processes and information technology services.
In the fourth stage (value chain reengineering) companies seek to further increase their cost savings by reengineering their processes to suit local market conditions, notably by substituting lower-cost labor for capital. General Electric’s (GE) medical equipment division, for example, has tailored its manufacturing processes abroad to take advantage of low labor costs. Not only does it use more labor-intensive production processes—it also designs and builds the capital equipment for its plants locally.
Finally, in the fifth stage (the creation of new markets), the focus is on market expansion. The McKinsey Global Institute estimates that the third and fourth stages together have the potential to reduce costs by more than 50% in many industries, which gives companies the opportunity to substantially lower their sticker prices in both old and new markets and to expand demand. Significantly, the value of new revenues generated in this last stage is often greater than the value of cost savings in the other stages.
It should be noted that the five stages described above do not define a rigid sequence that all industries follow. As the McKinsey study notes, companies can skip or combine steps. For example, in consumer electronics, product specialization and value chain disaggregation (the second and third stages) occurred together as different locations started to specialize in producing different components (Taiwanese manufacturers focused on semiconductors, while Chinese companies focused on computer keyboards and other components). | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/02%3A_The_Globalization_of_Companies_and_Industries/2.01%3A_The_Five_Stages_of_Going_Global.txt |
Executives often ask whether their industry is becoming more global and, if so, what strategies they should consider to take advantage of this development and stake out an enduring global competitive advantage. This may be the wrong question. Simple characterizations such as “the electronics industry is global” are not particularly useful. A better question is how global an industry is, or is likely, to become. Virtually all industries are global in some respects. However, only a handful of industries can be considered truly global today or are likely to become so in the future. Many more will remain hybrids, that is, global in some respects, local in others. Industry globalization, therefore, is a matter of degree. What counts is which elements of an industry are becoming global and how they affect strategic choice. In approaching this issue, we must focus on the drivers of industry globalization and think about how these elements shape strategic choice.
We should also make a distinction between industry globalization, global competition, and the degree to which a company has globalized its operations. In traditionally global industries, competition is mostly waged on a worldwide basis and the leaders have created global corporate structures. But the fact that an industry is not truly global does not prevent global competition. And a competitive global posture does not necessarily require a global reorganization of every aspect of a company’s operations. Economies of scale and scope are among the most important drivers of industry globalization; in global industries, the minimum volume required for cost efficiency is simply no longer available in a single country or region. Global competition begins when companies cross-subsidize national market-share battles in pursuit of global brand and distribution positions. A global company structure is characterized by production and distribution systems in key markets around the world that enable cross-subsidization, competitive retaliation on a global basis, and world-scale volume. (Hamel and Prahalad (1985, July-August)).
So why are some industries more global than others? And why do global industries appear to be concentrated in certain countries or regions? Most would consider the oil, auto, and pharmaceutical industries global industries, while tax preparation, many retailing sectors, and real estate are substantially domestic in nature. Others, such as furniture, lie somewhere in the middle. What accounts for the difference? The dominant location of global industries also poses interesting questions. Although the machine tool and semiconductor industries originated in the United States, Asia has emerged as the dominant player in most of their segments today. What accounts for this shift? Why is the worldwide chemical industry concentrated in Germany while the United States continues to dominate in software and entertainment? Can we predict that France and Italy will remain the global centers for fashion and design? These issues are important to strategists. They are also relevant as a matter of public policy as governments attempt to shape effective policies to attract and retain the most attractive industries, and companies must anticipate changes in global competition and locational advantage.
Minicase: Cemex's Globlization Path: First Cement, Then Services
When Lorenzo Zambrano became chairman and chief executive officer of Cemex in the 1980s, he pushed the company into foreign markets to protect it from the Latin American debt crisis. Now the giant cement company is moving into services. (Lindquist (2002, November 1); and www.cemex.com/)
Zambrano first focused on the United States. But attempts to sell cement north of the border were greeted by hostility from producers, who convinced the U.S. International Trade Commission to levy a stiff antidumping duty. Despite a a General Agreement on Tariffs and Trade’s (GATT) ruling in Cemex’s favor, the company was still paying the fine a dozen years later.
Rebuffed in the world’s biggest market, Zambrano turned to Spain, investing in port facilities and outmaneuvering European rivals for control of the country’s two largest cement firms. When he discovered how inefficiently they were run, Zambrano sent a team of his Mexican managers to Spain to introduce his distinctive way of doing business. Called the “Cemex Way,” it is a culture that blends modern, flexible management practices with cutting-edge technology.
From Spain, where profits increased from 7% to 24% during Cemex’s first 2 years there, the company expanded around the globe. Blending state-of-the-art technology with the making and selling of one of the world’s most basic products, Cemex has achieved remarkable customer service in some of the most logistically challenged countries. Whether Venezuela, Mexico, or the Philippines, Cemex trucks equipped with GPS navigational systems promise deliveries within 20 minutes.
After gaining a solid international footing, Zambrano went back to the United States. In 2000, he bought Houston-based Southdown Cement—one of the largest purchases ever by a Mexican company in the United States. Soon, Cemex was the biggest U.S. cement seller. In less than two decades, Zambrano had transformed Cemex from a domestic company into the world’s third-largest cement firm by investing heavily and imaginatively not only in plants and equipment, which is what one would expect in the cement industry, but also in information technology and particularly in Cemex’s people.
The corporation has consistently been more profitable than either of its two biggest competitors, France’s Lafarge and Switzerland’s Holcim. Sales in 2008 were almost \$22 billion, with an operating margin of almost 12%.
Today, Cemex has a presence in more than 50 countries across 5 continents. It has an annual production capacity of close to 96 million metric tons of cement, approximately 77 million cubic meters of ready-mix concrete and more than 240 million metric tons of aggregates. Its resource base includes 64 cement plants, over 2,200 ready-mix concrete facilities, and a minority participation in 15 cement plants, and it operates 493 aggregate quarries, 253 land-distribution centers, and 88 marine terminals.
Zambrano’s embrace of technology is central to Cemex’s efficiency. Fiber optics link the system, and satellite communications are used to connect remote outposts. Whether at the Monterrey headquarters or on the road, the chief executive officer can tap into his computer to check kiln temperatures in Bali or cement truck deliveries in Cairo.
Because he believes many companies use technology ineffectively, Zambrano spun off Cemex’s technology arm to sell its services. Organized under the CxNetworks Miami subsidiary, which is devoted to creating growth by building innovative businesses around Cemex’s strengths, Zambrano formed a consulting service called Neoris. With more than half of its customers coming from outside Cemex, the operation has already become hugely profitable. It has been grouped with another start-up—Arkio, a distributor of building material products to construction companies in developing nations. “We’re selling logistics,” says the president of CxNetworks. “We can assure our customers that they can have the materials from our warehouse to their construction site within 48 hours.” | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/02%3A_The_Globalization_of_Companies_and_Industries/2.02%3A_Understanding_Industry_Globalization.txt |
The theory of comparative economic advantage holds that as a result of natural endowments, some countries or regions of the world are more efficient than others in producing particular goods. Australia, for example, is naturally suited to the mining industry; the United States, with its vast temperate landmass, has a natural advantage in agriculture; and more-wooded parts of the world may have a natural advantage in producing timber-based products. This theory is persuasive for industries such as agriculture, mining, and timber. But what about industries such as electronics, entertainment, or fashion design? To explain the clustering of these industries in particular countries or regions, a more comprehensive theory of the geography of competition is needed.
In the absence of natural comparative advantages, industrial clustering occurs as a result of a relative advantage that is created by the industry itself. (Krugman (1993)). Producers tend to locate manufacturing facilities close to their primary customers. If transportation costs are not too high, and there are strong economies of scale in manufacturing, a large geographic area can be served from this single location. This, in turn, attracts suppliers to the industry. A labor market is likely to develop that begins to act like a magnate for “like” industries requiring similar skills. This colocation of “like” industries can lead to technological interdependencies, which further encourage clustering. Clustering, therefore, is the natural outcome of economic forces. A good example is provided by the semiconductor industry. Together, American and Asian firms supply most of the world’s needs. The industry is capital intensive, research and development costs are high, the manufacturing process is highly complex, but transportation costs are minimal. Technology interdependencies encourage colocation with suppliers, whereas cost and learning curve effects point to scale efficiencies. Clustering, therefore, is mutually advantageous.
Only when transportation costs are prohibitive or scale economies are difficult to realize—that is, when there are disincentives to clustering—do more decentralized patterns of industry location define the natural order. The appliance industry illustrates this. Companies such as GE and Whirlpool have globalized their operations in many respects, but the fundamental economics of the industry make clustering unattractive. The production of certain value-added components, such as compressors or electronic parts, can be concentrated to some extent, but the bulky nature of the product and high transportation costs make further concentration economically unattractive. What is more, advances in flexible manufacturing techniques are reducing the minimum scale needed for efficient production. This allows producers to more finely tailor their product offerings to local tastes and preferences, further thwarting the globalization of the industry.
Thus, classical economic theory tells us why clustering occurs. However, it does not fully explain why particular regions attract certain global industries. Porter addressed this issue using a framework he calls a “national diamond.”Porter (1990). It has six components: factor conditions, home-country demand, related and supporting industries, competitiveness of the home industry, public policy, and chance.
Factor Conditions
The explanation why particular regions attract particular industries begins with the degree to which a country or region’s endowments match the characteristics and requirements of an industry. Such factor conditions include natural (climate, minerals) as well as created (skill levels, capital, infrastructure) endowments. But to the extent that such factors are mobile, or can be imitated by other countries or regions, factor conditions alone do not fully explain regional dominance. In fact, the opposite is true. When a particular industry is highly profitable and barriers to entry are low, the forces of imitation and diffusion cause such an industry to spread across international borders. (Oster (1994)). The Japanese compete in a number of industries that originated in the United States; Korean firms imitate Japanese strategies; and Central European nations are conquering industries that were founded in Western Europe. Industries that depend on such mobile factors as capital are particularly susceptible.
Home-Country Demand
Porter’s second factor is the nature and size of the demand in the home country. Large home markets act as a stimulus for industry development. And when a large home market develops before it takes hold elsewhere in the world, experienced firms have ample incentives to look for business abroad when saturation at home begins to set in. The motorcycle industry in Japan, for example, used its scale advantage to create a global presence following an early start at home. (Oster (1994)). Porter found that it is not just the location of early demand but its composition that matters. A product’s fundamental or core design nearly always reflects home-market needs. As such, the nature of the home-market needs and the sophistication of the home-market buyer are important determinants of the potential of the industry to stake out a future global position. It was helpful to the U.S. semiconductor industry, for example, that the government was an early, sophisticated, and relatively cost-insensitive buyer of chips. These conditions encouraged the industry to develop new technologies and provided early opportunities to manufacture on a substantial scale.
Related and Supporting Industries
The presence of related and supporting industries is the third element of Porter’s framework. This is similar to our earlier observation about clustering. For example, Hollywood is more than just a cluster of moviemakers—it encompasses a host of suppliers and service providers, and it has shaped the labor market in the Los Angeles area.
Competitiveness of the Home Industry
Firm strategies, the structure, and the rivalry in the home industry define the fourth element of the “national diamond” model. In essence, this element summarizes the “five forces” competitive framework described earlier. The more vigorous the domestic competition is, the more successful firms are likely to compete on a global scale. There is plenty of evidence for this assertion. The fierce rivalry that exists among German pharmaceutical companies has made them a formidable force in the global market. And the intense battle for domestic market share has strengthened the competitive position of Japanese automobile manufacturers abroad.
Public Policy and Chance
The two final components of Porter’s model are public policy and chance. There can be no doubt that government policy can—through infrastructure, incentives, subsidies, or temporary protection—nurture global industries. Whether such policies are always effective is less clear. Picking “winners” in the global marketplace has never been the strong suit of governments. The chance element allows for the influence of random events such as where and when fundamental scientific breakthroughs occur, the presence of entrepreneurial initiative, and sheer luck. For example, the early U.S. domination of the photography industry is as much attributable to the fact that George Eastman (of Eastman Kodak) and Edwin Land (of Polaroid) were born here than to any other factor. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/02%3A_The_Globalization_of_Companies_and_Industries/2.03%3A_Porters_National_Diamond.txt |
Yip identifies four sets of “industry globalization drivers” that underlie conditions in each industry that create the potential for that industry to become more global and, as a consequence, for the potential viability of a global approach to strategy.George S. Yip first developed this framework in his book Total global strategy: Managing for worldwide competitive advantage (1992), chaps. 1 and 2. Market drivers define how customer behavior distribution patterns evolve, including the degree to which customer needs converge around the world, customers procure on a global basis, worldwide channels of distribution develop, marketing platforms are transferable, and “lead” countries in which most innovation takes place can be identified. Cost globalization drivers—the opportunity for global scale or scope economics, experience effects, sourcing efficiencies reflecting differentials in costs between countries or regions, and technology advantages—shape the economics of the industry. Competitive drivers are defined by the actions of competing firms, such as the extent to which competitors from different continents enter the fray, globalize their strategies and corporate capabilities, and create interdependence between geographical markets. Government drivers include such factors as favorable trade policies, a benign regulatory climate, and common product and technology standards.
Market Drivers
One aspect of globalization is the steady convergence of customer needs. As customers in different parts of the world increasingly demand similar products and services, opportunities for scale arise through the marketing of more or less standardized offerings. How common needs, tastes, and preferences will vary greatly by product and depend on such factors as the importance of cultural variables, disposable incomes, and the degree of homogeneity of the conditions in which the product is consumed or used. This applies to consumer as well as industrial products and services. Coca-Cola offers similar but not identical products around the world. McDonald’s, while adapting to local tastes and preferences, has standardized many elements of its operations. Software, oil products, and accounting services increasingly look alike no matter where they are purchased. The key to exploiting such opportunities for scale lies in understanding which elements of the product or service can be standardized without sacrificing responsiveness to local preferences and conditions.
Global customers have emerged as needs continue to converge. Large corporations such as DuPont, Boeing, or GE demand the same level of quality in the products and services they buy no matter where in the world they are procured. In many industries, global distribution channels are emerging to satisfy an increasingly global customer base, further causing a convergence of needs. Finally, as consumption patterns become more homogeneous, global branding and marketing will become increasingly important to global success.
Cost Globalization Drivers
The globalization of customer needs and the opportunities for scale and standardization it brings will fundamentally alter the economics of many industries. Economies of scale and scope, experience effects, and exploiting differences in factor costs for product development, manufacturing, and sourcing in different parts of the world will assume a greater importance as determinants of global strategy. At bottom is a simple fact: a single market will no longer be large enough to support a competitive strategy on a global scale in many industries.
Global scale and scope economics are already having far-reaching effects. On the one hand, the more the new economies of scale and scope shape the strategies of incumbents in global industries, the harder it will be for new entrants to develop an effective competitive threat. Thus, barriers to entry in such industries will get higher. At the same time, the rivalry within such industries is likely to increase, reflecting the broadening scope of competition among interdependent national and regional markets and the fact that true differentiation in such a competitive environment may be harder to achieve.
Competitive Drivers
Industry characteristics—such as the degree to which total industry sales are made up by export or import volume, the diversity of competitors in terms of their national origin, the extent to which major players have globalized their operations and created an interdependence between their competitive strategies in different parts of the world—also affect the globalization potential of an industry. High levels of trade, competitive diversity, and interdependence increase the potential for industry globalization. Industry evolution plays a role, too. As the underlying characteristics of the industry change, competitors will respond to enhance and preserve their competitive advantage. Sometimes, this causes industry globalization to accelerate. At other times, as in the case of the worldwide major appliance industry, the globalization process may be reversed.
Government Drivers
Government globalization drivers—such as the presence or absence of favorable trade policies, technical standards, policies and regulations, and government operated or subsidized competitors or customers—affect all other elements of a global strategy and are therefore important in shaping the global competitive environment in an industry. In the past, multinationals almost exclusively relied on governments to negotiate the rules of global competition. Today, however, this is changing. As the politics and economics of global competition become more closely intertwined, multinational companies are beginning to pay greater attention to the so-called nonmarket dimensions of their global strategies aimed at shaping the global competitive environment to their advantage (see the following section). This broadening of the scope of global strategy reflects a subtle but real change in the balance of power between national governments and multinational corporations and is likely to have important consequences for how differences in policies and regulations affecting global competitiveness will be settled in the years to come.
Minicase: Global Value Chains in the Automotive Industry: A Nested Structure (Sturgeon, Van Biesebroeck, and Gereffi (2009))
From a geographic point of view, the world automotive industry, like many others, is in the midst of a profound transition. Since the mid-1980s, it has been shifting from a series of discrete national industries to a more integrated global industry. In the automotive industry, these global ties have been accompanied by strong regional patterns at the operational level.
Market saturation, high levels of motorization, and political pressures on automakers to “build where they sell” have encouraged the dispersion of final assembly, which now takes place in many more places than it did 30 years ago. According to Automotive News Market Data Books, while seven countries accounted for about 80% of world production in 1975, 11 countries accounted for the same share in 2005.
The widespread expectation that markets in China and India were poised for explosive growth generated a surge of new investment in these countries. Consumer preferences require that automakers alter the design of their vehicles to fit the characteristics of specific markets. They also want their conceptual designers to be close to “tuners” to see how they modify their production vehicles. These motivations led automakers to establish a series of affiliated design centers in places such as China and Southern California. Nevertheless, the heavy engineering work of vehicle development, where conceptual designs are translated into the parts and subsystems that can be assembled into a drivable vehicle, remain centralized in or near the design clusters that have arisen near the headquarters of lead firms.
The automotive industry is therefore neither fully global, consisting of a set of linked, specialized clusters, nor tied to the narrow geography of nation states or specific localities, as is the case for some cultural or service industries. Global integration has proceeded at the level of design and vehicle development as firms have sought to leverage engineering effort across regions. Examples include right- versus left-hand drive, more rugged suspension and larger gas tanks for developing countries, and consumer preferences for pick-up trucks in Thailand, Australia, and the United States.
The principal automotive design centers in the world are Detroit, Michigan, in the United States (GM, Ford, Chrysler, and, more recently, Toyota and Nissan); Cologne (Ford Europe), Rüsselsheim (Opel, GM’s European division), Wolfsburg (Volkswagen), and Stuttgart (Daimler-Benz) in Germany; Paris, France (Renault); and Tokyo (Nissan and Honda) and Nagoya (Toyota) in Japan. This is just nine products sold in multiple end markets.
As suppliers have taken on a larger role in design, they have, in turn, established their own design centers close to those of their major customers in order to facilitate collaboration. On the production side, the dominant trend is regional integration, a pattern that has been intensifying since the mid-1980s for both political and technical reasons. In North America, South America, Europe, Southern Africa, and Asia, regional parts production tends to feed final assembly plants producing largely for regional markets. Political pressure for local production has driven automakers to set up final assembly plants in many of the major established market areas and in the largest emerging market countries, such as Brazil, India, and China. Increasingly, as a precondition to being considered for a new part, lead firms demand that their largest suppliers have a global presence.
Because centrally designed vehicles are manufactured in multiple regions, buyer-supplier relationships typically span multiple production regions. Within regions, there is a gradual investment shift toward locations with lower operating costs: the U.S. South and Mexico in North America; Spain and Eastern Europe in Europe; and Southeast Asia and China in Asia. Ironically, perhaps, it is primarily local firms that take advantage of such cost-cutting investments within regions (e.g., the investments of Ford, GM, and Chrysler in Mexico), since the political pressure that drives inward investment is only relieved when jobs are created within the largest target markets (e.g., the investments of Toyota and Honda in the Unites States and Canada).
Automotive parts, of course, are more heavily traded between regions than finished vehicles. Within countries, automotive production and employment are typically clustered in one or a few industrial regions. In some cases, these clusters specialize in specific aspects of the business, such as vehicle design, final assembly, or the manufacture of parts that share a common characteristic, such as electronic content or labor intensity.
Because of deep investments in capital equipment and skills, regional automotive clusters tend to be very long-lived. To sum up the complex economic geography of the automotive industry, we can say that global integration has proceeded the farthest at the level of buyer-supplier relationships, especially between automakers and their largest suppliers. Production tends to be organized regionally or nationally, with bulky, heavy, and model-specific parts production concentrated close to final assembly plants to assure timely delivery, and with lighter, more generic parts produced at a distance to take advantage of scale economies and low labor costs. Vehicle development is concentrated in a few design centers. As a result, local, national, and regional value chains in the automotive industry are “nested” within the global organizational structures and business relationships of the largest firms. While clusters play a major role in the automotive industry, and have “pipelines” that link them, there are also global and regional structures that need to be explained and theorized in a way that does not discount the power of localization. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/02%3A_The_Globalization_of_Companies_and_Industries/2.04%3A_Industry_Globalization_Drivers.txt |
Yoffie suggests 5 propositions that help explain how the structure of an industry can evolve depending on, among other factors, the dynamics that shape competition in the industry and the role governments play in stimulating or obstructing the globalization process. (Yoffie (1993), chaps. 1 and 10. The reader is encouraged to consult this excellent book for further details).
Proposition 1 is that when industries are relatively fragmented and competitive, national environments (factors of production, domestic market and domestic demand, and so forth) will largely shape the international advantage of domestically headquartered firms and the patterns of trade. A correlate to this proposition is that in emerging industries, country advantages also play a dominant role in determining global competitive advantage.
In other words, in fragmented industries relative cost is a key determinant of global success, and since countries differ in terms of their factor costs, as long as entry barriers remain low, production will gravitate to the lowest cost, highest efficiency manufacturing location. Another way of saying this is that the presence of multinational firms, by itself, should not influence the pattern of international trade in globally competitive, fragmented industries; other things being equal, country factors determine the location of production and the direction of exports. Oligopolistic global industry structures define a very different strategic context, as the next proposition illustrates.
Proposition 2 stipulates that if an industry becomes globally concentrated with high barriers to entry, then location, activity concentration, export, and other strategic decisions by multinational companies are determined to a greater extent by the nature of the global oligopolistic rivalry. Thus, while in concentrated industries country characteristics remain important, the dynamics of the global, oligopolistic competitive climate become the principal drivers of global strategy. This is intuitive. In global oligopolies, more so than in fragmented market structures, the success of one firm is directly affected by that of a few, immediate competitors. Entry into the industry is often restricted in some way—by factors such as economies of scale or scope, high levels of capital investment, and the like, or by restrictions imposed by governments. Furthermore, in many global oligopolies, participating firms earn above-average returns, which may make the difference in cost between producing locally and exporting a less critical determinant of strategy. Opportunities to cross-subsidize businesses and geographies further reduce the importance of geography in production or export decisions. As a consequence, the moves and countermoves of direct, global competitors heavily influence company strategies. For example, it is quite common for companies to enter some other firm’s home market, not just because that market is likely to generate additional profits but mainly to weaken its global competitive position. This line of reasoning directly leads to a third proposition, which relates organizational and strategic attributes of global competitors to global strategic choice.
Proposition 3 suggests that in global oligopolies, specific firm characteristics—the structure of ownership, strategies employed, and organizational factors, to name a few—directly affect strategic posture, the pattern of trade, and, sometimes, the competitiveness of nations. In global oligopolies with a relatively small number of competitors, issues such as who owns the resources necessary for creating value and who sets the global priorities take on a greater strategic significance. Executives from different cultures approach strategy differently—state-owned enterprises are often more motivated by public policy considerations, employment, and other nonprofit concerns. These differences can have a direct impact on the relative attractiveness of global strategy options. The influence of governments in global markets is captured further in the fourth proposition.
Proposition 4 suggests that extensive government intervention in global oligopolistic industries can alter the relative balance between firms of different countries—even in fragmented industries, it can alter the direction of trade and affect major corporate trade decisions. The degree and influence of government intervention varies from industry to industry. Whereas in fragmented industries the influence of governments is naturally somewhat limited by market conditions, government intervention can have a pronounced influence in industries with significant economies of scale effects or other market imperfections. For example, governments can protect “infant” industries with such characteristics. While a case can be made for the temporary protection of strategically important industries, in reality, such protection is rarely temporary. This can create a global strategic environment in which anticipating and capitalizing on the actions of governments become the driving forces of global strategy.
Proposition 5 suggests that in industries where firms make long-term commitments, corporate adjustments and patterns of trade tend to be “sticky.” This fifth and final proposition addresses the issue of corporate inertia. Although the global competitive climate changes every day, choices made by multinational companies and governments tend to have an enduring impact on the industry environment. This proposition has at least two implications. First, the study of how industries evolve globally and what decisions different competitors made and how they made them is relevant to understanding what drives strategy in a particular global context. Second, the commitments already made by industry participants and governments may spell opportunity or impose constraints for years to come.
These 5 propositions define 2 important dimensions for classifying globalizing industries according to the nature of the strategic challenge they represent: the degree of global concentration and the extent to which governments intervene. In industries with a relatively low degree of concentration and little government intervention, the classical economic laws of comparative advantage are the primary drivers of international competition. Here, factor costs are a primary determinant of global competitiveness. It would seem natural, therefore, to focus on a global strategy aimed at minimizing costs. But this can be extremely difficult in a fast-changing world. Comparative country costs change continuously. In cars, semiconductors, and computers, among other industries, the comparative (cost) advantage has shifted a number of times since World War II from the United States to Japan to East Asia to Southeast Asia. What is more, there is good reason to believe it will shift again, perhaps to Africa or Latin America. And, with new technological breakthroughs, Western nations may once again become the low-cost production centers. So what should companies do? While companies should definitely take advantage of opportunities to minimize costs, especially in their initial investments, Yoffie suggests that long-term global strategic choices should emphasize commitments to countries that are likely to act as the best platforms over time for a broad array of activities. (Yoffie (1993), 432).
In globally concentrated industries where the role of governments is limited, characterized by oligopolistic competition, company strategies are often heavily influenced by the moves and countermoves of direct competitors. Strategies such as making significant investments in competitors’ markets, regardless of their short- or medium-run profitability—which would not work in highly competitive markets—can only be explained in terms of a strategic posture aimed at maintaining a long-term global competitive balance between the various participants. Caterpillar invested heavily in Japan while Komatsu and European construction equipment manufacturing moved into the United States at a time when such moves offered limited immediate returns. In this kind of competitive environment, the potential for overglobalization—the globalization of different aspects of strategy well in advance of proven benefits—exists as the relatively small number of competitors and high barriers to entry encourage “follow-the-leader” competitive behavior. On the other hand, not responding directly to major competitors can be equally dangerous. Komatsu’s challenge to Caterpillar, in part, was made possible because, early on, Caterpillar focused its strategy on keeping John Deere, International Harvester, and Dresser Industries at bay rather than on beating Komatsu. This suggests a number of strategic implications. First, while imitation cannot be the sole basis for developing strategy, in oligopolies, it may be necessary, at times, to match a competitor in order to reduce the risk of competitive disadvantage. A related implication is that in global oligopolies, companies cannot allow their competitors to have uncontested home markets in which profit sanctuaries can be used to subsidize global competitive moves. This explains Kodak’s extraordinary efforts to pry open the Japanese market—it knew Fuji would be at a considerable advantage if it remained dominant in Japan. Finally, the use of alliances can make such global moves more affordable, flexible, and effective. Alliances can be powerful vehicles for rapidly entering new countries, acquiring new technologies, or otherwise supporting a global strategy at a relatively low cost. (Yoffie (1993), 433, 434).
Dealing effectively with governments is a prerequisite for global success in oligopolistic industries such as telecommunications, where extensive government intervention creates a global competitive climate known as regulated competition. Here, nonmarket dimensions of global strategy may well be as important as market dimensions. Political involvement may be necessary to create, preserve, or enhance global competitive advantage since government regulations—whether in infant or established industries—are critical to success. As a consequence, strategy in global, regulated industries should be focused as much on shaping the global competitive environment as on capitalizing on the opportunities it offers.
Political competition, characteristic of fragmented industries with significant government intervention, also calls for a judicious mix of market and nonmarket-based strategic thinking. In contrast to regulated competition, in which government policy has a direct impact on individual companies, however, government intervention in political competition often pits one country or region of the world against another. This encourages a whole range of cooperative strategies between similarly affected players and strategic action at the country-industry level.
Finally, it is worth remembering that patterns of competition are not static. Industries evolve continuously, sometimes dramatically. Similarly, the focus of government action in different industries can change as national priorities change and the global competitive environment evolves.
2.06: Points to Remember
1. Industries and companies tend to globalize in stages, and at each stage, there are different opportunities for, and challenges associated with, creating value.
2. Simple characterizations such as “the electronics industry is global” are not particularly useful. A better question is how global an industry is or is likely to become; industry globalization is a matter of degree.
3. A distinction must be made between industry globalization, global competition, and the degree to which a company has globalized its operations. Porter explains industry clustering using a framework he calls a “national diamond.” It has six components: factor conditions, home country demand, related and supporting industries, competitiveness of the home industry, public policy, and chance.
4. Yip identifies four sets of “industry globalization drivers”—underlying conditions in each industry that create the potential for that industry to become more global and, as a consequence, for the potential viability of a global approach to strategy. These drivers are market drivers, cost drivers, competitive drivers, and government drivers.
5. Yoffie offers five propositions that help explain how the structure of an industry can evolve depending on, among other factors, the dynamics that shape competition in the industry and the role governments play in stimulating or obstructing the globalization process. These propositions define two important dimensions for classifying globalizing industries according to the nature of the strategic challenge they represent: the degree of global concentration and the extent to which governments intervene. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/02%3A_The_Globalization_of_Companies_and_Industries/2.05%3A_Globalization_and_Industry_Structure.txt |
In this chapter, we introduce three generic strategies for creating value in a global context—adaptation, aggregation, and arbitrage—and a number of variants for each. (This chapter draws substantially on Ghemawat (2007b)). This conceptualization was first introduced by Pankaj Ghemawat in his important book Redefining Global Strategy and, as such, is not new. In the next chapter, we extend this framework, however, by integrating these generic strategies with the proposition that global strategy formulation is about changing a company’s business model to create a global competitive advantage.
03: Generic Strategies for Global Value Creation
Ghemawat so-called AAA framework offers three generic approaches to global value creation. Adaptation strategies seek to increase revenues and market share by tailoring one or more components of a company’s business model to suit local requirements or preferences. Aggregation strategies focus on achieving economies of scale or scope by creating regional or global efficiencies; they typically involve standardizing a significant portion of the value proposition and grouping together development and production processes. Arbitrage is about exploiting economic or other differences between national or regional markets, usually by locating separate parts of the supply chain in different places.
Adaptation
Adaptation—creating global value by changing one or more elements of a company’s offer to meet local requirements or preferences—is probably the most widely used global strategy. The reason for this will be readily apparent: some degree of adaptation is essential or unavoidable for virtually all products in all parts of the world. The taste of Coca-Cola in Europe is different from that in the United States, reflecting differences in water quality and the kind and amount of sugar added. The packaging of construction adhesive in the United States informs customers how many square feet it will cover; the same package in Europe must do so in square meters. Even commodities such as cement are not immune: its pricing in different geographies reflects local energy and transportation costs and what percentage is bought in bulk.
Ghemawat subdivides adaptation strategies into five categories: variation, focus, externalization, design, and innovation (Figure \(1\) "AAA Strategies and Their Variants").
Variation strategies not only involve making changes in products and services but also making adjustments to policies, business positioning, and even expectations for success. The product dimension will be obvious: Whirlpool, for example, offers smaller washers and dryers in Europe than in the United States, reflecting the space constraints prevalent in many European homes. The need to consider adapting policies is less obvious. An example is Google’s dilemma in China to conform to local censorship rules. Changing a company’s overall positioning in a country goes well beyond changing products or even policies. Initially, Coke did little more than “skim the cream” off big emerging markets such as India and China. To boost volume and market share, it had to reposition itself to a “lower margin–higher volume” strategy that involved lowering price points, reducing costs, and expanding distribution. Changing expectations for, say, the rate of return on investment in a country, while a company is trying to create a presence is also a prevalent form of variation.
A second type of adaptation strategies uses a focus on particular products, geographies, vertical stages of the value chain, or market segments as a way of reducing the impact of differences across regions. A product focus takes advantage of the fact that wide differences can exist within broad product categories in the degree of variation required to compete effectively in local markets. Ghemawat cites the example of television programs: action films need far less adaptation than local newscasts. Restriction of geographic scope can permit a focus on countries where relatively little adaptation of the domestic value proposition is required. A vertical focus strategy involves limiting a company’s direct involvement to specific steps in the supply chain while outsourcing others. Finally, a segment focus involves targeting a more limited customer base. Rather than adapting a product or service, a company using this strategy chooses to accept the reality that without modification, their products will appeal to a smaller market segment or different distributor network from those in the domestic market. Many luxury good manufacturers use this approach.
Whereas focus strategies overcome regional differences by narrowing scope, externalization strategies transfer—through strategic alliances, franchising, user adaptation, or networking—responsibility for specific parts of a company’s business model to partner companies to accommodate local requirements, lower cost, or reduce risk. For example, Eli Lilly extensively uses strategic alliances abroad for drug development and testing. McDonald’s growth strategy abroad uses franchising as well as company-owned stores. And software companies heavily depend on both user adaptation and networking for the development of applications for their basic software platforms.
A fourth type of adaptation focuses on design to reduce the cost of, rather than the need for, variation. Manufacturing costs can often be achieved by introducing design flexibility so as to overcome supply differences. Introducing standard production platforms and modularity in components also helps to reduce cost. A good example of a company focused on design is Tata Motors, which has successfully introduced a car in India that is affordable to a significant number of citizens.
A fifth approach to adaptation is innovation, which, given its crosscutting effects, can be characterized as improving the effectiveness of adaptation efforts. For instance, IKEA’s flat-pack design, which has reduced the impact of geographic distance by cutting transportation costs, has helped that retailer expand into 3 dozen countries.
Minicase: McDonald's McAloo Tikki (Mucha and Scheffler (2007, April 30))
When Ray Kroc opened his first McDonald’s in Des Plaines, Illinois, he could hardly have envisioned the golden arches rising 5 decades later in one of the oldest commercial streets in the world. But McDonald’s began dreaming of India in 1991, a year after opening its first restaurant in China. The attraction was obvious: 1.1 billion people, with 300 million destined for middle-class status.
But how do you sell hamburgers in a land where cows are sacred and 1 in 5 people are vegetarian? And how do you serve a largely poor consumer market that stretches from the Himalayas to the shores of the Indian Ocean? McDonald’s executives in Oak Brook struggled for years with these questions before finding the road to success.
McDonald’s has made big gains since the debut of its first two restaurants in India, in Delhi and Mumbai, in October 1996. Since then, the fast-food chain has grown to more than 160 outlets. The Indian market represents a small fraction of McDonald’s \$24 billion in annual revenues. But it is not insignificant because the company is increasingly focused on high-growth markets. “The decision to go in wasn’t complicated,” James Skinner, McDonald’s chief executive officer, once said. “The complicated part was deciding what to sell.”
At first, McDonald’s path into India was fraught with missteps. First, there was the nonbeef burger made with mutton. But the science was off: mutton is 5% fat (beef is 25% fat), making it rubbery and dry. Then there was the french fry debacle. McDonald’s started off using potatoes grown in India, but the local variety had too much water content, making the fries soggy. Chicken kabob burgers? Sounds like a winner except that they were skewered by consumers. Salad sandwiches were another flop: Indians prefer cooked foods.
If that was not enough, in May 2001, the company was picketed by protesters after reports surfaced in the United States that the chain’s fries were injected with beef extracts to boost flavor—a serious infraction for vegetarians. McDonald’s executives in India denied the charges, claiming their fries were different from those sold in America.
But the company persevered, learned, and succeeded. It figured out what Indians wanted to eat and what they would pay for it. It built, from scratch, a mammoth supply chain—from farms to factories—in a country where elephants, goats, and trucks share the same roads. To deal with India’s massive geography, the company divided the country into two regions: the north and east, and the south and west. Then it formed 50-50 joint ventures with two well-connected Indian entrepreneurs: Vikram Bakshi, who made his fortune in real estate, runs the northern region; and Amit Jatia, an entrepreneur who comes from a family of successful industrialists, manages the south.
Even though neither had any restaurant experience, this joint-venture management structure gave the company what it needed: local faces at the top. The two entrepreneurs also brought money: before the first restaurant opened, the partners invested \$10 million into building a workable supply chain, establishing distribution centers, procuring refrigerated trucks, and finding production facilities with adequate hygiene. They also invested \$15 million in Vista Processed Foods, a food processing plant outside Mumbai. In addition, Mr. Jatia, Mr. Bakshi, and 38 staff members spent an entire year in the Indonesian capital of Jakarta studying how McDonald’s operated in another Asian country.
Next, the Indian executives embarked on basic-menu research and development (R&D). After awhile, they hit on a veggie burger with a name Indians could understand: the McAloo Tikki (an “aloo tikki” is a cheap potato cake locals buy from roadside vendors).
The lesson in the McDonald’s India case: local input matters. Today, 70% of the menu is designed to suit Indians: the Paneer Salsa Wrap, the Chicken Maharaja Mac, the Veg McCurry Pan. The McAloo, by far the best-selling product, also is being shipped to McDonald’s in the Middle East, where potato dishes are popular. And in India, it does double duty: it not only appeals to the masses; it is also a hit with the country’s 200 million vegetarians.
Another lesson learned from the McDonald’s case: vegetarian items should not come into contact with nonvegetarian products or ingredients. Walk into any Indian McDonald’s and you will find half of the employees wearing green aprons and the other half in red. Those in green handle vegetarian orders. The red-clad ones serve nonvegetarians. It is a separation that extends throughout the restaurant and its supply chain. Each restaurant’s grills, refrigerators, and storage areas are designated as “veg” or “non-veg.” At the Vista Processed Foods plant, at every turn, managers stressed the “non-veg” side was in one part of the facility, and the “vegetarian only” section was in another.
Today, after many missteps, one can truly imagine the ghost of Ray Kroc asking Indians one of the greatest questions of all time—the one that translates into so many cultures: “You want fries with that?” Yes, Ray, they do.
Aggregation
Aggregation is about creating economies of scale or scope as a way of dealing with differences (see Figure \(1\) "AAA Strategies and Their Variants"). The objective is to exploit similarities among geographies rather than adapting to differences but stopping short of complete standardization, which would destroy concurrent adaptation approaches. The key is to identify ways of introducing economies of scale and scope into the global business model without compromising local responsiveness.
Adopting a regional approach to globalizing the business model—as Toyota has so effectively done—is probably the most widely used aggregation strategy. As discussed in the previous chapter, regionalization or semiglobalization applies to many aspects of globalization, from investment and communication patterns to trade. And even when companies do have a significant presence in more than one region, competitive interactions are often regionally focused.
Examples of different geographic aggregation approaches are not hard to find. Xerox centralized its purchasing, first regionally, later globally, to create a substantial cost advantage. Dutch electronics giant Philips created a global competitive advantage for its Norelco shaver product line by centralizing global production in a few strategically located plants. And the increased use of global (corporate) branding over product branding is a powerful example of creating economies of scale and scope. As these examples show, geographic aggregation strategies have potential application to every major business model component.
Geographic aggregation is not the only avenue for generating economies of scale or scope. The other, nongeographic dimensions of the CAGE framework introduced in Chapter 1—cultural, administrative, geographic, and economic—also lend themselves to aggregation strategies. Major book publishers, for example, publish their best sellers in but a few languages, counting on the fact that readers are willing to accept a book in their second language (cultural aggregation). Pharmaceutical companies seeking to market new drugs in Europe must satisfy the regulatory requirements of a few selected countries to qualify for a license to distribute throughout the EU (administrative aggregation). As for economic aggregation, the most obvious examples are provided by companies that distinguish between developed and emerging markets and, at the extreme, focus on just one or the other.
Minicase: Globalization at Whirlpool Corporation
The history of globalization at the Whirlpool Corporation—a leading company in the \$100-billion global home-appliance industry—illustrates the multitude of challenges associated with globalizing a business model. Whirlpool manufactures appliances across all major categories—including fabric care, cooking, refrigeration, dishwashing, countertop appliances, garage organization, and water filtration—and has a market presence in every major country in the world. It markets some of the world’s most recognized appliance brands, including Whirlpool, Maytag, KitchenAid, Jenn-Air, Amana, Bauknecht, Brastemp, and Consul. Of these, the Whirlpool brand is the world’s top-rated global appliance brand and ranks among the world’s most valuable brands. In 2008, Whirlpool realized annual sales of approximately \$19 billion, had 70,000 employees, and maintained 67 manufacturing and technology research centers around the world. (www.whirlpoolcorp.com/about/history.aspx)
In the late 1980s, Whirlpool Corporation set out on a course of growth that would eventually transform the company into the leading global manufacturer of major home appliances, with operations based in every region of the world. At the time, Dave Whitwam, Whirlpool’s chairman and CEO, had recognized the need to look for growth beyond the mature and highly competitive U.S. market. Under Mr. Whitwam’s leadership, Whirlpool began a series of acquisitions that would give the company the scale and resources to participate in global markets. In the process, Whirlpool would establish new relationships with millions of customers in countries and cultures far removed from the U.S. market and the company’s roots in rural Benton Harbor, Michigan.
Whirlpool’s global initiative focused on establishing or expanding its presence in North America, Latin America, Europe, and Asia. In 1989, Whirlpool acquired the appliance business of Philips Electronics N.V., which immediately gave the company a solid European operations base. In the western hemisphere, Whirlpool expanded its longtime involvement in the Latin America market and established a presence in Mexico as an appliance joint-venture partner. By the mid-1990s, Whirlpool had strengthened its position in Latin America and Europe and was building a solid manufacturing and marketing base in Asia.
In 2006, Whirlpool acquired Maytag Corporation, resulting in an aligned organization able to offer more to consumers in the increasingly competitive global marketplace. The transaction created additional economies of scale. At the same time, it expanded Whirlpool’s portfolio of innovative, high-quality branded products and services to consumers.
Executives knew that the company’s new scale, or global platform, that emerged from the acquisitions offered a significant competitive advantage, but only if the individual operations and resources were working in concert with each other. In other words, the challenge is not in buying the individual businesses—the real challenge is to effectively integrate all the businesses together in a meaningful way that creates the leverage and competitive advantage.
Some of the advantages were easily identified. By linking the regional organizations through Whirlpool’s common systems and global processes, the company could speed product development, make purchasing increasingly more efficient and cost-effective, and improve manufacturing utilization through the use of common platforms and cross-regional exports.
Whirlpool successfully refocused a number of its key functions to its global approach. Procurement was the first function to go global, followed by technology and product development. The two functions shared much in common and have already led to significant savings from efficiencies. More important, the global focus has helped reduce the number of regional manufacturing platforms worldwide. The work of these two functions, combined with the company’s manufacturing footprints in each region, has led to the development of truly global platforms—products that share common parts and technologies but offer unique and innovative features and designs that appeal to regional consumer preferences.
Global branding was next. Today, Whirlpool’s portfolio ranges from global brands to regional and country-specific brands of appliances. In North America, key brands include Whirlpool, KitchenAid, Roper by Whirlpool Corporation, and Estate. Acquired with the company’s 2002 purchase of Vitromatic S.A., brands Acros and Supermatic are leading names in Mexico’s domestic market. In addition, Whirlpool is a major supplier for the Sears, Roebuck and Co. Kenmore brand. In Europe, the company’s key brands are Whirlpool and Bauknecht. Polar, the latest addition to Europe’s portfolio, is the leading brand in Poland. In Latin America, the brands include Brastemp and Consul. Whirlpool’s Latin American operations include Embraco, the world’s leading compressor manufacturer. In Asia, Whirlpool is the company’s primary brand and the top-rated refrigerator and washer manufacturer in India.
Arbitrage
A third generic strategy for creating a global advantage is arbitrage (see Figure 3.1). Arbitrage is a way of exploiting differences, rather than adapting to them or bridging them, and defines the original global strategy: buy low in one market and sell high in another. Outsourcing and offshoring are modern day equivalents. Wal-Mart saves billions of dollars a year by buying goods from China. Less visible but equally important absolute economies are created by greater differentiation with customers and partners, improved corporate bargaining power with suppliers or local authorities, reduced supply chain and other market and nonmarket risks, and through the local creation and sharing of knowledge.
Since arbitrage focuses on exploiting differences between regions, the CAGE framework described in Chapter 1 is of particular relevance and helps define a set of substrategies for this generic approach to global value creation.
Favorable effects related to country or place of origin have long supplied a basis for cultural arbitrage. For example, an association with French culture has long been an international success factor for fashion items, perfumes, wines, and foods. Similarly, fast-food products and drive-through restaurants are mainly associated with U.S. culture. Another example of cultural arbitrage—real or perceived—is provided by Benihana of Tokyo, the “Japanese steakhouse.” Although heavily American—the company has only one outlet in Japan out of more than 100 worldwide—it serves up a theatrical version of teppanyaki cooking that the company describes as “Japanese” and “eatertainment.”
Legal, institutional, and political differences between countries or regions create opportunities for administrative arbitrage. Ghemawat cites the actions taken by Rupert Murdoch’s News Corporation in the 1990s. By placing its U.S. acquisitions into holding companies in the Cayman Islands, the company could deduct interest payments on the debt used to finance the deals against the profits generated by its newspaper operations in Britain. Through this and other similar actions, it successfully lowered its tax liabilities to an average rate of less than 10%, rather than the statutory 30% to 36% of the three main countries in which it operated: Britain, the United States, and Australia. By comparison, major competitors such as Disney were paying close to the official rates. (Ghemawat (2007a), chap. 6).
With steep drops in transportation and communication costs in the last 25 years, the scope for geographic arbitrage—the leveraging of geographic differences—has been diminished but not fully eliminated. Consider what is happening in medicine, for example. It is quite common today for doctors in the United States to take X-rays during the day, send them electronically to radiologists in India for interpretation overnight, and for the report to be available the next morning in the United States. In fact, reduced transportation costs sometimes create new opportunities for geographic arbitrage. Every day, for instance, at the international flower market in Aalsmeer, the Netherlands, more than 20 million flowers and 2 million plants are auctioned off and flown to customers in the United States.
As Ghemawat notes, in a sense, all arbitrage strategies that add value are “economic.” Here, the term economic arbitrage is used to describe strategies that do not directly exploit cultural, administrative, or geographic differences. Rather, they are focused on leveraging differences in the costs of labor and capital, as well as variations in more industry-specific inputs (such as knowledge) or in the availability of complementary products. (Ghemawat (2007a), chap. 6).
Exploiting differences in labor costs—through outsourcing and offshoring—is probably the most common form of economic arbitrage. This strategy is widely used in labor-intensive (garments) as well as high-technology (flat-screen TV) industries. Economic arbitrage is not limited to leveraging differences in labor costs alone, however. Capital cost differentials can be an equally rich source of opportunity.
Minicase: Indian Companies Investing in Latin America? To Serve U.S. Customers? (Dickerson (2007, June 9))
Indian investment in Latin America is relatively small but growing quickly. Indian firms have invested about \$7 billion in the region over the last decade, according to figures released by the Latin American division of India’s Ministry of External Affairs in New Delhi. The report projects that this amount will easily double in the next few years.
As India has become a magnet for foreign investment, Indian companies themselves are looking abroad for opportunities, motivated by declining global trade barriers and fierce competition at home. Their current focus is on Latin America, where hyperinflation and currency devaluation no longer dominate headlines.
Like China, India is trying to lock up supplies of energy and minerals to feed its rapidly growing economy. Indian firms have stakes in oil and natural gas ventures in Colombia, Venezuela, and Cuba. In 2006, Bolivia signed a deal with New Delhi-based Jindal Steel and Power, Ltd., which plans to invest \$2.3 billion to extract iron ore and to build a steel mill in that South American nation.
At the same time, Indian information technology companies are setting up outsourcing facilities to be closer to their customers in the West. Tata Consultancy Services is the leader, employing 5,000 tech workers in more than a dozen Latin American countries.
Indian manufacturing firms, accustomed to catering to low-income consumers at home, are finding Latin America a natural market. Mumbai-based Tata Motors, Ltd., has formed a joint venture with Italy’s Fiat to produce small pickup trucks in Argentina. Generic drug makers, such as Dr. Reddy’s, are offering low-cost alternatives in a region where U.S. and European multinationals have long dominated.
The Indian government has carefully positioned India as a partner, rather than a rival out to steal the region’s resources and jobs, a common worry about China. Mexico has been particularly hard-hit by China’s rise. The Asian nation’s export of textiles, shoes, electronics, and other consumer goods has cost Mexico tens of thousands of manufacturing jobs, displaced it as the second-largest trading partner with the United States, and flooded its domestic market with imported merchandise. In 2006, Mexico’s trade deficit with China was a record \$22.7 billion, but China has invested less than \$100 million in the country since 1994, according to the Bank of Mexico.
Mexico’s trading relationship with India, albeit small, is much more balanced. Mexico’s trade deficit with India was just under half a billion dollars in 2006, and Indian companies have invested \$1.6 billion here since 1994—or about 17 times more than China—according to Mexico’s central bank.
Some of that investment is in basic industries and traditional maquiladora factories making goods for export. For example, Mexico’s biggest steel plant is owned by ArcelorMittal. Indian pharmaceutical companies, too, are finding Latin America to be attractive for expansion. Firms including Ranbaxy Laboratories, Ltd., Aurobindo Pharma, Ltd., and Cadila Pharmaceuticals, Ltd., have sales or manufacturing operations in the region. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/03%3A_Generic_Strategies_for_Global_Value_Creation/3.01%3A_Ghemawats_AAA_Global_Strategy_Framework.txt |
A company’s financial statements can be a useful guide for signaling which of the “A” strategies will have the greatest potential to create global value. Firms that heavily rely on branding and that do a lot of advertising, such as food companies, often need to engage in considerable adaptation to local markets. Those that do a lot of R&D—think pharmaceutical firms—may want to aggregate to improve economies of scale, since many R&D outlays are fixed costs. For firms whose operations are labor intensive, such as apparel manufacturers, arbitrage will be of particular concern because labor costs vary greatly from country to country.
Which “A” strategy a company emphasizes also depends on its globalization history. Companies that start on the path of globalization on the supply side of their business model, that is, that seek to lower cost or to access new knowledge, first typically focus on aggregation and arbitrage approaches to creating global value, whereas companies that start their globalization history by taking their value propositions to foreign markets are immediately faced with adaptation challenges. Regardless of their starting point, most companies will need to consider all “A” strategies at different points in their global evolution, sequentially or, sometimes, simultaneously.
Nestlé’s globalization path, for example, started with the company making small, related acquisitions outside its domestic market, and the company therefore had early exposure to adaptation challenges. For most of their history, IBM also pursued an adaptation strategy, serving overseas markets by setting up a mini-IBM in each target country. Every one of these companies operated a largely local business model that allowed it to adapt to local differences as necessary. Inevitably, in the 1980s and 1990s, dissatisfaction with the extent to which country-by-country adaptation curtailed opportunities to gain international scale economies led to the overlay of a regional structure on the mini-IBMs. IBM aggregated the countries into regions in order to improve coordination and thus generate more scale economies at the regional and global levels. More recently, however, IBM has also begun to exploit differences across countries (arbitrage). For example, it has increased its work force in India while reducing its headcount in the United States.
Procter & Gamble’s (P&G) early history parallels that of IBM, with the establishment of mini-P&Gs in local markets, but it has evolved differently. Today, the company’s global business units now sell through market development organizations that are aggregated up to the regional level. P&G has successfully evolved into a company that uses all three “A” strategies in a coordinated manner. It adapts its value proposition to important markets but ultimately competes—through global branding, R&D, and sourcing—on the basis of aggregation. Arbitrage, while important—mostly through outsourcing activities that are invisible to the final consumer—is less important to P&G’s global competitive advantage because of its relentless customer focus.
3.03: From A to AA to AAA
Although most companies will focus on just one “A” at any given time, leading-edge companies—such as General Electric (GE), P&G, IBM, and Nestlé, to name a few—have embarked on implementing two, or even all three of the “A”s. Doing so presents special challenges because there are inherent tensions between all three foci. As a result, the pursuit of “AA” strategies, or even an “AAA” approach, requires considerable organizational and managerial flexibility.This discussion draws on Ghemawat (2007b), Chapter 7.
Pursuing Adaptation and Aggregation
P&G started out with a focus on adaptation. Attempts to superimpose aggregation across Europe first proved difficult and, in particular, led to the installation of a matrix structure throughout the 1980s, but the matrix proved unwieldy. So, in 1999, the then CEO, Durk Jager, announced another reorganization whereby global business units (GBUs) retained ultimate profit responsibility but were complemented by geographic market development organizations (MDOs) that actually managed the sales force as a shared resource across GBUs. The result was disastrous. Conflicts arose everywhere, especially at the key GBU-MDO interfaces. The upshot: Jager departed after less than a year in office.
Under his successor, A. G. Lafley, P&G has enjoyed much more success, with an approach that strikes a better balance between adaptation and aggregation and that makes allowances for differences across general business units and markets. For example, the pharmaceuticals division, with distinct distribution channels, has been left out of the MDO structure. Another example: in emerging markets, where market development challenges are huge, profit responsibility continues to rest with country managers.
Aggregation and Arbitrage
VIZIO, founded in 2002 with only \$600,000 in capital by entrepreneur William Wang to create high quality, flat panel televisions at affordable prices, has surpassed established industry giants Sony Corporation and Samsung Electronics Company to become the top flat-panel high definition television (HDTV) brand sold in North America. To get there, VIZIO developed a business model that effectively combines elements of aggregation and arbitrage strategies. VIZIO’s contract manufacturing model is based on aggressive procurement sourcing, supply-chain management, economies of scale in distribution.
While a typical flat-screen television includes thousands of parts, the bulk of the costs and ultimate performance are a function of two key components: the panel and the chipset. Together, these two main parts account for about 94% of the costs. VIZIO’s business model therefore focuses on optimizing the cost structure for these component parts. The vast majority of VIZIO’s panels and chipsets are supplied by a handful of partners. Amtran provides about 80% of VIZIO’s procurement and assembly work, with the remaining 20% performed by other ODMs, including Foxconn and TPV Technology.
One of the cornerstones of VIZIO’s strategy is the decision to sell through wholesale clubs and discount retailers. Initially, William Wang was able to leverage his relationships at Costco from his years of selling computer monitors. VIZIO’s early focus on wholesale stores also fit with the company’s value position and pricing strategy. By selling through wholesale clubs and discount stores, VIZIO was able to keeps its prices low. For VIZIO, there is a two-way benefit: the prices of its TVs are comparatively lower than those from major manufacturers at electronics stores, and major manufacturers cannot participate as fully as they would like to at places like Costco.
VIZIO has strong relationships with its retail partners and is honored to offer them only the most compelling and competitively priced consumer electronics products. VIZIO products are available at valued partners including Wal-Mart, Costco, Sam’s Club, BJ’s Wholesale Club, Sears, Dell, and Target stores nationwide along with authorized online partners. VIZIO has won numerous awards including a number-one ranking in the Inc. 500 for “Top Companies in Computers and Electronics,” Good Housekeeping’s “Best Big-Screens,” CNET’s “Top 10 Holiday Gifts,” and PC World’s “Best Buy,” among others. http://www.vizio.com/
Arbitrage and Adaptation
An example of a strategy that simultaneously emphasizes arbitrage and adaptation is investing heavily in a local presence in a key market to the point where a company can pass itself off as a “local” firm or “insider.” A good example is provided by Citibank in China. The company, part of Citigroup, has had an intermittent presence in China since the beginning of the 20th century. A little more than 100 years later, in 2007, it was one of the first foreign banks to incorporate locally in China. The decision to incorporate locally was motivated by the desire to increase Citibank’s status as an “insider”; with local incorporation, the Chinese government allowed it to extend its reach, expand its product offerings, and become more closely engaged with its local customers in the country.
China’s decision in 2001 to become a member of the World Trade Organization (WTO) was a major factor in Citibank’s decision to make a greater commitment to the Chinese market. Prior to China’ joining the WTO, the banking environment in China was fairly restrictive. Banks such as Citibank could only give loans to foreign multinationals and their joint-venture partners in local currency, and money for domestic Chinese companies could only be raised in offshore markets. These restrictions made it difficult for foreign banks to gain a foothold in the Chinese business community.
Once China agreed to abide by WTO trading rules, however, banks such as Citibank had significantly greater opportunities: they would be able to provide local currency loans to blue-chip Chinese companies and would be free to raise funds for them in debt and equity markets within China. Other segments targeted by Citibank included retail credit cards and home mortgages. These were Citibank’s traditional areas of expertise globally, and a huge potential demand for these products was apparent.
Significant challenges remained, however. Competing through organic growth with China’s vast network of low-cost domestic banks would be slow and difficult. Instead, in the next few years, it forged a number of strategic alliances designed to give it critical mass in key segments. The first consisted of taking a 5% stake in China’s ninth-largest bank, SPDB, a move that allowed Citibank to launch a dual-currency credit card that could be used to pay in renminbi in China and in foreign currencies abroad. In the following years, Citibank steadily increased its stake to the maximum 20% allowed under Chinese law and significantly expanded its product portfolio.
In June 2007, Citibank joined forces with Sino-U.S. MetLife Insurance Company, Ltd., to launch an investment unit-linked insurance product. In July of 2008, the company announced the launch of its first debit card. Simultaneously, it signed a deal with China’s only national bankcard association, which allowed Citibank’s debit cardholders to enjoy access to the association’s vast network in China. The card would provide Chinese customers with access to over 140,000 ATMs within China and 380,000 ATMs in 45 countries overseas. Customers could also use their debit cards with over 1 million merchants within China and in 27 other countries. Today, Citibank is one of the top foreign banks operating in China, with a diverse range of products, eight corporate and investment bank branches, and 25 consumer bank outlets.Citibank’s Co-Operative Strategy in China (2009).
Developing an AAA Strategy
There are serious constraints on the ability of any one company to use all three “A”s simultaneously with great effectiveness. Such attempts stretch a firm’s managerial bandwidth, force a company to operate with multiple corporate cultures, and can present competitors with opportunities to undercut a company’s overall competitiveness. Thus, to even contemplate an “AAA” strategy, a company must be operating in an environment in which the tensions among adaptation, aggregation, and arbitrage are weak or can be overridden by large-scale economies or structural advantages, or in which competitors are otherwise constrained. Ghemawat cites the case of GE Healthcare (GEH). The diagnostic imaging industry has been growing rapidly and has concentrated globally in the hands of three large firms, which together command an estimated 75% of revenues in the business worldwide: GEH, with 30%; Siemens Medical Solutions (SMS), with 25%; and Philips Medical Systems (PMS), with 20%. This high degree of concentration is probably related to the fact that the industry ranks in the 90th percentile in terms of R&D intensity.
These statistics suggest that the aggregation-related challenge of building global scale has proven particularly important in the industry in recent years. GEH, the largest of the three firms, has consistently been the most profitable, reflecting its success at aggregation through (a) economies of scale (e.g., GEH has higher total R&D spending than its competitors, but its R&D-to-sales ratio is lower), (b) acquisition prowess (GEH has made nearly 100 acquisitions under Jeffrey Immelt before he became GE’s CEO), and (c) economies of scope the company strives to integrate its biochemistry skills with its traditional base of physics and engineering skills; it finances equipment purchases through GE Capital).
GEH has even more clearly outpaced its competitors through arbitrage. It has recently become a global product company by rapidly migrating to low-cost production bases. By 2005, GEH was reportedly more than halfway to its goals of purchasing 50% of its materials directly from low-cost countries and locating 60% of its manufacturing in such countries.
In terms of adaptation, GEH has invested heavily in country-focused marketing organizations. It also has increased customer appeal with its emphasis on providing services as well as equipment—for example, by training radiologists and providing consulting advice on postimage processing. Such customer intimacy obviously has to be tailored by country. And, recently, GEH has cautiously engaged in some “in China, for China” manufacture of stripped-down, cheaper equipment, aimed at increasing penetration there. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/03%3A_Generic_Strategies_for_Global_Value_Creation/3.02%3A_Which_A_Strategy_Should_a_Company_Use.txt |
There are several factors that companies should consider in applying the AAA framework. Most companies would be wise to focus on one or two of the “A”s—while it is possible to make progress on all three “A”s, especially for a firm that is coming from behind, companies (or, more often to the point, businesses or divisions) usually have to focus on one or, at most, two “A”s in trying to build competitive advantage. Companies should also make sure the new elements of a strategy are a good fit organizationally. If a strategy does embody substantially new elements, companies should pay particular attention to how well they work with other things the organization is doing. IBM has grown its staff in India much faster than other international competitors (such as Accenture) that have begun to emphasize India-based arbitrage. But quickly molding this work force into an efficient organization with high delivery standards and a sense of connection to the parent company is a critical challenge: failure in this regard might even be fatal to the arbitrage initiative. Companies should also employ multiple integration mechanisms. Pursuit of more than one of the “A”s requires creativity and breadth in thinking about integration mechanisms. Companies should also think about externalizing integration. Not all the integration that is required to add value across borders needs to occur within a single organization. IBM and other firms have shown that some externalization can be achieved in a number of ways: joint ventures in advanced semiconductor research, development, and manufacturing; links to, and support of, Linux and other efforts at open innovation; (some) outsourcing of hardware to contract manufacturers and services to business partners; IBM’s relationship with Lenovo in personal computers; and customer relationships governed by memoranda of understanding rather than detailed contracts. Finally, companies should know when not to integrate. Some integration is always a good idea, but that is not to say that more integration is always better.
3.05: Points to Remember
1. There are three generic strategies for creating value in a global context: adaptation, aggregation, and arbitrage.
2. Adaptation strategies seek to increase revenues and market share by tailoring one or more components of a company’s business model to suit local requirements or preferences. Aggregation strategies focus on achieving economies of scale or scope by creating regional or global efficiencies. These strategies typically involve standardizing a significant portion of the value proposition and grouping together development and production processes. Arbitrage is about exploiting economic or other differences between national or regional markets, usually by locating separate parts of the supply chain in different places.
3. Adaptation strategies can be subdivided into five categories: variation, focus, externalization, design, and innovation.
4. Aggregation strategies revolve around generating economies of scale or scope. The other nongeographic dimensions of the CAGE framework introduced in Chapter 1—cultural, administrative, geographic, and economic—also lend themselves to aggregation strategies.
5. Since arbitrage focuses on exploiting differences between regions, the CAGE framework also defines a set of substrategies for this generic approach to global value creation.
6. A company’s financial statements can be a useful guide for signaling which of the “A” strategies will have the greatest potential to create global value.
7. Although most companies will focus on just one “A” at any given time, leading-edge companies such as GE, P&G, IBM, and Nestlé, to name a few, have embarked on implementing two, or even all three, of the “A”s.
8. There are serious constraints on the ability of any one company to simultaneously use all three “A”s with great effectiveness. Such attempts stretch a firm’s managerial bandwidth, force a company to operate with multiple corporate cultures, and can present competitors with opportunities to undercut a company’s overall competitiveness.
9. Most companies would be wise to (a) focus on one or two of the “A”s, (b) make sure the new elements of a strategy are a good fit organizationally, (c) employ multiple integration mechanisms, (d) think about externalizing integration, and (e) know when not to integrate. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/03%3A_Generic_Strategies_for_Global_Value_Creation/3.04%3A_Pitfalls_and_Lessons_in_Applying_the_AAA_Framework.txt |
Every company has a core domestic strategy, although it may not always be explicitly articulated. This strategy most likely evolved over time as the company rose to prominence in its domestic market and reflects key choices about what value it provides to whom and how, and at what price and cost. At any point in time, these choices are reflected in the company’s primary business model, a conceptual framework that summarizes how a company creates, delivers, and extracts value. A business model is therefore simply a description of how a company does business. As shown in Figure \(1\) "Components of a Business Model", it describes who its customers are, how it reaches them and relates to them (market participation); what a company offers its customers (the value proposition); with what resources, activities, and partners it creates its offerings (value chain infrastructure); and, finally, how it organizes and manages its operations (global management model ).
4.02: Components of a Business Model
A company’s value proposition composes the core of its business model; it includes everything it offers its customers in a specific market or segment. This comprises not only the company’s bundles of products and services but also how the company differentiates itself from its competitors. A value proposition therefore consists of the full range of tangible and intangible benefits a company provides to its customers (stakeholders).
The market participation dimension of a business model has three components. It describes what specific markets or segments a company chooses to serve, domestically or abroad; what methods of distribution it uses to reach its customers; and how it promotes and advertises its value proposition to its target customers.
The value chain infrastructure dimension of the business model deals with such questions as, what key internal resources and capabilities has the company created to support the chosen value proposition and target markets; what partner network has it assembled to support the business model; and how are these activities organized into an overall, coherent value creation and delivery model?
The global management submodel summarizes a company’s choices about a suitable global organizational structure and management policies. Global organization and management style are closely linked. In companies that are organized primarily around global product divisions, management is often highly centralized. In contrast, companies operating with a more geographic organizational structure are usually managed on a more decentralized basis.
It used to be that each industry was characterized by a single dominant business model. In such a landscape, competitive advantage was won mainly through better execution, more efficient processes, lean organizations, and product innovation. While execution and product innovation obviously still matter, they are no longer sufficient today.
Companies are now operating in industries that are characterized by multiple and coexisting business models. Competitive advantage is increasingly achieved through focused and innovative business models. Consider the airline, music, telecommunications, or banking industries. In each one, there are different business models competing against each other. In the airline industry, for example, there are the traditional flag carriers, the low-cost airlines, the business-class-only airlines, and the fractional private-jet-ownership companies. Each business model embodies a different approach to achieving a competitive advantage.
Southwest Airlines’ business model, for example, can be described as offering customers an alternative to traveling by car, bus, or train by giving them a no-frills flight service, enhanced through complementary activities. Southwest’s business model differs from those of other major U.S. airlines along several dimensions. It is about more than low fares, point-to-point connections, and the use of a standardized fleet of aircraft. A key differentiating factor is the way Southwest treats its employees—putting them first with profit-sharing and empowerment programs. Another is the fun experience Southwest creates on board and in the terminal, with jokes, quizzes, and the relaxed behavior of the cabin crew and ground staff. Yet another is the legendary care and attention Southwest puts into its customer service. Not surprisingly, Southwest’s demonstrably successful business model has spawned numerous imitators around the world, including Ryanair, EasyJet, JetBlue, and Air Arabia.
Apple provides an example of why it is useful to focus on a company’s overall business model rather than individual components such as products, markets, or suppliers. While it is tempting to think of the iPod as a successful product, it is, in fact, much more. Less visible than redefining the size, look, and functionality of an MP3 player, Apple’s real innovation was creating a digital rights management system that could satisfy the intellectual property concerns of the music industry while simultaneously creating a legal music download service that would satisfy consumers. Thus, Apple’s real breakthrough was not good product design, it was the creation of a revolutionary business model—one that allowed people to find and legally download high-quality music files extremely easily but that would not allow the pirating of entire albums. Put differently, the iPod was the front-end of a very smart and highly differentiated platform that worked for both the music industry and the consumer. That platform, the iTunes Music Store—which now also offers digital music videos, television shows, iPod games, and feature-length movies—is at the very heart of Apple’s strategic move into consumer electronics, allowing more recent Apple products like the iPhone and Apple TV to sync with PCs as easily as the iPod. In fact, iTunes is the trojan horse with which Apple plans to capture a significant share of the home entertainment market.
Describing a company’s business strategy in terms of its business model allows explicit consideration of the logic or architecture of each component and its relationship to others as a set of designed choices that can be changed. Thus, thinking holistically about every component of the business model—and systematically challenging orthodoxies within these components—significantly extends the scope for innovation and improves the chances of building a sustainable competitive advantage | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/04%3A_Global_Strategy_as_Business_Model_Change/4.01%3A_Chapter_Introduction.txt |
When a company decides to expand into foreign markets, it must take its business model apart and consider the impact of global expansion on every single component of the model. For example, with respect to its value proposition, a company must decide whether or not to modify its company’s core strategy as it moves into new markets. This decision is intimately linked to a choice of what markets or regions to enter and why. Once decisions have been made about the what (the value proposition) and where (market coverage) of global expansion, choices need to be made about the how—whether or not to adapt products and services to local needs and preferences or standardize them for global competitive advantage; whether or not to adopt a uniform market positioning worldwide; which value-adding activities to keep in-house, which to outsource, and which to relocate to other parts of the world—and so on. Finally, decisions need to be made about how to organize and manage these efforts on a global basis. Together, these decisions define a company’s global strategic focus on a continuum from a truly global orientation to a more local one. Crafting a global strategy therefore is about deciding how a company should change or adapt its core (domestic) business model to achieve a competitive advantage as the firm globalizes its operations.
Linking Pankaj Ghemawat’s generic strategy framework for creating a global competitive advantage, introduced in the Chapter 3, with the above business model concept and the full array of globalization decisions a company faces when it evaluates its global options, defines the global strategy formulation (conceptual) framework shown in Figure \(1\) "Global Strategy: A Conceptual Framework". Generic value creation options need to be evaluated for each business model component to address a range of globalization decisions.
Part 2 of this book is organized using this framework, with chapters devoted to the globalization of the different parts of the business model or the skills needed to do so. Before we embark on this journey, the balance of this chapter is devoted to introducing the concept of value disciplines—generic strategic foci for creating value for customers and the key in defining a company’s value proposition—and its implications for the other components of the business model.
Minicase: Microsoft in China (Kirkpatrick (2007, July 17))
Consider the challenges Microsoft faced in going to China. Today, Bill Gates is a local hero. On a recent visit he met with four members of the Politburo in a single day; most executives would count themselves lucky to talk with one of China’s top leaders. Last spring, President Hu Jintao toured the Microsoft campus in Redmond, Washington, and was treated to a dinner at Gates’s home.
It has not always been this way. Microsoft stumbled for years after entering China in 1992 and lost money there for over a decade. It finally became apparent that almost none of the success factors that drove the company’s performance in the United States and Europe applied to China. To succeed there, Microsoft had to become the “un-Microsoft,” pricing at rock bottom instead of charging hundreds of dollars for its Windows operating system and Microsoft Office applications; abandoning the public-policy strategy it used elsewhere of protecting its intellectual property at all costs; and closely partnering with the government instead of fighting it, as in the United States—a decision that has opened the company to criticism from human rights groups.
The story begins 15 years ago, when Microsoft sent a couple of sales managers into China from Taiwan. Their mission was to sell software at the same prices the company charged elsewhere. It did not work. The problem was not brand acceptance—everyone was using Windows. But no one was paying. Counterfeit copies could be bought on the street for a few dollars. Market share simply did not translate into revenue.
Microsoft fought bitterly to protect its intellectual property. It sued other companies for illegally using its software but lost regularly in court. Country managers came and went—five in one 5-year period. Two of them later wrote books criticizing the company. One, Juliet Wu, whose Up Against the Wind became a local best seller, wrote that Microsoft heartlessly sought sales by any means, that its antipiracy policy was needlessly heavy-handed, and that her own efforts to help bosses in Redmond understand China had been rebuffed.
To add insult to injury, Beijing’s city government started installing free open-source Linux operating systems on workers’ PCs. (The Chinese Academy of Sciences promoted a version called Red Flag Linux.) Meanwhile, security officials were troubled that government and military operations depended on Microsoft software made in the United States.
In 1999, Gates sent a senior executive, who headed the company’s public-policy efforts, to figure out why Microsoft was so hated. After extensive investigation, the executive concluded that Microsoft’s business model in China was wrong: the company had assigned executives that were too junior, selling was overemphasized, and the company’s business practices did not recognize the importance of collaborating with the government.
In response, Gates sent 25 of Microsoft’s 100 vice presidents on a weeklong “China Immersion Tour.” The company hired former Secretary of State Henry Kissinger for advice and to open doors. And it told leaders that Microsoft wanted to help China develop its own software industry, an urgent government priority. The company even commissioned a McKinsey study for Chinese officials in 2001 that, among other things, recommended improving the protection of intellectual property.
The company also initiated talks with Chinese security officials to convince them that Microsoft’s software was not a secret tool of the U.S. government. As a result, in 2003, the company offered China and 59 other countries the right to look at the fundamental source code for its Windows operating system and to substitute certain portions with their own software—something Microsoft had never allowed in the past. Now when China uses Windows in sensitive applications—such as in the president’s office and in its missile systems—it can install its own cryptography.
The opening of a research center in Beijing in 1998 proved to be a real turning point. Created because Gates was impressed with the quality of the country’s computer scientists, the laboratory helped Microsoft revamp its image. It began accumulating an impressive record of academic publications, helped lure back smart émigré scientists, and contributed key components to globally released products like the Vista operating system. The lab soon became, according to local polls, the most desirable place in the country for computer scientists to work.
Microsoft executives had also concluded that China’s weak intellectual property enforcement laws meant its usual pricing strategies were doomed to fail. Arguing that while it was terrible that people in China pirated so much software, Gates decided that if they were going to pirate anybody’s software, he would certainly prefer it be Microsoft’s.
In hindsight, it is clear that tolerating piracy turned out to be Microsoft’s best long-term strategy, and that it is the reason Windows is used on an estimated 90% of China’s almost 200 million PCs. Competing with Linux is easier when there is piracy than when there is not: you can get the real thing, and you get it at the same price. In China’s back alleys, Linux often costs more than Windows because it requires more disks. And Microsoft’s own prices have dropped so low, it now sells a \$3 package of Windows and Office to students.
In 2003, Microsoft took a quantum leap forward in China by hiring Tim Chen, who had been running Motorola’s China subsidiary. Chen arrived with entrée to the corridors of power and a practiced understanding of how a Western company could succeed in China. He kept up the blitz of initiatives. Microsoft made Shanghai a global center to respond to customer e-mails. It began extensive training programs for teachers and software entrepreneurs. And it began to work with the ministry of education to finance 100 model computer classrooms in rural areas.
These actions served to change the perception that Microsoft had mainly come to promote antipiracy and to sue people and demonstrated that it had a long-term vision. In the following years, Microsoft invested substantially in China and even invited officials to help decide in which local software and outsourcing companies it should invest. By doing so, it successfully leveraged the synergy that existed between the need of the Chinese economy to have local software capability and the company’s need for an ecosystem of companies using its technology and platform. At the same time, the Chinese government started thinking more like Microsoft: it required central, provincial, and local governments to begin using legal software. The city of Beijing now pays for software its employees had previously pirated.
In another boost for Microsoft, last year, the government required local PC manufacturers to load legal software on their computers. Lenovo, the market leader, had been shipping as few as 10% of its PCs that way, and even U.S. PC makers in China were selling many machines “naked.” Another mandate requires gradual legalization of the millions of computers in state-owned enterprises. As a consequence, the number of new machines shipped with legal software nationwide has risen from about 20% to more than 50% in recent years. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/04%3A_Global_Strategy_as_Business_Model_Change/4.03%3A_Global_Strategy_as_Business_Model_Change.txt |
A business model—and a company’s principal value proposition in particular—is shaped by the firm’s underlying value creation strategy or value discipline, a term coined by Michael Treacy and Fred Wiersema to describe different ways companies can differentiate itself from competitors.This section is based on Treacy and Wiersema (1993). A value discipline is more than just a benefit statement—it is a statement of strategic focus and provides a context for a company to set its corporate vision and objectives, to target its most profitable customers, and to focus and align its activities.
In contrast to more traditional market segmentation strategies, which group customers by geography, product mix, or demographics, value disciplines segment customers according to the full range of benefits that are most valuable to them. Specifically, Treacy and Wiersema identify three generic value disciplines: operational excellence, customer intimacy, and product leadership.
A strategy of operational excellence is defined by a relentless focus on providing customers with reliable products or services at competitive prices and delivered with minimal difficulty or inconvenience. Dell Inc., for instance, is a master of operational excellence. Dell has shown buyers of electronics that they do not have to sacrifice quality or state-of-the-art technology in order to buy PCs, printers, or other products easily and inexpensively. By selling to customers directly, building to order rather than to inventory, and creating a disciplined, extremely low-cost culture, Dell has been able to undercut its competitors in price yet provide high-quality products and service. Other leaders in operational excellence include Wal-Mart, Jet Blue, ING bank, and Federal Express.
Companies pursuing operational excellence are relentless in seeking ways to minimize overhead costs, to eliminate intermediate production steps, to reduce transaction and other “friction” costs, and to optimize business processes across functional and organizational boundaries. They focus on delivering their products or services to customers at competitive prices and with minimal inconvenience. Because they build their entire businesses around these goals, these organizations do not look or operate like other companies pursuing other value disciplines.
An operationally excellent company proactively designs its entire business model for its targeted customer segments, paying particular attention to speed, efficiency, and cost. This includes critically reevaluating business processes, reassessing the complete supply chain, and reaching out to suppliers, distributors, and customers to create a larger, more integrated approach to meeting customer needs.
Achieving market leadership through operational excellence requires the development of a business model that pervades the entire organization. Thus, becoming operationally excellent is a challenge not just for the manufacturing department but for the entire company. And while operationally excellent companies are focused on cost and efficiency, they are not necessarily the lowest cost producer or supplier. The notion that an operationally excellent company is fixated on costs and cost cutting, has a rigid command and control organization, and is focused on plant and internal efficiencies is a limited view that seriously misstates the intent and goals of operational excellence.
Minicase: Air Arabia Leads the World in Operational Excellence (www.airarabia.com)
In April of 2009, Air Arabia, the first and largest low-cost carrier (LCC) in the Middle East and North Africa, announced that it was recognized by Airbus, one of the world’s leading aircraft manufacturers, for achieving the highest operational utilization in the world. This is the fourth consecutive year that Air Arabia maintained the lead among all global airlines operating Airbus A320 aircraft. According to the latest reports from Airbus, Air Arabia achieved the highest aircraft utilization in 2008, with 99.8% operational reliability.
Operational excellence and service reliability are integral to Air Arabia’s success. In selecting Air Arabia for its operational excellence rankings, Airbus conducted a detailed technical analysis of all carriers in the segment. Air Arabia recorded the highest indicators for operational reliability and aircraft utilization reflecting the carrier’s extremely high maintenance and technical standards.
Currently, Air Arabia has a fleet of 16 Airbus A320 aircraft and has already placed an order of 44 additional Airbus A320s. By the end of 2009, Air Arabia expected to add two more aircraft and increase its fleet size to 18.
Air Arabia (PJSC), listed on the Dubai Financial Market, is the Middle East and North Africa’s leading low-cost carrier. Air Arabia commenced operations in October 2003 and currently operates a fleet of 16 new Airbus A320 aircraft, currently serving 44 destinations across the Middle East, North Africa, South Asia, and Central Asia through its main hub in Sharjah, United Arab Emirates.
Air Arabia is modeled after leading American and European low-cost airlines, and its business model is customized to accommodate local preferences. Its main focus is to make air travel more convenient through Internet bookings and through offering the lowest fares in the market along with the highest levels of safety and service standards.
A focus on customer intimacy, the second value discipline, means segmenting and targeting markets precisely and then tailoring offerings to exactly match the demands of those niches. Companies that excel in customer intimacy combine detailed customer knowledge with operational flexibility so they can respond quickly to almost any need, from customizing a product to fulfilling special requests. As a consequence, these companies engender tremendous customer loyalty. Nordstrom, the department store, for example, is better than any other company in its market of customer service and getting the customer precisely the product or information he or she wants.
While companies pursuing operational excellence concentrate on the operational side of their business models, those pursuing a strategy of customer intimacy continually tailor and shape products and services to fit an increasingly fine definition of the customer. This can be expensive, but customer-intimate companies are willing to take a long-term perspective and invest to build lasting customer loyalty. They typically look at the customer’s lifetime value to the company, not the value of any single transaction. This is why employees in these companies will do almost anything—with little regard for initial cost—to make sure that each customer gets exactly what he or she really wants. Nordstrom is a good example of such a company. A few years ago, Home Depot was known for its customer intimacy; more recently, however, it has strayed from this strategic focus.
Customer-intimate companies understand the difference between profit or loss on a single transaction and profit over the lifetime of their relationship with a single customer. Most companies know, for instance, that not all customers require the same level of service or will generate the same revenues. Profitability, then, depends in part on maintaining a system that can identify, quickly and accurately, which customers require what level of service and how much revenue they are likely to generate. Sophisticated companies now routinely use a telephone-computer system capable of recognizing individual customers by their telephone numbers when they call. Such systems allow differential levels of service for different customer groups. Clients with large accounts and frequent transactions are routed to their own senior account representative; those who typically place only an occasional order are referred to a more junior employee or a call center. In either case, the customer’s file appears on the representative’s screen before the phone is answered. What is more, such a system allows the company to direct specific value-added services or products to specific groups of clients.
Some years ago, Kraft USA decided to strengthen its focus on customer intimacy and created the capacity to tailor its advertising, merchandising, and operations in a single store, or in several stores within a supermarket chain, to the needs of those stores’ particular customers. To do so, it had to develop new information systems and analytical capabilities and educate its sales force to create multiple, so-called micromerchandising programs for a chain that carries its products. In other words, Kraft first had to change itself: it had to create the organization, build the information systems, and educate and motivate the people required to pursue a strategy of customer intimacy.
Like most companies that pursue customer intimacy, Kraft decentralized its marketing operations in order to empower the people actually dealing with the customer. Today, Kraft salespeople are trained and rewarded to work with individual store managers and regional managers to create customized promotional programs. To do so, the company gives them the data they need to make recommendations to store managers and to shape promotional programs such as consumer purchases by store, category, and product and their response to past price and other promotions. At corporate headquarters, Kraft trade marketing teams sort and integrate information from multiple sources to supply the sales force with a menu of programs, products, value-added ideas, and selling tools. For instance, the trade marketing team sorted all shoppers into six distinct groups, with names such as “full-margin shoppers,” “planners and dine-outs,” and “commodity shoppers.”
Minicase: Customer Intimacy at the Four Seasons (Martin (2007))
Isadore Sharp, one of four children of Polish parents who immigrated to Toronto before his birth in 1931, opened his first hotel—the Four Seasons Motor Hotel—in 1961 with 125 affordable rooms in a rather seedy area outside the core of downtown Toronto.
At that time, a would-be hotelier had two choices. He could build a small motel with fewer than 200 rooms and simple amenities at relatively low cost. The alternative was a large downtown hotel catering to business travelers. Such hotels usually had at least 750 guest rooms and extensive amenities, including conference facilities, multiple restaurants, and banquet rooms. Each type of hotel had its advantages as well as distinct drawbacks. For all its comfort and intimacy, the small motel was not an option for the business traveler who needed a well-appointed meeting room or state-of-the-art communications facilities. Large hotels produced a big enough pool of revenues to fund the features the market demanded but tended to be cold and impersonal.
But after opening his fourth hotel, Sharp decided to experiment and combine the best of the small hotel with the best of the large hotel. He envisioned a medium-sized hotel, big enough to afford an extensive array of amenities but small enough to maintain a sense of intimacy and personalized service. Sharp reasoned that if the Four Seasons offered distinctly better service than its competitors, it could charge a substantial premium, boosting revenue per room to the point where it could offer top-of-the-line amenities. Before he could ask guests to pay a superpremium room rate, though, Sharp understood that he would have to offer them an entirely different kind of service.
Luxury, at that time, was chiefly defined in terms of architecture and décor. Sharp decided to redefine luxury as service—a support system to fill in for the one left at home and the office. Four Seasons became the first to offer shampoo in the shower; 24-hour room service; bathrobes; cleaning and pressing; a two-line phone in every guest room; a big, well-lighted desk; and 24-hour secretarial services. Defying the traditional approach in the industry, which was to set a relatively fixed standard of physical and service quality across the entire chain, Sharp made sure each city’s Four Seasons reflected the local color and culture.
To free up capital and focus its senior management on providing service rather than managing real estate and financing, Four Seasons also became the first big hotel company to manage, rather than own, the hotel facilities that bore its name.
Redefining the way it treated its own employees also helped sharpen Four Seasons’ customer focus. Rather than treating its employees as disposable, Four Seasons distinguished itself by hiring more for attitude than experience, by establishing career paths and promotion from within, and by paying as much attention to employee concerns as guest complaints. It pushed responsibility down and encouraged self-discipline by setting high performance standards and holding people accountable, adhering to the company’s credo, “generating trust.” Significantly, Four Seasons has no separate customer service department. Each employee at the Four Seasons is not just a member of the customer service department but is in charge of it.
Today, with 73 hotels in 31 countries, and with 25 properties under development, Four Seasons is considerably larger than the next biggest luxury player. Condé Nast Traveler ranks 18 Four Seasons hotels in its global “Top 100” list, more than 3 times the next most-cited chain. A Four Seasons signifies that a city has become a global destination.
Finally, product leadership, the third discipline, means offering customers leading-edge products and services that consistently enhance the customer’s use or application of the product, thereby making rivals’ goods obsolete. Companies that pursue product leadership are innovation-driven, and they constantly raise the bar for competitors by offering more value and better solutions. Product leaders work with three basic principles. First, they focus on creativity; constant innovation is the key to their success. They look for new ideas inside as well as outside the company, have an “experimentation is good” mind-set, and reward risk taking. Second, they know that in order to be successful, they must be fast in capitalizing on new ideas; they know how to commercialize new ideas quickly. To do so, all their business and management processes have to be engineered for speed. Third, product leaders must relentlessly pursue new solutions to the problems that their own latest product or service has just solved. In other words, if anyone is going to render their technology obsolete, they prefer to do it themselves.
Examples of companies that use product leadership as a cornerstone of their strategies include BMW, Intel, Apple, and Nike. These companies have created and maintain a culture that encourages employees to bring ideas into the company and, just as important, they listen to and consider these ideas, however unconventional and regardless of the source. In addition, product leaders continually scan the landscape for new product or service possibilities; where others see glitches in their marketing plans or threats to their product lines, companies that focus on product leadership see opportunity and rush to capitalize on it.
Product leaders avoid bureaucracy at all costs because it slows commercialization of their ideas. Managers make decisions quickly since, in a product leadership company, it is often better to make a wrong decision than to make a late or not at all. That is why these companies are prepared to decide today, then implement tomorrow. Moreover, they continually look for new ways—such as concurrent engineering—to shorten their cycle times. Japanese companies, for example, succeed in automobile innovation because they use concurrent development processes to reduce time to market. They do not have to aim better than competitors to score more hits on the target because they can take more shots from a closer distance.
Product leaders are their own fiercest competitors. They continually cross a frontier, then break more new ground. They have to be adept at rendering obsolete the products and services that they have created because they realize that if they do not develop a successor, another company will. Apple and other innovators are willing to take the long view of profitability, recognizing that whether they extract the full profit potential from an existing product or service is less important to the company’s future than maintaining its product leadership edge and momentum. These companies are never blinded by their own successes.
Finally, product leaders also possess the infrastructure and management systems needed to manage risk well. For example, each time Apple ventures into an untapped area, it risks millions of dollars as well as its reputation. It takes that chance, though, in part because its hybrid structure allows it to combine the economies of scale and resource advantages of a multibillion-dollar corporation with the cultural characteristics of a startup company.
Figure \(1\) depicts strategic focus in terms of the three value disciplines discussed here and summarizes how each responds to a particular set of competitive drivers and customer needs.
Minicase: How Apple Maintains Product Leadership (Morrison (2009, August 10)).
How does Apple consistently redefine each market it enters by creating products that leapfrog the competition? First, it takes clarity of purpose and resolve: it may take years to cultivate new skills and build the right new product. Second, a significant investment in infrastructure is required: for example, Apple supports a dedicated innovation team. Third, consistently redefining markets requires strategic clarity: innovating effectively means creating your own opportunities in a crowded marketplace to avoid both mediocrity and commoditization. Fourth, patience is essential: creativity does not always follow the clock. False starts and the occasional flop are part of the process and must not only be tolerated but be sources of learning. Fifth, strong leadership is a prerequisite: innovation does not happen by committee. Visionaries with effective management skills are hard to find, but they are a critical ingredient for success.
Clarity of Purpose and Resolve
Apple’s company motto, “Think Different,” provides a hint at how Apple maintains focus and its introspective, self-contained operating style that is capable of confounding competitors and shaking up entire industries. Internally, Apple barely acknowledges competition. It is the company’s ability to think differently about itself that keeps Apple at the head of the pack. Current and past employees tell stories about products that have undergone costly overhauls just to improve one simple detail. Other products are canceled entirely because they do not fit in or do not perform up to par. Apple’s culture has codified a habit that is good for any company to have but is especially valuable for firms that make physical things: stop, step back from your product, and take a closer look. Without worrying about how much work you have already put into it, is it really as good as it could be? Apple constantly asks that question.
Infrastructure Investment
From the outside, Apple’s offices look like those of just about any large modern American corporation. Having outgrown its headquarters campus in Cupertino, California, Apple now has employees in other buildings scattered across the town and around the world. Size and sprawl are formidable challenges that most companies do not manage very well, either by splintering into disorganized, undisciplined communities or by locking employees into tight, stifling bureaucracies. Apple tends toward the latter, but it does so in a unique way that generally (but not always) plays to its advantage. At its worst, Apple’s culture is characterized by paranoia: employees are notoriously secretive and continuously fear being fired or sued for speaking to anyone outside the company. This obsession with secrecy does give Apple an element of surprise in the marketplace. But this comes at a high cost. Apple’s corporate culture came under scrutiny recently after an employee of a foreign supplier—reportedly under suspicion for leaking the prototype of a new iPhone—committed suicide in Shenzhen, China. Beyond the secrecy, which affects everyone, Apple’s approach is hardly one-size-fits-all. Rank-and-file employees are often given clear-cut directives and close supervision. Proven talent gets a freer hand, regardless of job title.
Strategic Clarity
Over time, Apple has built a seasoned management team to support bold new product initiatives. The team’s guiding principles include the following:
1. Ignore fads. Apple held off building a cheap miniature laptop to respond to the “netbook” fad because these devices do not offer good margins. Instead, it released the ultrathin, ultraexpensive Air, a product more in line with its own style.
2. Do not back down from fights you can win. Apple is a tough partner and a ruthless enemy. In 2007, Apple pulled NBC’s television programs from the iTunes Store after the network tried to double the prices consumers pay to download shows. NBC backed down within days, and, ever since, giant media conglomerates have been hesitant to face off with Apple over pricing.
3. Flatten sprawling hierarchies. Companies with extended chains of authority tend to plod when it is time to act. Most of the decisions at Apple come from its chief executive officer, Steve Jobs, and his immediate deputies.
4. Pay less attention to market research and competitors. Most firms develop their products based on information obtained from consumer focus groups and imitation of successful products from other companies. Apple does neither, as the iPod and iPhone clearly demonstrate.
5. Empower your most valuable employees to do amazing work. Apple takes meticulous care of a specific group of employees known as the “creatives.” Its segmented, stratified organizational structure—which protects and coddles its most valuable, productive employees—is one of the company’s most formidable assets. One example is Apple’s Industrial Design Group (IDG), the team that gives Apple products their distinctive, glossy look. Tucked away within Apple’s main campus, the IDG is a world unto itself. It is also sealed behind unmarked, restricted-access doors. Within the IDG, employees operate free from outside distractions and interference. But despite their favored status, Apple’s creatives still have no more insight into the company’s overall operations than an army private has into the Pentagon. At Apple, new products are often seen in their complete form by only a small group of top executives. This, too, works as a strength for Apple: instead of a sprawling bureaucracy that new products have to be pushed through, Apple’s top echelon is a small, tightly knit group that has a hand in almost every important decision the company makes.
Patience
Apple’s corporate culture is different because the company dances to a rhythm of its own making. Although its rising stock has become a vital part of many portfolios, Apple cancels, releases, and updates products at its own speed, seemingly irrespective of market conditions or competitive pressure. Apple does not telegraph its moves, either: the iPod and iPhone, both iconic products, each began as rumors that Apple seemed determined to quash.
Strong Leadership
New adherents to the cult of Steve Jobs may be surprised to hear this: the most iconic Apple laptop, the original PowerBook, was released in 1991 after Jobs had been absent for 6 years. Jobs was not responsible for this enduring innovation. So does that mean Steve Jobs is irrelevant? Or is Jobs—and his maniacal focus on building insanely great products—a necessary ingredient of Apple’s success? It is said that great leaders are made by their circumstances and that their great deeds actually reflect the participation of thousands, or even millions, of people. In the case of Apple, there would be no Mac, no iPod, and no iPhone without the efforts of thousands of engineers and vast numbers of consumers who were looking for products that better served their needs. That said, Jobs is an imposing figure, and if he was “made” by his circumstances, that process took many years. Remember that the first edition of Steve Jobs—the young inventor who, at 21, created Apple Computer—was not the visionary we know today. Instead, after 9 years at Apple’s helm, the young Steve Jobs was ousted because of his aggressive, take-no-prisoners personality, which created a poisonous, unproductive atmosphere when it pervaded the company.
Today’s Steve Jobs seems to have learned how to focus that aggressive, take-no-prisoners personality more shrewdly and to great effect. While he is still an essential part of Apple’s success, the company has also institutionalized many of Jobs’ values to such an extent that Apple is now far less dependent on him. Tim Cook, for example, functioned effectively as acting CEO when Jobs was on sick leave recently. But questions remain. So long as the overwhelming personality of Jobs is present, can anyone really grow into that position? Only when Jobs permanently steps back from his role will we really be able to determine how well Apple has learned the lessons he has taught. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/04%3A_Global_Strategy_as_Business_Model_Change/4.04%3A_Value_Disciplines_and_Business_Models.txt |
Choosing a value discipline and selecting a particular set of customers to serve are two sides of the same coin. Customers seeking operational excellence define value on the basis of price, convenience, and quality, with price the dominant factor. They are less particular about what they buy than they are about getting it at the lowest possible price and with the least possible hassle. They are unwilling to sacrifice low price or high convenience to acquire a product with a particular label or to obtain a premium service. Whether they are consumers or industrial buyers, they want high quality goods and services, but, even more, they want to get them cheaply or easily or both. These customers like to shop for retail goods at discount and membership warehouse stores, and they are comfortable buying directly from manufacturers. When they buy a car, they seek basic transportation, and when they buy or sell stocks, they use discount brokers.
Consumers seeking customer intimacy are far more concerned with obtaining precisely what they want or need. The specific features and benefits of the product or the way the service is delivered are far more important to them than any reasonable price premium or purchase inconvenience they might incur. Chain stores—whether in the food, book, or music business—that customize their inventories to match regional or even neighborhood tastes serve this category of customer. Other retailers and catalogers attract this customer type by offering the largest imaginable range of products. They typically do not carry just one version of a product or a single brand but many versions or multiple brands.
Finally, customers attuned to product leadership crave new, different, and unusual products. As clothing buyers, they are primarily interested in fashion and trends. In an industrial context, they are buyers who value state-of-the-art products or components because their own customers demand the latest technology from them. If they are service companies, they want suppliers that help them seize breakthrough opportunities in their own markets. They also like to be the first to adopt new technologies, whether BlackBerrys, new cell phones, or large flat-screen TVs.
4.06: Market Leadership and Value Disciplines
The research by Treacy and Wiersema revealed that companies that push the boundaries of one value discipline while meeting industry standards in the other two often gain a significant lead—one that competitors have difficulty overcoming.Treacy and Wiersema (1993). A key reason is that value-discipline leaders do not just tailor their products and services to their customers’ preferences but align their entire business model to serve a chosen value discipline. This makes it much harder for competitors to copy them, thus providing them with a more enduring competitive advantage.
Companies in different industries that pursue the same value discipline share many characteristics. The business models of Federal Express, Southwest Airlines, and Wal-Mart, for example, are notably similar because they all pursue operational excellence. Someone working at FedEx, therefore, would likely be very comfortable at Wal-Mart, and vice versa. Similarly, the systems, structures, and cultures of product leaders such as Apple in electronics, Johnson & Johnson in health care and pharmaceuticals, and Nike in sport shoes have a great deal in common. But across disciplines, the similarities end. Employees from Wal-Mart do not fit well with the value propositions, management styles, and cultures at Nike or Nordstrom.
When a company decides to go global and is faced with the challenge of adapting its business model to the needs of a foreign market, a key question is how easily the underlying value discipline “travels” or whether the company has to embrace a different strategic focus to succeed. Adapting a business model within a particular value discipline at which the company excels is decidedly easier than creating a new business model based on another value discipline that the company has not previously focused on, as the following minicase attests to.
Minicase: Dell in Asia: Adapt or Change? (Chai (2008, October 27))
From direct sales to retail and staid designs to sexy, Dell is speeding up its reinvention drive in Asia, with the region now earmarked as its bellwether for computer sales worldwide. The company considers countries such as China still “underdeveloped” information technology (IT) markets that offer ample opportunity for growth. To tap into this sales potential, the company is shedding some of the attributes that have defined its modus operandi in the past two decades. Dell has traditionally designed its business around selling to larger corporations, but it is diversifying to leverage Asia’s exploding PC user base.
First, the pioneer of direct selling by phone and over the Internet has struck retail agreements across the region, including tie-ups with electronics mega stores such as Gome in China and Courts in Singapore and a partnership with Tata Croma in India. The channel push is crucial to the company’s attempt to catch up in the cutthroat regional consumer and small and midsized business markets where Hewlett-Packard (HP) and Lenovo have long had a retail presence.
Second, to create a following, the company is supplementing its retail push with a radical shift in product design that now focuses on form as opposed to the functional and low-cost attributes that Dell has typically emphasized. For example, the firm is selling selected Dell laptops with an unusual color palette of blue, pink, and red. Soon, the company will even allow customers to print their own photos and pictures onto its notebooks. Beyond hardware and aesthetic components, Dell also allows consumers to personalize the content of their PCs, including the preloading of popular movies on selected products.
And third, while Dell previously relied on Asian companies primarily for manufacturing, it is increasingly using the region for higher-value activities such as product design. Four out of five of its new global design centers are based in the region. Its Singapore facility focuses on the company’s imaging portfolio of monitors, televisions, and printers; its Bangalore counterpart is responsible for software development and enterprise solutions; the company’s Taiwan design centre focuses on laptop and server development; and its China unit concentrates on developing desktop systems and PC-related services.
4.07: Points to Remember
1. Every company has a core domestic strategy, although it may not always be explicitly articulated.
2. A business model is therefore simply a description of how a company does business. It describes who its customers are and how it reaches them and relates to them (market participation); what a company offers its customers (the value proposition); with what resources, activities, and partners it creates its offerings (value chain infrastructure); and, finally, how it organizes its operations (implementation model).
3. Competitive advantage is increasingly achieved through focused and innovative business models.
4. Crafting a global strategy is about deciding how a company should change or adapt its core (domestic) business model to achieve a competitive advantage as the firm globalizes its operations.
5. A business model is shaped by a company’s underlying value creation strategy or value discipline. A value discipline is a statement of strategic focus and provides a context for a company to set its corporate vision and objectives, to target its most profitable customers, and to focus and align its activities.
6. Three generic value disciplines are operational excellence, customer intimacy, and product leadership. A strategy of operational excellence is defined by a relentless focus on providing customers with reliable products or services at competitive prices and delivered with minimal difficulty or inconvenience. A focus on customer intimacy, the second value discipline, means segmenting and targeting markets precisely and then tailoring offerings to match exactly the demands of those niches. And product leadership, the third discipline, means offering customers leading-edge products and services that consistently enhance the customer’s use or application of the product, thereby making rivals’ goods obsolete.
7. Choosing a value discipline and selecting a particular set of customers to serve are two sides of the same coin.
8. Companies that push the boundaries of one value discipline while meeting industry standards in the other two often gain a significant lead—one that competitors have difficulty overcoming. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/04%3A_Global_Strategy_as_Business_Model_Change/4.05%3A_Choosing_a_Value_Discipline_or_Selecting_a_Target_Market.txt |
Market participation decisions—selecting global target markets, entry modes, and how to communicate with customers all over the world—are intimately related to decisions about how much to adapt the company’s basic value proposition. The choice of customers to serve in a particular country or region and with a particular culture determines how and how much a company must adapt its basic value proposition. Conversely, the extent of a company’s capabilities to tailor its offerings around the globe limits or broadens its options to successfully enter new markets or cultures. In this chapter, we look at the first two of these decisions: selecting target markets around the world and deciding how best to enter them. In Chapter 6, we introduce a framework for analyzing choices about adapting a company’s basic value proposition. In Chapter 7, we take up global branding, one of a company’s primary vehicles for communicating with customers all over the world (Figure 5.1.1 "Market Participation").
05: Target Markets and Modes of Entry
Few companies can afford to enter all markets open to them. Even the world’s largest companies such as General Electric or Nestlé must exercise strategic discipline in choosing the markets they serve. They must also decide when to enter them and weigh the relative advantages of a direct or indirect presence in different regions of the world. Small and midsized companies are often constrained to an indirect presence; for them, the key to gaining a global competitive advantage is often creating a worldwide resource network through alliances with suppliers, customers, and, sometimes, competitors. What is a good strategy for one company, however, might have little chance of succeeding for another.
The track record shows that picking the most attractive foreign markets, determining the best time to enter them, and selecting the right partners and level of investment has proven difficult for many companies, especially when it involves large emerging markets such as China. For example, it is now generally recognized that Western carmakers entered China far too early and overinvested, believing a “first-mover advantage” would produce superior returns. Reality was very different. Most companies lost large amounts of money, had trouble working with local partners, and saw their technological advantage erode due to “leakage.” None achieved the sales volume needed to justify their investment.
Even highly successful global companies often first sustain substantial losses on their overseas ventures, and occasionally have to trim back their foreign operations or even abandon entire countries or regions in the face of ill-timed strategic moves or fast-changing competitive circumstances. Not all of Wal-Mart’s global moves have been successful, for example—a continuing source of frustration to investors. In 1999, the company spent \$10.8 billion to buy British grocery chain Asda. Not only was Asda healthy and profitable, but it was already positioned as “Wal-Mart lite.” Today, Asda is lagging well behind its number-one rival, Tesco. Even though Wal-Mart’s UK operations are profitable, sales growth has been down in recent years, and Asda has missed profit targets for several quarters running and is in danger of slipping further in the UK market.
This result comes on top of Wal-Mart’s costly exit from the German market. In 2005, it sold its 85 stores there to rival Metro at a loss of \$1 billion. Eight years after buying into the highly competitive German market, Wal-Mart executives, accustomed to using Wal-Mart’s massive market muscle to squeeze suppliers, admitted they had been unable to attain the economies of scale it needed in Germany to beat rivals’ prices, prompting an early and expensive exit.
What makes global market selection and entry so difficult? Research shows there is a pervasive the-grass-is-always-greener effect that infects global strategic decision making in many, especially globally inexperienced, companies and causes them to overestimate the attractiveness of foreign markets. (Ghemawat (2001)). As noted in Chapter 1, “distance,” broadly defined, unless well-understood and compensated for, can be a major impediment to global success: cultural differences can lead companies to overestimate the appeal of their products or the strength of their brands; administrative differences can slow expansion plans, reduce the ability to attract the right talent, and increase the cost of doing business; geographic distance impacts the effectiveness of communication and coordination; and economic distance directly influences revenues and costs.
A related issue is that developing a global presence takes time and requires substantial resources. Ideally, the pace of international expansion is dictated by customer demand. Sometimes it is necessary, however, to expand ahead of direct opportunity in order to secure a long-term competitive advantage. But as many companies that entered China in anticipation of its membership in the World Trade Organization have learned, early commitment to even the most promising long-term market makes earning a satisfactory return on invested capital difficult. As a result, an increasing number of firms, particularly smaller and midsized ones, favor global expansion strategies that minimize direct investment. Strategic alliances have made vertical or horizontal integration less important to profitability and shareholder value in many industries. Alliances boost contribution to fixed cost while expanding a company’s global reach. At the same time, they can be powerful windows on technology and greatly expand opportunities to create the core competencies needed to effectively compete on a worldwide basis.
Finally, a complicating factor is that a global evaluation of market opportunities requires a multidimensional perspective. In many industries, we can distinguish between “must” markets—markets in which a company must compete in order to realize its global ambitions—and “nice-to-be-in” markets—markets in which participation is desirable but not critical. “Must” markets include those that are critical from a volume perspective, markets that define technological leadership, and markets in which key competitive battles are played out. In the cell phone industry, for example, Motorola looks to Europe as a primary competitive battleground, but it derives much of its technology from Japan and sales volume from the United States. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/05%3A_Target_Markets_and_Modes_of_Entry/5.01%3A_Target_Market_Selection.txt |
Four key factors in selecting global markets are (a) a market’s size and growth rate, (b) a particular country or region’s institutional contexts, (c) a region’s competitive environment, and (d) a market’s cultural, administrative, geographic, and economic distance from other markets the company serves.
Market Size and Growth Rate
There is no shortage of country information for making market portfolio decisions. A wealth of country-level economic and demographic data are available from a variety of sources including governments, multinational organizations such as the United Nations or the World Bank, and consulting firms specializing in economic intelligence or risk assessment. However, while valuable from an overall investment perspective, such data often reveal little about the prospects for selling products or services in foreign markets to local partners and end users or about the challenges associated with overcoming other elements of distance. Yet many companies still use this information as their primary guide to market assessment simply because country market statistics are readily available, whereas real product market information is often difficult and costly to obtain.
What is more, a country or regional approach to market selection may not always be the best. Even though Theodore Levitt’s vision of a global market for uniform products and services has not come to pass, and global strategies exclusively focused on the “economics of simplicity” and the selling of standardized products all over the world rarely pay off, research increasingly supports an alternative “global segmentation” approach to the issue of market selection, especially for branded products. In particular, surveys show that a growing number of consumers, especially in emerging markets, base their consumption decisions on attributes beyond direct product benefits, such as their perception of the global brands behind the offerings.
Specifically, research by John Quelch and others suggests that consumers increasingly evaluate global brands in “cultural” terms and factor three global brand attributes into their purchase decisions: (a) what a global brand signals about quality, (b) what a brand symbolizes in terms of cultural ideals, and (c) what a brand signals about a company’s commitment to corporate social responsibility. This creates opportunities for global companies with the right values and the savvy to exploit them to define and develop target markets across geographical boundaries and create strategies for “global segments” of consumers. Specifically, consumers who perceive global brands in the same way appear to fall into one of four groups:
1. Global citizens rely on the global success of a company as a signal of quality and innovation. At the same time, they worry whether a company behaves responsibly on issues like consumer health, the environment, and worker rights.
2. Global dreamers are less discerning about, but more ardent in their admiration of, transnational companies. They view global brands as quality products and readily buy into the myths they portray. They also are less concerned with companies’ social responsibilities than global citizens.
3. Antiglobals are skeptical that global companies deliver higher-quality goods. They particularly dislike brands that preach American values and often do not trust global companies to behave responsibly. Given a choice, they prefer to avoid doing business with global firms.
4. Global agnostics do not base purchase decisions on a brand’s global attributes. Instead, they judge a global product by the same criteria they use for local brands.Quelch (2003, August); Holt, Quelch, and Taylor (2004, September).
Companies that use a “global segment” approach to market selection, such as Coca-Cola, Sony, or Microsoft, to name a few, therefore must manage two dimensions for their brands. They must strive for superiority on basics like the brand’s price, performance, features, and imagery, and, at the same time, they must learn to manage brands’ global characteristics, which often separate winners from losers. A good example is provided by Samsung, the South Korean electronics maker. In the late 1990s, Samsung launched a global advertising campaign that showed the South Korean giant excelling, time after time, in engineering, design, and aesthetics. By doing so, Samsung convinced consumers that it successfully competed directly with technology leaders across the world, such as Nokia and Sony. As a result, Samsung was able to change the perception that it was a down-market brand, and it became known as a global provider of leading-edge technologies. This brand strategy, in turn, allowed Samsung to use a global segmentation approach to making market selection and entry decisions.
Institutional Contexts (Khanna, Palepu, and Sinha (2005)).
Khanna and others developed a five-dimensional framework to map a particular country or region’s institutional contexts. Specifically, they suggest careful analysis of a country’s (a) political and social systems, (b) openness, (c) product markets, (d) labor markets, and (e) capital markets.
A country’s political system affects its product, labor, and capital markets. In socialist societies like China, for instance, workers cannot form independent trade unions in the labor market, which affects wage levels. A country’s social environment is also important. In South Africa, for example, the government’s support for the transfer of assets to the historically disenfranchised native African community has affected the development of the capital market.
The more open a country’s economy, the more likely it is that global intermediaries can freely operate there, which helps multinationals function more effectively. From a strategic perspective, however, openness can be a double-edged sword: a government that allows local companies to access the global capital market neutralizes one of the key advantages of foreign companies.
Even though developing countries have opened up their markets and grown rapidly during the past decade, multinational companies struggle to get reliable information about consumers. Market research and advertising are often less sophisticated and, because there are no well-developed consumer courts and advocacy groups in these countries, people can feel they are at the mercy of big companies.
Recruiting local managers and other skilled workers in developing countries can be difficult. The quality of local credentials can be hard to verify, there are relatively few search firms and recruiting agencies, and the high-quality firms that do exist focus on top-level searches, so companies scramble to identify middle-level managers, engineers, or floor supervisors.
Capital and financial markets in developing countries often lack sophistication. Reliable intermediaries like credit-rating agencies, investment analysts, merchant bankers, or venture capital firms may not exist, and multinationals cannot count on raising debt or equity capital locally to finance their operations.
Emerging economies present unique challenges. Capital markets are often relatively inefficient and dependable sources of information, scarce while the cost of capital is high and venture capital is virtually nonexistent. Because of a lack of high-quality educational institutions, labor markets may lack well-trained people requiring companies to fill the void. Because of an underdeveloped communications infrastructure, building a brand name can be difficult just when good brands are highly valued because of lower product quality of the alternatives. Finally, nurturing strong relationships with government officials often is necessary to succeed. Even then, contracts may not be well enforced by the legal system.
Competitive Environment
The number, size, and quality of competitive firms in a particular target market compose a second set of factors that affect a company’s ability to successfully enter and compete profitably. While country-level economic and demographic data are widely available for most regions of the world, competitive data are much harder to come by, especially when the principal players are subsidiaries of multinational corporations. As a consequence, competitive analysis in foreign countries, especially in emerging markets, is difficult and costly to perform and its findings do not always provide the level of insight needed to make good decisions. Nevertheless, a comprehensive competitive analysis provides a useful framework for developing strategies for growth and for analyzing current and future primary competitors and their strengths and weaknesses.
Minicase: Which BRIC Countries? A Key Challenge for Carmakers (Haddock and Jullens (2009)).
Today, automobile manufacturers face a critical challenge: deciding which BRIC countries (Brazil, Russia, India, and China) to bet on. In each, as per capita income rises, so will per capita car ownership—not in a straight line but in classic “S-curve” fashion. Rates of vehicle ownership stay low during the first phases of economic growth, but as the GDP or purchasing power of a country reaches a level of sustained broad prosperity, and as urbanization reshapes the work patterns of a country, vehicle sales take off. But that is about where the similarities end. Each of the four BRIC nations has a completely different set of market and industry dynamics that make decision choices about which countries to target, including making difficult decisions about which markets to avoid, extremely difficult.
For one thing, vehicle manufacturing is a high-profile industry that generates enormous revenue, employs millions of people, and is often a proxy for a nation’s manufacturing prowess and economic influence. Governments are extensively involved in regulating or influencing virtually every aspect of the product and the way the industry operates—including setting emissions and safety standards, licensing distributors, and setting tariffs and rules about how much manufacturing must take place locally. This reality makes the job of understanding each market and appreciating the differences more vital. For example, a summary overview of the BRIC nations reveals the differences among these markets and the operating complexities in all of them.
Brazil, with Russia, is one of the smaller BRIC countries, with 188 million people (by comparison, China and India each have more than 1 billion, Russia has 142 million). Yet car usage is already relatively high: 104 cars in use per 1,000 people, nearly 10 times the rate of usage in India, according to the Economist Intelligence Unit. Because of this, growth projections for Brazil are relatively low—more in line with developed nations than with the other BRIC countries. Projections made by the industry research firm Global Insight show that sales will grow just 2% until 2013, underperforming even the U.S. market’s projected growth rate.
On the plus side, Brazil is socioeconomically stable, with increasing wealth and a maturing finance system that is helping to propel growth among rural, first-time buyers who prefer compact cars. Few domestic brands exist, as the market is dominated by GM, Ford, Fiat, and Volkswagen. Prompted by generous government incentives, high import taxes, and exchange rate risks, foreign automakers have invested significantly in Brazil, which has thus become an unrivaled production hub for the rest of South America. Brazilian consumers live in a country with large rural areas and very rough terrain; they demand fairly large, SUV-like cars, made with economical small engines and flex-fuel power trains friendly to the country’s biofuel industry. When a Latin American family buys its first automobile, chances are it was made in Brazil.
Russia, even though it is the smallest of the BRIC countries in population, has the highest auto adoption of the four: 213 cars in use per 1,000 people. (Western Europe, by comparison, has 518, according to the Economist Intelligence Unit.) Yet Global Insight expects future sales growth to average 6.5% from 2008 to 2013, far outpacing Brazil (2%), Western Europe (1.2%), and Japan and Korea (0.2%).
Given Russia’s proximity to Europe, consumer preferences there are more akin to those of the developed markets than to those of China or India, and expensive, status-enhancing European models remain popular, although European safety features, interior components, and electronics are often stripped out to reduce costs. For vehicle manufacturers, the attractions of the Russian market include an absence of both local partnership requirements and significant local competitors. But there is high political risk. So far, the Russian government has permitted foreign carmakers to operate relatively freely, but the Kremlin’s history of meddling in private enterprise and undercutting private ownership worries some executives. These concerns were heightened in November 2008, when Russia implemented tariffs against car imports in hopes of avoiding layoffs that might spark labor unrest among the country’s 1.5 million car industry workers.
India has 1.1 billion people, but its level of car adoption is still low, with only 11 cars in use per 1,000 people. The upside is higher potential growth: among the BRIC countries, India is expected to have the fastest-growing auto sales, almost 15% per year until 2013, according to Global Insight. Sales of subcompact cars are strong, even during the global recession. The popularity of these small cars combines with India’s energy shortages and the country’s chronic pollution to provide foreign carmakers with an ideal opportunity to further develop electric power-train technologies there.
Until the early 1990s, foreign automobile manufacturers were mostly shut out of India. That has changed radically. Today, foreign automakers are welcomed and the government promotes foreign ownership and local manufacturing with tax breaks and strong intellectual property protection. And because foreign companies were shut out for a long period of time, India has capable manufacturers and suppliers for foreign vehicle manufacturers to partner with. Local competition is strong but is thus far concentrated among three players: Maruti Suzuki India, Ltd., Tata, and the Hyundai Corporation, which is well established in India.
China is almost as large as the other three combined in total auto sales and production. Its overall auto usage is just 18 cars per 1,000 households, but annual sales growth until 2013 is expected to be almost 10%. Its size and growth potential make China a dominant force in the industry going forward; new models and technologies developed there will almost certainly become available elsewhere.
But the Chinese government plays a central role in shaping the auto industry. Current ownership policies mandate that foreign vehicle manufacturers enter into 50-50 joint ventures with local automakers, and poor intellectual property rights enforcement puts the design and engineering innovations of foreign car companies at constant risk. At the same time, to cope with energy shortages and rampant pollution, the Chinese government is strongly encouraging research and development on alternative power trains, including electric cars and gasoline-electric hybrids. As a result, Chinese car companies may develop significant power-train capabilities ahead of their competitors.
Like their Indian counterparts, Chinese car companies have outpaced global automakers in developing cars specifically for emerging markets. A few Western companies, like Volkswagen AG, which has sold its Santana models in China through a joint venture (Shanghai Volkswagen Automotive Company) since 1985, are competitive. Some Chinese carmakers, like BYD Company, aspire to become global leaders in the industry. But many suffer from a talent shortage and inexperience in managing across borders. This may prompt them to acquire all or part of distressed Western automobile companies in the near future or to hire skilled auto executives from established companies and their suppliers.
In short, each of the four BRIC nations has a completely different set of market and industry dynamics. And the same is true for the other developing nations. Meanwhile, the number of autos in use in the developing world is projected to expand almost six-fold by 2018.
Cultural, Administrative, Geographic, and Economic Distance
Explicitly considering the four dimensions of distance introduced in Chapter 1 can dramatically change a company’s assessment of the relative attractiveness of foreign markets. In his book The Mirage of Global Markets, David Arnold describes the experience of Mary Kay Cosmetics (MKC) in entering Asian markets. MKC is a direct marketing company that distributes its products through independent “beauty consultants” who buy and resell cosmetics and toiletries to contacts either individually or at social gatherings. When considering market expansion in Asia, the company had to choose: enter Japan or China first? Country-level data showed Japan to be the most attractive option by far: it had the highest per capita level of spending on cosmetics and toiletries of any country in the world, disposable income was high, it already had a thriving direct marketing industry, and it had a high proportion of women who did not participate in the work force. MKC learned, however, after participating in both markets, that the market opportunity in China was far greater, mainly because of economic and cultural distance: Chinese women were far more motivated than their Japanese counterparts to boost their income by becoming beauty consultants. Thus, the entrepreneurial opportunity represented by what MKC describes as “the career” (i.e., becoming a beauty consultant) was a far better predictor of the true sales potential than high-level data on incomes and expenditures. As a result of this experience, MKC now employs an additional business-specific indicator of market potential within its market assessment framework: the average wage for a female secretary in a country.Arnold (2004), p. 34.
MKC’s experience underscores the importance of analyzing distance. It also highlights the fact that different product markets have different success factors: some are brand-sensitive while pricing or intensive distribution are key to success in others. Country-level economic or demographic data do not provide much help in analyzing such issues; only locally gathered marketing intelligence can provide true indications of a market’s potential size and growth rate and its key success factors.
Minicase: Tata Making Inroads Into China (Chow (2008, April 28)).
Not content with just India, Mumbai-based Tata Group, the maker of the \$2,500 Nano small car, is developing a small car for China. The platform is being designed and developed by a joint Indian and Chinese team based in China. The alliance won a new project for the complete design and development of a vehicle platform for a leading original equipment manufacturer for a small car for the China’s domestic market. The team is integrating components in automotive modules to radically improve manufacturability and bring down total cost.
Meanwhile, in 2009, Nanjing Tata AutoComp Systems began supplying automotive interior products to Shanghai General Motors and Changan Ford Automobile Company Products, including plastic vents, outlet parts, and cabin air-ventilation grilles. In the same year, Nanjing Tata began supplying General Motors Corporation in Europe. Eventually, the plant will supply global automakers in North America and Europe as well as emerging markets such as China.
Nanjing Auto is a wholly owned subsidiary of Tata AutoComp Systems, which is the automotive part manufacturing arm of India’s Tata Motors. The company has 30 manufacturing facilities, mainly in India, and production capabilities in automotive plastics and engineering. It also has 15 joint ventures with Tier 1 supplier companies, mainly in India.
The company has almost completed construction of the 280,000-square-foot Nanjing plant at a cost of approximately \$15 million. The first phase included capacity to make parts for air vents, handles, cupholders, ashtrays, glove boxes, and floor consoles. When completed, the plant will have double the current capacity and will also produce instrument panels, door panels, and larger parts. The plant is operated by local Chinese employees; only a few managers are Indian.
In its bid to become a \$1 billion global automotive supplier by 2008, Tata AutoComp had to expand into China. Total passenger car sales in India in 2007 were slightly more than 1.4 million units; in China, the number was more than 5.2 million units, according to data from Automotive Resources Asia, a division of J.D. Power and Associates. Tata Motors sold 221,256 passenger cars in India in 2007. In the same year, Shanghai General Motors sold 495,405 cars. “We see huge potential in China. To us, China is not just a manufacturing base, but a window to the global market. Our investments are keeping this promising future in mind,’” says the Tata AutoComp’s chief executive officer. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/05%3A_Target_Markets_and_Modes_of_Entry/5.02%3A_Measuring_Market_Attractiveness.txt |
What is the best way to enter a new market? Should a company first establish an export base or license its products to gain experience in a newly targeted country or region? Or does the potential associated with first-mover status justify a bolder move such as entering an alliance, making an acquisition, or even starting a new subsidiary? Many companies move from exporting to licensing to a higher investment strategy, in effect treating these choices as a learning curve. Each has distinct advantages and disadvantages.
Exporting is the marketing and direct sale of domestically produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since it does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses.
While relatively low risk, exporting entails substantial costs and limited control. Exporters typically have little control over the marketing and distribution of their products, face high transportation charges and possible tariffs, and must pay distributors for a variety of services. What is more, exporting does not give a company firsthand experience in staking out a competitive position abroad, and it makes it difficult to customize products and services to local tastes and preferences.
Licensing essentially permits a company in the target country to use the property of the licensor. Such property is usually intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance as well.
Because little investment on the part of the licensor is required, licensing has the potential to provide a very large return on investment. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost. Thus, licensing reduces cost and involves limited risk. However, it does not mitigate the substantial disadvantages associated with operating from a distance. As a rule, licensing strategies inhibit control and produce only moderate returns.
Strategic alliances and joint ventures have become increasingly popular in recent years. They allow companies to share the risks and resources required to enter international markets. And although returns also may have to be shared, they give a company a degree of flexibility not afforded by going it alone through direct investment.
There are several motivations for companies to consider a partnership as they expand globally, including (a) facilitating market entry, (b) risk and reward sharing, (c) technology sharing, (d) joint product development, and (e) conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships.
Such alliances often are favorable when (a) the partners’ strategic goals converge while their competitive goals diverge; (b) the partners’ size, market power, and resources are small compared to the industry leaders; and (c) partners are able to learn from one another while limiting access to their own proprietary skills.
The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions. Potential problems include (a) conflict over asymmetric new investments, (b) mistrust over proprietary knowledge, (c) performance ambiguity, that is, how to “split the pie,” (d) lack of parent firm support, (e) cultural clashes, and (f) if, how, and when to terminate the relationship.
Ultimately, most companies will aim at building their own presence through company-owned facilities in important international markets. Acquisitions or greenfield start-ups represent this ultimate commitment. Acquisition is faster, but starting a new, wholly owned subsidiary might be the preferred option if no suitable acquisition candidates can be found.
Also known as foreign direct investment (FDI), acquisitions and greenfield start-ups involve the direct ownership of facilities in the target country and, therefore, the transfer of resources including capital, technology, and personnel. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment.
Minicase: Cola-Cola and Illycaffé (www/thecocacolacompany.com/; http://www.illy.com/)
In March 2008, the Coca-Cola company and Illycaffé Spa finalized a joint venture and launched a premium ready-to-drink espresso-based coffee beverage. The joint venture, Ilko Coffee International, was created to bring three ready-to-drink coffee products—Caffè, an Italian chilled espresso-based coffee; Cappuccino, an intense espresso, blended with milk and dark cacao; and Latte Macchiato, a smooth espresso, swirled with milk—to consumers in 10 European countries. The products will be available in stylish, premium cans (150 ml for Caffè and 200 ml for the milk variants). All three offerings will be available in 10 European Coca-Cola Hellenic markets including Austria, Croatia, Greece, and Ukraine. Additional countries in Europe, Asia, North America, Eurasia, and the Pacific were slated for expansion into 2009.
The Coca-Cola Company is the world’s largest beverage company. Along with Coca-Cola, recognized as the world’s most valuable brand, the company markets four of the world’s top five nonalcoholic sparkling brands, including Diet Coke, Fanta, Sprite, and a wide range of other beverages, including diet and light beverages, waters, juices and juice drinks, teas, coffees, and energy and sports drinks. Through the world’s largest beverage distribution system, consumers in more than 200 countries enjoy the company’s beverages at a rate of 1.5 billion servings each day.
Based in Trieste, Italy, Illycaffé produces and markets a unique blend of espresso coffee under a single brand leader in quality. Over 6 million cups of Illy espresso coffee are enjoyed every day. Illy is sold in over 140 countries around the world and is available in more than 50,000 of the best restaurants and coffee bars. Illy buys green coffee directly from the growers of the highest quality Arabica through partnerships based on the mutual creation of value. The Trieste-based company fosters long-term collaborations with the world’s best coffee growers—in Brazil, Central America, India, and Africa—providing know-how and technology and offering above-market prices. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/05%3A_Target_Markets_and_Modes_of_Entry/5.03%3A_Entry_Strategies_-_Modes_of_Entry.txt |
In addition to selecting the right mode of entry, the timing of entry is critical. Just as many companies have overestimated market potential abroad and underestimated the time and effort needed to create a real market presence, so have they justified their overseas’ expansion on the grounds of an urgent need to participate in the market early. Arguing that there existed a limited window of opportunity in which to act, which would reward only those players bold enough to move early, many companies made sizable commitments to foreign markets even though their own financial projections showed they would not be profitable for years to come. This dogmatic belief in the concept of a first-mover advantage (sometimes referred to as “pioneer advantage”) became one of the most widely established theories of business. It holds that the first entrant in a new market enjoys a unique advantage that later competitors cannot overcome (i.e., that the competitive advantage so obtained is structural and therefore sustainable).
Some companies have found this to be true. Procter & Gamble (P&G), for example, has always trailed rivals such as Unilever in certain large markets, including India and some Latin American countries, and the most obvious explanation is that its European rivals were participating in these countries long before P&G entered. Given that history, it is understandable that P&G erred on the side of urgency in reacting to the opening of large markets such as Russia and China. For many other companies, however, the concept of pioneer advantage was little more than an article of faith and was applied indiscriminately and with disastrous results to country-market entry, to product-market entry, and, in particular, to the “new economy” opportunities created by the Internet.
The “get in early” philosophy of pioneer advantage remains popular. And while there are clear examples of its successful application—the advantages gained by European companies from being early in “colonial” markets provide some evidence of pioneer advantage—first-mover advantage is overrated as a strategic principle. In fact, in many instances, there are disadvantages to being first. First, if there is no real first-mover advantage, being first often results in poor business performance, as the large number of companies that rushed into Russia and China attests to. Second, pioneers may not always be able to recoup their investment in marketing required to “kick start” the new market. When that happens, a “fast follower” can benefit from the market development funded by the pioneer and leapfrog into earlier profitability.For a more detailed discussion, see Tellis, Golder, and Christensen (2001).
This ability of later entrants to free-ride on the pioneer’s market development investment is the most common source of first-mover disadvantage and suggests two critical conditions necessary for real first-mover advantage to exist. First, there must be a scarce resource in the market that the first entrant can acquire. Second, the first mover must be able to lock up that scarce resource in such a way that it creates a barrier to entry for potential competitors. A good example is provided by markets in which it is necessary for foreign firms to obtain a government permit or license to sell their products. In such cases, the license, and perhaps government approval, more generally, may be a scarce resource that will not be granted to all comers. The second condition is also necessary for first-mover advantage to develop. Many companies believed that brand preference created by being first constituted a valid source of first-mover advantage, only to find that, in most cases, consumers consider the alternatives available at the time of their first purchase, not which came first.
Minicase: Starbucks' Global Expansion (Starbucks: A Global Work-in-Process (2006); http://www.starbucks.com)
Starbucks’ decision to expand abroad came after an extended period of exclusive focus on the North American market. From its founding in 1971, it grew to almost 700 stores by 1995, all within the United States and Vancouver, Canada. It was not until the next decade that Starbucks made its first entry into international markets. By 2006, Starbucks operated approximately 11,000 stores, with 70% in the United States and 30% in international markets, and international revenue had grown to almost 20% of Starbucks’ total revenue. Starbucks offered the same basic coffee menu internationally as it did in the United States; however, the range of food products and other items, such as coffee mugs stocked, varied somewhat according to local customs and tastes.
Along with many other companies that pursue global expansion, Starbucks continually faces questions about where and how to further increase its global presence. Should the emphasis be on growth in existing countries or on increasing the number of countries in which it has a presence? How important is the fact that international markets so far have proven less profitable than the U.S. and Canadian markets?
Starbucks in Japan. Interestingly, Starbucks’ first foreign move (i.e., outside the United States and Canada) was a joint venture in Japan. At the time, Japan had the second largest economy in the world and was consistently among the top five coffee importers in the world.
The decision to use a joint venture to enter Japan followed intense internal debate. Concerns among senior executives centered on Starbucks’ lack of local knowledge, and questions were raised about the company’s ability to attract the local talent necessary to grow the Japanese business quickly enough. Starbucks was acutely aware that there were significant differences between doing business in Japan and in the United States and that it might not have enough experience to be successful on its own.
Among other factors, operating costs were predicted to be double those of North America, and Starbucks would have to pay to ship coffee to Japan from its roasting facility in Kent, Washington (near Seattle). In addition, retail space in Tokyo was 2 to 3 times as expensive as in Seattle. Just finding rental space in such a populous city might prove to be a tremendous challenge. Starbucks concluded it needed to form an alliance with a local group that had experience with complex operations and real estate.
Starbucks executives worried that a licensing deal would not be the right solution. Specifically, they were concerned about possible loss of control and insufficient knowledge transfer to learn from the experience. A joint venture was thought to be a better answer, and, after a long search, Starbucks approached Sazaby, Inc., operators of upscale retail and restaurant chains, whose president had approached Starbucks years earlier about the potential of opening Starbucks stores in Japan. Similarity in values, culture, and community-development goals between Starbucks and Sazaby were important considerations in concluding the 50-50 deal. The two companies were equally represented on the board of directors of the newly created Starbucks Coffee Japan. Starbucks was the sole decision-making power in matters relating to brand, product line advertising, and corporate communications, while decisions regarding real-estate operational issues and human resources were handled by Sazaby. Despite strong local competition, the venture was successful from the start. By fiscal year 2000, Starbucks Coffee Japan became profitable more than 2 years ahead of plan.
Starbucks in the United Kingdom. Unlike its expansion into Asia and (later) the Middle East, Starbucks chose to enter the United Kingdom through acquisition rather than partnerships. Speed was a major factor in Starbucks’ decision to enter the fast-growing UK market by acquisition. In addition, the culture, language, legal environment, management practices, and labor economics in the United Kingdom were considered sufficiently similar to those that Starbucks’ management already knew. This meant that a 100%-owned UK subsidiary could be successfully established from the outset. In May 1998, Starbucks acquired the Seattle Coffee Company, which had a presence in the United Kingdom for some time. This fast-growing chain was modeled on its own style of operations and, at the time of the purchase, had 56 retail units. The Seattle Coffee Company was an attractive acquisition target because of its focus: relatively small market capitalization and established retail units. By 2005, Starbucks had 469 stores in the United Kingdom, which made it the third largest country, after the United States and Japan, to serve Starbucks coffee.
Licensing in China. In a number of developing markets, including China, Starbucks chose to enter into minority share licensing agreements with high-quality, experienced local partners in order to minimize market-entry risks. Under these agreements, the local partners absorbed the capital costs (real estate, store construction) of bringing the Starbucks brand abroad. This eliminated the need for substantial general and administrative expenses by Starbucks and enabled it to establish a presence in foreign markets much more quickly than it would have if it had to invest its own capital and absorb start-up losses.
Risk was also a major consideration when Starbucks looked to enter China. While offering high-volume opportunities in an untapped coffee market, the prevailing culture and politics in China potentially posed significant problems. In April 2000, Beijing city authorities ordered Kentucky Fried Chicken to close its store near the Forbidden City when its lease expired in 2002. Similarly, under pressure from local authorities, McDonald’s removed its golden arches from outlets near Tiananmen Square. These incidents demonstrated China’s ambiguous attitude toward a growing Western economic and cultural influence.
Another major concern with starting operations in China was recruiting the right staff. Uniformity of customer experience and coffee quality was the key driver behind the Starbucks brand; failure to recruit the staff to ensure these key criteria not only would mean failure for the Chinese retail outlets but also could harm the company’s image globally.
Although these factors made licensing an attractive entry model, with growing experience in the Chinese market, Starbucks is steadily reducing its reliance on the licensing model and switching to its core company-operated business model to increase control and reap greater rewards.
Starbucks’ globalization history shows that while it was a “first mover” in the United States, it was forced to push harder in international markets to compete with existing players. In Japan, Starbucks was initially a huge success and became profitable 2 years earlier than anticipated. However, just 2 years after Starbucks Japan had become profitable, the company announced a loss of \$3.9 million in Japan, its second largest market at the time, reflecting a major increase in local competition. Additional international challenges were a result of Starbucks’ chosen entry mode. Although joint ventures provided Starbucks with local knowledge about the market and a low-risk entry into unproven territory, joint ventures did not always reap the rewards that the partners had anticipated. One key factor was that it was often difficult for Starbucks to control the costs in a joint venture, resulting in lower profitability.
5.05: Points to Remember
1. Selecting global target markets, entry modes, and deciding how much to adapt the company’s basic value proposition are intimately related. The choice of customers to serve in a particular country or region with a particular culture determines how and how much a company must adapt its basic value proposition. Conversely, the extent of a company’s capabilities in tailoring its offerings around the globe limits or broadens its options to successfully enter new markets or cultures.
2. Few companies can afford to enter all markets open to them. The track record shows that picking the most attractive foreign markets, determining the best time to enter them, and selecting the right partners and level of investment has proven difficult for many companies, especially when it involves large emerging markets such as China.
3. Research shows there is a pervasive the-grass-is-always-greener effect that infects global strategic decision making in many, especially globally inexperienced, companies and causes them to overestimate the attractiveness of foreign markets.
4. Four key factors in selecting global markets are (a) a market’s size and growth rate, (b) a particular country or region’s institutional contexts, (c) a region’s competitive environment, and (d) a market’s cultural, administrative, geographic, and economic distance from other markets the company serves.
5. There is a wide menu of options regarding market entry, from conservative strategies such as first establishing an export base or licensing products to gain experience in a newly targeted country to more aggressive options such as entering an alliance, making an acquisition, or even starting a new subsidiary.
6. Selecting the right timing of entry is equally critical. And just as many companies have overestimated market potential abroad, and underestimated the time and effort needed to create a real market presence, so have they justified their overseas’ expansion on the grounds of an urgent need to participate in the market early. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/05%3A_Target_Markets_and_Modes_of_Entry/5.04%3A_Entry_Strategies_-_Timing.txt |
Managers sometimes assume that what works in their home country will work just as well in another part of the world. They take the same product, the same advertising campaign, even the same brand names and packaging, and expect instant success. The result in most cases is failure. Why? Because the assumption that one approach works everywhere fails to consider the complex mosaic of differences that exists between countries and cultures.
Of course, marketing a standardized product with the same positioning and communications strategy around the globe—the purest form of aggregation—has considerable attraction because of its cost-effectiveness and simplicity. It is also extremely dangerous, however. Simply assuming that foreign customers will respond positively to an existing product can lead to costly failure. Consider the following classic examples of failure:
• Coca-Cola had to withdraw its 2-liter bottle in Spain after discovering that few Spaniards owned refrigerators with large enough compartments to accommodate it.
• General Foods squandered millions trying to introduce packaged cake mixes to Japanese consumers. The company failed to note that only 3% of Japanese homes were equipped with ovens.
• General Foods’ Tang initially failed in France because it was positioned as a substitute for orange juice at breakfast. The French drink little orange juice and almost none at breakfast.
With a few exceptions, the idea of an identical, fully standardized global value proposition is a myth, and few industries are truly global. How to adapt a value proposition in the most effective manner is therefore a key strategic issue.
06: Globalizing the Value Proposition
Value proposition adaptation deals with a whole range of issues, ranging from the quality and appearance of products to materials, processing, production equipment, packaging, and style. A product may have to be adapted to meet the physical, social, or mandatory requirements of a new market. It may have to be modified to conform to government regulations or to operate effectively in country-specific geographic and climatic conditions. Or it may be redesigned or repackaged to meet the diverse buyer preferences or standard-of-living conditions. A product’s size and packaging may also have to be modified to facilitate shipment or to conform to possible differences in engineering or design standards in a country or in regional markets. Other dimensions of value proposition adaptation include changes in brand name, color, size, taste, design, style, features, materials, warranties, after-sale service, technological sophistication, and performance.
The need for some changes, such as accommodating different electricity requirements, will be obvious. Others may require in-depth analysis of societal customs and cultures, the local economy, technological sophistication of people living in the country, customers’ purchasing power, and purchasing behavior. Legal, economic, political, technological, and climatic requirements of a country market may all dictate some level of localization or adaptation.
As tariff barriers (tariffs, duties, and quotas) are gradually reduced around the world in accordance with World Trade Organization (WTO) rules, other nontariff barriers, such as product standards, are proliferating. For example, consider regulations for food additives. Many of the United States’ “generally recognized as safe” (GRAS) additives are banned today in foreign countries. In marketing abroad, documentation is important not only for the amount of additive but also for its source, and often additives must be listed on the label of ingredients. As a result, product labeling and packaging must often be adapted to comply with another country’s legal and environmental requirements.
Many kinds of equipment must be engineered in the metric system for integration with other pieces of equipment or for compliance with the standards of a given country. The United States is virtually alone in its adherence to a nonmetric system, and U.S. firms that compete successfully in the global market have found metric measurement to be an important detail in selling to overseas customers. Even instruction or maintenance manuals, for example, should be made available in centimeters, weights in grams or kilos, and temperatures in degrees Celsius.
Many products must be adapted to local geographic and climatic conditions. Factors such as topography, humidity, and energy costs can affect the performance of a product or even define its use in a foreign market. The cost of petroleum products, along with a country’s infrastructure, for example, may mandate the need to develop products with a greater level of energy efficiency. Hot, dusty climates of countries in the Middle East and other emerging markets may force automakers to adapt automobiles with different types of filters and clutch systems than those used in North America, Japan, and European countries. Even shampoo and cosmetic product makers have to chemically reformulate their products to make them more suited for people living in hot, humid climates.
The availability, performance, and level of sophistication of a commercial infrastructure will also warrant a need for adaptation or localization of products. For example, a company may decide not to market its line of frozen food items in countries where retailers do not have adequate freezer space. Instead, it may choose to develop dehydrated products for such markets. Size of packaging, material used in packaging, before- and after-sale service, and warranties may have to be adapted in view of the scope and level of service provided by the distribution structure in the country markets targeted. In the event that postsale servicing facilities are conspicuous by their absence, companies may need to offer simpler, more robust products in overseas markets to reduce the need for maintenance and repairs.
Differences in buyer preferences are also major drivers behind value proposition adaptation. Local customs, such as religion or the use of leisure time, may affect market acceptance. The sensory impact of a product, such as taste or its visual impression, may also be a critical factor. The Japanese consumer’s desire for beautiful packaging, for example, has led many U.S. companies to redesign cartons and packages specifically for this market. At the same time, to make purchasing mass-marketed consumer products more affordable in lesser developed countries, makers of products such as razor blades, cigarettes, chewing gum, ball-point pens, and candy bars repackage them in small, single units rather than multiple units prevalent in the developed and more advanced economies.
Expectations about product guarantees may also vary from country to country depending on the level of development, competitive practices, and degree of activism by consumer groups; local standards of production quality; and prevalent product usage patterns. Strong warranties may be required to break into a new market, especially if the company is an unknown supplier. In other cases, warranties similar to those in the home country market may not be expected.
As a general rule, packaging design should be based on customer needs. For industrial products, packaging is primarily functional and should reflect needs for storage, transportation, protection, preservation, reuse, and so on. For consumer products, packaging has additional functionality and should be protective, informative, appealing, conform to legal requirements, and reflect buying habits (e.g., Americans tend to shop less frequently than Europeans, so larger sizes are more popular in the United States).
In analyzing adaptation requirements, careful attention to cultural differences between the target customers in the home country (country of origin) and those in the host country is extremely important. The greater the cultural differences between the two target markets, the greater the need for adaptation. Cultural considerations and customs may influence branding, labeling, and package considerations. Certain colors used on labels and packages may be found unattractive or offensive. Red, for example, stands for good luck and fortune in China and parts of Africa; aggression, danger, or warning in Europe, America, Australia, and New Zealand; masculinity in parts of Europe; mourning (dark red) in the Ivory Coast; and death in Turkey. Blue denotes immortality in Iran, while purple denotes mourning in Brazil and is a symbol of expense in some Asian cultures. Green is associated with high tech in Japan, luck in the Middle East, connotes death in South America and countries with dense jungle areas, and is a forbidden color in Indonesia. Yellow is associated with femininity in the United States and many other countries but denotes mourning in Mexico and strength and reliability in Saudi Arabia. Finally, black is used to signal mourning, as well as style and elegance, in most Western nations, but it stands for trust and quality in China, while white—the symbol for cleanliness and purity in the West—denotes mourning in Japan and some other Far Eastern nations.
A country’s standard of living and the target market’s purchasing power can also determine whether a company needs to modify its value proposition. The level of income, the level of education, and the availability of energy are all factors that help predict the acceptance of a product in a foreign market. In countries with a lower level of purchasing power, a manufacturer may find a market for less-sophisticated product models or products that are obsolete in developed nations. Certain high-technology products are inappropriate in some countries, not only because of their cost but also because of their function. For example, a computerized, industrial washing machine might replace workers in a country where employment is a high priority. In addition, these products may need a level of servicing that is unavailable in some countries.
When potential customers have limited purchasing power, companies may need to develop an entirely new product designed to address the market opportunity at a price point that is within the reach of a potential target market. Conversely, companies in lesser-developed countries that have achieved local success may find it necessary to adopt an “up-market strategy” whereby the product may have to be designed to meet world-class standards.
Minicase: Kraft Reformulates Oreo Cookies in China (Jargon (Jargon (2008, May 1)).
Kraft’s Oreo has long been the top-selling cookie in the U.S. market, but the company had to reinvent it to make it sell in China. Unlike their American counterparts, Oreo cookies sold in China are long, thin, four-layered, and coated in chocolate.
Oreos were first introduced in 1912 in the United States, but it was not until 1996 that Kraft introduced Oreos to Chinese consumers. After more than 5 years of flat sales, the company embarked on a complete makeover. Research had shown, among other findings, that traditional Oreos were too sweet for Chinese tastes and that packages of 14 Oreos priced at 72 cents were too expensive. In response, Kraft developed and tested 20 prototypes of reduced-sugar Oreos with Chinese consumers before settling on a new formula; it also introduced packages containing fewer Oreos for just 29 cents.
But Kraft did not stop there. The research team had also picked up on China’s growing thirst for milk, which Kraft had not considered before. It noted that increased milk demand in China and other developing markets was a contributing factor to higher milk prices around the world. This put pressure on food manufacturers like Kraft, whose biggest business is cheese, but it also spelled opportunity.
Kraft began a grassroots marketing campaign to educate Chinese consumers about the American tradition of pairing milk with cookies. The company created an Oreo apprentice program at 30 Chinese universities that drew 6,000 student applications. Three hundred were accepted and trained as Oreo-brand ambassadors. Some of them rode around Beijing on bicycles, outfitted with wheel covers resembling Oreos, and handed out cookies to more than 300,000 consumers. Others organized Oreo-themed basketball games to reinforce the idea of dunking cookies in milk. Television commercials showed kids twisting apart Oreo cookies, licking the cream center, and dipping the chocolate cookie halves into glasses of milk.
Still, Kraft realized it needed to do more than just tweak its recipe to capture a bigger share of the Chinese biscuit market. China’s cookie-wafer segment was growing faster than the traditional biscuit-like cookie segment, and Kraft needed to catch up to rival Nestlé SA, the world’s largest food company, which had introduced chocolate-covered wafers there in 1998.
So Kraft decided this market opportunity was big enough to justify a complete remake of the Oreo itself and, departing from longstanding corporate policy for the first time, created an Oreo that looked almost nothing like the original. The new Chinese Oreo consisted of four layers of crispy wafer filled with vanilla and chocolate cream, coated in chocolate. To ensure that the chocolate product could be shipped across the country, could withstand the cold climate in the north and the hot, humid weather in the south, and would still melt in the mouth, the company had to develop a new proprietary handling process.
Kraft’s adaptation efforts paid off. In 2006, Oreo wafer sticks became the best-selling biscuit in China, outpacing HaoChiDian, a biscuit brand made by the Chinese company Dali. The new Oreos also outsell traditional (round) Oreos in China. They also have created opportunities for further aggregation and product innovation. Kraft now sells the wafers elsewhere in Asia, as well as in Australia and Canada, and the company has introduced another new product in China: wafer rolls, a tube-shaped wafer lined with cream. The hollow cookie can be used as a straw through which to drink milk.
This success encouraged Kraft to empower managers in other businesses around the globe. For example, to take advantage of the European preference for dark chocolate, Kraft introduced dark chocolate in Germany under its Milka brand. Research showed that Russian consumers like premium instant coffee, so Kraft positioned its Carte Noire freeze-dried coffee as an upscale brand. And in the Philippines, where iced tea is popular, Kraft launched iced-tea-flavored Tang.
As Kraft’s experience shows, successful global marketing and branding is rooted in a careful blend of aggregation, adaptation, and arbitrage strategies that is tailored to the specific needs and preferences of a particular region or country. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/06%3A_Globalizing_the_Value_Proposition/6.01%3A_Value_Proposition_Adaptation_Decisions.txt |
A useful construct for analyzing the need to adapt the offer and message (positioning) dimensions is the value proposition globalization matrix shown in Figure 6.1.1 "The Value Proposition Globalization Matrix", which illustrates four generic global strategies:
1. A pure aggregation approach (also sometimes referred to as a “global marketing mix” strategy) under which both the offer and the message are the same
2. An approach characterized by an identical offer (product/service aggregation) but different positioning (message adaptation) around the world (also called a “global offer” strategy)
3. An approach under which the offer might be different in various parts of the world (product adaptation) but where the message is the same (message aggregation; also referred to as a “global message” strategy)
4. A “global change” strategy under which both the offer and the message are adapted to local market circumstances
Global mix or pure aggregation strategies are relatively rare because only a few industries are truly global in all respects. They apply (a) when a product’s usage patterns and brand potential are homogeneous on a global scale, (b) when scale and scope cost advantages substantially outweigh the benefits of partial or full adaptation, and (c) when competitive circumstances are such that a long-term, sustainable advantage can be secured using a standardized approach. The best examples are found in industrial product categories such as basic electronic components or certain commodity markets.
Global offer strategies are feasible when the same offer can be advantageously positioned differently in different parts of the world. There are several reasons for considering differential positioning. When fixed costs associated with the offer are high, when key core benefits offered are identical, and when there are natural market boundaries, adapting the message for stronger local advantage is tempting. Although such strategies increase local promotional budgets, they give country managers a degree of flexibility in positioning the product or service for maximum local advantage. The primary disadvantage associated with this type of strategy is that it could be difficult to sustain or even dangerous in the long term as customers become increasingly global in their outlook and confused by the different messages in different parts of the world.
Minicase: Starwood's Branding in China (Palmeri and Balfour (2009, Septermber 7)).
Check into a Four Points Hotel by Sheraton in Shanghai and you will get all the perks of a quality international hotel: a free Internet connection, several in-house restaurants, a mah-jongg parlor, and an assortment of moon cakes, a Chinese delicacy. All this for \$80 a night, about 20% less than the average cost of a room in Shanghai.
For travelers who associate the Sheraton brand with plastic ice buckets and polyester bedspreads in the United States, this may come as a surprise. Like Buick, Kentucky Fried Chicken (KFC), and Pizza Hut, Sheraton is one of those American names that, to some, seems past its prime at home, but it is still popular and growing abroad. The hotel brand has particular cachet in China, going back to 1985, when it opened the Great Wall Sheraton Hotel Beijing. Local developers still compete to partner with Sheraton’s parent company—Starwood Hotels & Resorts Worldwide—to develop new properties. In the near future, the company will have more rooms in Shanghai than it does in New York.
Like many other U.S. companies experiencing pressure at home, Starwood sees China as one of its best hopes for growth. The company, which also owns the upscale St. Regis, Westin, W, and Le Meridien brands, expects much of this growth will come from outlying regions. Big cities such as Beijing now have plenty of rooms, thanks in part to the Olympics, but there is growing demand for business-class accommodation in second- and third-tier cities such as Jiangyin and Dalian. Lower construction costs and inexpensive labor mean the company’s Chinese hotel owners can offer guests a lot more than comparably priced U.S. properties.
In recent years, the focus in China has shifted from international travelers to Chinese consumers. Starwood now asks its hotel staff to greet guests in Mandarin instead of English, which was long used to convey a sense of prestige. Many of its hotels do not label their fourth floors as such because four is considered an unlucky number.
Starwood is not alone in recognizing the potential of the Chinese market. Marriott International hopes to increase its China presence by 50%, to 61 hotels by 2014. And InterContinental Hotels Group, parent of Holiday Inn, plans to double the 118 hotels it has in China over the next 3 years.
One major perk Starwood can offer over local competitors is its extensive global network and loyalty perks. More than 40% of its Chinese business comes through its preferred-guest program, and Chinese membership in the program is increasing rapidly. But local customers are not particularly focused on accruing points to earn a free stay. They are more interested in “status,” using points to get room upgrades, a free breakfast, or anything that accords them conspicuous VIP treatment. Among other things, the preferred guest system allows staffers to see people’s titles immediately. That makes it easier to give better rooms to managers than the subordinates they are traveling with and to greet them first when a party arrives.
After a long period in which Starwood paid more attention to its hipper W and Westin brands, the company has recently been remodeling its U.S. Sheratons. Among mainland Chinese travelers, the Sheraton name has continued to exude an aura of international class. While that is helpful for Sheraton’s domestic Chinese business, the real potential will only be realized when they start to travel. The company’s goal is to lock in the loyalty of mainland customers so they will stay at a Sheraton when they travel abroad. Indeed, if the experience with Japanese tourists in the mid-1980s is any guide, Starwood could be looking at 100 million or more outbound trips from China.
Global message strategies use the same message worldwide but allow for local adaptation of the offer. McDonald’s, for example, is positioned virtually identical worldwide, but it serves vegetarian food in India and wine in France. The primary motivation behind this type of strategy is the enormous power behind a global brand. In industries in which customers increasingly develop similar expectations, aspirations, and values; in which customers are highly mobile; and in which the cost of product or service adaptation is fairly low, leveraging the global brand potential represented by one message worldwide often outweighs the possible disadvantages associated with factors such as higher local research and development (R&D) costs. As with global-offer strategies, however, global message strategies can be risky in the long run—global customers might not find elsewhere what they expect and regularly experience at home. This could lead to confusion or even alienation.
Minicase: KFC Abroad (www.kfcbd.com/aboutus_kfcbang.htm)
KFC is synonymous with chicken. It has to be because chicken is its flagship product. One of the more recent offers the company created—all around the world—is the marinated hot and crispy chicken that is “crrrrisp and crunchy on the outside, and soft and juicy on the inside.” In India, KFC offers a regular Pepsi with this at just 39 rupees. But KFC also made sure not to alienate the vegetarian community—in Bangalore, you can be vegetarian and yet eat at KFC. Why? Thirty-five percent of the Indian population is vegetarian, and in metros such as Delhi and Mumbai, the number is almost 50%. Therefore, KFC offers a wide range of vegetarian products, such as the tangy, lip-smacking Paneer Tikka Wrap ‘n Roll, Veg De-Lite Burger, Veg Crispy Burger. There are munchies such as the crisp golden veg fingers and crunchy golden fries served with tangy sauces. You can combine the veg fingers with steaming, peppery rice and a spice curry. The mayonnaise and sauces do not have egg in them.
While the vegetarian menu is unique to India because of the country’s distinct tastes, KFC’s “standard” chicken products are also adapted to suit local tastes. For example, chicken strips are served with a local sauce, or the sauce of the wrap is changed to local tastes. Thus, KFC tries to balance aggregation with adaptation: standardization of those parts of the value offering that travel easily (KFC’s core products and positioning), tailoring of standard chicken products with a different topping or sauce, and offering a vegetarian menu.
This adaptation strategy is used in every country that KFC serves: the U.S. and European markets have a traditional KFC menu based on chicken burgers and wraps, while Asian offerings like those in India are more experimental and adventurous and include rice meals, wraps, and culture-appropriate sides.
Global change strategies define a “best fit” approach and are by far the most common. As we have seen, for most products, some form of adaptation of both the offer and the message is necessary. Differences in a product’s usage patterns, benefits sought, brand image, competitive structures, distribution channels, and governmental and other regulations all dictate some form of local adaptation. Corporate factors also play a role. Companies that have achieved a global reach through acquisition, for example, often prefer to leverage local brand names, distribution systems, and suppliers rather than embark on a risky global one-size-fits-all approach. As the markets they serve and the company become more global, selective standardization of the message and the offer itself can become more attractive.
Minicase: Targeting Muslim Customers (Power (2009, June 1)).
Muslims often experience culture shock while staying in Western hotels. Minibars, travelers in bikinis, and loud music, among other things, embarrass Muslim travelers.
That is no longer necessary. A growing number of hotels has started to cater to Muslim travelers. In one, the lobby—decorated in white leather, brick, and glass, with a small waterfall—is quiet. Men in dishdashas and veiled women mingle with Westerners who are sometimes discreetly reminded to respect local customs. Minibars are stocked not with alcohol but with Red Bull, Pepsi, and the malt drink Barbican.
“Buying Muslim” used to mean avoiding pork and alcohol and getting your meat from a halal butcher, who slaughtered in accordance with Islamic principles. But the halal food market has exploded in the past decade and is now worth an estimated \$632 billion annually, according to the Halal Journal, a Kuala Lumpur–based magazine. That amounts to about 16% of the entire global food industry. Throw in the fast-growing Islam-friendly finance sector and the myriad of other products and services—cosmetics, real estate, hotels, fashion, insurance, for example—that comply with Islamic law and the teachings of the Koran, and the sector is worth well over \$1 trillion a year.
Seeking to tap that huge market, multinationals like Tesco, McDonald’s, and Nestlé have expanded their Muslim-friendly offerings and now control an estimated 90% of the global halal market. Governments in Asia and the Middle East are pouring millions into efforts to become regional “halal hubs,” providing tailor-made manufacturing centers and “halal logistics”—systems to maintain product purity during shipping and storage. The intense competition has created some interesting partnerships in unusual places. Most of Saudi Arabia’s chicken is raised in Brazil, which means Brazilian suppliers had to build elaborate halal slaughtering facilities. Abattoirs in New Zealand, the world’s biggest exporter of halal lamb, have hosted delegations from Iran and Malaysia. And the Netherlands, keen to exploit Rotterdam’s role as Europe’s biggest port, has built halal warehouses so that imported halal goods are not stored next to pork or alcohol.
It is not just about food. Major drug companies now sell halal vitamins free of the gelatins and other animal derivatives that some Islamic scholars say make mainstream products haram, or unlawful. The Malaysia-based company Granulab produces synthetic bone-graft material to avoid using animal bone, while Malaysian and Cuban scientists are collaborating on a halal meningitis vaccine. For Muslim women concerned about skin-care products containing alcohol or lipsticks that use animal fats, a few cosmetics firms are creating halal makeup lines.
The growing Islamic finance industry is trying to win non-Muslim customers. Investors are attracted by Islamic banking’s more conservative approach: Islamic law forbids banks from charging interest (though customers pay fees), and many scholars discourage investment in excessively leveraged companies. Though it currently accounts for just 1% of the global market, the Islamic finance industry’s value is growing at around 15% a year, and it could reach \$4 trillion in 5 years, according to a 2008 report from Moody’s Investors Service. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/06%3A_Globalizing_the_Value_Proposition/6.02%3A_Adaptation_or_Aggregation_-_The_Value_Proposition_Globalization_Matrix.txt |
One way around the trade-off between creating global efficiencies and adapting to local requirements and preferences is to design a global product or communication platform that can be adapted efficiently to different markets. This modularized approach to global product design has become particularly popular in the automobile industry. One of the first “world car platforms” was introduced by Ford in 1981. The Ford Escort was assembled simultaneously in three countries—the United States, Germany, and the United Kingdom—with parts produced in 10 countries. The U.S. and European models were distinctly different but shared standardized engines, transmissions, and ancillary systems for heating, air conditioning, wheels, and seats, thereby saving the company millions of dollars in engineering and development costs.
Minicase: Creating the Perfect Fit: New Car-Seat Design (Buss (2009)).
Imagine the challenge of being an automotive-seat engineer these days, and picture one of the hugest men you know—a large, American male weighing about 275 lbs. Now consider a petite woman, and throw in someone with lower-back pain. Your challenge: design a single seat that comfortably accommodates each of these physically and physiologically diverse individuals, not just for a few minutes but for a 4-hour drive. Welcome to the global automotive design challenge.
While the economic pressures to standardize are becoming stronger, car buyers are getting more size-diverse, more ergonomically distressed, and more demanding of power adjustments and other amenities. Seat developers are responding: they are using more versatile materials, new engineering techniques, digital technologies, and novel designs to make sitting in a car as, or even more, comfortable as sitting in your living room.
This concern for comfort is relatively new; hard benches were the standard during the industry’s earliest days. Even into the 1980s, most cars and trucks had simple bench seating in both the front and rear of the automobile. Automotive seat design only became a crucial discipline during the last generation as Americans began to spend more and more time in their vehicles and as interior comfort and appointments became a major competitive issue.
Federal regulations affect seat design only minimally, with the most important requirements focusing on headrests. And there are distance requirements between the driver’s body and the steering wheel, an issue that can also be addressed with telescoping steering wheels and adjustable pedals. In the end, automakers must mainly make sure the seat design helps the car pass the government’s crash-safety standards.
Consumers are far more demanding. Comfort and ergonomic functionality have become the focal points of seat design. Americans are getting bigger and heavier, and automakers try to design seats that can accommodate everyone from the smallest females to the largest males. This is not a simple feat, with the 95th-percentile American man now weighing about 24 lbs more than 2 decades ago. At the same time, while U.S. women in general also have gotten larger, the influx of immigrants from Asia actually kept the overall increase in the size of the 5th-percentile American woman down to under 5 lbs over the last 2 decades.
And just as airlines and home-furniture manufacturers have had to respond to wider girths by making seats bigger, auto companies are also faced with having to squeeze bigger people into cabins that are getting smaller as gas prices rise. At the same time, seats must secure tiny drivers and allow them to see clearly over the steering wheel and reach the accelerator and brake pedals.
The aging of the American population poses special difficulties. Younger demographics like their seats harder, but baby boomers and older customers are used to a soft seat. Whether this is best ergonomically is not important, despite the fact that more and more consumers are carrying specific maladies of aging into their cars, including back pain, aching knees, and a general decline in the basic nimbleness required to get in and out of an automobile.
It is one thing to design a single seat that can accommodate the frames of the smallest to the largest Americans. Now add the globalization challenge. As automakers seek to globalize vehicle platforms, their seats also have to be able to accommodate the diverse body proportions, size ranges, and consumer preferences of people around the world.
For example, while Europeans definitely prefer longer cushions, and Asians like shorter ones, Americans are somewhere in between. And in China, the second row must be as comfortable as the first because as many as 40% of car owners have a driver, and the owners tend to sit in the right rear seat.
6.04: Combining Adaptation and Arbitrage - Global Product Development
Globalization pressures have changed the practice of product development (PD) in many industries in recent years. (Eppinger and Chitkara (2006)). Rather than using a centralized or local cross-functional model, companies are moving to a mode of global collaboration in which skilled development teams dispersed around the world collaborate to develop new products. Today, a majority of global corporations have engineering and development operations outside of their home region. China and India offer particularly attractive opportunities: Microsoft, Cisco, and Intel all have made major investments there.
The old model was based on the premise that colocation of cross-functional teams to facilitate close collaboration among engineering, marketing, manufacturing, and supply-chain functions was critical to effective product development. Colocated PD teams were thought to be more effective at concurrently executing the full range of activities involved, from understanding market and customer needs through conceptual and detailed design, testing, analysis, prototyping, manufacturing engineering, and technical product support and engineering. Such colocated concurrent practices were thought to result in better product designs, faster time to market, and lower-cost production. They were generally located in corporate research and development centers, which maintained linkages to manufacturing sites and sales offices around the world.
Today, best practice emphasizes a highly distributed, networked, and digitally supported development process. The resulting global product development process combines centralized functions with regionally distributed engineering and other development functions. It often involves outsourced engineering work as well as captive offshore engineering. The benefits of this distributed model include greater engineering efficiency (through utilization of lower-cost resources), access to technical expertise internationally, more global input to product design, and greater strategic flexibility. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/06%3A_Globalizing_the_Value_Proposition/6.03%3A_Combining_Aggregation_and_Adaptation_-_Global_Product_Platforms.txt |
Many companies now have global supply chains and product development processes, but few have developed effective global innovation capabilities. (Santos, Doz, and Williamson (2004, Summer)). Increasingly, however, technology access and innovation are becoming key global strategic drivers. This move from cost to growth and innovation is likely to continue as the center of gravity of economic activity shifts further to the East.
To illustrate the significant advantages of a truly global innovation strategy, Santos and others cite the battle between Motorola, Inc. and Nokia Corporation in the cellular phone industry. Motorola was a pioneer in the technology, building on initial path-breaking research from Bell Laboratories. But by focusing primarily on U.S. customers and U.S. solutions, it missed the market shift toward digital mobile technology and the global system for mobile (GSM) communication, which became the standard in Europe. The company also failed to appreciate that consumers were rapidly developing different use patterns and preferences about product design, thereby rendering a one-size-fits-all strategy obsolete.
A core competency in global innovation—the ability to leverage new ideas all around the world—has become a major source of global competitive advantage, as companies such as Nokia, Airbus, SAP, and Starbucks demonstrate. They realize that the principal constraint on innovation “performance” is knowledge. Accessing a diverse set of sources of knowledge is therefore a key challenge and is critical to successful differentiation. Companies whose knowledge pool is the same as that of its competitors will likely develop uninspired “me, too” products; access to a diversity of knowledge allows a company to move beyond incremental innovation to attention-grabbing designs and breakthrough solutions.
There is an interesting relationship between geography and knowledge diversity. In Finland, for example, the high cost of installing and maintaining fixed telephone lines in isolated places has spurred advances in radiotelephony. In Germany, cultural and political factors have encouraged the growth of a strong “green movement,” which in turn has generated a distinctive market and technical knowledge in recycling and renewable energy. Just-in-time production systems were pioneered in part because of high land costs there. Recognition of the role played by geography in innovation has prompted many companies to globalize their perspective on the innovation process. For example, pharmaceutical companies such as Novartis AG and GlaxoSmithKline plc now realize that the knowledge they need extends far beyond traditional chemistry and therapeutics to include biotechnology and genetics. What is more, much of this new knowledge comes from sources other than the companies’ traditional R&D labs in Basel, Bristol, and in New Jersey, from places such as California, Tel Aviv, Cuba, or Singapore. For these companies, globalization of innovation processes is no longer optional—it has become imperative.
Companies that globalize their supply chains by accessing raw materials, components, or services from around the world are typically able to reduce the overall costs of their operations. Similarly, a side benefit of global innovation is cost reduction. Consider, for example, how companies are now leveraging software programmers in Bangalore, India, aerospace technologists in Russia, or chipset designers in China to cut the costs of their innovation processes.
To reap the benefits of global innovation, companies must do three things:
1. Prospect (find the relevant pockets of knowledge from around the world)
2. Assess (decide on the optimal “footprint” for a particular innovation)
3. Mobilize (use cost-effective mechanisms to move distant knowledge without degrading it (Santos, Doz, and Williamson (2004, Summer)).
Prospecting—that is, finding valuable new pockets of knowledge to spur innovation—may well be the most challenging task. The process involves knowing what to look for, where to look for it, and how to tap into a promising source. Santos and colleagues cite the efforts of the cosmetics maker Shiseido Co., Ltd., in entering the market for fragrance products. Based in Japan, a country with a very limited tradition of perfume use, Shiseido was initially unsure of the precise knowledge it needed to enter the fragrance business. But the company did know where to look for it. So it bought two exclusive beauty boutique chains in Paris, mainly as a way to experience, firsthand, the personal care demands of the most sophisticated customers of such products. It also hired the marketing manager of Yves Saint Laurent Parfums and built a plant in Gien, a town located in the French perfume “cluster.” France’s leadership in that industry made the where fairly obvious to Shiseido. The how had also become painfully clear because the company had previously flopped in its efforts to develop perfumes in Japan. Those failures convinced Shiseido executives that to access such complex knowledge—deeply rooted in local culture and combining customer information, aesthetics, and technology—the company had to immerse itself in the French environment and learn by doing. Having figured out the where and how, Shiseido would gradually learn what knowledge it needed to succeed in the perfume business.
Assessing new sources of innovation, that is, incorporating new knowledge into and optimizing an existing innovation network, is the second important challenge companies face. If a semiconductor manufacturer is developing a new chip set for mobile phones, for example, should it access technical and market knowledge from Silicon Valley, Austin, Hinschu, Seoul, Bangalore, Haifa, Helsinki, and Grenoble? Or should it restrict itself to just some of those sites? At first glance, determining the best footprint for innovation does not seem fundamentally different from the trade-offs companies face in optimizing their global supply chains: adding a new source might reduce the price or improve the quality of a required component, but more locations may also mean additional complexity and cost. Similarly, every time a company adds a source of knowledge to the innovation process, it might improve its chances of developing a novel product, but it also increases costs. Determining an optimal innovation footprint is more complicated, however, because the direct and indirect cost relationships are far more imprecise.
Mobilizing the footprint, that is, integrating knowledge from different sources into a virtual melting pot from which new products or technologies can emerge, is the third challenge. To accomplish this, companies must bring the various pieces of (technical) knowledge that are scattered around the world together and provide a suitable organizational form for innovation efforts to flourish. More importantly, they would have to add the more complex, contextual (market) knowledge to integrate the different pieces into an overall innovation blueprint.
Minicase: P&G's Success in Trickle-Up Innovation: Vicks Cough Syrup with Honey (Jana (2009, March 31)).
A new over-the-counter medicine from Vicks that has recently become popular in Switzerland is not as new as it seems. The product, Vicks Cough Syrup with Honey, is really just the latest incarnation of a product that Vicks parent company, Procter & Gamble (P&G), initially created for lower-income consumers in Mexico and then “trickled up” to more affluent markets.
The term “trickle up” refers to a strategy of creating products for consumers in emerging markets and then repackaging them for developed-world customers. Until recently, affluent consumers in the United States and Western Europe could afford the latest and greatest in everything. Now, with purchasing power dramatically reduced because of the global recession, budget items once again make up a growing portion of total sales in many product categories.
P&G is not the only multinational company using this strategy. Other practitioners of trickle-up innovation include General Electric (GE), Nestlé, and Nokia. In early 2008, GE Healthcare launched the MAC 400, GE’s first portable Electrocardiograph (ECG) that was designed in India for the fast-growing local market there. The company simplified elements of its earlier, 65-lb devices made for U.S. hospitals by shrinking its case to the size of a fax machine and removing features such as the keyboard and screen. The smaller MAC 400 costs only \$1,500, versus \$15,000 for its U.S. predecessor. This trickle-down innovation trickled back up again when GE Healthcare decided to sell the unit in Germany as well.
Nestlé offers inexpensive instant noodles in India and Pakistan under its Maggi brand. The line includes dried noodles that are engineered to taste as if they were fried, while they have a whole-wheat flavor that is popular in South Asia. And Nokia researches how people in emerging nations share phones, such as the best-selling 1100 series of devices created for developing-world consumers. The company then uses the information as inspiration for new features for developed-world users.
But what is unique about P&G’s Honey Cough, as it is also called, is that it has moved around the globe in more than one direction. Honey Cough originated in 2003 in P&G’s labs in Caracas, Venezuela, which creates products for all of Latin America. Market research revealed that Latin American shoppers tended to prefer homeopathic remedies for coughs and colds, so P&G set out to create a medicine using natural honey rather than the artificial flavors typically used. The company first introduced the syrup in Mexico, under the label VickMiel, and then in other Latin American markets, including Brazil.
P&G deduced that the product would appeal to parts of the United States that have large Hispanic populations. In 2005, the company rebranded it as Vicks Casero for sale in California and Texas, at a price slightly less than Vicks’ mainstay product, Vicks Formula 44. Within the first year of its release, the company boosted distribution to 27% more outlets.
Figuring that natural ingredients could appeal to even wider groups, P&G took the product to other markets where research indicated that homeopathic cold medicines are popular. In the past 2 years, the company has been marketing the product in Britain, France, Germany, and Italy, as well as Switzerland, and plans to add other Western European countries to the roster.
And Western Europe is not the last destination for iterations of Honey Cough. If P&G’s current market research in the greater United States shows that mainstream American shoppers will buy Honey Cough, P&G will repackage it and market it nationwide, not just as Vicks Casero in Latino markets.
Developing and marketing a new product for each nation or ethnic group can take half a decade. Trickle-up innovation can reduce this time by several years, which explains its appeal. In each rollout, P&G has needed to do little more than make adjustments for each nation’s health regulations.
At a time when companies are looking to speed product offerings while dealing with shrinking budgets and cash-strapped consumers, P&G’s experience with its Honey Cough line shows how an international product portfolio can be tapped quickly and cheaply—that is, if American companies learn how to go against the flow.
6.06: Points to Remember
1. Managers sometimes assume that what works in their home country will work just as well in another part of the world. The result in most cases is failure. Why? Because the assumption that one approach works everywhere fails to consider the complex mosaic of differences that exists between countries and cultures.
2. With a few exceptions, the idea of an identical, fully standardized global value proposition is a myth, and few industries are truly global. How to adapt a value proposition in the most effective manner is therefore a key strategic issue.
3. Value proposition adaptation deals with a whole range of issues, ranging from the quality and appearance of products to materials, processing, production equipment, packaging, and style.
4. A useful construct for analyzing the need to adapt the product or service and message (positioning) dimensions is the value proposition globalization matrix.
5. One way around the trade-off between creating global efficiencies and adapting to local requirements and preferences is to design a global product or communication platform that can be adapted efficiently to different markets.
6. Globalization pressures have changed the practice of product development in many industries in recent years. Today, a majority of global corporations have engineering and development operations outside of their home region.
7. Many companies now have global supply chains and product development processes but few have developed effective global innovation capabilities. Increasingly, however, technology access and innovation are becoming key global strategic drivers.
8. A core competency in global innovation—the ability to leverage new ideas all around the world—has become a major source of global competitive advantage. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/06%3A_Globalizing_the_Value_Proposition/6.05%3A_Combining_Aggregation_Adaptation_and_Arbitrage_-_Global_Innovation.txt |
As companies expand globally, a brand like Coke or Nike can be the greatest asset a firm has, but it also can quickly lose its power if it comes to signify something different in every market. Successfully leveraging a brand’s power globally requires companies to consider aggregation, adaptation, and arbitrage strategies all at the same time, beginning with defining the universal “heart and soul” of every one of a company’s brands (aggregation) and then expressing that in suitable words, images, and music (adaptation and arbitrage). In doing so, allowance must be made for flexibility in execution because even the smallest differences in different markets’ consumer preferences, habits, or underlying cultures can make or break a brand’s global success. In allowing such flexibility, a key consideration is how a product’s current positioning in a particular market might affect the company’s future offerings. If a product’s positioning varies significantly in different markets, any “follow-on products” will likely have to be positioned differently as well, and this raises costs and can create operational problems.
07: Global Branding
Johnson & Johnson (J&J) will not sacrifice premium pricing for its well-known brands. It believes that its popular Band-Aid adhesive bandages are superior to competitors’ products, and a premium price is a way to signal that. But even in this dimension of its marketing strategy, J&J must allow for some improvisation as it expands around the world and pushes deeper into less-developed countries. Specifically, the company accepts lower margins in a developing market and sometimes delivers a smaller quantity of a product to make it more affordable. For instance, it might sell a four-pack of Band-Aids instead of the larger box it markets in the developed world or a sample-sized bottle of baby shampoo instead of a full-sized one.
Carefully adhering to a particular positioning is both aggregation and adaptation; this creates uniformity in different world markets, but it also serves to define target segments as the company enters new countries or regions. Consider the decision by Diageo, the British beer-and-spirits company, to stick to premium pricing wherever it does business, even when it enters a new market. By projecting a premium positioning for brands such as Johnnie Walker Black, Smirnoff vodka, Captain Morgan rum, Tanqueray gin, and Guinness stout, and foregoing price cutting to grow volume, it identifies loyal consumers who will pay for its well-known products. Rather than sell its products’ functional benefits, Diageo successfully markets its drinks as either sophisticated, as it does with Tanqueray, or cool, as it does with Captain Morgan in its recent “Got a Little Captain in You?” ad campaign.Brand managers’ high-wire act (2007, October 31).
Minicase: Global Positioning of a MasterCard (www.leadingglobalbrands.com/)
Back in 1997, the MasterCard “brand” did not stand for any one thing. The parent company—MasterCard International—had run through five different advertising campaigns in 10 years and was losing market share at home and abroad. Fixing the brand was a key element of the turnaround. Working with McCann-Erikson, the company developed the highly successful “priceless” campaign. The positioning created by “priceless” allowed MasterCard to integrate all its other campaigns and marketing practices within the United States, and this became a marketing platform that formed the basis for many globalization decisions.
Up until that time, every country used a different agency, a different campaign, and a different strategy. The success of “priceless” as a platform in the United States helped the company persuade other countries to adopt one, single approach, which, over time, produced a consistent global positioning. The “priceless” campaign now appears in more than 100 countries and more than 50 languages and informs all brand communications.
Starting with a locally developed positioning and then successfully expanding it globally is one way to approach the global branding and positioning challenge. More typically, companies start by identifying a unique consumer insight that is globally applicable in order to create a global positioning platform. No matter which route is selected, successful global branding and positioning requires (a) identifying a globally “robust” positioning platform—MasterCard’s new positioning was readily accepted across all markets because of the quality of the insight and its instant recognition across cultural boundaries—and (b) clarity about roles and responsibilities for decision making locally and globally. There was a shared understanding of how the primary customer insight should be used at every stage in the process and which aspects of the branding platform were nonnegotiable; expectations for performance were clearly defined and communicated on a global basis; and a strategic partnership with a single advertising agency allowed for consistent, seamless execution around the world.
By providing a single, unifying consumer insight that “defines” the brand’s positioning, MasterCard has created economies of scale and scope and, hence, benefited from aggregation principles. The company uses adaptation and arbitrage strategies in its approach to implementation. It empowers local teams by inviting them to create content for their own markets within a proven, globally robust positioning framework. Additional, ongoing research generates insights that allow local marketers to create a campaign that they truly feel has local resonance while at the same time maintaining the core brand positioning. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/07%3A_Global_Branding/7.01%3A_Global_Branding_Versus_Global_Positioning.txt |
Multinational companies typically operate with one of three brand structures: (a) a corporate-dominant, (b) a product-dominant, or (c) a hybrid structure. A corporate-dominant brand structure is most common among firms with relatively limited product or market diversity, such as Shell, Toyota, or Nike. Product-dominant structures, in contrast, are often used by (mostly industrial) companies, such as Akzo Nobel, that have multiple national or local brands or by firms such as Procter & Gamble (P&G) that have expanded internationally by leveraging their “power” brands. The most commonly used structure is a hybrid (think of Toyota Corolla cars or Cadbury Dairy Milk chocolate) consisting of a mix of global (corporate), regional, and national product-level brands or different structures for different product divisions.
In many companies, “global” branding evolves as the company enters new countries or expands product offerings within an existing country. Typically, expansion decisions are made incrementally, and often on a country-by-country, product-division, or product-line basis, without considering their implications on the overall balance or coherence of the global brand portfolio. As their global market presence evolves and becomes more closely interlinked, however, companies must pay closer attention to the coherence of their branding decisions across national markets and formulate an effective global brand strategy that transcends national boundaries. In addition, they must decide how to manage brands that span different geographic markets and product lines, who should have custody of international brands and who is responsible for coordinating their positioning in different national or regional markets, as well as making decisions about use of a given brand name on other products or services.
To make such decisions, companies must formulate a coherent set of principles to guide the effective use of brands in the global marketplace. These principles must define the company’s “brand architecture,” that is, provide a guide for deciding which brands should be emphasized at what levels in the organization, how brands are used and extended across product lines and countries, and the extent of brand coordination across national boundaries.
Minicase: Henkel's "Fox" Brands: An Example of a Hybril Strategy (Arnold (2007); Schroiff and Arnold (2004)).
Like many European companies, Henkel, the German consumer-brands corporation, has globalized mostly via acquisitions, and, consequently, it has a portfolio of localized brands with a national heritage and good local market shares. As the portfolio grew, escalating media costs, increased communication and stronger linkages across markets, and the globalization of distribution created pressures for parsimony in the number of the firm’s brands and the consolidation of architecture across countries and markets. Henkel executives understood very well that a focus on a limited number of global strategic brands can yield cost economies and potential synergies. At the same time, they also knew that they needed to develop procedures for managing the custody of these brands, and that these should be clearly understood and shared throughout all levels of the organization, thus promoting a culture focused on global growth. They knew that failing to do so would likely trigger territorial power struggles between corporate and local teams for control of the marketing agenda.
While many companies would have focused on deciding between sacrificing local brand equity to develop “global power brands” (aggregation) or continuing to sacrifice global marketing economies of scale by investing separately in its portfolio of local brands (adaptation), Henkel chose an ingenious middle path. Henkel’s choice serves as a model for globalization of marketing concepts without loss of local brand equity through the grouping of all its “value-for-money” brands under the umbrella “Fox” brand. In each country, Henkel retained the local brand name but identifies it with the Fox umbrella brand. (In most cultures, the fox is seen as clever, selfish, and cunning—the sort of character who would buy a value-for-money brand but not a brand so cheap that its quality might be compromised.)
By using a fox to represent smart and cunning shoppers, Henkel has created a “global power brand concept” that can travel to almost any culture to enrich a local brand—especially local brands that individually could not have been globalized. But the scale economies Henkel gains from this program are more managerial than economic in nature. Programs and ideas to promote the Fox brands, and the concept of value-for-money detergents, are managed centrally and offered as a menu to all local markets in which these brands participate. Thus, a manager experienced in managing one of the Fox families of brands in one market can be transferred to another market and rapidly reach effective levels of performance. Because each brand still requires local investment, financial economies of scale are more modest.
Compare Henkel’s success to the failures of its major competitors as they tried to fully globalize their brand portfolios. Years ago, P&G, for example, attempted to globalize its European laundry detergent operations. In 2000, the company renamed its popular “Fairy” laundry detergent in Germany “Dawn” to position the latter as a global brand. There was no change in the product’s formulation. But by the end of 2001, P&G’s market share of Dawn in Germany had fallen drastically. While Fairy had represented a familiar and trusted brand persona to German consumers, Dawn meant nothing. With the renaming, the bond between consumers and the brand was broken; not even changing the brand’s name back to Fairy could restore it.
This experience suggests that attempting to achieve global brand positioning by deleting local brands can be problematic. In fact, a strategy of acquisition, and the subsequent shedding, of local brands by multinationals may actually create fragmentation in consumer demand rather than be a globalizing force. Such a scenario is particularly plausible if one or more of the local brands have reached “icon” status. Icon brands do not necessarily have distinctive features, deliver good service, or represent innovative technology. Rather, they resonate deeply with consumers because they possess cultural brand equity. Most of these brands fall into lifestyle categories: food, apparel, alcohol, and automobiles. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/07%3A_Global_Branding/7.02%3A_Global_Brand_Structures.txt |
The kinds of issues a company must resolve as it tries to shape a coherent global branding strategy reflect its globalization history—how it has expanded internationally and how it has organized its international operations. At any given point, the structure of a brand portfolio reflects a company’s past management decisions as well as the competitive realities the brand faces in the marketplace. Some companies, such as P&G and Coca-Cola, expanded primarily by taking domestic “power” brands to international markets. As they seek to expand further, they must decide whether to further extend their power brands or to develop brands geared to specific regional or national preferences and how to integrate the latter into their overall brand strategy. Others, such as Nestlé and Unilever, grew primarily by acquisition. As a consequence, they relied mainly on country-centered strategies, building or acquiring a mix of national and international brands. Such companies must decide how far to move toward greater harmonization of brands across countries and how to do so. This issue is particularly relevant in markets outside the United States, which often are fragmented, have small-scale distribution, and lack the potential or size to warrant the use of heavy mass-media advertising needed to develop strong brands.
Specifically, a company’s international brand structure is shaped by three sets of factors: (a) firm-based characteristics, (b) product-market characteristics, and (c) underlying market dynamics. (Douglas, Craig, and Nijssen (2001)).
Firm-Based Characteristics
Firm-based characteristics reflect the full array of past management decisions. First, a company’s administrative heritage—in particular, its organizational structure—defines the template for its brand structure. Second, a firm’s international expansion strategy—acquisition or organic growth—affects how its brand structure evolves over time. What is more, the use of strategic alliances to broaden the geographic scope of the firm’s operations often results in a “melding” of the brand strategies of the partners. Third and fourth, the importance of corporate identity and the diversity of the firm’s product lines and product divisions also determine the range and number of brands.
An appreciation of a company’s administrative heritage is critical to understanding its global brand structure.Bartlett and Ghoshal (1989). A firm that has historically operated on a highly decentralized basis, in which country managers have substantial autonomy and control over strategy as well as day-to-day operations, is likely to have a substantial number of local brands. In some cases, the same product may be sold under different brand names in different countries. In others, a product may be sold under the same brand name but have a different positioning or formulation in different countries.
Firms with a centralized organizational structure and global product divisions, such as Panasonic or Siemens, are more likely to have global brands. Both adopted a corporate branding strategy that emphasizes quality and reliability. Product lines are typically standardized worldwide, with minor variations in styling and features for local country markets.
Firms that expand internationally by acquiring local companies, even when the primary goal is to gain access to distribution channels, often acquire local brands. If these brands have high local recognition or a strong customer or distributor franchise, the company will normally retain the brand. This is particularly likely if the brand does not occupy a similar positioning to that of another brand currently owned by the firm. Nestlé and Unilever are examples of companies following this type of expansion strategy.
Expansion is often accompanied by diversification. Between 1960 and 1990, Nestlé expanded by acquiring a number of companies in a range of different product-markets, mostly in the food and beverage segment. These acquisitions included well-known global brands such as Perrier and San Pellegrino (mineral water), confectionery companies such as Rowntree and Perugina, pet food companies and brands such as Spillers and Alpo, and grocery companies such as Buitoni, Crosse & Blackwell, and Herta. The resulting proliferation of brands created the need to consolidate and integrate company-branding structures.Douglas, Craig, and Nijssen (2001), p. 101.
Firms that have expanded predominantly by extending strong domestic, so-called power brands into international markets primarily use product-level brand strategies. P&G, for instance, has rolled out several of its personal products brands, such as Camay and Pampers, into international markets. This strategy appears most effective when customer interests and desired product attributes are similar worldwide and brand image is an important cue for the consumer.
The relative importance placed by the firm on its corporate identity also influences brand structure. Companies such as General Electric (GE) and Apple place considerable emphasis on corporate identity in the communications strategies. In the case of GE, “Imagination at Work” is associated with a corporate reputation dedicated to turning innovative ideas into leading products and services that help alleviate some of the world’s toughest problems. Equally, Apple uses its apple logo to project the image of a vibrant innovator in the personal computer market. Increasingly, companies use their corporate identity as a means of reassuring customers and distributors that the company is reliable and stands behind its products. As a result, even companies with highly diverse product lines—such as Samsung—rely on the corporate brand name (and its logo) to project an image of reliability.
A fourth determinant of a company’s brand structure is the diversity, or, conversely, the interrelatedness of the product businesses in which the firm is involved. Firms that are involved in closely related product lines or businesses that share a common technology or rely on similar core competencies often emphasize corporate brands. 3M Corporation, for example, is involved in a wide array of product businesses worldwide, ranging from displays and optics to health care products to cleaners to abrasives and adhesives. All rely heavily on engineering skills and have a reputation of being cutting-edge. The use of the 3M brand provides reassurance and reinforces the firm’s reputation for competency and reliable products worldwide.
Minicase: Pharmaceutical Companies Try Global Branding
In Paris, stomach ulcers are treated with Mopral; in Chicago, it is called Prilosec. These two products are, in fact, exactly the same drug. Prilosec is the U.S. brand of AstraZeneca’s omeprazole; Mopral is its French counterpart. Unlike manufacturers of consumer goods, the pharmaceutical industry traditionally has been wary of creating big, international brands. But that is about to change. Take a look at pharmacists’ shelves. Viagra is there. So are Celebrex for arthritis pain, the antidiabetic agent Avandia, and the anticoagulant Plavix.
It is perhaps surprising that companies did not consider global branding sooner because a drug works for everybody in the same way in every country. While the industry has become global from a technological and geopolitical perspective, few companies have mastered globally integrated marketing practices. But change is coming—and fast. As more people travel internationally and the Internet makes information—including drug advice—readily available for doctors and patients, companies want to avoid any brand inconsistencies while maximizing exposure. Another globalizing force is growing standardization of the regulatory environment. With the establishment of the European Medical Evaluations Agency, for example, which approves drugs for all the members of the European Union, the borders are coming down. Japan has also adapted its approval system to facilitate the entry of Western products.
And then there is direct-to-consumer (DTC) advertising. While doctors and health care professionals remained the targets for pharmaceutical marketing, consumer-style branding was unnecessary. But companies are preparing for the spread of DTC beyond the shores of the United States. The introduction of global branding anticipates the transition to a more consumer-driven market.
Pressure to cut or contain costs is perhaps the most powerful driver behind the industry’s move to global branding. Mega mergers were a way to contain the costs of research and development and find pipeline products, yet the big companies still need about five new blockbuster products each year to return the promised growth. Global branding promises reduced marketing costs and much faster and higher product rollout.
Local market conditions, such as reimbursement policies, however, may still override the benefits of global strategies and therefore inhibit the globalization of brands. Local flexibility will be key to success. Significant cost savings may therefore be slow in coming. Even with a centralized, global brand, most companies will still likely use local agencies for their marketing campaigns.
Product-Market Factors
Three product-market factors play an important role in brand architecture: the nature and scope of the target market, the product’s cultural associations, and the competitive market structure. (Douglas, Craig, and Nijssen (2001), p. 103.)
When companies target a global market segment with relatively homogeneous needs and preferences worldwide, global brands provide an effective means of establishing a distinctive global identity. Luxury brands such as Godiva, Moet and Chandon, and Louis Vuitton, as well as brands such as deBeers, Benetton, and L’Oreal are all targeted to the same market segment worldwide and benefit from the cachet provided by their appeal to a global consumer group. Sometimes it is more effective to segment international markets by region and target regional segments with similar interests and purchase behavior, such as Euro-consumers. This provides cost efficiencies when such segments are readily accessible through targeted regional media and distribution channels.
A critical factor influencing brand structure is the extent to which the product is associated with a particular culture, that is, the extent to which there are strong and deeply ingrained local preferences for specific products or product variants (think of beer) or the products are an integral part of a culture (think of bratwurst, soccer teams). The stronger the cultural association, the less likely it is that global product brands will thrive; instead, local branding may be called for.
A third product-market driver of a company’s brand structure is the product’s competitive market structure, defined as the relative strength of local (national) versus global competitors in a given product market. If markets are fully integrated and the same competitors compete in these markets worldwide, as in aerospace, the use of global brands helps provide competitive differentiation on a global basis. If strong local, national, or regional competitors, as well as global competitors, are present in a given national or regional market, the use of a multitier branding structure, including global corporate or product brands as well as local brands, is desirable. Coca-Cola, for example, beyond promoting its power brands, has introduced several local and regional brands that cater to specific market tastes around the world.
Minicase: Use of Country of Origin Effects in Global Branding (Silverstein (2008, November 24)).
Whether you prefer obscure imports or something mainstream, most beer brands like to invoke their country of origin. Guinness comes from Ireland, Corona is Mexican, Heineken and Amstel are Dutch, and Budweiser is a truly American brand.
The use of “country of origin effects” is an essential part of beer branding. Using the country of origin as part of the brand equity is free, so companies can avoid having to build an image from scratch over decades. For a long time, Foster’s used a kangaroo in its advertisements, while Lapin Kulta, from Lapland in Finland, relies heavily on its unusual provenance in its marketing. Images of Finland’s stark landscapes adorn communications material and bottle labels.
Swiss watchmakers certainly know the value of their “Swiss made” brand. The Federation of the Swiss Watch Industry actively polices all uses of the term and has strict guidelines on how it may be used on clocks and watches. In a similar vein, the French leverage their reputation for good wine, cooking, and fashion and the Italians view themselves as the masters of style.
German companies have been particularly effective in leveraging country effects. Of Interbrand’s Top 100 Global Brands in 2008, 10 were German brands—five automobile brands (BMW, Porche, Mercedes-Benz, Volkswagen, and Audi), while brands in technology (SAP and Siemens), clothing (Adidas), financial services (Allianz), and cosmetics (Nivea) were also represented. Together, this group of German brands is valued at over \$98 billion. Germany was second only to the United States in the number of brands making the Top 100 list.
It should come as no surprise, then, that Germany itself was ranked the best overall “country brand” in the 2008 Anholt-GfK Roper Nation Brands Index, which measures the world’s perception of each nation as if it were a public brand. Fifty nations were measured in the study. The United States, the world’s leading branding powerhouse, ranked seventh. So what is it about German brands, and the country that produces them, that is so special? Two words might be all the explanation that’s required: discipline and quality.
German companies are highly disciplined in their approach to creating, introducing, and selling brands. They have the ability to consistently produce exceptional-quality products that are of lasting value. “German engineering” is a term closely associated with the country’s automobile industry, which has seen a level of global success second only to the Japanese automakers. In fact, between 1990 and 2000, Mercedes-Benz and BMW more than doubled their sales in the United States alone.
Why do customers like German brands? German companies are widely admired for their intense focus on product quality and service, thought to be less interested in competing on price and strict about adhering to safety and other government standards.
BMW, a maker of premium automobiles, is one such revered brand. Founded in 1917 in Munich, Germany, as “Bavarian Motor Works,” BMW produced aircraft engines during World War I, then built motorcycles in 1923 and went on to make cars in 1928. In recent years, BMW has been recognized as much for its innovative, quality marketing as for its high-performance cars.
But Germany’s branding power extends well beyond automobiles. NIVEA, whose name comes from the Latin for “snow white,” was created in late 1911. From its origins as a simple cream, NIVEA has now grown into a global manufacturer of a broad range of cosmetic and personal care products. NIVEA was voted the most trusted skin-care brand in 15 countries in the Reader’s Digest survey of European Trusted Brands 2007.
Adidas, named after its founder Adolf (Adi) Dassler (Das), is an 80-year-old company that today is a global leader in sports footwear, apparel, and accessories. In 1996, Adidas equipped 6,000 Olympic athletes from 33 countries with its athletic gear. “Adidas athletes” won 220 medals, including 70 gold, and apparel sales increased 50%.
SAP, founded in 1972, is the world’s largest business software company and the third-largest software supplier overall. The company employs almost 52,000 people and serves more than 76,000 customers in over 120 countries.
Other well-known global brands, from Bayer (pharmaceuticals) to Becks (beer) to Boss (clothing) to Braun (consumer products), are a testament to the fact that Germany is, and will continue to be, a prolific producer of some of the world’s finest products. It is Germany’s disciplined approach to quality that inspires consumer loyalty to German brands.
Market Dynamics
Finally, while the firm’s history and the product markets in which it operates shape its brand structure, market dynamics—including ongoing political and economic integration, the emergence of a global market infrastructure, and consumer mobility—shape and continually change the context in which this evolves.Douglas, Craig, and Nijssen (2001), p. 104.
Increasing political and economic integration in many parts of the world has been a key factor behind the growth of international branding. As governments remove tariff and nontariff barriers to business transactions and trade with other countries, and as people and information move easily across borders, the business climate has become more favorable to the marketing of international brands. Firms are less frequently required to modify products to meet local requirements or to develop specific variants for local markets and increasingly can market standardized products with the same brand name in multiple country markets. In many cases, harmonization of product regulation across borders has further facilitated this trend.
The growth of a global market infrastructure is also a major catalyst to the spread of international brands. Global and regional media provide economical and effective vehicles for advertising international brands. At the same time, global media help lay the groundwork for consumer acceptance of, and interest in, international brands by developing awareness of these brands and the lifestyles with which they are associated in other countries. In many cases, this stimulates a desire for the brands that consumers perceive as symbolic of a coveted lifestyle.
The globalization of retailing has further facilitated and stimulated the development of international manufacturer brands. As retailers move across borders, they provide an effective channel for international brands and, at the same time, increase their power. This forces manufacturers to develop strong brands with an international appeal so that they can negotiate their shelf position more effectively and ensure placement of new products.
A final factor shaping the context for international branding is increased consumer mobility. While global media provide passive exposure to brands, increasing international travel and movement of customers across national boundaries provides active exposure to brands in different countries. Awareness of the availability and high visibility of an international brand in multiple countries enhances its value to consumers and provides reassurance of its strength and reliability. Increased exposure to, and familiarity with, new and diverse products and the lifestyles and cultures in which they are embedded also generate greater receptivity to products of foreign origin or those perceived as international rather than domestic. All these factors help create a climate more favorable to international brands. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/07%3A_Global_Branding/7.03%3A_Determinants_of_Global_Brand_Structure.txt |
To create an effective global brand structure capable of spanning operations in different countries and product lines, companies must clearly define the importance and role of each level of branding (corporate, product division, or product brand level), as well as the interrelation or overlap of branding at each level. They should also determine the appropriate geographic scope for each level relative to the firm’s current organizational structure. To be effective, such “architecture” should satisfy three key principles: parsimony, consistency, and connectivity.
Parsimony requires that the brand architecture should incorporate all existing brands, whether developed internally or acquired, and provide a framework for consolidation to reduce the number of brands and strengthen the role of individual brands. Brands that are acquired need to be melded into the existing structure, especially when these brands occupy similar market positions to those of existing brands. When the same or similar products are sold under different brand names or are positioned differently in each country, ways to harmonize these should be examined.
A second important element of brand architecture is its consistency relative to the number and diversity of products and product lines within the company. A balance needs to be struck between the extent to which brand names differentiate product lines or establish a common identity across different products. Development of strong and distinctive brand images for different product lines helps establish their separate identities. Conversely, use of a common brand name consolidates effort and can produce synergies.
The value of corporate brand endorsement across different products and product lines and at lower levels of the brand hierarchy—a brand’s connectivity—also needs to be assessed. The use of corporate brand endorsement as either a name identifier or logo connects the different product brands to the company and helps provide reassurance to customers, distributors, and other value-chain partners. Implemented well, corporate brand endorsement can integrate and unify different brand identities across national boundaries. At the same time, corporate endorsement of a highly diverse range of product lines can result in dilution of image. Worse, if one product brand is “damaged,” corporate endorsement can spread the resulting negative effects or associations to other brands in the portfolio and create lasting effects across multiple product lines. Thus, both aspects need to be weighed in determining the role of corporate brand endorsement in brand architecture.
7.05: Managing Key Strategic Brands
Companies must also think about how to globally manage and monitor key strategic brands to ensure that they build and retain their integrity, visibility, and value. This entails assigning brand custody or appointing a brand champion responsible for approving brand extensions and monitoring brand positioning.
One option is to negotiate the harmonization of specific brand positions between corporate headquarters and country managers. This is appropriate for firms with strong country management that operate in product markets where brands were historically tailored to local market characteristics.
A more proactive and increasingly popular solution is to appoint a brand champion responsibility for building and managing a brand worldwide. This includes monitoring the consistency of the brand positioning in international markets as well as authorizing use of the brand (brand extensions) on other products or other product businesses. The brand champion can be a senior manager at corporate headquarters, a country manager, or a product development group. It is critical that the brand champion report directly to top management and have clear authority to sanction or refuse brand extensions to other product lines and product businesses so as to maintain the integrity of the brand and avoid brand dilution.
A third option is to centralize control of brands within a global product division. This approach is likely to be most effective when the business is targeted to a specific global market segment, with new products or brands, when there is greater consistency in market characteristics across countries, and when the company’s administrative heritage has only a limited history of strong country management.
Benefits of Corporate Branding
Corporations around the world are increasingly becoming aware of the enhanced value that corporate branding strategies can provide. (Holt, Quelch, and Taylor (2004, September)). A strong corporate branding strategy can add significant value in terms of helping the entire corporation and the management team with implementing its long-term vision, creating unique positions in the marketplace for the company and its brands, and signaling a commitment to a broader set of stakeholder issues. An effective corporate branding strategy therefore enables the company to leverage its tangible and nontangible assets and promote excellence throughout the corporation. To be effective and meet such objectives, corporate branding requires a high level of personal attention and commitment from the CEO and the senior management. Examples of effective corporate brands include Microsoft, Intel, Singapore Airlines, Disney, CNN, Samsung, and Mercedes. In recent years, the global financial powerhouses HSBC and Citibank have both acquired a vast number of companies across the globe and have fully adopted them under their international corporate brands with great success and within a relatively short time frame. All these companies understand that a well-executed corporate branding strategy can confer significant benefits.
Corporate Brand as the “Face of the Company”
A strong corporate brand acts as the face of the company, portraying what it wants to do and what it wants to be known for in the marketplace. In other words, the corporate brand is the umbrella for the corporation’s activities and encapsulates its vision, values, personality, positioning, and image, among many other dimensions. Think of HSBC. It employs the same slogan—“The world’s local bank”—around the world. This creative platform enables the corporation to portray itself as a bridge between cultures.
Simplicity
An effective corporate branding strategy creates simplicity by making the top of the brand portfolio the ultimate identifier of the corporation. P&G is widely known for its multibrand strategy. Yet, the corporate name P&G encapsulates all of its activities. Depending on the business strategy and the potential need for multiple brands, a corporate brand can assist management focus on the company’s core vision and values. Once established, it facilitates revisiting the definition of other brands in the corporations’ portfolio and the creation of new brand identities.
Cost Savings
A corporate branding strategy is often more cost-efficient than a multibrand architecture. Specifically, corporate branding produces efficiencies in terms of marketing and advertising spending as the corporate brand replaces budgets for individual product marketing efforts. Even a combined corporate and product branding strategy can often enable management to reduce costs and exploit synergies from a new and more focused brand architecture. The Apple brand has established a very strong position of being a design-driven and innovative company offering many types of products and services. Their corporate brand encapsulates the body and soul of the company, and the main messages from the company use the corporate Apple brand. Various sub-brands then help to identify the individual product lines.
Corporate Brands as Assets
In recent years, corporate brands themselves have become valuable assets on the company balance sheet, with market values very often much beyond book value.
Minicase: The Best Global Brands (www.Interbrand.com/(2009))
Interbrand, a leading international brand consultancy specializing in brand services and activities, has developed a method for valuing (global) brands. It examines brands through the lens of financial strength, the importance of the brand in driving consumer selection, and the likelihood of ongoing revenue generated by the brand.
Each year, Interbrand compiles a list of global brands for analysis based on five criteria:
1. There must be substantial publicly available financial data for the brand.
2. One-third of the brand’s revenues must come from outside its country of origin.
3. The brand must be positioned to play a significant role in the consumers’ purchase decision.
4. The Economic Value Added (EVA) must be positive, showing that there is revenue above the company’s operating and financing costs.
5. The brand must have a broad public profile and awareness.
The use of these criteria excludes a number of brands one might expect to be included. The Mars and BBC brands, for example, are privately held and do not have financial data publicly available. Wal-Mart, although it does business in international markets, does not do so under the Wal-Mart brand and is therefore not sufficiently global. Certain industry sectors are also not included in Interbrand’s study. An example is provided by telecommunication brands, which tend to have strong national roots and have faced awareness challenges due to numerous mergers and acquisitions. The major pharmaceutical companies, while very valuable businesses, are also excluded since their consumers tend to build a relationship with the product brands rather than the corporate brand.
For brands that meet the Interbrand criteria, the company next looks at the current financial health of the business and brand, the brand’s role in creating demand, and the future strength of the brand as an asset to the business.
Financial Analysis
Interbrand’s model first forecasts the current and future revenue specifically attributable to the branded products. It subtracts operating costs from this revenue to calculate branded operating profit. Next, a charge is applied to the branded profit that is based on the capital a business spends versus the money it makes. This yields an estimate of a business’s economic earnings. All financial analysis is based on publicly available company information.
Role of Brand Analysis
Brand analysis involves a measurement of how a brand influences customer demand at the point of purchase. It is applied to the economic earnings in order to arrive at the revenue that the brand alone generates (branded earnings). Interbrand uses in-house market research to establish individual brand scores against industry benchmarks to define the role a brand plays within the category. For example, role of brand is traditionally much higher in the luxury category than in the energy and utilities sector. The brand, not the business, is the principal reason consumers choose these goods and services.
Brand Strength Score
As brands are assets, valuing them requires an assessment of their ability to secure future earnings on behalf of the businesses that own them. Brand strength is a measure of the brand’s ability to secure demand, and therefore earnings, over time. Securing customer demand typically means achieving loyalty, advocacy, and favorable levels of customer trial, as well as maintaining a price premium. Interbrand’s methodology generates a discount factor that adjusts the forecasted brand earnings for their riskiness based on the level of demand the brand is able to secure. Brand strength is calculated by assessing the brand’s performance against a set of seven critical factors, including measures of relevance, leadership, market position, customer franchise, diversification, and brand support.
Brand Value
A brand’s value is a financial representation of a business’s earnings due to the superior demand created for its products and services through the strength of its brand. Brand value is the absolute financial worth of the brand as it stands today. Accordingly, the brand’s value can be compared to the total value of the business as it would be assessed on the stock exchange.
The winner and number 1 global brand on Interbrand’s 2009 list, once again, is Coca-Cola, which has topped the list for more than 20 years. IBM is number 2, Microsoft ranks third, GE comes in fourth, and Nokia has moved up to fifth position. Rounding out the top 10 are McDonald’s (6), Google (7), Toyota (8), Intel (9), and Disney (10).
Interestingly, not one of the 100 Best Global Brands emanates from the developing world, at least for now. But Interbrand’s research suggests this may soon change. With their huge populations, there is a decided shift in economic power to countries like China, India, Russia, Brazil, and Africa, and former global giants are making way for new leaders from fast developing markets.
The following brands are strong leaders in their home markets and already show some early signs of globalization:
• China: Lenovo (PCs), Haier (refrigerators, Tsingtao (beer)
• India: Tata (communications and information technology, engineering, materials, services, energy, consumer products, and chemicals), Reliance (energy and materials), ArcelorMittal (steel)
• Russia: Kaspersky Lab (information security to computer users, Aeroflot (airline), Gazprom (gas)
• South Africa: MTN (communications), Anglo American (mining), SABMiller (beer and soft drinks).
• Brazil: Banco Itaú (finance), Vale (mining), Natura Cosmético (cosmetics)
7.06: Points to Remember
1. As companies expand globally, a brand like Coke or Nike can be the greatest asset a firm has, but it can also quickly lose its power if it comes to signify something different in every market.
2. Successfully leveraging a brand’s power globally requires that marketers consider aggregation, adaptation, and arbitrage strategies all at the same time.
3. Multinational companies typically operate with one of three brand structures: a corporate-dominant, a product-dominant, or a hybrid structure.
4. A company’s international brand structure is shaped by three sets of factors: firm-based characteristics, product-market characteristics, and underlying market dynamics.
5. An effective global brand structure reflects parsimony, consistency, and connectivity.
6. Companies must also think about how to globally manage and monitor key strategic brands to ensure that they build and retain their integrity, visibility, and value.
7. A strong corporate branding strategy can add significant value in terms of helping the entire corporation and the management team with implementing its long-term vision, creating unique positions in the marketplace for the company and its brands, and signaling a commitment to a broader set of stakeholder issues.
8. The number 1 global brand on Interbrand’s 2009 list is Coca-Cola, which has topped the list for more than 20 years. Next on the list are IBM, Microsoft, GE, and Nokia. McDonald’s, Google, Toyota, Intel, and Disney round out the top 10. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/07%3A_Global_Branding/7.04%3A_Formulating_a_Global_Brand_Strategy.txt |
Globalizing a company’s value creation infrastructure—from the sourcing of raw materials and components, to manufacturing and research and development (R&D), to distribution and customer service—has three primary dimensions: (a) deciding which activities to perform in-house and which ones to outsource, and to whom and where; (b) developing the right partnerships to support a company’s globalization efforts; and (c) implementing a suitable supply-chain management model for integrating them into a cost-effective, seamless value-creating network. This chapter looks at the first two dimensions; the third—supply-chain management—is the subject of the next chapter.
08: Globalizing the Value Chain Infrastructure
Core competencies represent unique capabilities that allow a company to build a competitive advantage. 3M has developed a core competency in coatings. Canon has core competencies in optics, imaging, and microprocessor controls. Procter & Gamble’s marketing prowess allows it to adapt more quickly than its rivals to changing opportunities. The development of core competencies has become a key element in building a long-term strategic advantage. An evaluation of strategic resources and capabilities must therefore include assessments of the core competencies a company has or is developing, how they are nurtured, and how they can be leveraged.
Core competencies evolve as a firm develops its business model and incorporates its intellectual assets. Core competencies are not just things a company does particularly well; rather, they are sets of skills or systems that create a uniquely high value for customers at best-in-class levels. To qualify, such skills or systems should contribute to perceived customer benefits, be difficult for competitors to imitate, and allow for leverage across markets. Honda’s use of small engine technology in a variety of products—including motorcycles, jet skis, and lawn mowers—is a good example.
Core competencies should be focused on creating value and should be adapted as customer requirements change. Targeting a carefully selected set of core competencies also benefits innovation. Charles Schwab, for example, successfully leveraged its core competency in brokerage services by expanding its client communication methods to include Internet, telephone, offices, and financial advisors.
Hamel and Prahalad suggest three tests for identifying core competencies. First, core competencies should provide access to a broad array of markets. Second, they should help differentiate core products and services. Third, core competencies should be hard to imitate because they represent multiple skills, technologies, and organizational elements.Prahalad and Hamel (1990, May/June).
Experience shows that only a few companies have the resources to develop more than a handful of core competencies. Picking the right ones, therefore, is the key. A key question to ask is, which resources or capabilities should be kept in-house and developed into core competencies and which ones should be outsourced? Pharmaceutical companies, for example, increasingly outsource clinical testing in an effort to focus their resource base on drug development. Generally, the development of core competencies should focus on long-term platforms capable of adapting to new market circumstances; on unique sources of leverage in the value chain in which the firm thinks it can dominate; on elements that are important to customers in the long run; and on key skills and knowledge, not on products. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/08%3A_Globalizing_the_Value_Chain_Infrastructure/8.01%3A_Core_Competencies.txt |
Few companies, especially ones with a global presence, are self-sufficient in all of the activities that make up their value chain. Growing global competitive pressures force companies to focus on those activities they judge as critical to their success and excel at—core capabilities in which they have a distinct competitive advantage—and that can be leveraged across geographies and lines of business. Which activities should be kept in house and which ones can effectively be outsourced depends on a host of factors, most prominently the nature of the company’s core strategy and dominant value discipline. (Special report on outsourcing (2006, January)).
In principle, every functional or value-adding activity, from research to manufacturing to customer service, is a candidate for outsourcing. It is hard to imagine, however, that operationally excellent companies would consider outsourcing activities that are critical to the efficacy of their supply chain. Similarly, companies operating with a customer-intimate business model should be reluctant to outsource customer-service-related functions, while product leaders should nurture their capacity to innovate. That is why Toyota made continuous investments in its production system as it globalized its operations, Procter & Gamble focused on strengthening its world-class innovation and marketing capabilities as it expanded abroad, and Wal-Mart continued to refine its supply-chain management capabilities.
Firms tend to concentrate their investments in global value chain activities that contribute directly to their competitive advantage and, at the same time, help the company retain the right amount of strategic flexibility. Making such decisions is a formidable challenge—capabilities that may seem unrelated at first glance can turn out to be critical for creating an essential advantage when they are combined. As an example, consider the case of a leading consumer packaged-goods company that created strong embedded capabilities in sales. Its smaller brands showed up on retailers’ shelves far more regularly than comparable brands from competitors. It was also known for the efficacy of its short-term R&D in rapidly bringing product variations to market. These capabilities are worth investing in separately, but, together, they add up to a substantial advantage over competitors, especially in introducing new products.
Outsourcing and offshoring of component manufacturing and support services can offer compelling strategic and financial advantages including lower costs, greater flexibility, enhanced expertise, greater discipline, and the freedom to focus on core business activities.
Lower Costs
Savings may result from lower inherent, structural, systemic, or realized costs. A detailed analysis of each of these cost categories can identify the potential sources of advantage. For example, larger suppliers may capture greater scale benefits than the internal organization. The risk is that efficiency gains lead to lower quality or reliability. Offshoring typically offers significant infrastructure and labor cost advantages over traditional outsourcing. In addition, many offshoring providers have established very large-scale operations that are not economically possible for domestic providers.
Greater Flexibility
Using an outside supplier can sometimes add flexibility to a company such that it can rapidly adjust the scale and scope of production at low cost. As we have learned from the Japanese keiretsu and Korean chaebol conglomerates, networks of organizations can often adjust to demand more easily than fully integrated organizations.
Enhanced Expertise
Some suppliers may have proprietary access to technology or other intellectual property advantages that a firm cannot access by itself. This technology may improve operational reliability, productivity, efficiency, or long-term total costs and production. The significant scale of today’s offshore manufacturers, in particular, allows them to invest in technology that may be cost prohibitive for domestic providers.
Greater Discipline
Separation of purchasers and providers can assist with transparency and accountability in identifying true costs and benefits of certain activities. This can enable transactions under market-based contracts where the focus is on output rather than input. At the same time, competition among suppliers creates choice for purchasers and encourages the adoption of innovative work practices.
Focus on Core Activities
The ability to focus frees up resources internally to concentrate on those activities at which the company has distinctive capability and scale, experience, or differentiation to yield economic benefits. In other words, focus allows a company to concentrate on creating relative advantage to maximize total value and allows others to produce supportive goods and services.
While outsourcing is largely about scale and the ability to provide services at a more competitive cost, offshoring is primarily driven by the dramatic wage-cost differentials that exist between developed and developing nations. However, cost should not be the only consideration in making offshoring decisions; other relevant factors include the quality and reliability of labor continuous process improvements, environment, and infrastructure. Political stability and broad economic and legal frameworks should also be taken into account. In reality, even very significant labor cost differentials between countries cannot be the sole driver of offshoring decisions. Companies need to be assured of quality and reliability in the services they are outsourcing. This is the same whether services are outsourced domestically or offshore. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/08%3A_Globalizing_the_Value_Chain_Infrastructure/8.02%3A_To_Outsource_or_Not_to_Outsource.txt |
In the last 20 years companies have outsourced many activities, including manufacturing, back-office functions, information technology (IT) services, and customer support. Now the focus is shifting to more knowledge-intensive areas, such as product development, R&D, engineering, and analytical services.Myers and Cheung (2008, Summer). For example, as noted above, pharmaceutical companies depend on a steady pipeline of new products from R&D. The competitive pressures on these firms to bring out new products at an ever rapid pace to meet market needs are increasing. With it, the pressures on the R&D function are increasing. In order to alleviate the pressure, firms have to either increase R&D budgets or find ways to utilize the resources in a more productive way. There are situations when a firm should consider outsourcing some of its R&D work to contract research organizations or universities, for example, when (a) in-house new product design is ineffective or too slow, (b) the company is plagued by consistent project time and cost overruns, (c) loss of key talent has slowed new product development, (d) there is a need for an immediate competitive response, or (e) when problems of quality or yield reduce R&D effectiveness.
The growth in knowledge-based outsourcing is mainly driven by cost imperatives, but, increasingly, shortages of talent in home markets and the growing availability of skills in nations such as India, China, and Russia play a role. A second driver behind the growth in knowledge-based outsourcing is the increasing “commoditization” of standard business processes and IT services, depressing margins on such activities for outsourcers. This has further encouraged service providers to switch to other activities for which profits are potentially greater—including “innovation services” such as new product development (NPD), R&D, and engineering. According to Booz & Company, there has been 95% growth in the provision of such capabilities since the millennium.Bliss, Muelleer, Pfitzmann, and Shorter (2007). At the same time, providers of standardized services have come to recognize that they need to focus on efficiency and more seamless client integration if they are to continue making sufficient returns. By contrast, innovation services, including everything from prototype design to credit analysis, are more complex and client-specific, and therefore are more likely to command a premium.
For companies considering knowledge-based outsourcing, the lack of standardization means that partner vetting is critical and that outsourcers need to consider investing in captive or near-captive operations that can be sufficiently customized. That may mean turning to smaller providers—that is, those with fewer than 500 employees—that are better able to meet exacting requirements. The process of contracting with multiple, small service providers in different parts of the world is challenging. Many companies are still struggling to integrate more standardized processes with their existing core operations. Outsourcing knowledge-intensive activities will involve a whole new level of managerial complexity, potentially upending fundamental notions of how companies see themselves and what they do. Outsourcing vital activities such as prototype design and engineering support will be fraught with risk, with potentially significant downsides. However, organizations will have little choice: the need to identify talent outside the home territory will force them to work with partners overseas, whatever the pitfalls.
Companies that successfully manage knowledge-based outsourcing are looking to create collaborative management models that share responsibilities, risks, and rewards, enabling both sides to reach their objectives. This “comanagement” approach involves outsourcers treating contractors as valued collaborators even in cases where competitors are employing the same company. It will also necessitate joint investment in offshore staff development, helping providers to retain talent and maintain their revenue margins.
Increased use of knowledge-based offshoring could have significant ramifications on how companies are organized. Rather than multinational organizations with business units staffed by expatriate managers and orchestrated from a central headquarters, the organization of the future will be more globally distributed, with managers seeking out talent wherever it is located and plugging in capabilities when needed. Unlike the outsourcing of the past, knowledge-based offshoring is not simply about labor arbitrage; it is about transforming companies into more nimble, flexible entities.
Minicase: Outsourcing of R&D in the Pharmceutical Industry (Special report on outsourcing (2006, January)).
To cut costs and speed development, Eli Lilly outsources a substantial portion of its R&D—including clinical trials—to countries such as India and China. Lilly is not the only pharmaceutical company that has relocated R&D operations to the developing world; Pfizer tests drugs in Russia, and AstraZeneca conducts clinical trials in China. The main driver is rising development costs, estimated at some \$1.1 billion per drug—including expenses on all the products that do not make it to the market—and expected to increase to \$1.5 billion by 2010.
More recently, Lilly and other drug makers have begun to expand their R&D efforts in India and China to include clinical trials. These are the late-stage experiments to prove a drug can be used on humans. These tests are enormously expensive; Lilly estimates that each Phase III test costs at least \$50 million a year. To reduce costs, Lilly plans to move 20% to 30% of this testing in the next few years. While cost reduction is the main reason for the migration, this migration is made possible by the investments these nations have made in the necessary research labs, hospitals, and professional staffs to conduct studies that meet the stringent regulations of the U.S. Food & Drug Administration or drug regulators in the European Union.
While these outsourcing initiatives are extremely successful, it is unlikely that Lilly will move its entire R&D portfolio abroad. It will likely keep a number of centers of excellence in the United States, renowned for their path-breaking research in cancer and heart disease, to maintain its leadership in these areas and to keep a research presence in the country. Another reason that prevents pharmaceutical companies from outsourcing all of its research is that they may not be able to sell their newest products in countries like India and China because patients cannot afford them or because of worries about patent protection. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/08%3A_Globalizing_the_Value_Chain_Infrastructure/8.03%3A_The_Growth_in_Knowledge-Based_Outsourcing.txt |
Outsourcing can have significant benefits but is not without risk.Raiborn, Butler, and Massoud (2009) Some risks, such as potentially higher offshoring costs due to the eroding value of the U.S. dollar, can be anticipated and addressed through contracts by employing financial-hedging strategies. Others, however, are harder to anticipate or deal with.
As a general principle, functions that have the potential to ‘‘interrupt’’ the flow of product or service between a company and its customers are the riskiest to outsource. For example, delegating control of the distribution process to an online retailer can result in customers not receiving goods promptly; outsourcing call-center responsibilities can result in customers being dissatisfied with the product or service and, thus, in higher product returns, lower repurchases, or complaints that could endanger the company’s reputation.
The second riskiest type of activity to outsource is one that affects the relationship between a company and its employees. Outsourcing the human resources function, for example, can affect employee-hiring quality; outsourcing payroll and benefits processing can result in information breaches that generate identity theft issues and resultant legal issues; or outsourcing software design can generate a decline in organizational innovation. By contrast, support functions such as accounts payable and maintenance are less risky to outsource because they have few direct links to customers or internal organizational processes.
More formally, risks associated with outsourcing typically fall into four general categories: loss of control, loss of innovation, loss of organizational trust, and higher-than-expected transaction costs.
Loss of Control
Managers often complain about loss of control over their own process technologies and quality standards when specific processes or services are outsourced. The consequences can be severe. When tasks previously performed by company personnel are given to outsiders, over whom the firm has little or no control, quality may suffer, production schedules may be disrupted, or contractual disagreements may develop. If outsourcing contracts inappropriately or incorrectly detail work specifications, outsourcers may be tempted to behave opportunistically—for example, by using subcontractors or by charging unforeseen or unwarranted price increases to exploit the company’s dependency. Control issues can also be exacerbated by geographic distance, particularly when the vendor is offshore. Monitoring performance and productivity can be challenging, and coordination and communication maybe difficult with offshore vendors. The inability to engage in face-to-face discussions, brainstorm, or explore nuances of obstacles could cripple a project’s flow. Distance, too, can increase the likelihood of outages disabling the communication infrastructure between the vendor and the outsourcing firm. Depending on where the outsourced work is performed, there can be critical cultural or language-related differences between the outsourcing company and the vendor. Such differences can have important customer implications. For example, if customer call centers are outsourced, the manner in which an agent answers, interprets, and reacts to customer telephone calls (especially complaints) may be affected by local culture and language.
Loss of Innovation
Companies pursuing innovation strategies recognize the need to recruit and hire highly qualified individuals, provide them with a long-term focus and minimal control, and appraise their performance for positive long-run impact. When certain support services—such as IT, software development, or materials management—are outsourced, innovation may be impaired. Moreover, when external providers are hired for the purposes of cutting costs, gaining labor pool flexibility, or adjusting to market fluctuations, long-standing cooperative work patterns are interrupted, which may adversely affect the company’s corporate culture.
Loss of Organizational Trust
For many firms, a significant nonquantifiable risk occurs because outsourcing, especially of services, can be perceived as a breach in the employer-employee relationship. Employees may wonder which group or what function will be the next to be outsourced. Workers displaced into an outsourced organization often feel conflicted as to who their “real” boss is: the new external service contractor or the client company by which they were previously employed?
Higher-Than-Expected Transaction Costs
Some outsourcing costs and benefits are easily identified and quantified because they are captured by the accounting system. Other costs and benefits are decision-relevant but not part of the accounting system. Such factors cannot be ignored simply because they are difficult to obtain or because they require the use of estimates. One of the most important and least understood considerations in the make-or-buy decision is the cost of outsourcing risk.
There are many other factors to consider in selecting the right level of participation in the value chain and the location for key value-added activities. Factor conditions, the presence of supporting industrial activity, the nature and location of the demand for the product, and industry rivalry should all be considered. In addition, such issues as tax consequences, the ability to repatriate profits, currency and political risk, the ability to manage and coordinate in different locations, and synergies with other elements of the company’s overall strategy should be factored in.
Minicase: Nokia's Global Brain Trust: Encouraging the Mobility of Ideas (www.nokia.com)
Nokia likes to team up with leading international universities in search of the next great communications technology ideas. The Finnish company’s research center in the United Kingdom works with the University of Cambridge to develop nanotechnologies for mobile communication and what is being called “ambient intelligence”—electronic environments that are sensitive and responsive to the presence of people. In Beijing, Nokia’s research hub was set up to take advantage of China’s top-level universities and to gather valuable local perspectives on communications trends and market potential.
But the other aspect of Nokia’s open innovation model—its abundant use of the Internet to harvest new ideas—is far less conventional. The progress of current projects is posted on company wikis. The Nokia Beta Labs website plays host to a legion of testers who provide feedback on new and potential applications. And Forum Nokia, a portal available in English, Chinese, and Japanese, gives outside developers access to resources to help them design, test, certify, market, and sell their own applications, content, services, or websites to mobile users via Nokia devices.
By encouraging the mobility of ideas across its network and then exploiting them commercially, Nokia is able to succeed with an innovation strategy that represents the best of global and local approaches. But Nokia’s open-innovation thrust is by itself only part of a long-term innovation strategy aimed at supporting sustained expansion into markets outside the company’s traditional European markets.
Venture capital investment is the other thrust. The company’s Nokia Growth Partners, with offices in China, Finland, India, and the United States, manages \$350 million for direct investments and fund-of-fund investments in other venture capital players, primarily in the United States, Europe, and Asia. One recent fund investment was in Madhouse, China’s leading mobile advertisement network—a crucial driver for continued growth in mobile communications markets. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/08%3A_Globalizing_the_Value_Chain_Infrastructure/8.04%3A_Risks_Associated_With_Outsourcing.txt |
The search for growth is a primary driver of manufacturing relocation. (KPMG (2009)). Emerging economies have significantly higher trend rates of growth than mature economies. This is the inevitable result of the arrival of large-scale capital investment in low-wage and low-cost economies.
This phenomenon is clearly evident in the automotive industry—an industry challenged by low sales growth and declining margins in mature markets. The world’s automotive assemblers want to capture market share in the fastest growing markets of the near future, and they want their chosen suppliers to be with them. Suppliers, for their part, also want to be part of the growth story, serving not only their traditional global Original Equipment Manufacturer OEM customers but also the emerging local automakers that are capturing new markets with low cost and often innovative products, such as China’s Chery Auto and India’s Tata Motors.
Reducing cost is a second powerful driver of manufacturing relocation. A recent survey by KPMG Peat Marwick showed that among companies that are primarily motivated by costs to invest in new markets, the opportunity to lower material costs is considered marginally more important than labor or capital costs. (KPMG (2009)). This somewhat surprising result reflects the fact that companies still find that the costs of internationally traded raw materials and partially processed commodities, such as automotive steel, remain cheaper in some lower-cost economies. The same survey showed that even if costs can be reduced, companies remain concerned about the cost of complexity that may be introduced when operations become distributed over several locations that may be separated by large distances and may be in numerous jurisdictions. The companies interviewed also cited a wide range of other cost drivers of relocation. These include government incentives, regional interest rates, wages, and trade agreements.
The relative importance of a third driver—innovation—is increasing as the center of gravity of global business activity continues to shift eastward. In the automobile industry, for example, a vehicle manufactured today has, on average, 10 times the number of electronic functions of a vehicle manufactured 10 years ago. But while innovation has intensified, the sales volume to support the costs of this product innovation has failed to materialize. Price and income trends mean that sales volumes are unlikely to be rebuilt in the developed industrial markets; on the contrary, they are likely to fall further. In these markets, the average price of a new car has doubled over the last 20 years, but average incomes have only risen by 50%, and this price-income gap continues to widen, implying further falls in sales volumes if costs cannot be cut.
These trends are driving a multidirectional globalization of innovation in the supplier industry. Established companies in the automotive triad need both to cut the costs of innovation and find new sources of technology and process innovation. Suppliers in emerging economies need to acquire, rather than just develop, technologies and R&D skills in order to gain the innovation critical mass that will allow them to compete as global suppliers.
Companies participating in the KPMG’s Supplier Survey divide roughly equally between those who believe that R&D should be located close to production and those who are happy with geographically separated R&D and production. These responses suggest that a minority of companies plan to relocate R&D to emerging markets, despite cost pressures.
Companies who believe that R&D should be located close to production tend not to be planning R&D relocations. They believe that R&D for process improvement is more important than R&D for application engineering, and their R&D centers are most likely to be located in Western Europe and Asia, followed by North America. In contrast, companies willing to operate R&D centers remote from production are predisposed to relocating production facilities, although most of these companies say that innovation is a less important criterion than cost, growth, or risk.
These primary drivers—the need to find growth, to reduce costs, and to facilitate innovation—must be balanced by a company’s capacity to manage risks. Yet, in many cases, the upside and downside of all these factors may be more subtle or less clear than companies commonly suppose. Where markets offer the promise of growth, companies should consider how consistent that growth would be over the term of the investment. They might consider whether it is necessary to locate in a given economy, or even region, to access the expected growth. Where companies seek to reduce costs, they should also consider whether direct cost reductions in areas like labor and raw materials are accompanied by indirect cost increases in areas like logistics and quality assurance. Where companies seek to facilitate innovation, they should consider whether risks and costs are best balanced by a conservative strategy of centralized R&D or a radical strategy of globally distributed R&D. And, in seeking to manage risks, companies need to understand that globalized operations may offer risk mitigation opportunities through the hedging of production, currency exposure and raw materials sourcing, as well as the increased risk challenges inherent in global operations.
Minicase: Nestlé Adapts Its Business Model to Target the Global Halal Food Market (Aris (2006, December 18)).
In 2006, the Malaysian operations of the world’s biggest food company played a leading role as Nestlé began to target the fast-growing halal food business. Its annual turnover of \$73 billion (in 2005) dwarfed that of its nearest rivals, notably Kraft Foods, PepsiCo, Unilever, and Coca-Cola, whose sales ranged from \$20 billion to \$35 billion. Nevertheless, Nestlé was positioning itself to grow its food business even further.
With a market share of only 2% of the global food industry, Nestlé had ample room for growth. The halal segment, where it was well ahead of its major competitors in terms of market share and preparation, looked particularly promising. Worth \$150 billion and with Muslims forming about 25% of the world’s population and having higher per capita income growth, Nestlé estimated that the halal food business would grow to \$500 billion by 2010. Nestlé’s 2006 sales of halal products were in the region of \$6 billion.
The strategic importance of this segment of the market was clearly highlighted at Nestlé’s product exhibition center on the sixth floor of its headquarters in Vevey, Switzerland. In a special corner for halal food exhibits, posters displayed such messages as “As disposable incomes of Muslim countries increase, global halal food sales will skyrocket”; “In Europe, many supermarkets are selling halal products”; and “Worldwide, halal food sales exceed \$150 billion.”
Growth was expected to come from not only large, populated Muslim countries like Indonesia, Bangladesh, Pakistan, and the Middle East but also non-Muslim countries with a large number of Muslims, like India and the Muslim belt of North Africa, and in cities such as London.
There were a number of factors Nestlé believed would drive growth. One was an increasing demand for products that follow Islamic law. Another was the growing divide between the West and the Islamic world. One implication of the latter was an expected increase in trade between Muslim countries—halal food products would be strong beneficiaries. Third, Muslim governments were widely expected to launch initiatives to encourage private-sector participation in expanding the halal food business. In the case of Malaysia, for example, the government had initiated an ambitious plan to turn the country into the world’s premier halal hub. Finally, the international Muslim community was getting closer to standardizing and harmonizing matters pertaining to halal food manufacturing practices, certification, and product labeling.
To capitalize on these opportunities, Nestlé was prepared to make significant changes to its business model. First, it designated its Malaysian operations to take the lead. Nestlé had begun producing halal food in Malaysia in the 1970s. That was the decade when the company established a halal committee comprising Muslim senior executives of various disciplines from the operational-factory side and the corporate level. In the 1990s, the committee became more structured, and a halal policy was established. In 1995, Nestlé Malaysia took the halal initiative to the global platform within the Nestlé Group. Two years later, Nestlé Malaysia, in collaboration with the Nestlé Group, established internal guidelines with input from Jakim (the Department of Islamic Development in Malaysia) to define what constituted halal food and how to manage its production and supply.
Second, working with the international Muslim community and governments, it had 75 of its 487 factories in 84 countries certified halal. Sixty-six were in Asia and the Middle East, seven were in Europe, and two were in the Americas. All eight of Nestlé’s Malaysian factories were halal-certified, producing more than 300 products. The big items were powdered Milo beverage, Nescafé, Maggi noodles, sauces, and culinary mixes. The Malaysian operation was also the regional producer for Milo, Kit Kat chocolate, and infant cereals.
Third, at the retail level, Nestlé worked with the United Kingdom’s largest supermarket chain, Tesco, to promote halal food products as a specialty category. Tesco had agreed to create halal corners in 40 stores in the United Kingdom, with the potential for expanding that number to 500 stores. Nestlé was finalizing a list of products, including those made by its Malaysian factories, to be featured in this section of the supermarket.
Finally, to help the Malaysian government reach its target, Nestlé conducted a mentoring program for small- and medium-scale enterprises in the food industry to improve their standards with regard to hygiene and food safety. All these preparations were about to pay a dividend. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/08%3A_Globalizing_the_Value_Chain_Infrastructure/8.05%3A_Locating_Value-Added_Activities.txt |
Formulating cooperative strategies—joint ventures, strategic alliances, and other partnering arrangements—is the complement of outsourcing. For many corporations, cooperative strategies capture the benefits of internal development and acquisition while avoiding the drawbacks of both.
Globalization is an important factor in the rise of cooperative ventures. In a global competitive environment, going it alone often means taking extraordinary risks. Escalating fixed costs associated with achieving global market coverage, keeping up with the latest technology, and increased exposure to currency and political risk all make risk-sharing a necessity in many industries. For many companies, a global strategic posture without alliances would be untenable.
Cooperative strategies take many forms and are considered for many different reasons. However, the fundamental motivation in every case is the corporation’s ability to spread its investments over a range of options, each with a different risk profile. Essentially, the corporation is trading off the likelihood of a major payoff against the ability to optimize its investments by betting on multiple options. The key drivers that attract executives to cooperative strategies include the need for risk sharing, the corporation’s funding limitations, and the desire to gain market and technology access. (Harbison (1993)).
Risk Sharing
Most companies cannot afford “bet-the-company” moves to participate in all product markets of strategic interest. Whether a corporation is considering entry into a global market or investments in new technologies, the dominant logic dictates that companies prioritize their strategic interests and balance them according to risk.
Funding Limitations
Historically, many companies focused on building sustainable advantage by establishing dominance in all the business’s value-creating activities. Through cumulative investment and vertical integration, they attempted to build barriers to entry that were hard to penetrate. However, as the globalization of the business environment accelerated and the technology race intensified, such a strategic posture became increasingly difficult to sustain. Going it alone is no longer practical in many industries. To compete in the global arena, companies must incur immense fixed costs with a shorter payback period and at a higher level of risk.
Market Access
Companies usually recognize their lack of prerequisite knowledge, infrastructure, or critical relationships necessary for the distribution of their products to new customers. Cooperative strategies can help them fill the gaps. For example, Hitachi has an alliance with Deere & Company in North America and with Fiat Allis in Europe to distribute its hydraulic excavators. This arrangement makes sense because Hitachi’s product line is too narrow to justify a separate distribution network. What is more, customers benefit because the gaps in its product line are filled with quality products such as bulldozers and wheel loaders from its alliance partners.
Technology Access
A large number of products rely on so many different technologies that few companies can afford to remain at the forefront of all of them. Carmakers increasingly rely on advances in electronics, application software developers depend on new features delivered by Microsoft in its next-generation operating platform, and advertising agencies need more and more sophisticated tracking data to formulate schedules for clients. At the same time, the pace at which technology is spreading globally is increasing, making time an even more critical variable in developing and sustaining competitive advantage. It is usually beyond the capabilities, resources, and good luck in R&D of any corporation to garner the technological advantage needed to independently create disruption in the marketplace. Therefore, partnering with technologically compatible companies to achieve the prerequisite level of excellence is often essential. The implementation of such strategies, in turn, increases the speed at which technology diffuses around the world.
Other Factors
Other reasons to pursue a cooperative strategy are a lack of particular management skills; an inability to add value in-house; and a lack of acquisition opportunities because of size, geographical, or ownership restrictions.
The airline industry provides a good example of some of the drivers and issues involved in forging strategic alliances. Although the U.S. industry has been deregulated for some time, international aviation remains controlled by a host of bilateral agreements that smack of protectionism. Outdated limits on foreign ownership further distort natural market forces toward a more global industry posture. As a consequence, airline companies have been forced to confront the challenges of global competition in other ways. With takeovers and mergers blocked, they have formed all kinds of alliances—from code sharing to aircraft maintenance to frequent flyer plans.
Cooperative strategies cover a wide spectrum of nonequity, cross-equity, and shared-equity arrangements. Selecting the most appropriate arrangement involves analyzing the nature of the opportunity, the mutual strategic interests in the cooperative venture, and prior experience with joint ventures of both partners. The essential question is, how can this opportunity be structured in order to maximize benefit s) to both parties?
The Boston Consulting Group (BSC) divides alliances into four groups on the basis of whether the participants are competitors or not and on the relative depth and breadth of the alliance itself: expertise alliances, new business alliances, cooperative alliances, and merger and acquisition M&A-like alliances.
Expertise alliances typically bring together noncompeting firms to share expertise and specific capabilities. Outsourcing of IT services provides a good example. New business alliances are partnerships focused on entering a new business or market. Many companies, for example, have partnered when venturing into new parts of the world, such as China. Cooperative alliances are joint efforts by competing firms, formed to attain critical mass or economies of scale. Competitors combining to seek cheaper health insurance for employees, for example, or combined purchasing arrangements, illustrate this kind of alliance. M&A-like alliances—as the name implies—focus on near-complete integration but may be prevented from doing so, either because of legal regulatory constraints (e.g., airline industry) or because of unfavorable stock market conditions.
BCG found that while new-business alliances compose a clear majority (over 50%), expertise-based alliances are most favored by the stock market, and M&A-like alliances are least favored. The latter is not surprising since such alliances are created in response to unfavorable regulatory or market conditions.Cools and Roos (2005).
Minicase: May 2009: The Air France/KLM Group and Delta Air Lines Launch New Transatlantic Global Joint Venture (http://corporate.airfrance.com/; corporate.klm.com/; http://news.delta.com/)
The Air France KLM Group and Delta Air Lines announced a new, long-term joint venture whereby the partners will jointly operate their transatlantic business by coordinating operations and sharing revenues and costs of their transatlantic-route network. The airlines will cooperate on routes between North America and Africa, the Middle East and India, as well as on flights between Europe and several countries in Latin America.
For customers, this joint venture will result in more choices, frequencies, convenient flight schedules, competitive fares, and harmonized services on all transatlantic flights operated by the partners. The joint venture represents approximately 25% of total transatlantic capacity, with annual revenues estimated at more than \$12 billion (approximately 9.3 billion euros, reference year 2008–2009).
Global passengers will be able to access a vast network offering over 200 flights and approximately 50,000 seats daily. That network is structured around six main hubs: Amsterdam, Atlanta, Detroit, Minneapolis, New York-JFK, and Paris-CDG, together with Cincinnati, Lyon, Memphis, and Salt Lake City. The airline partners will provide their corporate clients with a broad global offering that best meets their expectations for the most convenient airline system, while providing efficient account management as well as ease of travel for their clients. Going forward, this structure will represent a major strength for the SkyTeam alliance, of which all three airlines are members.
The joint venture’s geographic scope includes all flights between North America and Europe, between Amsterdam and India, and between North America and Tahiti. On these routes, the business will be jointly operated, with the strategy and economics equally shared among the Air France-KLM Group and Delta.
Air France and KLM have been working with their respective American partners for many years. KLM signed a joint venture agreement with Northwest in 1997, while Air France and Delta signed a joint-venture agreement in 2007. Following the merger of Delta and Northwest, the next logical business strategy was to establish a single transatlantic joint venture. The agreement is the result of that collaboration.
Governance of the joint venture will be equally shared between the Air France KLM Group and Delta. An executive committee comprising the three CEOs and a management committee comprising representatives from marketing, network, sales, alliances, finance, and operations will define strategy. Ten working groups will be responsible for implementing and managing the agreement in the sectors of network, revenue management, sales, product, frequent flyer, advertising and brand, cargo, operations, IT, and finance. The joint venture will not lead to the creation of a subsidiary.
The venture is a long-term, evergreen arrangement that can only be canceled with a three-year notice and after an initial term of 10 years.
Minicase: GE Money Announces Joint Venture With One of Colombia's Largest Banking Groups (GE money to form a joint venture (2007, February 28)).
Stamford, Connecticut, February 28, 2007: Furthering its growth strategy in Latin America, GE Money, the consumer lending unit of General Electric Company, today announced that it would acquire a minority position in Banco Colpatria—Red Multibanca Colpatria S.A.—a consumer and commercial bank based in Bogota, Colombia. GE Money will acquire a 39.3% stake in Red Multibanca Colpatria in two installments, with options to acquire up to an additional 25% stake from Mercantil Colpatria S.A. by 2012. The initial purchase, subject to regulatory approvals, is expected to close within the next few months. “We are excited to be entering Colombia to partner with Banco Colpatria and its customers,” said the president and CEO of GE Money, Americas. “Colombia is an important growth market for GE as we continue to expand our business in Latin America. The Banco Colpatria team has built an exciting bank in Colombia. We look forward to partnering with them to help accelerate their growth.”
Banco Colpatria, a member of the Mercantil Colpatria S.A. group, had over \$2.4 billion in assets and was the second-largest credit card issuer in Colombia. With 139 branches, the bank served more than 1 million customers. The new partnership positioned the two companies to deliver enhanced consumer credit products to the growing Colombian financial services market.
“This partnership will enable Banco Colpatria to expand its product offerings and to further accelerate the bank’s strong growth in the Colombian market,” said the chairman of the board of Banco Colpatria. “This is part of the vision that we share with our new partner. GE Money is the perfect partner to help us broaden our business in Colombia.”
GE Money, Latin America, began operations in 2000, offering consumer loans and private-label credit cards. The business now operates in Mexico, Argentina, and Brazil, as well as in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama, through a joint venture with BAC-Credomatic Holding Co., Ltd. (BAC). With approximately \$7 billion in assets, GE Money, Latin America, offers a wide range of financial products, including mortgages, auto loans, credit cards, insurance products, and personal loans in more than 430 branches and locations. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/08%3A_Globalizing_the_Value_Chain_Infrastructure/8.06%3A_Partnering.txt |
1. Globalizing a company’s value creation infrastructure—from the sourcing of raw materials and components to manufacturing and R&D to distribution and customer service—has three primary dimensions: (a) deciding which activities to perform in house and which ones to outsource, to whom and where; (b) developing the right partnerships to support a company’s globalization efforts, and (c) implementing a suitable supply-chain management model for integrating them into a cost-effective, seamless, value-creating network.
2. Core competencies represent unique capabilities that allow a company to build a competitive advantage. Experience shows that only a few companies have the resources to develop more than a handful of core competencies. Picking the right ones, therefore, is the key.
3. Few companies, especially ones with a global presence, are self-sufficient in all the activities that make up their value chain. Growing global competitive pressures force companies to focus on those activities that they judge critical to their success and excel at—core capabilities in which they have a distinct competitive advantage—and that can be leveraged across geographies and lines of business. Which activities should be kept in house and which ones can effectively be outsourced depends on a host of factors, most prominently the nature of the company’s core strategy and dominant value discipline.
4. Outsourcing and offshoring of component manufacturing and support services can offer compelling strategic and financial advantages including lower costs, greater flexibility, enhanced expertise, greater discipline, and the freedom to focus on core business activities.
5. In the last 20 years, companies have outsourced many activities, including manufacturing, back-office functions, IT services, and customer support. Now the focus is shifting to more knowledge-intensive areas, such as product development, research and development, engineering, and analytical services.
6. Outsourcing can have significant benefits but is not without risk. Some risks, such as potentially higher offshoring costs due to the eroding value of the U.S. dollar, can be anticipated and addressed through contracts by employing financial hedging strategies. Others, however, are harder to anticipate or deal with. Risks associated with outsourcing typically fall into four general categories: loss of control, loss of innovation, loss of organizational trust, and higher-than-expected transaction costs.
7. The search for growth is a primary driver of manufacturing relocation. Others include cutting costs and innovation.
8. Formulating cooperative strategies—joint ventures, strategic alliances, and other partnering arrangements—is the complement of outsourcing. For many corporations, cooperative strategies capture the benefits of internal development and acquisition while avoiding the drawbacks of both.
9. The key drivers that attract executives to cooperative strategies include the need for risk sharing, the corporation’s funding limitations, and the desire to gain market and technology access.
10. The Boston Consulting Group divides alliances into four groups on the basis of whether the participants are competitors or not and on the relative depth and breadth of the alliance itself: expertise alliances, new business alliances, cooperative alliances, and M&A-like alliances.
11. BCG found that while new-business alliances compose a clear majority (over 50%), expertise-based alliances are most favored by the stock market, and M&A-like alliances are least favored. The latter is not surprising since such alliances are created in response to unfavorable regulatory or market conditions. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/08%3A_Globalizing_the_Value_Chain_Infrastructure/8.07%3A_Points_to_Remember.txt |
In today’s global competitive environment, individual companies no longer compete as autonomous entities but as supply-chain networks. Instead of brand versus brand or company versus company, it is increasingly suppliers-brand-company versus suppliers-brand-company. In this new competitive world, the success of a single business increasingly depends on management’s ability to integrate the company’s intricate network of business relationships. Supply-chain management (SCM) offers the opportunity to capture the synergy of intra- and intercompany integration and management. SCM deals with total business-process excellence and represents a new way of managing business and relationships with other members of the supply chain.
Top-performing supply chains have three distinct qualities. (Lee (2004, October)). First, they are agile enough to readily react to sudden changes in demand or supply. Second, they adapt over time as market structures and environmental conditions change. And, third, they align the interests of all members of the supply-chain network in order to optimize performance. These characteristics—agility, adaptability, and alignment—are possible only when partners promote knowledge-flow between supply-chain nodes. In other words, the flow of knowledge is what enables a supply chain to come together in a way that creates a true value chain for all stakeholders. Knowledge-flow creates value by making the supply chain more transparent and by giving everyone a better look at customer needs and value propositions. Broad knowledge about customers and the overall market, as opposed to just information from order points, can provide other benefits, including a better understanding of market trends, resulting in better planning and product development. (Myers and Cheung (2008, July)).
09: Global Supply-Chain Management
A supply chain refers to the flow of physical goods and associated information from the source to the consumer. Key supply-chain activities include production planning, purchasing, materials management, distribution, customer service, and sales forecasting. These processes are critical to the success manufacturers, wholesalers, or service providers alike.
Electronic commerce and the Internet have fundamentally changed the nature of supply chains and have redefined how consumers learn about, select, purchase, and use products and services. The result has been the emergence of new business-to-business supply chains that are consumer-focused rather than product-focused. They also provide customized products and services.
In the traditional supply-chain model, raw material suppliers define one end of the supply chain. They were connected to manufacturers and distributors, which, in turn, were connected to a retailer and the end customer. Although the customer is the source of the profits, they were only part of the equation in this “push” model. The order and promotion process, which involves customers, retailers, distributors, and manufacturers, occurred through time-consuming paperwork. By the time customers’ needs were filtered through the agendas of all the members of the supply chain, the production cycle ended up serving suppliers every bit as much as customers.
Driven by e-commerce’s capabilities to empower clients, most companies have moved from the traditional “push” business model, where manufacturers, suppliers, distributors, and marketers have most of the power, to a customer-driven “pull” model. This new business model is less product-centric and more directly focused on the individual consumer. As a result, the new model also indicates a shift in the balance of power from suppliers to customers.
Whereas in the old “push” model, many members of the supply chain remained relatively isolated from end users, the new “pull” model has each participant scrambling to establish direct electronic connections to the end customer. The result is that electronic supply-chain connectivity gives end customers the opportunity to become better informed through the ability to research and give direction to suppliers. The net result is that customers now have a direct voice in the functioning of the supply chain, and companies can better serve customer needs, carry less inventory, and send products to market more quickly.
Minicase: Zara's Global Business Model (Capell, Kamenev, and Saminather, N.(2006, September 4)).
Inditex, the parent company of cheap, chic-fashion chain Zara, has transformed itself into Europe’s leading apparel retailer over the past 10 years and has racked up impressive results in Asia and the United States. Since 2000, Inditex has more than quintupled its sales and profits as it has tripled the number of stores of its eight brands. (Zara is the biggest, accounting for two-thirds of total revenues.) More recently, Inditex increased its year-on-year net sales by 6% in the first nine months of its 2009 fiscal year to 7,759 million euros. Net income grew to 831 million euros. The retailer launched 266 new stores in the first nine months, bringing the group’s total number of stores to 4,530 by the end of October 2009.
Key highlights for the period included openings in Asian markets, with 90 new establishments inaugurated by October 31, 2009. These store openings reflect the strategic importance of Asian markets for the group and underscore a year of robust growth in China, Japan, and South Korea. High points of store launches so far this year include flagship locations in Japan and Mainland China.
In Japan, Zara now has a total of 50 stores, including a second flagship location in Tokyo’s Shibuya district, which is a must-see global fashion destination. Prior to this opening, Zara had already welcomed shoppers at another upscale store in Shibuya. Zara thus enhances its excellent retail presence in Tokyo’s four key shopping areas: the two aforementioned flagship stores in Shibuya, two each in Ginza and Shinjuku, and one in Harajuku.
Meanwhile, in Beijing, the group celebrated the opening of a flagship location in one of the Chinese capital’s busiest shopping hubs. The store, which opened its doors on the pedestrian Wangfujing Street, brings the group’s number of stores in China to more than 60. The company’s firm commitment to expansion in the Chinese fashion market is reflected in its decision to locate shops not only in Beijing and Shanghai but also in emerging cities such as Harbin, Dalian, Qingdao, Changchun, and Kunming.
To get where it is today, Zara has turned globalization on its head, distributing all of its merchandise, regardless of origin, from Spain. With more outlets in Asia and the United States, replenishing stores twice a week—as Zara does now—will become increasingly complex and expensive. The strain is already starting to show. Costs are climbing and growth in same-store sales is slowing: at outlets open for 2 years or more, revenues were up by 5% last year, compared with a 9% increase in 2004. So far, the company has managed to offset that problem by charging more for its goods as it gets farther from headquarters. For instance, Zara’s prices in the United States are some 65% higher than in Spain, brokerage Lehman Brothers, Inc., estimates.
Zara has succeeded by breaking every rule in retailing. For most clothing stores, running out of best-selling items is a disaster, but Zara encourages occasional shortages to give its products an air of exclusivity. With new merchandise arriving at stores twice a week, the company trains its customers to shop and shop often. And forget about setting trends—Zara prefers to follow them. Its aim is to give customers plenty of variety at a price they can afford. Zara made 30,000 different items last year, about triple what the Gap did.
Zara does not collaborate with big-name designers and or use multimillion-dollar advertising campaigns. Instead, it uses its spacious, minimalist outlets—more Gucci than Target—and catwalk-inspired clothing to build its brand. Their advertising is their stores. To get shoppers’ attention, Zara is located on some of the world’s priciest streets: New York’s Fifth Avenue, Tokyo’s Ginza, Rome’s Via Condotti, and the Champs-Elysees in Paris.
Keeping those locations flush with an ever-changing supply of new clothing means striking the right balance between flexibility and cost. So while rivals outsource to Asia, Zara makes its most fashionable items—half of all its merchandise—at a dozen company-owned factories in Spain. Clothes with a longer shelf life, such as basic T-shirts, are outsourced to low-cost suppliers, mainly in Asia and Turkey.
The tight control makes Zara more fleet-footed than its competitors. While rivals push their suppliers to churn out goods in bulk, Zara intentionally leaves extra capacity in the system. That results in fewer fashion mistakes, which means Zara sells more at full price, and when it discounts, it does not have to go as deep. The chain books 85% of the full ticket price for its merchandise, while the industry average is 60%.
Zara’s nerve center is an 11,000-square-foot hall at its headquarters in Arteixo, a town of 25,000 in Galicia. That is where hundreds of twenty-something designers, buyers, and production planners work in tightly synchronized teams. It is there that the company does all of its design and distribution and half of its production. The concentrated activity enables it to move a dress, blouse, or coat from drawing board to shop floor in just 2 weeks, less than a quarter of the industry average.
Consider how Zara managed to latch onto one of hottest trends in just 4 weeks in 2006. The process started when trend-spotters spread the word back to headquarters: white eyelet—cotton with tiny holes in it—was set to become white-hot. A quick telephone survey of Zara store managers confirmed that the fabric could be a winner, so in-house designers got down to work. They zapped patterns electronically to Zara’s factory across the street, and the fabric was cut. Local subcontractors stitched white-eyelet v-neck belted dresses and finished them in less than a week. The \$129 dresses were inspected, tagged, and transported through a tunnel under the street to a distribution center. From there, they were quickly dispatched to Zara stores from New York to Tokyo, where they were flying off the racks just 2 days later. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/09%3A_Global_Supply-Chain_Management/9.01%3A_Supply_Chains_-_From_Push_to_Pull.txt |
Supply-chain management (SCM) has three principal components: (a) creating the supply-chain network structure, (b) developing supply-chain business processes, and (c) managing the supply-chain activities. (Lambert and Cooper (2000, January)).
The supply-chain network structure consists of the member firms and the links between these firms. Primary members of a supply chain include all autonomous companies or strategic business units that carry out value-adding activities in the business processes designed to produce a specific output for a particular customer or market. Supporting members are companies that simply provide resources, knowledge, utilities, or assets for the primary members of the supply chain. For example, supporting companies include those that lease trucks to a manufacturer, banks that lend money to a retailer, or companies that supply production equipment, print marketing brochures, or provide administrative assistance.
Supply chains have three structural dimensions: horizontal, vertical, and the horizontal position of the focal company within the end points of the supply chain. The first dimension, horizontal structure, refers to the number of tiers across the supply chain. The supply chain may be long, with numerous tiers, or short, with few tiers. As an example, the network structure for bulk cement is relatively short. Raw materials are taken from the ground, combined with other materials, moved a short distance, and used to construct buildings. The second dimension, vertical structure, refers to the number of suppliers or customers represented within each tier. A company can have a narrow vertical structure, with few companies at each tier level, or a wide vertical structure with many suppliers or customers at each tier level. The third structural dimension is the company’s horizontal position within the supply chain. A company can be positioned at or near the initial source of supply, be at or near to the ultimate customer, or be somewhere between these end points of the supply chain.
Business processes are the activities that produce a specific output of value to the customer. The management function integrates the business processes across the supply chain. Traditionally, in many companies, upstream and downstream portions of the supply chain were not effectively integrated. Today, competitive advantage increasingly depends on integrating eight key supply-chain processes—customer relationship management, customer service management, demand management, order fulfillment, manufacturing flow management, procurement, product development and commercialization, and managing returns—into an effective value delivery network.Lambert , Guinipero, and Ridenhower (1998).
Regarding the supply-chain management function itself, in some companies, management emphasizes a functional structure, others a process structure, and yet others a combined structure of processes and functions. The number of business processes that it is critical or beneficial to integrate and manage between companies will likely vary. In some cases, it may be appropriate to link just one key process, and, in other cases, it may be appropriate to link multiple or all the key business processes. However, in each specific case, it is important that executives thoroughly analyze and discuss which key business processes to integrate and manage. With the shift from the traditional “push” to the modern “pull” model, supply-chain management has changed—the integration of e-commerce has produced (a) greater cost efficiency, (b) distribution flexibility, (c) better customer service, and (d) the ability to track and monitor shipments.
9.03: Supply-Chain Agility and Resiliency
The best companies create supply chains that can respond to sudden and unexpected changes in markets. Agility—the ability to respond quickly and cost-effectively to unexpected change—is critical because in most industries, both demand and supply fluctuate more rapidly and widely than they used to. In fact, the best companies use agile supply chains to differentiate themselves from rivals. For instance, Zara has become Europe’s most profitable apparel brands by building agility into every link of their supply chains. At one end of the product pipeline, Zara has created an agile design process. As soon as designers spot possible trends, they create sketches and order fabrics. That gives them a head start over competitors because fabric suppliers require the longest lead times. However, the company approves designs and initiates manufacturing only after it gets feedback from its stores. This allows Zara to make products that meet consumer tastes and reduces the number of items they must sell at a discount. At the other end of supply chain, the company has created a superefficient distribution system. In part because of these decisions, Zara has grown at more than 20% annually since the late 1990s, and its double-digit net profit margins are the envy of the industry.
Agility and resiliency have become more critical in recent years because sudden shocks to supply chains have become more frequent. The terrorist attack in New York in 2001, the dockworkers’ strike in California in 2002, and the SARS epidemic in Asia in 2003, for instance, disrupted many companies’ supply chains.
Agility and resiliency help supply chains recover more quickly from such sudden setbacks. When, in September 1999, an earthquake hit Taiwan, shipments of computer components to the United States were delayed by weeks and, in some cases, by months. Most computer manufacturers, such as Compaq, Apple, and Gateway, could not deliver products to customers on time and incurred losses. One exception was Dell. The company changed the prices of PC configurations overnight to steer consumer demand away from hardware built with components that were not available to machines that did not require those parts. Dell could do this because it had contingency plans in place. Not surprisingly, Dell gained market share in the earthquake’s aftermath. (Lee (2004, October)).
Supply-chain agility and resilience no longer imply merely the ability to manage risk. It now assumes that the ability to manage risk means being better positioned than competitors to deal with—and even gain advantage from—disruptions. Key to increasing agility and resilience is building flexibility into the supply-chain structure, processes, and management. (Sheffi (2005, October)). | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/09%3A_Global_Supply-Chain_Management/9.02%3A_Supply-Chain_Management.txt |
Global companies must be able to adapt their supply networks when markets or strategies change. The best companies tailor their supply chains to the nature of the markets they serve. They often end up with more than one supply chain, which can be expensive, but, in return, they secure the best manufacturing and distribution capabilities for each offering. Cisco, for example, uses contract manufacturers in low-cost countries such as China for standard, high-volume networking products. For its broad line of midvalue items, the company uses vendors in low-cost countries to build core products, but it customizes those products itself in major markets such as the United States and Europe. And for highly customized, low-volume products, Cisco uses vendors close to main markets, such as Mexico for the United States and Eastern European countries for Europe. Despite the fact that it uses three different supply chains at the same time, the company is careful not to become less agile. Because it uses flexible designs and standardized processes, Cisco can switch the manufacture of products from one supply network to another, when necessary. (Sheffi (2005, October)).
Companies that compete primarily on the basis of operational excellence typically focus on creating supply chains that deliver goods and services to consumers as quickly and inexpensively as possible. They invest in state-of-the art technologies and employ metrics and reward systems aimed at boosting supply-chain performance.
For companies competing on the basis of customer intimacy or product leadership, a focus on efficiency is not enough—agility is a key factor. Customer-intimate companies must be able to add and delete products and services as customer needs change; product leadership companies must be able to adapt their supply chains to changes in technology and to capitalize on new ideas.
All companies must align their supply-chain infrastructure and management with their underlying value proposition to achieve a sustainable competitive advantage. That is, they must align the interests of all the firms in the supply network so that companies optimize the chain’s performance when they maximize their interests.
Minicase: Nikon, With the Help of UPS, Focuses on Supply-Chain Innovation (www.ups-scs.co/solutions/case...s/cs_nikon.pdf)
To support the launch of its new digital cameras, Nikon, with the help of UPS Supply Chain Solutions, reengineered its distribution network to keep retailers well supplied. Nikon knew that customer service capabilities needed to be completely up to speed from the start and that distributors and retailers would require up-to-the-minute information about product availability. While the company had previously handled new product distribution in-house, this time Nikon realized that burdening its existing infrastructure with a new, demanding, high-profile product line could impact customer service performance adversely. So Nikon applied its well-known talent for innovation to creating an entirely new distribution strategy, and it took the rare step of outsourcing distribution of an entire consumer-electronics product line. With UPS Supply Chain Solutions on board, Nikon was able to quickly execute a synchronized supply-chain strategy that moves products to retail stores throughout the United States, Latin America, and the Caribbean, and allows Nikon to stay focused on the business of developing and marketing precision optics.
Starting at Nikon’s manufacturing centers in Korea, Japan, and Indonesia, UPS Supply Chain Solutions now manages air and ocean freight and related customs brokerage. Nikon’s freight is directed to Louisville, Kentucky, which not only serves as the all-points connection for UPS’s global operations but is also home to the UPS Supply Chain Solutions Logistics Center main campus. Here, merchandise can be either “kitted” with accessories such as batteries and chargers or repackaged to in-store display specifications. Finally, the packages are distributed to literally thousands of retailers across the United States or shipped for export to Latin American or Caribbean retail outlets and distributors, using any of UPS’s worldwide transportation services to provide the final delivery.
With the UPS Supply Chain Solutions system in place, the process calibrates the movement of goods and information by providing SKU-level visibility within complex distribution and information technology (IT) systems. UPS also provides Nikon advance shipment notifications throughout the U.S., Caribbean, and Latin American markets. The result: a “snap shot” of the supply chain that rivals the performance of a Nikon camera.
Nikon has already seen the results of its innovation in both digital technology and product distribution. The consumer digital-camera sector is one of Nikon’s fastest-growing product lines. In addition, supply-chain performance and customer service have measurably improved. Products leaving Nikon manufacturing facilities in Asia can now be on a retailer’s shelf in as few as 2 days. While products are en route, Nikon also has the ability to keep retailers informed of delivery times and to adjust them as needed so that no retailer needs to miss sales opportunities due to lack of product availability. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/09%3A_Global_Supply-Chain_Management/9.04%3A_Making_Supply_Chains_Adaptable.txt |
Leading companies take care to align the interests of all the firms in their supply chain with their own. This is important, because every supply-chain partner firm—whether a supplier, an assembler, a distributor, or a retailer—will focus on its own interests. If any company’s interests differ from those of the other organizations in the supply chain, its actions will not maximize the chain’s performance.
One way companies align their partners’ interests with their own is by redefining the terms of their relationships so that firms share risks, costs, and rewards equitably. Another involves the use of intermediaries, for example, when financial institutions buy components from suppliers at hubs and resell them to manufacturers. Everyone benefits because the intermediaries’ financing costs are lower than the vendors’ costs. Although such an arrangement requires trust and commitment on the part of suppliers, financial intermediaries, and manufacturers, it is a powerful way to align the interests of companies in supply chains.
A prerequisite to creating alignment is the availability of information so that all the companies in a supply chain have equal access to forecasts, sales data, and plans. Next, partner roles and responsibilities must be carefully defined so that there is no scope for conflict. Finally, companies must align incentives so that when companies try to maximize returns, they also maximize the supply chain’s performance.
Minicase: Nestlé Pieces Together Its Global Supply Chain (Steinert-Threlkeld (2006, January)).
A few years ago, Nestlé, the world’s largest food company, set out to standardize how it operates around the world. It launched GLOBE (Global Business Excellence), a comprehensive program aimed at implementing a single set of procurement, distribution, and sales management systems. The logic behind the \$2.4-billion project was impeccable: implementing a standardized approach to demand forecasting and purchasing would save millions and was critical to Nestlé’s operating efficiency in 200 countries around the world.
Nestlé’s goal was simple: to replace its 14 different SAP enterprise-planning systems—in place in different countries—with a common set of processes, in factory and in administration, backed by a single way of formatting and storing data and a single set of information systems for all of Nestlé’s businesses.
For Nestlé, this was not an everyday project. When it built a factory to make coffee, infant formula, water, or noodles, it would spend \$30 to \$40 million; committing billions in up-front capital to a backroom initiative was unheard of, or, as someone noted, “Nestlé makes chocolate chips, not electronic ones.”
The GLOBE project also stood as the largest-ever deployment of mySAP.com. But whether the software got rolled out to 230,000 Nestlé employees or 200 was not the point. The point was to make Nestlé the first company to operate in hundreds of countries in the same manner as if it operated in one. And that had not been achieved by any company—not even the British East India Company at the peak of its tea-trading power—in the history of global trade.
Consider the complexities. Nestlé was the world’s largest food company, with almost \$70 billion in annual sales. By comparison, the largest food company based in the United States, Kraft Foods, was less than half that size. Nestlé’s biggest Europe-based competitor, Unilever, had about \$54 billion in sales. In addition, Nestlé grew to its huge size by selling lots of small-ticket items—Kit Kat, now the world’s largest-selling candy bar; Buitoni spaghetti; Maggi packet soups; Lactogen dried milk for infants; and Perrier sparkling water.
The company operated in some 200 nations, including places that were not yet members of the United Nations. It ran 511 factories and employed 247,000 executives, managers, staff, and production workers worldwide.
What is more, for Nestlé, nothing was simple. The closest product to a global brand it had was Nescafé; more than 100 billion cups were consumed each year. But there were more than 200 formulations, made to suit local tastes. All told, the company produced 127,000 different types and sizes of products. Keeping control of its thousands of supply chains, scores of methods of predicting demand, and its uncountable variety of ways of invoicing customers and collecting payments was becoming evermore difficult and eating into the company’s bottom line.
The three baseline edicts for project GLOBE were: harmonize processes, standardize data, and standardize systems. This included how sales commitments were made, factory production schedules established, bills to customers created, management reports pulled together, and financial results reported. Gone would be local customs, except where legal requirements and exceptional circumstances mandated an alternative manner of, say, finding a way to pay the suppliers of perishable products like dairy or produce in a week rather than 30 days. And when was this all to be done? In just 3 and a half years. The original GLOBE timeline, announced by Nestlé’s executive board, called for 70% of the company’s \$50 billion business to operate under the new unified processes by the end of 2003.
Mission impossible? The good news was that in one part of the world, Asia, market managers had shown they could work together and create a common system for doing business with their customers. They had used a set of applications from a Chicago supplier, SSA Global, that allowed manufacturers operating worldwide to manage the flow of goods into their factories, the factories themselves, and the delivery of goods to customers while making sure the operations met all local and regional legal reporting requirements. The system was adopted in Indonesia, Malaysia, the Philippines, Thailand, even South Africa, and was dubbed the “Business Excellence Common Application.”
But this project was orders of magnitude more involved and more complex. Instead of just a few countries, it would affect 200 of them. Change would have to come in big, not small, steps. Using benchmarks they could glean from competitors such as Unilever and Danone, and assistance from PricewaterhouseCoopers consultants and SAP’s own deployment experts, the executives in charge of the GLOBE project soon came to a conclusion they had largely expected going in: this project would take more people, more money, and more time than the board had anticipated. Instead of measuring workers in the hundreds, and Swiss francs in the hundreds of millions, as originally expected, the team projected that 3,500 people would be involved in GLOBE at its peak. The new cost estimate was 3 billion Swiss francs, about \$2.4 billion. And the deadline was pushed back as well. The new target: putting the “majority of the company’s key markets” onto the GLOBE system by the end of 2005, not 2003.
To lead this massive undertaking, GLOBE’s project manager chose a group of business managers, not technology managers, from all of Nestlé’s key functions—manufacturing, finance, marketing, and human resources—and from all across the world—Europe, Asia, the Americas, Africa, and Australia.
These were people who knew how things actually worked or should work. They knew how the company estimated the demand for each of its products, how supplies were kept in the pipeline, even mundane things like how to generate an invoice, the best way to process an order, how to maintain a copier or other office equipment, and how to classify all the various retail outlets, from stores to vending machines, that could take its candy bars and noodles. The system would allow managers to manage it all from the web.
The process for the team of 400 executives started with finding, and then documenting, the four or five best ways of doing a particular task, such as generating an invoice. Then, the GLOBE team brought in experts with specific abilities, such as controlling financial operations, and used them as “challengers.” They helped eliminate weaknesses, leaving the best practices standing.
At the end of that first year, the project teams had built up the basic catalog of practices that would become what they would consider the “greatest asset of GLOBE”: its “Best Practices Library.” This was an online repository of step-by-step guides to the 1,000 financial, manufacturing, and other processes that applied across all Nestlé businesses. Grouped into 45 “solution sets,” like demand planning or closing out financial reports, the practices could now be made available online throughout the company, updated as necessary, and commented on at any time.
It was not always possible to choose one best practice. Perhaps the hardest process to document was “generating demand.” With so many thousands of products, hundreds of countries, and local tastes to deal with, there were “many different ways of going to market,” many of which were quite valid. This made it hard to create a single software template that would serve all market managers.
So GLOBE executives had to practice a bit more tolerance on that score. The final GLOBE template included a half-dozen or so different ways of taking products to market around the world. But no such tolerance was shown for financial reporting. The 400 executives were determined to come up with a rigorous step-by-step process that would not change.
Experts were brought in along the way to challenge each process. But in the end, one standard would, in this case, have to stand. Financial terms would be consistent. The scheme for recording dates and amounts would be the same. The timing of inputting data would be uniform; only the output could change. In Thailand, there would have to be a deviation so that invoices could be printed out in Thai characters so that they could be legal and readable. In the Philippines, dates would have to follow months, as in the United States. Most of the rest of the world would follow the European practice of the day preceding the month.
Progress was slow, however. Nestlé managers had always conducted their businesses as they saw fit. As a consequence, even standardizing on behind-the-scenes practices, like how to record information for creating bills to customers met, with resistance. As country managers saw it, decision making was being taken out of local markets and being centralized. Beyond that, someone had to pay the bill for the project itself. That would be the countries, too.
By the fall of 2005, almost 25% of Nestlé was running on the GLOBE templates. And GLOBE’s project manager was confident that 80% of the company would operate on the new standardized processes by the end of 2006. The greatest challenge was getting managers and workers to understand that their jobs would change—in practical ways. In many instances, workers would be entering data on raw materials as they came into or through a factory. Keeping track of that would be a new responsibility. Doing it on a computer would be a wholly new experience. And figuring out what was happening on the screen could be a challenge. Minutia? Maybe. Considerable change? Definitely.
But the templates got installed and business went on—in Switzerland, Malaysia-Singapore, and the Andean region. In each successive rollout, the managers of a given market had 9 months or more to document their processes and methodically adjust them to the templated practices. In 2003, Thailand, Indonesia, and Poland went live. In 2004, Canada, the Philippines, and the Purina pet food business in the United Kingdom joined the network. But, by then, the system was bumping up against some technical limits. In particular, the mySAP system was not built for the unusual circumstances of the Canadian food retailing market. Food manufacturers have lots of local and regional grocery chains to sell to, and promotional campaigns are rife. MySAP was not built to track the huge amount of trade promotions engaged in by Nestlé’s Canadian market managers: there were too many customers, too many products, and too many data points.
In India, changing over in mid-2005 was complicated by the fact that not only was Nestlé overhauling all of its business processes, but it also did not know what some of the key financial processes would have to be. At the same time it was converting to the GLOBE system, India was changing its tax structure in all 29 states and six territories. Each would get to choose whether, and how, to implement a fee on the production and sale of products, known as a value-added tax. Meeting the scheduled go-live date proved difficult.
And all over the world, managers learned that the smallest problem in standardized systems means that product can get stopped in its tracks. In Indochina, for instance, pallets get loaded with 48 cases of liquids or powders, and are then moved out. If a worker fails to manually check that the right cases have been loaded on a particular pallet, all dispatching stops are held up until the pallet is checked.
These setbacks notwithstanding, GLOBE taught Nestlé how to operate as a truly global company. For example, managers from the water businesses initially rejected the idea of collecting, managing, and disseminating data in the same way as their counterparts in chocolate and coffee. Some managers figured that if they were able to produce all the water or all the chocolate they needed for their market locally, that should be enough. But the idea was to get Nestlé’s vast empire to think, order, and execute as one rather than as a collection of disparate companies. This meant that a particular manufacturing plant in a particular manager’s region might be asked to produce double or triple the amount of coffee it had in the past. Or it might mean that a particular plant would be closed.
So, while the company did away with data centers for individual countries, each one does now have a data manager. The task is to make sure that the information that goes into GLOBE’s data centers is accurate and complete. That means that country managers can concentrate more on what really matters: serving customers.
9.06: Points to Remember
1. In today’s global competitive environment, individual companies no longer compete as autonomous entities but as supply-chain networks. Instead of brand versus brand or company versus company, then network is increasingly suppliers-brand-company versus suppliers-brand-company.
2. Top-performing supply chains have three distinct qualities. First, they are agile enough to react readily to sudden changes in demand or supply. Second, they adapt over time as market structures and environmental conditions change. And third, they align the interests of all members of the supply-chain network in order to optimize performance.
3. Driven by e-commerce’s capabilities to empower clients, most companies have moved from the traditional “push” business model—where manufacturers, suppliers, distributors, and marketers have most of the power—to a customer-driven “pull” model.
4. Supply-chain management (SCM) has three principal components: (a) creating the supply-chain network structure, (b) developing supply-chain business processes, and (c) managing the supply-chain activities. The supply-chain network structure consists of the member firms and the links between these firms. Business processes are the activities that produce a specific output of value to the customer. The management function integrates the business processes across the supply chain.
5. The best companies create supply chains that can respond to sudden and unexpected changes in markets. Agility—the ability to respond quickly and cost-effectively to unexpected change—is critical because in most industries, both demand and supply fluctuate more rapidly and widely than they used to. Key to increasing agility and resilience is building flexibility into the supply-chain structure, processes, and management.
6. Global companies must be able to adapt their supply networks when markets or strategies change. Companies that compete primarily on the basis of operational effectiveness typically focus on creating supply chains that deliver goods and services to consumers as quickly and inexpensively as possible. They invest in state-of-the-art technologies and employ metrics and reward systems aimed at boosting supply-chain performance. For companies competing on the basis of customer intimacy or product leadership, a focus on efficiency is not enough; agility is a key factor. Customer-intimate companies must be able to add and delete products and services as customer needs change; product leadership companies must be able to adapt their supply chains to changes in technology and to capitalize on new ideas.
7. Leading companies take care to align the interests of all the firms in their supply chain with their own. This is important because every supply-chain partner firm—whether a supplier, an assembler, a distributor, or a retailer—will focus on its own interests. If any company’s interests differ from those of the other organizations in the supply chain, its actions will not maximize the chain’s performance. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/09%3A_Global_Supply-Chain_Management/9.05%3A_Creating_Supply-Chain_Alignment.txt |
Previous chapters focused on the challenges associated with globalizing the first three components of the business model framework—the value proposition, market choices, and the value-chain infrastructure. This chapter looks at globalizing the fourth component—the company’s management model—which summarizes its choices about a suitable global organizational structure and decision-making framework.
The judicious globalization of a company’s management model is critical to unlocking the potential for global competitive advantage. But globalizing a company’s management model can be ruinous if conditions are not right or the process for doing so is flawed. So key questions include when, and to what extent, should a company globalize its decision-making processes and its organizational and control structure; what are some of the key implementation challenges; and how does a company get started?
This chapter is organized in two parts. The first discusses a key “soft” dimension of globalizing a company’s management model—creating and embedding a global mind-set—a prerequisite for global success. The second part deals with the “hard” dimensions of creating a global architecture: choosing a suitable organizational structure and streamlining global decision-making processes.
10: Globalizing the Management Model
Globalizing a company’s management model is hard. As firms increase their revenue by expanding into more countries and by extending the lives of existing products by bringing them into emerging markets, costs can often be reduced through global sourcing and better asset utilization. But capitalizing on such profit opportunities is hard because every opportunity for increased globalization has a cost and carries a danger of actually reducing profit. For example, the company’s customer focus may blur as excessive standardization makes products appeal to the lowest common denominator, alienating key customer segments and causing market share to fall. Or a wrong globalization move makes innovation slow down and causes price competition to sharpen.
The best executives in a worldwide firm are often country managers who are protective of “their” markets and value delivery networks. Globalization shrinks their power. Some rise to new heights within the organization by taking extra global responsibilities; some leave. Many fight globalization, making it tough for the CEO. Sometimes they win and the CEO loses. Overcoming organizational resistance is therefore key to success.
Minicase: When Global Strategy Goes Wrong (Huggett (2002, April 4)).
In April of 2002, Japan’s leading mobile operator, NTT DoCoMo, Inc., announced it would write down the reduced value of its investment in AT&T Wireless Services, Inc., a move expected to contribute to an extraordinary loss of about 1 trillion yen (\$7.53 billion) for the fiscal year. And when the full extent of the write-downs of all its recent European, U.S., and Asian investments was realized, the bill for the ambitious globalization strategy pursued by Japan’s—and Asia’s—most valuable company exceeded \$10 billion.
NTT DoCoMo clearly had the cash flow from its domestic business to avoid, by a long way, the high-profile fate of now bankrupt Swissair. However, the two companies’ approaches to global strategy provide interesting parallels and lessons for other international players in all industries. NTT DoCoMo and the former Swiss flag carrier enjoyed strong economic success built around a former monopoly and highly protected incumbent positions in their home markets. NTT DoCoMo was the clear leader in the Japanese mobile market, with a 60% market share that drove an annual operating cash flow of more than \$10 billion. Swissair’s dominant carrier position delivered financial performance that was similarly blue chip.
But a strong domestic market position and excess cash flow do not guarantee success abroad. In fact, without a quite sophisticated understanding of the uniqueness of its domestic situation, a strong domestic position could conceal some of the risks of a global strategy. The first lesson is one of microeconomics: understand what drives superior economic performance in a particular business and do not take domestic success for granted. Both the airline and the telecommunications businesses are highly regulated, technology-driven, and capital-intensive industries with high fixed and very low marginal costs (per airline seat or per mobile-call minute). Rapid changes in regulation and technology are changing some of the rules of the game but not the basic economics of either of these businesses.
In the airline industry, cost advantages are driven by an airline’s dominance in airport hubs and on specific routes. The airline with the most flights in and out of a specific airport generates lower unit costs per flight and per passenger than competitors. The airline with the highest market share and flight frequency on a given route typically has lower costs per seat, higher utilization, and superior pricing power. In the mobile industry, the significant fixed-cost components of the business (networks, product development, and brand advertising and promotion) provide unit cost advantages to the national market leader compared with its followers.
The second lesson from NTT DoCoMo and Swissair’s experience is to have a clear view of the real economic boundaries of your business—is it a global business or, rather, a multilocal or regional one? Sitting on increasing cash balances, both DoCoMo and Swissair saw a high volume of merger and acquisition activity. They concluded a wave of “globalization” was underway in their industries and that they could not afford to be left out. The result: they developed growth aspirations beyond their national boundaries.
But while regulatory changes allowed increased foreign shareholdings in telecommunications and airlines opened up new international investment opportunities, they have not changed the laws of economics. Despite regulatory changes, the economics of the mobile-phone industry remain primarily national or regional in nature. This implies that it is better to be a market leader in one country than a follower in two countries. Similarly, regulatory changes in traditional, bilateral air-transport agreements have shifted barriers to entry and hence increased competition and reduced pricing power in the airline industry, but they have not changed its fundamental economics. All successful airline mergers have been driven around building or expanding hub or route dominance, not around building sheer, absolute scale in terms of either aircraft or destinations served
When both NTT DoCoMo and Swissair convinced themselves they needed to expand beyond domestic boundaries to survive, the race to fulfill their global aspirations seems to have resulted in a set of investments more focused on the number of flags on a boardroom map rather than on these basic economics driving superior profitability in their industries. The risks of these two aggressive expansion strategies were further compounded by not having control over most of their international investments. This suggests a third lesson: move to management control if you are serious about capturing acquisition synergies.
During the mid to late 1990s, Swissair kept its investment bankers busy with a nonstop string of deals. The company adopted an explicit “hunter strategy,” which led to acquisitions of noncontrolling minority stakes in a string of strategically challenged nonincumbent carriers: German charter carrier LTU, the French airlines AOM-Air Liberte and Air Littoral, and Italy’s Volare Airlines and Air Europe. In addition, Swissair acquired stakes in Polish flag carrier LOT, Belgium’s Sabena, and South African Airways.
Without majority control, there was very limited scope for Swissair management to drive the economic benefits from these airline shareholdings through route consolidation, aircraft fleet rationalization and purchasing benefits. In addition, there was no ability to take corrective action when operational or financial performance deteriorated.
Similarly, in short order, DoCoMo accumulated direct or indirect stakes in nine mobile operators—most for cash—at the peak of the telecom bubble. But this acquisition spree resulted in equity stakes in only two market leaders, and these were in relatively minor geographic markets: KPN Mobile domestically in the Netherlands and Hutchison in Hong Kong. All the others were lesser players. DoCoMo acquired stakes in the No. 3 U.S. player, AT&T Wireless; Taiwan’s No. 4 player, KG Telecom; the United Kingdom’s No. 5 player, Hutchison U.K., and distant followers KPN Orange in Belgium and E-Plus in Germany. Worse still, all these investments were minority stakes and so gave DoCoMo limited ability to exert control over critical strategic and operational issues at these operators. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/10%3A_Globalizing_the_Management_Model/10.01%3A_Pitfalls_in_Globalizing_a_Management_Model.txt |
A common challenge that many corporations encounter as they move to globalize their operations can be summed up in one word: mind-set. Successful global expansion requires corporate leaders who think proactively, who sense and foresee emerging trends, and who act upon them in a deliberate, timely manner. To accomplish this, they need a global mind-set and an enthusiasm to embrace new challenges, diversity, and a measure of ambiguity. Simply having the right product and technology is not sufficient; it is the caliber of a company’s global leadership that that makes the difference.
Herbert Paul defines a mind-set as “a set of deeply held internal mental images and assumptions, which individuals develop through a continuous process of learning from experience” (Paul (2000)). These images exist in the subconscious and determine how an individual perceives a specific situation and his or her reaction to it. In a global context, a global mind-set is “the ability to avoid the simplicity of assuming all cultures are the same, and at the same time, not being paralyzed by the complexity of the differences ” (Paul (2000)). Thus, rather than being frustrated and intimidated by cultural differences, an individual with a global mind-set enjoys them and seeks them out because they are fascinated by them and understand they present unique business opportunities.
The concept of a mind-set does not just apply to individuals: it can be logically extended to organizations as the aggregated mind-set of all of its members. Naturally, at the organizational level, mind-set also reflects how its members interact as well as such issues as the distribution of power within the organization. Certain individuals, depending on their position in the organizational hierarchy, will have a stronger impact on the company’s mind-set than others. In fact, the personal mind-set of the CEO is sometimes the single most important factor in shaping the organization’s mind-set.
A corporate mind-set shapes the perceptions of individual and corporate challenges, opportunities, capabilities, and limitations. It also frames how goals and expectations are set and therefore has a significant impact on what strategies are considered and ultimately selected and how they are implemented. Recognizing the diversity of local markets and seeing them as a source of opportunity and strength, while at the same time pushing for strategic consistency across countries, lies at the heart of global strategy development. To become truly global, therefore, requires a company to develop two key capabilities. First, the company must have the capability to enter any market in the world it wishes to compete in. This requires that the company constantly looks for market opportunities worldwide, processes information on a global basis, and is respected as a real or potential threat by competitors, even in countries or markets it has not yet entered. Second, the company must have the capability to leverage its worldwide resources. Making a switch to a lower cost position by globalizing the supply chain is a good example. Leveraging a company’s global know-how is another.
To understand the importance of a corporate mind-set to the development of these capabilities, consider two often quoted corporate mantras: “think global and act local” and its opposite, “think local and act global.” The “think global and act local” mind-set is indicative of a global approach in which management operates under the assumption that a powerful brand name with a standard product, package, and advertising concept serves as a platform to conquer global markets. The starting point is a globalization strategy focused on standard products, optimal global sourcing, and the ability to react globally to competitors’ moves. While sometimes effective, this approach can discourage diversity, and it puts a lot of emphasis on uniformity. Contrast this with a “think local and act global” mind-set, which is based on the assumption that global expansion is best served by adaptation to local needs and preferences. In this mind-set, diversity is looked upon as a source of opportunity, whereas strategic cohesion plays a secondary role. Such a “bottom-up” approach can offer greater possibilities for revenue generation, particularly for companies wanting to rapidly grow abroad. However, it may require greater investment in infrastructure necessary to serve each market and can produce global strategic inconsistency and inefficiencies.
C. K. Prahalad and Kenneth Lieberthal first exposed the Western (which they refer to as “imperialist”) bias that many multinationals have brought to their global strategies, particularly in developing countries. They note that they would perform better—and learn more—if they more effectively tailored their operations to the unique conditions of emerging markets. Arguing that literally hundreds of millions of people in China, India, Indonesia, and Brazil are ready to enter the marketplace, they observe that multinational companies typically target only a tiny segment of affluent buyers in these emerging markets: those who most resemble Westerners. This kind of myopia—thinking of developing countries simply as new places to sell old products—is not only shortsighted and the direct result of a Western “imperialist” mind-set; it causes these companies to miss out on much larger market opportunities further down the socioeconomic pyramid that are often seized by local competitors. (Prahalad and Lieberthal (1998)).
Companies with a genuine global mind-set do not assume that they can be successful by simply exporting their current business models around the globe. Citicorp, for example, knew it could not profitably serve a client in Beijing or Delhi whose net wealth is less than \$5,000 with its U.S. business model and attendant cost structure. It therefore had to create a new business model—which meant rethinking every element of its cost structure—to serve average citizens in China and India.
What is more, as we have seen, the innovation required to serve the large tier-two and tier-three segments in emerging markets has the potential to make them more competitive in their traditional markets and therefore in all markets. The same business model that Citicorp developed for emerging markets, for example, was found to have application to inner-city markets in the United States and elsewhere in the developed world.
To become truly global, multinational companies will also increasingly have to look to emerging markets for talent. India is already recognized as a source of technical talent in engineering, sciences, and software, as well as in some aspects of management. High-tech companies recruit in India not only for the Indian market but also for the global market. China, Brazil, and Russia will surely be next. Philips, the Dutch electronics giant, is downsizing in Europe and already employs more Chinese than Dutch workers. Nearly half of the revenues for companies such as Coca-Cola, Procter & Gamble (P&G), Lucent, Boeing, and GE come from Asia, or will in the near future.
As corporate globalization advances, the composition of senior management will also begin to reflect the importance of the BRIC (Brazil, Russia, India, and China) countries and other emerging markets. At present, with a few exceptions, such as Citicorp and Unilever, executive suites are still filled with nationals from the company’s home country. As the senior managements for multinationals become more diverse, however, decision-making criteria and processes, attitudes toward ethics, and corporate responsibility, risk taking, and team building all will likely change, reflecting the slow but persistent shift in the center of gravity in many multinational companies toward Asia. This will make the clear articulation of a company’s core values and expected behaviors even more important than it is today. It will also increase the need for a single company culture as more and more people from different cultures have to work together. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/10%3A_Globalizing_the_Management_Model/10.02%3A_The_Importance_of_a_Global_Mind-Set.txt |
What factors shape a corporation’s mind-set? Can they be managed? Given the importance of mind-set to a company’s global outlook and prospects, these are important questions. Paul cites four primary factors: (1) top management’s view of the world; (2) the company’s strategic and administrative heritage; (3) the company’s dominant organizational dimension; and (4) industry-specific forces driving or limiting globalization. (Paul (2000)).
Top Management’s View of the World
The composition of a company’s top management and the way it exercises power both have an important influence on the corporate mind-set. The emergence of a visionary leader can be a major catalyst in breaking down existing geographic and competitive boundaries. Good examples are Jack Welch at General Electric or Louis Gerstner at IBM, who both played a dominant role in propelling their companies to positions of global leadership. In contrast, leaders with a parochial, predominantly ethnocentric vision are more likely to concentrate on the home market and not be very interested in international growth.
Administrative Heritage
The second factor is a company’s “administrative heritage”—a company’s strategic and organizational history, including the configuration of assets the company has acquired over the years, the evolution of its organizational structure, the strategies and management philosophies the company has pursued, its core competencies, and its corporate culture. In most companies, these elements evolve over a number of years and increasingly “define” the organization. As a consequence, changing one or more of these key tangible and intangible elements of a company is an enormous challenge and therefore a constraint on its global strategic options. For example, many traditional multinationals such as Philips and Unilever created freestanding subsidiaries with a high degree of autonomy and limited strategic coordination in many of the countries and markets where they chose to compete. Companies with such a history may encounter greater resistance in introducing a more global mind-set and related strategies than companies such as Coca-Cola, which have predominantly operated with a more centralized approach.
Organizational Structure
The type of organizational structure a company has chosen—discussed more fully in the next section—is also a key determinant of a corporate mind-set. In a strongly product-oriented structure, management is more likely to think globally as the entire information infrastructure is geared toward collecting and processing product data on a worldwide basis. Compare this to an organization with a focus on countries, areas, or regions—the mind-set of managers tends to be more local. Here, the information infrastructure is primarily oriented toward local and regional needs. It follows that in a matrix structure based on product as well as geographic dimensions, the mind-set of management is expected to reflect both global and local perspectives.
Industry Forces
Industry factors such as opportunities for economies of scale and scope, global sourcing, and lower transportation and communication costs push companies toward a global efficiency mind-set. Stronger global competition, the need to enter new markets, and the globalization of important customers pull in the same direction. Similarly, the trend toward a more homogeneous demand, particularly for products in fast-moving consumer goods industries, and more uniform technical standards for many industrial products, encourage a more global outlook. Another set of industry drivers, however, works in the opposite direction and calls for strategies with a high degree of local responsiveness. Such drivers include strong local competition in important markets and the existence of cultural differences, making the transfer of globally standardized concepts less attractive. Issues such as protectionism, trade barriers, and volatile exchange rates may also force a national business approach. All these forces work together and help create the conditions that shape the global mind-set of a company.
Creating the Right Global Mind-Set
Thus, to create the right global mind-set, management must understand the different, often opposite, environmental forces that shape it. At the corporate level, managers focusing on global competitive strategies tend to emphasize increased cross-country or cross-region coordination and more centralized, standardized approaches to strategy. Country managers, on the other hand, frequently favor greater autonomy for their local units because they feel they have a better understanding of local market and customer needs. Thus, different groups of managers can be expected to analyze data and facts in a different way and favor different strategic concepts and solutions depending on their individual mind-sets.
In practice, two different scenarios can develop. In the first scenario, one perspective consistently wins at the expense of the other. Under this scenario, the company may be successful for a certain period of time but will most likely run into trouble at a later time because its ability to learn and innovate will be seriously impaired as it opts for “short-sighted” solutions within a given framework. In the second scenario, a deliberate effort is made to maintain a “creative tension” between both perspectives. This scenario recognizes the importance of such a tension to the company’s ability to break away from established patterns of thinking and look for completely new solutions. This ability to move beyond the existing paradigm and, in that sense, further develop the mind-set is probably one of the most important success factors for many of the established successful global players. Utilizing creative tension in a constructive manner requires the development of a corporate vision as well as a fair decision-making process. The corporate vision is expected to provide general direction for all managers and employees in terms of where the company wishes to be in the future. Equally important is setting up a generally understood and accepted fair decision process, which must allow for sufficient opportunities to analyze and discuss both global and local perspectives, and their merits, in view of specific strategic situations.
P&G has been particularly innovative in designing its global operations around the tension between local and global concerns. Four pillars—global business units, market development organizations, global business services, and corporate functions—form the heart of P&G’s organizational structure. Global business units build major global brands with robust business strategies; market development organizations build local understanding as a foundation for marketing campaigns; global business services provide business technology and services that drive business success; and corporate functions work to maintain our place as a leader of our industries. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/10%3A_Globalizing_the_Management_Model/10.03%3A_Determinants_of_a_Corporate_Global_Mind-Set.txt |
Organizational design should be about developing and implementing corporate strategy. In a global context, the balance between local and central authority for key decisions is one of the most important parameters in a company’s organizational design. Companies that have partially or fully globalized their operations have typically migrated to one of four organizational structures: (a) an international, (b) a multidomestic, (c) a global, or (d) a so-called transnational structure. Each occupies a well-defined position in the global aggregation or local adaptation matrix first developed by Bartlett and Ghoshal and usefully describes the most salient characteristics of each of these different organizational structures (Figure \(1\) "Global Aggregation/Local Adaptation Matrix"). This section draws substantially on Aboy (2009). See, for example, Bartlett and Ghoshal (1987a, 1987b, 1988, 1992, 2000).
The international model characterizes companies that are strongly dependent on their domestic sales and that export opportunistically. International companies typically have a well-developed domestic infrastructure and additional capacity to sell internationally. As their globalization develops further, they are destined to evolving into multidomestic, global, or transnational companies. The international model is fairly unsophisticated, unsustainable if the company further globalizes, and is therefore usually transitory in nature. In the short term, this organizational form may be viable in certain situations where the need for localization and local responsiveness is very low (i.e., the domestic value proposition can be marketed internationally with very minor adaptations) and the economies of aggregation (i.e., global standardization) are also low.
The multidomestic organizational model describes companies with a portfolio of independent subsidiaries operating in different countries as a decentralized federation of assets and responsibilities under a common corporate name. (Bartlett and Ghoshal (1987a, 1987b)). Companies operating with a multidomestic model typically employ country-specific strategies with little international coordination or knowledge transfer from the center headquarters. Key decisions about strategy, resource allocation, decision making, knowledge generation and transfer, and procurement reside with each country subsidiary, with little value added from the center (headquarters). The pure multidomestic organizational structure is positioned as high on local adaptation and low on global aggregation (integration). Like the international model, the traditional multidomestic organizational structure is not well suited to a global competitive environment in which standardization, global integration, and economies of scale and scope are critical. However, this model is still viable in situations where local responsiveness, local differentiation, and local adaptation are critical, while the opportunities for efficient production, global knowledge transfer, economies of scale, and economies of scope are minimal. As with the international model, the pure multidomestic company often represents a transitory organizational structure. An example of this structure and its limitations is provided by Philips during the last 25 years of the last century. In head-to-head competition with its principal rival, Matsushita, Philips’ multidomestic organizational model became a competitive disadvantage against Matsushita’s centralized (global) organizational structure.
The traditional global company is the antithesis of the traditional multidomestic company. It describes companies with globally integrated operations designed to take maximum advantage of economies of scale and scope by following a strategy of standardization and efficient production. (See, for example, G. S. Yip (1981, 1982a, 1982b, 1989, 1991a, 1991b, 1994, 1996, 1997); Yip and Madsen (1996)). By globalizing operations and competing in global markets, these companies seek to reduce cost of research and development (R&D), manufacturing, production, procurement, and inventory; improve quality by reducing variance; enhance customer preference through global products and brands; and obtain competitive leverage. Most, if not all, key strategic decisions—about corporate strategy, resource allocation, and knowledge generation and transfer—are made at corporate headquarters. In the global aggregation-local adaptation matrix, the pure global company occupies the position of extreme global aggregation (integration) and low local adaptation (localization). An example of a pure global structure is provided by the aforementioned Japanese company Matsushita in the latter half of the last century. Since a pure global structure also represents an (extreme) ideal, it frequently is also transitory.
The transnational model is used to characterize companies that attempt to simultaneously achieve high global integration and high local responsiveness. It was conceived as a theoretical construct to mitigate the limitations of the pure multidomestic and global structures and occupies the fourth cell in the aggregation-adaptation matrix. This organizational structure focuses on integration, combination, multiplication of resources and capabilities, and managing assets and core competencies as a network of alliances as opposed to relying on functional or geographical division. Its essence, therefore, is matrix management. The ultimate objective is to have access and make effective and efficient use of all the resources the company has at its disposal globally, including both global and local knowledge. As a consequence, it requires management-intensive processes and is extremely hard to implement in its pure form. It is as much a mind-set, idea, or ideal rather than an organization structure found in many global corporations. (Ohmae (2006)).
Given the limitations of each of the above structures in terms of either their global competitiveness or their implementability, many companies have settled on matrix-like organizational structures that are more easily managed than the pure transnational model but that still target the simultaneous pursuit of global integration and local responsiveness. Two of these have been labeled the modern multidomestic and modern global models of global organization. (Aboy (2009), p. 3).
The modern multidomestic model is an updated version of the traditional (pure) multidomestic model that includes a more significant role for the corporate headquarters. Accordingly, its essence no longer consists of a loose confederation of assets, but rather a matrix structure with a strong culture of operational decentralization, local adaptation, product differentiation, and local responsiveness. The resulting model, with national subsidiaries with significant autonomy, a strong geographical dimension, and empowered country managers allows companies to maintain their local responsiveness and their ability to differentiate and adapt to local environments. At the same time, in the modern multidomestic model, the center is critical to enhancing competitive strength. Whereas the primary role of the subsidiary is to be locally responsive, the role of the center is multidimensional; it must foster global integration by (a) developing global corporate and competitive strategies, and (b) playing a significant role in resource allocation, selection of markets, developing strategic analysis, mergers and acquisitions, decisions regarding R&D and technology matters, eliminating duplication of capital intensive assets, and knowledge transfer. An example of a modern multidomestic company is Nestlé.
The modern global company is rooted in the tradition of the traditional (pure) global form but gives a more significant role in decision making to the country subsidiaries. Headquarters targets a high level of global integration by creating low-cost sourcing opportunities, factor cost efficiencies, opportunities for global scale and scope, product standardization, global technology sharing and information technology (IT) services, global branding, and an overarching global corporate strategy. But unlike the traditional (pure) global model, the modern global structure makes more effective use of the subsidiaries in order to encourage local responsiveness. As traditional global firms evolve into modern global enterprises, they tend to focus more on strategic coordination and integration of core competencies worldwide, and protecting home country control becomes less important. Modern global corporations may disperse R&D, manufacture and production, and marketing around the globe. This helps ensure flexibility in the face of changing factor costs for labor, raw materials, exchange rates, as well as hiring talent worldwide. P&G is an example of a modern global company. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/10%3A_Globalizing_the_Management_Model/10.04%3A_Organization_as_Strategy.txt |
Creating the right environment for a global mind-set to develop and realigning and restructuring a company’s global operations, at a minimum, requires (a) a strong commitment by the right top management, (b) a clear statement of vision and a delineation of a well-defined set of global decision-making processes, (c) anticipating and overcoming organizational resistance to change, (d) developing and coordinating networks, (e) a global perspective on employee selection and career planning.
A strong commitment by the right top management. Shaping a global mind-set starts at the top. The composition of the senior management team and the board of directors should reflect the diversity of markets in which the company wants to compete. In terms of mind-set, a multicultural board can help operating managers by providing a broader perspective and specific knowledge about new trends and changes in the environment. A good example of a company with a truly global top management team is the Adidas Group, the German-based sportswear company. Its executive board consists of two Germans, an American, and a New Zealander; the CEO is German. The company’s supervisory board includes German nationals, a Frenchman, and Russians. Adidas is still an exception. Many other companies operating on a global scale still have a long way to go to make the composition of their top management and boards reflects the importance and diversity of their worldwide operations.
A clear statement of vision and a delineation of a well-defined set of global decision-making processes. For decades, it has been general management’s primary role to determine corporate strategy and the organization’s structure. In many global companies, however, top management’s role has changed from its historical focus strategy, structure, and systems to one of developing purpose and vision, processes, and people. This new philosophy reflects the growing importance of developing and nurturing a strong corporate purpose and vision in a diverse, competitive global environment. Under this new model, middle and upper-middle managers are expected to behave more like business leaders and entrepreneurs rather than administrators and controllers. To facilitate this role change, companies must spend more time and effort engaging middle management in developing strategy. This process gives middle and upper-middle managers an opportunity to make a contribution to the (global) corporate agenda and, at the same time, helps create a shared understanding and commitment of how to approach global business issues. Instead of traditional strategic planning in a separate corporate planning department, Nestlé, for example, focuses on a combination of bottom-up and top-down planning approaches involving markets, regions, and strategic product groups. That process ensures that local managers play an important part in decisions to pursue a certain plan and the related vision. In line with this approach, headquarters does not generally force local units to do something they do not believe in. The new philosophy calls for development of the organization less through formal structure and more through effective management processes.
Anticipating and overcoming organizational resistance to change. The globalization of key business processes such as IT, purchasing, product design, and R&D is critical to global competitiveness. Decentralized, siloed local business processes simply are ineffective and unsustainable in today’s intense, competitive global environment. In this regard, creating the right “metrics” is important. When all of a company’s metrics are focused locally or regionally, locally or regionally inspired behaviors can be expected. Until a consistent set of global metrics is adopted, designed to encourage global behaviors, globalization is unlikely to take hold, much less succeed. Resistance to such global process initiatives runs deep, however. As many companies have learned, country managers will likely invoke everything from the “not invented here” syndrome to respect for local culture and business heritage to defend the status quo.
Developing and coordinating networks. Globalization has also brought greater emphasis on collaboration, not only with units inside the company but also with outside partners such as suppliers and customers. Global managers must now develop and coordinate networks, which give them access to key resources on a worldwide basis. Network building helps to replace nationally held views with a collective global mind-set. Established global companies, such as Unilever or GE, have developed a networking culture in which middle managers from various parts of the organization are constantly put together in working, training, or social situations. They range from staffing multicultural project teams, to sophisticated career path systems encouraging international mobility, to various training courses and internal conferences.
A global perspective on employee selection and career planning. Recruiting from diverse sources worldwide supports the development of a global mind-set. A multicultural top management, as described previously, might improve the company’s chances of recruiting and motivating high-potential candidates from various countries. Many companies now hire local managers and put them through intensive training programs. Microsoft, for example, routinely brings foreign talent to the United States for intensive training. P&G runs local courses in a number of countries and then sends trainees to its headquarters in Cincinnati or to large foreign subsidiaries for a significant period of time. After completion of their training, they are expected to take over local management positions.
Similarly, a career path in a global company must provide for recurring local and global assignments. Typically, a high-potential candidate will start in a specific local function, for example, marketing or finance. A successful track record in the chosen functional area provides the candidate with sufficient credibility in the company and, equally important, self-confidence to take on more complex and demanding global tasks, usually as a team member where he or she gets hands-on knowledge of the workings of a global team. With each new assignment, managers should broaden their perspectives and establish informal networks of contact and relationships. Whereas international assignments in the past were primarily demand-driven to transfer know-how and solve specific problems, they are now much more learning-oriented and focus on giving the expatriate the opportunity to understand and benefit from cultural differences as well as to develop long-lasting networks and relationships. Exposure to all major functions, rotation through several businesses, and different postings in various countries are critical in creating a global mind-set, both for the individual manager and for the entire management group. In that sense, global human resource management is probably one of the most powerful medium- and long-term tools for global success.
Minicase: March 31, 2008: Citi Announces New Corporate Organizational Structure (news.primerica.com/public/news/citi-announces-new-corp-orginazational-structure.html)
Vikram Pandit, Citi’s chief executive officer, recently announced a comprehensive reorganization of Citi’s structure to achieve greater client focus and connectivity, global product excellence, and clear accountability. The new organizational structure is designed to let Citi focus its resources toward growth in emerging and developed markets and improve efficiencies throughout the company.
Specifically, Citi has established a regional structure to bring decision making closer to clients. The new structure gives the leaders of the geographic regions authority to make decisions on the ground. The geographic regions are each led by a single chief executive officer who reports to Mr. Pandit.
In addition, Citi reorganized its consumer group into two global businesses: Consumer Banking and Global Cards. This brings Citi’s number of global businesses to four: Institutional Clients Group and Global Wealth Management are already organized as global businesses. The four global businesses will allow Citi to deliver on product excellence in close partnership with the regions. The product leaders also will report to Mr. Pandit.
“Our new organizational model marks a further important step along the path we are pursuing to make Citi a simpler, leaner and more efficient organization that works collaboratively across the businesses and throughout the world to benefit clients and shareholders,” said Mr. Pandit. “With this new structure, we reinforce our focus on clients by moving the decision-making process as close to clients as possible and assigning some of our strongest talent to lead the regional areas and global product groups.”
As part of the reorganization, in order to drive efficiency and reduce costs, Citi will further centralize global functions, including finance, IT, legal, human resources, and branding. By centralizing these global functions, particularly IT, Citi will reduce unnecessary complexity, leverage its global scale, and accelerate innovation. Risk is already centralized.
The business reorganization reflects priorities outlined by Mr. Pandit, who has been conducting intensive business reviews, since being named CEO, to drive greater cross-business collaboration; eliminate bureaucracy and create a nimbler, more client-focused organization; ensure strong risk management and capital resources; and drive cost and operational efficiencies to generate additional shareholder value.
10.06: Points to Remember
Developing a global mind-set requires companies to accomplish the following:
1. Integrate the global aspects of strategy into their overall corporate strategy and change thinking patterns from a single domestic focus to a broad global focus.
2. Manage uncertainty while constantly adapting to change and accepting it as part of a process.
3. Get the right people in place with the skills necessary to focus on international expansion.
4. Combine the various cultures and values of the corporate work force into a unique global organizational culture.
5. Invest in people so they can help the company to succeed globally.
6. Embrace diversity and differences.
7. Learn how to cooperate with partners worldwide by successfully managing global supply chains, teams, and alliances,
On the subject of creating a global organization, the following factors are important:
1. Globalization is driving a wholesale reinvention of organizational structure and management. The need for global scale and process efficiency is challenging corporate leaders to replace old paradigms of centralized control and decentralized autonomy with new models.
2. Achieving the potential of global operations requires a mix of “soft” and “hard” approaches. Optimizing global processes requires cultural change management, proactive team- and relationship-building, and also more traditional budgetary and accountability mechanisms and metrics.
3. Long-term vision, planning, and goal alignment can greatly increase chances of success. Corporations should start with a clear vision of their global objectives and values, and consciously develop shared language and identity, with participation from all global regions, not just headquarters.
4. Identifying and replicating successes quickly and continuously is crucial to global competitiveness. Today’s complex global markets require multifaceted, not monolithic, approaches and capabilities. Global collaboration with face-to-face feedback loops, and a focus on identifying local successes and building them into the global process portfolio, can maximize the value of a corporation’s global assets. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/10%3A_Globalizing_the_Management_Model/10.05%3A_Realigning_and_Restructuring_for_Global_Competitive_Advantage.txt |
Free Trade. Throughout history, free trade has been an important factor behind the prosperity of different civilizations. Adam Smith pointed to increased trade as the primary reason for the flourishing of the Mediterranean cultures, such as Egypt, Greece, and Rome, but also of Bengal (East India) and China. The great prosperity of the Netherlands, after it threw off Spanish imperial rule and came out in favor of free trade and freedom of thought, made the free trade versus mercantilist dispute the most important question in economics for centuries. Mercantilism is an economic theory that holds that the prosperity of a nation is dependent upon its supply of capital, and that the global volume of trade is “unchangeable.” Economic assets or capital are represented by bullion (gold, silver, and trade value) held by the state, which is best increased through a positive balance of trade with other nations (exports minus imports). Mercantilism suggests that the ruling government should advance these goals by playing a protectionist role in the economy through encouraging exports and discouraging imports, especially through the use of tariffs. Mercantilism was the dominant school of thought from the 16th to the 18th centuries. Domestically, this led to some of the first instances of significant government intervention and control over the economy, and it was during this period that much of the modern capitalist system was established. Internationally, mercantilism encouraged the many European wars of the period and fueled European imperialism. Belief in mercantilism began to fade in the late 18th century, as the arguments of Adam Smith and the other classical economists won out. Today, mercantilism (as a whole) is rejected by economists, though some elements are looked upon favorably by noneconomists. Ever since then, the “free-trade doctrine” has battled with mercantilist, protectionist, isolationist, and other trade doctrines and policies.
One of the strongest arguments for free trade was made by classical economist David Ricardo in his analysis of comparative advantage. Comparative advantage occurs when different parties (countries, regions, or individuals) have different opportunity costs of production. The theory is that free trade will induce countries to specialize in making the products that they are best at and that this will maximize the total wealth produced.
Adopting the free-trade doctrine means supporting and protecting (a) the trade of goods without taxes (including tariffs) or other trade barriers (e.g., quotas on imports or subsidies for producers); (b) trade in services without taxes or other trade barriers; (c) the absence of “trade-distorting” policies (such as taxes, subsidies, regulations, or laws) that give some firms, households, or factors of production an advantage over others; (d) free access to markets; (e) free access to market information; (f) efforts against firms trying to distort markets through monopoly or oligopoly power; (g) the free movement of labor between and within countries; and (h) the free movement of capital between and within nations.
Protectionism. Opposition to free trade, generally known as protectionism, is based on the notion that free trade is unrealistic or that the advantages are outweighed by considerations of national security, the importance of nurturing infant industries, preventing the exploitation of economically weak countries by stronger ones or of furthering various social goals.
Free trade is sometimes also opposed by domestic industries threatened by lower-priced imported goods. If U.S. tariffs on imported sugar were reduced, for example, U.S. sugar producers would have to lower their prices (and sacrifice profits). Of course, U.S. consumers would benefit from those lower prices. In fact, economics tells us that, collectively, consumers would gain more than the (domestic) producers would lose. However, since there are only a few domestic sugar producers, each one could lose a significant amount. This explains why domestic producers may be inclined to mobilize against the lifting of tariffs or, more generally, why they often favor domestic subsidies and tariffs on imports in their home countries, while objecting to subsidies and tariffs in their export markets.
Antiglobalization groups that maintain that, in reality, “free-trade agreements” often do not increase the economic freedom of the poor but rather make them poorer. These groups are another source of opposition to free trade. An example is the argument that letting subsidized corn from the United States into Mexico freely under NAFTA at prices well below production cost is ruinous to Mexican farmers. The real issue here, of course, is that such subsidies violate the principles of free trade and that this therefore exemplifies a flawed agreement rather than a valid argument against free trade.
As economic policy, protectionism is about restraining trade between nations, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive government regulations designed to discourage imports and prevent foreign takeover of local markets and companies. This policy is closely aligned with antiglobalization and contrasts with free trade, where government barriers to trade are kept to a minimum. The term is mostly used in the context of economics, where protectionism refers to policies or doctrines that “protect” businesses and workers within a country by restricting or regulating trade between foreign nations.
Historically, protectionism was associated with economic theories such as mercantilism and import substitution. During that time, Adam Smith famously warned against the “interested sophistry” of industry, seeking to gain advantage at the cost of the consumers.Friedman and Friedman (1980). Virtually all modern-day economists agree that protectionism is harmful in that its costs outweigh the benefits and that it impedes economic growth. Economics Nobel Prize winner and trade theorist Paul Krugman once stated, “If there were an Economist’s Creed, it would surely contain the affirmations ‘I believe in the Principle of Comparative Advantage’ and ‘I believe in Free Trade.’” (Krugman (1987)).
A variety of policies can be used to achieve protectionist goals, including the enactment of the following items:
1. Tariffs. Typically, tariffs (or taxes) are imposed on imported goods. Tariff rates vary according to the type of goods imported. Import tariffs will increase the cost to importers and increase the price of imported goods in the local markets, thus lowering the quantity of goods imported. Tariffs may also be imposed on exports, and in an economy with floating exchange rates, export tariffs have similar effects as import tariffs. However, for political reasons, such a policy is seldom implemented.
2. Import quotas. Import quotas reduce the quantity, and therefore increase the market price, of imported goods. Their economic effect is therefore similar to that of tariffs, except that the tax revenue gain from a tariff will instead be distributed to those who receive import licenses. This explains why economists often suggest that import licenses be auctioned to the highest bidder or that import quotas be replaced by an equivalent tariff.
3. Administrative barriers. Countries are sometimes accused of using their various administrative rules (e.g., regarding food safety, environmental standards, electrical safety) as a way to introduce barriers to imports.
4. Antidumping legislation. Dumping is the act of charging a lower price for a good in a foreign market than is charged for the same good in the domestic market (i.e., selling at less than “fair value”). Under the World Trade Organization (WTO) agreement, dumping is condemned (but not prohibited) if it causes or threatens to cause material injury to a domestic industry in the importing country. Supporters of antidumping laws argue that they prevent “dumping” of cheaper foreign goods that would cause local firms to close down. In practice, however, antidumping laws are often used to impose trade tariffs on foreign exporters.
5. Direct subsidies. Government subsidies (in the form of lump-sum payments or cheap loans) are sometimes given to local firms that cannot compete well against foreign imports. These subsidies are purported to “protect” local jobs and to help local firms adjust to the world markets.
6. Export subsidies. Under export subsidies, exporters are paid a percentage of the value of their exports. Export subsidies increase the amount of trade, and, in a country with floating exchange rates, have effects similar to import subsidies.
7. Exchange rate manipulation. A government may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market. Doing so will raise the cost of imports and lower the cost of exports, leading to an improvement in its trade balance. However, such a policy is only effective in the short run, as it will lead to higher price inflation in the country, which will in turn raise the cost of exports and reduce the relative price of imports.
In the modern trade arena, many other initiatives besides tariffs, quotas, and subsidies have been called protectionist. For example, some scholars, such as Jagdish Bhagwati, see developed countries’ efforts in imposing their own labor or environmental standards as forms of protectionism. (Bhagwati (2004)). The imposition of restrictive certification procedures on imports can also be seen in this light. Others point out that free-trade agreements often have protectionist provisions such as intellectual property, copyright, and patent restrictions that benefit large corporations. These provisions restrict trade in music, movies, drugs, software, and other manufactured items to high-cost producers with quotas from low-cost producers set to zero.
Arguments for protectionism. Opponents of free trade include those who argue that the comparative advantage argument for free trade has lost its legitimacy in a globally integrated world in which capital is free to move internationally. Herman Daly, a leading voice in the discipline of ecological economics, has stated that although Ricardo’s theory of comparative advantage is one of the most elegant theories in economics, its application to the present day is illogical: “Free capital mobility totally undercuts Ricardo’s comparative advantage argument for free trade in goods, because that argument is explicitly and essentially premised on capital (and other factors) being immobile between nations. Under the new globalization regime, capital tends simply to flow to wherever costs are lowest—that is, to pursue absolute advantage.” (Daly (2007)).
Others criticize free trade as being “reverse protectionism in disguise,” that is, of using tax policy to protect foreign manufacturers from domestic competition. By ruling out revenue tariffs on foreign products, government must fully rely on domestic taxation to provide its revenue, which falls disproportionately on domestic manufacturing. Or, in the words of Paul Craig Roberts, “[Foreign discrimination of U.S. products] is reinforced by the U.S. tax system, which imposes no appreciable tax burden on foreign goods and services sold in the U.S. but imposes a heavy tax burden on U.S. producers of goods and services regardless of whether they are sold within the U.S. or exported to other countries.” (Roberts (2005, July 26)).
Other defenses of protectionism include the idea that protecting newly founded, strategically important infant industries by imposing tariffs allows those domestic industries to grow and become self-sufficient within the international economy once they reach a reasonable size.
Arguments against protectionism. Most economists fundamentally believe in free trade and agree that protectionism reduces welfare. Nobel laureates Milton Friedman and Paul Krugman, for example, have argued that free trade helps third-world workers even though they may not be subject to the stringent health and labor standards of developed countries. This is because the growth of the manufacturing sector and the other jobs that a new export sector creates competition among producers, thereby lifting wages and living conditions.
Protectionism has also been accused of being one of the major causes of war. Proponents of this theory point to the constant warfare in the 17th and 18th centuries among European countries whose governments were predominantly mercantilist and protectionist; the American Revolution, which came about primarily due to British tariffs and taxes; as well as the protective policies preceding World War I and World War II. | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/11%3A_Appendix_A_-_Global_Trade_-_Doctrines_and_Regulation/11.02%3A_Doctrines.txt |
Traditionally, trade was regulated through bilateral treaties between two nations. After World War II, as free trade emerged as the dominant doctrine, multilateral treaties like the GATT and World Trade Organization (WTO) became the principal regime for regulating global trade.
The WTO, created in 1995 as the successor to the General Agreement on Tariffs and Trade (GATT), is an international organization charged with overseeing and adjudicating international trade. The WTO deals with the rules of trade between nations at a near-global level; is responsible for negotiating and implementing new trade agreements; and is in charge of policing member countries’ adherence to all the WTO agreements, signed by the majority of the world’s trading nations and ratified in their parliaments. Additionally, it is the WTO’s duty to review the national trade policies and to ensure the coherence and transparency of trade policies through surveillance in global economic policy making.
Headquartered in Geneva, Switzerland, the WTO has more than 150 members, which represent more than 95% of total world trade. It is governed by a ministerial conference, which meets every 2 years; a general council, which implements the conference’s policy decisions and is responsible for day-to-day administration; and a director-general, who is appointed by the ministerial conference.
Five basic principles guide the WTO’s role in overseeing the global trading system:
1. Nondiscrimination. This principle inspired two major policies—the most favored nation (MFN) rule and the national treatment policy—embedded in the main WTO rules on goods, services, and intellectual property. The MFN rule requires that a WTO member must apply the same conditions on all trade with other WTO members, that is, a WTO member has to grant the most favorable conditions under which it allows trade in a certain product type to all other WTO members. The national treatment policy, adopted to address nontariff barriers to trade (e.g., technical standards, security standards) dictates that imported and locally produced goods should be treated equally (at least after the foreign goods have entered the market).
2. Reciprocity. This principle reflects both a desire to limit the scope of free riding that that may arise because of the MFN rule and a desire to obtain better access to foreign markets.
3. Binding and enforceable commitments. The tariff commitments made by WTO members in a multilateral trade negotiation and on accession are enumerated in a list of concessions. A country can change its commitments but only after negotiating with its trading partners, which could mean compensating them for loss of trade. If satisfaction is not obtained, the complaining country may invoke the WTO dispute settlement procedures.
4. Transparency. WTO members are required to publish their trade regulations, to maintain institutions charged with review of administrative decisions affecting trade, to respond to requests for information by other members, and to notify changes in trade policies to the WTO.
5. Safety valves. Under specific circumstances, governments can (within limits) restrict trade to attain noneconomic objectives, to ensure “fair competition,” and under special economic circumstances.
The WTO operates on a “one country, one vote” system, but actual votes have never been taken. Ostensibly, decisions are made by consensus, with relative market size as the primary source of bargaining power. In reality, most WTO decisions are made through a process of informal negotiations between small groups of countries, often referred to as the “green room” negotiations (after the color of the WTO director-general’s office in Geneva) or “miniministerials” when they occur in other countries. These processes have been regularly criticized by many of the WTO’s developing-country members who are often excluded from these negotiations.
The WTO oversees about 60 different agreements that have the status of international legal texts. Member countries must sign and ratify all WTO agreements on accession. Some of the most important agreements concern agriculture, services, and intellectual-property rights.
Regional arrangements such as Mercosur in South America; the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico; ASEAN in Southeast Asia; and the European Union (EU) between 27 independent states constitute a second dimension of the international trade regulatory framework.
The EU is an economic and political union of 27 member states. Committed to regional integration, the EU was established by the Treaty of Maastricht on November 1, 1993, upon the foundations of the preexisting European Economic Community. With almost 500 million citizens, the EU combined generates an estimated 30% share of the nominal gross world-product.
The EU has developed a single market through a standardized system of laws that apply in all member states, ensuring the freedom of movement of people, goods, services, and capital. It maintains common policies on trade, agriculture, fisheries, and regional development. A common currency, the euro, has been adopted by 16 member states known as the Eurozone. The EU has developed a limited role in foreign policy, having representation at the WTO, G8 summits, and at the UN. It enacts legislation in justice and home affairs, including the abolition of passport controls between many member states. Twenty-one EU countries are also members of NATO, those member states outside NATO being Austria, Cyprus, Finland, Ireland, Malta, and Sweden.
Mercosur is a regional trade agreement among Argentina, Brazil, Paraguay, and Uruguay, founded in 1991 by the Treaty of Asunción, which was later amended and updated by the 1994 Treaty of Ouro Preto. Its purpose is to promote free trade and the fluid movement of goods, people, and currency.
Bolivia, Chile, Colombia, Ecuador, and Peru currently have associate-member status. Venezuela signed a membership agreement on June 17, 2006, but before becoming a full member, its entry has to be ratified by the Paraguayan and the Brazilian parliaments.
The NAFTA is an agreement signed by the governments of the United States, Canada, and Mexico, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canada–United States Free Trade Agreement. In terms of combined purchasing power, parity GDP of its members, as of 2007 the trade block, is the largest in the world and second largest by nominal GDP comparison. NAFTA has two supplements: the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC).
The Association of Southeast Asian Nations, commonly abbreviated ASEAN, is a geopolitical and economic organization of 10 countries located in Southeast Asia, which was formed on August 8, 1967, by Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Since then, membership has expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. Its aims include the acceleration of economic growth, social progress, cultural development among its members, and the protection of the peace and stability of the region.
12.01: Section 1-
This appendix lists suggested cases for each chapter of this book. All can be ordered through Harvard Business School Publishing.
12: Appendix B - Suggested Cases
This appendix lists suggested cases for each chapter of this book. All can be ordered through Harvard Business School Publishing.
Chapter 1
• Ghemawat, P., Rukstad, M. G., & Illes, J. L. (2009). Arcor: Global strategy and local turbulence (abridged).
• Jones, G. G., & Lefort, A. (2009). McKinsey and the globalization of consultancy.
• McKern, B., & Palma, M. V. (2006). Confectionary industry: Latin America and the global industry in 2006.
Chapter 2
• Alafaro, L. (2002). Brazil: Embracing globalization?
• Bartlett, C. A. (2009). Global wine war 2009: New world versus old.
• Ghemawat, P., & Matthews, J. L. (2004). Globalization of CEMEX.
Chapter 3
• Inkpen, A. C. (2000). Whirlpool corporation’s global strategy.
• Ramaswamy, K. (2003). Louis Vuitton Moet Hennessy: In search of synergies in the global luxury industry.
Chapter 4
• Bartlett, C. A. (2003). BRL Hardy: Globalizing an Australian wine company.
• Roberto, M. A. (2005). Robert Mondavi and the wine industry.
• Tan, D., & Tan, J. (2004). Amway in China A): A new business model.
Chapter 5
• Azhar, W., & Drabkin, D. (2008). Pepsi Cola Pakistan: Franchising & product line management.
• Getaway, P., & Khanna, T. (2009/1999). Tricon Restaurants International: Globalization re-examined.
• Roberts, J., & Doornik, K. (2007). Nokia Corp: Innovation and efficiency in a high-growth global firm.
Chapter 6
• Bartlett, C. A. (2004). P&G Japan: The SK-II globalization project.
• Khanna, T., Vargas, I., & Palepu, K. G. (2006). Haier: Taking a Chinese company global.
• Ramaswamy, K. (2007). LG Electronics: Global strategy in emerging markets.
Chapter 7
• Quelch, J. A. (2008). BBC worldwide: Global strategy.
• Quelch, J. A. (2006). Lenovo: Building a global brand.
• Quelch, J. A., & Harrington, A. (2008/2004). Samsung Electronics Co: Global marketing operations.
Chapter 8
• Goldberg, R. A., & Clay, T. (1997). Royal Ahold NV: Shopkeeper to the global village.
• Ichijo, K., & Radler, G. (2006). Toyota’s strategy and initiatives in Europe: The launch of the Aygo.
• Ko, S., & Loo, G. (2009). Li & Fung: Growth for a supply-chain specialist.
Chapter 9
• Lee, H., Hoyt, D. W., & Singh, S. (2007). Rio Tinto Iron Ore: Challenges of globalization in the mining industry.
• Marks, M., Holloway, C., Lee, H., Hoyt, D. W., & Silverman, A. (2009). Crocs: Revolutionizing an industry’s supply chain model for competitive advantage.
• Nielsen, B., Pedersen, T., & Pyndt, J. (2008). ECCO A/S: Global value chain management.
• Pisano, G. P., & Adams, A. (2009). VF Brands: Global supply chain strategy.
Chapter 10
• Mandviwalla, M., & Palmer, J. W. (2008). Globalization of Wyeth.
• Paine, L. S., & Wruck, K. H. (2006). Sealed Air Corp: Globalization and corporate culture (abridged). | textbooks/biz/Business/Advanced_Business/Fundamentals_of_Global_Strategy_(de_Kluyver)/11%3A_Appendix_A_-_Global_Trade_-_Doctrines_and_Regulation/11.03%3A_Regulation_of_International_Trade.txt |
Sara Johnson owns a pet store. She started this small business out of a passion for helping people take care of their pets. The store is off to a good start, but she really worries about how she will grow the business. The competitive environment that surrounds her store is challenging, with the big-box stores having full-blown pet departments, specialty stores improving, and Web-based operations providing access to low-priced supplies. In addition, customer needs seem to change over time.
In contrast, Ken Smith is a brand manager for a \$900 million division of a major consumer products company. Ken worries about the exact same things as Sara, just on a different scope and scale. He has customers who have supported 8% growth of his product lines in each of the last 2 years. His challenge, though, is how to maintain that growth rate (representing \$72 million in sales) in markets where competitive imitation over time has led the products to become very similar and competitive advantage more difficult to come by.
The context and magnitude of these problems are quite different, but, at the root, they are the same. Whether you are Sara or Ken, the general manager of an insurance company seeking to increase policies sold, a United Way director seeking to increase donations, or a human resource director wishing to increase business with internal staff in their hiring decisions, your question is, how do we successfully position against the competition and grow our business? While a complex matter, the task of building growth strategy has some simple foundational ideas. The goal of this book is to teach these fundamental concepts to you so that you can implement them and then teach others.
The teaching requires breaking down what seems like a complex task into simpler component parts. While you will have no trouble understanding the component parts—such as customer value, competitive position differences, and firm capabilities—what most firms struggle with is how you integrate them in building effective growth strategy. In this chapter, we will consider the fundamentals of competitive strategy at the heart of the framework we use and the reasons why integrating these principles is difficult and rare. Yet we will also point out that businesses that practice such integration make more money. At the core of all this is the notion that you cannot grow your company (or your school, your nonprofit, your relationships, the happiness of your volunteers, for that matter) without really understanding the value your “customers” seek and the value that you can create for them.
1.02: Three Fundamentals
Having lost a teenage brother to an auto accident in his youth, CEO Peter Lewis of Progressive Insurance was driven by a deep understanding of human needs surrounding auto insurance. Further fueled by his distaste for abysmal turnaround times on claims in the industry, Lewis decided—in the face of much resistance within his company—that Progressive would become a company with the capability of providing an immediate-response claims service. Progressive’s well-known growth from small niche competitor to one of the “Big 4” auto insurance firms owes everything to Peter Lewis’s intuitive, tenacious application of three basic principles of positioning strategy.Katz (2008, July 8). Also, Salter (1998, October 3) notes that proposition 103 highly regulated the insurance industry and cost Progressive \$60 million in refunds.
The first principle is defining advantage from the perspective of customer value. Jaworski and Kohli (1990, December 7); MacMillan and Selden (2006); Sheth et al. (2000); Kim and Mauborgne (1997, January–February). Lewis saw dissatisfaction with response times where others in the industry did not. Further, he understood why it was important. Delay in claims processing causes inconvenience and adds stress to already stressful situations for drivers having had an accident who seek fast resolution and peace of mind. The second principle is developing insight about opportunity in a way that differentiates from the competition.Porter (1980, 1985). So while many firms in the industry would define their business purpose as “paying auto accident claims,” Lewis instead described Progressive’s as “reducing the human trauma and economic costs of automobile accidents.” Other competitors either did not recognize the opportunity or simply accepted poor claims-adjustment service and response time because all firms were following the same antiquated model.
Just developing a positioning strategy is not enough, however. The third principle centers around developing distinctive capabilities, resources, and assets to execute the positioning strategy.Wernerfelt (1984); Barney (1991); Porter (1996). Progressive built skill in technology development, process design, and human resources. Over a period of years, the company developed proprietary software and databases, specific selection and development skills for hiring and training employees, as well as a disciplined measurement culture to manage continuous improvement.
In sum, in his search for growth, Peter Lewis intuitively and persistently followed these three fundamental principles:
• Create important value for customers
• Be different from (better than) the competition
• Build and leverage your capabilities with an eye toward the desired customer value
While almost simple enough to be intuitively obvious, it is easy to lose sight of these principles. In fact, there are a variety of forces that get in the way of their effective implementation.
Challenge 1: Limited Integration of Strategy Perspectives
It turns out that it is difficult for an individual—let alone a complex organization—to simultaneously hold the three principles of strategy in mind. Multiple goals imply multiple, often costly, efforts to achieve them. Potential conflict between, and trade-offs among, the three goals of beating the competitor, creating value for customers, and leveraging our capabilities make it natural for firms to treat them separately. Illustrative of this is a study of strategic focus in decision making, conducted by George Day and Prakash Nedungadi of the Wharton School, which found that 77% of the organizations studied had a “single-minded” focus;Day and Nedungadi (1994, April). that is, the organizations largely focused on either customers, competitors, or the internal workings of the company but rarely any of the three together. Three distinct types of firms were identified in the study: self-centered firms (i.e., focused on internal factors; 33%), customer-centered firms (31%), and competitor-centered firms (13%).
These single-minded views are suboptimal, however. Day and Nedungadi found that 16% of the firms they studied were market driven, that is, focused jointly on competitors and customers, and that these firms reported significantly superior financial performance relative to the other firms in the study. Similarly, other research has found that a more integrated view of company, customers, and competitors leads to greater profitability.Slater and Narver (2000); Narver and Slater (1990); Kirca et al. (2005). Yet the striking point is that firms that do an effective job of integrating are in the minority. The more common tendency to be single-minded limits the search for growth opportunities and may be self-perpetuating.Hambrick (1982); Cohen and Levinthal (1990); Oxenfeldt and Moore (1978).
Challenge 2: Knowing Customers
Most decisions that involve customers are made without customer research. Firms have neither the time nor the resources to devote to every customer-related decision. Interestingly, though, even when sophisticated, large-sample research is conducted for particular decisions, it may frequently fall by the wayside because the research is shouted down by managers with prior agendas that contradict research findings.
Challenge 2a: Truly Understanding Customer Values and Beliefs
Although they may at times dismiss formal research, we know that smart managers talk to customers and know them, often over many years. So it is fair to say more informal research is the norm. In this sense, it is difficult for managers to believe that they “don’t know” customers. Yet there is much research that suggests the opposite. To understand why, consider a particularly telling study from University of Chicago researchers Harry Davis, Steve Hoch, and Easton Ragsdale. Davis and his colleagues asked pairs of experimental subjects to estimate each other’s preferences for new product concepts. The new product concepts were a mix of higher-priced durable goods, lower-priced durables and nondurables, and services. For each concept, each subject was asked to estimate both the probability that they would purchase the concept in the future and the probability that the person they were paired with would purchase the concept. Across four studies, which varied the amount of information provided for the concepts (verbal description only vs. verbal description and pictorial representation) and the dependent measure used, the authors found the same results. Despite showing confidence in their estimates, the subjects showed substantial error in predicting their partners’ preferences. Only about half of them predicted more accurately than a naïve forecast that used the average of the gender-specific preferences. The authors found a strong tendency for a person to use their own preferences for the new concept to predict the preferences of their partner.
The most remarkable thing about this research, however, is that the subject pairs were not strangers. Across all the studies, husbands were paired with wives. Davis et al. (1986). In spite of intimate familiarity with each other, spouses demonstrated significant error in projecting each other’s preferences, with error coming largely from two sources. First, the husband (or wife) tried to project their own preferences onto the other, when in fact their preference was not similar to their spouse’s. Second, when the husband-wife preferences were similar, error was introduced when the spouse overadjusted for what he or she thought would be a difference in his or her mate’s preference relative to their own.
This leads us to a key question: If people who live together and know each other intimately make such errors in predicting each other’s preferences, how can product and marketing managers NOT be subject to the similar errors in predicting customers’ values? There is a fair amount of academic research that finds significant error in managerial judgment of consumer attitudes, beliefs, and behavior.See Hoch (1988); Urbany et al. (1991); Parasuraman et al. (1985); Moorman (1998). Further evidence of this comes from surveys of our own executive students and clients. They predict customer beliefs with good confidence yet express significant surprise (and opportunity!) when they subsequently conduct primary research with customers.In the past year, 155 executive MBA students who have participated in 3-Circle projects have been surveyed about the insights they obtained from customer research required as part of the project. Sixty-three percent found insights from customers to be “very surprising,” while over three-fourths (76%) reported the research “suggested customer needs they hadn’t thought of before.” Of greater interest, though, is that 88% agreed that the customer insights “led to some obvious conclusions about what we should do.”
In fact, this should not be surprising. In the day-to-day operation of a business, the immediate challenges often center on internal concerns, which tend to be very concrete, top of mind, and unavoidable. Managers spend most of their time inside, managing people and resources. The capacities within the firm need to be organized, people need to be developed, budgets need to be met. There may in fact be a bias against spending time to understand the customer’s perspective on our products and services because hearing bad news would mean that our products, processes, people selection and development, and execution would have to be changed, which is no easy task. Instead, it is very easy to assume “we know the customer.”
Challenge 2b: Understanding Customer Evaluations of Competitors
While most companies ask customers how their company is doing, many do not seek comparative customer views of competitors. One firm, which we will call Food Supplier, Inc., for example, happily found—through interviews in a 3-Circle project with one customer segment (independent restaurants)—that the company was hitting on a number of important points of value for customers, many relating to delivery, warehousing, and sales support. Consistent with their expectations, this suggested that the company was providing customers a great deal of value. Yet the research also explored customer perception of competitor value. This produced the startling conclusion that the key competitor matched every point-of-value provided by Food Supplier, Inc., but it was also perceived as having far superior accuracy in deliveries and invoicing, as well as premium food quality at competitive prices. This analysis opened the executive team’s eyes to opportunities for a new process improvement program in operations and sales to enhance competitive superiority in key functional areas, as well as a new marketing program to clearly communicate the differential customer value created by these new internal programs. Since that implementation, the company has experienced increases in same-store sales and has extended these standardized processes to other areas of the company.
Common Strategic Mistakes in Evaluating Competitive Differences
Most of us face the difficulty of integrating relevant competitive, company, and customer facts, as well as the challenge of truly knowing customers’ natural biases. Some may argue that these difficulties work themselves out through learning and experience. But what seems to happen is often the opposite—these biases can lead to flawed judgment about competitive advantage. This is because we anchor our beliefs in these early observations and we are not likely to change them. In companies we work with, we see, over and over, the following three strategic errors that result from the biases discussed earlier:
1. We think we are different from competitors, but we are not really different in the customer’s eyes.
2. We are different from competitors, but in ways that are not really important to customers.
3. We are different from competitors in ways that matter to customers, but we do not have the resources or capabilities to build and sustain those differences.
In fact, what is needed is a way of thinking and a process that helps us to simultaneously think about customers, competitors, and the company, and that puts our existing beliefs to the test. That is the primary goal of the 3-Circle model and the process we will teach you in this book. Let us illustrate the key concepts. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/01%3A_The_Challenges_of_Growth/1.01%3A_Introduction.txt |
Exploring Value
There is competitive advantage in thinking about your organization in a way that integrates the value customers seek, the value the competitor is believed to provide, and your own value-producing capabilities. A company called Ultimate Ears illustrates such thinking. A sound engineer who worked closely with big rock bands like Van Halen, Jerry Harvey was very close to the customer segment (rock musicians) and the need for sound management. The traditional technology for band members to hear their own performance was large, onstage monitors (speakers) tied to each instrument. Figure \(1\) is our first circle—the customer’s circle, in this case representing the value sought by rock and roll musicians in the sound equipment used by the band to hear its own performance. Here is the key benefit that a band desires from that equipment: that it produces sound audible to the band members (seems pretty obvious!). But let us push that a little further. Why is this important to the musicians? It seems simple, but digging underneath, it is easy to see how the notion of being able to “listen to one’s self play” is fundamentally related to overall performance and achievement. If the sound back to the band is audible, that enhances performance quality by allowing the band to be more precisely in sync with each other. Performance quality is fundamental to the success of the show to an audience that is accustomed to hearing the music on precisely mixed studio recordings. Figure \(2\) "Value Delivered By Onstage Monitors" captures the fact that the standard technology—large onstage monitors—provides this basic quality. The circle added on the lower left represents the customer’s perception of the value provided by the onstage monitors. As in any product or service category, there are a number of dimensions of this value. For the moment, though, we will focus on a few of the most important dimensions.
The overlap between the circles is strategically important. It is the positive “equity” provided by the product in the mind of the customer—that is, the space where value delivered meets value sought. So the onstage monitors provide a way for the band to effectively hear the sounds of their instruments and vocals, and positive value is produced for these customers.
Nonvalue or Negative Value (Disequity)
Figure \(2\) also points out two other strategically important concepts, relating to the areas where the circles do not overlap. The nonoverlapping area to the left—which we label nonvalue or negative value (the latter also known as disequity). Many consumption experiences have nonvalue or negative value associated with them. It is the calories consumed while relishing a big hamburger, the headache after a celebratory night out, and, occasionally, it is an endemic part of a good or service that we are simply willing to put up with in the absence of a superior alternative. It is the exorbitant fees for the broker with whom you have developed a very close relationship and trust implicitly, the chatty hair stylist whose gossip you put up with because you love the way he or she cuts your hair, or the doctor you love who makes you wait forever in the waiting room. In the case of the rock musician, it is the “wall of sound” that occurs when onstage monitors are used to allow the band members to hear the instruments. This is the deafening sound onstage that escalates as each member player sequentially keeps turning up the volume on their own monitor so they can hear their instrument. That wall of sound not only gets in the way of effective performance, it has also contributed to significant hearing loss over time among rock band members.Peters et al. (2005). For example, Alex Van Halen reports that he has lost 30% to 60% of his hearing as a result of years of sound “gas fires” occurring during onstage Van Halen shows. Sauer (2007, June 1). Where a firm’s products or services create nonvalue, or even negative value, there is significant opportunity for growth.
Unmet Needs
Similarly, growth can be found in unmet needs. This upper right portion of Figure \(2\) is another nonoverlapping area, critical in that it keeps attention focused on the reality that customer needs are never fully met. Musicians seek perfection in performance, possibly an ideal that cannot be achieved. Yet any edge that can be obtained to improve performance is a direct contribution to the musician’s bottom line, relating to success, enjoyment, and career achievement. A second way to think more deeply about unmet needs is to ask some obvious-sounding questions about points of negative value that our product or service is creating. Why is that important enough to consumers for them to mention it? For example, one reason that the “wall of sound” problem is important to rock musicians is because it is associated with hearing loss. Why is hearing loss important? It is so obvious that we do not really think about it, yet we should think about it to understand its enormity as a consideration in decision making. As people lose their hearing, they may lose not only the capability to make a living and take care of one’s family but also the ability to enjoy the people and world around them—that is, quality of later life is a deeper value that is touched by this. So how big is the value of an alternative that solves this problem? (Huge!) Would musicians be willing to pay handsomely for a superior solution? (Yes!)
Opportunity
This dilemma is where Jerry Harvey came in. Encouraged by musicians who sought something to help improve performance and to reduce hearing loss, Harvey developed the equivalent of an in-ear monitor, which each player on stage would have, isolating the sound of their specific instrument. This allowed the musicians to hear clearly, to know how they fit in with the other players, and to better control their own sound. These performance benefits were supplemented not only by substantial noise reduction (easier on the ears) but also by the greater room on stage given the removal of the larger onstage monitors. Figure \(3\) completes the 3-Circle picture, adding the circle on the left, which represents the value provided by Harvey’s company, Ultimate Ears. The addition of the third circle creates seven distinctive areas in the Venn diagram—each labeled by a letter and each strategically meaningful. For the moment, we will focus on a couple of the key areas for illustration. Note that the basic benefit—“sound back to band is audible”—is in the middle area, labeled “Area B” or points of parity. The customer believes each of the two competing technologies delivers on that basic benefit. What distinguishes the Ultimate Ears product are the benefits in its Area A, that is, its points of difference. The product delivers substantial, unique value to customers in the form of superior performance (both due to hearing the performance better and less onstage equipment) and in substantially reducing hearing loss, a quality-of-life issue. It is difficult to identify any items that customers would call positive points of difference for the onstage monitors. In contrast, the disequities that were mentioned earlier fit into Area F, which is more broadly defined as disequities, or potential equities, for the onstage monitor technology.Areas D, E, and F in Figure \(3\) are all labeled “disequity/potential equity” because they represent attributes currently providing no value to customers but, in fact, may provide the potential to provide value. Ultimate Ears has been a major entrepreneurial success. This product concept, based on unique, patented technology and manufacturing capability, has become a standard in the industry. It creates significant customer benefits in both enhancing performance quality and the musicians’ quality of life by limiting hearing loss.
The analysis based on Figure \(1\) through Figure \(3\) illustrates that Ultimate Ears was successful because it
1. developed a unique company capability,
2. delivered value on a customer need that mattered greatly,
3. delivered that value in a manner that was superior to competitive options.
These are the three core principles of competitive business strategy that drive the analysis guided by the 3-Circle model.
1.04: Chapter Summary and Looking Ahead
While the 3-Circle analysis presented here provides a post-hoc account of Ultimate Ears’ success after the fact, this book is about how to use the framework to analyze a current market situation and look ahead. The goal is to anticipate market development and evolution, and to build and execute solid growth strategy. We will see, in the chapters that follow, that this simple diagram provides a powerful basis for analysis of a company’s current competitive position and substantial insight into prospective growth strategy for the company. But at its roots is the most basic of all competitive strategy notions—that in simplest terms, competitive advantage is about creating value that really matters for customers, in ways that competitors cannot.
We find that the most effective starting point for such analysis is the customer and developing a deep understanding of customers’ values. Chapter 2 provides an overview of the underlying framework that begins with the customer perspective. There, we will introduce the basic concepts and several case examples illustrating the principles that underlie the development of effective growth strategy. We then proceed in Chapter 3 through Chapter 8 to provide detail on the core model concepts. The process begins with a clear definition of context (Chapter 3). It is followed by an in-depth study of customers in which we will deeply explore the value customers seek and how existing competitors get credit for the value they create (Chapter 4). From these steps, significant insight is obtained into current competitive positions and potential growth. Chapter 5 presents the categorization of customer value that is at the heart of the 3-Circle model’s contribution and in clarifying a firm’s positioning. Chapter 6 then explores and defines the growth strategies that naturally evolve from the seven categories of value, leading to the inevitable question addressed in Chapter 7: Do we have the skills and resources to pursue these ideas? Answering this requires a much deeper reflection on the firm’s (and competitors’) capabilities in terms of what strengths we have to leverage, what weaknesses we need to fix, and what gaps exist around which capability building will be necessary. Chapter 8 explores the dynamic aspects of markets and Chapter 9 provides a summary of the book with a review of the 10-step process behind a 3-Circle growth strategy project.
This is designed to be a team process that engages customer, company, and competitor research in an integrative way. We look forward to the journey. At the end, you will find that the core of this analysis is seeking to deeply study and uncover ways to provide value for customers that competitors have simply not understood, and perhaps ways that have always been there for the taking. Chapter 2 next provides an overview of the full 3-Circle framework. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/01%3A_The_Challenges_of_Growth/1.03%3A_Thinking_Integratively_About_Customer_Value_Competitive_Position_and_Capabilities.txt |
Booklet Binding, Inc., is a Chicago-based provider of finishing services for printers and publishers. The company provides folding, binding, cutting, and gluing services for printers preparing all forms of printed materials, including direct mail pieces. Started in 1976, the company distinguished itself from sleepy competitors by building fast service with the latest technology, making large gains in market share. By the mid-1990s, the competition had caught up. Customers increasingly saw the market as “commoditized,” with competitors each believed to be delivering similar products with similar service levels. This led, much more quickly, to conversations about price and pressure to lower prices. In fact, this pressure became so significant that the company’s salespeople began to introduce price into the conversation before customers even began to talk about it!
Commoditization is a real issue in most industries, as markets have become increasingly hypercompetitive and as competitive imitation of new ideas has become fast and furious. In this chapter, we will introduce the concepts in the 3-Circle model by considering customer value and how competitive forces evolve in a market, putting a premium on tools to understand that evolution. Commoditization is one of many strategic problems that is well addressed by the model.
Commoditization
There is a state in an industry in which all competitive products or services have evolved to look the same, that is, to appear undifferentiated. Investopedia defines commoditization as a situation in which “a product becomes indistinguishable from others like it and consumers buy on price alone.”Investopedia, a Forbes digital company. Rangan and Bowman (1992) were among the earliest to explicitly discuss commoditization as signaled by “increasing competition, availability of ‘me-too’ products, the customer’s reluctance to pay for features and services accompanying the product, and pressure on prices and margins in general.” As products or services become more similar in a market, there is an increasing reluctance among buyers to pay high prices. Picking up with our basic diagram from the previous Chapter, Figure $1$ "Market With Distinctive Competitive Positions vs. Commoditized Market" (part A) depicts a competitive market in which two different competitors (or competitor groups) show some degree of differentiation. Recall from Figure 1.3.3 that Area B represents common value or “points of parity”—this is the value that customers believe both competitors provide. In contrast, Areas A and C capture what is unique about the two competitors. The firm in this example shows a healthy Area A and its competitor shows an equally healthy Area C, indicating that each firm is believed by customers to create unique value in ways the competitor does not. An example might be the market in which Booklet Binding, Inc., initially competed, where it created a distinctive position around service and speed that could not be matched by the smaller, traditional, competitive “craftsmen” in the industry, whose smaller size and longer customer relationships could differentiate them.
Fast-forward 15 years, and what you find is a market with a great deal of overlap in the value being provided by each competitor. Panel B of Figure $2$ illustrates what happens in a commodity market. The predominant feature of this diagram is the enormous Area B, simply indicating that customers perceive a lot of common value. In other words, over time, the competitors have copied each other’s advantages, and, as a result, they may largely be indistinguishable in the eyes of the customer—hence, the renewed focus on price to seek to gain customers’ favor. Yet this often ends up in lost margin and blood on the income statement rather than competitive advantage.
The goal of this chapter is to introduce the 3-Circle model concepts in more depth, with the aim of illustrating how its primary goal of understanding how—in a market—value is perceived to be “shared” among competitors and how it is actually created. As it turns out, the primary way out of commoditization is through deeply exploring customer value in order to identify and understand needs that have not been well articulated. This is one of the core insights of the 3-Circle growth strategy process.
Some Fundamentals
The easiest—and, in fact, most powerful—definition of customer value is that it is the customer’s sense of what benefits they get from a firm relative to the price they pay. There is a way to quantify this, which we will see. But the fact is that most firms use the term loosely, without much precision—a topic of some consideration in Chapter 4. It is a term that seems to have intuitive meaning to people, which can be dangerous. One manager might be talking about the quality of a product, while another may be thinking about price. But each is defining this under the rubric “value.” We will provide a more formal definition of customer value shortly, but first consider why the concept of customer value is important in the first place.
Customer Value and Financial Value
The best way to answer the question of why customer value is important is to think about how customer value plays into the bottom line of the firm. Global customer value expert Ray Kordupleski has an excellent chapter in his book Mastering Customer Value Management that goes to great lengths to illustrate very strong relationships among measures of customer value perceptions, market share, and profitability.Kordupleski (2003), chap. 1. The truth is that firms create financial value most effectively by first focusing on the value they create for customers. At the highest level, it is easy to illustrate that profit is a function of revenue and cost:
profit = total revenue – total cost.
Further, total revenue can be broken down as a function of volume and price:
total revenue = $Q$ * price,
where $Q$ is equal to the sales volume of the product or service (how many units we sell) and price is how much we charge customers for it.
Then, a simple way to think about $Q$ (how much we can sell) is that it is determined by customers’ choices. First, we sell more when more customers choose our brand over competitive brands. Second, the reason customers will tend to choose our brand over competitors is that they believe our brand is a better value for the money.
Frank Perdue
So think of chicken. The Perdue chicken example presented here is a standard case for explaining the basics of customer value, and is sourced from Gale (1994). Twenty years ago, chicken was a commodity product in the grocery store. Different brands were perceived to be very similar and were sold at similar prices. Perdue chicken was one of those brands. Considering the definition of value given previously, we can envision a scenario that defines a commodity market:
$\frac{benefits\,from\,Perdue\,chicken}{price\,of\,Perdue\,chicken}=\frac{benefits\,from\,brand\,z}{price\,of\,brand\,z}$
where the ratios can be thought of as capturing each brand’s value for the money (“was that product or service worth what I paid for it?”). If the two ratios are equal, you have a commodity market. It is a coin flip to determine which brand a consumer will choose.
In the face of this situation, Frank Perdue did something to change this market. Based on a study of the value that customers sought from chicken, Perdue concluded that consumers wanted meatier, yellower chicken, with no pinfeathers. He then put significant research and investment into breeding and technology that would produce plumper chickens with yellower skin, and processing with turbine engine blow-drying to remove pin feathers on the skin. Essentially, Perdue substantially increased the numerator in his value ratio, greatly enhancing the benefits that consumers received from his chicken. A creative advertising program further enhanced those benefits by communicating the uniqueness of Perdue chicken and conveying Perdue’s no-nonsense personality. At equivalent prices, the Perdue brand became a clear choice for the consumer of the competitive brand Z because it delivers more effectively on important consumer benefits sought.
Considering the relative value ratios, although the denominators are essentially the same, the Perdue numerator is larger, making the overall ratio larger. Interestingly, though, as Perdue’s sales grew as a result of the improved product, competitive brands began to reduce their prices to try to defend their market shares. Yet many consumers still stuck with the higher-priced Perdue brand, meaning they were willing to trade-off higher prices for better chicken. In sum, even at a higher price point, Perdue’s benefits were still considered to be a good value for the money. This was the foundation for Perdue chicken establishing a very profitable niche in the retail grocery market.
So, to this point, a few fundamentals are important:
• Customers choose products or services that they believe provide greater value.
• Commoditization occurs as, over time, firms imitate new ideas and the products and services (and value ratios) become increasingly similar.
• Breaking out of commoditization requires a focus on customer value and the reasons why customers choose certain products. A firm can distinguish its offering by either substantively enhancing the benefits offered or lowering the customer’s costs in a way that is difficult to imitate.
• Greater customer value relative to the competition produces more sales volume, greater revenue, and greater profit (provided it is created within a manageable cost structure). | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/02%3A_Introduction_to_Three-Circle_Analysis/2.01%3A_Introduction.txt |
The 3-Circle model provides a method of explicitly identifying the current state of customer value in a market and a variety of sources for improving a firm’s competitive position and profit potential. In introducing the 3-Circle model here, in Chapter 2, we will first take you through what we refer to as the “outside” view. This represents the customer’s view of the world. Yet it is important to briefly distinguish this outside view and what we later refer to as the inside view.
The outside view is what customers believe about us. The outside view is the front office or maybe even the front window. It captures the impressions our customers, and potential customers, have about us based on what they observe: seeing and using our products and services, our pricing, distributor relationships, exposure to our marketing communications and to word-of-mouth from others familiar with us, and so on. The outside view is the customer’s perception of our value and competitors’ value. It is the rock musician’s beliefs about the Ultimate Ears monitors and the benefits he or she derives from them.
In contrast, the inside view is the back office. It is what we really are on the inside—the assets, resources, capabilities, and knowledge that we bring to bear in producing value for customers. The inside view is what we really are and can do. For Ultimate Ears, this reflects the true capability the company has for research and development, product design, manufacturing, sales, and customer relationship management in serving the market.
The distinction between outside and inside is very important. We will learn that there are many, many times that customers’ view of a company does not match the actual value that the company is creating or can create. Further, as George Day of the Wharton School first suggested, true competitive advantage occurs only when the distinctive value produced for customers is produced by real capabilities and assets that competitors cannot match.Day (1994, October).
The DNA of Customer Value: Attributes
We will formalize this discussion in Chapter 4, but our first premise is that customers purchase and consume value in the form of product attributes. Derived from the Latin root attributus (which means “to bestow”), the word attribute means an inherent characteristic or a quality of some object. In the same way that people can be described as a bundle of characteristics (height, weight, gender, ethnicity, age), goods and services can be described based on size, cost, quality, reliability, and reputation.
In fact, it is surprising how precisely we can characterize the attributes or features of products and services. We started with a relatively simple description of chicken—with dimensions of meatiness, color, presence of pin feathers, and price. More complex product categories (e.g., dishwashers) might have over 100 attributes when functional qualities, design qualities, pre- and post-purchase services, and perception of transactional factors are taken into account. Figure \(2\) "Customer Values for Cellular Telephones" (Column 1) provides a partial list of the attributes of cell phones to illustrate how value can be broken down into component parts.
Sorting Value
The first fundamental insight of the 3-Circle model is that we can learn a lot about firms’ positions in a market by sorting the attributes in a way that clarifies customer beliefs about which competitors get credit for which attributes and benefits. The framework provides a strategically meaningful way to categorize current attributes and anticipate the creation of future value. An organization gets insight into its current and future competitive position by examining how value can be broken down into attributes, determining how important those attributes are, and identifying what attributes customers associate most strongly with each competitor.
What follows is an illustration of the output of a 3-Circle analysis. For the illustration, we use the case of a small church-based primary school. Although one might believe education to be a commoditized market, in fact, the analysis reveals some interesting, very natural differences in competitive positions. It is also important to note that the analysis here is based on the same exercise in examining growth strategy as one would undertake in any competitive market. While the focus again is on output here, subsequent chapters will provide detail on process.
Context
Glenview New Church is a religious organization in Glenview, Illinois, headed by Pastor Peter Buss. The church has a small primary school for kindergarten through 8th grade. With the school still early in its development, Pastor Buss undertook a 3-Circle analysis in the interest of building growth strategy. Pastor Buss focused on parishioners, parents of younger school-aged children as the market segment to study, and the Glenview Public Schools as the competitive target. The goal of a 3-Circle analysis is to build a growth strategy for Glenview New Church School (GNCS) via a deep study of the customer’s view of competitive positions (outside view) and an internal analysis of the school’s current capabilities and assets (inside view). We begin with the outside view.
Customer Circle
Having identified the target customer segment for the analysis as young parishioner families with school-aged children, we can depict the customer circle as reflecting the value they seek. What are the attributes of schools that affect family choices? There are several that are straightforward:
• Where is the school located (e.g., how far from my house)?
• What is the quality of the education there?
• Do they have good teachers?
• What are the other families like?
These are some of the basic criteria families will use to evaluate the schools they are considering.
A more complete listing of attributes that emerged from the analysis is given in Figure \(2\). These attributes and considerations are determined by conversations with the target segment. These concerns are familiar, relating to curriculum, quality of teaching, school culture, facilities, and so on. The list is generated from thoughtfully listening to people describe how and why they chose their school or are considering their choice of schools. Of course, not all of these factors are considered by all families. Some factors are more important than others. In fact, we can usually group customers together in terms of the factors that are most important in their decision making. These groups are called market segments, and such groups will be considered in more depth in Chapter 3. For the moment, we will summarize the area of the customer circle as capturing the value a particular customer segment is seeking—in other words, what the customers want.
Company Circle
In Figure \(3\), we add a circle that represents the customer’s perception of how well our company (in this case, Glenview New Church School) is delivering on the value that the customer is seeking. At this point, it is very important to distinguish the fact that the circle represents customer perception—it does not represent what we actually offer or what we think we offer. This distinction is critical in emphasizing that the outside view focuses on what customers believe rather than what we (the firm) believe the reality to be.
As we know from Chapter 1, bringing these two circles together produces the simple distinction between positive value (the overlapping area), nonvalue or negative value, and unmet needs.
Pastor Buss discovered that families recognized the school for its comprehensive curriculum, for a caring and supportive environment, and for a value- and morals-based education. In addition, they felt that the school facility met their needs, including availability of after-school enrichment programs and parental involvement. We will expand upon the other two areas (nonvalue or negative value and unmet needs) as we build the analysis out. Suffice to say that there are a number of positives that Pastor Buss heard from families. Yet the surprise in this analysis occurs when we subsequently learn that our competitor not only has many of the same positives, they also have some positives that we don’t have! So the next step is to add a circle that represents customer perception of the competitor, in this case, Glenview Public Schools.
Competitor Circle and Areas A, B, and C
Among other competitors for GNCS, Glenview Public School District 34 (GPSD) is formidable. Glenview has a total enrollment of over 4,300 students across 3 primary, 3 intermediate, and 2 middle schools. Four of the schools have been selected as National Blue Ribbon schools. There are 370 teachers, with an average of 8 years teaching experience, three-quarters of whom have a master’s degree. What are the beliefs of parents regarding the value provided by the Glenview public school system?
Figure \(4\) introduces the competitor circle, illustrating some very important distinctions. First, one striking point is that of all the dimensions of positive value for GNCS depicted in Figure \(2\), only about half are unique to Pastor Buss’s school relative to the competitor (individualized attention, values- and moral-based education, and caring and supportive environment, which define GNCS’s Area A, or points of difference). The attributes on which GNCS is believed to be about the same as GPSD are comprehensive curriculum, facilities, enrichment (after-school programs), and parental involvement. This latter set of attributes is labeled Points of Parity (Area B), as the competitors are “at parity”—that is, neither is believed to have a unique advantage. In other frameworks, these dimensions are given other labels (e.g., table stakes; expected product) but have the same basic meaning. These are the factors that customers fundamentally expect all schools to deliver on in order to be in the consideration set.
What was striking to Pastor Buss, however, was to identify the points of difference for GPSD, the competitor (Area C). GPSD got a great deal of credit for the breadth of its curriculum, its technology, its greater opportunity for socialization among a diverse population, and its reputation. But one dimension that surprised Pastor Buss and his team was the heavy weight that parents placed on the notion of “verifiability” in both academic performance and teacher credentials. This weight is consistent with the attention that standardized testing has received since the passage of the No Child Left Behind Act of 2001 (NCLBA), requiring performance standards for adequate yearly progress for public schools. Illinois private schools such as GNCS are not subject to the same performance standards and are therefore not required to administer standardized tests. Pastor Buss discovered that standardized test scores as evidence of academic performance were a major positive point of difference for Glenview Public—and therefore a disequity for GNCS.
The Meanings of Areas D, E, and F
Figure \(5\) focuses on the areas of the model that, for both firms, fall outside the customer’s circle. By definition, these areas reflect the firms’ attributes and benefits that are unimportant to customers or do not meet customer needs. Areas D, E, and F capture value that is being produced by the competitive firms that fits into one of two categories:
• Nonvalue: Value that is unimportant to customers. This could include attributes that were once differentiating but became points-of-parity and have lost their value over time. For example, at one time, batteries had self-testers built right into the packages so that users could see how much life was left at any point they wanted. This was an attribute that initially differentiated Duracell, but it turned out to be an expensive add-on imitated by competitors that did not provide substantial enough incremental value to customers to justify its existence. Alternatively, certain attributes are simply pushed out by superior technology—for example, at one time, golf clubs called “woods” were actually made of wood! Finally, nonvalue can also include attributes or benefits that firms thought would create value for customers but, in the end, did not. Handwriting recognition on personal digital assistants (PDAs), colas of a clear color, and separate boy and girl disposable diapers were all efforts that firms anticipated would be big sellers but that consumers found to demonstrate little incremental value.
• Negative value (disequity): Value with which customers are dissatisfied. We might also find negative value in these areas. This might alternatively be referred to as dissatisfiers or “disequities.” Industry-wide dissatisfiers fall into Area D—both (or maybe all) competitors suffer from this. Some might say that customer service in the airline industry is very poor across all or most competitors. Alternatively, one firm may possess a dissatisfier while another does not. Major retail video stores continue to charge fees for late returns, for example, which is a major source of customer dissatisfaction in the video rental industry. In contrast, competitor Netflix has a business model that does not require customers to pay late fees. The alarm clock that works fine but is very difficult to set, the mobile phone service that has good coverage but for which billing is complex and confusing, and good physicians with long wait times are all examples of products and services for which we accept the good and the bad. That is, consumers essentially trade-off the positive returns from consumption in these categories against the negative returns that, in some cases, they simply decide to put up with.
In the case of Glenview New Church School, the public school’s strength in verifiable academic performance is actually a unique disequity, which would define it as falling into Area E. Simply, parents have a more difficult time choosing a school in a post-NCLBA world if the evidence of performance is not offered up. The notion of verifiability both in terms of school performance and staff credentials was something of a surprise to the GNCS management team. In his study, Pastor Buss’s analysis for GNCS did not reveal any items of common disequity (Area D) for the two schools.
In addition, Pastor Buss was surprised to hear that many parents were not clear on the church’s mission for the new school. There were two dimensions of this. First, the reputation of the school was generally unknown among some parents. Second, some of those who were aware of the school conveyed that the church’s communications about the school were not perceived as relevant—that is, they did not personally connect with the messages. The sum total of these two concerns is that the school’s identity was difficult to pin down, which can be a disequity in the customer’s eyes.
As we will see, these areas turn out to be very important, in part because there are strategic options for dealing with these concerns that have implications for growth. Attributes or benefits one finds in Area E, for example, might be (a) maintained, (b) eliminated to save cost, or, ironically, (c) actually built into potential satisfiers.
Area G: The White Space
Innovation is a critical component of growth strategy for many organizations today. As such, it is critical to have a systematic way of motivating the search for new customer value ideas. The 3-Circle model gives meaning and language to the need for innovation.
Figure \(2\) focuses on Area G, which we label the “white space.”We thank Viva Bartkus for suggesting this term. This region of the framework actually has two different dimensions or meanings, both critically important. The white space generically captures value desired by the customer that is not currently being fulfilled by either the firm or its competitor. Those needs may be (a) currently known and top-of-mind or (b) less known (latent). Needs that are currently known and top-of-mind are often obvious in customer complaints; therefore, many clues about unmet needs might be found in the attributes that end up in areas D, E, and F. For example, the travel industry is complex and rife with consumer dissatisfaction due to late planes, mistaken communications, and confusing airline loyalty programs, among other factors.Higgins (2008, June 1); Haberkorn (2008, May 28). In short, there may be needs the customer has that are known and that have not yet been satisfied.
Yet there are also underlying needs that may be less obvious. As we will discuss in Chapter 5 and Chapter 6, there are approaches for exploring the white space that require deeper inquiry, and a variety of methods are available. To illustrate this distinction, notice the last two columns of Figure \(1\). While the first column deals explicitly with the features of the phone itself, the second and third columns focus on the outcomes of particular features of the phone. So, for example, while the packaging and sales discussion might focus on a number of features like screen readability, size, weight, and battery and memory size, ultimately, the customer wants to get a sense of how this phone will help them in voice and text communication, personal organization, durability, safety, and comfort. The latter reflects deeper needs, which might more powerfully guide product development by providing a clearer understanding of customer problems to be solved.
In his analysis of GNCS parents’ decision making regarding schools, Pastor Buss utilized a research approach called “laddering,” which effectively drills down into deeper reasons underlying customers’ interest in the attributes of a product or service. So why are attributes like individualized attention, comprehensive curriculum, and values-based curriculum important to families as they choose among schools? Figure \(6\) reveals several interesting values that Pastor Buss identified in his in-depth conversations with customers. These values relate to the deeper goals that parents have for their children—becoming a likable, honest person; navigating a cultural minefield; wanting their child to have it better than they did. These are not attributes of the school but are ultimately outcomes of the school’s attributes. They are unmet in the sense that they probably can never be completely resolved. At the same time, the school’s efforts to speak to these values in program development, hiring, and communications will have a very big impact on the value that parents find in the school.
Note that these deeper values are hardwired in us. No firm “creates” needs—they are built into us and drive our daily behaviors. However, most of us as consumers (and as managers) do not really think about these deeper drivers on a regular basis. But recognizing their existence—by keeping a focus on Area G in growth strategy planning—can offer dramatic insight into customer value and impact on growth strategy. An example is a case involving the Rust-Oleum management team. Rust-Oleum is a well-known manufacturer of high quality paints, with its brand anchored around its historically highly effective rust-preventative paints. Facing pressure from retail store category managers to lower prices, company management found deeper concerns about category profitability (and, likely, personal achievement) in the retail category managers’ protests. Instead of cutting prices, the Rust-Oleum team sought to more deeply understand the problem that category managers were attempting to solve. They concluded that the retailers’ real issue was not a need to extract more margin from individual vendors but, instead, a need to improve the overall profitability of their small project paint category. In response, Rust-Oleum created a data-driven approach to category management for small project paints, helping retailers significantly improve sales and profit from the paint category and producing double-digit growth in sales of its own brand.
The lesson is that in any product or service category, needs are never completely fulfilled. Area G is a critically important source of potential value to be added in a market that can fuel growth. It is important to note that Pastor Buss’s analysis of GNCS was undertaken on his own, with guidance from the 10-step 3-Circle growth strategy process that is summarized in Chapter 9 of this book. We will discuss the implications of this analysis for the school’s growth strategy, but we will first consider the concept of the inside view. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/02%3A_Introduction_to_Three-Circle_Analysis/2.02%3A_The_Outside_View.txt |
In 3-Circle analysis, significant insight is gained by thinking of the circles as having deeper layers. For example, Pastor Buss found that at the core of parents’ decisions about schools was a deep concern about their child’s development as an honest human being and achievement in later life. Similarly, the company circle has depth to it. That is, residing behind or inside the company circle that customers see are the capabilities, resources, assets, and value networks that the firm uses to create value for its customers.This dimension of the model is informed specifically by the works of Day (1994, October), Barney (1991), and Kumar (2004).
Capabilities, Resources, and Assets
Figure \(1\) provides a simple schematic of the dimensions on which the inside view might be discussed. The circle on the left results from an analysis of our company’s resources, capabilities, and assets (which we will refer to as RCA). The circle would “contain” a weighted listing of our RCAs, to be compared to those of the competitor, captured by the circle on the right. Note that the two circles overlap, which suggest that the firms have some capabilities in common. Yet each firm has unique RCAs as well.
This brings us to the ultimate definition of distinctive competitive advantage (following the work of Michael Porter and George Day). True competitive advantage exists when the attributes or benefits that reside in Area A in the outside view of the model (seen by customers) are the product of the firm’s unique RCAs. In other words, the strongest, most sustainable competitive advantage is one in which the firm’s unique position in the mind of customers (Area A) is produced by capabilities and resources that competitors cannot match.
Competitive Advantage and Red Bull
At the heart of the framework is the idea that true competitive advantage comes from aligning the firm’s distinctive RCA to important customer values in ways that competitors do not. To illustrate, consider Red Bull, the brand that pioneered the “functional energy drink” beverage category. Figure \(2\) illustrates, in simple terms, the idea of alignment. The company built a variety of distinctive capabilities around research and development, product development, and (later) branding and marketing communications. Based on these capabilities, the company developed unique strategies for product (a research-based formula including the newly introduced ingredient taurine), distribution (refrigeration units and display innovation in retail stores, building relationships with clubs), and promotion (sponsorship or creation of high-energy events and athletes). These tactics were driven by the Area A positioning strategy “revitalizing body and mind,” ultimately delivering uniquely on the basic needs of combating mental and physical fatigue in people seeking performance, achievement, or socialization. IBISWorld reports that, as of 2010, Red Bull has a 70% share of the “energy drink” segment of the functional drink category. IBISWorld (2010).
The Red Bull case illustrates an important point regarding a common misconception about what most people believe to be vacuous marketing practices as a key to marketplace success. Without the foundation of key capabilities and resources in execution, communications campaigns that seek to create image are doomed to fail. The most successful brands and products are those that deliver on the promises made in positioning via strong core capabilities. In describing the history, structure, philosophy, and success of the Mayo Clinic—one of the most successful and important enterprises in American business history—Len Berry and Kent Selman (2008) note, “Smart executives understand that advertising effectiveness over time depends on advertised goods or services delivering what the organization promises.” In sum, the brand is a result of performance of the product or service. For Glenview New Church School, capability development is critical. GNCS’s current Area A is essentially built around its small size, individualized attention, and morals-based education. As we will see, there are opportunities for developing growth strategy that are based upon building new capabilities. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/02%3A_Introduction_to_Three-Circle_Analysis/2.03%3A_The_Inside_View.txt |
The most significant contribution of the 3-Circle model is the guidance on growth strategy that falls relatively easily out of an effective customer analysis. We will use the GNCS example to quickly illustrate this. First, recall our basic definition of customer value:
$value=\frac{benefits\,obtained}{price\,paid}$
As noted, this ratio is important in suggesting that the firm increases the chance that the potential customer will choose their brand when they either increase the numerator relative to the competition or reduce the denominator. Apple and Dell represent polar opposites in terms of competitive positions—Apple differentiated around excellent design and functionality (with margin driving its profitability) and Dell focused more on efficiency, low-cost basis, and aggressive pricing (with high volume driving its profitability). In some ways—and with certain exceptions—we might refer to Apple as a numerator company and Dell as a denominator company. Each creates significant value for its customers but in very different ways.
As a self-funded private school, GNCS does charge tuition. It gives regular parishioners a discount from the stated tuition level. For the purposes of our discussion here, we will not introduce a tuition cut into the mix for GNCS. However, it is important to note that price reduction—when financially well reasoned—is a plausible alternative here, particularly if it is accompanied by cost reductions.
We will organize the consideration of growth strategies around four questions. Although we will later see that there are additional growth strategy implications that emerge from the model, these four questions are most fundamental.
Growth Question 1: How Do We Build and Defend Area A?
The 3-Circle model makes a fundamental premise of competitive strategy very plain: The firm must be different from competitors in ways that matter to customers. One of the most valuable aspects of the model is the manager’s ability to teach colleagues and staff this notion. But beyond just conveying understanding of the notion that all firms must have points of difference to grow there are important implications in (a) first discovering our points of difference from the customer’s perspective (often, they are not what we expect) and then (b) thinking through how we can build and defend them. In a subsequent chapter, we will detail the bases for differentiation and the variety of ways that firms attack this important element of strategy. For the GNCS example, growth question 1 is summarized in Figure $1$.
Although relatively new, GNCS does have a differential advantage over the public schools in its small size, caring environment, and potential for individualized attention to children. These are natural advantages, but the team at GNCS decided that they could be leveraged in two ways. These two secondary questions form a foundation for growth strategy in each of the general categories we will discuss:
• What capabilities can we build to reinforce and strengthen our Area A? In education, there is an important paradigm developing around what is known as differentiated instruction.(Tomlinson (2000)). This teaching pedagogy focuses on teaching children in a way that adapts to their individual differences in learning styles and levels. The approach requires training and development for teachers that is not standard in colleges of education. One growth direction for GNCS is to build teacher skill sets in differentiated instruction, which the public schools would have a more difficult time pursuing.
• Can we communicate more effectively? Pastor Buss did discover in his research, to his surprise, that several families were unaware of the school’s value proposition and how it related to their values. There is an important opportunity here to better connect messages about the school’s positioning to the values uncovered in the Area G analysis.
Growth Question 2: How Do We Correct, Reduce, or Eliminate Disequity and Build Potential Equities in Area E?
Figure $2$ identifies a series of questions about Area E, which we only summarize here and save for greater depth later. In some ways, this is even a higher short-term priority than building Area A. Very often in this analysis, firms find that customers raise concerns that they were not aware of, and find that these concerns are sometimes based on misconceptions. Again, GNCS discovered a general lack of awareness of the school’s value proposition. The clear growth strategy emerging from this is conducting an audit of all communications media and touchpoints, as well as all opportunities to clearly convey the school’s mission and, again, how it connects to the Area G values identified. Probably the most significant disequity defined for GNCS was the fact that they lacked the test scores that would provide credible evidence of both the school’s academic excellence and the teaching staff’s credentials, the former because the school had not undertaken the standardized tests and the latter because they had never thought to communicate teacher credentials. In their analysis, GNCS discovered the importance of building a capability in standardized testing and in very clearly promoting their teachers’ advanced degrees.
Growth Question 3: Should We Neutralize Competitors’ Area C, and If So, How?
In Area C reside the competitors’ strengths. Growth for our firm may be produced by offsetting or neutralizing these (Figure $3$). One can see the complementary relationship between Areas C and E here—the competitor’s advantages (Area C) may, at times, be seen as the firm’s disequities (Area E). The issue of whether or not the firm should vigorously attack Area C depends—to what degree do we have, or can we build, a credible attack on the competitor? What are the costs of, and returns from, such an attack? In the case of GNCS, neutralizing the public school’s advantage on verifiability (i.e., building the standardized testing capability) is straightforward. This is essentially a competitive requirement today, because test scores are data that families expect each school to be able to produce (i.e., it has essentially become a point of parity). In addition, the costs of building this capability are reasonable, particularly compared to the costs of not doing it. As noted, though, the firm needs to be discriminating about which Area C dimensions to attack. Given resource constraints and a more focused mission, it would not make sense for GNCS to seek to broaden its curriculum to match the curriculum breadth of GPSD, for example.
A related growth strategy question that falls roughly into the category of growth question 3 is the question of whether or not to attack or leverage the competitor’s disequities (Area F). To the extent that such deficiencies are strategically important (i.e., associated or potentially associated with customer value), these dimensions represent an opportunity to directly attack the competition to take away customers. Overcoming deficiencies involves making better products or services than the competition and distributing them more effectively. In addition, communications strategy can point out the problems with the competitor’s offerings. Research on comparative advertising suggests that a direct attack on a smaller competitor is generally a bad idea for a market leader. But the fact that it may work for an underdog is reflected in Apple’s brilliant “Get a Mac” campaign, which cleverly and effectively positioned Microsoft as an overconfident (if insecure), bumbling nerd of a competitor.
Growth Question 4: How Can We Identify Totally New Growth Ideas in Area G?
Customers’ needs are never fully met. There are always problems somewhere in the customer’s consumption chain for which alternative solutions might be developed that could serve to ultimately build Area A. This includes both functional value (e.g., suitcases with wheels and golf bags with stand-up legs are only recent inventions in a long history of travel and golf), and deeper psychological or social value (e.g., helping parents feel more confident about the chances for their children’s future success). To illustrate, consider the human value “control.” Deep-seated and highly influential in guiding our behavior, the desire for control is what is called an instrumental value. That means that it is an intermediary of a value—that is, it helps lead to other terminal values like peace of mind or security.(Wilkie (1994)). But the overriding point is straightforward: We value feeling in control. In general, humans like to feel a sense of certainty and predictability. Through evolution, this has just been hardwired into our systems. When companies can help us feel more in control, there is value there that is worth paying for. Thinking about the values (control), as opposed to product features and attributes, tends to open up thinking about potential solutions for customers. It is easy to find examples of new innovations that connect with customers because they touch our sense of control:
• Palm Pilot. This brilliant innovation was initially marketed as a competitor to the desktop computer, so the customer need was envisioned to be convenient (portable) computing. But founder Jeff Hawkins ultimately concluded (through deeper research with users) that the PDA was essentially a device not for computing per se but for helping business people get control of their information, schedule, and personal contacts, and for subsequent performance on the job. Users believe that PDAs are superior to paper-based planning systems like Day-Timer for this purpose.
• Global positioning systems (GPS). According to marketing researcher RNCOS, GPS products and applications sales will be \$75 billion by 2013.(Joseph (2009, May 27)). From helping farmers maximize crop yields, to helping companies track shipping fleets, to helping golfers find the yardage to the hole, this technology is going a long way toward enhancing our sense of control over the physical environment.
• Calorie management websites. As evidence mounts that the key principle in weight reduction is simply managing caloric intake,(Arnst (2003, April 8)). a wide variety of websites have popped up that help people track the number of calories they take in and burn up every day, including SparkPeople, LIVESTRONG, and About.com Health. These services bring a strong element of control by way of enhancing one’s ability to monitor and regulate eating behavior with some advising—a self-regulatory solution to what is often an emotional, fad-driven activity.
We will expand our discussion of values in Chapter 4, but, for now, we point out that the exploration of Area G for growth opportunities requires going beyond the current conception of the product or service. It requires a way of exploring customers’ deeper problems, needs, and motives.
At the chapter’s opening, we discussed Booklet Binding, Inc. (BBI), the firm competing in the market for printed booklets that had become commoditized. After deeper study of customers’ purchasing patterns and needs, the company turned itself around by listening more carefully to individual customer needs and by expanding the definition of its product. It found that customers would significantly benefit from sales programs that anticipated their promotion schedules over time, reminded them of previous orders, and helped them plan ahead. It also found that they could create value for customers through education on topics that helped customers improve their efficiency and sales effectiveness. These efforts not only enhanced customers’ sense of control over at least one aspect of their business, it also helped BBI customers create more value for their customers. This required redefining what BBI considered to be its core product and service capabilities, but in doing so, the company was able to recapture a substantial part of the market and to improve profitability.
Regarding GNCS, we have already made some mention of the values that Pastor Buss uncovered in Area G. Given this depth of understanding of the values driving family school choice, the GNCS team should evaluate all existing programs in terms of how well they deliver upon these values (see Figure $3$). Subsequently, the team should strive to build the programs that most directly address these values and perhaps eliminate programs that do not. So an after-school program that can be understood to have the benefits of preparing primary school students for middle school is likely to have a greater impact than one that has a more general positioning. New programs might be built specifically around the life skills that contribute to the children’s ability to navigate challenging circumstances, like decision-making skills. (As an example, see the curriculum developed by Tom Reynolds and team for teaching children a framework for decision making. See the website http://lifegoals.net/ and Warner (2004).) Finally, it is important for GNCS to reflect these values in their communication with prospects. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/02%3A_Introduction_to_Three-Circle_Analysis/2.04%3A_Growth_Strategies.txt |
Pastor Buss and the GNCS team are still working on implementing the strategic directions that emerged from the 3-Circle project. They have built an impressive staff and communicated their credentials, implemented standardized testing processes, and are in the process of hiring new leadership. While the development of the school will take time, and the development of new teaching paradigms like differentiated instruction will be up to the new school leaders, Pastor Buss reports being “sold on the 3-Circle model” and process that led to the current growth strategy for the school.
The simple truth is that your business is more profitable when you lead it with a careful view to customer value. However, there is much lip service given to customer value and customer satisfaction these days because we have few disciplined ways to think about and evaluate it. The 3-Circle model provides such discipline in asking the right questions and providing guidance on the right answers for growth. The key benefits of the framework are the following:
• Understanding the customer’s perspective with a focus on competitive assessment and the deeper values underlying customer decision making
• Straightforward illustration of principles of competitive strategy and actionable implications for how to improve competitive position
• An explicit focus on building competitive advantage through both capability development and communications strategy
The outside view of the framework captures the front office—that is, it focuses explicitly on customer perception of the firm and its competitor. The analysis of the outside view produces a categorization of value in 7 categories, as summarized in Figure \(1\). The key competitive concepts reflected in this figure, and the associated growth strategy implications, are as follows:
• Area A: Our competitive points of difference. Build and defend.
• Area B: Points of parity. This is the common value that customers may come to expect from all competitors. These attributes and benefits should generally be monitored and maintained at competitive levels.
• Area C: Their (the competitor’s) points of difference. If there are absolutely critical dimensions that can be matched in cost-effective ways, there is a high priority on matching the competitor’s advantages. The exception is when the competitor’s strategy is built upon a fundamentally different positioning strategy. For example, it would not be prudent for GNCS to pursue a broad curriculum in the same way that it would be foolish for Apple to get into a price war with Dell. So “live and let live” is another potential strategic implication for Area C.
• Area D: This is nonvalue or disequity common to both competitors in the analysis. The goal here is to fix disequities if this action can contribute to your competitive advantage, reduce or eliminate attributes and benefits that customers find have little value, or potentially unearth value that has not been clearly developed or articulated to customers. Palm was the first to figure out that customers desired PDAs with a very simple set of functions, and so stripped out much of the complexity of its first generation product—to great success.
• Area E: Similar to Area D, except that this nonvalue or disequity is specific to our company, so there may be some very high priority fixes here. In addition, study of Area E might even emphasize the search for potential equities and unique capabilities the organization has that might be clarified and leveraged.
• Area F: This is the competitor’s nonvalue or disequity. If chosen, the strategy of overcoming competitors’ deficiencies involves making better products and services than the competition and distributing them more effectively. In addition, communications strategy can point out the problems with the competitor’s offering.
• Area G: The white space represents areas of unmet need that neither competitor has touched. It is important to seek growth potential in unmet needs but in a structured and disciplined manner. Identify the deeper reasons underlying customer complaints and problems, and search for potential differentiating sources of new value for which we have a capability advantage.
The inside view of the 3-Circle model captures the back office: the work, processes, capabilities, assets, and resources that are utilized in creating customer value. In the end, the most powerful competitive advantage emerges when your distinctive Area A, as perceived by customers, is a function of real, substantive, and distinctive capabilities and assets. Finally, the framework identifies a variety of actionable, high-impact ways in which a firm can enhance its growth prospects by building customer value that is superior to that of the competitors.
Chapter 1 and Chapter 2 have provided an overview of the framework and an introduction to the key concepts within it. Now it is time to get busy with an exploration of the core concepts in the model. Chapter 3 starts with the start—defining the context for your growth strategy analysis. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/02%3A_Introduction_to_Three-Circle_Analysis/2.05%3A_Chapter_Summary.txt |
The world cannot be governed without juggling.
- John Selden, The Table-Talk of John Selden, 1892
Jugglers captivate audiences. Even juggling just three balls is an elegant and artistic act that is seemingly out of the reach of 95% of the population, given requirements of technical skill, great coordination, and focus. This is why we watch the juggler with great envy and admiration.
Yet there is a way to simplify this complex and challenging act so that everyone can do it. (Honestly, everyone.) Michael Gelb’s brilliant discussion of juggling as a metaphor for human learning applies three key principles: (a) breaking the complex into simple pieces, (b) getting repetition on the pieces and then building them into an integrated whole, and (c) creating a language around which we can think, train, and discuss. (Gelb (2003))
The natural inclination of the novice juggler is to focus on catching the balls. Toss one, then two, then three, and try to catch. Every dropped ball is a failure and a source of frustration. Balls fly all over the place because there is no discipline in the tossing. But it takes the novice a while to realize that because he is so focused on catching the balls, he fails to see the mechanics that underlie successful juggling. The error variance caused by the many, varied throws really takes the would-be juggler away from the goal of tossing and catching the balls in an easy, controlled pattern.
Gelb’s insightful method, though, brings order to this chaos by boiling the task down to its simplest components. Following it, a novice can be juggling three tennis balls comfortably in 10 to 20 minutes. We have provided an overview of the initial step in Figure \(1\) to illustrate the basic principles applied.
Summary From Gelb (2003)
You begin by writing numbers on the tennis balls with a magic marker—1, 2, and 3. Put a big dot or “X” on Ball 3 to distinguish it from the other two.
Left-Hand Throw (Ball 1)
Stand facing your couch so that when you are tossing balls the couch will catch any that do not land in your hands. Holding only Ball 1 in your left hand, envision a frame floating in front of you. The frame is about the width of your shoulders and would extend vertically to a little above your eye line. Toss Ball 1 from your left hand up to the center-right part of the top of your imaginary frame, keeping your eyes looking up (don’t look down at your hands). If you toss it accurately to the upper right of the frame, the ball will tend to drop straight down (see Figure \(1\)). It is safe to say that your first few tosses will not be accurate. But it’s not important that you catch it. Just try to throw it easily, accurately, and in a controlled way. Focus on the toss with your left hand, not the catch with your right. Pick the ball up from the couch and keep tossing. Make your throws as consistent as you can. Odds are that by the 5th or 6th throw, even though you’re not trying to catch the ball in your right hand, you do (you just can’t help it!). Keep practicing your left-handed throw until the ball starts dropping consistently into your right hand, keeping your eyes forward.
This fundamental principle of the accurate “left-hand toss to upper right frame” is at the center of your ability to juggle. Once the novice has experience at this basic toss, Gelb teaches how to generalize it and follow with a “right-hand toss to upper left frame” (Ball 2) and then to add Ball 3 with appropriate timing. Once Ball 3 is added, the 3-ball integrated toss is defined around the concept of a juggulation, an aptly named cycle that consists of three tosses and three catches. The juggler proceeds to juggling excellence by first achieving a juggulation, then practicing one juggulation at a time, then going for two juggulations one after the other, and so on.
We leave you to Gelb’s books for completion of your juggling training. But there is a wonderful set of principles in this process that lay a foundation for our work on growth strategy:
• Break down the complex into simple pieces. Gelb’s approach to teaching juggling is based on the learning principle that complex subjects can be broken down into their simpler component pieces. The first step is to envision an imaginary frame in front of you that is a little wider than your shoulders and extends from your navel to about 6 inches above your head. Gelb calls this the “juggler’s box.” With this frame in mind, think of a basic toss that underlies all of three-ball juggling; toss Ball 1 with your left hand to the upper right part of an imaginary frame so that it will drop down to somewhere around your right hand (see Figure \(1\)). You will not be able to juggle effectively until you can reasonably perfect this basic toss.
• Assemble the pieces into an integrated whole. Once this basic toss is learned, it becomes easier to catch the balls. The toss is then duplicated with a second toss from the right hand, and then later integrates a third toss. The process is learn a toss, get repetition on the piece, then add another piece until the juggler has cumulatively built the full repertoire of tosses needed to complete a cycle. In sum, there is gradual integration of additional pieces until they form an elegant whole.
• Build a common language. Importantly, the process creates a language by which we can communicate about juggling. The terms toss and catch are quite simple but have specific meaning in this context. You know the difference between Balls 1, 2, and 3; we know that the juggler’s box provides a critical reference for guiding the effort. Juggulation—the completion of one successful cycle of three tosses and three catches—is an important concept. Learning is facilitated by limiting your efforts to build up to learning one juggulation at a time and perfecting that before you move on. This term is important in communication, specifically in helping the teacher convey to the learner what to focus on.
The same principles are at work in our description of the 3-Circle model. What has been written on growth strategy, competitive strategy, positioning, customer analysis, competitive analysis, and company analysis can, and does, fill libraries. It is fair to describe it as chaotic, and attacking it all at once would be like trying to teach yourself to juggle by simultaneously throwing multiple balls in the air at once. Our process is designed to do exactly the same thing as Gelb’s: Break down the components, integrate them back together in a way that produces effective results, and, in doing so, create a language around which to build growth strategy. The goal is to make accessible concepts that have been thought to be messy, complex, and inaccessible.
The objective in this chapter is to teach how to frame up a 3-Circle project by defining its component parts. These are the three most significant component parts that every manager juggles in growth strategy planning and execution. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/03%3A_Defining_the_Context/3.01%3A_Chapter_Introduction.txt |
In developing growth strategy—as in juggling (!)—first, you need a frame that serves a purpose like the juggler’s box. The difference is that the frame for growth strategy is not imaginary. Instead, it is a very real combination of the statement of a particular company unit (product, service, brand, product/service line, etc.), the customer segment, and the competitor. In fact, the generic way that we define a growth strategy project is by stating a project goal in the following way:
“My goal is to grow COMPANY UNIT by creating more value for CUSTOMER SEGMENT than COMPETITOR does.”
This definition provides a means of building the frame for the growth strategy for a particular business unit. Some simple examples of project contexts, reflected from past projects, are the following:
• My goal is to figure out how McDONALD’S can grow by creating more value for BREAKFAST CUSTOMERS than STARBUCKS does.
• My goal is to figure out how HARRAH’S CASINO can grow by creating more value for the HIGH NET WORTH GAMBLER than EMPRESS CASINO does.
• My goal is to figure out how ORBITZ can grow by creating more value for HIGH FREQUENCY TRAVELERS than EXPEDIA.COM does.
This statement first requires a precise statement of each element. It puts the three dimensions of the 3-Circle project in a particular action-oriented context, focused on company growth, customer value, and a competitor. While the previous statements look fairly simple in hindsight, in reality, they are often difficult to develop. This is not because it is difficult to find things to put in the blanks. On the contrary, it is because there are often way too many things that we could put in the blanks!
Why a Focused Project Context Is Necessary
Stephen Johnson is a photographer wishing to build a growth strategy for his newly opened shop. Stephen’s project definition states a goal of “seeking to grow Johnson Photography by creating more value for customers than Frederick Pictures (the local competitor).” There is a very clear problem with this statement. “Customers” is ill-defined. Once Stephen started exploring customers’ value definitions and perceptions, he would find very big differences between different types of customers. For example, primary school administrators who need to choose a photographer for school pictures will have very different criteria for value (e.g., moderate quality, volume, price) and very different awareness levels than will young couples or families in the market for weddings, who would likely put more emphasis on very high quality, responsive service, and related services (e.g., video, websites), along with a greater willingness to pay. In addition, depending on the segment chosen for study, different competitors emerge. If we tried to do a growth strategy project without distinguishing between potentially different customers, we would find a confusing mass of answers because different people will define value differently and will have different competitors in mind. As a result, it is best to be as specific as possible in defining project contexts, even if that means giving up some breadth in the analysis. As we will see, the returns provided by greater depth are more than worth the depth given up.
Often, defining the context for a 3-Circle project is an excellent opportunity to look more fundamentally at your business, asking the following basic questions:
• What is the company “unit of analysis”?
• Who (what customer segments) do we serve?
• With whom do we compete?
The project context statement is an integrative statement that brings together these three elements. As noted later, the order of determination may well depend on the particular business problem that needs to be solved. The goal is to define the boundaries of the project in the form of a simple declarative statement that can be easily communicated to others. The best way to illustrate the subtlety—and, sometimes, frustration!—in leading to these simple statements is reflected in a series of principles. These principles provide the organizing framework for the chapter. The first principle is about chickens and eggs.
Chicken or Egg Does Not Matter
It would seem that there would be an optimal “starting point” for defining the project context statement. However, there is no single answer. If there is one natural, central defining construct in the process, it is customer decision making. This means that important issues spring from the way the customer approaches the decision—for example, what attributes, features, and benefits are important, what competitive options are considered and not considered, and so on. For the most part, the relevant dimensions of the context all spring from how the customers tend to view and make the decision. Early discussions with customers help define (a) the particular unit of analysis about which they make decisions—such as selection of one brand over another, or selection of complementary products and services at the same time, and (b) the competitive options that they consider.
That said, while an understanding of the customer segment and how customers likely choose between competitive options will somehow always be reflected in the analysis, it may not always be the first step. So what should come first in defining your initial project: the company unit, the customer segment, or the competitor? We believe that to answer this, you first need to consider your business problem. It may be that you have been observing a segment of customers get larger over time, representing a great opportunity, but you have been unable to build sales in that segment as quickly as you like. If so, the customer segment may be the anchor for the project. With the customer segment in mind, you then explore (a) what the relevant company unit (e.g., product or service line, brand, even division) is with which you can create value for this segment and (b) which competitor(s) you want to include in the analysis. On the other hand, maybe you have had a new competitor preying on your mind, perhaps one that is beginning to eat away at your sales. As such, a project may be motivated by a desire to develop a deeper understanding of a particular competitor. Once you anchor on a competitor, then think through the particular company unit with whom they compete and the most relevant customer segment you both serve. Finally, you may start with the company unit—once defined—for example, perhaps you have carried around the broader problem of how to grow the business unit. This one is broader by definition, in that it could conceivably involve different segments and competitors, so may require a bit more search and analysis in its development.
Without a particular business problem in mind, we will start with the company unit of analysis, noting that there is a common thread across all three areas to help define the basic dimensions of the project—that common thread is customer choice.
Define the Company Unit of Analysis So It Is Actionable
This is usually straightforward, so we will spend little time here. If the company is small and interacts with customers with a single product, it may be that the unit of analysis is just the company itself. Alternatively, the project may be organized around a particular product line. Consider the following project context statement from Medline, an Illinois-based manufacturer of hospital clothing and supplies: “How Medline can grow our fashion scrubs business by creating more value for hospital employees in a color by discipline program than a local scrub store?” In this case, the company unit is a newer line of scrubs that is targeted to hospitals who have adopted a color-by-discipline program in which the hospital employees role can be identified by the color they wear. This project was undertaken by the product manager responsible for the line who was exploring the potential for an online retail store presence.
The key criterion in defining context will almost always be a function of customer choice. There are many dimensions on which the company unit can be defined. It could be defined by an individual brand or an umbrella brand (covering multiple brands). It could be defined by an individual product or service or by a line of products or services. It is less likely to be a broad business unit, though, because what is critical is that the unit of analysis be some unit around which we can define customer choice; that is, the company unit must be the subject of choice. In short, we need to define the company as a unit of analysis where the dimensions of value on which customers compare our offering to competitors’ can be identified. As an example, we can define the reasons why customers might choose between Medline’s online store and a local bricks-and-mortar retail store; such factors would include time savings, ability to control shopping time frame, pricing, ability to try on goods, ability to physically inspect the products, immediacy of purchase, and so on. In contrast, it would be difficult to frame a project around Medline’s multidivision product line against that of a similar competitor. Why? Because people do not evaluate whether to choose one Medline division over another (or even over competitors). In contrast, evaluating a narrower product line or category provides a concrete starting point for a project. The general comparison of Dell versus Apple for the purposes of developing growth strategy is relevant only within particular product or service lines. Otherwise, it would be a general analysis of brand meaning, which, while useful for understanding brand equity, falls short of useful growth strategy development for particular areas of the firm.
Think About Customer Segments
Most companies (whether they know it or not) serve multiple customer segments. That is, different customers purchase the company’s products or services for different reasons. If we can recognize and understand those different reasons, it is possible to change our marketing mix, custom-tailoring it to different segments to generate a better share of each segment’s sales than if we had a “one size fits all” offering. A hypothetical example is presented in Figure \(1\), illustrating how a bottled-water company might substantially increase its total contribution by recognizing that there are different segments of consumers. Treating all consumers the same (with a single product, i.e., the “undifferentiated” case), the company offers one product at a price of \$1.00 and a margin of \$0.50. However, through a little research, the company learns that different customers have different purchase motivations. It turns out that 70% of the market is price driven, and enjoys paying \$1.00 for the current product. The other 30%, however, is concerned with health. The latter segment would like a product that is vitamin-fortified, and is willing to pay more for it. The calculations appear in the Appendix to this chapter, but the conclusion is that the firm’s total contribution increases from \$75 previously (selling just the single product) to \$115 when two products are offered. This is because the healthy segment will buy more of a product that better meets their needs, and their willingness to pay \$1.50 provides a higher margin on each bottle sold (see the “differentiated” scenario on the right in Figure \(1\)). In sum, there is an economic logic to market segmentation—firms engage in the practice because it increases profitability.
There are hundreds of textbooks and trade books that provide insight into “how” markets can be segmented. There are many different ways to segment the market, but there is a basic logic that is common across approaches:(Sarvary and Elberse (2006)).
• Identify different types of benefits that customers seek from your product
• Group customers together based on the benefits they seek
• Use other descriptors to describe the segments—for example, demographics like age, income, firm size, and location
Segmentation Is About Reasons
An important way to think about market segments is to consider how different people might decide to buy a product or service for different reasons. Some people buy for price alone, for example. In contrast, others are willing to pay a high price for convenience.
The following exercise can be used to explore the reasons for customer choice in the market you are looking to study. Let us take the example of gasoline service stations. What segments might exist in this market? One way of addressing this would be to speak with those who have fairly extensive experience in the market (e.g., service station operators, executives). While their knowledge of the market may not be perfect—and they will have varying opinions—they will have insights that will help you move forward. In addition, you might have conversations with 5 to 10 customers—even just people you know—as almost all consumers have experience in this service category. But the goal of these discussions is to identify the general needs (e.g., the reasons why people need the service in the first place) and then the reasons why a customer chooses one service station over another. This exercise can be framed as a simple question: why did you choose service station A over service station B? (You will also be able to ask some people why they have chosen B over A in the past, for many people likely have patronized both service stations.) Let us say the reasons that emerge in this analysis include the following:
• Prices good; saves me money
• Fast service; saves me time
• Needed milk; they have a big product assortment
• I know and like the people there; relationship
• Convenient location on my way to work; close to my house
• Very neat; well maintained
Now, looking at these reasons, two things become clear: (a) different people are likely to emphasize different reasons for choosing a service station (people segments), and (b) there are likely to be times when the same person might make a choice for different reasons (situation segments). People segments are easiest to think about, as we group different people into reason-based segments. So, for example, consider Figure \(2\) in which—based on preliminary research and conversations with customers—we identify three segments that place different weights on the reasons we listed previously. (These segments are based upon Mobil’s classic market segmentation research; see Sullivan (1995).)
The segments are largely defined by different needs. The first segment tends to seek low gas prices first and foremost, and other concerns are secondary. The second segment seeks food product assortment and variety. The third segment is happy to pay higher prices because they value consistently patronizing a service station where expectations are regularly met and there is value in the relationship built with the staff. This is the basis for market segmentation: Different people choose certain products for different reasons.
Defining the Project With a Segment Focus
The point of exploring customer segments in your market is that, most of the time, it is best to keep a project focused on one segment. The clearer a picture you have of the particular customers you are seeking to grow business with, the deeper and more insightful your project will be. For example, Harley-Davidson management could define a project as having the goal of “growing sales by creating more value for heavy weight motorcycle riders than does Honda.” The challenge with this customer definition is that it is very broad, encompassing many different types of customers who purchase motorcycles for very different reasons. Envisioning growth among customers requires a very close look at who they are and “why they buy.” Based on research summarized in Winer, (Winer (2002)) there are, in fact, at least six different customer segments of Harley purchasers, ranging from “tour gliders” (about 14% of Harley purchasers) to the much larger “dream rider” segment, which accounts for 40% of Harley’s market. The tour gliders use their bikes for long trips for recreation and relaxation, tend to buy more expensive bikes, and spend twice as much on accessories as the dream riders, who tend to ride many fewer miles—mostly local—and appear to be “outlaw wannabes.” If a growth strategy project mixed these two segments, it would be difficult to sort out value—the tour gliders seek bike comfort for long trips, while the dream riders seek shine and glitz in a less expensive bike that makes them a “hog.” The individual preferences of each segment would be blurred if we tried to do a project that lumped them together. In addition, these different segments may each have different competitive brands in mind when they choose their motorcycles. That leads us to the next principle.
Choose Competitors That Are Relevant to Target Customers
There are a variety of strategic considerations in selecting a competitor or competitors for your growth strategy project. But two general rules capture the most important issues:
1. Identify competitors that your target customer gives serious consideration to when choosing a product or service in this category.
2. Out of that set, select a competitor that is strategically relevant to you—that is, one that currently affects your business or will affect it in the future in terms of market share and profit potential.
Identifying the competitors that your customer considers is actually pretty straightforward—it just takes a few conversations with customers, asking the question, “When you thought about buying a product or service in this category, what were all the options you considered?” But you will also need to keep in mind a broad field of vision for identifying your competitors. You may think of your competitor as the firm that is most like you or that is your biggest potential threat in terms of market share and profitability. Your customer may have other ideas. A systematic way to think about potential competitors is captured in Figure \(3\), which depicts concentric circles representing competition at different levels. If our target brand for assessment is Diet Coke, for example, we can argue that its closest direct “form” competitor is Diet Pepsi—the two are of the same exact product form, and each is a national brand. Yet we know that Diet Coke competes at other levels with other brands and options. At the product category level, there are many other soda products that the consumer might consider, including national, regional, and local brands. At an even broader level, it is conceivable that, at times, a consumer may choose between having a Diet Coke and a cup of coffee (or another beverage that is not soda). Finally, the budget level of competition may include all things that might compete for that \$1.50 spent on a Diet Coke. It might be a bag of potato chips or pretzels, a comic book, or a candy bar.
This brings us to the point concerning selecting competitors based on strategic relevance. The general guidance here assumes that strategic relevance relates to degree of current or future impact of a competitor. This might take one of several forms: (a) selecting a large, fierce competitor, (b) selecting a competitor who has been gradually creeping up, or (c) selecting a competitor out on the horizon who might have an interest in the market. Again, your decision here should be based on current strategic priorities—from what type of analysis do you stand to gain the most? Which competitor (large current threat, future threat, distant future threat on the horizon) represents the most relevant analysis for you today?
Multiple Customer Segments, Multiple Competitors
There will no doubt be multiple customer segments that you will identify as important, as well as multiple competitors. As we noted earlier in the chapter, though, it is important that any given project have a focus on one of each. As an example, Sarah is a brand manager with Procter & Gamble, and she is considering a 3-Circle project in which she is exploring the goal of “growing the Pampers brand by creating more value for customer segment than competitor.”
In truth, there are many interesting combinations of customer segments and competitors that Pampers might study here. The first basic distinction in customer segments might be between retailers and consumers. If Sarah chose retailers—in an effort to improve value in the interest of securing valuable shelf space in stores—there in fact would be subsegments to consider: traditional high-low grocery stores, everyday low-price chains, mass merchandisers, and so on. Within consumer segments, there are many ways that the market might be segmented: by benefits (time-constrained moms vs. price-constrained moms), geography (cold climate vs. warm climate; see Figure \(4\)), or other demographics. The marketplace is complex, and it is important not to gloss over that complexity. What this means is that we are almost always best served by identifying an initial project around the market segment and competitor combination of greatest interest, and then later replicating it on other combinations. There are two reasons why this narrow starting point is important. First, as we will see, one gets deeper insight when the analysis is focused on a particular customer segment and competitor combination than if customer segments and competitors are “aggregated.” To illustrate, consider the answers we get from customers on the question, “Overall, does Pampers meet, exceed, or fall below your expectations on the following dimensions: fair price, readily available at the store, and easy to change the baby?” Answers on the three dimensions may differ significantly for different consumer segments. If we lumped all segments together, we would likely be mixing consumers with quite different beliefs and importance ratings. Note the same argument holds if our analysis is to focus on retailers as customers. Buyers and other decision makers within conventional grocery stores will likely place very different levels of importance and beliefs on product attributes than buyers from mass merchandisers.
So to the extent you can, analyze market segments separately. In fact, if you have the resources to conduct analysis on different customer-segment-competitor combinations, it provides for a very powerful comparison and contrast of such analyses. Finding commonalities between them—say, common dimensions of Area A—would reflect strong evidence of brand equity. The lack of such commonalities would indicate concerns about brand equity and the bases of customer choice.
Stay Open to Broader Applications
The most frequent application of the 3-Circle model has been in competitive market situations in which the firm is seeking to grow its business for particular customer segments in the face of competition. However, application is limited only by our ability to envision the potential choice of anyone who we might define as a “customer.” As a result, the framework can be broadly applied to almost any leadership situation. For example, the human resources department has internal customers who choose between its services and outside headhunters. The marketing research department has internal customers who choose between its services and going ahead on a decision without research. We have frontline employees who choose whether to buy in to a new operating process or not. We have employees who choose whether to commit to a new business vision or not. The more we can understand and respect the value that each of these parties seeks and is driven by in these decisions, the more likely it is we can figure out how to create and substantively build that value.
As an illustration, consider a vice president or general manager tasked with determining whether or not we even need the 3-person market research department that the organization has had for 20 years. When economic times are challenging, the goal should not simply be to slash. The goal should be to determine where we can do the needed work both more effectively and efficiently. This requires understanding the value created by the market research department for its customers (and, down the chain, the perspective of those customers on how the group contributes to the value created for the firm’s end customers). A project context could be usefully stated as follows: “My goal is to determine whether outsourcing market research provides superior value for internal research users than does the current market research department.”
We might define internal research users more specifically (e.g., new product development teams or teams involved in mergers and acquisitions), as again, needs will vary depending on the customer. However, what is important here is that this analysis digs more deeply into the value sought by the research users in the organization rather than simply seeking to find justification for budget dollars. We will find that the search for, and understanding of, that value provides a basis for making decisions that will enhance the organization’s profitability in the longer term by better aligning resources with the firm’s real needs. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/03%3A_Defining_the_Context/3.02%3A_Defining_the_Context-_Overview.txt |
Life is fundamentally about choices, and people make many different kinds of choices in the marketplace. We choose one competitive brand over another. We choose to work for one firm and not another firm. We choose to buy in to management’s new process initiative or stick with the old way. At the core, the goal of leadership in the marketplace and in organizations is to create conditions to give a high probability to choices coming our way. The most effective way of accomplishing this is to uncover, deeply understand, and respect the value that people seek in these choices. Surprisingly, we rarely take the time to do this. So those who do take the time enjoy a big advantage over those who do not.
Defining the context in a 3-Circle project is critical, as it helps managers or analysts really get their hands around the choices being made, why such choices are made, and where the growth opportunities exist. The more clearly and precisely the decision context is defined, the deeper the insights, the stronger the analysis, and further—paradoxically—the more likely the insights will generalize to other contexts. The real value of a context well defined is the ability to really deeply explore the value sought by the customer.
The key principles of context definition include:
• Clearly define the company “unit” under study—with what unit are you creating value (a department, a product or service line, you or yourself, a service department, etc.)?
• Clearly define the customer segment who you would like to choose your offering. The key is to understand the value this segment seeks. Segment “selection” presumes that we already know how the market is segmented; in fact, you may need a segmentation exercise before you can select.
• Choose a competitor who is a viable object of choice for the customer.
• Remember that—even though an apparent “narrow” context may seem overly restrictive—the resulting depth of analysis more than compensates for the limited breadth. We can apply the analysis to other customer segments and competitors later.
3.04: Appendix- The Economics of Market Segmentation
Imagine that a company sells bottled water in a market of 500 customers, each of whom consumes one bottle during a given period of time (e.g., a day, every 2 days; the particular period is not relevant). The company sells its water for \$1.00. Its variable cost is \$0.50 and it has a 30% share of the market. That means it sells 150 bottles every period (500 × 30%) and earns a \$75 contribution (150 bottles times a unit margin of \$0.50; see Figure 3.2.1, undifferentiated section on left).
The company keeps its eyes and ears open, however, and discovers that there are some consumers who enjoy bottled water and also believe that water might be a vehicle through which to obtain additional vitamins. In short, they represent a growing segment interested in health and in the impact of the products they consume on their well-being. Additional research identifies that of the 500 folks in the market, the health-driven segment now totals 150 people! These folks would get a lot of value out of a bottled water product that is vitamin-fortified.
Your product development folks figure out how to add vitamins for an extra \$0.25 per bottle, raising your variable costs to \$0.75. When this product enters the market, it reveals more about how the market has been (unbeknownst to you) segmented all along—see the right-hand portion of Figure 3.2.1 labeled “differentiated.” The top circle reveals the fact that 70% of the market is actually price sensitive and enjoys the existing product at the low price of \$1.00. It turns out that you have about a 40% share of this segment, so these folks accounted for 140 of the 150 bottles you were selling when you only had one undifferentiated product on the market. If we keep that product on the market and add a new product to appeal to the healthy segment, we increase our total contribution from \$75 to \$115! How does this happen? Well, we find that—if we have been on target in our new product development—the healthy segment is much more likely to purchase the vitamin-fortified product, even though it costs 50% more than our standard product. In fact, we get a 40% share of the healthy market, selling at a unit margin of \$0.75, producing a total contribution of \$45. Adding this to the \$70 we earn from the price-sensitive market, we have increased total contribution from \$75 to \$115 by (a) understanding that there are segments in the marketplace, and (b) effectively targeting them.Note that there will also be new fixed costs involved in the marketing of the new product (e.g., a separate advertising budget and distribution costs). As long as these fixed costs are less than the incremental contribution of \$40, segmentation and differentiation is a more profitable strategy. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/03%3A_Defining_the_Context/3.03%3A_Chapter_Summary-_A_Matter_of_Choice.txt |
In August 2008, CEO Mike Lenahan was finding growth to be challenging for his firm Resource Recovery Corporation (RRC). RRC is a small competitor in the recycling industry, geographically constrained with a pool of about 30 customers, all of whom are foundries. Foundries use tons of sand weekly for moldings and then need to dispose of it. RRC was created in the interest of reducing disposal cost and identifying reuses of the spent sand and other materials. The company had very close relationships with this customer base, in part because in 1991, about 15 of these 30 foundries had actually banded together to form RRC, as a low-cost competitive alternative to the large recycling firms, including Waste Management. These large competitors had more recently constrained RRC’s growth.
As part of a 3-Circle project, Mike’s executive team undertook interviews with customers to learn more about how they valued their service versus the service of competitors. Issues of cost levels, aspects of the firm’s recycling methods, speed of service, reliability, and size of the company all came up in the discussions with customers. Many of the customer assessments were positive on these dimensions. When it came to size of the company, RRC executives felt that their small size was a significant advantage to them in the eyes of the customer. Mike and his team believed that small meant fast on the feet and responsive, a major advantage over very large competitors slowed down by corporate hierarchy. However, when they explored the deeper meaning of “firm size” to customers, they were stunned. Instead of seeing RRC’s firm size as a strength, customers saw it as a weakness. When Mike and his team dug into this assessment, they found customers to be concerned about the long-term viability of a small firm in an industry in which four large competitors have over half of the market share. In other words, the sentiment they heard was “we know you’re good and we love your cost model, but we don’t know if you are going to be around in five years.”
RRC quickly responded to these concerns and, within a month, increased its sales at a level that represented 10% of the company’s annual sales. This was accomplished by conducting a strategic review of all the capabilities, resources, and assets the firm had access to that signaled longer-term stability. They had recently firmed up a variety of resource commitments and external partnerships and had asset investments and customer relationships that reflected a clear external commitment to the firm into the future. The RRC team then developed a sales strategy that focused customers’ attention on the strength of these resource commitments and relationships, and returned to these customers. On top of an already compelling cost model, this allowed the team to land an account that had been sitting on the fence for some time, and provided a robust piece of revenue that has helped stabilize the firm in more recent recessionary times.
Mike Lenahan runs a smart company that is very close to its customers. Yet in these relationships—and unbeknownst to RRC—customers’ persistent belief that “small equals unstable” had existed for some time, limiting their sales growth. Is it uncommon for executives to feel confident that they know customers but to then get blindsided by unexpected customer assessments? In 3-Circle projects with over 200 executives, we have found the majority indicating surprise at the insights obtained. Most managers initially believe that they have a reasonable, intuitive understanding of the value customers seek. Yet with deeper discussions with customers, they very frequently discover insights that materially improve growth strategies.
But can we get a broader sense of the payoffs from deeper understanding of customer value? In an important research study that provides the foundation for his Momentum Effect model of growth, Jean-Claude Larreche of INSEAD examined the financial results for 367 of the largest worldwide companies for the 20-year period from 1985 through 2004. Some of the most interesting discoveries from the research focused upon the 119 leading consumer goods firms.Larreche (2008a, 2008b). Consumer firms are the focus here because they were the largest category of firms in Larreche’s study. Larreche sorted these consumer firms into three groups: those firms that increased, those that decreased, and those that held constant advertising expenditures over that time period (where advertising spending was measured by the advertising-to-sales ratio, or A/S). Consistent with a traditional view, more intensive advertising was found to produce positive financial results, as measured by improvement of firm value. The group that increased its A/S ratio over time (labeled pushers by Larreche) experienced improvement in market capitalization that was 28% higher than the firms who held their A/S ratios roughly constant (labeled plodders). Improvement in market capitalization over time for the pushers matched the average change in the Dow Jones index for the same time period, indicating that “marketing as pushing” is a reasonably successful strategy. Figure \(1\) shows the results for these two groups as the first two bars, indicating that increasing advertising intensity leads to greater stock market value.
However, note that there is a third group that Larreche identified: the firms that actually reduced their advertising spending over time. Based on the apparent positive effect of greater advertising intensity for pushers, we might expect that this third group would significantly underperform over time. Yet they not only beat the Plodders by 108%, they also substantially outperformed the pushers (by 80%)! This stunning result has a simple interpretation. It is not that these firms found advertising ineffective, reduced it, and subsequently increased performance. Instead, it is that there is another element of strategy to consider: the excellence of their products and services. This third group—labeled the pioneers—includes firms that design products and services with such compelling and unique value that they create their own sales momentum. In short, demand for these firms’ products and services is less a function of advertising and communications and more a function of how well they deliver the value that customers seek. In essence, these firms allow their actual offerings to do the talking.
So where do these more compelling offerings come from? Whether the firm is Apple, Starbucks, Southwest Airlines, FedEx, or Mike Lenahan’s Resource Recovery Corporation, the compelling offerings come from a deeper understanding of customer value than competitors have. This chapter defines and explores customer value. We first consider the fundamental dimensions of customer value and then consider how studying these dimensions can help in understanding competitive dynamics and growth strategy. We further consider that there are important growth opportunities in thinking more broadly and deeply about customer value than competitors do. The last section of the chapter overviews an approach to engaging the study of customer value. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/04%3A_The_Meaning_of_Value/4.01%3A_Chapter_Introduction.txt |
Sometimes, customers’ choices are difficult for a firm to understand. Consider Chris, a consumer evaluating two brands of aspirin side-by-side. One brand, the national brand, costs \$5.99. The other brand, a store brand, costs \$3.19 for a package that contains more than twice the quantity in the national brand’s package. Chris winces when she sees the price difference, as she is managing her household under an end-of-the-month budget constraint, so even a couple of dollars really matter. In addition, Chris has a high degree of confidence—based on research evidence and the reported conclusions of the U.S. Food and Drug Administration (FDA)—that one unit of the generic brand provides essentially the same performance and benefits as one unit of the national brand. Yet, after brief consideration, Chris grabs the national brand and puts it in her shopping cart.
Observing such a decision would be extremely disheartening to two people: (a) a classical economist, and (b) the category manager for the retailer who wishes to build their store brands. The decision would not make sense to the economist, who assumes that consumers are utility maximizing. The economist knows that, given full knowledge of the brands, Chris should choose the best value for the money. Similarly, the store category manager might be equally disappointed over Chris’s choice, as the manager is seeking to build the private label brand’s sales performance.
But Chris’s decision makes sense when one considers the reality that she sees. She is buying the aspirin for her husband, who was just advised by his doctor after a check-up to take one aspirin a day for circulation. This decision is linked to a very important concern for her: the health and safety of her spouse, which motivates her to manage risk. Further, the national brand was always in the medicine cabinet at her home when she was a little girl. She has a deep and abiding trust in the brand, as her mother was always a loyal purchaser. Although dressed in packaging with similar colors and design, the store’s private label brand, positioned right next to the popular national brand, has plainer and less informative packaging. Yet Chris remembers reading an FDA conclusion that generics can be expected to produce the same benefits as the brand-name equivalent provided they have gone through the same approval process. So with a very high level of confidence, she assumes these two brands are very similar in the basic benefits they deliver.
In the end, though, this is not a decision where she wants to take the chance that the private label manufacturer did not “go through the approval process.” This will be a product her husband will be taking regularly, for a long period of time, to keep him healthy. In addition, although her husband has never had a stomach problem from using aspirin, she notes that the national brand has a coating, which may help in everyday consumption, just in case. For a brand with which she is more assured, Chris is happy to pay \$2.80 more for a package containing less than half the number of aspirin tablets. From different perspectives, this decision may not make sense to people, yet it makes complete sense to Chris.
Customer Value: Some Basic Concepts
As we have discussed, a common representation of customer choice is to summarize key reasons for purchase as benefits or costs, and to suggest that the customer makes an overall evaluation of each choice option, comparing these concepts.This notion is standard to many conceptualizations in the disciplines of marketing and in the trade literature on measuring customer value and satisfaction. See Zeithaml (1988); Kordupleski (2003); and Gale (1994). The benefits represent what the customer gets from the purchase. This “get” can be broken down into component parts, often identified as attributes. Recall that in Chapter 2, we defined attribute to be an inherent characteristic or a quality of some object. In Chris’s decision, she considered attributes such as effectiveness, package size, familiarity with the brand, and whether the aspirin is easy on the stomach. What is the “give”? This is Chris’s perceptions of the costs of the purchase, represented most predominantly by the price in this case. Two issues briefly bear further discussion.
First, somehow, Chris obviously combines this information to come to a choice. We know that she considered price and package size trade-offs, for example, and further integrated her trust in the brand. There is no one particular method by which customers choose—some people may be completely price driven (i.e., “always choose the lowest price”), while others may be totally driven by a perceived benefit (e.g., “always choose the most effective”).To see a basic accounting of the types of choice rules that consumers may use in decision making, see Bettman (1979); Wilkie (1994). For our purposes in this book, we will get enough information in knowing that (a) customers make choices, (b) those choices involve evaluating different options on particular attributes, and (c) those attributes vary in importance.
The second point is to distinguish between attributes and benefits, but then to suggest that we will often refer to them in the same breath. While an attribute is an inherent quality or characteristic of a product or service, a benefit is a result or outcome associated with consuming that product or service. So while effectiveness (measured by amount of pain killer in the aspirin) could be considered a feature or attribute of aspirin, the associated benefit of consuming the aspirin is that “I feel better quickly.” Alternatively, the benefit attached to a larger package size is that “I don’t have to go to the store as often.” Very often, measurement of customer beliefs is made at the attribute level because attributes are concrete and easy to envision. We will soon see that the consumer’s translation of attributes to benefits (and then even deeper values) becomes critically important for creating distinctive value around which growth strategy can be built. Before we get there, though, let us consider attributes as dimensions of value in more depth.
Attributes and Competition: Six Lessons
In the preceding analysis, the attribute is the key unit of analysis—it might be thought of as the DNA of customer choice. Let us first consider some basic principles underlying the evolution of competition in a given market. In his book Strategic Marketing Management: A Means-End Approach,(Parry (2002)). Mark Parry provides an excellent illustration of the principles described here in his analysis of a seemingly simple product category—toothpaste. Beginning with Pepsodent in the 1920s, and its appeal to white teeth and attractiveness, and carrying through to developments of fluoride, health, and good parenting (e.g., Crest, in 1956), packaging (e.g., first pump in 1984 by a brand called Check-Up), and baking soda (Arm & Hammer, in 1986) as examples, Parry’s work illustrates the story of competitive dynamics in the market as a story of attributes and benefits. This historical review provides a helpful context in which to highlight the following key principles regarding customer-value dynamics and competition.The six lessons described here are based upon a variety of sources, each source reflecting an important contribution to the literature on strategy. These include Peter Dickson’s (1992) work on competitive rationality and market dynamics, Theodore Levitt’s (1980) work on differentiation and associated dynamics, Chan Kim and Renee Mauborgne’s (1997, January–February) work on value innovation, and Tom Reynolds’s work on laddering and values (Reynolds and Gutman 1988).
Lesson 1: Every choice option—particularly products and services in the marketplace—can be broken down into attributes and benefits. Figure \(1\) is a picture of a contemporary package of Crest toothpaste. How many attributes and benefits are reflected on the label? A quick count shows at least seven—tartar control, whitening, with Scope, minty fresh, liquid gel, fluoride anticavity, and strengthens enamel. Note that the attributes are presented as factual statements of product features (e.g., “contains fluoride”), while benefits reflect outcomes of using the product (e.g., “strengthens enamel”).
Lesson 2: Certain attributes and benefits are required just to be in the game. Some attributes and benefits in a category are “stakes of the game”—your brand needs to have them just to play. So competing automobile manufacturers make vehicles with four wheels and a steel or aluminum chassis that run (largely) on gasoline and get people from point A to point B. These attributes represent the “core” product. For toothpaste, the core product is simply having an agent of some form (the choices now include paste, liquid, or gel) designed to clean teeth and made available in easy-to-use packaging, conveniently distributed in high-frequency locations.
Lesson 3: Other attributes and benefits provide differentiation. A fundamental law of the marketplace, however, is that competitors seek growth by differentiation. That is, in order to motivate and incentivize customer choice of their brand, the firm seeks to make it different from the competition in a way that is important to customers. So, for example, Crest was the first to introduce fluoride as an ingredient (an attribute) in 1955. That introduction created the modern era of competition in the toothpaste market. In the intervening 40 years, the innovation and product development in this category has been fast and furious.
Lesson 4: Once-differentiating attributes eventually become common, competition evolves around the ebb and flow of new attributes and benefits, which accumulate over time. Parry follows the evolution of the toothpaste product category, beginning with initial value-added attributes around taste, whitening, and social benefits. But Crest’s introduction of fluoride protection and subsequent endorsement from the American Dental Association in 1960 turned the market on its head. This created a new subcategory called “therapeutic,” which gained 14.5% of the market by 1960 and 54.7% by 1965. (Miskell (2005, January 17)). Today, however, we find that nearly all toothpaste brands have fluoride. In other words, fluoride has gone from being a differentiating attribute for Crest to being a must-have. (This is an idea explored in more detail in the next chapter.) But there is a critical point here in understanding the dynamics of competition. The tendency to seek differentiation builds on itself. Firms produce a constant stream of new ideas when the power of the last idea to distinguish the brand has “worn out.” This leads to a situation in which attributes are added over time, each with an eye toward seeking a differential advantage for the brand and each urgent when competitors have copied the last new feature. Figure \(2\) illustrates, for the toothpaste category, how those value-adding features or benefits accumulate. The product becomes much more complex than it was at the start and enormous variety ensues. The point here is that there may in fact be growth opportunity in understanding this accumulation—in part because some attributes that were once differentiators may in fact become expendable over time!
Lesson 5: While attributes reflect features, ingredients, or characteristics of a choice option, benefits represent the consequences or outcomes of using that choice option. One of the most often-repeated phrases in the discipline of marketing is that “people buy benefits, not attributes.” This is a significant point, one often lost in practice. Chris Wirthwein, an ad agency CEO, describes his recent desire to indulge a childhood passion and purchase a telescope to “explore the universe again.” When he began shopping, Wirthwein had a general idea about the benefits he sought but was essentially a novice beginning at square one. What he found were manufacturers’ websites that were very thorough at explaining the detailed technical features of their telescopes but extremely poor in making sense of them for potential buyers:
Everyone talked over my head. On every website I visited, the copy seemed to have been written not for humans but for some race of unemotional alien beings. I was promised diffraction-limited Schmidt-Newtonians, achromatic refraction, and German-type equatorial mounting. I was enticed with enhanced aluminum coatings and large aperture Dobsonians…[the dealers’ websites] were more muddled and confusing than the manufacturers’ sites. (Wirthwein (2008), p. xvi.)
In fact, there is a certain cause and effect for customers in choice and consumption behavior. We eat and that satiates our hunger. We drink and that satisfies our thirst. We look into a telescope and experience the thrill of exploring the stars. So when we buy, we do our best to estimate whether the attributes of the offering will get us to the outcomes we seek. The reason fluoride became such an important attribute for Crest to add was that it so clearly linked to higher-order, significant personal benefit for consumers (i.e., fluoride → cavity prevention → good health). As customers, we tend to think in terms of outcomes from using the product or service. In contrast, firms tend to think in terms of the features of the products or services that they have spent so much time developing, often without fully thinking through whether the product or service will do the job the customer would like to get done.
A key to building growth strategy is to think broadly and think deeply. Thinking broadly means breaking outside of a current view of your product or service just in terms of price, quality, and service. Your product or service, and the way you interact with customers, produces all sorts of outcomes or benefits for them, with many dimensions. It is important to put meaning on those benefits. Thinking deeply means recognizing that there are deeper values or problems that drive customers’ decision making. Understanding this can literally be the difference between big success or failure of a new product. The idea of thinking broadly means to stop for a moment and consider the different potential dimensions on which customers may get value from your firm and your offering. So what are the types of benefits that customers might experience in purchasing and consuming products or services? As outlined here, there are many more than you may realize.
• Functional: Does the product or service provide some basic outcome or consequence that the customer values? This is truly the direct cause-effect type of instrumental benefit—for example, I drink a Red Bull, I feel energized (I have wiiings!). What are the outcomes your customers seek from consuming your product or service? Does your offering provide this value reliably and consistently?
• Place: Is there value for the customer in the convenience and accessibility of location in acquiring this brand? This is about meeting customer needs regarding lot size, market decentralization, waiting time for orders, product variety, and service backup. Although cutting back on locations more recently, Starbucks has certainly gained enormous value in ubiquity over time, as have their customers. Procter & Gamble developed a distribution strategy aimed at reaching tens of thousands of small, high-frequency stores in areas outside larger Mexican cities that accounted for \$16 billion in sales annually.(Byron (2007, July 16))
• Financial: Are there financial benefits associated with your offering? To some degree, this is associated with the firms that are positioned as low-cost leaders—such as Dell, McDonald’s, and Southwest Airlines. However, there is a literature in economics and marketing that identifies and explores a unique impact of the feeling of a “good deal.” (Thaler (1985); Urbany et al. (1988); Compeau et al. (2002))
• Information: Does the customer feel “informed” in consuming its products or services? There is enormous potential competitive advantage here in building more clarity into products and services. An example is Exempla Healthcare Systems, which was a pioneer in the publication of internal quality and performance, including mortality data for various conditions and procedures.
• Time: Does the consumer perceive value in the speed of service and general timesaving in consuming this brand? Part of the issue here is saving time, which is a natural benefit in terms of “time for other things.” However, there are more subtle dimensions. For example, research has found that providing an explanation of waiting time gave consumers greater satisfaction with the experience because it provides a greater sense of control.Hui and Zhou (1996).
• Relationship: Does the customer feel connected to this brand, past experiences, and employees? This is a close cousin to the symbolic factor still to be discussed. Apple is a good example of a brand with which customers feel a strong resonance and personal connection.
• Experiential: Does the customer get particular enjoyment or satisfaction out of the consumption experience? Disney’s value is built around experience, as are Starbucks stores, through the music and ambience. But interestingly, almost all product and service consumption has some experiential dimensions, including Wal-Mart (Ever get greeted at the front door with a nice “hello” from a smiling senior citizen?).
• Symbolic: Is the consumer proud to wear this brand on his or her sleeve? Rolex watches, Pierre Cardin clothing, and automobile brands like Lexus, Mercedes, and BMW are all quite visible representations of personal value for customers. The values may be related to success or achievement, or they may be related to affiliation with other reference people or groups. The same holds in business-to-business markets. For many years, IBM was the dominant supplier of PCs in the workplace: It was risky for corporate buyers not to buy the IBM brand. IBM was a symbol of success and smart, low-risk purchasing behavior within the firm.
• Psychosocial: Does the consumer relate to other people through consuming our product? Product or service consumption experiences at times create benefits for us in how we relate to others. So purchasing those tickets for the NBA game not only leads to personal enjoyment but also to a chance to impress a client. Figure \(2\)—which also organizes consumer benefits around several of the benefit categories mentioned previously—illustrates a psychosocial benefit through “attractiveness to others.” That is, one benefit of using a particular brand of toothpaste may be that your fresh breath and white teeth will help in making a positive impression on others.
Lesson 6: Attributes are only important because they produce outcomes relevant to the customer’s values. The story behind DuPont’s success with Teflon illustrates this point. Teflon was derived from a solid called polytetrafluoroethylene (PTFE) discovered in 1938, one of the most slippery materials in existence. A French engineer named Marc Gregoire later discovered how to bond the material to aluminum. Teflon-coated cookware became available in the United States in the 1960s. But DuPont’s early efforts to promote this new product around the functional benefit of “fat-free cooking” produced poor results. It was not until the product was repositioned around a different functional benefit, “fast clean up,” that sales took off. Why? Interestingly, it is the same attribute (Teflon coating) and the same benefit (stuff will not stick to it) in either case. Yet the real tale is told by customers’ deeper values and benefits sought—that is, what they actually get from consuming the product. Consumers in the 1960s—especially the late 1960s, as married women were moving back into the work force—put a much greater personal value on time saving than on healthy eating. The key point is that the value that people see in any given bundle of attributes depends upon their own personal values.
Who knew toothpaste could be so complicated? But understanding these tendencies is critical to competitive growth strategy development. Growth can be found in understanding these values more deeply, by both discovering new ways to connect with them and identifying where existing attributes no longer connect. To get to these insights, though, we need a process for exploring and uncovering customer value sought. That is where we head next. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/04%3A_The_Meaning_of_Value/4.02%3A_Customer_Value_Basics.txt |
A fundamental goal in the 3-Circle growth strategy process is to learn about customer value; first, estimating customer judgments from our own perspective, and then, obtaining customers’ actual perceptions of value, importance, and beliefs about our firm and the competitive firm. There are a few key lessons in two separate areas that we will discuss here: executive estimates and actual customer self-reports.
Executive Estimates of Customer Value
For several reasons, it is initially very important for the executive team to provide their own estimates of customer value before getting feedback from customers. We use the term “customers” (as opposed to “consumers”) to provide a general reference that would cover both business-to-consumer and business-to-business markets. It is important to note, however, that the term is not meant to refer only to current customers. Generally speaking, there is value in sampling current customers, potential customers who have never tried your offering, and especially customers who have tried your offering but whose business you have lost. First, it forces you and the team to think through the kinds of questions you will eventually ask of customers and how you might ask them. Second, in requiring the team to come to a consensus about expected customer evaluations, it may create conversations that have never really been explored before—vital conversations around the core value issues of the business. Finally, these estimates provide a foundation against which to compare actual customer beliefs that you obtain later. After you have conversations with customers, you may find that your team was right on the mark in anticipating customer perceptions. Alternatively, you may reveal areas in which your expectations were very different from what customers said. It is critical to note that in these differences exist potentially enormous growth opportunities. So, in this way, surprise is a good thing because it will help motivate the subsequent actions to close the gaps.
The first thing that must be done is to estimate a list of customer reasons for choice. You got some exposure to this in Chapter 3 (recall the “service station A versus service station B” exercise). The way to do the exercise is to sit down for a 5- to 10-minute time frame and write down as many reasons you can think of why people would purchase your brand over the competitors. Then repeat the exercise, thinking of why customers might choose the competitive brand over yours. A key here is to pretend: step into the shoes of your customers.
Ultimately, reasons why people make choices will be stated as either attributes or benefits. To illustrate, consider that the president of a regional bank defined a project around the following context statement: “My goal is to figure out how my bank can grow by creating more value for and attracting new small business loan and deposit clients relative to their current banks.”
Note that in a given region, there are many banking players, so market share is spread out over a variety of competitors. As such, this executive and his team felt it best to define the competitor as the “current bank” and to allow the target competitor to vary as needed. In the preliminary estimation of the reasons for choosing one bank over another for loan and deposit business, the bank’s president surveyed nine different regional managers reporting to him, who, together, defined the following list:
• Timely service response
• High trust of bank and banker
• Knowledgeable employees
• Straight talk and sound advice
• Strong, stable, and secure bank
• Fair and open pricing
• Commitment to community service and involvement
• Decisions made locally
• Products and services offered
• Convenient locations
This is a very good list that covers both the numerator of the value ratio (i.e., benefits such as timeliness of service, trust, and security of the bank) and the denominator (i.e., fair and open pricing). As we will see, subsequent conversations with customers helped the team refine the list and statement of reasons. There are a couple of important pieces of advice here as you explore the reasons:
• Break down reasons and attributes to concrete and actionable items. In one major study, we found that parents would often state “quality of academics” in describing why they would choose a particular school over another. With some probing, we learned that the most significant subdimension of quality in this context was not the currency or sophistication of the curriculum or the textbooks used, or even the projects used. Instead, it was the teacher’s ability to communicate effectively with the parents about the child’s progress and the ability to respond to individual needs. Brainstorming ways to help teachers develop communication skills is straightforward. In contrast guessing how to improve “quality of academics” is not. So the advice here is to probe your initial list for actionable items. The acid test is to ask, “If the customers rated us poorly on this attribute, would we know what to do?”
• Try to keep reasons and attributes simple. Be careful not to use technical terms in describing reasons and attributes. The bank example demonstrates effective, customer-driven language. When executives take a first crack at this, however, they often use familiar jargon (e.g., technical features of an automobile like height of the suspension rather than consumer perceptions of ease of handling). Further, try to keep reasons simple and one-dimensional. For example, the bank president in our example would find it more precise to break the pricing dimension down into “fair pricing” and “open pricing.” Because these are different dimensions, a customer could believe that pricing is fair but not open, for example. As such, estimating both together can be confusing.
Given a list of attributes and benefits, we would next have our executive team estimate customer perceptions of the importance of those attributes, as well as customer beliefs about our brand and the competitive brand on each dimension. Although, as we know, growth projects can be defined in almost any context (e.g., internal company projects, personal projects, projects for charities), for simplicity in our description of the process in these chapters, we refer to the company unit of analysis as “the firm” and the two alternative choices as “our brand” and the “competitive brand.”
• Estimate importance of each attribute/benefit to customers. “Importance” captures the evaluation, value, or weight people place on the dimensions of a given attribute or benefit. As described in Fishbein and Ajzen (1975), among the classic models, importance has been captured in different ways. Fishbein’s (1963) original model held that beliefs about objects are weighted by “evaluations” of the attributes, that is, both the belief that an airplane was noisy or roomy and then the positive or negative evaluations of whether noisiness or roominess were good or bad. Edwards’s (1954) classic model of subjective expected utility defined attributes more as outcomes. The theory suggested that an individual’s attitude was a function of the probability that choosing that alternative would lead to a given outcome, and the value or utility the individual placed on the outcome. A third framework, instrumentality value, held that a person’s evaluation of an object on each attribute would be weighted by the value importance, defined as the degree of satisfaction or dissatisfaction the person would experience if he or she obtained that object and its outcomes. To keep the task simple and fast, we have the executives we work with—and, later their customers—use a simple categorizing exercise in looking at importance. We ask them to rate attributes as low, medium, or high in importance. But the catch is they may not say that everything is important; we ask for discrimination. All attributes and benefits may seem to all be important—and, being the top 10, they most likely are—but it is still possible to discriminate the more from the less important in the list.
• Estimate customer beliefs about our brand and competitive brand. To understand how to think about beliefs, it is important to understand the insights needed to effectively judge competitive positions. There are two relevant reference points:
• Ask how we do relative to the customers’ expectations. There is a long line of research in customer satisfaction that defines satisfaction as a customer judgment of how the firm performs compared to what the customer expects. (Oliver (1977, 1980)). This notion of a relative judgment is very important. A lot of satisfaction research fails to take this into account. So if we find that customers rate us as 5.8 on a 7-point satisfaction scale, what do we know? Not much. It is much more informative to know whether customers believe we are below, above, or equal to their expectations.
• Ask how we do relative to the competitor. In the late 1980s, management in AT&T’s Allegheny region were consistent winners of the firm’s internal satisfaction rewards, regularly scoring 98% in customer satisfaction. In contrast, the New York City region was consistently scoring in a percentage range around the mid-70s. Yet the Allegheny management team was eventually replaced while the New York team thrived, producing good business results. How could this be? Turns out the Allegheny region had tougher competition than did the New York region. In New York, AT&T was the dominant player. In Allegheny, competition was tougher. Allegheny produced high customer satisfaction scores because their current customers liked them, but customers liked competitors even more in many cases. In contrast, the New York team was able to produce positive sales and business results even though many of their customers were unhappy.Kordupleski (2003), pp. xvii–xviii. Two lessons are relevant here: (a) New York could be even more successful once they sorted out their satisfaction problems, but, more broadly, (b) Allegheny could only improve sales results by providing more value for customers than competitors did. Competitor comparisons are at the core of customer judgment.
Actual Consumer Interviews
The gathering of insights from customers is a critical step in developing growth strategy. It is not as difficult as it seems. Here are a few rules to guide the effort.
Rule 1: Just do it, even if it is only a small sample. For a start, interview 5 to 10 customers. Ironically, there is often initial resistance among executives to talk to customers about issues of value. The most common counterarguments are either “we already know what customers want” or “what will we be able to tell by talking to only a few customers?” The resistance is natural and logical. But this is one time when you need to suspend belief. In addition, it is not that difficult and costs very little. What do you ask? Essentially, you can ask the same basic questions that the members of the executive team just answered—(a) how important is each of the attributes and benefits on the list, and (b) how do customers evaluate our offer and the competitors’ offers on those dimensions? When you are asking the right questions, you will find insight, even though such a sample is too small to make inferences about the larger population (see next paragraph). Open-ended interviews with customers—whether on the phone or in person—are thought provoking and may identify some obvious problems that require immediate exploration or even quick fixes. More generally, they will uncover issues that require deeper study and that even a small number of customers will really appreciate.
Rule 2: Don’t get too carried away with your conclusions from small samples. So what happens once you actually sit down with a few customers? You obtain new insights that contrast, and may even contradict, your previous beliefs. In other words, you will learn. You also find that customers are appreciative. And you may see opportunities to make some short-term moves that will correct problems and improve your value. So we find a surprising aggressiveness among executives to act on this small-sample feedback because it tends to be powerful and energizing. Take care, though. It is not a good idea to make major investment decisions based on feedback from 1 or 5 or 10 customers. These initial interviews often, at best, provide you with a structure for further refining your hypotheses about the value customers seek from your organization. If well selected, insights from this small sample will (a) potentially have some immediate implications for fixing problems of which you were unaware, (b) identify longer-term growth opportunities to explore, and (c) provide the basis for further study with larger samples. We caution against running too far with the inputs from a small number of qualitative interviews without testing those conclusions on larger samples, however (unless those customers selected for the survey account for a significant portion of your company’s revenue). The primary mandate is that those who you interview or survey are representative of the customer segment you have selected for the project.
Returning to our bank example, recall that the regional managers (RMs) for the bank estimated the following four attributes at the top of the list for small-business customers:
• Timely service response
• High trust of bank and banker
• Knowledgeable employees
• Straight talk and sound advice
In fact, the president conducted individual, in-depth exploratory interviews with a diverse group of seven small-business employees who had just started doing business with the bank during the previous 9 months (all from different industries). Interestingly, as a group, the small sample of business people framed the value they were looking for somewhat differently than the RMs. The small-business customers felt that the bank’s unique value was tied to (a) the knowledge of its staff and their willingness to advise (as opposed to simply sharing knowledge), (b) the fact that the bank was locally owned and cared about its community, and (c) the team approach the bank used in providing service. There were two surprises. First, the importance of local community involvement was greater than the RMs expected. Second, the “team approach” did not even make the RMs’ top-10 list of attributes but was of central importance to customers!
Now, why is the team approach important? Here is where we need to think deeply. There are a variety of research approaches that are used for understanding deeper customer motivations for purchase and consumption behaviors that consumers may have a difficult time articulating. For excellent discussions of projective research techniques, see Wilkie (1994); Churchill (1999); and Madison (2005). Gerry Zaltman’s well-known work in the use of metaphor in studying consumer motivations is the topic of a recent book Zaltman and Zaltman (2008). For insight into laddering, see Reynolds and Gutman (1988); Reynolds (2006); and Wansink (2003). In the 3-Circle growth strategy process, laddering research is undertaken as a systematic effort to drill down into the needs and values that truly drive customer decision making. Laddering is a research method that might be described as “root-cause analysis” with customers. The method seeks to uncover the underlying values or reasons why certain attributes are important and influence decision making by asking, “why is that important?” in a sequence of questions. As an illustration, a team from the Infiniti automobile brand used laddering on 25 attributes of a new car design to “identify the core value embodied by or most closely associated with each feature.”Schroder (2009, October 23), p. 28. Figure \(1\) shows the aggregate ladder that emerged when consumers were asked why they felt the “around view monitor” with video on all sides of the car was important. Based on the research across all the attributes, the strategy and planning teams were able to prioritize new features according to the core values of the target market and make feature rollout recommendations based on the laddering research. The Infiniti EX35 is the first model to have the around-view-monitor (AVM) feature.
In the banking case, laddering with the customer respondents revealed they were driven by both time and profitability (not surprising for small businesses!). Figure \(2\) provides the laddering results for the three top attributes, as identified by our bank president. Note that the bank’s team approach creates value for small-business customers by leveraging the knowledge of many people (less likely to miss something), and also by creating a more efficient process. The truth is we could push this ladder further—with a couple more “whys”—we would likely find out that an efficient process is important because there are so many other things that a small-business person has on the plate, and that time is one of their most precious commodities.
It is important to note that the deeper values that you reach via laddering and other qualitative research techniques tend to reveal a lot about how we are hardwired as human beings. Across different countries and industries, the following types of values often emerge in laddering studies and other studies of values:
• Accomplishment
• Belonging
• Self-fulfillment
• Self-esteem
• Family
• Satisfaction
• Security, peace of mind
• Control
To illustrate, Figure \(3\) presents a ladder from a 3-Circle growth strategy study conducted by a research supplier that sells research services to brand managers in particular consumer-package-goods categories. Although a totally different context and a different attribute than the Infiniti (in this case, simply vendor familiarity), the end value is the same: peace of mind.
4.04: Chapter Summary
Among several implications that the bank took away from the 3-Circle analysis was the importance of building and reinforcing the team culture as their distinctive competitive advantage (what we call Area A). This involved creating new education programs and building in initiatives to proactively get clients and prospective clients in front of several different bank team members within relevant specialties.
One lesson from this chapter is that when you ask the right questions of customers, the insights that emerge are almost always actionable for growth. From the customer’s perspective, value is essentially what one gets relative to what one gives, and growth opportunities emerge from developing a broader and deeper understanding of both numerator and denominator. Competitive markets evolve around a shifting definition of value, which places a great premium on the firm’s ability to maintain a close eye on the value customers are seeking and how that is changing over time. There is nothing new in that message. But what is new (and needed) is a way to break down value and uncover the highest-priority growth ideas. We start with this issue in Chapter 5. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/04%3A_The_Meaning_of_Value/4.03%3A_Identifying_and_Analyzing_Customer_Value.txt |
Kraft Foods’ Tang—the orange-flavored drink that Americans closely associate with astronauts and the space program—experienced 30% growth in 2009 in developing markets, including Asia, Latin America, and Eastern Europe.“Tang Gets a Second Rocket Ride” (2010). It is instructive to note how the firm has leveraged different kinds of value in achieving these results. In competing in any market, there is some basic value a brand must provide, including adequate distribution and certain levels of market awareness and understanding of the product. Other dimensions of value differentiate the product; in Tang’s case, it is a unique flavor and established brand equity. The company has new flavors, including mango variations in the Philippines and maracuja (passion fruit) in Brazil. As the brand reach was expanded, the company remained open to research and insight about unmet needs, and potentially yet-to-be-determined attributes. In China, they discovered both a strong belief that children’s hydration was important and required drinking a lot of water (up to 6 glasses a day) and that kids found water boring! Most significantly, though, they found a strong preference for single servings, leading to the development of single-serve powder sticks to address this unmet need. This new form of packaging was adopted in place of pitcher packs, which Chinese moms found to provide nonvalue (in being wasteful and expensive).
At this point in the book, we have established the challenges of growing in the competitive marketplace today, introduced the 3-Circle model, and explored the basic concepts behind it. As reflected in the Tang example, we have also reinforced throughout that in any customer market, there are different dimensions of customer value that can play different strategic roles for the firm. Different strategy and customer value frameworks over the past 30 years have identified categories of value in disparate areas of the literature. Cutting across those frameworks (Kano (1995); Kuo (2004). See also Gale (1994) and the previously cited works of Kim and Mauborgne (1997, 2005) and Levitt (1980)) and adding unique insight around nonvalue, we can summarize these categories as follows:
• Required but nondifferentiating attributes. There are certain attributes that a firm must have to play the game. What is important about these basic attributes is that (a) their absence leads to customer dissatisfaction, because all competitors have them, and, for that reason, (b) they do not provide a basis for differentiation. In Theodore Levitt’s words, a customer of strip steel not only expects a product that meets specifications but also expects the product has minimal requirements for delivery times, purchase terms, support, and ideas for improving efficiency. In contrast, the absence of these attributes leads to a significant drop in overall satisfaction.
• Differentiating attributes. Kano’s model (Kano (1995)) suggests that there are two types of attributes that may provide a firm’s basis for differentiation. The first are performance attributes, which are attributes that consumers expect but on which performance can vary. So while the Ford Escape Hybrid and the Jeep Compass are each characterized by fuel efficiency, the Escape gets a superior 31 miles per gallon. Performance attributes are those for which customers base their willingness to pay. But Kano’s model also defines excitement attributes as those that may not be anticipated by customers. These are attributes whose absence does not lower customer satisfaction but whose presence may well significantly increase it.
• Yet-to-be-determined attributes. For hundreds of years, travelers carried suitcases. But there existed a latent demand for ease of transport. This was finally discovered and solved by a stewardess who jimmy-rigged wheels onto her suitcase. Other stewardesses followed suit, the luggage companies took note, and today it is difficult to find a suitcase that does not have wheels. Sometimes, potential new, desired attributes are known to both firm and customer. For example, for years, people walking around with a cell phone in one pocket and a PDA in another recognized the need for an integrated unit. But often, new ideas that better meet existing needs are a matter of discovery by firms (and customers!) who are continuously on the lookout.
There are three kinds of nonvalued attributes. Surprisingly, very important growth implications emerge from considering different attributes that are currently not valued by customers.
• Nonvalue: Attributes that can be reduced or dropped with no loss in value. In a case identified in Kim and Mauborgne’s work, Accor developed a new hotel concept called “Formule 1” by taking out a number of dimensions of value they believed were not valued by a short-stay segment of the market. Accor eliminated fancy lobbies, restaurants and bars, workout rooms, and even the receptionist, who was replaced by an automated teller machine (ATM). They eliminated these values to invest heavily in the other attributes that were highly valued by this customer segment: quiet, clean rooms with excellent beds. Independently, the idea of eliminating nonvalue has emerged as a strategic theme in Jean-Claude Larreche’s interesting work on the Momentum Effect model discussed in Chapter 4.
• Nonperformance: Attributes on which our performance fails to meet expectations. In the Tang example, the pitcher packs required a parent to make a full pitcher, which led to waste. This is a good example of a feature that can be corrected (i.e., eliminated or changed) and an immediate positive boost to customer value may be provided.
• Low awareness: Attributes that may have value to customers but are largely unknown. It turns out that a very common reason why customers may see little value in a particular attribute or benefit is that they are simply not very aware of them.
In short, experience has shown that there is significant insight in recognizing these different categories of value in developing growth strategy. But what is needed is a way to simultaneously represent all of these categories of value in a manner that can be easily taught within the organization in order to get team members most quickly focused on the important dimensions of growth strategy.
We will describe a case study in order to illustrate how the 3-Circle framework provides the basis for integrating all of these value concepts in an actionable way. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/05%3A_Sorting_Value/5.01%3A_Introduction-_The_Value_of_Sorting.txt |
The Amazon Kindle is the first-of-its-kind electronic reader that has now become the market standard. It allows for 1,500 book titles to be downloaded, voice or text reading, and utilizes a technology called “E Ink,” which looks like print on paper and is clearly visible both indoors and outdoors. The Apple iPad, its biggest new threat, was introduced as a “truly magical and revolutionary product” by Apple CEO Steve Jobs in a highly anticipated media event on January 27, 2010. Jobs described the iPad as a third category of device, somewhere in the middle between a laptop and a smart phone. He described a product that was superior for web browsing, e-mail, photo management, video viewing, and video game playing. But he further described the iPad as “standing on the shoulders” of Amazon and its Kindle product, which he felt had done a great job of pioneering the e-book reading functionality. The iPad is linked directly to the iBooks store, has navigation that replicates page turning with an actual book, provides quick access to tables of contents, and has flexibility with font size and type (see Figure \(1\) for images of each device).
Throughout the next section, we will use the iPad-versus-Kindle comparison as a basis for illustrating how value might be sorted in this category, using the comments of posters in a Wall Street Journal forum and other media sources.The analysis is based on media accounts, including “iPad vs. Kindle” (2010), “Apple’s iPad” (2010), and Espinoza (2010, March 1). The analysis here is framed as follows: What might be the basic elements of the growth strategy that Amazon might pursue with the Kindle in light of potential competition from Apples iPad? So our operational context statement here is, “Our goal is to determine how Amazon can defend and grow its Kindle sales by creating more value for established e-book readers than Apple’s iPad.”
Consider the ratings presented in Figure \(2\), which was developed based on early popular press and blog comparisons of the Kindle and the iPad. We will use the comparison of these two products, as well as other case examples, to illustrate how the dimensions of value in that developing market can be categorized.
Your job in the sorting exercise is to identify where these different dimensions of value belong in the 3-Circle framework. Figure \(3\) presents the generic “outside view” of the 3 circles, showing 7 categories of value. As we have noted, the upper right-hand circle represents customer needs and values; the upper left-hand circle represents customer perception of the value that our company provides; and the bottom circle represents customer perception of the competitor’s value. Each of the 7 areas in the framework—indicated by the letters A through G—has strategic meaning. The task here is to sort the reasons or attributes that you have assessed into different areas.
Corresponding to the outside view of the 3-Circle model presented graphically in Figure \(3\), Figure \(4\) provides some simple sorting rules. These rules identify how feedback from customers may be used to categorize particular attributes and benefits into the different areas of the model. The inputs for sorting are straightforward: a comparison of your firm’s rating or evaluation (by customers) versus the competitor, qualified by attribute importance.
Judgment of value is broken down by attribute or reason. Each individual attribute is sorted into Areas A through F based on the relative ratings given by customers (first column) qualified by our assessment of attribute importance. Area G is somewhat a unique area that explores attributes or attribute levels that might not currently exist in the market. We will later elaborate further on Area G. Figure \(5\) provides a graphical representation of the data in Figure \(2\).
Areas B, A, C
The iPad is an improved netbook, but it won’t replace our Kindle.
- Jon Kamp, February 12, 2010
The first three areas of the model under consideration address attributes the firm has in common with their competitor and those on which there are competitive differences.
Area B: Points of parity. We begin with Area B because most contemporary discussions of customer value begin with the point that there are elements of value that are must haves, without which a firm cannot even compete. Area B captures the required, nondifferentiating attributes that are common to the competitors in the market. They are currently nondifferentiating.
Identifying Area B: Points of parity. In customer research, points of parity are at least moderately important attributes and benefits on which customers rate you and your competitor as basically the same. The phrases “points of parity” and (later) “points of difference” come from the work of Keller (2008). There is a sense of equivalence. In the most current Consumer Reports study of consumer perception of automotive brands, for example, Ford and Subaru were in a virtual dead heat for second place, with 22% and 21% of consumers rating them in the top three on safety, the most important attribute to consumers.“Most Important Factor” (2010, January). So in an evaluation of Ford versus Subaru, safety is a wash; that is, the two are not distinguishable on this dimension. The Kindle and the iPad have a number of basic characteristics in common—by way of description, they are both portable electronic devices that can be used for reading books and other material. One nondifferentiating element for which the two might be similarly rated would be online access to reading material—each provides access to various book titles and other media remotely—the iPad through wireless Internet access and the Kindle through a 3G network.
Areas A and C: Points of difference. This is the central definition of competitive advantage as perceived by customers. Very simply, Area A captures the value that we provide customers that (a) matters to them, and (b) is different than the value competitors provide. Area C, then, is essentially the competitive complement to Area A. On what important advantages does the competitor hang its hat?
Identifying Areas A and C. It is usually fairly easy to identify the attributes and benefits that go into Areas A and C. These attributes tend to stand out in customers’ minds. Area A attributes and benefits are those of high importance for which our firm rates as superior to the competition. Area C is the flip side—important attributes and benefits on which the competitor is rated as superior. Returning to the 2010 automobile data from Consumer Reports, it is no surprise that safety is the predominant Area A item for Volvo (73%) against every other brand in the market. In a direct comparison with Toyota, though, the Consumer Reports data suggest that Volvo’s Area A dominance of safety might be trumped by Toyota’s superior scores on leadership in quality, value, and environmental friendliness, all among the top five important attributes.
Users of e-book very clearly identify the trade-offs between the Kindle and the new iPad; these would be the key Area A and Area C attributes representing the “get” and “give” of each device. While the less sophisticated of the two devices, with far less functionality, the Kindle has a simplicity that is perceived to be a core strength—it focuses on reading, undistracted by e-mail, the web, and gaming opportunities:
When I want to disconnect and read, I can’t have distractions, and having a multifunction device has always been an avenue for distractions to me. (Ali (2010)).
When I want to read, I want undistracted reading. As it is I don’t have much time to do so, with an iPad, it just defeats the purpose. (Ali (2010)).
There are two other major points of difference for the Kindle, reflected in the Figure \(2\) ratings: much superior battery life (1 week vs. iPad’s 10 hours) and no monthly fee for Internet access, significantly reducing operating costs. Most significant, though, among e-book users may be the fact that the Kindle is easier on the eyes because of its E-Ink technology. In contrast, the iPad’s backlit screen presentation is believed to create eyestrain:
The iPad, unlike the rest of the e-book readers has a traditional backlit screen and it is more tiring to the eyes. I cannot imagine people taking it to the coffee shops to read for a long time. (Javier (2010)).
In all, we might summarize the Kindle’s points of difference around the phrase “focused reading experience.” The commentary of loyal Kindle users reflects a deep commitment to reading as an important lifestyle activity, and a devotion to the Kindle as a means of delivering content.
In contrast, there is some attention given to the iPad for its unique features (Area C). In the reading domain, two major points of difference for the iPad are its navigation and page-turning capabilities, as well as its full color feature, which enhances reading of color-rich media:
I’ve been waiting for a convenient way to read my collection of PDFs and Zinio magazines, as well as eBooks, and the iPad is just the ticket. As a long time user of eBooks (I had an original Rocket eBook, and have its successor, the eBookWise), the iPad definitely has my attention. (Ali (2010)).
The ratings in Figure \(2\) reflect these advantages, along with a couple of the more obvious iPad advantages, which predominantly focus on the wide range of applications for its iPhone (videos, games, photography). In fact, consumers who value this dimension look at the iPad as a “Kindle Killer”:
The iPad is a Kindle killer. No question about it. For about \$200 more you get a device that goes way, way beyond the capabilities of a Kindle. Coupled with the Apple/iPod/iPhone/iTouch name recognition and the iPad is going to sell like crazy. Every kid in college is going to want an iPad. (Ali (2010)).
We can see that there is a segment of dedicated e-book readers who will cede the greater capability and applications benefit to iPad, but who will not find those features to be important. The Figure \(2\) analysis provides a fair accounting of the relative competitive position of each device, and the analysis is relatively straightforward. Areas D, E, F, and G take a bit more interpretation.
Areas D, E, F: Disequity or Potential Equity?
Areas D, E, and F represent the interesting and important space that is outside the customer’s circle, as we have defined it. In fact, it is usually not immediately obvious what factors that we categorize into these areas actually mean, because there are multiple meanings. An attribute or benefit is placed outside the customer’s circle may represent one of four cases:
• The current offering is unsatisfactory to the customer on this attribute (disequity).
• The attribute is unimportant to the customer (nonvalued equity).
• The customer does not really understand the attribute or benefit and how effectively we offer it (miscommunicated equity).
• We do not effectively provide the value sought, but we possibly could (unleveraged equity). This is an important phenomenon that is addressed in detail in Chapter 7, so is given less attention here.
Understanding these four distinctions is critical. This represents one layer of the analysis. But another critical part of the categorization is distinguishing whether this value that falls outside of the customer’s circle is a concern for (a) just our firm, which puts it in Area E; (b) just the competitor, which puts it in Area F; or (c) both firms, which puts it in Area D, also known as “the swamp.”This term comes from a client who described this area as a “swampy mess,” in that it could represent value that had grown up organically but was no longer of value to customers. Let us consider these categories in more detail:
• Nonvalued equity. There are often attributes or benefits that are of great significance to a firm that fails to stir customers, and some that may even produce a negative reaction. For example, a well-known golf course architect was enamored with the idea of building an authentic Scottish golf experience at a particular American university. The course was designed to be relatively long, had no par set up on the scorecard, and was designed to be a course that patrons walked. The course was beautifully laid out within the land that the architect had to work with, complete with long grass, rolling fairways, and large, chunky pins on the large greens. The downside was the discovery (luckily, early enough in the process) of big concerns from potential patrons, for example, alumni coming to play on football weekends. These golfers, to put it mildly, were not inclined to spend 5 or 6 hours walking a long golf course prior to tailgating on football Saturday. So, as a last minute addition, designers had to squeeze in cart paths on the course and revamp a pro shop building with storage for electric carts underneath. Nonvalued equity is often discovered in personal discussions with customers that reveal relatively low interest or emphasis on certain dimensions of value the firm thought important.
• Unsatisfactory delivery. If your brand “underdelivers” relative to customer expectations, it has disequity. This is straightforward. So the car that promises 24 miles per gallon and delivers 18 disappoints in a manner similar to the restaurant that promises a 15-minute wait time that turns into 30 minutes. These sorts of issues may be easy to spot; you just have to ask. Disequity due to underperformance can be common to all competitors—like long waiting times in doctor’s offices—and this may potentially be an Area G item (i.e., an unmet need). Alternatively, such disequity may be unique to one or another competitor. One example would be the viruses and system crashes experienced by Microsoft Windows, humorously pointed out by Apple in its clever Mac vs. PC ad campaign. Often, one competitor’s advantages (e.g., Kindle’s Area A—the electronic ink and ease of reading) are a reflection or mirror image of a competitor’s disadvantage (e.g., iPad’s Area F—the backlit screen and eye strain).
• Customer is not aware of or does not understand the equity. One of the most common things we find from the customer analysis in the 3-Circle process is that the firm has overestimated what its customers actually know about it. For example, recall that Pastor Buss and his team at Glenview New Church School (Chapter 2) were surprised by a general lack of awareness of the school’s vision and value proposition among prospective parents and even church members. Regarding iPad, we might speculate that given all the device can do, the photo management capability may get less attention than it deserves, given firmly established habits around photo management on laptops and PCs.
• Unleveraged equity—the firm has a hidden capability to correct the current dissatisfying performance or serve an unmet need. A particular attribute or benefit may in fact be a disequity because it is not currently delivered well. However, the firm may have the capability to deliver that value more effectively. This can be a major insight, and great efficiency when the firm discovers that its capability in one area may be able to compensate in another product market.
Note that each of these four states could be firm-specific (Area E or F) or could be a problem, concern, or opportunity faced by all competitors (Area D) that simply has not been resolved.
Identifying Area D, E, F Attributes and Benefits
The core definition of the value in Areas D, E, and F is that it is (a) deficient, (b) unimportant, or (c) not well known to the customer. Your ability to identify value that goes into these areas is dependent upon the method used. One approach that we have applied in the ratings in Figure \(2\) is to ask customers to evaluate each competitive option on each attribute or benefit as either meeting, exceeding, or falling below expectations. So deficiency or disequity would be captured by below-expectations ratings. Any ratings on attributes or benefits that are deemed of moderate or high importance should be explored in more detail. The best example in the Kindle-iPad case is the fact that, with a certain segment of diehard e-book readers, the iPad’s substantial capabilities in accessing other applications much like the iPad actually creates disequity, as noted earlier, by providing potential distractions from the reading experience.
An even more direct illustration of disutility or deficiency comes from Barnes & Noble’s initial e-book entry called Nook, introduced in the fall of 2009. The Nook’s positive points of difference are interesting—it replicates the Kindle’s E-Ink technology, but with a color touch screen, providing more intuitive navigation for those accustomed to touch-screen technology. The package deal for the Nook also includes a book-sharing feature, allowing users to borrow books from one another rather than buying the books separately. However, a BusinessWeek review captures a critical disequity for the Nook: “Amazon’s current-model Kindle 2 takes about three seconds from the moment you release the power button until you can start reading. On the Nook, it takes a minute and 50 seconds.”Jaroslovsky (2009, December 7). Page turning and navigation in the new Nook appear to be similarly sluggish.
Low attribute importance is also a reason why certain value dimensions may fall outside the customer’s circle. This is, of course, captured in the importance ratings using our simple method of asking for a low, medium, or high rating. It should be noted that there are more sophisticated ways to obtain importance ratings, as it may be difficult for customers to be completely objective in these ratings. The challenge with self-report measures, which capture customer estimates of importance directly, is that customers may often rate all attributes of high importance. The analyst will need to use some judgment here based on the traditional meaning of importance as well as the stage of the life cycle in which this attribute might be categorized (see Chapter 8 on dynamics). For example, once many battery manufacturers had adopted a self-testing capability for household batteries, it became clear, over time, that this was not a product benefit that consumers valued. Crystal Pepsi (a clear cola) is another example of an attempt to create a differentiating attribute that failed because it held no value for consumers.
Finally, certain attributes or benefits may not be known to customers. These attributes reveal themselves in discussions with customers. When you excitedly ask customers to rate your brand on its postpurchase follow-up service (which you know to be excellent) and they say “what service?” you know you have hit on an Area E attribute.
Area G: The White Space
The “white space” captures unmet customer needs. While the internal language of most businesses tends to be around existing attributes—for example, the offer you currently produce—potentially profitable value often comes from thinking from the view of customer problems, needs, and values, which are not currently addressed. These are the deeper reasons why customers purchase those attributes. Area G represents value that does not currently exist in the market but that is (or would be) desired by customers. It suggests that there is some degree of elasticity in the customer’s definition of value, portions of which neither the firm nor its competitors have yet discovered.
There are two kinds of value in Area G. There are attributes or benefits that the customer can articulate but that do not currently exist. For example, new product ideas such as wheels on suitcases, televisions with built-in DVD players, and cell phones with web access and calendar tools were obtained from innovative customers. Alternatively, Area G may contain value that has not yet been discovered, that is, new attributes unanticipated by consumers whose value production can only been seen with experience. Herein lies an opportunity for growth.
The identification of Area G puts into our shared language an ongoing space that can be continuously explored and mined for new value-creation opportunities. The ideas that may appear in Area G can be identified a variety of ways:
• Direct questioning. It is possible to directly ask a customer what our unmet needs are. What can we do better? What can we do that would make you a more satisfied customer? A couple of challenges with direct questions like these are that (a) usually, when asked, customers are not in the state of mind in which they have experienced concerns or unmet needs before and so cannot access relevant thoughts, or (b) they ask for the world.
• Customer complaints. Many times, customer complaints for a firm reflect Area E items, such as, current disequities or deficiencies. However, it is possible that a consumer complaint may be the tip of the iceberg, and discovering the iceberg represents a real opportunity for growth. For example, a 2004 study by the Better Business Bureau identified the three most common complaints in the mobile phone industry to involve (a) billing, (b) the quality of customer service, and (c) misrepresentation or miscommunication by sales or customer service personnel. Interestingly, complaints were often generated about the complaint-handling process itself, where “it was not uncommon for small misunderstandings…to balloon into much larger customer service issues, enraging the customers and, in many cases, overwhelming the original issue.”Better Business Bureau (2004, May 4). There are clearly root causes underlying customer dissatisfaction that can be addressed.
• Qualitative research. While studying customer complaints and having direct conversations with customers will provide insight into unmet needs, customers cannot always put their finger on what ails them. Instead, inferences must often be made from more general conversations about understanding larger problems and concerns that the customer has, research approaches that dig beneath the surface to understand customer needs and values, and ethnographic studies that observe customers and the circumstances surrounding their consumption of the product.There are a variety of research methods that exist for exploring customers’ motives for purchase that they may find difficult to articulate in simple direct questioning. For excellent discussions of projective research techniques, see Wilkie (1994) and Churchill (1999). For ethnography, see Madison (2005). Gerry Zaltman’s well-known work in the use of metaphor in studying consumer motivations is the topic of a recent book by Zaltman and Zaltman (2008). Detailing these methods is beyond the scope of the current book. However, the laddering research discussed in Chapter 4 is one illustration of this type of research.
• Observing customer-to-customer conversations. There is significant insight into deeper customer needs in online customer communities. Such communities provide opportunities for customers to engage each other through discussion boards, surveys, photo galleries, and other online events around a particular common interest. Communispace is one organization that provides online community development and management capability. Working with Charles Schwab,Mohl (2006, July 10). for example, Communispace built an online customer community that revealed several important insights into the unmet investment needs of gen Xers (those born between 1961 and 1981). These unmet needs included their need for financial guidance, their distrust of investment service firms, their disdain for firms seeking to discuss retirement, and their need for advice on managing expenses and saving rather than strictly investing. Schwab responded with some creative new accounts and services targeted at this market, generating new sales as well as loyalty to those who appreciated the fact that the company listened.
What are some Area G items for e-book readers? One way to explore this is to ladder on the Area A dimensions. That is, ask this customer segment why, for example, focused reading is such an important dimension to them. One can envision that dedicated e-book readers would reflect that focused reading allows them to make every minute reading more productive and enjoyable. Why is that important? For some, it may be that reading is a comfortable oasis in a busy life, so the goal is to separate one’s self from the current busy world in which they live for respite. In addition, there is likely to be deep personal interest and connections with the authors and topics about which they read. There is, to some degree, deep immersion in the work. Such immersion may be associated with the desire for understanding geographic locations in the book, more about the author and his or her background and other works, or deeper insight into particular historical events in the work. What services or ideas might enhance such a reading immersion experience? How about links to social networks or blogs dedicated to particular authors or genres? How about information about the history of countries and locations in which books are set? How about information about events related to the book and author? There are likely many ideas, but the point is that identifying profitable growth opportunities significantly benefits from a deep understanding of the goals and values that drive interest in this consumption experience. It may be that the firm who really understands the depth of the reader’s values will be the one to develop the most grounded new ideas that are most likely to connect with customers. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/05%3A_Sorting_Value/5.02%3A_The_3-Circle_Model-_Seven_Categories_of_Value.txt |
By the time you have been able to explore the value that customers seek in some depth, you will be able to come to some conclusions about your offering’s overall position as perceived by customers and potential customers. The position of a product or service is essentially a summary assessment of where it resides in the mind of customers. Much like a city resides in the space defined in a map with distances relative to other cities, your offering exists somewhere in customers’ minds in a space relative to other competitive offerings. One tool that has become increasingly common for representing competitive positions is what is called a “value map.” The first representation of a value map appeared in the work of Rangan and Kasturi in 1992.For additional discussion of this paper, see the opening of chap. 2 of Rangan and Bowman (1992). Figure \(1\) provides an example of a value map with selected e-book-reader brands. The two dimensions of the map match the dimensions of the simple “value = benefits/cost” equation. The horizontal dimension captures some the benefits provided by each offering. The vertical axis captures selling price, which, in many product and service categories, accounts for a large proportion of the customer’s cost. These dimensions might be estimated based on completely objective criteria. Richard D’Aveni (2007) of Dartmouth College has recently examined several cases that make use of objective measures of price and product features. Alternatively, they could be measured based on customer perception of price and benefits. In either case, the benefits dimension is generally an aggregation of customer perception or objective measures across many different features or dimensions. The value map in Figure \(1\) is estimated based on the objective ratings and prices provided in Consumer Reports’ latest assessment of e-book readers. The map generally reflects a positive relationship between benefits provided and price, with the Nook and the Kindle anchoring the lower left quadrant and the iPad distanced from the other brands in the upper right. The Kindle 2 (costing \$260, on average) is a substantially better value than Barnes & Noble’s Nook at the same price (recall the challenges with Nook’s speed of response). The iPad far exceeds the other options on a variety of dimensions, driven by its advantages on versatility and file support. Hence, the value map illustrates the likely trade-offs between additional benefits that customers receive and the prices they may be willing to pay. Mapping a market over time is often eye-opening, as one can track the competitive changes in pricing and product features and make some judgments about what customers value, particularly if the map is based on customer perception. We introduce the value map tool here so we can use it again in Chapter 6. There, we will use the value map to characterize the positioning implications of particular growth strategies that emerge out of the 3-Circle analysis.
*Data on which this value map is based come from Consumer Reports’ ratings of e-book readers on the dimensions of readability, versatility, responsiveness, page turn, navigation, file support, and size of viewer display, weighted equally. The figures used for the iPad are estimated based on initial reports, as the iPad was not included in the full ratings of the e-book readers.
Sources: www.consumerreports.org/cro/electronics-computers/phones-mobile-devices/e-book-readers/e-book-reader-ratings/ratings-overview.htm; www.consumerreports.org/cro/magazine-archive/2010/june/electronics-computers/computers/apple-ipad/index.htm
5.04: Chapter Summary- Not All Value Is Created Equal
This chapter has been about categories of value. The reason that we seek to understand and “sort” value is that not all value is the same. And, as we will soon see, there are different growth strategies for different categories of value. To give a little prelude to this, consider that the key focus of both Porter’s framework on competitive advantage and the resource-based view of the firm can be framed as Area A strategies:
• Grow, strengthen, and defend Area A, our unique points-of-difference.
• However, by sorting value into the categories defined in the 3-Circle model, there are several other equally important strategies that might be pursued. These strategies include the following:
• Maintain and defend critical points of parity (Area B).
• Correct, reduce, and eliminate disequities, or reveal equities that customers are unaware of (Areas E and D).
• Potentially neutralize competitors’ differentiation (Area C).
• Identify totally new value identified around customers’ unmet needs (Area G).
And importantly, these five categories of growth strategy can often be pursued in parallel, as a portfolio of strategies to accelerate growth by providing a big jump in customer value. We dig into these growth strategies in the next chapter. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/05%3A_Sorting_Value/5.03%3A_Overall_Positioning_Strategy.txt |
We have used the phrase “breakdown” value several times so far. The term breaking down has become a common phrase in the English language in reference to dividing some whole up into component parts. In sports, one of the most impressive feats in the history of breaking down complexity is Ben Hogan’s classic Five Lessons: The Modern Fundamentals of Golf. (Hogan (1957)). Mr. Hogan is one of the greatest champions in the history of the game, with 64 PGA tour wins between 1938 and 1959. These included nine major tournament titles, six of which came after a horrific 1949 accident in which the car he was driving collided head on with a Greyhound bus. In Five Lessons, he provides the first in-depth accounting of the golf swing broken down into four core elements: the grip, stance and posture, first part of the swing (backswing), and the second part of the swing (downswing). This paperback has itself turned into a modern classic, still in print (available on Amazon!) and responsible for the swings of some of the most accomplished players today, including Tiger Woods.
Those inexperienced with golf often wonder how this seemingly simple game can be worthy of such devotion and study. They are incredulous to learn, for example, that Mr. Hogan’s book has an entire chapter on the grip—that is, simply how to hold the club! Figure \(1\) shows the striking ink drawings by Anthony Ravielli on the cover of Sports Illustrated, perfect in detail as Mr. Hogan demanded. Hogan’s devotion to studying different approaches to gripping the club has him describing grip aesthetics in words rich with emotion: “For myself and other serious golfers there is an undeniable beauty in the way a fine player sets his hands on the club.” Such admiration and attention to subtle nuance is the result of deep study, and it leads to explanations of the grip of such a technical nature as to leave any but the most dedicated student of golf scratching heads:
When a golfer has completed his left-hand grip, the V formed by the thumb and forefinger should point to his right eye. The total pressure of all the fingers should not be any stronger (and may even be a little less strong) than the pressure exerted by just the forefinger and the palm pad in the preparatory guiding action. In the completed I grip, the main pressure points are the last three fingers, with the forefinger and the palm pad adding assisting pressure. (Hogan, 1957)
Yet Mr. Hogan is also clear in identifying the important outcomes of developing this understanding, which ultimately connects the grip with other parts of the swing:
Keeping pressure on the shaft with the palm pad does three things: it strengthens the left arm throughout the swing; at the top of the backswing, the pressure from this pad prevents the club from slipping from the player’s grasp; and it acts as a firm reinforcement at impact. (Hogan, 1957)
The grip elements represent one piece of the puzzle. But Mr. Hogan has a deep, almost stunning insight about the outcome of grounding your golf swing in solid fundamentals throughout. Ultimately, careful attention to the grip helps in executing other fundamental elements of the swing and also dramatically improves the golfer’s ability to compete:
Frequently, you know, what looks like a fairly good golf swing falls apart in competition…the harsh light of competition reveals that a swing is only superficially correct…It can’t stand up day after day. A correct swing will. In fact, the greater the pressure you put on it, the better your swing should function, if it is honestly sound. (Hogan, 1957)
While we would overly flatter ourselves to suggest that we could replicate the level of depth and expertise in Mr. Hogan’s work on the golf swing in the study of growth strategy, our intent is the same. The 3-Circle model is about creating honestly sound strategy that will hold up under competition. We do that by breaking down value, seeking to deeply understand the component parts and how to work with them and then assembling them back together in an integrative strategy. The primary insight is that each individual category of value can spawn unique ideas for growth through building the firm’s ability to produce and communicate value that really matters to customers. This is what we will be breaking down in this chapter.
6.02: Value and Positioning
There are a number of prescriptions for growth that emerge from the 3-Circle model. However, growth strategy should not be developed independent of the firm’s overall positioning strategy. At the end of Chapter 5, the value map was presented as a means of thinking through where your offering lies in a value space, defined by price on one axis and perceived benefits on the other. Growth strategy ideas that each seek to improve value for customers should form an integrative whole to the extent possible, and should be consistent with the overall positioning and meaning for your organization or brand. As you think through growth strategies, it is important to do so with the backdrop of your goals for your overall position as a choice alternative for the customer. The overall goal of the analysis is to improve the value proposition for the customer relative to competitors to increase the probability that the customer will choose your offering.
Overall Positioning Strategy
We have replicated the value map from Chapter 5 into Figure \(1\), which illustrates “directional” moves from a center location. As noted in Chapter 5, a firm improves its value proposition by either adding or improving benefits or lowering the customer’s costs. The degree to which adding or improving benefits (moving east on the value map) increases sales depends on whether those benefits are important to customers. The degree to which changing customer costs or price will affect sales depends on customer price sensitivity. Lowering customer costs represents a southerly move, while raising customer costs is a move toward the north on the map. However, simultaneous changes in both numerator and denominator can occur—then, customer response depends on the combined impact on value. So a firm might add benefits and raise price, which would move it northeast on the 45-degree line on the map, as when Ford makes a hybrid version of its Escape SUV and charges \$9,000 more. Alternatively, a southwest move would involve reducing benefits compared to an existing position and lowering price, illustrated by a cluster of emergent cell phone and cell phone service providers like Net10 who sell simple cell phones on prepaid plans at prices substantially lower than the standard national carriers. Figure \(2\) illustrates a unique strategy by Apple, moving the iPhone southeast—enhancing both benefits (twice as fast) and cost (half the price). We will see that this overall value positioning is difficult but increasingly evident, reflected in Kim and Mauborgne’s work on value innovation and blue ocean strategy.Kim and Mauborgne (2005). In sum, while we think of individual changes as additions or deletions of attributes or benefits, such changes, in fact, (a) may have multiple elements, and (b) will eventually be translated in the minds of customers to some sense of overall value for the money. The degree to which such changes contribute to improved profitability is a function of both changes in sales revenue and changes in cost. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/06%3A_Growth_Strategy/6.01%3A_Introduction.txt |
In alphabetical order, here is a generally comprehensive list of the key growth strategy implications from the seven value categories in the 3-Circle framework:
• Area A: Defend and build. The chief goal is to enhance and enlarge Area A relative to Area C by building distinctive attributes and benefits for which we have a unique capability or identity, in a manner focused on target customers.
• Area B: Maintain and defend the foundation. There are core attributes and benefits (table stakes) that you must deliver as effectively as competitors do to even be in the game.
• Area C: Shore up your value (i.e., neutralize competitors’ advantage) where it is cost-effective and strategy-consistent to do so. Certain deficits in Area C may provide an opportunity to improve our value proposition by neutralizing and perhaps exceeding the competitor’s advantage. Alternatively, live and let live.
• Areas D, E: Correct negative value, eliminate or reduce unwanted attributes, better communicate, or find new capabilities. These are areas with multiple dimensions for which there are a variety of growth strategy directions.
• Area F: Improve upon and exploit the competitor’s unique deficiency. This is a strategic decision, but it holds the possibility of improving your offering’s value position by helping customers discover more about what is legitimately wrong with the competitor’s offering.
• Area G: Continually seek unmet needs. There are ways in which the white space can be explored in a structured and disciplined manner. The exploration provides a means of uncovering potentially new sources of value that can substantially improve customers’ connection with the firm’s offering.
Here, we will cycle through these ideas, expanding upon them and introducing a number of illustrations. An important point here is that there is a logical sequence or order with which one should evaluate growth opportunities. We are going to suggest a series of strategic growth options—questions that will prompt a concrete look at a number of potential ideas for growing the value customers receive that will enhance and strengthen the firm’s overall position. We always need to keep in mind the simple value formula and the goal: to enhance that overall value by recognizing that the firm might improve either numerator or denominator:
$value\,=\frac{benefits\,obtained}{price\,paid}$
We will walk through each of the imperatives and strategic growth opportunities, one at a time. We will occasionally refer to “numerator” ideas, which are ideas to build and enhance benefits. “Denominator” ideas are those related to reducing customer costs—either direct costs or effort costs.
6.04: Overall Positioning- First Take a Hard Honest Look at Your Area A
The following questions are among the most essential that one can ask about the business that can be answered by the customer value analysis you have completed:
• What is our unique equity with customers? Do we truly have a unique competitive advantage?
• If no, why not?
• If yes, does that Area A value accurately capture the market position we are trying to reflect?
• Going forward, what do we want Area A to be—that is, what points of difference do we want to establish?
To illustrate a common finding, consider a manufacturer who has, for the past several years, touted its efficiency as its primary point of difference. The firm’s management has been consistent in communicating this priority both internally (mission statement, coffee cups, posters on the wall) and externally with distributors and customers, proud of the fact that it is the “most efficient in the industry.” Then, in a 3-Circle growth project, some leaders in the firm discover the surprising insight that customers only care about the firm’s efficiency if they see some benefit from it. In some ways, the firm’s promotion of its efficiency is almost resented by some customers who do not believe they see anything being passed down in the way of lower costs or greater efficiency for them. Recall similar cases in this book (e.g., Resource Recovery Corporation, Food Supplier, Inc.) in which executives discovered that their Area A was not nearly as large and distinctive as they had envisioned. So the first step in plotting growth is to get a clear understanding of your current Area A, being open to the possibility that customers may not view you as you think they do. As noted in Chapter 5, an important element of this assessment is identifying where you currently reside in consumers’ minds on the value map. Figure \(1\) summarizes this first priority. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/06%3A_Growth_Strategy/6.03%3A_Growth_Implications_for_Value_Categories.txt |
The strategic positioning assessment is critical in highlighting strategic priorities for the company. In addition, there are some tactical insights that emerge that can be fixed in a straightforward way. The fundamental growth imperatives can be summarized as follows:
• Correct obvious, critical deficiencies (Areas E, D)
• Solidify Area B
• Neutralize Area C
• Reduce and eliminate, or reinvigorate, current Areas E and D dimensions
• Build and defend Area A
The goal of 3-Circle analysis is to leverage the insight from the initial, structured analysis of customer feedback into a preliminary set of ideas or brainstorms about growth. We will provide a systematic walk-through of these ideas. Figure \(1\) summarizes the analysis of the first four growth imperatives.
Growth Imperative 1: Correct Deficiencies (Areas E and D)
As we emphasize throughout the book, customer value is enhanced (by way of the numerator of the value ratio) by ensuring that the product substantively delivers upon and exceeds expectations. At times, there are very fundamental issues that emerge in research and analysis that suggest obvious change—for example, the proverbial low-hanging fruit. Note such insights occur both for substantive changes in quality and basic issues on which our current superiority is not being effectively communicated. A few examples include substantively changing benefits and clarifying customer perception.
Substantively Changing Benefits
In Michael Porter’s work on competitive strategy and the value chain, he notes an example of a bulk chocolate manufacturer who sells its finished product to a confectionary producer in bulk bars.Porter (1985). Essentially, a study of the customer’s inbound logistics and operations (i.e., the real processes and needs) led to the discovery that the chocolate manufacturer was wasting time hardening and packaging the chocolate, when the confectionary producer had to remelt it upon arrival. Each manufacturer saved time and money when the chocolate manufacturer began delivering the product in liquid form. This illustrates a reality in most firm-customer relationships—there very often exist opportunities to improve value (sometimes for both parties) that are surprisingly related to basic blocking and tackling rather than significant innovation. Domino’s experienced increases in revenue and operating profit of 18% and 28%, respectively, in the first quarter of 2010 after communicating in its advertising that it was responding to consumer dissatisfaction with its pizza recipe with an improved product.Solsman and Ziobro (2010, May 4); Bryson (2010). Similarly, Microsoft’s notorious reputation of a controlling, complex, and unreliable operating system was softened by the introduction of Windows 7, which was developed with advertising in which users explained how the new operating system integrated their ideas for improvement.“10 Things Microsoft Did” (2010, March 4). Finally, Hyundai is an excellent example of a firm once characterized by significant disequity that has substantially improved its position. In a difficult 2009 market for the auto industry, Hyundai increased sales over 6% in the United States, improving market share to 4.3% from 3.0% in 2008 with substantive changes in car design, warranty, and platform integration to improve cycle time.Ohnsman and Cha (2009, December 28); Saad and Hill (2010, February 25). Figure \(2\) illustrates Hyundai’s desired shift on the industry’s value map, particularly with a focus on new, more elegant car designs.
Clarifying Customer Perceptions
A significant insight in 3-Circle growth analysis is that items that emerge in Area E that are misperceptions can be corrected through communications. We would not claim to be the first to discover certain types of misperception in the marketplace that can be corrected. A clever example of this is Rolling Stone magazine’s classic “perception vs. reality” ad campaign back in the 1980s and 1990s, which sought to correct major advertisers’ misperception that the magazine’s readership was composed primarily of hippies. The ads were two full pages—a left-hand page titled “perception” and a right-hand page titled “reality,” each presenting insights about previous vs. new readers, respectively. One of the best-known versions of the ad had a left-hand page showing a peace sign, and a right-hand page showing a Mercedes-Benz hood ornament. Similarly, SC Johnson currently fends off the longtime perception for its Pledge furniture cleaner product that it leaves wax build-up by pointing out that the product does not even have wax in it! (The tag line is “No wax. No build-up.”) Surprises in customer perceptions are a very common outcome in 3-Circle growth strategy projects, producing significant growth opportunities. We will detail a pharmaceutical case in Chapter 9 in which the firm discovered and responded to important physician misperceptions about their drug’s outcomes and managed care system.
Growth Imperative 2: Solidify and Update Area B (Points of Parity)
Points of parity are those dimensions of value that your offering is expected to have. Laptop computers have at minimum 3 or 4 gigabytes of hard drive space and 32 megabytes of RAM. Those basic requirements used to be a lot lower. The Wikipedia entry for Moore’s Law (which describes the exponential growth of digital device capabilities) indicates that hard drive memory capacity—a standard feature of personal computers—grew from 0.01 gigabytes in 1985 to 1,000 gigabytes in 2010. (http://en.Wikipedia.org/wiki/Moore’s_law). The issue here is that even points of parity evolve and move. Returning to the six lessons about attributes from Chapter 4, there is a dynamic pattern to value creation in markets that begins with a firm’s incentive to try something new—a new value-added feature like a camera on a cell phone, for example. Once the market finds value in that feature, it becomes a point of parity, that is, a basic expectation of the market. But it is important for the firm to keep an eye on that, as some firms may continue to improve it, for example, by improving picture quality or allowing for more video capacity or easier sharing. This is not to suggest that every effort to improve points of parity should be imitated without consideration of the value that customers obtain from it. Instead, the more general point is to take a systematic look at Area B attributes to ensure that your offering is not slipping behind on these table stakes.
Growth Imperative 3: Neutralize Area C (C→B or C→A)
In the normal course of competition in the free market, one of the most fundamental principles is that successful offerings get imitated unless they are protected legally or by unique resources, capabilities, and assets. McDonald’s has experienced success in mimicking both the higher quality coffee and, to some extent, the consumption experience of Starbucks stores, at substantially lower prices. McDonald’s marketing communications program includes a billboard with huge lettering saying “four bucks is dumb,” with a parenthetical remark below (“now serving espresso”) and the golden arches logo in the lower right. Ironically, a McDonald’s competitor has similarly pursued an imitation strategy so extreme that they depict a brazen Burger King (with the smiling plastic mask) breaking into McDonald’s corporate headquarters to steal the secret plans for the Sausage McMuffin. Burger King wants you to know that you get the exact same product, with one difference: a price of \$1.00 rather than \$1.99. Each of these actions would be seeking to directly position south of the competitor on the value map, essentially with a denominator (price) strategy. We might think of three strategies related to neutralizing Area C:
• Equal value: Match the competitors’ benefits simply to neutralize them as a unique advantage. Strategies that seek to neutralize Area C may be such strategies in which the firm seeks to turn the competitor’s Area C attributes (their points of difference) into Area B attributes (points of parity). For example, Verizon has been very aggressive about promoting the superiority of its mobile phone coverage, with a campaign built around the strength of its coverage map relative to AT&T’s. In a fierce advertising battle, AT&T responded in kind for a time, seeking to make coverage an Area B item. In addition, AT&T spent \$2 billion improving its network in 2010. There was some measure of success in the campaign, as AT&T picked up new users, although it appears that those gains came from smaller carriers like Sprint and T-Mobile rather than Verizon.Fredrix (2010). Note that while the strategy of equalizing value on particular attributes does not create a superior advantage—it removes a reason for not choosing a brand, which can have a powerful effect on customer choices.
• Better value. A firm may instead seek to leapfrog a competitor on value. One way of doing this is to match the competitor’s Area C benefits, but at a lower price. This is illustrated by Burger King’s blatant, humorous effort to literally duplicate the McDonald’s breakfast sandwich, but to offer it at a significantly lower price (again, a due south positioning strategy on the value map). Alternatively, the firm might neutralize the competitor’s advantage by developing superior benefits at the same price (a due east strategy). Eastern strategies would tend to involve the addition of value-added products or services that competitors do not, or cannot, offer. Examples of this would include the Infiniti with the “Around View Monitor” with cameras on all sides of the car, the Motorola-Verizon Droid surpassing the Apple-AT&T iPhone’s features at a similar price, the computer manufacturer with a superior warranty, or the consumer-products firm that adds 30% more product volume in the package than the competitor but at the same price.
• Live and let live. While we may see prospects for improving customer value and choice in neutralizing the competitor’s Area C, the larger assessment, in fact, should be whether or not the benefits of such a strategy exceed the costs for the firm. There may be Area C advantages that naturally belong to the competitor and would be too costly to try to match. For example, recall in Chapter 2 that while standardized testing was a cost-feasible addition for Glenview New Church School (and a competitive must-have), it would be very difficult and costly for Glenview New Church to attempt to imitate the public school’s broad curriculum (beyond the core). It is important that a cost-benefit analysis be applied in a disciplined way to match or imitate a competitor’s advantages. Criteria for evaluating the desirability of such imitation would include not only investment and likely return financially but also the fit of the move with current positioning and strategy and the likelihood of provoking competitive reaction. For the market-share leader, a move to imitate a smaller underdog’s actions may simply bring more attention to the underdog.
Growth Imperative 4: Reduce or Eliminate Nonvalued Benefits
Kim and Mauborgne’s (2005) empirical research on value innovation and blue ocean strategy revealed an important element of strategy that had not been discussed previously. They found firms who were able to find growth, even in highly competitive industries, by reducing or even eliminating attributes or benefits that customers valued less, and by investing in significantly improving the most important values. An example is adapted in Figure \(3\), depicting the strategy for Quicken’s personal finance software, which was introduced into an existing market of 42 powerful, but very complex and difficult-to-use, software products. Scott Cook, founder of Intuit, considered those products but also had in mind positioning against the simplest of all financial management products—the pencil! As Figure \(3\) shows, Quicken’s value was in its ease of use but equivalent power relative to the software packages of the day, yet it maintained the speed and accuracy advantages over the pencil. The company simplified the product by stripping out many complex features and using straightforward language. The simpler product also costs less, illustrating the core principle in Kim and Mauborgne’s (2005) concept of “value innovation”—that companies create significant gains in value by focusing on building a few benefits that customers value and eliminating or reducing those that are less valued. The elimination of some benefits can lower costs, leading to lower prices as well. Figure \(3\) illustrates the same Quicken positioning strategy as captured in a value map.
Growth Imperative 5: Build and Defend Area A
The 3-Circle model provides a simple way to explain the essence of competitive strategy: the goal is to build Area A relative to Area C. Seeking to shrink Area C may be part of that strategy. But building Area A is a code word for the raison d’être for any business—what truly unique value do you bring into the world? Having analyzed customer value and categorized the value using the seven categories in the framework, you will find a variety of ways to think about how to build the distinctive value in Area A. As captured in Figure \(4\), there are a number of areas in the 3-Circle model that provide sources of value on which Area A might be built.
Ratchet Up Points of Parity (Area B → Area A)
JetBlue was founded on a unique passenger experience. Building upon the original model of Southwest Airlines of a regional hub-to-hub airline with an emphasis on low cost, JetBlue captured significant unique dimensions of value by taking a standard flying experience and enhancing the comfort and excitement of the passenger experience. In one of its early advertisements—a humorous “mockumentary”—JetBlue employees explain, for a variety of basic services, that when customers ask them to do something (e.g., seat them together with another passenger), they actually do it. So when a passenger asked for some headphones, “I hooked him up,” notes a flight attendant. This is a parody on the notion that many existing airlines often fail to meet the most basic of expected services. Yet JetBlue’s distinctive value is in taking a commoditized in-flight experience and significantly improving it. The firm seeks a very passenger-oriented in-flight experience from its attendants, and has both comfortable leather seats and entertainment systems for every passenger on every flight. This is a classic illustration of taking standard attributes in the overall value proposition and pushing them to new value-enhancing levels in ways that require significant investment. For such a strategy to work, the attributes or benefits must be (a) fundamentally important to customers, and (b) credibly differentiable among competitors. In certain circumstances, there may be opportunities for differentiation because an industry (both firms and customers) has become so accustomed to its points of parity that all take certain levels of value as given. So when Wal-Mart takes its standard in-store layout that has been virtually the same (and similar to other mass-merchant rivals) for decades and enhances colors, layout, and fashion orientation, the result is a remarkable contrast that sharpens the value customers obtain from its low-price Area A. In sum, raising the levels of Area B attributes to enhance Area A is often a process of exploring the customer’s experience around existing attributes and then uncovering how to build a new experience.
Find Value in Old Ideas That Worked at One Time (Area D → Area A)
If we classify an attribute or benefit in Area D, it means that this dimension of value is or was jointly produced by each firm but that it is outside the customer’s circle. It is possible that there still exists value in such retired attributes. Determining whether there might be value there, though, requires some skill in discrimination. There are examples of bringing back values that have been successful, as in car companies bringing back vintage cars or introducing classic design elements in contemporary cars. We might think of a category of value that may have seemed to go out of style but, in fact, is classic enough to have an appeal to certain consumers in every generation—for example, the simplicity and elegance of Frank Lloyd Wright architecture. Kmart created a point of difference by bringing back a layaway capability when difficult economic times set in back in 2008, and it got a great deal of positive press as a result. In a 2008 Wall Street Journal article, Mark Snyder, Kmart’s chief marketing officer, noted, “While not sexy, layaway became the big idea at Kmart these holidays.”Mohammed (2010, March 2). Similarly, in large banks, check cashing has not been a highly demanded service, as consumers typically deposit checks and electronic deposits have become increasingly common. As competition for middle-class and wealthy consumers has heated up, some banks have looked for business elsewhere, discovering a very large segment of “unbanked” or “underbanked” consumers who do not have relationships with banks, yet spend over \$11 billion per year at financial institutions that cash checks. (Carrns (2007, March)). In response, Key Bank has experimented with check-cashing services in a variety of retail bank branches, with specific technology for identifying customers and providing other services for a cash economy in which many customers engage.
Find Hidden Equity in Area E (Area E → Area A)
As noted earlier, there are multiple interpretations of Area E. The first we addressed previously: There are some dimensions of value that may be important and on which we are not meeting expectations. The strategy for such dimensions is to correct obvious problems to negate the disadvantage (a high priority). But the other, more subtle element of Area E (same with D and F) is that it may contain dimensions of value that are currently undervalued by the market. A couple of examples have been mentioned throughout this book. Upon first introduction, the feature “Teflon coated” was quickly relegated to Area E status, as consumers did not connect with the value of fat-free cooking, as the original promotion held. Yet when the feature was connected to a more important value (ease of clean-up, time savings), Teflon coating became an instant strong point of difference. Similarly, earlier we mentioned Tang’s rise to prominence in Asia and other locations as the firm has leveraged the brand’s recognition with packaging innovations that better connected with customer needs.
The general notion here is that the firm may discover in Area E hidden assets that may—with a little extra effort—connect well to customer values. In a classic Harvard Business Review article, Nariman Dhalla and Sonia Yuspeh cite many examples of firms who gave up on certain brand assets under the assumption that they were in the mature phase of the product life cycle.Dhalla and Yuspeh (1976). They cite the case of Ipana toothpaste, for example, given up for dead by its corporate parent and sold off to small investors. The new owners subsequently produced healthy sales for a reformulated product with the same packaging and branding, with later research showing 1.5 million regional users of the brand. More recent examples of the same phenomenon have occurred in fashion, with the successful reintroduction of the brands Vionnet and Marimekko, each long-ago pioneers in the industry and now experiencing new energy through new ownership. (Binkley (2009, November 6); Sains (2004, April 26).)
At times, an organization may not realize the strength of its current offering. In the earlier cited work on decommoditization, Rangen and Bowman offer up the example of Signode Corporation, a manufacturer of steel strapping for industrial applications.Rangen and Bowman (1992). In customer research, the company discovered that a certain segment of customers put a high value on its bundled offering of strapping equipment, supplies, and engineering service. Essentially, the unique value of the bundling was unknown to the firm, who assumed it was unimportant in the customer’s decision calculus. In the firm’s assessment (prior to the research), this was essentially an Area E item, not believed to be particularly influential in customer decisions. The discovery that this was more important to some customer segments than first thought led to clearer segmentation of the market and more profitable pricing policies.
Exploit the Competition’s Weakness (Area F → Area A)
As noted earlier, there are risks associated with attacking a competitor on a weakness and potentially leveraging that weakness into a strength or point of difference. However, the strategy may be most likely undertaken when the competitor will find it difficult or unprofitable to follow. A recent illustration is Southwest Airline’s taking advantage of the baggage fees introduced by legacy airlines like United, Delta, and Continental. Southwest has countered this move with a steadfast refusal to introduce fees for the first two bags checked and a humorous advertising campaign built around the theme “Bags Fly Free.” While debate has ensued about Southwest’s decision to eschew significant revenue the other airlines are gathering, the company points to its gains in passenger miles and load factor, each surprisingly up 9% and 11%, respectively, in August 2009.Bachman (2009, October 14); Associated Press (2010, May 3). Southwest executive Kevin Krone reflects the company’s resolve to stick with the no fee policy, noting, “If we’re trying to get people to travel, we should probably let people take their suitcase.”
Explore and Leverage the White Space (Area G → Area A)
One of the exciting dimensions of the 3-Circle model is the fact that it graphically illustrates a reality that we often lose sight of on a day-to-day basis: that customers always have unmet needs or needs that have not been fully met. In the nearly \$7-billion laundry detergent market, Procter & Gamble (P&G) was able to make significant strides in market share for their brand Gain, originally introduced in 1969 as an enzyme-driven laundry soap for difficult stains. More recently, deeper study of consumer needs uncovered a powerful—if somewhat obvious in hindsight— conclusion that consumers are driven in laundry detergent choice as much by what they smell as by how the detergent cleans. In fact, scent connected especially well for ethnic segments, such as Hispanics. (Byron (2007, September 4)). The repositioning of the brand around scent was enormously successful, as Gain picked up 3 percentage points in market share, that increment valued at \$198 million annually, and the brand became P&G’s 23rd billion-dollar brand. In a similar vein, Crocs shoes had to counter long-standing disequity that its shoes were ugly by bringing attention to the comfort of the shoes with the theme “feel the love” (see Figure \(5\)). Croc’s revenue increased 24% in the 1st quarter of 2010, compared to the 2009 results, with a \$28-million improvement in net income. (Young (2010, April 20); Business Wire (2010, May).)
In each of these cases, the firms did not discover needs that they were not already aware of. What is different here is that once the firms understood the importance of these values, in each case, they asked how they could more effectively deliver on or connect with these needs. In short, these efforts were not framed as technology in search of markets but instead were understood to be customer needs in search of solutions. That is a very important distinction.
The topic of brainstorming around unmet needs is quite important (and complex), and there exist a number of helpful sources that dive deeply into the topic. In our view, some of the most helpful frameworks can be found in Eric von Hippel’s (1988) work on innovation by studying lead users; Rao and Steckel’s (1998) insightful chapter on studying unmet customer needs; Christensen et al.’s (2007) framework on customer “jobs”; and MacMillan and McGrath’s (1998) study of the customer’s consumption chain. It is beyond the scope of the current work to overview these approaches, but we will offer a short, concrete insight that builds upon our earlier coverage of understanding deeper customer values. Consider a firm we will call David, Inc., which competes in electronic commerce industry, working with billion-dollar customers in a targeted industry. The competitor is Goliath Corp., inventor of the current technology used in the industry. Our analyst for David, Inc. (let us call him Dave), undertook a 3-Circle growth strategy analysis with a strong predisposition that to win business from Goliath, it would be critical to reduce and allocate the customers’ costs for them, to be compliant with security protocols and governance practices, and to reduce complexity and time. While these expectations are all accurate at a certain level, in-depth interviews with customers had an eye-opening impact on Dave’s thinking:
So, what did we learn in talking to customers? A LOT. News flash—analysts write about features and capabilities, not customer needs. If you want to find out what is really going on, ask a customer—they are happy to tell you…I thought it was all about technology and capabilities. Sure, technology is important, but what customers are really looking for is partnership.
Prospective customers ultimately conveyed, very frankly, that they were tired of being treated like a “captive audience” by Goliath Corp. Frustration was such that when one vice president of finance for a potential customer was asked, “What matters most in a technology vendor?” she replied, “The ability to easily replace them.” A vice president of information technology (IT) unexpectedly answered the same question, “The ability to help us move faster.” Rather than being concerned about features offered by a vendor, he was ultimately concerned with the fact that his reputation was on the line in getting the IT infrastructure to a point where it could keep up with, and not constrain, the speed with which his firm was doing business. These deeper Area G insights and frustrations gave the David, Inc., team new inspiration. Instead of being frustrated by the impossible task of unseating the dominant competitor, the team developed strategy with the belief that there were ways to quietly and effectively partner with customers. Business could be taken from Goliath Corp. not as a pure cost-reduction positioning (although that was important), but more broadly in terms of moving quickly to next-generation solutions and to broaden the types of information that could be electronically moved in the interest of partnering and helping customers maintain the pace of business. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/06%3A_Growth_Strategy/6.05%3A_Exploring_Five_Growth_Imperatives.txt |
Let us summarize the chapter’s key concepts by returning to the Kindle example from Chapter 5. What are the implications of the growth strategy framework for Kindle’s possible outlets for growth? We can get some initial speculative insight—subject, of course, to the need for additional research.
• Kindle’s Area A: Kindle’s positioning as a dedicated electronic reader is very clear, as it was essentially the pioneer. Its features build to the core benefits of focused reading and undistracted immersion, as well as inexpensive access to books.
• Imperative 1: Correct deficiencies. There may be some borderline deficiencies here, particularly related to navigation. While the system moves relatively quickly, the difficulty of using the tiny joystick can be frustrating both in terms of speed and accuracy of navigation.
• Imperative 2: Solidify and update Area B. If book selection is currently roughly equivalent (and limited) between Kindle and iPad, then this may be an area we can expect differences to emerge because it is both important to customers and a function of building and shifting partnerships with publishers, which could quickly add access.
• Imperative 3: Neutralize Area C. There is, of course, some overlap here with Imperative 1. We designated navigation as more of a deficiency because it has an immediate, potentially dissatisfying effect in simple operation of the device. Related, but perhaps not as immediately urgent, is the availability of touch-screen technology and color. The point here is not simply to mimic the iPad but to enable design changes that will improve the user experience for the focused purpose. It is conceivable that no changes should be made regarding the Kindle navigation if most users perceive minimal effects on the user experience or if such changes reduced the speed of the device.
• Imperative 4: Reduce and eliminate nonvalue. Since the Kindle is already believed to have value because of its simplicity and single purpose, it is fair to suggest that there may be few areas in which to reduce the reading-focused capability. However, it is important to note the mantra of “keeping Kindle simple” is strategically very important, as there may be temptation to gravitate toward greater capability. (Brown (2010, January 28).)
• Imperative 5: Build and expand Area A. To be selective here, we will focus on an Area G item that is important to readers, particular on niche genres or topics. Collectively, readers demand a large book selection. Currently, each competitor in the eReader market is limited to a select number of publishing relationships. Blogger Damon Brown (cf. note 16) offers the following advice:
There are hundreds of medium-sized (or smaller) publishers available within and outside of the United States. Amazon wisely is going after the smaller guys, too, with its recent royalty (and rights!) heavy contract option appealing to self-publishers, a group Apple didn’t acknowledge (during a keynote address).
The development of reading-related applications and more extensive study, which allowed the sizing of benefit and interest segments in the reading market, could be important vehicles for reaching readers more effectively than Apple does.
The importance of the 3-Circle framework is that it allows a systematic walk-through of the dimensions of value currently available on the market and a rigorous review of growth strategy questions with emphasis on all the important value dimensions in the market (but current, known dimensions and those not so well known). The goal is to stay focused on how our organization might build a unique position by developing important value for customers that competitors cannot match. A critical issue in this is the notion of capability—once we develop ideas for building growth strategy, how do we execute them? Capabilities, resources, and assets are the focus of the next chapter. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/06%3A_Growth_Strategy/6.06%3A_Chapter_Summary.txt |
In the Studebaker National Museum sits an automobile that is powered by ion beams. Engineers within the Studebaker Corporation saw an opportunity to build an automobile that used a completely revolutionary design and energy source. They built a prototype of the automobile but lacked the capabilities and assets to produce the ion beams to propel the car as they had planned. If it were possible to produce the envisioned automobile, it would have produced a solid Area A, a point of difference, in the automotive industry. Because they were unable to deliver on their strategy, their prototype sits in the Studebaker National Museum as another good idea that lacked the resources, capabilities, and assets necessary to make it work. The Studebaker Company had the vision but lacked the internal resources, capabilities, and assets to bring their idea to life. The world is full of executives and entrepreneurs who have tremendous strategies and sensational ideas, but who are unable to execute those strategies or carry out those ideas to realize the anticipated dream.
What is in a company’s DNA, its internal characteristics, that makes it possible to produce the goods and services desired by the customer? What are the characteristics that both build and sustain an organization’s current competitive advantage (Area A) and have the potential to create future advantages?
Having identified areas of customer need and opportunity to build a sustainable point of difference, an Area A, executives face the daunting task of implementation. This requires them to look for the resources, capabilities, and assets necessary to successfully achieve Area A. Sometimes the necessary resources, capabilities, and assets can be found inside the firm; other times, the executive must look outside the firm.
Da Ali G Show is a satirical TV series starring Sacha Baron Cohen. During its second season, Cohen, playing the lead character “Ali G,” carried out comedic interviews with unsuspecting celebrities and professionals. In one episode, Ali visited with an investor and showed a blank skateboard, without wheels, and introduced it as a “hoverboard.” Ali explained that he had seen it in a movie (Back to the Future) years ago, and so he knew it was possible to produce one and that it would have huge market potential. In fact, Ali explained he was amazed that someone had not already produced the hoverboard since it had already been in the movies. He went on to explain that all he needed from the investor was a team of scientists with the technology, knowledge, and skills to make the hoverboard work.(http://www.youtube.com/watch?v=nkuOuxRD1Bc) Ali G had a great idea, with a potentially huge Area A—teens would have lined up to get their own hoverboard; the only thing lacking was the back office, inside resources, capabilities, and assets necessary to make it happen!
Customers rarely know anything about what occurs inside an organization, much less care about what an organization must do to create the attributes they desire. They are often completely unaware of what it takes in terms of the skills, resources, or costs necessary to make attributes and features they desire possible. In most cases, customers only care about the desired benefits that are salient to them are delivered in a cost-effective, efficient manner. For example, most computer users do not understand the internal design and associated knowledge and skills required to create a product with the attributes they desire. In fact, customers will often call those involved with the internal workings of the computer “nerds” or “geeks,” especially when they enthusiastically try to explain the internal beauty of the machine and the competencies involved! Most customers only see the computer’s attributes and expect a great product for a great price. Yet the inside resources, capabilities, and assets necessary for the production of a computer not only makes the current attributes available but also makes future attributes and cost saving possible. The link between the company’s DNA and desired customer attributes can be graphically demonstrated as follow:
Internal Resources → Customer attributes/benefits → Capabilities & Assets → Position
Because of the link between inside company resources, assets, and capabilities necessary to deliver the attributes customer demand, it is essential that company executives have a clear understanding of not only what organizational DNA is used to deliver current customer attributes and benefits but also how it might be used to deliver future attributes and benefits. Executives who become so focused on current internal practices and characteristics necessary to deliver attributes that current customers demand, without keeping an eye on attributes that future customers will desire, risk market myopia that will make his or her firm irrelevant over time.(Christensen (1997).) This chapter is designed to help you understand the essential internal building blocks of execution and how to locate them. In the process, you will discover the essential value drivers necessary for your organization to have a sustainable competitive advantage. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/07%3A_Implementation-_An_Inside_View_of_the_Organization/7.01%3A_Chapter_Introduction.txt |
In Chapter 6, we described growth strategies. It is now essential that we look inside the firm to determine whether the building blocks exist to actually execute the strategy. Naturally, executives look inside their organizations for the internal resources or building blocks that form the strategic bundles necessary to execute strategies to build their points of differences, or, their Area A. These building blocks are the input that managers use to create product and service attributes that meet current and future customer needs and bring the firm a competitive advantage.Hamel and Heene (1994) provide a nice description of the variety of depictions of the internal mechanisms of the firm. In this book, we have simply collectively referred to those internal building blocks as the internal resources, capabilities, and assets of the organization that may or may not be known to the customer who could only be familiar with the more visible attributes of the product or service. Rigsby and Greco described financial, physical, human, technological, and reputation resources as the major internal firm assets necessary for executing strategy (see Figure \(1\)). (Rigsby and Greco (2005).)
Resources, capabilities, and assets are both tangible and intangible and are tied either permanently or semipermanently to the organization.(Wernerfelt (1984).) For example, employees in the organization provide key capabilities and competencies to the organization. Such capabilities and competencies are intangible and consist of the knowledge, skills, thought patterns, motivation, culture, and networks of the employees in the organization.(Dubois (2009); Boyatzis (1982).) Dubois and Rothwell argued that employee capabilities could be further classified as either technical-functional or personal functioning.(Dubois and Rothwell (2000).) Technical capabilities include specialized knowledge, skills, and capabilities that can be used in particular ways within the company. For example, gas metal arc welders have specialized skills because of their ability to weld aluminum at Boeing. Without this capability, Boeing would be unable to deliver fabrication attributes that its airframe customers value. Likewise, computer programmers at Microsoft and Apple have specialized capabilities necessary to produce attributes that end users value in their computer operating systems. A second category of human resource competencies is “personal” and includes management skills, strategic views, networking abilities, and psychological characteristics. Southwest Airlines has often been cited for its managerial skills that create customer relationship attributes that are valued by customers. These managerial competencies have helped build attributes in Southwest Airline’s Area A that other airlines have not been able to imitate. While technical competencies are easier to define, interpret, and apply than personal competencies, personal competencies are also very important and cannot be overlooked. (Dubois (2009).)
Finances, plants, equipment, and physical assets are resources that are absolutely necessary for creation of attributes that are both valued and expected by customers. Physical resources also include the intellectual property and trade secrets that can be used to create and sustain an Area-A market advantage. Distinctive patents, copyrights, and other assets protect the organization’s advantage from being imitated by competitors and make an important feature of the resource bundle that sustains the distinctiveness of competencies. Physical resources are not considered firm competencies; however, they are necessary for the human competencies to create products and services that are valued by customers. An organization can have the best human capital and capabilities in the industry, but if the organization lacks the resources to execute those competencies, it cannot build its competitive advantage. Likewise, a company can have all the distinctive physical resources but lack the core competencies necessary to develop the products valued by customers for a distinctive advantage. For example, the University of Iowa built a laser-technology building with distinctive, state-of-the-art equipment; however, the university was unable to attract key scientists with the core competencies necessary to bring the university an Area A in laser research. As a result, the building was renamed the “Iowa Advanced Technology Laboratories” and now houses multidisciplinary research rather than the planned laser technology focus. (Iowa Alumni Review, 45.) A primary reason new ideas and ventures fail is that they lack the bridge funding and physical resources necessary to bundle with human competencies to deliver a product or service to the market. Without the distinctive physical resources to complement the human competencies (knowledge, capabilities, and skills), the organization cannot successfully produce attributes that bring the organization a sustainable advantage.
These resources, capabilities, and assets are structured to build the attributes that are viewed by customers. The sequence of activities that an organization develops to produce attributes often defines the firm, its processes, and culture. Figure \(2\) graphically demonstrates how resources, capabilities, and assets might work together to produce attributes, products, and services.
How the resources, capabilities, and assets are deployed and associated is an essential characteristic of the organization. As described previously, Southwest Airlines may have human and physical resources similar to any other airline—the way they link the resources and skills to produce the customer-valued attributes is distinctive, giving them a competitive advantage. Michael Porter described how the airline’s attributes are structured in a way that brings the airline a competitive advantage based on low cost and a reputation as the fun airline (Figure \(3\)); however, the figure fails to demonstrate the inside view, that is, the competencies and physical resource chains that underlie the attributes. (Porter (1980).) For example, Southwest Airlines has mechanics whose competencies specialize in the maintenance of a single physical resource—the Boeing 737 airplane. They do not have human competencies in meal preparation or boarding-pass production and distribution and associated physical assets. Southwest has linked the human competencies and the necessary physical resources in such a way that the value chain itself—the way the resources and competencies are bundled—gives Southwest Airlines a distinctive position in the industry, that is, a very strong and sustainable Area A. It must also be noted that the competencies and resources employed by Southwest Airlines are tightly focused, and those not fitting their business model are closely examined to determine whether they can be developed in some way to grow the company or whether they should simply be eliminated to reduce costs.
It is critical that management understand how resource, capability, and asset competencies are bundled to create and grow Area A and sustain Area B for their organization. The DNA of any firm lies in how building blocks such as employee skills, knowledge, and capabilities—often called competencies—as well as its physical resources, assets, and networks fit together to form a unique strategic bundle. (Barney (1991).) Strategic bundles are aggregations of the firm’s internal attributes (skills, capabilities, knowledge), often invisible to the market, which have the potential of meeting current and future customer needs and values. For a bundle to be “core” to the business it must contribute to its long-term prosperity and be a source of competitive advantage; the bundle is the DNA that makes it possible for the firm to have a viable, sustainable Area A in the 3-Circle model.
Typically, both the firm and its competition have resources that are distinctive. These are areas E and F (see Figure \(4\)). There is also an area of overlap in which both the competitor and the firm have resources, capabilities, and assets that are common; this can be considered a point of internal similarity. Resources that form internal similarity are often the ones necessary to produce the attributes populating Area B. In commodity markets, the area of internal similarity may be very large as competitors imitate each other (restaurants) or are highly regulated to be similar (banking). This is shown in Area B of Figure \(4\).
Building blocks (resources, capabilities, networks, knowledge, assets) in areas E and D do not fall within the customer circle and are therefore more difficult to associate directly to the firm’s current revenues stream associated with Area A or Area B. (Hamel and Heene (1994).) Area E and D resources, capabilities, and assets may play an indirect, noncritical role in producing the attributes currently valued by the customer, but we cannot conclude that they have no value. As shown in Chapter 6, Area E building blocks may or may not be currently used in a strategic bundle, but they have potential for building Area A by addressing an unmet customer need found in Area G or imitating a competitor’s advantage found in Area C. Simply because internal building blocks in Area E may not currently play a direct role in creating Area A or B customer value, they still may have potential. Likewise, it was also shown in Chapter 6 that even Area D resources, capabilities, and assets can be resurrected and can create or strengthen Areas A and B.
Adding the customer circle to Figure \(4\) allows us to examine all of the resources underlying both the firm and the competition’s ability to produce current and future products and attributes. Figure \(4\) is a representation of the entire 3-Circle model from the inside view. The inside view of all of the areas of the 3-Circle model pertaining to the firm can be described as follows:
• Area A. This area includes resource bundles necessary to produce attributes that are valued by customers by meeting real needs. The unique combination of employee competencies, knowledge, and company assets gives the firm a competitive advantage in the market and competitors cannot easily imitate this (due to the tacitness of the knowledge, intellectual-property protection, scarce resources, and so on). Likewise, there are no close substitutes for the resource bundle that can produce product or service attributes that may satisfy the customer need in the same or similar way. To sustain this advantage, the firm must protect, and continually improve, the resource bundle to stay ahead of competitors who seek to imitate their attributes by producing better resource bundles (improved factors of production by cost, knowledge, skills, etc.). These resource bundles make it possible for the firm to produce attributes that bring the firm abnormal, above-industry average profits.
• Area B. This Area consists of resource bundles necessary to produce attributes that are valued by customers and meet real customer needs; however, these bundles are similar to those of competitors in the industry (as described in this chapter and shown in Figure \(5\). These resource bundles are necessary to produce the minimum attributes required by customers in the market. The factors of production making up these resource bundles are not unique and can be copied by others. While customers may value the attributes resulting from Area B resources, they only bring the firm normal, average profits. If there is a small or no Area A or C and there is a large Area B, the firm finds itself in a commodity market (as shown in Figure \(5\), Area B). Thus, firms face the constant struggle to find differentiated resource bundles and a competitive advantage. Yet to remain competitive, firms must maintain Area B competencies because they make possible the delivery of those minimal attributes required by customers of all organizations in industry. Failure to deliver Area B attributes both threatens the market relevance of the firm to the customer and gives the competitor an advantage.
• Area E. Area E consists of resources, capabilities, and assets that are either indirectly involved in supporting those that are used to build Area A and/or B attributes, or are part of the company’s unused building-block inventory. These resources may include such things as employee skills, knowledge, and competencies as well as the firm’s physical resources, assets, and intellectual property. Such resources are more difficult to tie directly to the firm’s revenue generating product and service attributes. Some of the Area E resources may, or may never, provide customer value now or in the future and can safely be eliminated. Still, the potential of the Area E resource inventory must be considered (as described in Chapter 5 and Chapter 6). The potential of Area E resources in developing new attributes may be substantial and the firm should not simply divest such resources without careful analysis. IBM may have had internal resources, but the company failed to develop microprocessors (developed by Motorola and Intel), operating systems (developed by Microsoft), software (the birth of WordPerfect), and chips (the birth of Texas Instruments).
• Area D. Area D consists of resource bundles that may have created product or service attributes that were valued by customers (areas A or B) but are no longer appreciated. Area D resources are not distinctive because the competition has similar resources with the same potential. Area D resources are a very difficult case. While they may be able to be used to develop Area A (as described earlier), the competitor is likely to follow. As a result, to sustain attributes, products, and services emerging from Area D, resources must be combined with others from Areas E, A, or B in ways that are rare, valuable, and nonsubstitutable in order to sustain customer value and the distinctiveness necessary to grow Area A. American automobile manufacturers have successfully reintroduced outdated models that customers no longer desired. For example, Chrysler brought back the retro-styled PT Cruiser (see Figure \(6\)).
Customer demand for the PT Cruiser had waned, and the company stopped producing the car in the early 1950s. Today’s customers would likely not value the features and attributes of the older model. To successfully reintroduce the PT Cruiser, Chrysler used resources, capabilities, and assets from areas E, A, and B to add features today’s customers desire—from scalloped headlights, a chromed front grill, brake cooling ducts, and antilock brakes, to new audio systems, including an MP3 player jack and satellite radio, a turbocharged 2.4 L four-cylinder engine, and the latest in cruise control. Simply producing a Cruiser with the features from the classic 1940s model, exclusively using Area D resources and associated features, would have failed to penetrate the customer circle. The successful integration of current Area A, B, and E resources added desirable features to the PT Cruiser that led to the growth of Chrysler’s Area A and the car’s being recognized as Motor Trend’s car of the year in 2001.
Growing Area B by using Area D resources may be necessary to meet the new minimum market standards; however, because customers will expect the attributes of all companies in the market, demands for quality will be high and there will be downward price pressure. While it is necessary to maintain Area B market attributes, investing heavily in Area B may simply increase customer expectations and organizational costs without building profits. Thus, the profit-margin potential will be low. Thus, resources, capabilities, and assets found in Area D must be assessed with care.
The natural inclination is to eliminate resources, capabilities, and assets located in Area D because they burn valuable resources, have little discernable connection to the revenue-generating attributes of the firm, and, as a result, may be a fatal distraction to the central mission and vision of the company. Yet to remove those resources may give competitors an advantage because the firm can no longer pose the threat of retaliation through imitation. Firms retain these Area D resources because if they do not, competitors who also have them can build a competitive advantage unchallenged. (Stiglitz and Mathewson (1986).) Still, as described here, unless the resources in Area D are transformed or bundled with other organizational resources, capabilities, and assets they have very little chance of building a meaningful advantage in a way that cannot be imitated by the competitor. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/07%3A_Implementation-_An_Inside_View_of_the_Organization/7.02%3A_Looking_Inside_the_3_Circles_for_the_Building_Blocks_of_Product_Attributes_and_Ser.txt |
The key challenge for management is to recognize internal capabilities, skills, resources, knowledge, networks, and so on that can be aggregated into bundles or competencies that can grow and sustain current value for the customers (Area A), have the potential of building new value by adding to Area A (E with potential for A), and must be maintained to deliver required attributes (Area B). While the resources within Area D may or may not be the type that will be appreciated and valued by customers, management must know them and make good decisions about what to do with them. Management must decide whether to remove or retain Area D resources. They may decide to retain Area D resources because they believe, correctly or incorrectly, that their competitors may build an advantage if they do not, or they can reconfigure resources and grow Area A. Yet keeping those resources can be a distraction and add unnecessary costs to the firm. Such blocks may be obsolete resources (inventory), outdated skills, and equipment, and, yet, management still holds on for fear of what competitors with those same resources may do. Still, there is a chance that they may be correct in their perception, and so management tends to retain, and even protect, Area D resources.
A building block in Area E has the potential of having attributes capable of growing Area A and strengthening Area B. One of the primary jobs of management is to find, sustain, and skillfully aggregate internal building blocks of core competencies to produce attributes that can lead to a differentiated, sustainable advantage (equity) in terms of features or cost, offering a limited, but highly desirable, subset of attributes.
A strategic bundle consists of the core building blocks that have the potential of bringing a sustainable competitive advantage to the company. Strategic bundles have the potential of being rare and unique not only because of the building blocks (skills, abilities, and knowledge) but also because of the way they combined to form the bundles. (Barney (1991).) Competitors may be able to imitate an asset or a resource, but it is extremely difficult for them to imitate the way they are combined with knowledge, skills, and experience to form a strategic bundle. Likewise, there is no substitute for a firm’s unique strategic bundle that creates product and service attributes valued by the customer.
Progressive Insurance
Recall from the opening chapter of this book the situation faced by Peter Lewis of Progressive Insurance as he developed growth strategy in the 1990s. Consumer dissatisfaction with automobile insurance companies was high, particularly regarding claims-processing times. As depicted in Figure \(1\), drilling down into this Area D disequity reveals its significance; it is ultimately connected to consumers’ peace of mind, an important driver of human behavior, particularly in a context as stressful as automobile accidents. Also recall that Peter Lewis had lost a younger brother in an auto accident and so had a deep understanding of the emotional trauma caused by an accident. After sensing the level of consumer dissatisfaction with the industry upon California’s passage of Proposition 103, which penalized the industry, Lewis reasoned that the most substantive way that Progressive could deliver value to customers was to create an “immediate response” capability that would dramatically reduce response times to auto accidents. Because this was born of real customer value and was very difficult to accomplish, it also had the potential to substantially differentiate Progressive from its competitors. But then the issue was how does a firm build such a capability?
Lewis set about developing strategies to deliver the peace of mind valued and desired by the market. He decided that a strategy of immediate response would deliver the distinctive value to bring this peace of mind and grow Area A. His strategy was to speed up claim processing in a more humane way that did not add to the trauma customers already suffered from the accident. To implement the strategy of a product with those service attributes, Lewis had to locate the resources, capabilities, and assets to successfully deliver the program. Attributes of the proposed program included an instant claims workbench, databases that were accurate and accessible to customers, committed and dedicated employees, and disciplined management. All of these proposed strategies and attributes are on the outside view of the 3-Circles model, viewed and appreciated by customers.
Next, Lewis had to determine whether he could implement his strategies and develop the required product and service attributes. This required Lewis to identify, develop, or acquire the internal resources, capabilities, and assets necessary to deliver the attribute and product value customers demanded that would bring peace of mind. He recognized that he would need radically different resources, assets, company culture, structure, and leadership to overcome the “high prices, bloated bureaucracies and poor service” characteristic of the industry. (Salter (1998, October 31).) His company shared the same skills, abilities, and technology as all other insurance companies. Lewis recognized that he needed a new resource bundle of resources, capabilities, and assets to deliver the value that customers desired. To provide immediate response, Lewis had to create an ultrafast, no-hassle, customer-friendly claims service. Internally, he had to develop an entirely new approach to human resources, including employees that were ready to serve customers 24 hours a day, 7 days a week. As Lewis put it, technology is not “worth a thing without topflight talent” and that they needed the “best people in the industry as measured by education, intelligence, initiative, work ethic and work record.” (Salter (1998, October 31).) The immediate-response team needed an information system with software that could efficiently manage a very smooth information flow. Within Progressive’s information-systems department, Lewis found competencies to develop software to enable the necessary concurrent information flow to make the service attributes that delivered the customer value. This information system has all the characteristics of a sustainable competitive advantage. The new information system and its management were necessary for implementing the information-transparency strategy. It also opened a sales channel for Progressive appreciated by customers and different from the exclusive direct sales approach utilized by other companies. While competitors have tried to imitate Progressive, “no other insurance company can instantly move information back and forth between a laptop and a mainframe and keep claims moving toward resolution.” (Salter (1998, October 31).) Lewis found he needed to add new assets to his resource bundle to deliver the attributes necessary to meet customer needs, including laptop computers and immediate-response vehicles. In short, to meet the market need Lewis had identified, he needed to develop a resource bundle by looking both inside and outside Progressive, for the new resources, capabilities, and assets necessary to bring the peace of mind his clients desired. Figure \(2\) shows the internal view of Progressive and its competitors. Note that most of the distinctive, internal resources used to implement Lewis’s strategies are not visible to the customers. They will see the product and service and their associated attributes; however, they may not have any idea of what Progressive does to deliver them.
It is the inside resources, capabilities, and assets that brings Progressive its sustainable competitive advantage. Progressive’s resource bundle consists of DNA that is valuable (it satisfies the client value of “peace of mind”); is rare (no other company has the resource bundle); cannot be copied (Progressive consistently stays ahead of its competition that consistently tries to imitate their bundle); and that has no close substitutes. In 1998, the industry as a whole had experienced 5 years of underwriting losses. During that same time period, Progressive had underwriting margins of over 8% and annual revenues in excess of \$4 billion, up 36% from the previous year.Salter (1998, October 31). Recognizing the attributes that customers value and developing and capitalizing upon Progressive’s resources, capabilities, and assets has helped the company develop and grow its distinctive advantage, that is, its Area A. Figure \(3\) shows the value ladder of the Progressive customers after its transformation. Progressive’s internal resources enabled the company to deliver the attributes recognized by customers and bring them the peace of mind they desired.
7.04: Chapter Summary
Whether the resources, capabilities, and assets—the firm’s resource bundle—can be found inside the company, it is absolutely essential that the bundle is in place to properly execute your strategy and grow your competitive advantage. At times, your resource bundle is easily accessible. While this makes implementation easy, it also makes it easy for competitors to imitate your advantage and reduce it to a commodity-type offering (Area B). Arguably, your advantage is best sustained when you can develop a resource bundle that has the attributes of a competitive advantage—resources, capabilities, and assets that are rare, have value, and cannot be copied or substituted. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/07%3A_Implementation-_An_Inside_View_of_the_Organization/7.03%3A_Growth_From_Resources_Capabilities_and_Assets_Inside_the_Company.txt |
Youngme Moon’s new work, entitled Different, is an essay on differentiation in a competitive marketplace. (Moon (2010)). In the book, Moon recounts how, in her early teaching experience, she provided detailed feedback to students on their work on specific dimensions of performance relative to the class average. She identified an interesting and very natural tendency for students to stop developing areas in which they exceeded the class average and to instead focus on improving the areas in which they were below the class average. Moon notes, “The most creative thinkers in the room were intent on improving their analytical skills, while the most analytical thinkers in the room were intent on improving their creative contributions.” The interesting outcome of these rational instincts is that the students in the class all tended to regress to the mean. That is, those who initially had unique advantages in certain areas did not develop those advantages but instead sought to become more like others on the dimensions in which they lagged.
Now consider this in extension to the competitive marketplace. Moon recounts, in simple fashion, the distinctive positions of Jeep and Nissan in the off-road vehicle market 20 years ago, when Jeep’s point of difference was its reputation as a rugged sport utility vehicle, while Nissan’s reputation was linked more to the quality of its engineering. The way of the competitive market, though, is reflected in what happens in the intervening two decades. In the next 20 years Jeep has improved its quality, Nissan has improved its ruggedness and the two brands have become similar on several other dimensions.
Moon’s work identifies a natural dynamic in the marketplace. Good people, working hard to improve their products and services by offsetting deficiencies, have a natural tendency to become more like their rivals. But in spite of this natural tendency toward sameness, why do some firms still rise above the pack? In his widely cited work on competitive rationality, (Dickson (1992, 1997)) Peter Dickson suggests that there are three innate drivers of entrepreneurial behavior in a competitive marketplace: the drive to improve customer satisfaction, to reduce process costs, and to improve process efficiency. The energy that fuels these drivers is the desire to learn. People and organizations who can learn the most quickly about variation in demand and supply will tend to be the most competitive. Leveraging these drives along with the natural differences that exist among customers (demand heterogeneity), some firms essentially experiment by introducing new product or service variations. The “improve my deficiency” tendency that Moon identifies is nested in the innovation-imitation process, that is, successful experiments are copied by competitors. At the same time, though, customers in such markets become more sensitive to, and come to seek, new variations that better meet demand. Drawing on classic work in economics, Dickson builds into his model the notion that luck favors prepared and alert firms, for example, innovators who have a deep understanding of how customer expectations are changing and imitators who watch and think about market reactions before blindly mimicking competitors’ actions. The most competitive firms are those that have the strongest drive to learn and improve.
Market dynamics are about a constant search for differentiation that can, paradoxically, lead to “sameness.” Yet Dickson’s work reminds us that there are firms who continuously lead the way out of commoditization by having greater perceptual acuity—by understanding their markets in a manner superior to the competition. Here in Chapter 8, we consider both how the 3-Circle model describes and reveals market dynamics, and then how the model can help in anticipating likely actions of customers and how competitors can improve growth strategy. The market does not stand still—it is dynamic. To that end, this chapter explains how value moves through the 3-Circle model by demonstrating how markets and competitors change and how competitive advantage shifts over time. Building upon the research of D’Aveni, Mintzberg, Miller and Friesen, and others we demonstrate how customer values and needs, competitors market positioning, and a company’s own resource bundling may change the market landscape.A number of scholars have examined value migration and industry change, including D’Aveni (1994), Mintzberg (1994), and Miller and Friesen (1982). We begin with an important and dramatic illustration of market dynamics. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/08%3A_Dynamic_Aspects_of_Markets/8.01%3A_Chapter_Introduction.txt |
Johnson & Johnson (J&J) developed the first working “stent,” a small medical implement that could be used for patients with artery blockages in lieu of open heart surgery. A tiny metal “scaffold” that is inserted into an artery during a balloon angioplasty procedure, the stent significantly cuts down the rates of the artery collapsing after angioplasty and, as a result, reduces the probability of follow-up emergency surgery. This case is based upon media accounts and personal discussions with physicians and other health care professionals. Key resources include Winslow (1998), Tully (2004, May 31), Gurel (2006, July 24), Johannes (2004, September 1), Burton (2004), and Kamp (2010, February 10).
Over 7 years in the late 1980s and early 1990s, J&J invested in the research and development of the stent and compiled the research necessary to gain regulatory approval. The product was an immediate success, quickly building a \$1-billion market, even though the stent was too new to be covered by health insurance. Having pioneered the development effort, J&J held a well-deserved 90% of that market in 1996. This product alone accounted for a significant proportion of the consumer-products giant’s operating income. Cleveland Clinic physician Eric Topal described the J&J Palmaz-Schatz stent as “changing cardiology and the treatment of coronary-artery disease forever.” Despite all this success, by the end of 1998, J&J lost all but 8% of its market share.
J&J faced several challenges after introducing the stent to the market. First, the J&J Palmaz-Schatz stent was initially so successful that demand substantially exceeded supply. As a result, one of the company’s initial challenges was making enough stents to meet demand. On top of that, two other initiatives were consuming significant company attention and resources. To facilitate its move into medical devices, J&J had acquired angioplasty balloon-maker Cordis, a merger made particularly challenging by Cordis’s entrepreneurial culture that conflicted with J&J’s top-down culture. In addition, J&J was allocating significant resources to lobbying the insurance industry to obtain insurance coverage for the stent. At introduction, the company had priced the stent at \$1,595, a significant new expense for hospitals that was not covered by existing reimbursement levels for angioplasty procedures.
Customer Response
While doctors (and, by extension, their patients) were happy with the stent’s initial performance, hospital administrators had difficulty with its cost. Despite pressure from hospitals for price breaks, J&J stood by its price of \$1,595. The company would not give quantity discounts, requiring many hospitals to carry new, significant budget expenses for the stent. Many hospitals felt gouged by J&J, perceived to be a consumer-products firm (the “baby shampoo” company) and a newcomer to the medical implements market. They felt that J&J was holding hospitals hostage by flexing its pricing power.
Market Learning
As J&J focused on building capacity, lobbying the insurance industry, and integrating a new firm with a very different culture, the company was unable to respond to feedback from doctors for improving on the first-generation stent. The original J&J stent came in only one size (about 5/8 of an inch) and was made of relatively inflexible, bare metal. The doctors learned quickly and expressed a very clear need for stents of different sizes and flexibilities to improve ease of use.
Competitor Response
J&J had built an honest advantage in pioneering the stent market, but the company also paid the price often paid by a first-mover innovator. The company carried the product through research, development, and regulatory approval, creating both a knowledge base and market opportunity for other fast followers. Paying close attention to market reaction to the one-size, bare-metal J&J stent, competitor Guidant’s subsequent success in this market was built upon J&J’s early research and market development investments and learning: (a) Guidant was able to develop the more flexible stents that physicians were demanding, (b) Guidant and other rivals benefited from both J&J’s groundwork and physicians’ pushing the FDA to speed up the approval process for new stents, and (c) J&J was successful in achieving a \$2,600 increase in insurance coverage for angioplasty procedures to cover the cost of a stent exactly one day before Guidant introduced its new stent product on the U.S. market.
Understanding Market Needs
J&J’s subsequent dramatic loss of market share resulted from a significant store of resentment that had built up through its holding the line on its \$1,595 price point and its inability to adequately address physician concerns about flexibility and ease of use. J&J’s behavior was driven by a solid belief in its pricing (which was later validated by rivals’ entry pricing) and the allocation of resources to other tasks. Doctors and hospitals interpreted the company’s apparent lack of responsiveness to a failure to understand the needs of this new market. While J&J was in some ways a victim of awful luck, ultimately, the customer’s perception of how a firm responds to its circumstances is the real determinant of its market share.
The J&J story is told neither to lament the company’s situation in the stent market (they have since continued to innovate and to effectively compete in this market) nor to focus on a great idea gone awry. It is instead told to illustrate an extreme example of the innovation-imitation cycles that Dickson describes in his model of competitive rationality, as well as the fact that the fastest learner in a market often gets an advantage. In addition, it allows us to consider how the 3-Circle model captures such dynamics. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/08%3A_Dynamic_Aspects_of_Markets/8.02%3A_Johnson_and_Johnson_Stent-_The_Perfect_Market-Dynamics_Storm.txt |
In previous chapters, there has been a strong theme of value dynamics. Beginning in Chapter 2, we showed how movement of the circles could illustrate commoditization. Integral to Chapter 4 was a discussion of key lessons about attributes and benefits that can evolve from differentiators to parity to nonvalue, while Chapter 6 presented a way to think about growth strategy as value shifting between different areas of the model. Here, we review the two general types of dynamics that provide some diagnostic value for anticipating future behavior in the market.
Dynamic Type 1: Value Flows Through the Circles
A key point throughout the earlier chapters is that one can think of attributes and benefits as having different roles over time. While this is not a new idea it is embedded in the work of Kano (1995) and Gale (1994), it is an idea that is not really captured in a life-cycle flow in other models. Figure \(1\) (part A) shows what we might expect to be a typical flow of value in a market. New ideas or innovations, like the stent, emerge by providing new technology or methods for better resolving unmet needs. Once developed and commercialized, such innovative attributes become a firm’s Area A. So J&J initially had a near monopoly on stent sales with a distinctive Area A. Yet competitive imitation pushes once-distinctive attributes and benefits into Area B, where they become, at best, points of parity. In fact, continuing the path, one can see that for many patients, doctors would prefer new, flexible stents, suggesting that the bare-metal stent (although still on the market) may, for many situations, fall into Area D or even out of the model, that is, not even in the consideration set for certain procedures.
If we think of an attribute life cycle, we might consider that attributes or benefits similarly pass through different phases of introduction, growth, maturity, and decline, as reflected in the classic product life cycle theory. As noted, the original one-size, inflexible, bare-metal stents quickly lost favor and gave way to more flexible stents. But the market kept moving quickly from there. When it was discovered that there could be a build-up of scar tissue around an implanted stent over time, J&J once again innovated in creating a drug-eluting stent that provided for the timed-release of blood-thinning drugs to prevent clotting. However, Boston Scientific has fought J&J for this business, with market share going back and forth, along with lawsuits over patent challenges. Different types of drugs (e.g., transplant drugs vs. cancer drugs) have been used for drug-eluting stents, further increasing the variation in offerings. Stent manufacturers and vascular specialists have discovered other stent applications as the category has evolved. Fighting 700,000 strokes a year, stents for the carotid artery have been developed, credited with significant improvement in stroke prevention and reducing the need for surgery. Nonvascular stents have been developed for clearing blockages in kidneys, intestines, and lungs. Each of these value-added variations occupies a different place in the 3-Circle model for a given manufacturer, depending on the relative uniqueness of its offering relative to competitors.
Dynamic Type 2: Circles Shift Over Time
One of the most useful and powerful ways the 3-Circle graphics can convey the implications of thoughtful customer and competitor research (and subsequent action) is in the conceptual meaning behind the movement of the circles. There are three basic types of movements:
• One of the firms moves closer to the customer circle. A competitor who has improved its value delivery on dimensions important to the customer will find an increase in overlap between its circle and the customer’s circle. This can be identified conceptually and is based on measurement of customer value, as the firm’s scores on dimensions more important to customers improve. The service firm who improves its speed of service delivery, the educational institution that more effectively connects its students to opportunities, the technology product that improves the user’s efficiency to get a greater sense of control—all move the firm’s circle closer, creating greater overlap with fundamental customer needs. Depending on various product failures or recalls in the stent market, J&J and Boston Scientific continue to go back and forth in terms of market share. In 3-Circle terms this is like a moving picture over time in which the two firms alternate in their degree of overlap with the customer circle.
• The circles for both competitors move closer to the customer’s circle. When innovation-imitation cycles kick in, the net effect is that both competitors converge on the customer’s circle. From a societal allocation of resources perspective, this is a positive—the customer gets more value. From a competitive strategy perspective, it may be less desired if the follower is simply matching the value added by the innovator, creating a commodity market.
• The customer’s circle shifts away from both competitors’ circles. As substitute technologies emerge, it is frequently the case that customers find value in new sources. This may be a transition that happens very quickly (e.g., the MP3 player over portable CD players) or it may be slower. In either case, the firm’s ability to pick up on changes in customer purchasing behavior and attitudes is critical.
Referring back to Figure \(1\), part B demonstrates the shift in circles capturing J&J’s decline in the stent market in 1996 through 1998. Our post-hoc interpretation of this unusual situation is straightforward. The combination of new competitive offerings that effectively met customers’ developing needs and built up resentment toward J&J for perceived price gouging and nonresponse on new product development led to a situation in which the competitor’s circle essentially took over the customer’s circle while pushing J&J nearly out of the picture. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/08%3A_Dynamic_Aspects_of_Markets/8.03%3A_Market_Dynamics_in_3_Circles.txt |
In earlier chapters, we have discussed analysis of customer value in a way that prompts growth strategy development. Ultimately, though, the growth strategies you propose need to be vetted. Our vetting process here first requires you to look closely at whether you have, or could get, the resources needed to effectively execute the growth strategy (Chapter 7). Next, though, is to think through how your growth strategies will fit as market conditions change and how those strategies may change the market.
The term dynamics is about change—how is the market likely to change in the future in part as a function of implementing a new growth strategy? Thinking “dynamically” is difficult. It means evaluating a decision as a game theorist might: anticipating decision options the firm might have, thinking about how different players in the market (customers, competitors) will react over time to each decision option by stepping into the shoes of those players, then working back from these anticipated outcomes to select the best option. It turns out that such predictions are often so uncertain and complex, that we just avoid the issue!The challenges that people have in estimating the likely reactions of others to their own actions have been discussed widely. One paper on competitive decision making found that only a minority of managers considered competitors’ future reactions in either describing past decisions or making future decisions. Across two studies—one examining actual managerial decisions and a second examining decision making in a simulated business gain—they were most likely to discuss current internal factors (e.g., sales/revenue goals, costs, capacity constraints), which are known and can be controlled with much greater certainty (see Montgomery et al. 2005). For discussion of the evidence and explanations of a low incidence of considering competitor reactions, see Urbany and Montgomery (1998) and Moore and Urbany (1994). Such dynamics can only be estimated with great uncertainty.
Our goal in concluding the chapter is to provoke some thinking about how to get your hands around the likely dynamics that your new growth strategies will face. It is beyond the scope of this chapter to provide a detailed analysis of market dynamics to cover all types of growth strategies, but we will plant a few seeds here for analysis and subsequent study. We will address anticipation of the dynamic aspects of customer, competitors, and capabilities.
Anticipating Customer Dynamics
A variety of theories—from the product life cycle to competitive rationality—help us understand that customer preferences will change over time. There are two primary reasons for this. First, there may be a natural change in customer preferences and demand to external environmental events. The rapid increase in fuel costs in the past few years has significantly affected customer value and associated attributes that they began to demand from the producers of automobiles. Toyota introduced the first widely accepted hybrid technology in the Prius and enjoyed a significant Area A around the hybrid technology. Since then, a number of other auto manufacturers have developed hybrid versions of their vehicles. A second driver of changes in customer preferences is the rate of innovation-imitation cycles themselves. Dickson (1997) noted in his book Marketing Management that between 1987 and 1992, the mountain bike market share grew from 12% to 58% of the overall bicycle market. This remarkable jump was not due to consumers waking up one morning with visions that they must have a mountain bike. Instead, it resulted from the experimentation of one bike manufacturer that was quickly imitated by others, creating a spike in the amount and variation of supply, which unearthed significant customer demand.
While there is no precise science of customer value dynamics we can summarize some important principles as follows:
• Over time, as products become more alike, customers will become more price driven and tougher negotiators. This is the first thing business people tend to think about as markets mature. In the pioneering work that introduced the concept of cocreation in the business press, C. K. Prahalad and Venkat Ramaswamy describe today’s marketplace as one in which customers are increasingly powerful:
It’s perfectly feasible for a customer to approach a bank and say, “I will always leave a \$5,000 balance in the bank. These are the services I want free in return for this commitment.”…A customer at one telecom provider, a heavy user of long-distance services, even obtained preferential long-distance rates in exchange for a commitment to that provider.Prahalad and Ramaswamy (2000).
• This tendency is a natural outcome of more and better information for customers today, particularly via the Internet. Yet it is more significantly a function of the similarity in products that emerge as markets mature. As we have emphasized throughout this book, striving to deeply understand the value customers seek and producing unique solutions is an important strategic priority. As markets evolve, though, it is equally important to understand how to give customers an additional hand in this process.
• Over time, customers will learn how features of a product or service link to their consumption problems and benefits desired. We once conducted an exploratory study of consumers who had recently purchased computers for their homes. We preselected half of those interviewed to be novices (first-time purchasers) and half to be experts (very experienced with purchasing and using computers). The difference between them was straightforward. The experts spoke in terms of how different types of computer features could be used for particular applications and what attribute levels were needed to accomplish particular goals. In short, they understood how to translate benefits into the task that needed to be done. In contrast, the novices’ basic approach was to take a newspaper ad for a computer to a retail salesperson or to an expert at work and to ask, “Are these the features I need?” In sum, the novices needed a translator! Essentially, experience leads to an ability to speak two languages: the language of features and the language of desired outcomes and results, and to be able to translate one to another.
• Over time, as customers learn, they will add value if you let them. A still-developing, yet very important paradigm in the business press today is “cocreation.” In purest form, cocreation refers to a scenario in which firm and customer together define the product or service experience. An extreme form of cocreation is when users “take over” a brand, as Alex Wipperfurth describes in his book Brand Hijack.There are a variety of excellent case studies in Wipperfurth (2005). For example, the author describes the original music-sharing website as the prototype of a brand takeover by users. The founder developed a means of sharing music among users online with no intent of financial gain. Users stood to gain only in that the more people who participated, the more music that was available. A community spirit emerged because users were on the front end of helping build the idea from its inception and in having a joint sense of control—and a sense of rebellion. There is a more basic research tradition around lead users that was pioneered by Eric von Hippel of MIT, which explores how to leverage the ideas of innovative customers in product and service development. (Von Hippel (1988).) Von Hippel’s work has been seminal in helping firms understanding the role of customers in leading innovation. Cocreation, though, formalizes discussion of a new layer of value that emerges from the customer’s ownership in the ideas that emerge. An interesting example is the secret menu that customers codeveloped at In-N-Out Burger, a restaurant with a cult following and a very simple 4-item menu: burgers, fries, shakes, and soft drinks. The secret menu developed in response to customers’ special requests for variations of the menu (e.g., the “wish burger” is a vegetarian option not on the menu and named by customers). There is significant potential here for Area-G thinking as the product or service matures, and it exists in the thinking of the very people using the product.
The key question as you develop strategy should be, is your growth idea subject to these dynamics in a way that will reduce its probability of success? Or, can you leverage these forces to enhance your Area A?
Anticipating Competitor Dynamics
Customer learning and evolving participation can certainly have a significant impact on growth strategy as it develops. However, it is also important to note that the reactions of competitors can have an enormous impact on the success or failure of a new growth strategy. Northwest Airlines, for example, cut its prices on a route critical to a smaller regional competitor when that competitor slashed its prices on one of Northwest’s key routes, completely neutralizing the smaller rival’s strategy. But as we have noted, there is a fair amount of evidence suggesting that managers may not often take the time to anticipate competitor reactions. Interestingly, this may not be harmful, as there may be many circumstances in which competitors actually may not respond to particular moves. However, the likelihood of a competitive response to your new growth strategy will be a function of the degree of threat as perceived by the competitor. In a recent Harvard Business Review article, McKinsey consultants Kevin Coyne and John Horn (Coyne and Horn (2009).) provide a very practical template for thinking through the odds that competitors will react to your actions, organized around the following questions:
• Will your rival see your actions? Coyne and Horn’s empirical research suggests that firms often do not observe rivals’ actions until it is too late to respond.
• Will the competitor feel threatened? Here, it is important to get a sense of the rival’s goals for the product or service lines that might be affected.
• Will mounting a response be a priority for the competitor? Of everything on the competitor’s plate, will reacting to your new strategy be a priority?
• Can your rival overcome organizational inertia? Coyne and Horn point out the very real organizational barrier that reactions will require resource allocations and external commitments that the rival may find too cumbersome to overcome.
The first four questions all speak to gauging the probability that a competitor will even respond to your new growth strategy. This leads to another set of questions under the assumption that a reaction will be forthcoming:
• If the competitor is likely to respond,
• what options will the competitor actively consider;
• which option will the competitor most likely choose?
The authors’ research suggests that competitors are likely to consider two to three options. Further, they suggest that much insight can be gained into predicting the competitor’s likely reaction if our team can put themselves in the rivals shoes by thinking through (a) the number of moves the rival is likely to look ahead and (b) the particular metrics the competitor is likely to use.
In all, Coyne and Horn’s framework provides an excellent series of prompts for considering whether competitor reactions to your new growth strategy are forthcoming and what actions are likely to be considered. But if the competitor is probably going to react to our new growth strategy, the question is, what is our next move? Here, we need to return to capabilities, which are themselves dynamic.
Capability Dynamics
Despite decades of industry leadership and a large Area A, in the early 1990s, IBM’s stock price plummeted, 60,000 employees were dismissed, and Wall Street had written the company off. (Harreld et al. (2007)). Like a driver stuck in the sand, IBM executives thought that if they spun their tires just a little bit longer, using the same tried and true strategies and resources, they could regain market leadership and move forward again. Louis Gerstner, who became IBM CEO in 1993, said that the company lost its market in the early 1990s because “all of [IBM’s] capabilities were of a business model that had fallen wildly out of step with marketplace realities.” (Gerstner (2002), p. 123). In Chapter 7, we described how successful companies become entrenched with the resources, capabilities, and assets that made them successful and become out of touch with changing customer values. This view was supported by Chandler’s research, where he found that successful companies typically pursue the same strategies and competencies that brought them success, and yet, they are fatal in the long run. (Chandler (1990)).
Harreld et al. described how IBM’s leadership used dynamic capabilities to redefine itself and regain and sustain market leadership. Dynamic capabilities require company executives to first “sense” or anticipate opportunities in the market. For IBM, this meant sensing new market opportunities through exploration and learning. Gerstner, IBM’s new CEO, forecasted that, over the next decade, “customers would increasingly value companies that could provide solutions-solutions that integrated technology from various suppliers and, more importantly integrated technology into the processes of the enterprise.” (Gersnter (2002)).
While anticipating new customer value propositions is necessary to firm positioning, execution is the key to delivering the value and capturing the market. An organization with dynamic capability is able to quickly and effectively adjust and restructure its internal resources, capabilities, and assets to capture the anticipated opportunities. Gerstner’s internal analysis of the firm’s capabilities found that IBM had intelligent and talented employees and that its problems were not with its technology. The primary problem was that IBM failed to build and configure bundles of resources, capabilities, and assets necessary to meet the needs of the changing market. IBM leveraged and reconfigured its resources and, in the process, provided the type of value desired by customers—value that was rare in the market and could not be easily imitated by the competition. Among other things, they created internal computer software technology with “open architecture, integrated processes and self-managing systems” to help IBM employees communicate better within the company and to quickly respond to customer needs. The change in the way information is managed within IBM has modified the internal capabilities and assets of the company, transforming the market brand from a computer-hardware to a computer-services business. (Harreld et al. (2007)). In short, IBM created a strong Area A, a competitive advantage.
Companies that anticipate or “sense” changes in customer value and have dynamic rather than static internal capabilities gain and sustain Area A advantages. In short, the 3-Circle model shifts as organizations anticipate external customer value by dynamically altering their internal competencies.
8.05: Chapter Summary
The effective development of growth strategy not only needs to account for the current and future state of customer value and competitive behavior, it also needs to consider how those states of nature will change. Here, we have reviewed some basic tendencies in competitive markets that tend to evolve toward commoditization until a perceptive, fast-learning firm can move it in a different direction. We have also seen how such dynamics can be captured in the 3-Circle framework. Dynamics bring to mind that life and marketplace competitions have some circular elements to them—patterns repeat, influence one another, and the folks who get the quickest understanding of the value sought in the system often end up winning. It is not an endless cycle, however. We have defined a series of 10 discrete steps that will help form the basis for a productive growth strategy project. Our next chapter brings the discussion of growth strategy full circle by summarizing the overall process for strategy development that integrates the core concepts of the first eight chapters. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/08%3A_Dynamic_Aspects_of_Markets/8.04%3A_Anticipating_Market_Dynamics.txt |
Beating the competitor, creating value for customers, and building capabilities may be seen as goals or principles that are often at odds with one another. So most firms tend to focus on one or two of those goals. The search for growth is further complicated by the fact that knowledge of customer needs can get quickly out of date even though we feel confident in our existing knowledge. The imperative here is first to narrow the focus to the three core principles, to focus on understanding customer value as primary, but then to also think of those principles as an integrated whole. The 3-Circle model provides an integrated view of these three principles and allows a team to quickly understand the current nature of competitive advantage in their markets. The 10-step process for 3-Circle growth strategy development is summarized in Figure \(1\) with an additional brief description of each step.
One of us recently gave a talk to Notre Dame alumni in San Francisco. At the reception following the seminar, a conversation with new, incoming MBA students in attendance was joined by Ryan Else, an entrepreneur who had recently graduated from the Notre Dame executive MBA (EMBA) program. Ryan told the tale of his most recent company, Corte, LLC, a manufacturer and marketer of environmentally friendly chemical products. The company had developed a product called Corte-Clean, which is a nontoxic, chlorine-free agent for cleaning composite decking material commonly used for backyard decks. Ryan had developed the competitive positioning strategy for Corte-Clean in a 3-Circle growth strategy project in his EMBA marketing core course. With composite decking increasing from 2% to 20% of all decks, yet with the cleaning-solution category dominated by existing players, the company needed a solid positioning strategy to leverage that growth. The 3-Circle analysis revealed that Corte-Clean could be most powerfully positioned against competitors PSC, Behr and Olympic, with a focus on the absence of harsh chemicals (eco-friendliness) as the core of Area A, supported by ease of use and shelf life. It turns out these values all mattered a great deal to customers. Taking an even deeper look at customer buying behavior, though, Ryan’s analysis revealed that the company’s Internet site could become an important sales tool after discovering the importance that customers place on subscription sales plan and worry-free regular ordering called AutoShip. These were key insights on which Corte LLC developed strategy for penetrating key retail partners. The company went from about 100 stores in 2007 to over 3,800 stores in 2010. Sales of Corte-Clean more than doubled between 2007 and 2009, and sales in the first 4 months of 2010 have exceeded all of 2009 by 44%. The product is now distributed domestically through Lowe’s, ACE Hardware, True Value, and 84 Lumber, and has stretched, through its website and through international distribution, to Germany, France, Spain, England, Australia, the UAE, and Scandinavia.
While Ryan generously attributes the success of his new venture to his 3-Circle project, in fact, the 3-Circle model cannot take credit. That success was a function of the Corte team’s determined market insight, development of an innovative product that delivered on important customer values, a solid website, and dogged persistence in getting distribution. However, the case study does illustrate effective application of the principles that lay a foundation for effective competitive strategy with which we began this book:
• Create important value for customers
• Be different from (better than) the competition
• Build and leverage your capabilities with an eye toward the desired customer value
In sum, Ryan’s company has now crafted a unique competitive position in its market, and that position is built upon the firm foundation of a truly, substantively different product that customers (and, subsequently, retailers) highly value. The primary credit that the 3-Circle model can claim is in helping to keep all eyes focused on the value sought by customers, the desired competitive position, and building the capabilities that allow the team to deliver on that position honestly. As with many of the case study successes we have explored in which the 3-Circle model has been applied, in the end, Ryan’s product matters more to customers than do competitive products. That is something worth growing. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/09%3A_Summary-_Growth_Strategy_in_10_Steps/9.01%3A_Chapter_Summary.txt |
This book is based on a fairly simple premise, one that is not new: the firm that develops a better understanding of the value that customers seek has a competitive advantage. What is new, however, is the realistic look at just how difficult it is to develop that understanding. It is a long shot from simply “giving customers what they want.” It instead means developing an understanding of the deep drivers of customer value sought, shoring up our value proposition in the short term, but then building a longer-term, unique position that speaks to those customer values. We find, over and over again, that there are gaps between what managers currently believe customers value and believe and actual customer assessments. There is growth opportunity in closing these gaps, and the 3-Circle strategy process is precisely designed to uncover and leverage that opportunity.
In this chapter, we summarize the work by presenting the 10-step process in which a growth strategy project is defined and executed (see Figure \(1\)). There are really three big elements underlying these 10 steps. First is for the management team to formally lay out the scope of the project and then their hypotheses about customer value (Steps 1 and 2a). Second is to gather data directly from target customers and to analyze it by breaking it down into the categories defined in the model and deeper analysis via laddering (Steps 2b, 3, and 4). Third is to develop particular growth strategy ideas and test them out via (a) assessment of capabilities required and alignment, and (b) evaluating the competitive dynamics of the marketplace. By Step 10, we have developed a growth strategy that has been developed upon the sound foundation of customer value analysis and screened by a deep analysis of capabilities, resources, and assets. To illustrate this process, we will use the case study of a major global pharmaceuticals firm.
9.03: Step 1- Defining Context
In fact, Chapter 4 has covered Step 1 in fair detail. It is essential that we have a clear sense of the parameters of the project, in the form of the now familiar context statement:
“My goal is to grow COMPANY UNIT by creating more value for CUSTOMER SEGMENT than COMPETITOR does.”
Annie Lambert is a brand manager at MedFactor,The branding and category information is disguised for confidentiality, but the example is built around an actual application of the 3-Circle model. an \$8-billion worldwide manufacturer of pharmaceuticals, who led a 3-Circle project for her company. The goal for the context statement was “to grow sales and profit of MedFactor’s OptiMod drug by creating more value for specialist doctors than PharmaRival does with its drug Vivatrol.”
9.04: Step 2- Customer Analysis
Recall from Chapter 4 that the underlying factor behind a successful competitive strategy is superior understanding of what drives the value being sought by customers. We can wander back through the chapters and see this in many examples: DuPont’s success with Teflon came only after its management team understood the important values behind consumers value placed on time savings (as opposed to healthy eating); Ultimate Ears’ phenomenal success was due to the enormous value placed by musicians on superior performance and safety, values less known before in-ear monitors were invented simply because on-stage monitors were taken as a “given”; Accor was successful with the spartan Formule 1 hotel design because they understood that a large segment of customers simply sought rest and safety in a clean, quiet place to sleep; providing for this specific experience at a bargain price made Formule 1 very successful.
Yet we need a systematic way to think about value. Step 2 involves uncovering the dimensions of value—first to understand executives’ best guesses as to customer value (Step 2a) and then to obtain customers’ actual perceived value (Step 2b). Recall from Chapter 4 that value can be broken down in a simple way:
$Value\,=\sum_{i=1}^j n*I_i$
This equation simply implies that a customer’s assessment of the overall value of brand j can be broken down to be a function of what the customer believes about brand j on each of up to n attributes, each weighted by their importance. There is a long line of research in psychology and marketing that uses this formulation to determine overall brand assessments by taking individual consumer beliefs about the brand—for example, Bij —the consumer’s belief about brand j on attribute i—each weighted by Ii, the importance of attribute i to the consumer. This, again, is a straightforward way to think about overall value—there are some critical pieces of information that come out of this model that help us dig more deeply into customer value:
• There are attributes or benefits on which customers base their evaluations.
• These attributes/benefits vary in their importance.
• Customers have varying beliefs about the competitive brands on these attributes.
It turns out that this is enough information to make some significant strides in understanding customer value and growth opportunities.
In the case of our pharmaceuticals example, assume that Annie and her executive team initially identified the following six key attributes and benefits as key reasons why doctors in this category would choose one brand over another (again, this was before speaking to the doctors):
• Dosing options (variety of strength levels)
• Drug efficacy
• Familiarity with or trust in brand
• Adequacy of managed care coverage
• Drug tolerability
• Drug half-life
The executive team made their estimates of customer value before any doctors were interviewed. This exercise required the executives to estimate both how important they believe the previous attributes are to the doctors and how the doctors are likely to rate both their brand OptiMod and the competitive brand Vivatrol on each attribute. Subsequently, Annie interviewed a sample of specialist doctors, asking them to provide ratings in a format similar to those provided by the MedFactor team. In addition, open-ended questions were asked about other attributes or benefits the doctors believe influence their prescription decisions and the important values behind the key reasons. These questions proved insightful, as they revealed two other attributes that were important to doctors in evaluating competitive drugs: the availability of clinical evidence and sales-force experience. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/09%3A_Summary-_Growth_Strategy_in_10_Steps/9.02%3A_Chapter_Introduction.txt |
Step 3 involves the actual sorting of value into the seven categories defined by the 3-Circle model. As we have emphasized throughout the book, each of these categories has implications for growth strategies. Together, they summarize most of the core concepts of current work on growth strategy. For MedFactor’s drug OptiMod, Annie’s analysis based on interviews with several specialist physicians revealed a number of important insights (see Figure \(1\) for a summary). The analysis illustrates a classic case of a new brand facing an entrenched existing brand with whom physicians are quite familiar. Annie’s drug OptiMod gets unique credit from physicians only for its flexibility in dosage levels (Area A). In contrast, the competitor’s Vivatrol is a very familiar drug with which physicians have a great deal of experience. It is also perceived by physicians to have an advantage on the managed-care side, meaning that they believe the patient will pay less and be better served by insurance coverage for Vivatrol compared to OptiMod.
Surprise Insights
The Figure \(1\) analysis captures physician perceptions as Annie identified them in the interviews. However, two critical points came as a complete surprise:
• Area B: While the two brands were perceived by doctors to be equivalent in efficacy, a head-to-head trial showed statistically significant improvement symptom relief for Annie’s brand OptiMod over Vivatrol.
• Area C: Vivatrol was perceived by the doctors to have an advantage in managed-care coverage in spite of the fact there is objectively no difference between OptiMod and Vivatrol on this dimension.
These two insights were quite significant but there was more. In addition to the earlier findings of important customer attributes that the executive team had not included in their original list, the physicians volunteered that two other factors were influential in their assessments of the two companies and their drugs: laboratory evidence and sales-force experience.
9.06: Step 4- Deep Diving
Throughout the book, we have alluded to the importance of understanding customer value from a deeper perspective. In sum, behind the customer attributes we have identified are the deeper reasons or values we discussed in Chapter 4. In Annie’s case, she wanted to focus on what she found to be the most important attribute to doctors—efficacy. Efficacy is shorthand for effectiveness—to what extent does the drug produce the desired remedy? Figure \(1\) presents the ladder that summarizes Annie’s conversations with doctors regarding the reasons why efficacy is an important driver of decisions. This insight is straightforward: doctors do not seek to prescribe a particular drug simply because it is more efficacious—the efficacy is important because it reinforces the doctor’s sense of fulfillment in helping improve patients’ quality of life. While in hindsight this seems obvious, in fact it is not obvious at all if you do not ask the questions. The product’s positioning and communications can be much more powerful if it is connected to the customer’s deeper values (i.e., there will be a greater sense of patient care and personal satisfaction for this objectively better drug). Further, understanding the doctor’s goal at a deeper level gets us thinking about how to both communicate and, in thinking through broader solutions, support his or her efforts—for example, by developing new ways to ensure that patients take required dosages.
9.07: Step 5- Preliminary Growth Strategy Ideas
The categories of value identified in Step 3 (sorting) and additional insights from the research generate some natural, action-oriented questions for pursuing growth of customer value and competitive position. In Chapter 6, we discussed a series of growth questions that naturally emerge from the different categories of the framework. For Annie’s case, the questions led to a number of preliminary growth ideas, which are presented in the text boxes surrounding the 3-Circle diagram in Figure 9.7.1. The figure exhibits the value that Annie discovered in her interviews in Column A and the basic growth questions for each category of value in Column B. Column C indicates the conclusions initially drawn by this analysis. Chief among these conclusions was to correct doctor’s misperceptions regarding OptiMod’s efficacy and managed-care coverage. We will come to the final conclusions regarding growth strategy in Step 10. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/09%3A_Summary-_Growth_Strategy_in_10_Steps/9.05%3A_Step_3-_Sorting_Value.txt |
Refer back to Figure 9.1.1 for a moment. Once growth ideas are initially generated in Step 5, then the important questions revolve around (a) whether or not we can substantively deliver upon those unique ideas, or (b) whether we might want to cut costs by reducing those capabilities or assets that are not contributing effectively to customer value. So Step 6 begins the process of grounding growth strategy in our existing and potential future capabilities. The questions here are what capabilities do we actually have? Are those capabilities aligned with our Area A? Do we have the substantive capabilities to defend and build our Area A? What capabilities do we need to pursue each of the growth ideas we discovered in Step 5? Step 7 then takes the necessary step of turning the microscope to competitors’ organizations in order to provide an honest look at ourselves. Do we really have capabilities, resources, or assets that are in any way truly different from those of competitors?
Figure 9.8.1 provides a partial analysis of what we label the inside view for Annie and her firm MedFactor versus PharmaRival. As noted in Chapter 8, the two circles reflecting the inside view capture skills and assets inside the firm. The easiest way to identify the relationship between the inside view (two circles capturing capabilities) and the outside view (three circles capturing customers’ perception of needs and the ability of each player to meet those needs) is to think of cause and effect. The inside view causes the outside view. In other words, the customer benefits that we find in the customer’s assessment (the outside view) are actually produced by the capabilities, resources, and assets that we enumerate in the inside view. So the firm maximizes its competitive advantage and financial outcomes when it develops skills and resources that both (a) generate unique benefits for customers and (b) cannot be easily matched by competitors. The problem with the standard literature on the resource-based view of the firm is that it provides no mechanism by which resources and capabilities are connected to unique customer value.For the exception to this, see Burke (2006). In the analysis here, the mechanism is a careful set of questions that ask the analyst to evaluate both the existing points of difference and the potential growth ideas against the capabilities that should be in place to make them happen. Annie’s analysis for MedFactor in Figure 9.8.1 suggests that the firm appears to have a unique capability advantage in product development and potentially a unique capability disadvantage in the sales force (both size and organization or discipline). The analysis suggests that MedFactor’s Area A with OptiMod (higher dosage potential) is unique to the product and, along with an actual advantage in efficacy, is likely attributable to a better new product development capability. The jury is still out on whether or not these product advantages are sustainable. In this case, however, it was clear that some growth issues could be addressed specifically through more effective communications and building the sales force’s skills and tool kit around the specific hot-button issues in the value proposition—specifically, OptiMod’s currently underappreciated efficacy advantage and the misperception about the managed-care disadvantage.
9.09: Step 9- Dynamics
Step 9 involves an analysis of market dynamics depicted in the three circles. This step recognizes that markets are constantly moving, and in potentially predictable ways. Recall from Chapter 8 that changes in the market can be reflected one of two ways in the model. First, the circles move, often approaching one another as the offerings of the different competitors become more similar and customer needs become more well known as a product or service category matures. Second, though, is the flow of value through the circles, which helps illustrate the typical competitive innovation-imitation cycle of healthy markets. In the case of MedFactor and its drug OptiMod, the market dynamics analysis would suggest that once the firm is able to establish its unique Area A with doctors, there is a very real possibility that its advantages can be eroded over time as its competitors seek to imitate its unique advantages. A careful exploration of the forces that evolve the market toward commoditization is imperative, as patent protection is limited and other firms are likely to be aggressive in their imitation of a demonstrated competitive advantage. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/09%3A_Summary-_Growth_Strategy_in_10_Steps/9.08%3A_Steps_67and_8-_Exploring_Capabilities_Resources_and_Assets_to_Align_Behind_Growth_Strategy_Ideas.txt |
Ultimately, the ideas behind growth strategy evolve and improve through the iterative evaluation in Steps 6 through 9 of the 10-step process. The first screen is customer value. The second screen includes capabilities, resources, and assets. The third screen addresses market dynamics. In the end, the goal is to develop growth strategy that will hit the most important customer values in the most efficient way. The OptiMod team developed and executed their growth strategy for the brand in three specific ways. The following is paraphrased from Annie’s report:
Reposition “EFFICACY” from Area B to Area A. A notable theme throughout this analysis is that there are key benefits to be leveraged for OptiMod of which the customer is not fully aware. From the outside view, efficacy is a point of parity between the two products (Area B) but it actually is an attribute that could be leveraged for OptiMod (Area A) because of the favorable head-to-head study results.
Optimize Area A. Dosing is an important attribute to specialist doctors in this category and is a point of difference for OptiMod. Communicate the dosing feature as a point of difference between Vivatrol and OptiMod when a rheumatologist views efficacy as being the same. Create shelf talkers to communicate the key dosing messages for OptiMod at the point of selection. Enhance prominence of dosing message on sales material.
Moving from Area C to B. Doctors are under the misconception that Vivatrol has managed care advantages over OptiMod. Sales force should educate doctors on managed care position of OptiMod in local areas. Create geography-specific shelf talkers that highlight formulary coverage of OptiMod vs. competition.
In addition, doctors are more familiar with PharmaRival than MedFactor. Develop awareness campaign & corporate branding initiatives that highlight MedFactor’s current commitment to rheumatology and future pipeline. Ensure key opinion leaders in the field are aware of points of difference about MedFactor as opposed to product differentiation only. Continue to partner with professional associations to improve the awareness of the MedFactor name.More information cannot be provided without divulging proprietary information.
MedFactor put five different corporate branding initiatives into place in order to improve awareness of the company name with customers. In addition, the company has also addressed the problem of its managed care positioning. MedFactor put two new sales tools in place that feature local formulary grids. This enabled its sales representatives to review the information with customers—and show them how it is relevant to their local business.
The actions undertaken by the MedFactor team were very successful. The new branding initiatives contributed to a 20% growth in prescription volume for OptiMod in fiscal year 2009. Fueled by truly superior product value and communications that effectively demonstrated that value, the brand took over the market leadership position in its category during that year. The key competitive strategy concerns that Annie and her team identified on the basis of interviewing physicians in the key target market tended to focus on education. They found fairly clear consistency around the need for evidence in demonstrating one’s advantages and the company’s failure to effectively share that evidence. In general, there is lower risk in making big decisions regarding education even on the basis of small sample evidence as, very frequently, more education is better, provided that (a) it is focused on the right customer values, and (b) the company really, truly effectively delivers on those customer values. | textbooks/biz/Business/Advanced_Business/Growth_and_Competitive_Strategy_in_Three_Circles/09%3A_Summary-_Growth_Strategy_in_10_Steps/9.10%3A_Step_10-_Vetted_Growth_Strategy.txt |
WHAT’S IN IT FOR ME?
1. What is international business?
2. Who has an interest in international business?
3. What forms do international businesses take?
4. What is the globalization debate?
5. What is the relationship between international business and ethics?
This chapter introduces you to the study of international business. After reading a short case study on Google Inc., the Internet search-engine company, you’ll begin to learn what makes international business such an essential subject for students around the world. Because international business is a vital ingredient in strategic management and entrepreneurship, this book uses these complementary perspectives to help you understand international business. Managers, entrepreneurs, workers, for-profit and nonprofit organizations, and governments all have a vested interest in understanding and shaping global business practices and trends. Section 1.1 gives you a working definition of international business; Section 1.2 helps you see which actors are likely to have a direct and indirect interest in it. You’ll then learn about some of the different forms international businesses take; you’ll also gain a general understanding of the globalization debate. This debate centers on (1) whether the world is flat, in the sense that all markets are interconnected and competing unfettered with each other, or (2) whether differences across countries and markets are more significant than the commonalities. In fact, some critics negatively describe the “world is flat” perspective as globaloney! What you’ll discover from the discussion of this debate is that the world may not be flat in the purest sense, but there are powerful forces, also called flatteners, at work in the world’s economies. Section 1.5 concludes with an introductory discussion of the relationship between international business and ethics.
Opening Case: Google’s Steep Learning Curve in China
Image courtesy of Kit Eaton.
Of all the changes going on in the world, the Internet is the one development that many people believe makes our world a smaller place—a flat or flattening world, according to Thomas Friedman, Pulitzer Prize–winning author of The World Is Flat: A Brief History of the Twenty-First Century and The Lexus and the Olive Tree: Understanding Globalization. Because of this flattening effect, Internet businesses should be able to cross borders easily and profitably with little constraint. However, with few exceptions, cross-border business ventures always seem to challenge even the most able of competitors, Internet-based or not. Some new international ventures succeed, while many others fail. But in every venture the managers involved can and do learn something new. Google Inc.’s learning curve in China is a case in point.
In 2006, Google announced the opening of its Chinese-language website amid great fanfare. While Google had access to the Chinese market through Google.com at the time, the new site, Google.cn, gave the company a more powerful, direct vehicle to further penetrate the approximately 94 million households with Internet access in China. As company founders Larry Page and Sergey Brin said at the time, “Unfortunately, access for Chinese users to the Google service outside of China was slow and unreliable, and some content was restricted by complex filtering within each Chinese ISP. Ironically, we were unable to get much public or governmental attention paid to the issue. Although we dislike altering our search results in any way, we ultimately decided that staying out of China simply meant diminishing service and influence there. Building a real operation in China should increase our influence on market practices and certainly will enhance our service to the Chinese people.”Larry Page and Sergey Brin, “2005 Founders’ Letter,” Google Investor Relations, December 31, 2005, accessed October 25, 2010, http://investor.google.com/corporate/2005/founders-letter.html.
A Big Market, Bigger Concerns
Google’s move into China gave it access to a very large market, but it also raised some ethical issues. Chinese authorities are notorious for their hardline censorship rules regarding the Internet. They take a firm stance against risqué content and have objected to The Sims computer game, fearing it would corrupt their nation’s youth. Any content that was judged as possibly threatening “state security, damaging the nation’s glory, disturbing social order, and infringing on other’s legitimate rights” was also banned.John Oates, “Chinese Government Censors Online Games,” Register, June 1, 2004, accessed November 12, 2010, www.theregister.co.uk/2004/06/01/china_bans_games. When asked how working in this kind of environment fit with Google’s informal motto of “Don’t be evil” and its code-of-conduct aspiration of striving toward the “highest possible standard of ethical business,” Google’s executives stressed that the license was just to set up a representative office in Beijing and no more than that—although they did concede that Google was keenly interested in the market. As reported to the business press, “For the time being, [we] will be using the [China] office as a base from which to conduct market research and learn more about the market.”Lucy Sherriff, “Google Goes to China,” Register, May 11, 2005, accessed January 25, 2010, www.theregister.co.uk/2005/05/11/google_china. Google likewise sidestepped the ethical questions by stating it couldn’t address the issues until it was fully operational in China and knew exactly what the situation was.
One Year Later
Google appointed Dr. Kai-Fu Lee to lead the company’s new China effort. He had grown up in Taiwan, earned BS and PhD degrees from Columbia and Carnegie Mellon, respectively, and was fluent in both English and Mandarin. Before joining Google in 2005, he worked for Apple in California and then for Microsoft in China; he set up Microsoft Research Asia, the company’s research-and-development lab in Beijing. When asked by a New York Times reporter about the cultural challenges of doing business in China, Lee responded, “The ideals that we uphold here are really just so important and noble. How to build stuff that users like, and figure out how to make money later. And ‘Don’t Do Evil’ [referring to the motto ‘Don’t be evil’]. All of those things. I think I’ve always been an idealist in my heart.”Clive Thompson, “Google’s China Problem (and China’s Google Problem),” New York Times, April 23, 2006, accessed January 25, 2010, www.nytimes.com/2006/04/23/magazine/23google.html.
Despite Lee’s support of Google’s utopian motto, the company’s conduct in China during its first year seemed less than idealistic. In January, a few months after Lee opened the Beijing office, the company announced it would be introducing a new version of its search engine for the Chinese market. Google’s representatives explained that in order to obey China’s censorship laws, the company had agreed to remove any websites disapproved of by the Chinese government from the search results it would display. For example, any site that promoted the Falun Gong, a government-banned spiritual movement, would not be displayed. Similarly (and ironically) sites promoting free speech in China would not be displayed, and there would be no mention of the 1989 Tiananmen Square massacre. As one Western reporter noted, “If you search for ‘Tibet’ or ‘Falun Gong’ most anywhere in the world on google.com, you’ll find thousands of blog entries, news items, and chat rooms on Chinese repression. Do the same search inside China on google.cn, and most, if not all, of these links will be gone. Google will have erased them completely.”Clive Thompson, “Google’s China Problem (and China’s Google Problem),” New York Times, April 23, 2006, accessed January 25, 2010, www.nytimes.com/2006/04/23/magazine/23google.html.
Google’s decision didn’t go over well in the United States. In February 2006, company executives were called into congressional hearings and compared to Nazi collaborators. The company’s stock fell, and protesters waved placards outside the company’s headquarters in Mountain View, California. Google wasn’t the only American technology company to run aground in China during those months, nor was it the worst offender. However, Google’s executives were supposed to be different; given their lofty motto, they were supposed to be a cut above the rest. When the company went public in 2004, its founders wrote in the company’s official filing for the US Securities and Exchange Commission that Google is “a company that is trustworthy and interested in the public good.” Now, politicians and the public were asking how Google could balance that with making nice with a repressive Chinese regime and the Communist Party behind it.Larry Page and Sergey Brin, “2004 Founders’ IPO Letter,” Google Investor Relations, August 18, 2004, accessed October 25, 2010, http://investor.google.com/corporate/2004/ipo-founders-letter.html. One exchange between Rep. Tom Lantos (D-CA) and Google Vice President Elliot Schrage went like this:
Lantos: You have nothing to be ashamed of?
Schrage: I am not ashamed of it, and I am not proud of it…We have taken a path, we have begun on a path, we have done a path that…will ultimately benefit all the users in China. If we determined, congressman, as a result of changing circumstances or as a result of the implementation of the Google.cn program that we are not achieving those results then we will assess our performance, our ability to achieve those goals, and whether to remain in the market.Declan McCullagh, “Congressman Quizzes Net Companies on Shame,” CNET, February 15, 2006, accessed January 25, 2010, http://news.cnet.com/Congressman-quizzes-Net-companies-on-shame/2100-1028_3-6040250.html.
See the video “Google on Operating inside China” at news.cnet.com/1606-2-6040114.html. In the video, Schrage, the vice president for corporate communications and public affairs, discusses Google’s competitive situation in China. Rep. James Leach (R-IA) subsequently accuses Google of becoming a servant of the Chinese government.
Google Ends Censorship in China
In 2010, Google announced that it was no longer willing to censor search results on its Chinese service. The world’s leading search engine said the decision followed a cyberattack that it believes was aimed at gathering information on Chinese human rights activists.Jessica E. Vascellaro, Jason Dean, and Siobhan Gorman, “Google Warns of China Exit over Hacking,” January 13, 2010, accessed November 12, 2010, http://online.wsj.com/article/SB126333757451026659.html#ixzz157TXi4FV. Google also cited the Chinese government’s restrictions on the Internet in China during 2009.Tania Branigan, “Google to End Censorship in China over Cyber Attacks,” Guardian, January 13, 2010, accessed November 12, 2010, http://www.guardian.co.uk/technology/2010/jan/12/google-china-ends-censorship. Google’s announcement led to speculation whether Google would close its offices in China or would close Google.cn. Human rights activists cheered Google’s move, while business pundits speculated on the possibly huge financial costs that would result from losing access to one of the world’s largest and fastest-growing consumer markets.
In an announcement provided to the US Securities and Exchange Commission, Google’s founders summarized their stance and the motivation for it. Below are excerpts from Google Chief Legal Officer David Drummond’s announcement on January 12, 2010.David Drummond, “A New Approach to China,” Official Google Blog, January 12, 2010, accessed January 25, 2010, http://googleblog.blogspot.com/2010/01/new-approach-to-china.html.
Like many other well-known organizations, we face cyberattacks of varying degrees on a regular basis. In mid-December, we detected a highly sophisticated and targeted attack on our corporate infrastructure originating from China, resulting in the theft of intellectual property from Google. However, it soon became clear that what at first appeared to be solely a security incident—albeit a significant one—was something quite different.
First, this attack was not just on Google. As part of our investigation, we have discovered that at least twenty other large companies from a wide range of businesses—including the Internet, finance, technology, media, and chemical sectors—have been similarly targeted. We are currently in the process of notifying those companies, and we are also working with the relevant US authorities.
Second, we have evidence to suggest that a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists. Based on our investigation to date, we believe their attack did not achieve that objective. Only two Gmail accounts appear to have been accessed, and that activity was limited to account information (such as the date the account was created) and subject line, rather than the content of emails themselves.
Third, as part of this investigation but independent of the attack on Google, we have discovered that the accounts of dozens of US-, China- and Europe-based Gmail users who are advocates of human rights in China appear to have been routinely accessed by third parties. These accounts have not been accessed through any security breach at Google, but most likely via phishing scams or malware placed on the users’ computers.
We have taken the unusual step of sharing information about these attacks with a broad audience, not just because of the security and human rights implications of what we have unearthed, but also because this information goes to the heart of a much bigger global debate about freedom of speech. In the last two decades, China’s economic reform programs and its citizens’ entrepreneurial flair have lifted hundreds of millions of Chinese people out of poverty. Indeed, this great nation is at the heart of much economic progress and development in the world today.
The decision to review our business operations in China has been incredibly hard, and we know that it will have potentially far-reaching consequences. We want to make clear that this move was driven by our executives in the United States, without the knowledge or involvement of our employees in China who have worked incredibly hard to make Google.cn the success it is today. We are committed to working responsibly to resolve the very difficult issues raised.
The Chinese government’s first response to Google’s announcement was simply that it was “seeking more information.”Tania Branigan, “Google Challenge to China over Censorship,” Guardian, January 13, 2010, accessed January 25, 2010, http://www.guardian.co.uk/technology/2010/jan/13/google-china-censorship-battle. In the interim, Google “shut down its censored Chinese version and gave mainlanders an uncensored search engine in simplified Chinese, delivered from its servers in Hong Kong.”Harry McCracken, “Google’s Bold China Move,” PCWorld, March 23, 2010, accessed November 12, 2010, www.pcworld.com/article/192130/googles_bold_china_move.html. Like most firms that venture out of their home markets, Google’s experiences in China and other foreign markets have driven the company to reassess how it does business in countries with distinctly different laws.
Opening Case Exercises
(AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills)
1. Can Google afford not to do business in China?
2. Which stakeholders would be affected by Google’s managers’ possible decision to shut down its China operations? How would they be affected? What trade-offs would Google be making?
3. Should Google’s managers be surprised by the China predicament? | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/01%3A_Introduction/1.01%3A_Chapter_Introduction.txt |
Learning Objectives
1. Know the definition of international business.
2. Comprehend how strategic management is related to international business.
3. Understand how entrepreneurship is related to international business.
The Definition of International Business
As the opening case study on Google suggests, international business relates to any situation where the production or distribution of goods or services crosses country borders. Globalization—the shift toward a more interdependent and integrated global economy—creates greater opportunities for international business. Such globalization can take place in terms of markets, where trade barriers are falling and buyer preferences are changing. It can also be seen in terms of production, where a company can source goods and services easily from other countries. Some managers consider the definition of international business to relate purely to “business,” as suggested in the Google case. However, a broader definition of international business may serve you better both personally and professionally in a world that has moved beyond simple industrial production. International business encompasses a full range of cross-border exchanges of goods, services, or resources between two or more nations. These exchanges can go beyond the exchange of money for physical goods to include international transfers of other resources, such as people, intellectual property (e.g., patents, copyrights, brand trademarks, and data), and contractual assets or liabilities (e.g., the right to use some foreign asset, provide some future service to foreign customers, or execute a complex financial instrument). The entities involved in international business range from large multinational firms with thousands of employees doing business in many countries around the world to a small one-person company acting as an importer or exporter. This broader definition of international business also encompasses for-profit border-crossing transactions as well as transactions motivated by nonfinancial gains (e.g., triple bottom line, corporate social responsibility, and political favor) that affect a business’s future.
Strategic Management and Entrepreneurship
A knowledge of both strategic management and entrepreneurship will enhance your understanding of international business. Strategic management is the body of knowledge that answers questions about the development and implementation of good strategies and is mainly concerned with the determinants of firm performance. A strategy, in turn, is the central, integrated, and externally oriented concept of how an organization will achieve its performance objectives.Mason Carpenter and William G. Sanders, Strategic Management: A Dynamic Perspective, Concepts and Cases (Upper Saddle River, NJ: Pearson Education, 2007). One of the basic tools of strategy is a SWOT (strengths, weaknesses, opportunities, threats) assessment. The SWOT tool helps you take stock of an organization’s internal characteristics—its strengths and weaknesses—to formulate an action plan that builds on what it does well while overcoming or working around weaknesses. Similarly, the external part of SWOT—the opportunities and threats—helps you assess those environmental conditions that favor or threaten the organization’s strategy. Because strategic management is concerned with organizational performance—be that social, environmental, or economic—your understanding of a company’s SWOT will help you better assess how international business factors should be accounted for in the firm’s strategy.
Entrepreneurship, in contrast, is defined as the recognition of opportunities (i.e., needs, wants, problems, and challenges) and the use or creation of resources to implement innovative ideas for new, thoughtfully planned ventures. An entrepreneur is a person who engages in entrepreneurship. Entrepreneurship, like strategic management, will help you to think about the opportunities available when you connect new ideas with new markets. For instance, given Google’s current global presence, it’s difficult to imagine that the company started out slightly more than a decade ago as the entrepreneurial venture of two college students. Google was founded by Larry Page and Sergey Brin, students at Stanford University. It was first incorporated as a privately held company on September 4, 1998. Increasingly, as the Google case study demonstrates, international businesses have an opportunity to create positive social, environmental, and economic values across borders. An entrepreneurial perspective will serve you well in this regard.
Spotlight on International Strategy and Entrepreneurship
Hemali Thakkar and three of her fellow classmates at Harvard found a way to mesh the power of play with electrical power. The foursome invented “a soccer ball with the ability to generate electricity,” Thakkar said.“Harnessing the Power of Soccer,” interview with Thakkar Hemali by Ike Sriskandarajah, October 20, 2010, accessed November 12, 2010, www.loe.org/shows/segments.htm?programID=10-P13-00044&segmentID=5. Every kick of the ball creates a current that’s captured for future use. Fifteen minutes of play lights a lamp for three hours.
Called the sOccket, the soccer ball can bring off-grid electricity to developing countries. Even better, the soccer ball can replace kerosene lamps. Burning kerosene is not only bad for the environment because of carbon dioxide emissions but it’s also a health hazard: according to the World Bank, breathing kerosene fumes indoors has the same effects as smoking two packs of cigarettes per day.Ariel Schwartz, “The SOccket: A Soccer Ball to Replace Kerosene Lamps,” Fast Company, January 26, 2010, accessed November 12, 2010, www.fastcompany.com/blog/ariel-schwartz/sustainability/soccket-soccer-ball-replace-kerosene-lamps.
How did the idea of sOccket emerge? All four students (Jessica Lin, Jessica Matthews, Julia Silverman, and Hemali Thakkar) had experience with developing countries, so they knew that kids love playing soccer (it’s the world’s most popular sport). They also knew that most of these kids lived in homes that had no reliable energy.Clark Boyd, “SOccket: Soccer Ball by Day, Light by Night,” Discovery News, February 18, 2010, accessed November 12, 2010, news.discovery.com/tech/soccket-soccer-ball-by-day-light-by-night.html.
As of November 2010, the sOccket prototype cost \$70 to manufacture, but the team hopes to bring the cost down to \$10 when production is scaled up.Ike Sriskandarajah, “Soccer Ball Brings Off-Grid Electricity Onto the Field,” The Atlantic, November 3, 2010, accessed November 12, 2010, http://www.theatlantic.com/technology/archive/2010/11/soccer-ball-brings-off-grid-electricity-onto-the-field/65977. One ingenious way to bring costs down is to set up facilities where developing-world entrepreneurs assemble and sell the balls themselves.
At this point it’s also important to introduce you to the concepts of intrapreneurship and the intrapreneur. Intrapreneurship is a form of entrepreneurship that takes place inside a business that is already in existence. An intrapreneur, in turn, is a person within the established business who takes direct responsibility for turning an idea into a profitable finished product through assertive risk taking and innovation. An entrepreneur is starting a business, while an intrapreneur is developing a new product or service in an already existing business. Thus, the ideas of entrepreneurship can be applied not only in new ventures but also in the context of existing organizations—even government.
KEY TAKEAWAYS
• International business encompasses a full range of cross-border exchanges of goods, services, or resources between two or more nations. These exchanges can go beyond the exchange of money for physical goods to include international transfers of other resources, such as people, intellectual property (e.g., patents, copyrights, brand trademarks, and data), and contractual assets or liabilities (e.g., the right to use some foreign asset, provide some future service to foreign customers, or execute a complex financial instrument).
• Strategic management is the body of knowledge that answers questions about the development and implementation of good strategies and is mainly concerned with the determinants of firm performance. Because strategic management is concerned with organizational performance, your understanding of a company’s SWOT (strengths, weaknesses, opportunities, threats) helps you better assess how international business factors should be accounted for in the firm’s strategy.
• Entrepreneurship is the recognition of opportunities (i.e., needs, wants, problems, and challenges) and the use or creation of resources to implement innovative ideas. Entrepreneurship helps you think about the opportunities available when you connect new ideas with new markets.
EXERCISES
(AACSB: Reflective Thinking, Analytical Skills)
1. What is international business?
2. Why is an understanding of strategy management important in the context of international business?
3. Why is an understanding of entrepreneurship important in the context of international business? | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/01%3A_Introduction/1.02%3A_What_Is_International_Business.txt |
Learning Objectives
1. Know who has an interest in international business.
2. Understand what a stakeholder is and why stakeholder analysis might be important in the study of international business.
3. Recognize that an organization’s stakeholders include more than its suppliers and customers.
The Stakeholders
As you now know, international business refers to a broad set of entities and activities. But who cares about international business in the first place? To answer this question, let’s discuss stakeholders and stakeholder analysis. A stakeholder is an individual or organization whose interests may be affected as the result of what another individual or organization does.Mason Carpenter, Talya Bauer, and Berrin Erdogan, Principles of Management (Nyack, NY: Unnamed Publisher, 2009), accessed January 5, 2011, www.gone.2012books.lardbucket.org/printed-book/127834. Stakeholder analysis is a technique you use to identify and assess the importance of key people, groups of people, or institutions that may significantly influence the success of your activity, project, or business. In the context of what you are learning here, individuals or organizations will have an interest in international business if it affects them in some way—positively or negatively.Management Sciences for Health and the United Nations Children’s Fund, “Stakeholder Analysis,” The Guide to Managing for Quality, 1998, accessed November 21, 2010, erc.msh.org/quality/ittools/itstkan.cfm. That is, they have something important at stake as a result of some aspect of international business.
Obviously, Google and its managers need to understand international business because they do business in many countries outside their home country. A little more than half the company’s revenues come from outside the United States.“Google Announces First Quarter 2009 Results,” Google Investor Relations, April 16, 2009, accessed January 25, 2010, http://investor.google.com/releases/2009Q1_google_earnings.html. Does this mean that international business wouldn’t be relevant to Google if it only produced and sold its products in one country? Absolutely not! Factors of international business would still affect Google—through any supplies it buys from foreign suppliers, as well as the possible impact of foreign competitors that threaten to take business from Google in its home markets. Even if these factors were not present, Google could still be affected by price swings—for instance, in the international prices of computer parts, even if they bought those parts from US suppliers. After all, the prices of some of the commodities used to make those parts are determined globally, not locally. Beyond its involvement in web advertising, which requires massive investments in computer-server farms around the world, Google is increasingly active in other products and services—for example, cell phones and the operating systems they use.
So far, this chapter has covered only how a business and its managers should understand international business, regardless of whether their organization sells or produces products or services across borders. Who else might be an international business stakeholder beyond Google and its management? First, Google is likely to have to pay taxes, right? It probably pays sales taxes in markets where it sells its products, as well as property and payroll taxes in countries where it has production facilities. Each of these governmental stakeholders has an important economic interest in Google. Moreover, in many countries, the government is responsible for protecting the environment. Google’s large computer-server farms consume energy and generate waste, and its products (e.g., cell phones) come in disposable packaging, thus impacting the environment in places where they are manufactured and sold.
Beyond the company and governments, other stakeholder groups might include industry associations, trade groups, suppliers, and labor. For instance, you’ve already learned that Google is an Internet search-engine company, so it could be a member of various computer-related industry associations. Labor is also a stakeholder. This can include not only the people immediately employed by a business like Google but also contract workers or workers who will lose or gain employment opportunities depending on where Google chooses to produce and sell its products and services.
Did You Know?
From our opening case, you’ve learned a little about how different countries deal with personal privacy. At about the same time Google was experiencing difficulty protecting individuals’ privacy in China, its managers in Italy were being convicted of violating consumer-privacy laws. Google executives had been accused of breaking Italian law by allowing a video clip of four boys bullying another child to be posted online.“Google Bosses Convicted in Italy,” BBC News, February 24, 2010, accessed November 21, 2010, http://news.bbc.co.uk/2/hi/8533695.stm. The video had originally been posted by the boys themselves and Google removed the video when Italy’s Interior Ministry requested its removal.J. R. Raphael, “Italy’s Google Convictions Set a Dangerous Precedent,” PCWorld, February 24, 2010, accessed November 21, 2010, http://www.pcworld.com/article/190191/italys_google_convictions_set_a_dangerous_precedent.html. The three Google executives were absolved of the defamation charges but convicted of privacy violations.Colleen Barry, “Three Google Employees Convicted in Italian Court of Privacy Violations,” Associated Press, February 24, 2010, accessed November 21, 2010, www.cleveland.com/world/index.ssf/2010/02/three_google_employees_convict.html. Google said that the conviction of its top Italian managers “attacks the ‘principles of freedom’ of the Internet and poses a serious threat to the web.”Paul McNamara, “Conviction of Google Execs in Italy Sheer Madness,” PCWorld, February 24, 2010, accessed April 5, 2010, www.pcworld.com/article/190125/conviction_of_google_execs_in_italy_sheer_madness.html. Following the conviction, several privacy advocates stepped up to speak out in Google’s defense—a position quite contrary to their typical stances in Google privacy stories.Jaikumar Vijayan, “Conviction of Google Execs Alarms Privacy Advocates,” PCWorld, February 24, 2010, accessed April 5, 2010, www.pcworld.com/article/190175/conviction_of_google_execs_alarms_privacy_advocates.html.
KEY TAKEAWAYS
• Beyond yourself, as an international business student and future international business person, you can identify the people and organizations that might have an interest in international business if their interests are affected now or in the future by it. Such international business stakeholders include employees, managers, businesses, governments, and nongovernmental organizations.
• Stakeholder analysis is a technique used to identify and assess the importance of key people, groups of people, or institutions that may significantly influence the success of an activity, project, or business.
EXERCISES
(AACSB: Reflective Thinking, Analytical Skills)
1. What is a stakeholder?
2. Why is stakeholder analysis important in international business? | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/01%3A_Introduction/1.03%3A_Who_Is_Interested_in_International_Business.txt |
Learning Objectives
1. Know the possible forms that international businesses can take.
2. Understand the differences between exporting, importing, and foreign direct investment.
3. See how governments and nongovernmental organizations can be international businesses.
The Forms of International Business
It probably doesn’t surprise you that international businesses can take on a variety of forms. Recognizing that international business, based on our broad definition, spans business, government, and nongovernmental organizations (NGOs), let’s start by looking at business.
A business can be a person or organization engaged in commerce with the aim of achieving a profit. Business profit is typically gauged in financial and economic terms. However, some level of sustained financial and economic profits are needed for a business to achieve other sustainable outcomes measured as social or environmental performance. For example, many companies that are for-profit businesses also have a social and environmental mission. Table 1.1 provides an example of a company with this kind of mission.
Table 1.1 Sample Three-Part Mission Statement
Social and Environmental Mission Product Mission Economic Mission
Part of being a responsible company is working hard to help solve the world’s environmental problems and, importantly, also helping those who buy our products to make more responsible choices.“Investing in People, Investing for the Planet,” SC Johnson, accessed November 21, 2010, http://www.scjohnson.com/en/commitment/report/CEO-Letter.aspx. To make, distribute, and sell the finest quality products with a continued commitment to promoting business practices that respect the Earth and the environment.“Ben & Jerry’s,” Unilever, accessed November 21, 2010, www.unileverusa.com/brands/foodbrands/benandjerrys. To create long-term value and capture the greatest opportunity for our stakeholders by delivering sustainable, profitable growth in sales, earnings, and cash flow in a global company built on pride, integrity, and respect.“Our Business Purpose,” Amtrak, accessed November 21, 2010, www.aramark.com/AboutARAMARK/BusinessPurpose.
On the one hand, while companies such as Ben & Jerry’s (part of Unilever) and SC Johnson are very large, it’s hard to imagine any business—small or large—that doesn’t have international operating concerns. On the other hand, the international part of a firm’s business can vary considerably, from importing to exporting to having significant operations outside its home country. An importer sells products and services that are sourced from other countries; an exporter, in contrast, sells products and services in foreign countries that are sourced from its home country. Beyond importing and exporting, some organizations maintain offices in other countries; this forms the basis for their level of foreign direct investment. Foreign direct investment means that a firm is investing assets directly into a foreign country’s buildings, equipment, or organizations. In some cases, these foreign offices are carbon copies of the parent firm; that is, they have all the value creation and support activities, just in a different country. In other cases, the foreign operations are focused on a small subset of activities tailored to the local market, or those that the entity supplies for operations every place in which the firm operates.
When a firm makes choices about foreign operations that increase national and local responsiveness, the organization is more able to adapt to national and local market conditions. In contrast, the greater the level of standardization—both within and across markets—the greater the possible level of global efficiency. In many cases, the choice of foreign location generates unique advantages, referred to as location advantages. Location advantages include better access to raw materials, less costly labor, key suppliers, key customers, energy, and natural resources. For instance, Google locates its computer-server farms—the technological backbone of its massive Internet services—close to dams that produce hydroelectric power because it’s one of the cheapest sources of electricity.Stephanie N. Mehta, “Behold the Server Farm! Glorious Temple of the Information Age!,” Fortune, August 1, 2006, accessed April 27, 2010, http://money.cnn.com/magazines/fortune/fortune_archive/2006/08/07/8382587/index.htm. Ultimately, managerial choices regarding the trade-off between global efficiency and local responsiveness are a function of the firm’s strategy and are likely to be a significant determinant of firm performance.
International Forms of Government
Governmental bodies also take on different international forms. Among political scientists, government is generally considered to be the body of people that sets and administers public policy and exercises executive, political, and sovereign power through customs, institutions, and laws within a state, country, or other political unit. Or more simply, government is the organization, or agency, through which a political unit exercises its authority, controls and administers public policy, and directs and controls the actions of its members or subjects.
Most national governments, for instance, maintain embassies and consulates in foreign countries. National governments also participate in international treaties related to such issues as trade, the environment, or child labor. For example, the North American Free Trade Agreement (NAFTA) is an agreement signed by the governments of the United States, Canada, and Mexico to create a trade bloc in North America to reduce or eliminate tariffs among the member countries and thus facilitate trade. The Kyoto Protocol is an agreement aimed at combating global warming among participating countries. In some cases, such as with the European Community (EC), agreements span trade, the environment, labor, and many other subjects related to business, social, and environmental issues. The Atlanta Agreement, in turn, is an agreement between participating governments and companies to eliminate child labor in the production of soccer balls in Pakistan.“Atlanta Agreement,” Independent Monitoring Association for Child Labor, accessed November 12, 2010, http://www.imacpak.org/atlanta.htm. Finally, supraorganizations such as the United Nations (UN) or the World Trade Organization (WTO) are practically separate governments themselves, with certain powers over all member countries.United Nations website, accessed January 20, 2010, www.un.org; World Trade Organization website, accessed January 20, 2010, http://www.wto.org.
Nongovernmental Organizations
National nongovernmental organizations (NGOs) include any nonprofit, voluntary citizens’ groups that are organized on a local, national, or international level. International NGOs (NGOs whose operations cross borders) date back to at least 1839.Steve Charnovitz, “Two Centuries of Participation: NGOs and International Governance,” Michigan Journal of International Law 18, no. 183 (Winter 1997): 183–286. For example, Rotary International was founded in 1905. It has been estimated that, by 1914, there were 1,083 NGOs.Oliver P. Richmond and Henry F. Carey, eds., Subcontracting Peace: The Challenges of NGO Peacebuilding (Burlington, VT: Ashgate, 2005), 21; United Nations, “Chapter X: The Economic and Social Council,” Charter of the United Nations, accessed April 28, 2010, www.un.org/en/documents/charter/chapter10.shtml. International NGOs were important in the antislavery movement and the movement for women’s suffrage, but the phrase “nongovernmental organization” didn’t enter the common lexicon until 1945, when the UN was established along with the provisions in Article 71 of Chapter 10 of the UN charter,United Nations, “Chapter X: The Economic and Social Council,” Charter of the United Nations, accessed April 28, 2010, www.un.org/en/documents/charter/chapter10.shtml., which granted a consultative role to organizations that are neither governments nor member states.
During the twentieth century, globalization actually fostered the development of NGOs because many problems couldn’t be solved within a single nation. In addition, international treaties and organizations, such as the WTO, were perceived by human rights activists as being too centered on the interests of business. Some argued that in an attempt to counterbalance this trend, NGOs were formed to emphasize humanitarian issues, developmental aid, and sustainable development. A prominent example of this is the World Social Forum—a rival convention to the World Economic Forum held every January in Davos, Switzerland.
KEY TAKEAWAYS
• International businesses take on a variety of forms. Importers sell goods and services obtained from other countries, while exporters sell goods and services from their home country abroad.
• Firms can also make choices about the extent and structure of their foreign direct investments, from simply an array of satellite sales offices to integrated production, sales, and distribution centers in foreign countries.
• Government and nongovernmental organizations also comprise international business.
EXERCISES
(AACSB: Reflective Thinking, Analytical Skills)
1. What is the difference between an exporter and an importer?
2. What is a location advantage?
3. How is government considered an international business? | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/01%3A_Introduction/1.04%3A_What_Forms_Do_International_Businesses_Take.txt |
Learning Objectives
1. Understand the flattening world perspective in the globalization debate.
2. Understand the multidomestic perspective in the globalization debate.
3. Know the dimensions of the CAGE analytical framework.
In today’s global economy, everyone is accustomed to buying goods from other countries—electronics from Taiwan, vegetables from Mexico, clothing from China, cars from Korea, and skirts from India. Most modern shoppers take the “Made in [a foreign country]” stickers on their products for granted. Long-distance commerce wasn’t always this common, although foreign trade—the movement of goods from one geographic region to another—has been a key factor in human affairs since prehistoric times. Thousands of years ago, merchants transported only the most precious items—silk, gold and other precious metals and jewels, spices, porcelains, and medicines—via ancient, extended land and sea trade routes, including the famed Silk Road through central Asia. Moving goods great distances was simply too hard and costly to waste the effort on ordinary products, although people often carted grain and other foods over shorter distances from farms to market towns.William J. Bernstein, A Splendid Exchange: How Trade Shaped the World (New York: Atlantic Monthly Press, 2008).
What is the globalization debate? Well, it’s not so much a debate as it is a stark difference of opinion on how the internationalization of businesses is affecting countries’ cultural, consumer, and national identities—and whether these changes are desirable. For instance, the ubiquity of such food purveyors as Coca-Cola and McDonald’s in practically every country reflects the fact that some consumer tastes are converging, though at the likely expense of local beverages and foods. Remember, globalization refers to the shift toward a more interdependent and integrated global economy. This shift is fueled largely by (1) declining trade and investment barriers and (2) new technologies, such as the Internet. The globalization debate surrounds whether and how fast markets are actually merging together.
We Live in a Flat World
The flat-world view is largely credited to Thomas Friedman and his 2005 best seller, The World Is Flat. Although the next section provides you with an alternative way of thinking about the world (a multidomestic view), it is nonetheless important to understand the flat-world perspective. Friedman covers the world for the New York Times, and his access to important local authorities, corporate executives, local Times bureaus and researchers, the Internet, and a voice recorder enabled him to compile a huge amount of information. Many people consider globalization a modern phenomenon, but according to Friedman, this is its third stage. The first stage of global development, what Friedman calls “Globalization 1.0,” started with Columbus’s discovery of the New World and ran from 1492 to about 1800. Driven by nationalism and religion, this lengthy stage was characterized by how much industrial power countries could produce and apply.
“Globalization 2.0,” from about 1800 to 2000, was disrupted by the Great Depression and both World Wars and was largely shaped by the emerging power of huge, multinational corporations. Globalization 2.0 grew with the European mercantile stock companies as they expanded in search of new markets, cheap labor, and raw materials. It continued with subsequent advances in sea and rail transportation. This period saw the introduction of modern communications and cheaper shipping costs. “Globalization 3.0” began around 2000, with advances in global electronic interconnectivity that allowed individuals to communicate as never before.
In Globalization 1.0, nations dominated global expansion. Globalization 2.0 was driven by the ascension of multinational companies, which pushed global development. In Globalization 3.0, major software advances have allowed an unprecedented number of people worldwide to work together with unlimited potential.
The Mumbai Taxman
What shape will globalization take in the third phase? Friedman asks us to consider the friendly local accountants who do your taxes. They can easily outsource your work via a server to a tax team in Mumbai, India. This increasingly popular outsourcing trend has its benefits. As Friedman notes, in 2003, about 25,000 US tax returns were done in India.Thomas L. Friedman, The World Is Flat (New York: Farrar, Straus and Giroux, 2005). By 2004, it was some 100,000 returns, with 400,000 anticipated in 2005. A software program specifically designed to let midsized US tax firms outsource their files enabled this development, giving better job prospects to the 70,000 accounting students who graduate annually in India. At a starting salary of \$100 per month, these accountants are completing US returns and competing with US tax preparers.
Chris C. Got It Wrong?
In 1492, Christopher Columbus set sail for India, going west. He had the Niña, the Pinta, and the Santa María. He never did find India, but he called the people he met “Indians” and came home and reported to his king and queen: “The world is round.” I set off for India 512 years later. I knew just which direction I was going in—I went east. I was in Lufthansa business class, and I came home and reported only to my wife and only in a whisper: “The world is flat.”
And therein lies a tale of technology and geoeconomics that is fundamentally reshaping our lives—much, much more quickly than many people realize. It all happened while we were sleeping, or rather while we were focused on 9/11, the dot-com bust, and Enron—which even prompted some to wonder whether globalization was over. Actually, just the opposite was true, which is why it’s time to wake up and prepare ourselves for this flat world, because others already are, and there is no time to waste.Thomas L. Friedman, “It’s a Flat World, After All,” New York Times Magazine, April 3, 2005, accessed June 2, 2010, www.nytimes.com/2005/04/03/magazine/03DOMINANCE.html.
This job competition is not restricted to accountants. Companies can outsource any service or business that can be broken down to its key components and converted to computerized operations. This includes everything from making restaurant reservations to reporting corporate earnings to reading x-rays. And it doesn’t stop at basic services. With the “globalization of innovation,” multinationals in India are filing increasing numbers of US patent applications, ranging from aircraft-engine designs to transportation systems and microprocessor chips. Japanese-speaking Chinese nationals in Dailian, China, now answer call-center questions from Japanese consumers. Due to Dailian’s location near Japan and Korea, as well as its numerous universities, hospitals, and golf courses, some 2,800 Japanese companies outsource operations there. While many companies are outsourcing to other countries, some are using “home sourcing”—allowing people to work at home. JetBlue uses home sourcing for reservation clerks. Today, about 16 percent of the US workforce works from home. In many ways, outsourcing and home sourcing are related; both allow people to work from anywhere.
How the World Got Flat
Friedman identifies ten major events that helped reshape the modern world and make it flat:Thomas L. Friedman, The World Is Flat (New York: Farrar, Straus and Giroux, 2005), 48–159.
1. 11/9/89: When the walls came down and the windows went up. The fall of the Berlin Wall ended old-style communism and planned economies. Capitalism ascended.
2. 8/9/95: When Netscape went public. Internet browsing and e-mail helped propel the Internet by making it commercially viable and user friendly.
3. Work-flow software: Let’s do lunch. Have your application talk to my application. With more powerful, easier-to-use software and improved connectivity, more people can share work. Thus, complex projects with more interdependent parts can be worked on collaboratively from anywhere.
4. Open-sourcing: Self-organizing, collaborative communities. Providing basic software online for free gives everyone source code, thus accelerating collaboration and software development.
5. Outsourcing: Y2K. The Internet lets firms use employees worldwide and send specific work to the most qualified, cheapest labor, wherever it is. Enter India, with educated and talented people who work at a fraction of US or European wages. Indian technicians and software experts built an international reputation during the Y2K millennium event. The feared computer-system breakdown never happened, but the Indian IT industry began handling e-commerce and related businesses worldwide.
6. Offshoring: Running with gazelles, eating with lions. When it comes to jobs leaving and factories being built in cheaper places, people think of China, Malaysia, Thailand, Mexico, Ireland, Brazil, and Vietnam. But going offshore isn’t just moving part of a manufacturing or service process. It means creating a new business model to make more goods for non-US sale, thus increasing US exports.
7. Supply-chaining: Eating sushi in Arkansas. Walmart demonstrates that improved acquisition and distribution can lower costs and make suppliers boost quality.
8. Insourcing: What the guys in funny brown shorts are really doing. This kind of service collaboration happens when firms devise new service combinations to improve service. Take United Parcel Service (UPS). The “brown” company delivers packages globally, but it also repairs Toshiba computers and organizes delivery routes for Papa John’s pizza. With insourcing, UPS uses its logistics expertise to help clients create new businesses.
9. Informing: Google, Yahoo!, MSN Web Search. Google revolutionized information searching. Its users conduct some one billion searches annually. This search methodology and the wide access to knowledge on the Internet transforms information into a commodity people can use to spawn entirely new businesses.
10. The steroids: Digital, mobile, personal, and virtual. Technological advances range from wireless communication to processing, resulting in extremely powerful computing capability and transmission. One new Intel chip processes some 11 million instructions per second (MIPS), compared to 60,000 MIPS in 1971.
These ten factors had powerful roles in making the world smaller, but each worked in isolation until, Freidman writes, the convergence of three more powerful forces: (1) new software and increased public familiarity with the Internet, (2) the incorporation of that knowledge into business and personal communication, and (3) the market influx of billions of people from Asia and the former Soviet Union who want to become more prosperous—fast. Converging, these factors generated their own critical mass. The benefits of each event became greater as it merged with another event. Increased global collaboration by talented people without regard to geographic boundaries, language, or time zones created opportunity for billions of people.
Political allegiances are also shifting. While critics say outsourcing costs US jobs, it can also work the other way. When the state of Indiana bid for a new contract to overhaul its employment claims processing system, a computer firm in India won. The company’s bid would have saved Indiana \$8 million, but local political forces made the state cancel the contract. In such situations, the line between the exploited and the exploiter becomes blurred.
Corporate nationality is also blurring. Hewlett-Packard (HP) is based in California, but it has employees in 178 countries. HP manufactures parts wherever it’s cheapest to do so. Multinationals like HP do what’s best for them, not what’s best for their home countries. This leads to critical issues about job loss versus the benefits of globalization.
Since the world’s flattening can’t be stopped, new workers and those facing dislocation should refine their skills and capitalize on new opportunities. One key is to become an expert in a job that can’t be delegated offshore. This ranges from local barbers and plumbers to professionals such as surgeons and specialized lawyers.
We Live in a Multidomestic World, Not a Flat One!
International business professor Pankaj Ghemawat takes strong issue with the view that the world is flat and instead espouses a world he characterizes as “semiglobalized” and “multidomestic.” If the world were flat, international business and global strategy would be easy. According to Ghemawat, it would be domestic strategy applied to a bigger market. In the semiglobalized world, however, global strategy begins with noticing national differences.Pankaj Ghemawat, “Distance Still Matters,” Harvard Business Review 79, no. 8 (2001): 137–47.
Ghemawat’s research suggests that to study “barriers to cross-border economic activity” you will use a “CAGE” analysis. The CAGE framework covers these four factors:Pankaj Ghemawat, “Distance Still Matters,” Harvard Business Review 79, no. 8 (2001): 137–47.
• 1. Culture. Generally, cultural differences between two countries reduce their economic exchange. Culture refers to a people’s norms, common beliefs, and practices. Cultural distance refers to differences based in language, norms, national or ethnic identity, levels of trust, tolerance, respect for entrepreneurship and social networks, or other country-specific qualities. Some products have a strong national identification, such as the Molson beer company in Canada (see Molson’s “I am Canadian” ad campaign).“I Am Canadian,” YouTube video, posted by “vinko,” May 22, 2006, accessed May 4, 2011, http://www.youtube.com/watch?v=BRI-A3vakVg. Conversely, genetically modified foods (GMOs) are commonly accepted in North America but highly disdained in Western Europe. Such cultural distance for GMOs would make it easier to sell GMO corn in the United States but impossible to sell in Germany. Some differences are surprisingly specific (such as the Chinese dislike of dark beverages, which Coca-Cola marketers discovered too late).
• 2. Administration. Bilateral trade flows show that administratively similar countries trade much more with each other. Administrative distance refers to historical governmental ties, such as those between India and the United Kingdom. This makes sense; they have the same sorts of laws, regulations, institutions, and policies. Membership in the same trading block is also a key similarity. Conversely, the greater the administrative differences between nations, the more difficult the trading relationship—whether at the national or corporate level. It can also refer simply to the level and nature of government involvement in one industry versus another. Farming, for instance, is subsidized in many countries, and this creates similar conditions.
• 3. Geography. This is perhaps the most obvious difference between countries. You can see that the market for a product in Los Angeles is separated from the market for that same product in Singapore by thousands of miles. Generally, as distance goes up, trade goes down, since distance usually increases the cost of transportation. Geographic differences also include time zones, access to ocean ports, shared borders, topography, and climate. You may recall from the opening case that even Google was affected by geographic distance when it felt the speed of the Internet connection to Google.com was slowed down because the Chinese were accessing server farms in other countries, as none were set up in China (prior to the setup of Google.cn).
• 4. Economics. Economic distance refers to differences in demographic and socioeconomic conditions. The most obvious economic difference between countries is size (as compared by gross domestic product, or GDP). Another is per capita income. This distance is likely to have the greatest effect when (1) the nature of demand varies with income level, (2) economies of scale are limited, (3) cost differences are significant, (4) the distribution or business systems are different, or (5) organizations have to be highly responsive to their customers’ concerns. Disassembling a company’s economy reveals other differences, such as labor costs, capital costs, human capital (e.g., education or skills), land value, cheap natural resources, transportation networks, communication infrastructure, and access to capital.
Each of these CAGE dimensions shares the common notion of distance. CAGE differences are likely to matter most when the CAGE distance is great. That is, when CAGE differences are small, there will likely be a greater opportunity to see business being conducted across borders. A CAGE analysis also requires examining an organization’s particular industry and products in each of these areas. When looking at culture, consider how culturally sensitive the products are. When looking at administration, consider whether other countries coddle certain industries or support “national champions.” When looking at geography, consider whether products will survive in a different climate. When looking at economics, consider such issues as the effect of per capita income on demand.
An Amusing Anecdote
Pankaj Ghemawat provides this anecdote in partial support of his multidomestic (or anti-flat-world) view. “It takes an aroused man to make a chicken affectionate” is probably not the best marketing slogan ever devised. But that’s the one Perdue Chicken used to market its fryers in Mexico. Mexicans were nonplussed, to say the least, and probably wondered what was going on in founder Frank Perdue’s henhouse. How did the slogan get approved? Simple: it’s a literal translation of Perdue’s more appetizing North American slogan “It takes a tough man to make a tender chicken.” As Perdue discovered, at least through his experience with the literal translation of his company motto into Spanish, cultural and economic globalization have yet to arrive. Consider the market for capital. Some say capital “knows no boundaries.” Recent data, however, suggests capital knows its geography quite well and is sticking close to home. For every dollar of capital investment globally, only a dime comes from firms investing “outside their home countries.” For every \$100 US investors put in the stock market, they spend \$15 on international stocks. For every one hundred students in Organisation for Economic Co-operation (OECD) universities, perhaps five are foreigners. These and other key measures of internationalization show that the world isn’t flat. It’s 90 percent round, like a rugby ball.Pankaj Ghemawat, Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter (Boston: Harvard Business School Press, 2007), 42.
While the world may not be flat, it is probably safe to say that it is flattening. We will use the CAGE framework throughout this book to better understand this evolving dynamic.
KEY TAKEAWAYS
• The globalization debate pits the opinions of Thomas Friedman against those of Pankaj Ghemawat. Their differing views help you better understand the context of international business. Through exposure to Friedman’s ideas, you gain a better perspective on the forces, or “flatteners,” that are making cross-border business more prominent.
• Ghemawat portrays a world that is “semiglobalized” and “multidomestic,” where global strategy begins with noticing national differences.
• Ghemawat’s CAGE framework covers four factors—culture, administration, geography, and economics.
EXERCISES
(AACSB: Reflective Thinking, Analytical Skills)
1. What are the basic tenets of the flat-world perspective?
2. Why does Ghemawat disagree with the flat-world perspective?
3. What are the four components of the CAGE analytical framework? | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/01%3A_Introduction/1.05%3A_The_Globalization_Debate.txt |
Learning Objectives
1. Learn about the field of ethics.
2. Gain a general understanding of business ethics.
3. See why business ethics might be more challenging in international settings.
A Framework for Ethical Decision Making
The relationship between ethics and international business is a deep, natural one. Definitions of ethics and ethical behavior seem to have strong historical and cultural roots that vary by country and region. The field of ethics is a branch of philosophy that seeks virtue. Ethics deals with morality about what is considered “right” and “wrong” behavior for people in various situations. While business ethics emerged as a field in the 1970s, international business ethics didn’t arise until the late 1990s. Initially, it looked back on the international developments of the late 1970s and 1980s, such as the Bhopol disaster in India or the infant milk-formula debate in Africa.Georges Enderle, ed., International Business Ethics: Challenges and Approaches (Notre Dame, IN: University of Notre Dame Press, 1999), 1. Today, those who are interested in international business ethics and ethical behavior examine various kinds of business activities and ask, “Is the business conduct ethically right or wrong?”
While ethical decision making is tricky stuff, particularly regarding international business issues, it helps if you start with a specific decision-making framework, such as the one summarized from the Markkula Center for Applied Ethics at Santa Clara University.“A Framework for Thinking Ethically,” Markkula Center for Applied Ethics, Santa Clara University, last modified May 2009, accessed January 26, 2010, http://www.scu.edu/ethics/practicing/decision/framework.html.
1. Is it an ethical issue? Being ethical doesn’t always mean following the law. And just because something is possible, doesn’t mean it’s ethical—hence the global debates about biotechnology advances, such as cloning. Also, ethics and religion don’t always concur. This is perhaps the trickiest stage in ethical decision making; sometimes the subtleties of the issue are above and beyond our knowledge and experience. Listen to your instincts—if it feels uncomfortable making the decision on your own, get others involved and use their collective knowledge and experience to make a more considered decision.
2. Get the facts. What do you know and, just as important, what don’t you know? Who are the people affected by your decision? Have they been consulted? What are your options? Have you reviewed your options with someone you respect?
3. Evaluate alternative actions. There are different ethical approaches that may help you make the most ethical decision. For example, here are five approaches you can consider:
1. Utilitarian approach. Which action results in the most good and least harm?
2. Rights-based approach. Which action respects the rights of everyone involved?
3. Fairness or justice approach. Which action treats people fairly?
4. Common good approach. Which action contributes most to the quality of life of the people affected?
5. Virtue approach. Which action embodies the character strengths you value?
4. Test your decision. Could you comfortably explain your decision to your mother? To a man on the street? On television? If not, you may have to rethink your decision before you take action.
5. Just do it—but what did you learn? Once you’ve made the decision, implement it. Then set a date to review your decision and make adjustments if necessary. Often decisions are made with the best information on hand at the time, but things change and your decision making needs to be flexible enough to change too. Even a complete about-face may be the most appropriate action later on.
Ethics in Action
You might know that almost 60 percent of the soccer balls in the world are made in the city of Sialkot, Pakistan. Historically, these balls were hand-stitched in peoples’ homes, often using child labor. During the 1996 European Championships, the media brought attention to the 7,000 seven- to fourteen-year-old children working full time stitching balls. NGOs (nongovernmental organizations) and industry groups stepped up to take action.“Child Labour Case Study,” The Global Compact, accessed November 12, 2010, human-rights.unglobalcompact.org/case_studies/child-labour/child_labour/combating_child_labour_in_football_production.html. UNICEF, the World Federation of the Sporting Goods Industry, the International Labour Organization (ILO), and the Sialkot Chamber of Commerce signed the Atlanta Agreement to eliminate the use of child labor in Pakistan’s soccer ball industry.“Atlanta Agreement,” Independent Monitoring Association for Child Labor, accessed November 12, 2010, http://www.imacpak.org/atlanta.htm. The Atlanta Agreement got ball production out of the home and into stitching centers, which could be monitored more easily. This also led to the centralization of production in approved “stitching centers.” On the one hand, the centers made it easier for the Independent Monitoring Association for Child Labor (IMAC)—an NGO created to watch over the Atlanta Agreement—to make sure no child labor was used. On the other hand, the centralization sometimes forced workers to commute farther to get to work. As a result, child labor has to a large extent disappeared from this sector.“Child Labour Eliminated in Manufacturing Soccer Balls,” The Nation, April 19, 2010, accessed November 12, 2010, www.nation.com.pk/pakistan-news-newspaper-daily-english-online/Business/18-Apr-2010/Child-labour-eliminated-in-manufacturing-soccer-balls. Moreover, global fair-trade companies, such as GEPA, have set up village-based stitching centers that solely employ women.GEPA website, accessed January 20, 2010, www.gepa.de/p/index.php/mID/1/lan/en. Custom and religion prohibit women from working with men in Pakistan, and the women-only soccer ball stitching centers give them an opportunity to have a job and improve their families’ incomes.
What Ethics Is Not
Two of the biggest challenges to identifying ethical standards relate to questions about what the standards should be based on and how we apply those standards in specific situations. Experts on ethics agree that the identification of ethical standards can be very difficult, but they have reached some agreement on what ethics is not. At the same time, these areas of agreement suggest why it may be challenging to obtain consensus across countries and regions as to “what is ethical?” Let’s look at this five-point excerpt from the Markkula Center for Applied Ethics at Santa Clara University about what ethics is not:
Ethics is not the same as feelings. Feelings provide important information for our ethical choices. Some people have highly developed habits that make them feel bad when they do something wrong, but many people feel good even though they are doing something wrong. And often our feelings will tell us it is uncomfortable to do the right thing if it is hard.
Ethics is not religion. Many people are not religious, but ethics applies to everyone. Most religions do advocate high ethical standards but sometimes do not address all the types of problems we face.
Ethics is not following the law. A good system of law does incorporate many ethical standards, but law can deviate from what is ethical. Law can become ethically corrupt, as some totalitarian regimes have made it. Law can be a function of power alone and designed to serve the interests of narrow groups. Law may have a difficult time designing or enforcing standards in some important areas, and may be slow to address new problems.
Ethics is not following culturally accepted norms. Some cultures are quite ethical, but others become corrupt—or blind to certain ethical concerns (as the United States was to slavery before the Civil War). “When in Rome, do as the Romans do” is not a satisfactory ethical standard.
Ethics is not science. Social and natural science can provide important data to help us make better ethical choices. But science alone does not tell us what we ought to do. Science may provide an explanation for what humans are like. But ethics provides reasons for how humans ought to act. And just because something is scientifically or technologically possible, it may not be ethical to do it.“A Framework for Thinking Ethically,” Markkula Center for Applied Ethics, Santa Clara University, last modified May 2009, accessed January 26, 2010, http://www.scu.edu/ethics/practicing/decision/framework.html.
KEY TAKEAWAYS
• The subject of ethics is important in almost any context—be it medicine, science, law, or business. You learned a framework for ethical decision making as well as some opinions on what ethics is not.
• Many would argue that international business ethics can have a strong foundation in national culture. Some argue that ethics shouldn’t follow culturally accepted norms. However, business managers should have a good understanding of which norms their ethical standards are based on and why and how they believe they should apply in other national contexts.
EXERCISES
(AACSB: Reflective Thinking, Analytical Skills)
1. To what does the term business ethics refer?
2. What are the five steps in the ethical decision-making framework?
3. What five areas have experts agreed are not ethics?
1.07: End-of-Chapter Questions and Exercises
These exercises are designed to ensure that the knowledge you gain from this book about international business meets the learning standards set out by the international Association to Advance Collegiate Schools of Business (AACSB International).The Association to Advance Collegiate Schools of Business website, accessed January 26, 2010, http://www.aacsb.edu. AACSB is the premier accrediting agency of collegiate business schools and accounting programs worldwide. It expects that you will gain knowledge in the areas of communication, ethical reasoning, analytical skills, use of information technology, multiculturalism and diversity, and reflective thinking.
EXPERIENTIAL EXERCISES
(AACSB: Communication, Use of Information Technology, Analytical Skills)
1. One of your friends plans to return to the family alfalfa farm in central California after college and has an idea to export a compressed form of alfalfa (alfalfa pellets) to be used as high-quality animal feed. Your friend knows that you are studying international business and has asked you for guidance. Prepare a summary for your friend of the issues that need to be considered; you can consult the “A Basic Guide to Exporting” series of webinars found on the globalEDGE website (http://globaledge.msu.edu). What other resources did you find helpful?
2. You like international business so much that you are inspired to start up an international business club at your school. While some of your classmates share this interest, you would like to start the club with strong membership numbers. Your teacher has agreed to give you ten minutes at the start of the next class to introduce your club idea and build support for it. You think that you can also use this presentation to build awareness of international business among students who might really enjoy the class and the topic if they knew more about it. Develop a ten-minute presentation that explains why you are passionate about international business, what international business people do, and what types of organizations are involved in international business.
3. You are browsing YouTube and come across the video “RMIT Business—International Business” (http://www.youtube.com/watch?v=jVmaBDalFsU). You share this video with your international business instructor. She is so impressed by the video that she asks you to develop a two- to three-minute video for your class that can be posted on YouTube as well. Adapt your presentation from Exercise 2 into a YouTube production and share it with your class.
Ethical Dilemmas
(AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills)
1. In Section 1.5, under the subhead “What Ethics Is Not,” you read the statement “Ethics is not following culturally accepted norms.” This is a tough statement as many argue that ethics is impacted by cultural values. What are some examples of culturally accepted norms from one country that challenge the ethical beliefs in another?
2. Giving gifts is an accepted and legal tradition in the Japanese business setting but is discouraged (and in some cases illegal) in the US business setting. Does this difference affect the competitive advantage of Japanese firms doing business in the United States or US firms doing business in Japan? | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/01%3A_Introduction/1.06%3A_Ethics_and_International_Business.txt |
International Trade and Foreign Direct Investment
WHAT’S IN IT FOR ME?
1. What is international trade theory?
2. How do political and legal factors impact international trade?
3. What is foreign direct investment?
It’s easy to think that trade is just about business interests in each country. But global trade is much more. There’s a convergence and, at times, a conflict of the interests of the different stakeholders—from businesses to governments to local citizens. In recent years, advancements in technology, a renewed enthusiasm for entrepreneurship, and a global sentiment that favors free trade have further connected people, businesses, and markets—all flatteners that are helping expand global trade and investment. An essential part of international business is understanding the history of international trade and what motivates countries to encourage or discourage trade within their borders. In this chapter we’ll look at the evolution of international trade theory to our modern time. We’ll explore the political and legal factors impacting international trade. This chapter will provide an introduction to the concept and role of foreign direct investment, which can take many forms of incentives, regulations, and policies. Companies react to these business incentives and regulations as they evaluate with which countries to do business and in which to invest. Governments often encourage foreign investment in their own country or in another country by providing loans and incentives to businesses in their home country as well as businesses in the recipient country in order to pave the way for investment and trade in the country. The opening case study shows how and why China is investing in the continent of Africa.
Opening Case: China in Africa
Foreign companies have been doing business in Africa for centuries. Much of the trade history of past centuries has been colored by European colonial powers promoting and preserving their economic interests throughout the African continent.Martin Meredith, The Fate of Africa (New York: Public Affairs, 2005). After World War II and since independence for many African nations, the continent has not fared as well as other former colonial countries in Asia. Africa remains a continent plagued by a continued combination of factors, including competing colonial political and economic interests; poor and corrupt local leadership; war, famine, and disease; and a chronic shortage of resources, infrastructure, and political, economic, and social will.“Why Africa Is Poor: Ghana Beats Up on Its Biggest Foreign Investors,” Wall Street Journal, February 18, 2010, accessed February 16, 2011, http://online.wsj.com/article/SB10001424052748704804204575069511746613890.html. And yet, through the bleak assessments, progress is emerging, led in large part by the successful emergence of a free and locally powerful South Africa. The continent generates a lot of interest on both the corporate and humanitarian levels, as well as from other countries. In particular in the past decade, Africa has caught the interest of the world’s second largest economy, China.Andrew Rice, “Why Is Africa Still Poor?,” The Nation, October 24, 2005, accessed December 20, 2010, www.thenation.com/article/why-africa-still-poor?page=0,1.
At home, over the past few decades, China has undergone its own miracle, managing to move hundreds of millions of its people out of poverty by combining state intervention with economic incentives to attract private investment. Today, China is involved in economic engagement, bringing its success story to the continent of Africa. As professor and author Deborah Brautigam notes, China’s “current experiment in Africa mixes a hard-nosed but clear-eyed self-interest with the lessons of China's own successful development and of decades of its failed aid projects in Africa.”Deborah Brautigam, “Africa’s Eastern Promise: What the West Can Learn from Chinese Investment in Africa,” Foreign Affairs, January 5, 2010, accessed December 20, 2010, www.foreignaffairs.com/articles/65916/deborah-brautigam/africa%E2%80%99s-eastern-promise.
According to CNN, “China has increasingly turned to resource-rich Africa as China's booming economy has demanded more and more oil and raw materials.”“China: Trade with Africa on Track to New Record,” CNN, October 15, 2010, accessed April 23, 2011, articles.cnn.com/2010-10-15/world/china.africa.trade_1_china-and-africa-link-trade-largest-trade-partner?_s=PM:WORLD. Trade between the African continent and China reached \$106.8 billion in 2008, and over the past decade, Chinese investments and the country’s development aid to Africa have been increasing steadily.“China-Africa Trade up 45 percent in 2008 to \$107 Billion,” China Daily, February 11, 2009, accessed April 23, 2011, http://www.chinadaily.com.cn/china/2009-02/11/content_7467460.htm. “Chinese activities in Africa are highly diverse, ranging from government to government relations and large state owned companies (SOE) investing in Africa financed by China’s policy banks, to private entrepreneurs entering African countries at their own initiative to pursue commercial activities.”Tracy Hon, Johanna Jansson, Garth Shelton, Liu Haifang, Christopher Burke, and Carine Kiala, Evaluating China’s FOCAC Commitments to Africa and Mapping the Way Ahead (Stellenbosch, South Africa: Centre for Chinese Studies, University of Stellenbosch, 2010), 1, accessed December 20, 2010, www.ccs.org.za/wp-content/uploads/2010/03/ENGLISH-Evaluating-Chinas-FOCAC-commitments-to-Africa-2010.pdf.
Since 2004, eager for access to resources, oil, diamonds, minerals, and commodities, China has entered into arrangements with resource-rich countries in Africa for a total of nearly \$14 billion in resource deals alone. In one example with Angola, China provided loans to the country secured by oil. With this investment, Angola hired Chinese companies to build much-needed roads, railways, hospitals, schools, and water systems. Similarly, China provided nearby Nigeria with oil-backed loans to finance projects that use gas to generate electricity. In the Republic of the Congo, Chinese teams are building a hydropower project funded by a Chinese government loan, which will be repaid in oil. In Ghana, a Chinese government loan will be repaid in cocoa beans.Deborah Brautigam, “Africa’s Eastern Promise: What the West Can Learn from Chinese Investment in Africa,” Foreign Affairs, January 5, 2010, accessed December 20, 2010, www.foreignaffairs.com/articles/65916/deborah-brautigam/africa%E2%80%99s-eastern-promise.
The Export-Import Bank of China (Ex-Im Bank of China) has funded and has provided these loans at market rates, rather than as foreign aid. While these loans certainly promote development, the risk for the local countries is that the Chinese bids to provide the work aren’t competitive. Furthermore, the benefit to local workers may be diminished as Chinese companies bring in some of their own workers, keeping local wages and working standards low.
In 2007, the UNCTAD (United Nations Conference on Trade and Development) Press Office noted the following:
Over the past few years, China has become one of Africa´s important partners for trade and economic cooperation. Trade (exports and imports) between Africa and China increased from US\$11 billion in 2000 to US\$56 billion in 2006….with Chinese companies present in 48 African countries, although Africa still accounts for only 3 percent of China´s outward FDI [foreign direct investment]. A few African countries have attracted the bulk of China´s FDI in Africa: Sudan is the largest recipient (and the 9th largest recipient of Chinese FDI worldwide), followed by Algeria (18th) and Zambia (19th).United Nations Conference on Trade and Development, “Asian Foreign Direct Investment in Africa: United Nations Report Points to a New Era of Cooperation among Developing Countries,” press release, March 27, 2007, accessed December 20, 2010, www.unctad.org/Templates/Webflyer.asp?docID=8172&intItemID=3971&lang=1.
Observers note that African governments can learn from the development history of China and many Asian countries, which now enjoy high economic growth and upgraded industrial activity. These Asian countries made strategic investments in education and infrastructure that were crucial not only for promoting economic development in general but also for attracting and benefiting from efficiency-seeking and export-oriented FDI.United Nations Conference on Trade and Development, “Foreign Direct Investment in Africa Remains Buoyant, Sustained by Interest in Natural Resources,” press release, September 29, 2005, accessed December 20, 2010, http://news.bbc.co.uk/2/hi/africa/7086777.stm.
Source: “China in Africa: Developing Ties,” BBC News, last updated November 26, 2007, accessed June 3, 2011, http://news.bbc.co.uk/2/hi/africa/7086777.stm.
Criticized by some and applauded by others, it’s clear that China’s investment is encouraging development in Africa. China is accused by some of ignoring human rights crises in the continent and doing business with repressive regimes. China’s success in Africa is due in large part to the local political environment in each country, where either one or a small handful of leaders often control the power and decision making. While the countries often open bids to many foreign investors, Chinese firms are able to provide low-cost options thanks in large part to their government’s project support. The ability to forge a government-level partnership has enabled Chinese businesses to have long-term investment perspectives in the region. China even hosted a summit in 2006 for African leaders, pledging to increase trade, investment, and aid over the coming decade.“Summit Shows China’s Africa Clout,” BBC News, November 6, 2006, accessed December 20, 2010, http://news.bbc.co.uk/2/hi/business/6120500.stm. The 2008 global recession has led China to be more selective in its African investments, looking for good deals as well as political stability in target countries. Nevertheless, whether to access the region’s rich resources or develop local markets for Chinese goods and services, China intends to be a key foreign investor in Africa for the foreseeable future.“China in Africa: Developing Ties,” BBC News, November 26, 2007, accessed December 20, 2010, http://news.bbc.co.uk/2/hi/africa/7086777.stm.
Opening Case Exercises
(AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills)
1. Describe China’s strategy in Africa.
2. If you were the head of a Chinese business that was operating in Sudan, how would you address issues of business ethics and doing business with a repressive regime? Should businesses care about local government ethics and human rights policies?
3. If you were a foreign businessperson working for a global oil company that was eager to get favorable government approval to invest in a local oil refinery in an African country, how would you handle any demands for paybacks (i.e., bribes)? | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/02%3A_International_Trade_and_Foreign_Direct_Investment/2.01%3A_Chapter_Introduction.txt |
Learning Objectives
1. Understand international trade.
2. Compare and contrast different trade theories.
3. Determine which international trade theory is most relevant today and how it continues to evolve.
What Is International Trade?
International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries.
People or entities trade because they believe that they benefit from the exchange. They may need or want the goods or services. While at the surface, this many sound very simple, there is a great deal of theory, policy, and business strategy that constitutes international trade.
In this section, you’ll learn about the different trade theories that have evolved over the past century and which are most relevant today. Additionally, you’ll explore the factors that impact international trade and how businesses and governments use these factors to their respective benefits to promote their interests.
What Are the Different International Trade Theories?
“Around 5,200 years ago, Uruk, in southern Mesopotamia, was probably the first city the world had ever seen, housing more than 50,000 people within its six miles of wall. Uruk, its agriculture made prosperous by sophisticated irrigation canals, was home to the first class of middlemen, trade intermediaries…A cooperative trade network…set the pattern that would endure for the next 6,000 years.”Matt Ridley, “Humans: Why They Triumphed,” Wall Street Journal, May 22, 2010, accessed December 20, 2010, http://online.wsj.com/article/SB10001424052748703691804575254533386933138.html.
In more recent centuries, economists have focused on trying to understand and explain these trade patterns. Chapter 1, Section 1.4 discussed how Thomas Friedman’s flat-world approach segments history into three stages: Globalization 1.0 from 1492 to 1800, 2.0 from 1800 to 2000, and 3.0 from 2000 to the present. In Globalization 1.0, nations dominated global expansion. In Globalization 2.0, multinational companies ascended and pushed global development. Today, technology drives Globalization 3.0.
To better understand how modern global trade has evolved, it’s important to understand how countries traded with one another historically. Over time, economists have developed theories to explain the mechanisms of global trade. The main historical theories are called classical and are from the perspective of a country, or country-based. By the mid-twentieth century, the theories began to shift to explain trade from a firm, rather than a country, perspective. These theories are referred to as modern and are firm-based or company-based. Both of these categories, classical and modern, consist of several international theories.
Mercantilism
Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop an economic theory. This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings. In it’s simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports. In other words, if people in other countries buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in gold and silver. The objective of each country was to have a trade surplus, or a situation where the value of exports are greater than the value of imports, and to avoid a trade deficit, or a situation where the value of imports is greater than the value of exports.
A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism flourished. The 1500s marked the rise of new nation-states, whose rulers wanted to strengthen their nations by building larger armies and national institutions. By increasing exports and trade, these rulers were able to amass more gold and wealth for their countries. One way that many of these new nations promoted exports was to impose restrictions on imports. This strategy is called protectionism and is still used today.
Nations expanded their wealth by using their colonies around the world in an effort to control more trade and amass more riches. The British colonial empire was one of the more successful examples; it sought to increase its wealth by using raw materials from places ranging from what are now the Americas and India. France, the Netherlands, Portugal, and Spain were also successful in building large colonial empires that generated extensive wealth for their governing nations.
Although mercantilism is one of the oldest trade theories, it remains part of modern thinking. Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage imports through a form of neo-mercantilism in which the countries promote a combination of protectionist policies and restrictions and domestic-industry subsidies. Nearly every country, at one point or another, has implemented some form of protectionist policy to guard key industries in its economy. While export-oriented companies usually support protectionist policies that favor their industries or firms, other companies and consumers are hurt by protectionism. Taxpayers pay for government subsidies of select exports in the form of higher taxes. Import restrictions lead to higher prices for consumers, who pay more for foreign-made goods or services. Free-trade advocates highlight how free trade benefits all members of the global community, while mercantilism’s protectionist policies only benefit select industries, at the expense of both consumers and other companies, within and outside of the industry.
Absolute Advantage
In 1776, Adam Smith questioned the leading mercantile theory of the time in The Wealth of Nations.Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London: W. Strahan and T. Cadell, 1776). Recent versions have been edited by scholars and economists. Smith offered a new trade theory called absolute advantage, which focused on the ability of a country to produce a good more efficiently than another nation. Smith reasoned that trade between countries shouldn’t be regulated or restricted by government policy or intervention. He stated that trade should flow naturally according to market forces. In a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on specializing on producing that good. Similarly, if Country B was better at producing another good, it could focus on specialization as well. By specialization, countries would generate efficiencies, because their labor force would become more skilled by doing the same tasks. Production would also become more efficient, because there would be an incentive to create faster and better production methods to increase the specialization.
Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit and trade should be encouraged. His theory stated that a nation’s wealth shouldn’t be judged by how much gold and silver it had but rather by the living standards of its people.
Comparative Advantage
The challenge to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in many areas. In contrast, another country may not have any useful absolute advantages. To answer this challenge, David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. Ricardo reasoned that even if Country A had the absolute advantage in the production of both products, specialization and trade could still occur between two countries.
Comparative advantage occurs when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods. The difference between these two theories is subtle. Comparative advantage focuses on the relative productivity differences, whereas absolute advantage looks at the absolute productivity.
Let’s look at a simplified hypothetical example to illustrate the subtle difference between these principles. Miranda is a Wall Street lawyer who charges \$500 per hour for her legal services. It turns out that Miranda can also type faster than the administrative assistants in her office, who are paid \$40 per hour. Even though Miranda clearly has the absolute advantage in both skill sets, should she do both jobs? No. For every hour Miranda decides to type instead of do legal work, she would be giving up \$460 in income. Her productivity and income will be highest if she specializes in the higher-paid legal services and hires the most qualified administrative assistant, who can type fast, although a little slower than Miranda. By having both Miranda and her assistant concentrate on their respective tasks, their overall productivity as a team is higher. This is comparative advantage. A person or a country will specialize in doing what they do relatively better. In reality, the world economy is more complex and consists of more than two countries and products. Barriers to trade may exist, and goods must be transported, stored, and distributed. However, this simplistic example demonstrates the basis of the comparative advantage theory.
Heckscher-Ohlin Theory (Factor Proportions Theory)
The theories of Smith and Ricardo didn’t help countries determine which products would give a country an advantage. Both theories assumed that free and open markets would lead countries and producers to determine which goods they could produce more efficiently. In the early 1900s, two Swedish economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain comparative advantage by producing products that utilized factors that were in abundance in the country. Their theory is based on a country’s production factors—land, labor, and capital, which provide the funds for investment in plants and equipment. They determined that the cost of any factor or resource was a function of supply and demand. Factors that were in great supply relative to demand would be cheaper; factors in great demand relative to supply would be more expensive. Their theory, also called the factor proportions theory, stated that countries would produce and export goods that required resources or factors that were in great supply and, therefore, cheaper production factors. In contrast, countries would import goods that required resources that were in short supply, but higher demand.
For example, China and India are home to cheap, large pools of labor. Hence these countries have become the optimal locations for labor-intensive industries like textiles and garments.
Leontief Paradox
In the early 1950s, Russian-born American economist Wassily W. Leontief studied the US economy closely and noted that the United States was abundant in capital and, therefore, should export more capital-intensive goods. However, his research using actual data showed the opposite: the United States was importing more capital-intensive goods. According to the factor proportions theory, the United States should have been importing labor-intensive goods, but instead it was actually exporting them. His analysis became known as the Leontief Paradox because it was the reverse of what was expected by the factor proportions theory. In subsequent years, economists have noted historically at that point in time, labor in the United States was both available in steady supply and more productive than in many other countries; hence it made sense to export labor-intensive goods. Over the decades, many economists have used theories and data to explain and minimize the impact of the paradox. However, what remains clear is that international trade is complex and is impacted by numerous and often-changing factors. Trade cannot be explained neatly by one single theory, and more importantly, our understanding of international trade theories continues to evolve.
Modern or Firm-Based Trade Theories
In contrast to classical, country-based trade theories, the category of modern, firm-based theories emerged after World War II and was developed in large part by business school professors, not economists. The firm-based theories evolved with the growth of the multinational company (MNC). The country-based theories couldn’t adequately address the expansion of either MNCs or intraindustry trade, which refers to trade between two countries of goods produced in the same industry. For example, Japan exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from Germany.
Unlike the country-based theories, firm-based theories incorporate other product and service factors, including brand and customer loyalty, technology, and quality, into the understanding of trade flows.
Country Similarity Theory
Swedish economist Steffan Linder developed the country similarity theory in 1961, as he tried to explain the concept of intraindustry trade. Linder’s theory proposed that consumers in countries that are in the same or similar stage of development would have similar preferences. In this firm-based theory, Linder suggested that companies first produce for domestic consumption. When they explore exporting, the companies often find that markets that look similar to their domestic one, in terms of customer preferences, offer the most potential for success. Linder’s country similarity theory then states that most trade in manufactured goods will be between countries with similar per capita incomes, and intraindustry trade will be common. This theory is often most useful in understanding trade in goods where brand names and product reputations are important factors in the buyers’ decision-making and purchasing processes.
Product Life Cycle Theory
Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the 1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that production of the new product will occur completely in the home country of its innovation. In the 1960s this was a useful theory to explain the manufacturing success of the United States. US manufacturing was the globally dominant producer in many industries after World War II.
It has also been used to describe how the personal computer (PC) went through its product cycle. The PC was a new product in the 1970s and developed into a mature product during the 1980s and 1990s. Today, the PC is in the standardized product stage, and the majority of manufacturing and production process is done in low-cost countries in Asia and Mexico.
The product life cycle theory has been less able to explain current trade patterns where innovation and manufacturing occur around the world. For example, global companies even conduct research and development in developing markets where highly skilled labor and facilities are usually cheaper. Even though research and development is typically associated with the first or new product stage and therefore completed in the home country, these developing or emerging-market countries, such as India and China, offer both highly skilled labor and new research facilities at a substantial cost advantage for global firms.
Global Strategic Rivalry Theory
Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages. The critical ways that firms can obtain a sustainable competitive advantage are called the barriers to entry for that industry. The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or new market. The barriers to entry that corporations may seek to optimize include:
• research and development,
• the ownership of intellectual property rights,
• economies of scale,
• unique business processes or methods as well as extensive experience in the industry, and
• the control of resources or favorable access to raw materials.
Porter’s National Competitive Advantage Theory
In the continuing evolution of international trade theories, Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. Porter’s theory stated that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. His theory focused on explaining why some nations are more competitive in certain industries. To explain his theory, Porter identified four determinants that he linked together. The four determinants are (1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics.
1. Local market resources and capabilities (factor conditions). Porter recognized the value of the factor proportions theory, which considers a nation’s resources (e.g., natural resources and available labor) as key factors in determining what products a country will import or export. Porter added to these basic factors a new list of advanced factors, which he defined as skilled labor, investments in education, technology, and infrastructure. He perceived these advanced factors as providing a country with a sustainable competitive advantage.
2. Local market demand conditions. Porter believed that a sophisticated home market is critical to ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the development of new products and technologies. Many sources credit the demanding US consumer with forcing US software companies to continuously innovate, thus creating a sustainable competitive advantage in software products and services.
3. Local suppliers and complementary industries. To remain competitive, large global firms benefit from having strong, efficient supporting and related industries to provide the inputs required by the industry. Certain industries cluster geographically, which provides efficiencies and productivity.
4. Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and industry rivalry. Local strategy affects a firm’s competitiveness. A healthy level of rivalry between local firms will spur innovation and competitiveness.
In addition to the four determinants of the diamond, Porter also noted that government and chance play a part in the national competitiveness of industries. Governments can, by their actions and policies, increase the competitiveness of firms and occasionally entire industries.
Porter’s theory, along with the other modern, firm-based theories, offers an interesting interpretation of international trade trends. Nevertheless, they remain relatively new and minimally tested theories.
Which Trade Theory Is Dominant Today?
The theories covered in this chapter are simply that—theories. While they have helped economists, governments, and businesses better understand international trade and how to promote, regulate, and manage it, these theories are occasionally contradicted by real-world events. Countries don’t have absolute advantages in many areas of production or services and, in fact, the factors of production aren’t neatly distributed between countries. Some countries have a disproportionate benefit of some factors. The United States has ample arable land that can be used for a wide range of agricultural products. It also has extensive access to capital. While it’s labor pool may not be the cheapest, it is among the best educated in the world. These advantages in the factors of production have helped the United States become the largest and richest economy in the world. Nevertheless, the United States also imports a vast amount of goods and services, as US consumers use their wealth to purchase what they need and want—much of which is now manufactured in other countries that have sought to create their own comparative advantages through cheap labor, land, or production costs.
As a result, it’s not clear that any one theory is dominant around the world. This section has sought to highlight the basics of international trade theory to enable you to understand the realities that face global businesses. In practice, governments and companies use a combination of these theories to both interpret trends and develop strategy. Just as these theories have evolved over the past five hundred years, they will continue to change and adapt as new factors impact international trade.
KEY TAKEAWAYS
• Trade is the concept of exchanging goods and services between two people or entities. International trade is the concept of this exchange between people or entities in two different countries. While a simplistic definition, the factors that impact trade are complex, and economists throughout the centuries have attempted to interpret trends and factors through the evolution of trade theories.
• There are two main categories of international trade—classical, country-based and modern, firm-based.
• Porter’s theory states that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. He identified four key determinants: (1) local market resources and capabilities (factor conditions), (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics.
EXERCISES
(AACSB: Reflective Thinking, Analytical Skills)
1. What is international trade?
2. Summarize the classical, country-based international trade theories. What are the differences between these theories, and how did the theories evolve?
3. What are the modern, firm-based international trade theories?
4. Describe how a business may use the trade theories to develop its business strategies. Use Porter’s four determinants in your explanation. | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/02%3A_International_Trade_and_Foreign_Direct_Investment/2.02%3A_What_Is_International_Trade_Theory.txt |
Learning Objectives
1. Know the different political systems.
2. Identify the different legal systems.
3. Understand government-business trade relations and how political and legal factors impact international business.
Why should businesses care about the different political and legal systems around the world? To begin with, despite the globalization of business, firms must abide by the local rules and regulations of the countries in which they operate. In the case study in Chapter 1, you discovered how US-based Google had to deal with the Chinese government’s restrictions on the freedom of speech in order to do business in China. China’s different set of political and legal guidelines made Google choose to discontinue its mainland Chinese version of its site and direct mainland Chinese users to a Hong Kong version.
Until recently, governments were able to directly enforce the rules and regulations based on their political and legal philosophies. The Internet has started to change this, as sellers and buyers have easier access to each other. Nevertheless, countries still have the ability to regulate or strong-arm companies into abiding by their rules and regulations. As a result, global businesses monitor and evaluate the political and legal climate in countries in which they currently operate or hope to operate in the future.
Before we can evaluate the impact on business, let’s first look at the different political and legal systems.
What Are the Different Political Systems?
The study of political systems is extensive and complex. A political system is basically the system of politics and government in a country. It governs a complete set of rules, regulations, institutions, and attitudes. A main differentiator of political systems is each system’s philosophy on the rights of the individual and the group as well as the role of government. Each political system’s philosophy impacts the policies that govern the local economy and business environment.
There are more than thirteen major types of government, each of which consists of multiple variations. Let’s focus on the overarching modern political philosophies. At one end of the extremes of political philosophies, or ideologies, is anarchism, which contends that individuals should control political activities and public government is both unnecessary and unwanted. At the other extreme is totalitarianism, which contends that every aspect of an individual’s life should be controlled and dictated by a strong central government. In reality, neither extreme exists in its purest form. Instead, most countries have a combination of both, the balance of which is often a reflection of the country’s history, culture, and religion. This combination is called pluralism, which asserts that both public and private groups are important in a well-functioning political system. Although most countries are pluralistic politically, they may lean more to one extreme than the other.
In some countries, the government controls more aspects of daily life than in others. While the common usage treats totalitarian and authoritarian as synonyms, there is a distinct difference. For the purpose of this discussion, the main relevant difference is in ideology. Authoritarian governments centralize all control in the hands of one strong leader or a small group of leaders, who have full authority. These leaders are not democratically elected and are not politically, economically, or socially accountable to the people in the country. Totalitarianism, a more extreme form of authoritarianism, occurs when an authoritarian leadership is motivated by a distinct ideology, such as communism. In totalitarianism, the ideology influences or controls the people, not just a person or party. Authoritarian leaders tend not to have a guiding philosophy and use more fear and corruption to maintain control.
Democracy is the most common form of government around the world today. Democratic governments derive their power from the people of the country, either by direct referendum (called a direct democracy) or by means of elected representatives of the people (a representative democracy). Democracy has a number of variations, both in theory and practice, some of which provide better representation and more freedoms for their citizens than others.
Did You Know?
It may seem evident that businesses would prefer to operate in open, democratic countries; however, it can be difficult to determine which countries fit the democratic criteria. As a result, there are a variety of institutions, including the Economist, which analyze and rate countries based on their openness and adherence to democratic principles.
There is no consensus on how to measure democracy, definitions of democracy are contested and there is an ongoing lively debate on the subject. Although the terms “freedom” and “democracy” are often used interchangeably, the two are not synonymous. Democracy can be seen as a set of practices and principles that institutionalise and thus ultimately protect freedom. Even if a consensus on precise definitions has proved elusive, most observers today would agree that, at a minimum, the fundamental features of a democracy include government based on majority rule and the consent of the governed, the existence of free and fair elections, the protection of minorities and respect for basic human rights. Democracy presupposes equality before the law, due process and political pluralism.“Liberty and Justice for Some,” Economist, August 22, 2007, accessed December 21, 2010, http://www.economist.com/node/8908438.
To further illustrate the complexity of the definition of a democracy, the Economist Intelligence Unit’s annual “Index of Democracy” uses a detailed questionnaire and analysis process to provide “a snapshot of the current state of democracy worldwide for 165 independent states and two territories (this covers almost the entire population of the world and the vast majority of the world’s independent states (27 micro states are excluded) [as of 2008)].”Economist Intelligence Unit, “The Economist Intelligence Unit’s Index of Democracy 2008,” Economist, October 29, 2008, accessed December 21, 2010, http://graphics.eiu.com/PDF/Democracy%20Index%202008.pdf. Several things stand out in the 2008 index.
Although almost half of the world’s countries can be considered to be democracies, the number of “full democracies” is relatively low (only 30); 50 are rated as “flawed democracies.” Of the remaining 87 states, 51 are authoritarian and 36 are considered to be “hybrid regimes.” As could be expected, the developed OECD countries dominate among full democracies, although there are two Latin American, two central European and one African country, which suggest that the level of development is not a binding constraint. Only two Asian countries are represented: Japan and South Korea.
Half of the world’s population lives in a democracy of some sort, although only some 14 percent reside in full democracies. Despite the advances in democracy in recent decades, more than one third the world’s population still lives under authoritarian rule. Economist Intelligence Unit, “The Economist Intelligence Unit’s Index of Democracy 2008,” Economist, October 29, 2008, accessed December 21, 2010, http://graphics.eiu.com/PDF/Democracy%20Index%202008.pdf.
What businesses must focus on is how a country’s political system impacts the economy as well as the particular firm and industry. Firms need to assess the balance to determine how local policies, rules, and regulations will affect their business. Depending on how long a company expects to operate in a country and how easy it is for it to enter and exit, a firm may also assess the country’s political risk and stability. A company may ask several questions regarding a prospective country’s government to assess possible risks:
1. How stable is the government?
2. Is it a democracy or a dictatorship?
3. If a new party comes into power, will the rules of business change dramatically?
4. Is power concentrated in the hands of a few, or is it clearly outlined in a constitution or similar national legal document?
5. How involved is the government in the private sector?
6. Is there a well-established legal environment both to enforce policies and rules as well as to challenge them?
7. How transparent is the government’s political, legal, and economic decision-making process?
While any country can, in theory, pose a risk in all of these factors, some countries offer a more stable business environment than others. In fact, political stability is a key part of government efforts to attract foreign investment to their country. Businesses need to assess if a country believes in free markets, government control, or heavy intervention (often to the benefit of a few) in industry. The country’s view on capitalism is also a factor for business consideration. In the broadest sense, capitalism is an economic system in which the means of production are owned and controlled privately. In contrast, a planned economy is one in which the government or state directs and controls the economy, including the means and decision making for production. Historically, democratic governments have supported capitalism and authoritarian regimes have tended to utilize a state-controlled approach to managing the economy.
As you might expect, established democracies, such as those found in the United States, Canada, Western Europe, Japan, and Australia, offer a high level of political stability. While many countries in Asia and Latin America also are functioning democracies, their stage of development impacts the stability of their economic and trade policy, which can fluctuate with government changes. Chapter 4 provides more details about developed and developing countries and emerging markets.
Within reason, in democracies, businesses understand that most rules survive changes in government. Any changes are usually a reflection of a changing economic environment, like the world economic crisis of 2008, and not a change in the government players.
This contrasts with more authoritarian governments, where democracy is either not in effect or simply a token process. China is one of the more visible examples, with its strong government and limited individual rights. However, in the past two decades, China has pursued a new balance of how much the state plans and manages the national economy. While the government still remains the dominant force by controlling more than a third of the economy, more private businesses have emerged. China has successfully combined state intervention with private investment to develop a robust, market-driven economy—all within a communist form of government. This system is commonly referred to as “a socialist market economy with Chinese characteristics.” The Chinese are eager to portray their version of combining an authoritarian form of government with a market-oriented economy as a better alternative model for fledging economies, such as those in Africa. This new combination has also posed more questions for businesses that are encountering new issues—such as privacy, individual rights, and intellectual rights protections—as they try to do business with China, now the second-largest economy in the world behind the United States. The Chinese model of an authoritarian government and a market-oriented economy has, at times, tilted favor toward companies, usually Chinese, who understand how to navigate the nuances of this new system. Chinese government control on the Internet, for example, has helped propel homegrown, Baidu, a Chinese search engine, which earns more than 73 percent of the Chinese search-engine revenues. Baidu self-censors and, as a result, has seen its revenues soar after Google limited its operations in the country.Rolfe Winkler, “Internet Plus China Equals Screaming Baidu,” Wall Street Journal, November 9, 2010, accessed December 21, 2010, http://online.wsj.com/article/SB10001424052748703514904575602781130437538.html.
It might seem straightforward to assume that businesses prefer to operate only in democratic, capitalist countries where there is little or no government involvement or intervention. However, history demonstrates that, for some industries, global firms have chosen to do business with countries whose governments control that industry. Businesses in industries, such as commodities and oil, have found more authoritarian governments to be predictable partners for long-term access and investment for these commodities. The complexity of trade in these situations increases, as throughout history, governments have come to the aid and protection of their nation’s largest business interests in markets around the world. The history of the oil industry shows how various governments have, on occasion, protected their national companies’ access to oil through political force. In current times, the Chinese government has been using a combination of government loans and investment in Africa to obtain access for Chinese companies to utilize local resources and commodities. Many business analysts mention these issues in discussions of global business ethics and the role and responsibility of companies in different political environments.
What Are the Different Legal Systems?
Let’s focus briefly on how the political and economic ideologies that define countries impact their legal systems. In essence, there are three main kinds of legal systems—common law, civil law, and religious or theocratic law. Most countries actually have a combination of these systems, creating hybrid legal systems.
Civil law is based on a detailed set of laws that constitute a code and focus on how the law is applied to the facts. It’s the most widespread legal system in the world.
Common law is based on traditions and precedence. In common law systems, judges interpret the law and judicial rulings can set precedent.
Religious law is also known as theocratic law and is based on religious guidelines. The most commonly known example of religious law is Islamic law, also known as Sharia. Islamic law governs a number of Islamic nations and communities around the world and is the most widely accepted religious law system. Two additional religious law systems are the Jewish Halacha and the Christian Canon system, neither of which is practiced at the national level in a country. The Christian Canon system is observed in the Vatican City.
The most direct impact on business can be observed in Islamic law—which is a moral, rather than a commercial, legal system. Sharia has clear guidelines for aspects of life. For example, in Islamic law, business is directly impacted by the concept of interest. According to Islamic law, banks cannot charge or benefit from interest. This provision has generated an entire set of financial products and strategies to simulate interest—or a gain—for an Islamic bank, while not technically being classified as interest. Some banks will charge a large up-front fee. Many are permitted to engage in sale-buyback or leaseback of an asset. For example, if a company wants to borrow money from an Islamic bank, it would sell its assets or product to the bank for a fixed price. At the same time, an agreement would be signed for the bank to sell back the assets to the company at a later date and at a higher price. The difference between the sale and buyback price functions as the interest. In the Persian Gulf region alone, there are twenty-two Sharia-compliant, Islamic banks, which in 2008 had approximately \$300 billion in assets.Tala Malik, “Gulf Islamic Bank Assets to Hit \$300bn,” Arabian Business, February 20, 2008, accessed December 21, 2010, www.arabianbusiness.com/511804-gulf-islamic-banks-assets-to-hit-300bn. Clearly, many global businesses and investment banks are finding creative ways to do business with these Islamic banks so that they can comply with Islamic law while earning a profit.
Government—Business Trade Relations: The Impact of Political and Legal Factors on International Trade
How do political and legal realities impact international trade, and what do businesses need to think about as they develop their global strategy? Governments have long intervened in international trade through a variety of mechanisms. First, let’s briefly discuss some of the reasons behind these interventions.
Why Do Governments Intervene in Trade?
Governments intervene in trade for a combination of political, economic, social, and cultural reasons.
Politically, a country’s government may seek to protect jobs or specific industries. Some industries may be considered essential for national security purposes, such as defense, telecommunications, and infrastructure—for example, a government may be concerned about who owns the ports within its country. National security issues can impact both the import and exports of a country, as some governments may not want advanced technological information to be sold to unfriendly foreign interests. Some governments use trade as a retaliatory measure if another country is politically or economically unfair. On the other hand, governments may influence trade to reward a country for political support on global matters.
Did You Know?
State Capitalism: Governments Seeking to Control Key Industries
Despite the movement toward privatizing industry and free trade, government interests in their most valuable commodity, oil, remains constant. The thirteen largest oil companies (as measured by the reserves they control) in the world are all state-run and all are bigger than ExxonMobil, which is the world’s largest private oil company. State-owned companies control more than 75 percent of all crude oil production, in contrast with only 10 percent for private multinational oil firms.Ian Bremmer, “The Long Shadow of the Visible Hand,” Wall Street Journal, May 22, 2010, accessed December 21, 2010, http://online.wsj.com/article/SB10001424052748704852004575258541875590852.html; “Really Big Oil,” Economist, August 10, 2006, accessed December 21, 2010, http://www.economist.com/node/7276986.
Table 2.1 The Major Global State-Owned Oil Companies
Aramco Saudi Arabia
Gazprom Russia
China National Petroleum Corp. China
National Iranian Oil Co. Iran
Petróleos de Venezuela Venezuela
Petrobras Brazil
Petronas Malaysia
Source: Energy Intelligence Group, “Petroleum Intelligence Weekly Ranks World’s Top 50 Oil Companies (2009),” news release, December 1, 2008, accessed December 21, 2010, www.energyintel.com/documentdetail.asp?document_id=245527.
In the past thirty years, governments have increasingly privatized a number of industries. However, “in defense, power generation, telecoms, metals, minerals, aviation, and other sectors, a growing number of emerging-market governments, not content with simply regulating markets, are moving to dominate them.”Ian Bremmer, “The Long Shadow of the Visible Hand,” Wall Street Journal, May 22, 2010, accessed December 21, 2010, http://online.wsj.com/article/SB10001424052748704852004575258541875590852.html.
State companies, like their private sector counterparts, get to keep the profits from oil production, creating a significant incentive for governments to either maintain or regain control of this very lucrative industry. Whether the motive is economic (i.e., profit) or political (i.e., state control), “foreign firms and investors find that national and local rules and regulations are increasingly designed to favor domestic firms at their expense. Multinationals now find themselves competing as never before with state-owned companies armed with substantial financial and political support from their governments.”Ian Bremmer, “The Long Shadow of the Visible Hand,” Wall Street Journal, May 22, 2010, accessed December 21, 2010, http://online.wsj.com/article/SB10001424052748704852004575258541875590852.html.
Governments are also motivated by economic factors to intervene in trade. They may want to protect young industries or to preserve access to local consumer markets for domestic firms.
Cultural and social factors might also impact a government’s intervention in trade. For example, some countries’ governments have tried to limit the influence of American culture on local markets by limiting or denying the entry of American companies operating in the media, food, and music industries.
How Do Governments Intervene in Trade?
While the past century has seen a major shift toward free trade, many governments continue to intervene in trade. Governments have several key policy areas that can be used to create rules and regulations to control and manage trade.
• Tariffs. Tariffs are taxes imposed on imports. Two kinds of tariffs exist—specific tariffs, which are levied as a fixed charge, and ad valorem tariffs, which are calculated as a percentage of the value. Many governments still charge ad valorem tariffs as a way to regulate imports and raise revenues for their coffers.
• Subsidies. A subsidy is a form of government payment to a producer. Types of subsidies include tax breaks or low-interest loans; both of which are common. Subsidies can also be cash grants and government-equity participation, which are less common because they require a direct use of government resources.
• Import quotas and VER. Import quotas and voluntary export restraints (VER) are two strategies to limit the amount of imports into a country. The importing government directs import quotas, while VER are imposed at the discretion of the exporting nation in conjunction with the importing one.
• Currency controls. Governments may limit the convertibility of one currency (usually its own) into others, usually in an effort to limit imports. Additionally, some governments will manage the exchange rate at a high level to create an import disincentive.
• Local content requirements. Many countries continue to require that a certain percentage of a product or an item be manufactured or “assembled” locally. Some countries specify that a local firm must be used as the domestic partner to conduct business.
• Antidumping rules. Dumping occurs when a company sells product below market price often in order to win market share and weaken a competitor.
• Export financing. Governments provide financing to domestic companies to promote exports.
• Free-trade zone. Many countries designate certain geographic areas as free-trade zones. These areas enjoy reduced tariffs, taxes, customs, procedures, or restrictions in an effort to promote trade with other countries.
• Administrative policies. These are the bureaucratic policies and procedures governments may use to deter imports by making entry or operations more difficult and time consuming.
Did You Know?
Government Intervention in China
As shown in the opening case study, China is using its economic might to invest in Africa. China’s ability to focus on dominating key industries inspires both fear and awe throughout the world. A closer look at the solar industry in China illustrates the government’s ability to create new industries and companies based on its objectives. With its huge population, China is in constant need of energy to meet the needs of its people and businesses.
As a result, the government has placed a priority on energy related technologies, including solar energy. China’s expanding solar-energy industry is dependent on polycrystalline silicon, the main raw material for solar panels. Facing a shortage in 2007, growing domestic demand, and high prices from foreign companies that dominated production, China declared the development of domestic polysilicon supplies a priority. Domestic Chinese manufacturers received quick loans with favorable terms as well as speedy approvals. One entrepreneur, Zhu Gongshan, received \$1 billion in funding, including a sizeable investment from China’s sovereign wealth fund, in record time, enabling his firm GCL-Poly Energy Holding to become one of the world’s biggest in less than three years. The company now has a 25 percent market share of polysilicon and almost 50 percent of the global market for solar-power equipment.Jason Dean, Andrew Browne, and Shai Oster, “China’s ‘State Capitalism’ Sparks Global Backlash,” Wall Street Journal, November 16, 2010, accessed December 22, 2010, http://online.wsj.com/article/SB10001424052748703514904575602731006315198.html.
How did this happen so fast? Many observers note that it was the direct result of Chinese government intervention in what was deemed a key industry.
Central to China’s approach are policies that champion state-owned firms and other so-called national champions, seek aggressively to obtain advanced technology, and manage its exchange rate to benefit exporters. It leverages state control of the financial system to channel low-cost capital to domestic industries—and to resource-rich foreign nations (such as those we read in the opening case) whose oil and minerals China needs to maintain rapid growth.Jason Dean, Andrew Browne, and Shai Oster, “China’s ‘State Capitalism’ Sparks Global Backlash,” Wall Street Journal, November 16, 2010, accessed December 22, 2010, http://online.wsj.com/article/SB10001424052748703514904575602731006315198.html.
Understanding the balance between China’s government structure and its ideology is essential to doing business in this complex country. China is both an emerging market and a rising superpower. Its leaders see the economy as a tool to preserving the state’s power, which in turn is essential to maintaining stability and growth and ensuring the long-term viability of the Communist Party.Jason Dean, Andrew Browne, and Shai Oster, “China’s ‘State Capitalism’ Sparks Global Backlash,” Wall Street Journal, November 16, 2010, accessed December 22, 2010, http://online.wsj.com/article/SB10001424052748703514904575602731006315198.html.
Contrary to the approach of much of the world, which is moving more control to the private sector, China has steadfastly maintained its state control. For example, the Chinese government owns almost all the major banks, the three largest oil companies, the three telecommunications carriers, and almost all of the media.
China’s Communist Party outlines its goals in five-year plans. The most recent one emphasizes the government’s goal for China to become a technology powerhouse by 2020 and highlights key areas such as green technology, hence the solar industry expansion. Free trade advocates perceive this government-directed intervention as an unfair tilt against the global private sector. Nevertheless, global companies continue to seek the Chinese market, which offers much-needed growth and opportunity.Jason Dean, Andrew Browne, and Shai Oster, “China’s ‘State Capitalism’ Sparks Global Backlash,” Wall Street Journal, November 16, 2010, accessed December 22, 2010, http://online.wsj.com/article/SB10001424052748703514904575602731006315198.html.
KEY TAKEAWAYS
• There are more than thirteen major types of government and each type consists of multiple variations. At one end of the political ideology extremes is anarchism, which contends that individuals should control political activities and public government is both unnecessary and unwanted. The other extreme is totalitarianism, which contends that every aspect of an individual’s life should be controlled and dictated by a strong central government. Neither extreme exists in its purest form in the real world. Instead, most countries have a combination of both. This combination is called pluralism, which asserts that both public and private groups are important in a well-functioning political system. Democracy is the most common form of government today. Democratic governments derive their power from the people of the country either by direct referendum, called a direct democracy, or by means of elected representatives of the people, known as a representative democracy.
• Capitalism is an economic system in which the means of production are owned and controlled privately. In contrast a planned economy is one in which the government or state directs and controls the economy.
• There are three main types of legal systems: (1) civil law, (2) common law, and (3) religious law. In practice, countries use a combination of one or more of these systems and often adapt them to suit the local values and culture.
• Government-business trade relations are the relationships between national governments and global businesses. Governments intervene in trade to protect their nation’s economy and industry, as well as promote and preserve their social, cultural, political, and economic structures and philosophies. Governments have several key policy areas in which they can create rules and regulations in order to control and manage trade, including tariffs, subsidies; import quotas and VER, currency controls, local content requirements, antidumping rules, export financing, free-trade zones, and administrative policies.
EXERCISES
(AACSB: Reflective Thinking, Analytical Skills)
1. Identify the main political ideologies.
2. What is capitalism? What is a planned economy? Compare and contrast the two forms of economic ideology discussed in this section.
3. What are three policy areas in which governments can create rules and regulations in order to control, manage, and intervene in trade. | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/02%3A_International_Trade_and_Foreign_Direct_Investment/2.03%3A_Political_and_Legal_Factors_That_Impact_International_Trade.txt |
Learning Objectives
1. Understand the types of international investments.
2. Identify the factors that influence foreign direct investment (FDI).
3. Explain why and how governments encourage FDI in their countries.
Understand the Types of International Investments
There are two main categories of international investment—portfolio investment and foreign direct investment. Portfolio investment refers to the investment in a company’s stocks, bonds, or assets, but not for the purpose of controlling or directing the firm’s operations or management. Typically, investors in this category are looking for a financial rate of return as well as diversifying investment risk through multiple markets.
Foreign direct investment (FDI) refers to an investment in or the acquisition of foreign assets with the intent to control and manage them. Companies can make an FDI in several ways, including purchasing the assets of a foreign company; investing in the company or in new property, plants, or equipment; or participating in a joint venture with a foreign company, which typically involves an investment of capital or know-how. FDI is primarily a long-term strategy. Companies usually expect to benefit through access to local markets and resources, often in exchange for expertise, technical know-how, and capital. A country’s FDI can be both inward and outward. As the terms would suggest, inward FDI refers to investments coming into the country and outward FDI are investments made by companies from that country into foreign companies in other countries. The difference between inward and outward is called the net FDI inflow, which can be either positive or negative.
Governments want to be able to control and regulate the flow of FDI so that local political and economic concerns are addressed. Global businesses are most interested in using FDI to benefit their companies. As a result, these two players—governments and companies—can at times be at odds. It’s important to understand why companies use FDI as a business strategy and how governments regulate and manage FDI.
Factors That Influence a Company’s Decision to Invest
Let’s look at why and how companies choose to invest in foreign markets. Simply purchasing goods and services or deciding to invest in a local market depends on a business’s needs and overall strategy. Direct investment in a country occurs when a company chooses to set up facilities to produce or market their products; or seeks to partner with, invest in, or purchase a local company for control and access to the local market, production, or resources. Many considerations influence its decisions:
• Cost. Is it cheaper to produce in the local market than elsewhere?
• Logistics. Is it cheaper to produce locally if the transportation costs are significant?
• Market. Has the company identified a significant local market?
• Natural resources. Is the company interested in obtaining access to local resources or commodities?
• Know-how. Does the company want access to local technology or business process knowledge?
• Customers and competitors. Does the company’s clients or competitors operate in the country?
• Policy. Are there local incentives (cash and noncash) for investing in one country versus another?
• Ease. Is it relatively straightforward to invest and/or set up operations in the country, or is there another country in which setup might be easier?
• Culture. Is the workforce or labor pool already skilled for the company’s needs or will extensive training be required?
• Impact. How will this investment impact the company’s revenue and profitability?
• Expatriation of funds. Can the company easily take profits out of the country, or are there local restrictions?
• Exit. Can the company easily and orderly exit from a local investment, or are local laws and regulations cumbersome and expensive?
These are just a few of the many factors that might influence a company’s decision. Keep in mind that a company doesn’t need to sell in the local market in order to deem it a good option for direct investment. For example, companies set up manufacturing facilities in low-cost countries but export the products to other markets.
There are two forms of FDI—horizontal and vertical. Horizontal FDI occurs when a company is trying to open up a new market—a retailer, for example, that builds a store in a new country to sell to the local market. Vertical FDI is when a company invests internationally to provide input into its core operations—usually in its home country. A firm may invest in production facilities in another country. When a firm brings the goods or components back to its home country (i.e., acting as a supplier), this is referred to as backward vertical FDI. When a firm sells the goods into the local or regional market (i.e., acting as a distributor), this is termed forward vertical FDI. The largest global companies often engage in both backward and forward vertical FDI depending on their industry.
Many firms engage in backward vertical FDI. The auto, oil, and infrastructure (which includes industries related to enhancing the infrastructure of a country—that is, energy, communications, and transportation) industries are good examples of this. Firms from these industries invest in production or plant facilities in a country in order to supply raw materials, parts, or finished products to their home country. In recent years, these same industries have also started to provide forward FDI by supplying raw materials, parts, or finished products to newly emerging local or regional markets.
There are different kinds of FDI, two of which—greenfield and brownfield—are increasingly applicable to global firms. Greenfield FDIs occur when multinational corporations enter into developing countries to build new factories or stores. These new facilities are built from scratch—usually in an area where no previous facilities existed. The name originates from the idea of building a facility on a green field, such as farmland or a forested area. In addition to building new facilities that best meet their needs, the firms also create new long-term jobs in the foreign country by hiring new employees. Countries often offer prospective companies tax breaks, subsidies, and other incentives to set up greenfield investments.
A brownfield FDI is when a company or government entity purchases or leases existing production facilities to launch a new production activity. One application of this strategy is where a commercial site used for an “unclean” business purpose, such as a steel mill or oil refinery, is cleaned up and used for a less polluting purpose, such as commercial office space or a residential area. Brownfield investment is usually less expensive and can be implemented faster; however, a company may have to deal with many challenges, including existing employees, outdated equipment, entrenched processes, and cultural differences.
You should note that the terms greenfield and brownfield are not exclusive to FDI; you may hear them in various business contexts. In general, greenfield refers to starting from the beginning, and brownfield refers to modifying or upgrading existing plans or projects.
Why and How Governments Encourage FDI
Many governments encourage FDI in their countries as a way to create jobs, expand local technical knowledge, and increase their overall economic standards.Ian Bremmer, The End of the Free Market: Who Wins the War Between States and Corporations (New York: Portfolio, 2010). Countries like Hong Kong and Singapore long ago realized that both global trade and FDI would help them grow exponentially and improve the standard of living for their citizens. As a result, Hong Kong (before its return to China) was one of the easiest places to set up a new company. Guidelines were clearly available, and businesses could set up a new office within days. Similarly, Singapore, while a bit more discriminatory on the size and type of business, offered foreign companies a clear, streamlined process for setting up a new company.
In contrast, for decades, many other countries in Asia (e.g., India, China, Pakistan, the Philippines, and Indonesia) restricted or controlled FDI in their countries by requiring extensive paperwork and bureaucratic approvals as well as local partners for any new foreign business. These policies created disincentives for many global companies. By the 1990s (and earlier for China), many of the countries in Asia had caught the global trade bug and were actively trying to modify their policies to encourage more FDI. Some were more successful than others, often as a result of internal political issues and pressures rather than from any repercussions of global trade.UNCTAD compiles statistics on foreign direct investment (FDI): “Foreign Direct Investment database,” UNCTAD United Nations Conference on Trade and Development, accessed February 16, 2011, http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx?sRF_ActivePath=P,5,27&sRF_Expanded=,P,5,27&sCS_ChosenLang=en.
How Governments Discourage or Restrict FDI
In most instances, governments seek to limit or control foreign direct investment to protect local industries and key resources (oil, minerals, etc.), preserve the national and local culture, protect segments of their domestic population, maintain political and economic independence, and manage or control economic growth. A government use various policies and rules:
• Ownership restrictions. Host governments can specify ownership restrictions if they want to keep the control of local markets or industries in their citizens’ hands. Some countries, such as Malaysia, go even further and encourage that ownership be maintained by a person of Malay origin, known locally as bumiputra. Although the country’s Foreign Investment Committee guidelines are being relaxed, most foreign businesses understand that having a bumiputra partner will improve their chances of obtaining favorable contracts in Malaysia.
• Tax rates and sanctions. A company’s home government usually imposes these restrictions in an effort to persuade companies to invest in the domestic market rather than a foreign one.
How Governments Encourage FDI
Governments seek to promote FDI when they are eager to expand their domestic economy and attract new technologies, business know-how, and capital to their country. In these instances, many governments still try to manage and control the type, quantity, and even the nationality of the FDI to achieve their domestic, economic, political, and social goals.
• Financial incentives. Host countries offer businesses a combination of tax incentives and loans to invest. Home-country governments may also offer a combination of insurance, loans, and tax breaks in an effort to promote their companies’ overseas investments. The opening case on China in Africa illustrated these types of incentives.
• Infrastructure. Host governments improve or enhance local infrastructure—in energy, transportation, and communications—to encourage specific industries to invest. This also serves to improve the local conditions for domestic firms.
• Administrative processes and regulatory environment. Host-country governments streamline the process of establishing offices or production in their countries. By reducing bureaucracy and regulatory environments, these countries appear more attractive to foreign firms.
• Invest in education. Countries seek to improve their workforce through education and job training. An educated and skilled workforce is an important investment criterion for many global businesses.
• Political, economic, and legal stability. Host-country governments seek to reassure businesses that the local operating conditions are stable, transparent (i.e., policies are clearly stated and in the public domain), and unlikely to change.
Ethics in Action
Encouraging Foreign Investment
Governments seek to encourage FDI for a variety of reasons. On occasion, though, the process can cross the lines of ethics and legality. In November 2010, seven global companies paid the US Justice Department “a combined \$236 million in fines to settle allegations that they or their contractors bribed foreign officials to smooth the way for importing equipment and materials into several countries.”Kara Scannell, “Shell, Six Other Firms Settle Foreign-Bribery Probe,” Wall Street Journal, November 5, 2010, accessed December 23, 2010, http://online.wsj.com/article/SB10001424052748704805204575594311301043920.html. The companies included Shell and contractors Transocean, Noble, Pride International, Global Santa Fe, Tidewater, and Panalpina World Transport. The bribes were paid to officials in oil-rich countries—Nigeria, Brazil, Azerbaijan, Russia, Turkmenistan, Kazakhstan, and Angola. In the United States, global firms—including ones headquartered elsewhere, but trading on any of the US stock exchanges—are prohibited from paying or even offering to pay bribes to foreign government officials or employees of state-owned businesses with the intent of currying business favors. While the law and the business ethics are clear, in many cases, the penalty fines remain much less onerous than losing critical long-term business revenues.Kara Scannell, “Shell, Six Other Firms Settle Foreign-Bribery Probe,” Wall Street Journal, November 5, 2010, accessed December 23, 2010, http://online.wsj.com/article/SB10001424052748704805204575594311301043920.html.
Did You Know?
Hong Kong: From Junks to Jets? The Rise of a Global Powerhouse
Policies of openness to FDI and international trade have enabled countries around the world to leapfrog economically over their neighbors. The historical rise of Hong Kong is one example. Hong Kong’s economic strengths can be traced to a combination of factors, including its business-friendly laws and policies, a local population that is culturally oriented to transacting trade and business, and Hong Kong’s geographic proximity to the major economies of China, Japan, and Taiwan.
Hong Kong has always been open to global trade. Many people, from the Chinese to the Japanese to the British, have occupied Hong Kong over the centuries, and all of them have contributed to its development as one of the world’s great ports and trading centers.
In 1997, Hong Kong reverted back to Chinese control; however, free enterprise will be governed under the agreement of Basic Law, which established Hong Kong as a separate Special Administrative Region (SAR) of China. Under its Basic Law, in force until 2047, Hong Kong will retain its legal, social, economic, and political systems apart from China’s. Thus, Hong Kong is guaranteed the right to its own monetary system and financial autonomy. Hong Kong is allowed to work independently with the international community; to control trade in strategic commodities, drugs, and illegal transshipments; and to protect intellectual property rights. Under the Basic Law, the Hong Kong SAR maintains an independent tax system and the right to free trade.
Hong Kong has an open business structure, which freely encourages foreign direct investment. Any company that wishes to do business here is free to do so as long as it complies with local laws. Hong Kong’s legal and institutional framework combined with its good banking and financial facilities and business-friendly tax systems have encouraged foreign direct investment as many multinationals located their regional headquarters in Hong Kong.
As a base for doing business with China, Hong Kong now accounts for half of all direct investments in the mainland and is China’s main conduit for investment and trade. China has also become a major investor in Hong Kong.
Culturally, many foreign firms are attracted to Hong Kong by its skilled workforce and the fact that Hong Kong still conducts business in English, a remnant of its British colonial influence. The imprint of the early British trading firms, known as hongs, is particularly strong today in the area of property development. Jardine Matheson and Company, for instance, founded by trader William Jardine, remains one of Hong Kong’s preeminent firms. In many of these companies, British management practices remain firmly in place. Every aspect of Hong Kong’s business laws—whether pertaining to contracts, taxes, or trusts—bears striking similarities to the laws in Britain. All these factors contribute to a business culture that is familiar to people in many multinationals.
Chinese cultural influences have always affected business and are increasingly so today. Many pundits claim that Hong Kong already resembles China’s free-trade zone. And, indeed, the two economies are becoming increasingly intertwined. Much of this economic commingling began in the 1990s, when Hong Kong companies began relocating production centers to the mainland—especially to Guangdong province.
Because of the shift in production to mainland China and other Asian countries, there is not much manufacturing left in Hong Kong. What remains is light in nature and veers toward high-value-added products. In fact, 80 percent of Hong Kong’s gross domestic product now comes from its high value-added service sector: finance, business and legal services, brokerage services, the shipping and cargo industries, and the hotel, food, and beverage industry.
Local Hong Kong companies, as well as foreign businesses based there, are uniquely positioned to play important roles as brokers and intermediaries between the mainland and global corporations. Doing business in China is not only complex and daunting but also requires connections, locally known as guanxi, to influential people and an understanding of local laws and protocol. Developing these relationships and this knowledge is almost impossible without the assistance of an insider. It is in this role that the Hong Kong business community stands to contribute enormously.
Hong Kong’s openness to foreign investment coupled with its proximity to China will ensure its global economic competitiveness for decades to come.
KEY TAKEAWAYS
• There are two main categories of international investment: portfolio investment and foreign direct investment (FDI). Portfolio investment refers to the investment in a company’s stocks, bonds, or assets, but not for the purpose of controlling or directing the firm’s operations or management. FDI refers to an investment in or the acquisition of foreign assets with the intent to control and manage them.
• Direct investment in a country occurs when a company chooses to set up facilities to produce or market its products or seeks to partner with, invest in, or purchase a local company for control and access to the local market, production, or resources. Many considerations can influence the company’s decisions, including cost, logistics, market, natural resources, know-how, customers and competitors, policy, ease of entry and exit, culture, impact on revenue and profitability, and expatriation of funds.
• Governments discourage or restrict FDI through ownership restrictions, tax rates, and sanctions. Governments encourage FDI through financial incentives; well-established infrastructure; desirable administrative processes and regulatory environment; educational investment; and political, economic, and legal stability.
EXERCISES
(AACSB: Reflective Thinking, Analytical Skills)
1. What are three factors that impact a company’s decision to invest in a country?
2. What is the difference between vertical and horizontal FDI? Give one example of an industry for each type.
3. How can governments encourage or discourage FDI? | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/02%3A_International_Trade_and_Foreign_Direct_Investment/2.04%3A_Foreign_Direct_Investment.txt |
Attracting Trade and Investment
Governments around the world seek to attract trade and investment, but some are better at achieving this objective than others. Are you wondering where the best country to start a business might be? The Wall Street Journal recently made an effort to answer this question by reviewing data from global surveys. Contrary to what you might think given the global push toward globalization and a flat world, most governments still actively limit and control foreign investment.
Governments in the developing world, for instance, often impose high costs and numerous procedures on people who are trying to get a company off the ground. In Zimbabwe, entrepreneurs will have to fork over about 500 percent of the country’s average per-capita income in government fees. Compare that with 0.7 percent in the U.S. In Equatorial Guinea, owners have to slog through 20 procedures to get their venture going, versus just one in Canada and New Zealand. Still, lots of countries are making progress. In a World Bank study of red tape, Samoa was singled out for making the most strides in reforming its practices. It went from one of the toughest places in the world to start a company last year—131st out of 183—to No. 20 this year…China, for instance, ranks as just the 40th best place in the world to start a company. Yet China and its up-and-coming peers score high on forward-looking measures like expectations for job creation—so they’re likely to catch up fast with more-advanced economies.Jeff May, “The Best Country to Start a Business…and Other Facts You Probably Didn’t Know about Entrepreneurship around the World,” Wall Street Journal, November 15, 2010, accessed December 27, 2010, http://online.wsj.com/article/SB10001424052748703859204575525883366862428.html.
Quick Facts
• What’s the best place in the world to start a business? Denmark.
• What country has the biggest share of women who launch new businesses? Peru.
• Where does it cost the most to start a company? You’ll have to pony up the most money in the Netherlands.
• Where does it take an average of 694 days to clear government red tape and get a company off the ground? Suriname.Jeff May, “The Best Country to Start a Business…and Other Facts You Probably Didn’t Know about Entrepreneurship around the World,” Wall Street Journal, November 15, 2010, accessed December 27, 2010, http://online.wsj.com/article/SB10001424052748703859204575525883366862428.html.
2.06: End-of-Chapter Questions and Exercises
These exercises are designed to ensure that the knowledge you gain from this book about international business meets the learning standards set out by the international Association to Advance Collegiate Schools of Business (AACSB International).Association to Advance Collegiate Schools of Business website, accessed January 26, 2010, http://www.aacsb.edu. AACSB is the premier accrediting agency of collegiate business schools and accounting programs worldwide. It expects that you will gain knowledge in the areas of communication, ethical reasoning, analytical skills, use of information technology, multiculturalism and diversity, and reflective thinking.
EXPERIENTIAL EXERCISES
(AACSB: Communication, Use of Information Technology, Analytical Skills)
1. Define the differences between the classical, country-based trade theories and the modern, firm-based trade theories. If you were a manager for a large manufacturing company charged with developing your firm’s global strategy, how would you use these theories in your analysis? Which theories seem most appealing to you and which don’t seem to apply?
2. Pick a country as a potential new market for your firm’s operations. Using what you have learned in this chapter and from online resources (e.g., www.cia.gov/library/publications/the-world-factbook/index.html and http://globaledge.msu.edu/),Central Intelligence Agency, World Factbook, Central Intelligence Agency website, accessed February 16, 2011, www.cia.gov/library/publications/the-world-factbook/index.html; globalEDGE website, International Business Center, Michigan State University, accessed February 16, 2011, http://globaledge.msu.edu. assess the local political, economic, and legal factors of the country. Would you recommend to your senior management that your firm establish operations and invest in this country? Which factors do you think are most important in this decision?
Ethical Dilemmas
(AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills)
1. Imagine that you are working for a US business that is evaluating whether it should move its manufacturing to India or China. You have been asked to present the pros and cons of this investment. Based on what you have learned in this chapter, what political, legal, economic, social, and business factors would you need to assess for each country? Use the Internet for country-specific research.globalEDGE website, International Business Center, Michigan State University, accessed February 16, 2011, http://globaledge.msu.edu.
2. Imagine that you work for a large, global company that builds power plants for electricity. This industry has a long-term perspective and requires stable, reliable countries in order to make FDIs. You are assigned to evaluate which of the following would be better for a long-term investment: South Africa, Nigeria, Algeria, or Kenya. Recall what you’ve learned in this chapter about political and legal factors and political ideologies—as well as earlier discussions about global business ethics and bribery. Then, using online resources to support your opinion, provide your recommendations to senior management. | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/02%3A_International_Trade_and_Foreign_Direct_Investment/2.05%3A_Tips_in_Your_Entrepreneurial_Walkabout_Toolkit.txt |
Culture and Business
WHAT’S IN IT FOR ME?
1. What is culture? What kinds of culture are there?
2. What are the key methods used to describe cultures? What are the additional determinants of cultures?
3. How does culture impact local business practices and how does cultural understanding apply to business negotiating?
4. What is global business ethics and how is it impacted by culture?
5. How do ethics impact global businesses?
This chapter will take a closer look at how two key factors, culture and ethics, impact global business. Most people hear about culture and business and immediately think about protocol—a list of dos and don’ts by country. For example, don’t show the sole of your foot in Saudi Arabia; know how to bow in Japan. While these practices are certainly useful to know, they are just the tip of the iceberg. We often underestimate how critical local culture, values, and customs can be in the business environment. We assume, usually incorrectly, that business is the same everywhere. Culture does matter, and more and more people are realizing its impact on their business interactions.
Culture, in the broadest sense, refers to how and why we think and function. It encompasses all sorts of things—how we eat, play, dress, work, think, interact, and communicate. Everything we do, in essence, has been shaped by the cultures in which we are raised. Similarly, a person in another country is also shaped by his or her cultural influences. These cultural influences impact how we think and communicate.
This chapter will discuss what culture means and how it impacts business. We’ll review a real company, Dunkin’ Brands, that has learned to effectively incorporate, interpret, and integrate local customs and habits, the key components of culture, into its products and marketing strategy.
Opening Case: Dunkin’ Brands—Dunkin’ Donuts and Baskin-Robbins: Making Local Global
High-tech and digital news may dominate our attention globally, but no matter where you go, people still need to eat. Food is a key part of many cultures. It is part of the bonds of our childhood, creating warm memories of comfort food or favorite foods that continue to whet our appetites. So it’s no surprise that sugar and sweets are a key part of our food focus, no matter what the culture. Two of the most visible American exports are the twin brands of Dunkin’ Donuts and Baskin-Robbins.
Owned today by a consortium of private equity firms known as the Dunkin’ Brands, Dunkin’ Donuts and Baskin-Robbins have been sold globally for more than thirty-five years. Today, the firm has more than 14,800 points of distribution in forty-four countries with \$6.9 billion in global sales.
After an eleven-year hiatus, Dunkin’ Donuts returned to Russia in 2010 with the opening of twenty new stores. Under a new partnership, “the planned store openings come 11 years after Dunkin’ Donuts pulled out of Russia, following three years of losses exacerbated by a rogue franchisee who sold liquor and meat pies alongside coffee and crullers.”Kevin Helliker, “Dunkin’ Donuts Heads Back to Russia,” Wall Street Journal, April 27, 2010, accessed February 15, 2011, http://online.wsj.com/article/SB10001424052748704464704575208320044839374.html. Each culture has different engrained habits, particularly in the choices of food and what foods are appropriate for what meals. The more globally aware businesses are mindful of these issues and monitor their overseas operations and partners. One of the key challenges for many companies operating globally with different resellers, franchisees, and wholly owned subsidiaries is the ability to control local operations.
This wasn’t the first time that Dunkin’ had encountered an overzealous local partner who tried to customize operations to meet local preferences and demands. In Indonesia in the 1990s, the company was surprised to find that local operators were sprinkling a mild, white cheese on a custard-filled donut. The company eventually approved the local customization since it was a huge success.David Jenkins (former director, International Operations Development, Allied-Domecq QSR International Ltd.), interview with the author, 2010.
Dunkin’ Donuts and Baskin-Robbins have not always been owned by the same firm. They eventually came under one entity in the late 1980s—an entity that sought to leverage the two brands. One of the overall strategies was to have the morning market covered by Dunkin’ Donuts and the afternoon-snack market covered by Baskin-Robbins. It is a strategy that worked well in the United States and was one the company employed as it started operating and expanding in different countries. The company was initially unprepared for the wide range of local cultural preferences and habits that would culturally impact its business. In Russia, Japan, China, and most of Asia, donuts, if they were known at all, were regarded more as a sweet type of bakery treat, like an éclair or cream puff. Locals primarily purchased and consumed them at shopping malls as an “impulse purchase” afternoon-snack item and not as a breakfast food.
In fact, in China, there was no equivalent word for “donut” in Mandarin, and European-style baked pastries were not common outside the Shanghai and Hong Kong markets. To further complicate Dunkin’ Donuts’s entry into China, which took place initially in Beijing, the company name could not even be phonetically spelled in Chinese characters that made any sense, as Baskin-Robbins had been able to do in Taiwan. After extensive discussion and research, company executives decided that the best name and translation for Dunkin’ Donuts in China would read Sweet Sweet Ring in Chinese characters.
Local cultures also impacted flavors and preferences. For Baskin-Robbins, the flavor library is controlled in the United States, but local operators in each country have been the source of new flavor suggestions. In many cases, flavors that were customized for local cultures were added a decade later to the main menus in major markets, including the United States. Mango and green tea were early custom ice cream flavors in the 1990s for the Asian market. In Latin America, dulce de leche became a favorite flavor. Today, these flavors are staples of the North American flavor menu.
One flavor suggestion from Southeast Asia never quite made it onto the menu. The durian fruit is a favorite in parts of Southeast Asia, but it has a strong, pungent odor. Baskin-Robbins management was concerned that the strong odor would overwhelm factory operations. (The odor of the durian fruit is so strong that the fruit is often banned in upscale hotels in several Asian countries.) While the durian never became a flavor, the company did concede to making ice cream flavored after the ube, a sweetened purple yam, for the Philippine market. It was already offered in Japan, and the company extended it to the Philippines. In Japan, sweet corn and red bean ice cream were approved for local sale and became hot sellers, but the two flavors never made it outside the country.
When reviewing local suggestions, management conducts a market analysis to determine if the global market for the flavor is large enough to justify the investment in research and development and eventual production. In addition to the market analysis, the company always has to make sure they have access to sourcing quality flavors and fruit. Mango proved to be a challenge, as finding the correct fruit puree differed by country or culture. Samples from India, Hawaii, Pakistan, Mexico, the Philippines, and Puerto Rico were taste-tested in the mainland United States. It seems that the mango is culturally regarded as a national treasure in every country where it is grown, and every country thinks its mango is the best. Eventually the company settled on one particular flavor of mango.
A challenging balance for Dunkin’ Brands is to enable local operators to customize flavors and food product offerings without diminishing the overall brand of the companies. Russians, for example, are largely unfamiliar with donuts, so Dunkin’ has created several items that specifically appeal to Russian flavor preferences for scalded cream and raspberry jam.Kevin Helliker, “Dunkin’ Donuts Heads Back to Russia,” Wall Street Journal, April 27, 2010, accessed February 15, 2011, http://online.wsj.com/article/SB10001424052748704464704575208320044839374.html.
In some markets, one of the company’s brands may establish a market presence first. In Russia, the overall “Dunkin’ Brands already ranks as a dessert purveyor. Its Baskin-Robbins ice-cream chain boasts 143 shops there, making it the No. 2 Western restaurant brand by number of stores behind the hamburger chain McDonald’s Corp.”Kevin Helliker, “Dunkin’ Donuts Heads Back to Russia,” Wall Street Journal, April 27, 2010, accessed February 15, 2011, http://online.wsj.com/article/SB10001424052748704464704575208320044839374.html. The strength of the company’s ice cream brand is now enabling Dunkin’ Brands to promote the donut chain as well.
Opening Case Exercises
(AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills)
1. If you were a manager for Baskin-Robbins, how would you evaluate a request from a local partner in India to add a sugar-cane-flavored ice cream to its menu? What cultural factors would you look at?
2. Do you think Dunkin’ Brands should let local operators make their own decisions regarding flavors for ice creams, donuts, and other items to be sold in-country? How would you recommend that the company’s global management assess the cultural differences in each market? Should there be one global policy? | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/03%3A_Culture_and_Business/3.01%3A_Chapter_Introduction.txt |
Learning Objectives
1. Understand what is meant by culture.
2. Know that there are different kinds of culture.
3. Identify several different kinds of culture.
As the opening case about Dunkin’ Brands illustrates, local preferences, habits, values, and culture impact all aspects of doing business in a country. But what exactly do we mean by culture? Culture is different from personality. For our purposes here, let’s define personality as a person’s identity and unique physical, mental, emotional, and social characteristics.Dictionary.com, s.v. “personality,” accessed February 22, 2011, http://dictionary.reference.com/browse/personality. No doubt one of the highest hurdles to cross-cultural understanding and effective relationships is our frequent inability to decipher the influence of culture from that of personality. Once we become culturally literate, we can more easily read individual personalities and their effect on our relationships.
So, What Is Culture, Anyway?
Culture in today’s context is different from the traditional, more singular definition, used particularly in Western languages, where the word often implies refinement. Culture is the beliefs, values, mind-sets, and practices of a group of people. It includes the behavior pattern and norms of that group—the rules, the assumptions, the perceptions, and the logic and reasoning that are specific to a group. In essence, each of us is raised in a belief system that influences our individual perspectives to such a large degree that we can’t always account for, or even comprehend, its influence. We’re like other members of our culture—we’ve come to share a common idea of what’s appropriate and inappropriate.
Culture is really the collective programming of our minds from birth. It’s this collective programming that distinguishes one group of people from another. Much of the problem in any cross-cultural interaction stems from our expectations. The challenge is that whenever we deal with people from another culture—whether in our own country or globally—we expect people to behave as we do and for the same reasons. Culture awareness most commonly refers to having an understanding of another culture’s values and perspective. This does not mean automatic acceptance; it simply means understanding another culture’s mind-set and how its history, economy, and society have impacted what people think. Understanding so you can properly interpret someone’s words and actions means you can effectively interact with them.
When talking about culture, it’s important to understand that there really are no rights or wrongs. People’s value systems and reasoning are based on the teachings and experiences of their culture. Rights and wrongs then really become perceptions. Cross-cultural understanding requires that we reorient our mind-set and, most importantly, our expectations, in order to interpret the gestures, attitudes, and statements of the people we encounter. We reorient our mind-set, but we don’t necessarily change it.
There are a number of factors that constitute a culture—manners, mind-set, rituals, laws, ideas, and language, to name a few. To truly understand culture, you need to go beyond the lists of dos and don’ts, although those are important too. You need to understand what makes people tick and how, as a group, they have been influenced over time by historical, political, and social issues. Understanding the “why” behind culture is essential.
When trying to understand how cultures evolve, we look at the factors that help determine cultures and their values. In general, a value is defined as something that we prefer over something else—whether it’s a behavior or a tangible item. Values are usually acquired early in life and are often nonrational—although we may believe that ours are actually quite rational. Our values are the key building blocks of our cultural orientation.
Odds are that each of us has been raised with a considerably different set of values from those of our colleagues and counterparts around the world. Exposure to a new culture may take all you’ve ever learned about what’s good and bad, just and unjust, and beautiful and ugly and stand it on its head.
Human nature is such that we see the world through our own cultural shades. Tucked in between the lines of our cultural laws is an unconscious bias that inhibits us from viewing other cultures objectively. Our judgments of people from other cultures will always be colored by the frame of reference we’ve been taught. As we look at our own habits and perceptions, we need to think about the experiences that have blended together to impact our cultural frame of reference.
In coming to terms with cultural differences, we tend to employ generalizations. This isn’t necessarily bad. Generalizations can save us from sinking into what may be abstruse, esoteric aspects of a culture. However, recognize that cultures and values are not static entities. They’re constantly evolving—merging, interacting, drawing apart, and reforming. Around the world, values and cultures are evolving from generation to generation as people are influenced by things outside their culture. In modern times, media and technology have probably single-handedly impacted cultures the most in the shortest time period—giving people around the world instant glimpses into other cultures, for better or for worse. Recognizing this fluidity will help you avoid getting caught in outdated generalizations. It will also enable you to interpret local cues and customs and to better understand local cultures.
Understanding what we mean by culture and what the components of culture are will help us better interpret the impact on business at both the macro and micro levels. Confucius had this to say about cultural crossings: “Human beings draw close to one another by their common nature, but habits and customs keep them apart.”
What Kinds of Culture Are There?
Political, economic, and social philosophies all impact the way people’s values are shaped. Our cultural base of reference—formed by our education, religion, or social structure—also impacts business interactions in critical ways. As we study cultures, it is very important to remember that all cultures are constantly evolving. When we say “cultural,” we don’t always just mean people from different countries. Every group of people has its own unique culture—that is, its own way of thinking, values, beliefs, and mind-sets. For our purposes in this chapter, we’ll focus on national and ethnic cultures, although there are subcultures within a country or ethnic group.
Precisely where a culture begins and ends can be murky. Some cultures fall within geographic boundaries; others, of course, overlap. Cultures within one border can turn up within other geographic boundaries looking dramatically different or pretty much the same. For example, Indians in India or Americans in the United States may communicate and interact differently from their countrymen who have been living outside their respective home countries for a few years.
The countries of the Indian subcontinent, for example, have close similarities. And cultures within one political border can turn up within other political boundaries looking pretty much the same, such as the Chinese culture in China and the overseas Chinese culture in countries around the world. We often think that cultures are defined by the country or nation, but that can be misleading because there are different cultural groups (as depicted in the preceding figure). These groups include nationalities; subcultures (gender, ethnicities, religions, generations, and even socioeconomic class); and organizations, including the workplace.
Nationalities
A national culture is—as it sounds—defined by its geographic and political boundaries and includes even regional cultures within a nation as well as among several neighboring countries. What is important about nations is that boundaries have changed throughout history. These changes in what territory makes up a country and what the country is named impact the culture of each country.
In the past century alone, we have seen many changes as new nations emerged from the gradual dismantling of the British and Dutch empires at the turn of the 1900s. For example, today the physical territories that constitute the countries of India and Indonesia are far different than they were a hundred years ago. While it’s easy to forget that the British ran India for two hundred years and that the Dutch ran Indonesia for more than one hundred and fifty years, what is clearer is the impact of the British and the Dutch on the respective bureaucracies and business environments. The British and the Dutch were well known for establishing large government bureaucracies in the countries they controlled. Unlike the British colonial rulers in India, the Dutch did little to develop Indonesia’s infrastructure, civil service, or educational system. The British, on the other hand, tended to hire locals for administrative positions, thereby establishing a strong and well-educated Indian bureaucracy. Even though many businesspeople today complain that this Indian bureaucracy is too slow and focused on rules and regulations, the government infrastructure and English-language education system laid out by the British helped position India for its emergence as a strong high-tech economy.
Even within a national culture, there are often distinct regional cultures—the United States is a great example of diverse and distinct cultures all living within the same physical borders. In the United States, there’s a national culture embodied in the symbolic concept of “all-American” values and traits, but there are also other cultures based on geographically different regions—the South, Southwest, West Coast, East Coast, Northeast, Mid-Atlantic, and Midwest.
Subcultures
Many groups are defined by ethnicity, gender, generation, religion, or other characteristics with cultures that are unique to them. For example, the ethnic Chinese business community has a distinctive culture even though it may include Chinese businesspeople in several countries. This is particularly evident throughout Asia, as many people often refer to Chinese businesses as making up a single business community. The overseas Chinese business community tends to support one another and forge business bonds whether they are from Indonesia, Malaysia, Singapore, or other ASEAN (Association of Southeast Asian Nations) countries. This group is perceived differently than Chinese from mainland China or Taiwan. Their common experience being a minority ethnic community with strong business interests has led to a shared understanding of how to quietly operate large businesses in countries. Just as in mainland China, guanxi, or “connections,” are essential to admission into this overseas Chinese business network. But once in the network, the Chinese tend to prefer doing business with one another and offer preferential pricing and other business services.
Organizations
Every organization has its own workplace culture, referred to as the organizational culture. This defines simple aspects such as how people dress (casual or formal), how they perceive and value employees, or how they make decisions (as a group or by the manager alone). When we talk about an entrepreneurial culture in a company, it might imply that the company encourages people to think creatively and respond to new ideas fairly quickly without a long internal approval process. One of the issues managers often have to consider when operating with colleagues, employees, or customers in other countries is how the local country’s culture will blend or contrast with the company’s culture.
For example, Apple, Google, and Microsoft all have distinct business cultures that are influenced both by their industries and by the types of technology-savvy employees that they hire, as well as by the personalities of their founders. When these firms operate in a country, they have to assess how new employees will fit their respective corporate cultures, which usually emphasize creativity, innovation, teamwork balanced with individual accomplishment, and a keen sense of privacy. Their global employees may appear relaxed in casual work clothes, but underneath there is often a fierce competitiveness. So how do these companies effectively hire in countries like Japan, where teamwork and following rules are more important than seeking new ways of doing things? This is an ongoing challenge that human resources (HR) departments continually seek to address.
KEY TAKEAWAYS
• Culture is the beliefs, values, mind-sets, and practices of a specific group of people. It includes the behavior pattern and norms of a specific group—the rules, the assumptions, the perceptions, and the logic and reasoning that are specific to a group. Culture is really the collective programming of our minds from birth. It’s this collective programming that distinguishes one group of people from another. Cultural awareness most commonly refers to having an understanding of another culture’s values and perspective.
• When trying to understand how cultures evolve, we look at the factors that help determine cultures and their values. In general, a value is defined as something that we prefer over something else—whether it’s a behavior or a tangible item. Values are usually acquired early in life and are usually nonrational. Our values are the key building blocks of our cultural orientation.
• When we say cultural, we don’t always just mean people from different countries. Cultures exist in all types of groups. There are even subcultures within a country or target ethnic group. Each person belongs to several kinds of cultures: national, subcultural (regional, gender, ethnic, religious, generational, and socioeconomic), and group or workplace (corporate culture).
EXERCISES
(AACSB: Reflective Thinking, Analytical Skills)
1. What is culture?
2. What are the different levels or types of cultures?
3. Identify your national culture and describe the subcultures within it. | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/03%3A_Culture_and_Business/3.02%3A_What_Is_Culture_Anyhow_Values_Customs_and_Language.txt |
Learning Objectives
1. Know several methods to describe cultures.
2. Define and apply Hofstede’s and Hall’s categories for cultural identification.
3. Identify and discuss additional determinants of culture.
The study of cross-cultural analysis incorporates the fields of anthropology, sociology, psychology, and communication. The combination of cross-cultural analysis and business is a new and evolving field; it’s not a static understanding but changes as the world changes. Within cross-cultural analysis, two names dominate our understanding of culture—Geert Hofstede and Edward T. Hall. Although new ideas are continually presented, Hofstede remains the leading thinker on how we see cultures.
This section will review both the thinkers and the main components of how they define culture and the impact on communications and business. At first glance, it may seem irrelevant to daily business management to learn about these approaches. In reality, despite the evolution of cultures, these methods provide a comprehensive and enduring understanding of the key factors that shape a culture, which in turn impact every aspect of doing business globally. Additionally, these methods enable us to compare and contrast cultures more objectively. By understanding the key researchers, you’ll be able to formulate your own analysis of the different cultures and the impact on international business.
Hofstede and Values
Geert Hofstede, sometimes called the father of modern cross-cultural science and thinking, is a social psychologist who focused on a comparison of nations using a statistical analysis of two unique databases. The first and largest database composed of answers that matched employee samples from forty different countries to the same survey questions focused on attitudes and beliefs. The second consisted of answers to some of the same questions by Hofstede’s executive students who came from fifteen countries and from a variety of companies and industries. He developed a framework for understanding the systematic differences between nations in these two databases. This framework focused on value dimensions. Values, in this case, are broad preferences for one state of affairs over others, and they are mostly unconscious.
Most of us understand that values are our own culture’s or society’s ideas about what is good, bad, acceptable, or unacceptable. Hofstede developed a framework for understanding how these values underlie organizational behavior. Through his database research, he identified five key value dimensions that analyze and interpret the behaviors, values, and attitudes of a national culture:“Dimensions of National Cultures,” Geert Hofstede, accessed February 22, 2011, www.geerthofstede.nl/culture/dimensions-of-national-cultures.aspx.
1. Power distance
2. Individualism
3. Masculinity
4. Uncertainty avoidance (UA)
5. Long-term orientation
Power distance refers to how openly a society or culture accepts or does not accept differences between people, as in hierarchies in the workplace, in politics, and so on. For example, high power distance cultures openly accept that a boss is “higher” and as such deserves a more formal respect and authority. Examples of these cultures include Japan, Mexico, and the Philippines. In Japan or Mexico, the senior person is almost a father figure and is automatically given respect and usually loyalty without questions.
In Southern Europe, Latin America, and much of Asia, power is an integral part of the social equation. People tend to accept relationships of servitude. An individual’s status, age, and seniority command respect—they’re what make it all right for the lower-ranked person to take orders. Subordinates expect to be told what to do and won’t take initiative or speak their minds unless a manager explicitly asks for their opinion.
At the other end of the spectrum are low power distance cultures, in which superiors and subordinates are more likely to see each other as equal in power. Countries found at this end of the spectrum include Austria and Denmark. To be sure, not all cultures view power in the same ways. In Sweden, Norway, and Israel, for example, respect for equality is a warranty of freedom. Subordinates and managers alike often have carte blanche to speak their minds.
Interestingly enough, research indicates that the United States tilts toward low power distance but is more in the middle of the scale than Germany and the United Kingdom.
Let’s look at the culture of the United States in relation to these five dimensions. The United States actually ranks somewhat lower in power distance—under forty as noted in Figure 3.1. The United States has a culture of promoting participation at the office while maintaining control in the hands of the manager. People in this type of culture tend to be relatively laid-back about status and social standing—but there’s a firm understanding of who has the power. What’s surprising for many people is that countries such as the United Kingdom and Australia actually rank lower on the power distance spectrum than the United States.
Figure 3.1 The United States’ Five Value Dimensions
Source: “Geert Hofstede™ Cultural Dimensions,” Itim International, accessed June 3, 2011, www.geert-hofstede.com/hofstede_united_states.shtml.
Individualism, noted as IDV in Figure 3.1, is just what it sounds like. It refers to people’s tendency to take care of themselves and their immediate circle of family and friends, perhaps at the expense of the overall society. In individualistic cultures, what counts most is self-realization. Initiating alone, sweating alone, achieving alone—not necessarily collective efforts—are what win applause. In individualistic cultures, competition is the fuel of success.
The United States and Northern European societies are often labeled as individualistic. In the United States, individualism is valued and promoted—from its political structure (individual rights and democracy) to entrepreneurial zeal (capitalism). Other examples of high-individualism cultures include Australia and the United Kingdom.
On the other hand, in collectivist societies, group goals take precedence over individuals’ goals. Basically, individual members render loyalty to the group, and the group takes care of its individual members. Rather than giving priority to “me,” the “us” identity predominates. Of paramount importance is pursuing the common goals, beliefs, and values of the group as a whole—so much so, in some cases, that it’s nearly impossible for outsiders to enter the group. Cultures that prize collectivism and the group over the individual include Singapore, Korea, Mexico, and Arab nations. The protections offered by traditional Japanese companies come to mind as a distinctively group-oriented value.
The next dimension is masculinity, which may sound like an odd way to define a culture. When we talk about masculine or feminine cultures, we’re not talking about diversity issues. It’s about how a society views traits that are considered masculine or feminine.
This value dimension refers to how a culture ranks on traditionally perceived “masculine” values: assertiveness, materialism, and less concern for others. In masculine-oriented cultures, gender roles are usually crisply defined. Men tend to be more focused on performance, ambition, and material success. They cut tough and independent personas, while women cultivate modesty and quality of life. Cultures in Japan and Latin American are examples of masculine-oriented cultures.
In contrast, feminine cultures are thought to emphasize “feminine” values: concern for all, an emphasis on the quality of life, and an emphasis on relationships. In feminine-oriented cultures, both genders swap roles, with the focus on quality of life, service, and independence. The Scandinavian cultures rank as feminine cultures, as do cultures in Switzerland and New Zealand. The United States is actually more moderate, and its score is ranked in the middle between masculine and feminine classifications. For all these factors, it’s important to remember that cultures don’t necessarily fall neatly into one camp or the other.
The next dimension is uncertainty avoidance (UA). This refers to how much uncertainty a society or culture is willing to accept. It can also be considered an indication of the risk propensity of people from a specific culture.
People who have high uncertainty avoidance generally prefer to steer clear of conflict and competition. They tend to appreciate very clear instructions. At the office, sharply defined rules and rituals are used to get tasks completed. Stability and what is known are preferred to instability and the unknown. Company cultures in these countries may show a preference for low-risk decisions, and employees in these companies are less willing to exhibit aggressiveness. Japan and France are often considered clear examples of such societies.
In countries with low uncertainty avoidance, people are more willing to take on risks, companies may appear less formal and structured, and “thinking outside the box” is valued. Examples of these cultures are Denmark, Singapore, Australia, and to a slightly lesser extent, the United States. Members of these cultures usually require less formal rules to interact.
The fifth dimension is long-term orientation, which refers to whether a culture has a long-term or short-term orientation. This dimension was added by Hofstede after the original four you just read about. It resulted in the effort to understand the difference in thinking between the East and the West. Certain values are associated with each orientation. The long-term orientation values persistence, perseverance, thriftiness, and having a sense of shame. These are evident in traditional Eastern cultures. Based on these values, it’s easy to see why a Japanese CEO is likely to apologize or take the blame for a faulty product or process.
The short-term orientation values tradition only to the extent of fulfilling social obligations or providing gifts or favors. These cultures are more likely to be focused on the immediate or short-term impact of an issue. Not surprisingly, the United Kingdom and the United States rank low on the long-term orientation.
Long- and short-term orientation and the other value dimensions in the business arena are all evolving as many people earn business degrees and gain experience outside their home cultures and countries, thereby diluting the significance of a single cultural perspective. As a result, in practice, these five dimensions do not occur as single values but are really woven together and interdependent, creating very complex cultural interactions. Even though these five values are constantly shifting and not static, they help us begin to understand how and why people from different cultures may think and act as they do. Hofstede’s study demonstrates that there are national and regional cultural groupings that affect the behavior of societies and organizations and that these are persistent over time.
Edward T. Hall
Edward T. Hall was a respected anthropologist who applied his field to the understanding of cultures and intercultural communications. Hall is best noted for three principal categories that analyze and interpret how communications and interactions between cultures differ: context, space, and time.
Context: High-Context versus Low-Context Cultures
High and low context refers to how a message is communicated. In high-context cultures, such as those found in Latin America, Asia, and Africa, the physical context of the message carries a great deal of importance. People tend to be more indirect and to expect the person they are communicating with to decode the implicit part of their message. While the person sending the message takes painstaking care in crafting the message, the person receiving the message is expected to read it within context. The message may lack the verbal directness you would expect in a low-context culture. In high-context cultures, body language is as important and sometimes more important than the actual words spoken.
In contrast, in low-context cultures such as the United States and most Northern European countries, people tend to be explicit and direct in their communications. Satisfying individual needs is important. You’re probably familiar with some well-known low-context mottos: “Say what you mean” and “Don’t beat around the bush.” The guiding principle is to minimize the margins of misunderstanding or doubt. Low-context communication aspires to get straight to the point.
Communication between people from high-context and low-context cultures can be confusing. In business interactions, people from low-context cultures tend to listen only to the words spoken; they tend not to be cognizant of body language. As a result, people often miss important clues that could tell them more about the specific issue.
Space
Space refers to the study of physical space and people. Hall called this the study of proxemics, which focuses on space and distance between people as they interact. Space refers to everything from how close people stand to one another to how people might mark their territory or boundaries in the workplace and in other settings. Stand too close to someone from the United States, which prefers a “safe” physical distance, and you are apt to make them uncomfortable. How close is too close depends on where you are from. Whether consciously or unconsciously, we all establish a comfort zone when interacting with others. Standing distances shrink and expand across cultures. Latins, Spaniards, and Filipinos (whose culture has been influenced by three centuries of Spanish colonization) stand rather close even in business encounters. In cultures that have a low need for territory, people not only tend to stand closer together but also are more willing to share their space—whether it be a workplace, an office, a seat on a train, or even ownership of a business project.
Attitudes toward Time: Polychronic versus Monochronic Cultures
Hall identified that time is another important concept greatly influenced by culture. In polychronic culturespolychronic literally means “many times”—people can do several things at the same time. In monochronic cultures, or “one-time” cultures, people tend to do one task at a time.
This isn’t to suggest that people in polychronic cultures are better at multitasking. Rather, people in monochronic cultures, such as Northern Europe and North America, tend to schedule one event at a time. For them, an appointment that starts at 8 a.m. is an appointment that starts at 8 a.m.—or 8:05 at the latest. People are expected to arrive on time, whether for a board meeting or a family picnic. Time is a means of imposing order. Often the meeting has a firm end time as well, and even if the agenda is not finished, it’s not unusual to end the meeting and finish the agenda at another scheduled meeting.
In polychronic cultures, by contrast, time is nice, but people and relationships matter more. Finishing a task may also matter more. If you’ve ever been to Latin America, the Mediterranean, or the Middle East, you know all about living with relaxed timetables. People might attend to three things at once and think nothing of it. Or they may cluster informally, rather than arrange themselves in a queue. In polychronic cultures, it’s not considered an insult to walk into a meeting or a party well past the appointed hour.
In polychronic cultures, people regard work as part of a larger interaction with a community. If an agenda is not complete, people in polychronic cultures are less likely to simply end the meeting and are more likely to continue to finish the business at hand.
Those who prefer monochronic order may find polychronic order frustrating and hard to manage effectively. Those raised with a polychronic sensibility, on the other hand, might resent the “tyranny of the clock” and prefer to be focused on completing the tasks at hand.
What Else Determines a Culture?
The methods presented in the previous sections note how we look at the structures of cultures, values, and communications. They also provide a framework for a comparative analysis between cultures, which is particularly important for businesses trying to operate effectively in multiple countries and cultural environments.
Additionally, there are other external factors that also constitute a culture—manners, mind-sets, values, rituals, religious beliefs, laws, arts, ideas, customs, beliefs, ceremonies, social institutions, myths and legends, language, individual identity, and behaviors, to name a few. While these factors are less structured and do not provide a comparative framework, they are helpful in completing our understanding of what impacts a culture. When we look at these additional factors, we are seeking to understand how each culture views and incorporates each of them. For example, are there specific ceremonies or customs that impact the culture and for our purposes its business culture? For example, in some Chinese businesses, feng shui—an ancient Chinese physical art and science—is implemented in the hopes of enhancing the physical business environment and success potential of the firm.
Of these additional factors, the single most important one is communication.
Verbal Language
Language is one of the more conspicuous expressions of culture. As Hall showed, understanding the context of how language is used is essential to accurately interpret the meaning. Aside from the obvious differences, vocabularies are actually often built on the cultural experiences of the users. For example, in the opening case with Dunkin’ Donuts, we saw how the local culture complicated the company’s ability to list its name in Chinese characters.
Similarly, it’s interesting to note that Arabic speakers have only one word for ice, telg, which applies to ice, snow, hail, and so on. In contrast, Eskimo languages have different words for each type of snow—even specific descriptive words to indicate the amounts of snow.
Another example of how language impacts business is in written or e-mail communications, where you don’t have the benefit of seeing someone’s physical gestures or posture. For example, India is officially an English-speaking country, though its citizens speak the Queen’s English. Yet many businesspeople experience miscommunications related to misunderstandings in the language, ranging from the comical to the frustrating. Take something as simple as multiplication and division. Indians will commonly say “6 into 12” and arrive at 72, whereas their American counterparts will divide to get an answer of 2. You’d certainly want to be very clear if math were an essential part of your communication, as it would be if you were creating a budget for a project.
Another example of nuances between Indian and American language communications is the use of the word revert. The word means “to go back to a previously existing condition.” To Indians, though, the common and accepted use of the word is much more simplistic and means “to get back to someone.”
To see how language impacts communications, look at a situation in which an American manager, in negotiating the terms of a project, began to get frustrated by the e-mails that said that the Indian company was going to “revert back.” He took that to mean that they had not made any progress on some issues, and that the Indians were going back to the original terms. Actually, the Indians simply meant that they were going to get back to him on the outstanding issues—again, a different connotation for the word because of cultural differences.
The all-encompassing “yes” is one of the hardest verbal cues to decipher. What does it really mean? Well, it depends on where you are. In a low-context country—the United States or Scandinavian countries, for example—“yes” is what it is: yes. In a high-context culture—Japan or the Philippines, for example—it can mean “yes,” “maybe,” “OK,” or “I understand you,”—but it may not always signify agreement. The meaning is in the physical context, not the verbal.
Language or words become a code, and you need to understand the word and the context.
Did You Know?
English Required in Japan
It’s commonly accepted around the world that English is the primary global business language. In Japan, some companies have incorporated this reality into daily business practice. By 2012, employees at Rakuten, Japan’s biggest online retailer by sales, will be “required to speak and correspond with one another in English, and executives have been told they will be fired if they aren’t proficient in the language by then. Rakuten, which has made recent acquisitions in the U.S. and Europe, says the English-only policy is crucial to its goal of becoming a global company. It says it needed a common language to communicate with its new operations, and English, as the chief language of international business, was the obvious choice. It expects the change, among other things, to help it hire and retain talented non-Japanese workers.”Daisuke Wakabayashi, “English Gets the Last Word in Japan,” Wall Street Journal, August 6, 2010, accessed February 22, 2011, http://online.wsj.com/article/SB10001424052748703954804575382011407926080.html.
Rakuten is only one of many large and small Japanese companies pursuing English as part of its ongoing global strategy. English is key to the business culture and language at Sony, Nissan Motor, and Mitsubishi, to name a few Japanese businesses. English remains the leading global business language for most international companies seeking a standard common language with its employees, partners, and customers.
Body Language
How you gesture, twitch, or scrunch up your face represents a veritable legend to your emotions. Being able to suitably read—and broadcast—body language can significantly increase your chances of understanding and being understood. In many high-context cultures, it is essential to understand body language in order to accurately interpret a situation, comment, or gesture.
People may not understand your words, but they will certainly interpret your body language according to their accepted norms. Notice the word their. It is their perceptions that will count when you are trying to do business with them, and it’s important to understand that those perceptions will be based on the teachings and experiences of their culture—not yours.
Another example of the “yes, I understand you” confusion in South Asia is the infamous head wobble. Indians will roll their head from side to side to signify an understanding or acknowledgement of a statement—but not necessarily an acceptance. Some have even expressed that they mistakenly thought the head wobble meant “no.” If you didn’t understand the context, then you are likely to misinterpret the gesture and the possible verbal cues as well.
Did You Know?
OK or Not OK?
Various motions and postures can mean altogether divergent things in different cultures. Hand gestures are a classic example. The American sign for OK means “zero” in Tunisia and southern France, which far from signaling approval, is considered a threat. The same gesture, by the way, delivers an obscenity in Brazil, Germany, Greece, and Russia. If you want to tell your British colleagues that victory on a new deal is close at hand by making the V sign with your fingers, be sure your palm is facing outward; otherwise you’ll be telling them where to stick it, and it’s unlikely to win you any new friends.
Eye contact is also an important bit of unspoken vocabulary. People in Western cultures are taught to look into the eyes of their listeners. Likewise, it’s a way the listener reciprocates interest. In contrast, in the East, looking into someone’s eyes may come off as disrespectful, since focusing directly on someone who is senior to you implies disrespect. So when you’re interacting with people from other cultures, be careful not to assume that a lack of eye contact means anything negative. There may be a cultural basis to their behavior.
Amusing Anecdote
Kiss, Shake, Hug, or Bow
Additionally, touching is a tacit means of communication. In some cultures, shaking hands when greeting someone is a must. Where folks are big on contact, grown men might embrace each other in a giant bear hug, such as in Mexico or Russia.
Japan, by contrast, has traditionally favored bowing, thus ensuring a hands-off approach. When men and women interact for business, this interaction can be further complicated. If you’re female interacting with a male, a kiss on the cheek may work in Latin America, but in an Arab country, you may not even get a handshake. It can be hard not to take it personally, but you shouldn’t. These interactions reflect centuries-old traditional cultural norms that will take time to evolve.
Ethnocentrism
A discussion of culture would not be complete without at least mentioning the concept of ethnocentrism. Ethnocentrism is the view that a person’s own culture is central and other cultures are measured in relation to it. It’s akin to a person thinking that their culture is the “sun” around which all other cultures revolve. In its worst form, it can create a false sense of superiority of one culture over others.
Human nature is such that we see the world through our own cultural shades. Tucked in between the lines of our cultural laws is an unconscious bias that inhibits us from viewing other cultures objectively. Our judgments of people from other cultures will always be colored by the frame of reference in which we have been raised.
The challenge occurs when we feel that our cultural habits, values, and perceptions are superior to other people’s values. This can have a dramatic impact on our business relations. Your best defense against ethnocentric behavior is to make a point of seeing things from the perspective of the other person. Use what you have learned in this chapter to extend your understanding of the person’s culture. As much as possible, leave your own frame of reference at home. Sort out what makes you and the other person different—and what makes you similar.
KEY TAKEAWAYS
• There are two key methods used to describe and analyze cultures. The first was developed by Geert Hofstede and focuses on five key dimensions that interpret behaviors, values, and attitudes: power distance, individualism, masculinity, uncertainty avoidance, and long-term orientation. The second method was developed by Edward T. Hall and focuses on three main categories for how communications and interactions between cultures differ: high-context versus low-context communications, space, and attitudes toward time.
• In addition to the main analytical methods for comparing and contrasting cultures, there are a number of other determinants of culture. These determinants include manners, mind-sets, values, rituals, religious beliefs, laws, arts, ideas, customs, beliefs, ceremonies, social institutions, myths and legends, language, individual identity, and behaviors. Language includes both verbal and physical languages.
EXERCISES
(AACSB: Reflective Thinking, Analytical Skills)
1. Define Hofstede’s five value dimensions that analyze and interpret behaviors, values, and attitudes.
2. Identify Hall’s three key factors on how communications and interactions between cultures differ.
3. What are the two components of communications?
4. Describe two ways that verbal language may differ between countries.
5. Describe two ways that body language may differ between cultures.
6. What is ethnocentrism? | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/03%3A_Culture_and_Business/3.03%3A_What_Are_the_Key_Methods_Used_to_Describe_Cultures.txt |
Learning Objectives
1. Identify the ways that culture can impact how we do business.
2. Understand the aspects of business most impacted by culture.
Professionals err when thinking that, in today’s shrinking world, cultural differences are no longer significant. It’s a common mistake to assume that people think alike just because they dress alike; it’s also a mistake to assume that people think alike just because they are similar in their word choices in a business setting. Even in today’s global world, there are wide cultural differences, and these differences influence how people do business. Culture impacts many things in business, including
• The pace of business;
• Business protocol—how to physically and verbally meet and interact;
• Decision making and negotiating;
• Managing employees and projects;
• Propensity for risk taking; and
• Marketing, sales, and distribution.
There are still many people around the world who think that business is just about core business principles and making money. They assume that issues like culture don’t really matter. These issues do matter—in many ways. Even though people are focused on the bottom line, people do business with people they like, trust, and understand. Culture determines all of these key issues.
The opening case shows how a simple issue, such as local flavor preferences, can impact a billion-dollar company. The influence of cultural factors on business is extensive. Culture impacts how employees are best managed based on their values and priorities. It also impacts the functional areas of marketing, sales, and distribution.
It can affect a company’s analysis and decision on how best to enter a new market. Do they prefer a partner (tending toward uncertainty avoidance) so they do not have to worry about local practices or government relations? Or are they willing to set up a wholly owned unit to recoup the best financial prospects?
When you’re dealing with people from another culture, you may find that their business practices, communication, and management styles are different from those to which you are accustomed. Understanding the culture of the people with whom you are dealing is important to successful business interactions and to accomplishing business objectives. For example, you’ll need to understand
• How people communicate;
• How culture impacts how people view time and deadlines;
• How they are likely to ask questions or highlight problems;
• How people respond to management and authority;
• How people perceive verbal and physical communications; and
• How people make decisions.
To conduct business with people from other cultures, you must put aside preconceived notions and strive to learn about the culture of your counterpart. Often the greatest challenge is learning not to apply your own value system when judging people from other cultures. It is important to remember that there are no right or wrong ways to deal with other people—just different ways. Concepts like time and ethics are viewed differently from place to place, and the smart business professional will seek to understand the rationale underlying another culture’s concepts.
For younger and smaller companies, there’s no room for errors or delays—both of which may result from cultural misunderstandings and miscommunications. These miscues can and often do impact the bottom line.
Spotlight on Cultures and Entrepreneurship
With global media reaching the corners of the earth, entrepreneurship has become increasingly popular as more people seek a way to exponentially increase their chances for success. Nevertheless, entrepreneurs can face challenges in starting to do business in nations whose cultures require introductions or place more value on large, prestigious, brand-name firms.
Conversely, entrepreneurs are often well equipped to negotiate global contracts or ventures. They are more likely to be flexible and creative in their approach and have less rigid constraints than their counterparts from more established companies. Each country has different constraints, including the terms of payment and regulations, and you will need to keep an open mind about how to achieve your objectives.
In reality, understanding cultural differences is important whether you’re selling to ethnic markets in your own home country or selling to new markets in different countries. Culture also impacts you if you’re sourcing from different countries, because culture impacts communications.
Your understanding of culture will affect your ability to enter a local market, develop and maintain business relationships, negotiate successful deals, conduct sales, conduct marketing and advertising campaigns, and engage in manufacturing and distribution. Too often, people send the wrong signals or receive the wrong messages; as a result, people get tangled in the cultural web. In fact, there are numerous instances in which deals would have been successfully completed if finalizing them had been based on business issues alone, but cultural miscommunications interfered. Just as you would conduct a technical or market analysis, you should also conduct a cultural analysis.
It’s critical to understand the history and politics of any country or region in which you work or with which you intend to deal. It is important to remember that each person considers his or her “sphere” or “world” the most important and that this attitude forms the basis of his or her individual perspective. We often forget that cultures are shaped by decades and centuries of experience and that ignoring cultural differences puts us at a disadvantage.
Spotlight on Impact of Culture on Business in Latin America
The business culture of Latin America differs throughout the region. A lot has to do with the size of the country, the extent to which it has developed a modern industrial sector, and its openness to outside influences and the global economy.
Some of the major industrial and commercial centers embody a business culture that’s highly sophisticated, international in outlook, and on a par with that in Europe or North America. They often have modern offices, businesspeople with strong business acumen, and international experience.
Outside the cities, business culture is likely to be much different as local conditions and local customs may begin to impact any interaction. Farther from the big cities, the infrastructure may become less reliable, forcing people to become highly innovative in navigating the challenges facing them and their businesses.
Generally speaking, several common themes permeate Latin American business culture. Businesses typically are hierarchical in their structure, with decisions made from the top down. Developing trust and gaining respect in the business environment is all about forging and maintaining good relationships. This often includes quite a bit of socializing.
Another important factor influencing the business culture is the concept of time. In Latin America, “El tiempo es como el espacio.” In other words, time is space. More often than not, situations take precedence over schedules. Many people unfamiliar with Latin American customs, especially those from highly time-conscious countries like the United States, Canada, and those in Northern Europe, can find the lack of punctuality and more fluid view of time frustrating. It’s more useful to see the unhurried approach as an opportunity to develop good relations. This is a generalization, though, and in the megacities of Latin America, such as Mexico City, São Paulo, and Buenos Aires, time definitely equals money.
In most Latin American countries, old-world manners are still the rule, and an air of formality is expected in most business interactions and interpersonal relationships, especially when people are not well acquainted with one another. People in business are expected to dress conservatively and professionally and be polite at all times. Latin Americans are generally very physical and outgoing in their expressions and body language. They frequently stand closer to one another when talking than in many other cultures. They often touch, usually an arm, and even kiss women’s cheeks on a first meeting.
In business and in social interactions, Latin America is overwhelmingly Catholic, which has had a deep impact on culture, values, architecture, and art. For many years and in many countries in the region, the Catholic Church had absolute power over all civil institutions, education, and law. However, today, the church and state are now officially separated in most countries, the practice of other religions is freely allowed, and Evangelical churches are growing rapidly. Throughout the region, particularly in Brazil, Indians and some black communities have integrated many of their own traditional rituals and practices with Christianity, primarily Catholicism, to produce hybrid forms of the religion.
Throughout Latin America, the family is still the most important social unit. Family celebrations are important, and there’s a clear hierarchy within the family structure, with the head of the household generally being the oldest male—the father or grandfather. In family-owned businesses, the patriarch, or on occasion matriarch, tends to retain the key decision-making roles.
Despite the social and economic problems of the region, Latin Americans love life and value the small things that provide color, warmth, friendship, and a sense of community. Whether it’s sitting in a café chatting, passing a few hours in the town square, or dining out at a neighborhood restaurant, Latin Americans take time to live.
From Mexico City to Buenos Aires—whether in business or as a part of the vibrant society—the history and culture of Latin America continues to have deep and meaningful impact on people throughout Latin America.CultureQuest Doing Business: Latin America (New York: Atma Global, 2011).
Key Takeaways
• Professionals often err when they think that in today’s shrinking world, cultural differences no longer pertain. People mistakenly assume that others think alike just because they dress alike and even sound similar in their choice of words in a business setting. Even in today’s global world, there are wide cultural differences and these differences influence how people do business. Culture impacts many elements of business, including the following:
• the pace of business
• business protocol—how to physically and verbally meet and interact
• decision making and negotiating
• managing employees and projects
• propensity for risk taking
• marketing, sales, and distribution
• When you’re dealing with people from another culture, you may find that their business practices and communication and management styles are different from what you are accustomed to. Understanding the culture of the people you are dealing with is important to successful business interactions as well as to accomplishing business objectives. For example, you’ll need to understand the following:
• how people communicate
• how culture impacts how people view time and deadlines
• how people are likely to ask questions or highlight problems
• how people respond to management and authority
• how people perceive verbal and physical communications
• how people make decisions
EXERCISES
(AACSB: Reflective Thinking, Analytical Skills)
1. How does culture impact business?
2. What are three steps to keep in mind if you are evaluating a business opportunity in a culture or country that is new to you?
3. If you are working for a small or entrepreneurial company, what are some of the challenges you may face when trying to do business in a new country? What are some advantages? | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/03%3A_Culture_and_Business/3.04%3A_Understanding_How_Culture_Impacts_Local_Business_Practices.txt |
Conducting Business and Negotiating
In this chapter, you have learned about the methods of analyzing cultures, how values may differ, and the resulting impact on global business. Let’s take a look at how you as a businessperson might incorporate these ideas into a business strategy. The following are some factors to take into consideration in order to take to equip yourself for success and avoid some cultural pitfalls.
1. One of the most important cultural factors in many countries is the emphasis on networking or relationships. Whether in Asia or Latin America or somewhere in between, it’s best to have an introduction from a common business partner, vendor, or supplier when meeting a new company or partner. Even in the United States and Europe, where relationships generally have less importance, a well-placed introduction will work wonders. In some countries, it can be almost impossible to get through the right doors without some sort of introduction. Be creative in identifying potential introducers. If you don’t know someone who knows the company with which you would like to do business, consider indirect sources. Trade organizations, lawyers, bankers and financiers, common suppliers and buyers, consultants, and advertising agencies are just a few potential introducers. Once a meeting has been set up, foreign companies need to understand the nuances that govern meetings, negotiations, and ongoing business expansion in the local culture.
2. Even if you have been invited to bid on a contract, you are still trying to sell your company and yourself. Do not act in a patronizing way or assume you are doing the local company or its government a favor. They must like and trust you if you are to succeed. Think about your own business encounters with people, regardless of nationality, who were condescending and arrogant. How often have you given business to people who irritated you?
3. Make sure you understand how your overseas associates think about time and deadlines. How will that impact your timetable and deliverables?
4. You need to understand the predominant corporate culture of the country you are dealing with—particularly when dealing with vendors and external partners. What’s the local hierarchy? What are the expected management practices? Are the organizations you’re dealing with uniform in culture, or do they represent more than one culture or ethnicity? Culture affects how people develop trust and make decisions as well as the speed of their decision making and their attitudes toward accountability and responsibility.
5. Understand how you can build trust with potential partners. How are people from your culture viewed in the target country, and how will it impact your business interactions? How are small or younger companies viewed in the local market? Understand the corporate culture of your potential partner or distributor. More entrepreneurial local companies may have more in common with a younger firm in terms of their approach to doing business.
6. How do people communicate? There are also differences in how skills and knowledge are taught or transferred. For example, in the United States, people are expected to ask questions—it’s a positive and indicates a seriousness about wanting to learn. In some cultures, asking questions is seen as reflecting a lack of knowledge and could be considered personally embarrassing. It’s important to be able to address these issues without appearing condescending. Notice the word appearing—the issue is less whether you think you’re being condescending and more about whether the professional from the other culture perceives a statement or action as condescending. Again, let’s recall that culture is based on perceptions and values.
7. Focus on communications of all types and learn to find ways around cultural obstacles. For example, if you’re dealing with a culture that shies away from providing bad news or information—don’t ask yes-or-no questions. Focus on the process and ask questions about the stage of the business process or deliverable. Many people get frustrated by the lack of information or clear communications. You certainly don’t want to be surprised by a delayed shipment to your key customers.
8. There are no clear playbooks for operating in every culture around the world. Rather, we have to understand the components that affect culture, understand how it impacts our business objectives, and then equip ourselves and our teams with the know-how to operate successfully in each new cultural environment. Once you’ve established a relationship, you may opt to delegate it to someone on your team. Be sure that your person understands the culture of the country, and make sure to stay involved until there is a successful operating history of at least one or more years. Many entrepreneurs stay involved in key relationships on an ongoing basis. Be aware that your global counterparts may require that level of attention.
9. Make sure in any interaction that you have a decision maker on the other end. On occasion, junior employees get assigned to work with smaller companies, and you could spend a lot of time with someone who is unable to finalize an agreement. If you have to work through details with a junior employee, try to have that person get a senior employee involved early on so you run fewer chances of losing time and wasting energy.
10. When negotiating with people from a different culture, try to understand your counterpart’s position and objectives. This does not imply that you should compromise easily or be soft in your style. Rather, understand how to craft your argument in a manner that will be more effective with a person of that culture.
11. Even in today’s wired world, don’t assume that everyone in every country is as reliant on the Internet and e-mail as you are. You may need to use different modes of communication with different countries, companies, and professionals. Faxes are still very common, as many people consider signed authorizations more official than e-mail, although that is changing.
12. As with any business transaction, use legal documents to document relationships and expectations. Understand how the culture you are dealing with perceives legal documents, lawyers, and the role of a business’s legal department. While most businesspeople around the world are familiar with legal documents, some take the law more seriously than others. Some cultures may be insulted by a lengthy document, while others will consider it a normal part of business.
Many legal professionals recommend that you opt to use the international courts or a third-party arbitration system in case of a dispute. Translate contracts into both languages, and have a second independent translator verify the copies for the accuracy of concepts and key terminology. But be warned: translations may not be exactly the same, as legal terminology is both culture- and country-specific. At the end of the day, even a good contract has many limitations in its use. You have to be willing to enforce infractions.Sanjyot P. Dunung, Straight Talk about Starting and Growing Your Own Business (New York: McGraw-Hill, 2005). | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/03%3A_Culture_and_Business/3.06%3A_Tips_in_Your_Entrepreneurial_Walkabout_Toolkit.txt |
These exercises are designed to ensure that the knowledge you gain from this book about international business meets the learning standards set out by the international Association to Advance Collegiate Schools of Business (AACSB International).Association to Advance Collegiate Schools of Business website, accessed January 26, 2010, http://www.aacsb.edu. AACSB is the premier accrediting agency of collegiate business schools and accounting programs worldwide. It expects that you will gain knowledge in the areas of communication, ethical reasoning, analytical skills, use of information technology, multiculturalism and diversity, and reflective thinking.
EXPERIENTIAL EXERCISES
(AACSB: Communication, Use of Information Technology, Analytical Skills)
1. As people look at their own habits and perceptions, they need to think about the experiences that have blended together to impact our cultural frame of reference. Many of you in this course come from around the United States, and some of you are from overseas. Furthermore, many of us have immigrant heritages adding to the number of influences that have affected our values. All of this just begins to illustrate how intricate the cultural web can be. Make a list of the most important factors that you think have contributed to how you see your own culture and other cultures.
2. Identify two national cultures among your classmates. Visit http://www.geert-hofstede.com and research Hofstede’s five value dimensions for each country. If you were working for a company from one of the two countries selected, how would you advise the senior management on the compatibility of the two cultures? Are the cultures individualistic or collectivist? Do they have a high or low tolerance for risk? Do they have similar or opposite approaches to long-term orientation?
3. Identify someone in your class or a colleague who has recently come from another country. Ask this person what their first impressions were when they came to the new country. Use Hofstede’s and Hall’s methodologies and determinants to analyze your classmate’s or colleague’s impressions and experiences. How might you feel if you were to relocate to their country?
4. Pick a country that Dunkin’ Brands is not currently operating in. Outline key cultural issues that management should consider before entering that market. Use the cultural methodologies and determinants that this chapter discusses.
Ethical Dilemmas
(AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills)
1. Section 3.1 and Section 3.4 discuss how culture impacts local values and the perception of global business ethics. Each professional is influenced by the values, social programming, and experiences he or she has absorbed since childhood. These collective factors impact how a person perceives an issue and the related correct or incorrect behavior. Culture can also impact how people see the role of one another in workplace. For example, gender issues are at times impacted by local perceptions of women in the workplace. Knowing this, imagine you are a Western businesswoman doing business in Kuwait. Go to Geert Hofstede’s site at http://www.geert-hofstede.com, click on Arab World, and review Hofstede’s value dimensions and Hall’s categories to discuss how local businessmen may perceive your role. Discuss how you would handle an introduction, establish credentials at a first meeting, and conduct ongoing business. Would being a woman be the most difficult impediment to doing business? What other factors might impact your ability to conduct business effectively? How could you prepare yourself to be successful in this market?
2. Both Chapter 1 and this chapter address global business ethics and gift giving in international business. Imagine you are the global business development director for a large American aircraft parts manufacturing firm. You want to make a big sale to an overseas government client. How would you handle a situation where you are doing business with a person from this culture in which gift giving is a routine part of traditional business life? Imagine that your competitors are from other countries, some of which are less concerned about the ethics of gift giving as this book defines it. Discuss if and how you can still win business in such a situation. How would you advise your senior management?
3. You work for a pulp and paper manufacturing company. Using the Corruption Perceptions Index on Transparency International’s website (www.transparency.org/policy_research/surveys_indices/cpi/2010/results), discuss how you would advise your senior management reviewing the possible setup of operations in either Latin America or Africa. Which countries would suggest further research and which countries would pose ethical challenges? How important do you think the Corruption Perceptions Index is to your business objectives? Should it be a factor in determining where you set up operations? | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/03%3A_Culture_and_Business/3.07%3A_End-of-Chapter_Questions_and_Exercises.txt |
World Economies
WHAT’S IN IT FOR ME?
1. How are economies classified?
2. What is the developed world?
3. What is the developing world?
4. Which are the emerging markets?
From the title of this chapter, you may be wondering—is this chapter going to cover the world? And, in a sense, the answer is yes. When global managers explore how to expand, they start by looking at the world. Knowing the major markets and the stage of development for each allows managers to determine how best to enter and expand. The manager’s goal is to hone in on a new country—hopefully, before their competitors and usually before the popular media does. China and India were expanding rapidly for several years before the financial press, such as the Wall Street Journal, elevated them to their current hot status.
It’s common to find people interested in doing business with a country simply because they’ve read that it’s the new “hot” economy. They may know little or nothing about the market or country—its history, evolution of thought, people, or how interactions are generally managed in a business or social context. Historically, many companies have only looked at new global markets once potential customers or partners have approached them. However, trade barriers are falling, and new opportunities are fast emerging in markets of the Middle East and Africa—further flattening the world for global firms. Companies are increasingly identifying these and other global markets for their products and services and incorporating them into their long-term growth strategies.
Savvy global managers realize that to be effective in a country, they need to know its recent political, economic, and social history. This helps them evaluate not only the current business opportunity but also the risk of political, economic, and social changes that can impact their business. First, Section 4.1 outlines how businesses and economists evaluate world economies. Then, the remaining sections review what developed and developing worlds are and how they differ, as well as explain how to evaluate the expanding set of emerging-market countries, which started with the BRIC countries (i.e., Brazil, Russia, India, and China) and has now expanded to include twenty-eight countries. Effective global managers need to be able to identify the markets that offer the best opportunities for their products and services. Additionally, managers need to monitor these emerging markets for new local companies that take advantage of business conditions to become global competitors.
Opening Case: China versus India: Who Will Win??
India and China are among the world’s fastest-growing economies, contributing nearly 30 percent to global economic growth. Both China and India are not emerging economies—they’re actually “re-emerging,” having spent centuries at the center of trade throughout history: “These two Asian giants, which until 1800 used to make up half the world economy, are not, like Japan and Germany, mere nation states. In terms of size and population, each is a continent—and for all the glittering growth rates, a poor one.”“Contest of the Century,” Economist, August 19, 2010, accessed January 3, 2011, http://www.economist.com/node/16846256.
Both India and China are in fierce competition with each other as well as in their quest to catch up with the major economies in the developed world. Each have particular strengths and competitive advantages that have allowed each of them to weather the recent global financial crisis better than most countries. China’s growth has been mainly investment and export driven, focusing on low-cost manufacturing, with domestic consumption as low as 36 percent of gross domestic product (GDP). On the other hand, India’s growth has been derived mostly from a strong services sector and buoyant domestic consumption. India is also much less dependent on trade than China, relying on external trade for about 20 percent of its GDP versus 56 percent for China. The Chinese economy has doubled every eight years for the last three decades—the fastest rate for a major economy in recorded history. By 2011, China is the world’s second largest economy in the world behind the United States.Gopal Ethiraj, “China Edges Out Japan to Become World’s No. 2 Economy,” Asian Tribune, August 18, 2010, accessed January 7, 2011, www.asiantribune.com/news/2010/08/18/china-edges-out-japan-become-world%E2%80%99s-no-2-economy. A recent report by PricewaterhouseCoopers forecasts that China could overtake the US economy as early as 2020.Suzanne Rosselet, “Strengths of China and India to Take Them into League of Developing Countries,” Economic Times, May 7, 2010, accessed January 3, 2011, http://economictimes.indiatimes.com/features/corporate-dossier/Strengths-of-China-and-India-to-take-them-into-league-of-developing-countries/articleshow/5900893.cms.
China is also the first country in the world to have met the poverty-reduction target set in the UN Millennium Development Goals and has had remarkable success in lifting more than 400 million people out of poverty. This contrasts sharply with India, where 456 million people (i.e., 42 percent of the population) still live below the poverty line, as defined by the World Bank at \$1.25 a day.Suzanne Rosselet, “Strengths of China and India to Take Them into League of Developing Countries,” Economic Times, May 7, 2010, accessed January 3, 2011, http://economictimes.indiatimes.com/features/corporate-dossier/Strengths-of-China-and-India-to-take-them-into-league-of-developing-countries/articleshow/5900893.cms. Section 4.1 will review in more detail how we classify countries. China has made greater strides in improving the conditions for its people, as measured by the HDI. All of this contributes to the local business conditions by both developing the skill sets of the workforce as well as expanding the number of middle-class consumers and their disposable incomes.
India has emerged as the fourth-largest market in the world when its GDP is measured on the scale of purchasing power parity. Both economies are increasing their share of world GDP, attracting high levels of foreign investment, and are recovering faster from the global crisis than developed countries. “Each country has achieved this with distinctly different approaches—India with a ‘grow first, build later’ approach versus a ‘top-down, supply driven’ strategy in China.”Suzanne Rosselet, “Strengths of China and India to Take Them into League of Developing Countries,” Economic Times, May 7, 2010, accessed January 3, 2011, http://economictimes.indiatimes.com/features/corporate-dossier/Strengths-of-China-and-India-to-take-them-into-league-of-developing-countries/articleshow/5900893.cms.
The Chinese economy historically outpaces India’s by just about every measure. China’s fast-acting government implements new policies with blinding speed, making India’s fractured political system appear sluggish and chaotic. Beijing’s shiny new airport and wide freeways are models of modern development, contrasting sharply with the sagging infrastructure of New Delhi and Mumbai. And as the global economy emerges from the Great Recession, India once again seems to be playing second fiddle. Pundits around the world laud China’s leadership for its well-devised economic policies during the crisis, which were so effective in restarting economic growth that they helped lift the entire Asian region out of the downturn.Michael Schuman, “India vs. China: Whose Economy Is Better?,” Time, January 28, 2010, accessed January 3, 2011, www.time.com/time/world/article/0,8599,1957281,00.html.
As recently as the early 1990s, India was as rich, in terms of national income per head. China then hurtled so far ahead that it seemed India could never catch up. But India’s long-term prospects now look stronger. While China is about to see its working-age population shrink, India is enjoying the sort of bulge in manpower which brought sustained booms elsewhere in Asia. It is no longer inconceivable that its growth could outpace China’s for a considerable time. It has the advantage of democracy—at least as a pressure valve for discontent. And India’s army is, in numbers, second only to China’s and America’s…And because India does not threaten the West, it has powerful friends both on its own merits and as a counterweight to China.“Contest of the Century,” Economist, August 19, 2010, accessed January 3, 2011, http://www.economist.com/node/16846256.
India’s domestic economy provides greater cushion from external shocks than China’s. Private domestic consumption accounts for 57 percent of GDP in India compared with only 35 percent in China. India’s confident consumer didn’t let the economy down. Passenger car sales in India in December jumped 40 percent from a year earlier.Michael Schuman, “India vs. China: Whose Economy Is Better?,” Time, January 28, 2010, accessed January 3, 2011, www.time.com/time/world/article/0,8599,1957281,00.html.
Since 1978, China’s economic growth and reform have dramatically improved the lives of hundreds of millions of Chinese, increased social mobility. The Chinese leadership has reduced the role of ideology in economic policy by adopting a more pragmatic perspective on many political and socioeconomic problems. China’s ongoing economic transformation has had a profound impact not only on China but on the world. The market-oriented reforms China has implemented over the past two decades have unleashed individual initiative and entrepreneurship. The result has been the largest reduction of poverty and one of the fastest increases in income levels ever seen.
China used to be the third-largest economy in the world but has overtaken Japan to become the second-largest in August 2010. It has sustained average economic growth of over 9.5 percent for the past 26 years. In 2009 its \$4.814 trillion economy was about one-third the size of the United States economy.“Background Note: China,” Bureau of East Asian and Pacific Affairs, US Department of State, August 5, 2010, accessed January 3, 2011, http://www.state.gov/r/pa/ei/bgn/18902.htm. China leapfrogged over Japan and became the world’s number two economy in the second quarter of 2010, as receding global growth sapped momentum and stunted a shaky recovery.
India’s economic liberalization in 1991 opened gates to businesses worldwide. In the mid- to late 1980s, Rajiv Gandhi’s government eased restrictions on capacity expansion, removed price controls, and reduced corporate taxes. While his government viewed liberalizing the economy as a positive step, political pressures slowed the implementation of policies. The early reforms increased the rate of growth but also led to high fiscal deficits and a worsening current account. India’s major trading partner then, the Soviet Union, collapsed. In addition, the first Gulf War in 1991 caused oil prices to increase, which in turn led to a major balance-of-payments crisis for India. To be able to cope with these problems, the newly elected Prime Minister Narasimha Rao along with Finance Minister Manmohan Singh initiated a widespread economic liberalization in 1991 that is widely credited with what has led to the Indian economic engine of today. Focusing on the barriers for private sector investment and growth, the reforms enabled faster approvals and began to dismantle the License Raj, a term dating back to India’s colonial historical administrative legacy from the British and referring to a complex system of regulations governing Indian businesses.“Economic History of India,” History of India, accessed January 7, 2011, http://www.indohistory.com/economic_history_of_india.html.
Since 1990, India has been emerging as one of the wealthiest economies in the developing world. Its economic progress has been accompanied by increases in life expectancy, literacy rates, and food security. Goldman Sachs predicts that India’s GDP in current prices will overtake France and Italy by 2020; Germany, the United Kingdom, and Russia by 2025; and Japan by 2035 to become the third-largest economy of the world after the United States and China. India was cruising at 9.4 percent growth rate until the financial crisis of 2008–9, which affected countries the world over.Mamta Badkar, “Race of the Century: Is India or China the Next Economic Superpower?,” Business Insider, February 5, 2011, accessed May 18, 2011, http://www.businessinsider.com/are-you-betting-on-china-or-india-2011-1?op=1.
Both India and China have several strengths and weaknesses that contribute to the competitive battleground between them.
China’s Strengths
1. Strong government control. China’s leadership has a development-oriented ideology, the ability to promote capable individuals, and a system of collaborative policy review. The strong central government control has enabled the country to experience consistent and managed economic success. The government directs economic policy and its implementation and is less susceptible than democratic India to sudden changes resulting from political pressures.
2. WTO and FDI. China’s entry into the World Trade Organization (WTO) and its foreign direct investment (FDI) in other global markets has been an important factor in the country’s successful growth. Global businesses also find the consistency and predictability of the Chinese government a plus when evaluating direct investment.
3. Cheap, abundant labor. China’s huge population offers large pools of skilled and unskilled workers, with fewer labor regulations than in India.
4. Infrastructure. The government has prioritized the development of the country’s infrastructure including roads and highways, ports, airports, telecommunications networks, education, public health, law and order, mass transportation, and water and sewer treatment facilities.
5. Effectiveness of two-pronged financial system. “The first prong is a well-run directed-credit system that channels funds from bank and postal deposits to policy-determined public uses; the second is a profit-oriented and competitive system, albeit in early and inefficient stages of development. Both prongs continue to undergo rapid government-sponsored reforms to make them more effective.”Albert Keidel, “E-Notes: Assessing China’s Economic Rise: Strengths, Weaknesses and Implications,” Foreign Policy Research Institute, July 2007, accessed January 3, 2011, www.fpri.org/enotes/200707.keidel.assessingchina.html.
India’s Strengths
Infosys is one of India’s new wave of world-class IT companies.
Image courtesy of Infosys.
1. Quality manpower. India has a technologically competent, English-speaking workforce. As a major exporter of technical workers, India has prioritized the development of its technology and outsourcing sectors. India is the global leader in the business process outsourcing (BPO) and call-center services industries.
2. Open democracy. India’s democratic traditions are ingrained in its social and cultural fabric. While the political process can at times be tumultuous, it is less likely than China to experience big uncertainties or sudden revolutionary changes as those recently witnessed in the Middle East in late 2010 and early 2011.
3. Entrepreneurship. India entrepreneurial culture has led to global leaders, such as the Infosys cofounder, Narayana Murthy. Utilizing the global network of Indians in business and Indian business school graduates, India has an additional advantage over China in terms of entrepreneurship-oriented bodies, such as the TiE network (The Indus Entrepreneurs) or the Wadhwani Foundation, which seek to promote entrepreneurship by, among other things, facilitating investments.“Entrepreneurship: Riding Growth in India and China,” INSEAD, accessed January 3, 2011, knowledge.insead.edu/contents/Turner.cfm.
4. Reverse brain drain. Historically many emerging and developing markets experienced what is known as brain drain—where its best young people, once educated, moved to developed countries to access better jobs, incomes, and prospects for career advancement. In the past decade, economists have observed that the fast-growing economies of China and India are experiencing the reverse. Young graduates are remaining in India and China to pursue dynamic domestic opportunities. In fact, older professionals are returning from developed countries to seek their fortunes and career advancements in the promising local economies—hence the term reverse brain drain. The average age of the Indian returnees is thirty years old, and these adults are well educated—66 percent hold a master’s degree, while 12 percent hold PhDs. The majority of these degrees are in management, technology, and science. Indians returning home are encouraged by the increasing transparency in business and government as well as the political freedoms and the prospects for economic growth.Vivek Wadhwa, “Beware the Reverse Brain Drain to India and China,” TechCrunch, October 17, 2009, accessed January 7, 2011, http://techcrunch.com/2009/10/17/beware-the-reverse-brain-drain-to-india-and-china.
5. Indian domestic-market growth. According to the Trade and Development Report 2010, for sustainable growth, policies “should be based on establishing a balanced mix of domestic and overseas demand.”Pioneer Edit Desk, “Expand Domestic Market,” The Pioneer, September 20, 2010, accessed January 7, 2011, http://dailypioneer.com/284197/Expand-domestic-market.html. India has a good mix of both international and domestic markets.
Each country has embraced the trend toward urbanization differently. Global businesses are impacted in the way cities are run:
China is in much better shape than India is. While India has barely paid attention to its urban transformation, China has developed a set of internally consistent practices across every element of the urbanization operating model: funding, governance, planning, sectorial policies, and shape. India has underinvested in its cities; China has invested ahead of demand and given its cities the freedom to raise substantial investment resources by monetizing land assets and retaining a 25 percent share of value-added taxes. While India spends \$17 per capita in capital investments in urban infrastructure annually, China spends \$116. Indian cities have devolved little real power and accountability to its cities; but China’s major cities enjoy the same status as provinces and have powerful and empowered political appointees as mayors. While India’s urban planning system has failed to address competing demands for space, China has a mature urban planning regime that emphasizes the systematic development of run-down areas consistent with long-range plans for land use, housing, and transportation.Richard Dobbs and Shirish Sankhe, “Opinion: China vs. India,” Financial Times, May 18, 2010, reprinted on McKinsey Global Institute website, accessed January 3, 2011, www.mckinsey.com/mgi/mginews/opinion_china_vs_india.asp.
Despite the urbanization challenges, India is likely to benefit in the future from its younger demographics: “By 2025, nearly 28 percent of China’s population will be aged 55 or older compared with only 16 percent in India.”Richard Dobbs and Shirish Sankhe, “Opinion: China vs. India,” Financial Times, May 18, 2010, reprinted on McKinsey Global Institute website, accessed January 3, 2011, www.mckinsey.com/mgi/mginews/opinion_china_vs_india.asp. The trend toward urbanization is evident in both countries. By 2025, 64 percent of China’s population will be living in urban areas, and 37 percent of India’s people will be living in cities.Richard Dobbs and Shirish Sankhe, “Opinion: China vs. India,” Financial Times, May 18, 2010, reprinted on McKinsey Global Institute website, accessed January 3, 2011, www.mckinsey.com/mgi/mginews/opinion_china_vs_india.asp. This historically unique trend offers global businesses exciting markets.
So what markets are likely to benefit the most from these trends? In India, by 2025, the largest markets will be transportation and communication, food, and health care followed by housing and utilities, recreation, and education. Even India’s slower-growing spending categories will represent significant opportunities for businesses because these markets will still be growing rapidly in comparison with their counterparts in other parts of the world. In China’s cities today, the fastest-growing categories are likely to be transportation and communication, housing and utilities, personal products, health care, and recreation and education. In addition, in both China and India, urban infrastructure markets will be massive.Richard Dobbs and Shirish Sankhe, “Opinion: China vs. India,” Financial Times, May 18, 2010, reprinted on McKinsey Global Institute website, accessed January 3, 2011, www.mckinsey.com/mgi/mginews/opinion_china_vs_india.asp.
While both India and China have unique strengths as well as many similarities, it’s clear that both countries will continue to grow in the coming decades offering global businesses exciting new domestic markets.See also “India’s Surprising Economic Miracle,” Economist, September 30, 2010, accessed January 3, 2011, http://www.economist.com/node/17147648; “A Bumpier but Freer Road,” Economist, September 3, 2010, accessed January 3, 2011, http://www.economist.com/node/17145035; Chris Monasterski, “Education: India vs. China,” Private Sector Development Blog, World Bank, April 25, 2007, accessed January 7, 2011, psdblog.worldbank.org/psdblog/2007/04/education_india.html; Shreyasi Singh, “India vs. China,” The Diplomat, August 27, 2010, accessed January 7, 2011, http://the-diplomat.com/indian-decade/2010/08/27/india-vs-china; “The India vs. China Debate: One Up for India?,” Benzinga, January 29, 2010, accessed January 7, 2011, http://www.benzinga.com/global/104829/the-india-vs-china-debate-one-up-for-india; Steve Hamm, “India’s Advantages over China,” Bloomberg Business, March 6, 2007, accessed January 7, 2011, http://www.businessweek.com/globalbiz/blog/globespotting/archives/2007/03/indias_advantag.html.
Opening Case Exercise
(AACSB: Ethical Reasoning, Multiculturalism, Reflective Thinking, Analytical Skills)
1. Pick an industry and company that interests you. As a global manager of the firm you’ve selected, you’re asked to review China and India and determine which market to enter first. How would you evaluate each market and its potential customers? Use your understanding of the stage of development for each country from the case study as well as online resources. Which country would you recommend entering first? Based on your understanding of these markets, would you recommend a strategy for only one country or both? | textbooks/biz/Business/Advanced_Business/International_Business_(LibreTexts)/04%3A_World_Economies/4.01%3A_Chapter_Introductions.txt |
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