Globalisation

A Presentation

by

A.V.Vedpuriswar

Multinational races : Aryans, Mongolians

Multinational religions : Christianity, Islam, Buddhism.

Multinational empires : Greek, Roman, Spanish, Turkish, British

Multinational companies : European, Japanese, American

The East India Company

THE LONG TRADITION OF MUTINATIONALISM

Multinational : builds strong local presence through sensitivity and responsiveness to national differences.

Global : Builds cost advantages through centralized global scale operations.

International : parent company’s knowledge and capabilities transferred to individual countries accompanied by marginal adaptation.

(Bartlett and Ghoshal)

MULTINATIONAL, GLOBAL AND INTERNATIONAL

COMPANIES

MNC Global International

Configuration of Decentralized Centralized, centralization of core competencies

assets, capabilities nationally globally decentralization of other activities

self sufficient scaled

Role of overseas Sensing and Implementing Adapting and leveraging parent company operations exploiting local parent company competencies

opportunities strategies

Development and Knowledge Knowledge Knowledge developed at the center

diffusion of developed and developed and and transferred to overseas units

knowledge retained within retained at

each unit the center

• Ethnocentric : Home office people put in charge of key international positions.

• Polycentric : Local nationals placed in key positions and allowed to appoint and develop their own people.

• Regiocentric ; Depends on local managers from a particular geographic region to handle operations in and around that area.

• Geocentric: Attempt to integrate diverse regions of the world through a global approach to decision making. Subsidiary and headquarters managers are treated on equal terms.

• Ethnocentric means :– top down style– global integration– culture oriented towards home country– product development determined primarily by

the needs of home country customers– people of home country developed for key

positions throughout the world

• Polycentric means– bottom up approach– national responsiveness– culture oriented towards host country– local product development based on local needs– people of local nationality developed for key

positions in their own country

• Regiocentric– governance mutually negotiated between region

and its subsidiaries– regional integration and national

responsiveness– regional culture– standardization within a region but not across

regions– regional people developed for key positions

anywhere within the region

• Geocentric means– governance style mutually negotiated at all

levels of the corporation– global culture– global products with local variations– best people developed everywhere in the world

for key positions everywhere in the world.

Extreme Stage of Globalisation

• Global market participation

• Global products and services

• Global location of activities

• Global marketing

• Global competitive moves

Country Activity

A Research & Development

B Design

C Purchasing

D Manufacturing

E Marketing

F Selling

G Distribution

H Service

Extreme Global value chain

The traditional paradigm

M.N Global Intnl

Responsiveness : Unilever Kao P&G

(Branded

packaged goods)

Efficiency : Philips Matsushita G.E

(Consumer

electronics)

Transfer of

knowledge : ITT NEC Ericsson

(Telecom

switching)

Need to compete on all three dimensions simultaneously:

National responsiveness

Global efficiency

Need to share knowledge across the system

A Transnational corporation has such capabilities.

We shall use Global and Transnational interchangeably in this presentation.

TODAY’S PARADIGM

Unilever• Founded in 1885 by William Lever

• Very early bid to enter export market

• Aided by Britain’s capabilities as a colonial power

• Representatives sent to each markets

• Hands on centralized style of management

• After his death, Overseas committee set up

• Need for more autonomy to divisions felt

• More local competition meant need for locally manufactured products

Unilever, contd...• Trade barriers in the 1920s and 1930s

• Soon, Self-sufficient fully integrated National Operations

• “Ization” process in 1930s. Expatriates replaced by local CEOs

• Outbreak of World War II

• Breakdown of Communications with London.

• Watchwords: “Local initiative and decentralized control”

Unilever, contd...• After World War II, Geographically supported

structure supported by product coordination groups to transfer learning- Matrix structure

• All businesses however similarly managed

• Mid 1970s- Differences across businesses felt

• Chemicals / Detergents needed standardization and integration.

• Foods needed customization

• 1970s: P&G launched new laundry detergents based on rapeseed

Unilever, contd...• Unilever companies responded individually with 13

different products• Resistance from companies to accept technological

guidance from centre• Management soon realised the need to revamp

processes

Businesses Functions TasksChemicals Research Product Policy

Detergents Product Devpt. Advertising

Personal Products Manufacturing Pricing & Distribution

Packaged Foods Marketing & Sales Promotion

• Responsibility to companies now given within a framework of more globally designed policies and strategies.

• Unilever now realises that organisational requirements vary from business to business.

• Personnel: Need for a global mindset– Job rotation– Training programs in England – Job assignments for International Managers in HQ– Mike Heron - High recruitment standards. Only First

Class people taken– Cross Unit transfers.

• INTERNATIONAL SERVICE SYSTEMS(ISS)

• $ 2 billion company in the commercial cleaning business with operations spanning 17 countries on three continents.

• Paul Andreassen , CEO broke up powerful national entities into half a dozen small companies per country. More expensive arrangement but Andreassen went ahead to develop a sense of identity and ownership

• ISS organized around small independent units to which employees felt intense loyalty. In the process, entrepreneurship allowed to flourish.

• Individual initiative helped in many ways:

• Specialized capabilities for cleaning meat section and freezers

• Entry into new areas such as airports, rubble disposals, abattoir cleaning, labeling, uniform cleaning and repair of shopping carts

• Andreassen’s commitment to entrepreneurship in frontline units reinforced by building Chinese walls to keep senior executives from meddling in operations

• Separate Board of Directors for each national subsidiary, springboard for new ideas

• Autonomy and empowerment balanced by demanding performance standards- 5% profit before tax, 12% growth target

• Andreassen less interested in running operations and more in building an ambitious organization. Felt ISS should consider itself not to be a cleaning company but the world’s best service organisation.

• Andreassen’s visionary leadership- insightfulness, inspiration, open mindedness.

• Importance attached to development of employees

• Five Star training and development program took motivated and competitive frontline cleaning supervisors and by systematically developing their technical and administrative skills, grow them into operating level entrepreneurs.

• First six months on the job, employees given training in cleaning techniques such as which chemicals to use on specific stains and surfaces, as well as on safety.

• After six months, employees move from applied chemistry to applied economics. They learn how to interpret contracts and evaluate profitability of each contract. This training comes in handy when

• when employees become team leaders.

• Once employees become team leaders, they receive advice on dealing with customers and learn how to coach junior members of the team. Team leaders are evaluated on the basis of both profitability and customer retention.

• Thanks to the extensive training programs as well as its back office expertise, the company can bid for complicated contracts offering cleaning, catering and laundry services to a hospital.

• In 1997, ISS won a contract to clean hotel rooms in Disneyland Paris, a very demanding customer.

• ISS has sold off its university in order to decentralise training and tailor the programs to suit local conditions

• Accounting crisis due to lax internal controls in the US. Almost drove company to bankruptcy. Sold the American business in 1998.Subsequently, business has recovered.

• ISS a success story in globalization in an industry considered to the most local of businesses.

• Other international firms in the business- Rentokil Initial (Britain), Abilis(Netherlands) and Service Master(US)

Ericsson• By 1920s: Substantial Worldwide Network of

National Operations

• Strong technological capabilities at Headquarters Gradually, subsidiaries became independent

• Duplication of effort, Divergence in technology, Lack of competitiveness in Servicing

• Need for centralization

• 1950s: R&D Strengthened– Leadership position in Cross bar switch (earlier

Strowger Switch)

• 1960s: New Challenges,Pressure from local Governments for technological transfer

• Development responsibilities delegated to local outfits.

• Need to exploit comparative advantage in assembly processes

• Mid 1970s: R&D Centralized

• When National capabilities existed, local managers were transferred to HQ in the 1980s

• When local Govt insisted on local R&D, Australian Engineers led the development of AXE switch in 1982. They designed several key

• components. The local manager’s strong and entrepreneurial leadership strengthened the subsidiary’s capabilities beyond what was needed.

• Later, some technicians were transferred to HQ

• Motivation and transfer of knowledge achieved

• Without appropriate management, building excess resources in a non critical environment can be counterproductive. On the other hand, too many restrictions on the development activities of subsidiaries can frustrate skilled and experienced personnel.

• R&D team in Australia given worldwide development tasks. Half the team attached

• to HQ. Contrast with American MNCs having Canadian subsidiaries.

• HQ managers emphasise the importance of developing strong country organizations to generate sales and to tap into locally available resources. Local managers encouraged to think of themselves as part of worldwide group rather than as independent units.

• Mechanisms- constant transfers, frequent assignments on HQ subsidiary teams, allocation of worldwide product responsibilities to national firms.

•

• Software today represents a larger portion of value added. Ericsson has been transferring some development activities to advanced overseas operations.

• Sensitiveness and flexibility in the wake of changes in the environment.

• No one group allowed to dominate. When overseas units became independent, reigned in. Also balance of power retained between product and functional groups.

• Balanced two way flow of ideas between HQ and subsidiaries. Differences resolved in national level board meetings which serve as legitimate forums.

ABB• 1988: Merger of Asea & Brown Boveri

• 1300 companies in 140 countries

• 65 Global business areas

• Companies reported to product as well as regional Managers

• New Information and Reporting system - ABACUS (ABB Accounting & Communication System)

• Unambiguous performance standards

• Feedback by showing relative performance of various units

• Balance between Strategic and Operational objectives through matrix structure

• True empowerment

• 90% of R&D expenditure, 95% of HR activities left to subsidiaries

• Could borrow locally and retain up to 30% of earnings

• ABACUS used judiciously

• Potential to globalize varies across businesses.For turnkey projects / total business solutions, high level of coordination needed across subsidiaries, Other businesses heavily local. Compare electrical installation and service with combined cycle power plants.

• Barnevik : “ The vast majority of our businesses fall somewhere between the super local and the superglobal. These are the businesses in which building a multi domestic organization offers powerful advantages.”

• ABB Deputy CEO, “ It is wrong to say that because we are global, we are uniform. The world is too different and human beings are too diverse. You need to adapt to their individual needs… It is important in many of our markets to project a distinctive national profile. We have to be a Finnish company in Finland, a German company in Germany, a Swiss company in Switzerland and an US company in the United States. It is how well you bridge the differences that in turn will make you successful.”

• Head of Power Transformers:” We have 25 countries around the world, each with its own President, Design Manager, Marketing Manager and Production Manager. These people are working on the same problems and opportunities day after day, year after year and learning a tremendous amount. We want to create a process of continuous expertise transfer. If we do that, this is a source of advantage, none of our rivals can watch.”

• Barnevik: “ The thing I watch when say, a German manager has to appoint someone, he very often will come up with a German. It is not because of nationality and language but because he usually knows the person better. I tell him to go and interview candidates in other countries. Maybe it will make him think that it will be useful to have say an Italian or an American on his senior staff.”

• Mixed nationality teams and personal alliances across borders encouraged. Executive Committee to oversee ABB’s global strategy and performance. Members drawn from different nationalities.

• Response to changing environment by reducing number of business areas, companies to make the system more manageable

• Barnevik’s vision: “ global and local, big and small, decentralised with central control”

• Top management’s role: create a congenial environment and lay down guidelines for management behaviours. Those close to scene of action allowed to take decisions.

• Behavioral Characteristics - Stretch & Trust

• Barnevik:” Thinking- the strategies and designs- only gets you 10% of the way. Ninety to ninetyfive percent is in execution.”

A Global Corporation “Running a global company is an order of

magnitude more complicated than managing a multinational or International firm. The Global or transnational corporation looks at the whole world as one market. It manufactures, conducts research, raises capital and buys supplies where ever it can do the job best. It keeps in touch with technology and market trends all around the world. National boundaries and regulations tend to be irrelevant or a mere hindrance. Corporate headquarters might be anywhere”

VIJAY JOLLY, IMD, LAUSANNE

A global company has the following characteristics :

• Ability to compete in any market it chooses

• Ability to bring entire worldwide capabilities to bear on any transaction elsewhere

A company can operate in all countries of the world. but if what it does in one country has no meaning for what it does in others, it is no different from the domestic companies with which it competes.

GLOBAL CHARACTERISTICS

• Market share

• Sourcing all assets not just production on an optimal basis

• Contestability

• Global orientation of all functions

Evolution of the Global Organisation• Simple Export• Export Manager• Export Department / Warehousing• Sales Branches / Subsidiaries• Assembly abroad• Production abroad

– Contract

– Licensing

– Direct Investment viz. Joint Venture, Wholly Owned, Acquired, Turnkey.

• Integration & Coordination of foreign affiliates

Multi Local Vs Globalised

Multi Local :- Tailoring country specific strategies to maximize local competitive advantage.

Globalisation :- Coordinated Approach, Sharing and Integration

Key Issues

• Globalisation Vs Non Globalisation

• Degree of Globalisation

• Activities to be globalised– Paint Industry– Restaurants

Key components of total global strategy

• Development of Core Business Strategy

• Internationalisation

• Globalisation

Core Business Strategy

• Types of products, services to be offered

• Types of customers to be targeted

• Which geographical markets to target?

• Functional strategies

• Competitive strategies

Business Strategy: A paradigm shift

• Satisfying demand Creating demand

• Excellence in operations Strategic vision

• Hardware Software

• Vertical Integration Outsourcing

• Natural resources Knowledge

• Tangibles Intangibles

• Commodities Brands

• Mass production Mass Custmn

Internationalisation

• Selecting the geographic markets

• Adaptation of products & programs to take into account foreign needs, preferences, culture, language etc.

• System not tightly integrated

Globalisation

• Integration & Management of strategies for world wide business leverage & competitive strategy

• Aspects of strategy to be globalized

• Evaluating the costs & benefits of globalization

Macro Factors encouraging Globalisation

• Growing Similarity in Consumer tastes• Reduction of tariff & non tariff barriers• Heavy technology investments• Communications & Information Revolution• Impact of Japanese Corporations• Air transport : cents 68/mile(1930) 11/mile(1990)• 3minute call: $244.65(1930) $3.32(1990)• Unit of Computing power -- steep fall.• Sea freight fell by 70% between early 1980s and 1996

Globalisation Drivers

• Common customer needs

• Global customers & competitors

• Global channels

• Transferable marketing

• Lead countries

Increasing Globalisation of the World Economy

• EXPORTS AS A PERCENTAGE OF GLOBAL OUTPUT

• 1913 9

• 1950 7

• 1973 11

• 1990s 14

• In 1996, global FDI was $ 3200 billion.

Role of Government• Favorable trade policies

• Compatible technical standards

• Common marketing regulations

• Government owned competitors/consumers

• Host Government concerns

THE GLOBAL MENTALITY

• A. The UN Model assumption– Subsidiaries have similar importance and

requirements– Resources and competencies are centralized– Subsidiaries are expected to implement standardized

global strategies

B. The Headquarters hierarchy syndrome Clear superior-subordinate leadership

Attempt by headquarters to control key decisions and resources

Lead Countries

• Japan - Consumer electronics

• Germany - Industrial control equipment

• USA - Computer software

• Denmark - Insulin

• Italy - Ceramic tiles

• France - Cosmetics

• COORDINATION MECHANISMS

• Centralization

• Coordination in most Japanese companies shaped by a consensus decision making process which is culture specific and which requires intensive communication.

• Difficulties in transferring this style abroad.

• Many Japanese companies have developed international coordination processes that rely on direct actions and intervention of the Headquarters Management Group

• Centralization is very costly to operate. As the organization grows in size and complexity, HQ might find it difficult to deal with requests from subsidiaries. Size and bureaucracy of the central decision making unit increases till it reaches the limit. Subsidiary managers might also find it demotivating.

• Formalization

• The growth of US MNCs was shaped in an era of professional management in which greater delegation of responsibility was made possible by the development of sophisticated management

• systems that allowed corporate managers to control operations and hold other managers accountable for delegated tasks. Thus, the coordination process for most American companies was based largely on formal systems, policies and standards.

• The routinisation of decision making delivers important operating efficiencies that are the hallmark of this means of coordination. Decision making is subjected to a set of impersonal policies that assume a power independent of the interests and motives of either headquarters or subsidiary.

• The problems associated with this method include the high cost of establishing the systems, policies and rules. A routine decision making approach may not be appropriate in the face of complex and changing tasks that MNCs often face.

• Socialisation

• European companies expanded at a time when global communication was slow and expensive. They also did not have the systems expertise of American companies. Management of subsidiaries was typically given to family members or trusted acquaintances. The management process relied on

• individuals’ understanding of corporate objectives and their personal relationships. This coordination mechanism depended heavily on careful recruitment, development and acculturation of decision makers.

• Socialisation is attractive because it does not have the problem of headquarters overload associated with centralization and the inflexibility associated with formalization. Since it depends on shared values and objectives, it represents a more flexible and robust means of coordination. Decisions reached by negotiations between

• knowledgeable groups with common objectives should be much better than those made by superior authority or standard policy.

• The major problem associated with socialisation is cost. It takes the decision load off top management by institutionalising its goals throughout the organisation. However, ensuring that mangers share objectives, priorities and values demands indoctrination and training requiring substantial investments. In addition, decision making processes are usually slower, ambiguous and more complex. Socialisation depends heavily on transfer

• of managers and use of expatriate managers which can be very expensive. Sometimes negotiations can also be long drawn out consuming plenty of time and energy.

DESIGNING GLOBAL PRODUCTS AND SERVICES

• Standardize core product

• Build additions and features to customize– Automobiles– Canon– Computer hardware– Textbook publishing– Process control instruments– Chocolates– Telecom- convergence of standards

GLOBAL MARKET PARTICIPATION• Significant global market share

• Balance between geographic and market spread

• Presence in globally strategic country markets

• Globally strategic markets:– Large source of revenues/profits– Home market of global competitors– Home market of global customers– Significant market of global competitors– Major source of industry innovation

• Portfolio approach is useful.

• MNC strategies- multilocal or global

• CNDs : Leverage parent’s expertise in product development, manufacturing, quality control, marketing , Stand alone management

• Approaches– Develop products with global market in mind– Understand reasons for product variations

• Pay equal importance to product similarities and differences across markets

FORMULATING A GLOBALLY LEVERAGED STRATEGY

• Strategic advantage : core business strategy

• Comparative advantage : low labour costs, superior technological infrastructure

• Core formula strategy : Strategic advantage

• Cost based export strategy : Comparative advantage

• Globally leveraged strategy

• Untenable strategy

Guidelines for locating global activities• Start with zero based approach

• Different activities have different centralisation/decentralisation needs

• Ideal pattern of locations is dynamic

• Some activities such as R&D need presence in globally strategic countries.

• Coordination of geographically dispersed activities can substitute in some cases for global centralization

• Consider both strategic and comparative advantage

In the case of R&D, globally strategic countries are characterized by :

a) major source of industry innovation

b) presence of highly skilled low cost/ R&D workers

c) highly demanding customers

For manufacturing, globally strategic countries are characterized by :

a) favorable factor conditions

b) close location to major markets

c) favorable country of origin effect

d) manufacturing presence of global competitors

Examples (Location of Activities)

• BECKTON DICKINSON– Production : USA, Ireland, Mexico, Brazil– Standardized products– Standardized production processes– Benefited during Mexican peso crisis

Examples contd...

• CERAMIC TILE INDUSTRY– 1960s,1970s : Batch process, Skill oriented– Base in Germany. Later, continuous process operations,

new technology – Skills available in Italy: Low cost of capital, cheap labour– 1990s : Paris, Milan - Design

Italy, Portugal - Production

Germany, US - Marketing

. ARROW SHIRT

Cotton 1

Ginning 1

Spinning 1

Weaving 1

Finishing 1 Total cost = $ 60

Dyeing 1

Designer 6

Tailor 6

Wholesaler 6

Retailer 18

Promotion 12 Organiser 6

---

Positioning: Similarity of business competitive position, purchase motivation and use/ consumption pattern

Brand Name: Global acceptance/ prestige of home country brand name, meaning, ease of pronunciation

Packaging: Similarity in the information to be communicated, usage patterns & measurement systems, acceptability of multi language labeling

DEVELOPING A GLOBAL MARKETING STRATEGY

Advertising:

Same copy strategy

Same script, different execution

Identical advertisements

Global + Local tactical campaign

combination often used

Sales promotion: Least likely candidate for globalisation, Trade shows an important exception

DEVELOPING A GLOBAL MARKETING STRATEGY contd...

• Marlboro

• 3M - Magnetic tapes

• Nissan / Datsun

• Fosters

• Mc Donald’s– Beer (Germany)– Coconut, Mango Shakes (Hong Kong)

• General Foods - Coffee– Black (France)– With Milk (UK)– Chicory (Latin America)

Global Marketing in action

• Coca Cola

• Unilever– Lux– Sunsilk– Food Products

Global Marketing in action contd...

• Cross country subsidization

• Counter parry

• Globally coordinated sequence of moves

• Preemptive

Global plan necessary to attack global competitors. However, involve country managements

Dimensions: Product lines and customers of the competitor to target, selection and timing of countries for offensive moves

Eg:VCR Industry. Matsushita Vs GE, RCA, Zenith

Making global competitive moves

• Early mover advantages - Market share, standards, costs and quality advantages

• Global approach means more options for both offence and defence.

• Pitfalls - Dip in revenues, profits , deterioration of competitive position in individual countries, Lack of perspective among individual country managers

• Organisation structure

• Management processes

• People

• Culture

Building a global organisation

• Structure

Centralised global authority

No domestic- international split• Management processes

Coordination

Technology sharing

Information systems

Strategic planning

Budgets & control

Performance review and compensation

• People

Comfortable with multi country careers

Prepared with extensive travel

• Culture

Global identity

• Cultural assimilator : Programmed learning technique designed to expose members of one culture to some of the basic concepts, attitudes, role perceptions, customs and values of another culture.

• Some assimilators use critical incidents. A situation is classified as a critical incident if it meets one of the following conditions:

• a) An expatriate and host national interact in the situation

• b) The situation is puzzling or likely to be misinterpreted by the expatriate.

• c) The situation can be accurately interpreted if sufficient knowledge about the culture is available

• d) The situation is relevant to the expatriate’s task or mission requirements.

• Cultural dimensions• Power distance

– extent to which less powerful members of institutions and organisations accept that power is distributed unequally.

• Uncertainty avoidance– extent to which people feel threatened by ambiguous situations

and have created beliefs and institutions that try to avoid these.

• Individualism– Tendency of people to look after themselves and their immediate

family only.

• Masculinity– Situation in which the dominant values in society are success,

money and things

• Largest export trading company in Hong Kong. Turnover: $ 1.7 billion in 1997

• Innovative Supply Chain Management practices

• Customers - American & European Retailers

• Clothing, Consumer Goods - Toys, Fashion Accessories, Luggage etc.

• Founded in 1906

• In the 1970s Victor Fung & William Fung joined the family business. Both from H.B.S.

Case Study - Li & Fung

• Challenge - to transform Li & Fung’s role of buying agent who was getting squeezed between buyers and factories.

• Extended Geographic reach. Set up offices in Taiwan, Korea and Singapore.

• Knowledge of region generated key competitive advantage. Quotas, Hong Kong strong in Cotton, Taiwan better in Synthetics.

• Working with a large number of countries led to assortment packing by sourcing at the most efficient location

• Next Step - Management of manufacturing programs. Discussion with client to develop prototype, product mix, production schedule. Coordinate with factories to ensure quality and on time delivery.

• Reconfiguration of value chain by moving Labour intensive production to China.

• Dolls:– Design in Hong Kong– Molds in Hong Kong– Manufacture of dolls & Painting in China– Final testing, inspection, packing in HK– Distribution & Finance coordinated from HK

• Garments: – Buy yarn from Korean Producer.– Weaving & Dyeing in Taiwan.– Buy zippers from Japanese company YKK’s

production facility in China.– Make Garments in Thailand based on Cheap labour

and availability of quotas.– Manufacturing done at number of factories in

Thailand.

“We dissect the manufacturing process and look for the best at each step. We’re not asking which country can do the job overall. Instead we are pulling apart the value chain and optimising each step and we’re doing it globally.”

“Today, assembly is the easy part. The hard part is managing your suppliers and the flow of parts.”

• Smokeless Factory

• Responsibilities - Design, procurement & inspection of Raw materials, set up production, inspect output. However, do not own factories, don’t manage workers.

• 30 - 70% of Factory production purchased by Li & Fung

• Building blocks - Customer focused divisions. Each product group executive also given country responsibilities.

• Financial controls & Operating procedures - Tightly Centralized.

• Cash flows managed centrally in HongKong.

• LCs sent to Hongkong for approval.

• Increasing use of Information Technology but equal importance given to relationships.

“As a pure intermediary, our margins were squeezed. But as the member of the supply chain options expands, add value for our customers by using information and relationships to manage the network. We help the companies navigate through a world of expanded choice. And the expanding power of IT helps us do that.”

Value Chain Configuration

Hong Kong Front End: Design Engineering

Production Planning

Back End: Quality Control

Testing. Logistics.

Finance

Outside Raw material and component sourcing

Management of production.

Thank You