WINNING THE WINNING THE GLOBALIZATION GAMEGLOBALIZATION GAME

Harvard Business Review OnPoint (2004)Harvard Business Review OnPoint (2004)

Three key readings: Three key readings:

- Prahalad & Lieberthal, The End of Corporate Imperialism- Prahalad & Lieberthal, The End of Corporate Imperialism- Pankaj Ghemawat, Distance Still Matters- Pankaj Ghemawat, Distance Still Matters- Diana Farrell, Beyond Offshoring- Diana Farrell, Beyond Offshoring

The End of Corporate ImperialismThe End of Corporate Imperialism

In order to compete in the emerging markets, the MNCs must answer:

1.- What is the Business Model for the Emerging Middle Class?- Consumers in the emerging markets are not “affluent” by Western standards.

- Three-tiered pyramid structure:

tier 1

tier 2

tier 3

Purchasing power (in U.S. dollars)

Greater than $20,000 (in this tire people have income to afford international brands)

$10,000 to $20,000 (people is less attracted to international brands)

$5,000 to $10,000 (massive group that is loyal to local customs, habits, etc)

Less than $5,000 (group unlikely to become active customers soon)

MNC Business Rethinking Model:

• Rethinking the Price/Performance Equation: in the emerging markets they receive education in global standards but they do not pay global prices.

• Rethinking Brand Management: usually, the MNCs overestimate the extent of Westernization.

• Rethinking the Costs of Market Building: MNCs should provide consumers with a new product that requires no education.

• Rethinking Product-Design: redesign can be helpful to reflect differences in use and distribution.

• Rethinking Packaging: it must depend on the distribution infrastructure.

• Rethinking Capital Efficiency: there is less need for vertical integration than MNCs might think.

2.- How Does the Distribution System Work?-MNCs need to invest more in distribution before launching their products. They must understand the unique characteristics of each country.

3.- Will Local or Expatriate Leadership Be More Effective?-MNCs leadership should be a blend of local sensitivity and global knowledge. -The local managers are market sensitive, cost effective and are committed to local customs. Expatriates transfer technology and management practices, they also have more credibility at the headquarters.

4.- Is It Necessary to Present One Face?-There is no right answer to this question--It depends on the level of governmental interference.

Conclusion:

The End of Corporate Imperialism suggests:

-New relationships between the developed and emerging markets,

-An end to the era of centralized corporate power, and

-A shift to a much more dispersed base of power and influence.

Distance Still MattersDistance Still Matters

The Four Dimensions of Distance:The Four Dimensions of Distance:

1) 1) Cultural DistanceCultural Distance: a country's cultural attributes : a country's cultural attributes determine how people interact. Differences in religion, determine how people interact. Differences in religion, social norms, race and language can create distance social norms, race and language can create distance between countries. between countries.

2)2) Administrative or Political DistanceAdministrative or Political Distance: historical and : historical and political associations shared by countries greatly affect political associations shared by countries greatly affect trade betweentrade between themthem..

3)3) Geographic Distance:Geographic Distance: the further you are from a the further you are from a country the harder it will be to conduct business in that country the harder it will be to conduct business in that country. It also refers to the country size, access to country. It also refers to the country size, access to waterways and ocean, and topography. This attribute waterways and ocean, and topography. This attribute has a direct relationship with the cost of transportation.has a direct relationship with the cost of transportation.

4) 4) Economic Distance:Economic Distance: the wealthy or income of the wealthy or income of customers creates distance between countries, and has customers creates distance between countries, and has a marked effect on the levels of trade and type of a marked effect on the levels of trade and type of partners a country trades with.partners a country trades with.

Measuring the Impact of Distance on TRADEMeasuring the Impact of Distance on TRADE

Distance AttributeDistance Attribute

Change in Change in InternationInternational Trade al Trade

(%)(%)

Income Level: GDP per capita (1% Income Level: GDP per capita (1% increase)increase)

+0.7+0.7

Economic size: GDP (1% increase)Economic size: GDP (1% increase) +0.8+0.8

Physical distance (1% increase)Physical distance (1% increase) -1.1-1.1

Physical size (1% increase)*Physical size (1% increase)* -0.2-0.2

Access to ocean*Access to ocean* +50+50

Common borderCommon border +80+80

Common languageCommon language +200+200

Common regional trading blocCommon regional trading bloc +330+330

Colony-colonizer relationship Colony-colonizer relationship +900+900

Colony-colonizerColony-colonizer +190+190

Common polityCommon polity +300+300

Common currencyCommon currency +340+340

ConclusionsConclusions

- Managers must always be aware of distance.Managers must always be aware of distance.

- The CAGE framework represents a complement to the The CAGE framework represents a complement to the tools used by most companies.tools used by most companies.

- Technology may be making the world a smaller place, Technology may be making the world a smaller place, but is not eliminating the “cost of distance”.but is not eliminating the “cost of distance”.

Beyond OffshoringBeyond Offshoring

To measure To measure how global your industry ishow global your industry is, calculate the ratio of , calculate the ratio of

annual value of trade (include product components and final annual value of trade (include product components and final

goods) to the annual value of industry sales.goods) to the annual value of industry sales.

1%

33%

42%

77%

118%

0% 20% 40% 60% 80% 100%

120%

140%

IT/Business-process outsourcing

Steel

Auto

Apparel

Consumer electronics

Ratios over 100% indicate industries that are very global

The course of Globalization in a company or industry can be The course of Globalization in a company or industry can be determined by three factors:determined by three factors:

a) a) ProductionProduction: the potential for an industry to disaggregate its : the potential for an industry to disaggregate its value chain is determined by the combination of: relocation value chain is determined by the combination of: relocation sensitivity and location-specific advantages.sensitivity and location-specific advantages.

b) b) RegulatoryRegulatory: host countries´ regulations can inhibit : host countries´ regulations can inhibit globalization in several ways: tariffs, quotas, etc.globalization in several ways: tariffs, quotas, etc.

c) c) OrganizationalOrganizational: three factors can limit globalization: internal : three factors can limit globalization: internal management structure, incentive systems, and unionization.management structure, incentive systems, and unionization.

• StandardizationStandardization is a critical part of Globalization. is a critical part of Globalization.

Stages of Globalization:Stages of Globalization:

1)1) Stage One: Stage One: Market EntryMarket Entry: companies enter new : companies enter new countries using production models that are very similar countries using production models that are very similar to the ones they deploy in their home markets.to the ones they deploy in their home markets.

2)2) Stage Two: Stage Two: Product SpecializationProduct Specialization: companies transfer : companies transfer the full production process of a particular product to a the full production process of a particular product to a single-low-cost location and export the goods to various single-low-cost location and export the goods to various consumer markets.consumer markets.

3) Stage Three: 3) Stage Three: Value Chain DisaggregationValue Chain Disaggregation: companies : companies start to disaggregate the production process and focus start to disaggregate the production process and focus each activity in the most advantageous location.each activity in the most advantageous location.

4)4) Stage Four: Stage Four: Value Chain ReengineeringValue Chain Reengineering: companies : companies do not just replicate their production processes abroad, do not just replicate their production processes abroad, they increase their cost savings by reengineering their they increase their cost savings by reengineering their processes to suit local market conditions.processes to suit local market conditions.

Stages 3 and 4 together have the potential to reduce Stages 3 and 4 together have the potential to reduce costs by more than 50% in many industries.costs by more than 50% in many industries.

5)5) Stage Five: Stage Five: Creation of New MarketsCreation of New Markets: expansion of : expansion of the market. The value of new revenues generated in the market. The value of new revenues generated in this stage is often greater than the value of cost this stage is often greater than the value of cost savings in other stages.savings in other stages.

Cost Savings in new market opportunities can be reached Cost Savings in new market opportunities can be reached through:through:

- Labor: Data worker in US: $20 per hourLabor: Data worker in US: $20 per hour Data worker in India: $2 per hourData worker in India: $2 per hour

- Re-engineering their production processes: substitute Re-engineering their production processes: substitute low-cost labor for high-cost capital.low-cost labor for high-cost capital.

- - Utilizing their capital equipment more intensively.Utilizing their capital equipment more intensively.

- - Hiring local engineers in low-wage environments to Hiring local engineers in low-wage environments to design and build cheaper capital equipment.design and build cheaper capital equipment.

- - Globalization can save as much as 70% of their total Globalization can save as much as 70% of their total costs.costs.

How To Win:How To Win:

a)a) Abandon incremental thinkingAbandon incremental thinking

b)b) Use global assets, effectively and efficientlyUse global assets, effectively and efficiently

c)c) Tailor your best practices to local conditionsTailor your best practices to local conditions

d)d) Aim for higher qualityAim for higher quality