To create a global vision, a company must carefully define what globalization means for its particular businesses. This depends on the industry, the products or services, and the requirements for global success. For Coca-Cola, it meant duplicating a substantial part of its value creation process—from product formulation to marketing and delivery—throughout the world. Intel’s global competitive advantage is based on attaining technological leadership and preferred component supplier status on a global basis. For a midsize company, it may mean setting up a host of small foreign subsidiaries and forging numerous alliances. For others, it may mean something entirely different. Thus, although it is tempting to think of global strategy in universal terms, globalization is a highly company- and industry-specific issue. It forces a company to rethink its strategic intent, global architecture, core competencies, and entire current product and service mix. For many companies, the outcome demands dramatic changes in the way they do business—with whom, how, and why.
Global Strategy as Business Model Change
To craft a global strategy, a company therefore 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 and/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, 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. Figure 8.1 shows the full array of globalization decisions a company needs to make when it expands globally.
Figure 8.1 Array of globalization decisions
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.
Ghemawat’s Generic ”AAA” Global Strategy Framework
Ghemawat offers three generic approaches to global value creation. Adaptation strategies generate 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; their pricing in different geographies reflects local energy and transportation costs and what percentage is bought in bulk.
Adaptation strategies typically fall into one of five categories: variation, focus, externalization, design, and focus (Figure 8.2).
Variation strategies not only include decisions to make changes in products and services but also adjustments to policies, business positioning, and even redefine expectations for success. The product dimension will be obvious: Whirlpool, for example, offers smaller washers and dryers in Europe than those 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.
Figure 8.2 Adaptation, aggregation, and arbitrage
A second type of adaptation strategy 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—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 accepts that without modification its products will appeal to a smaller market segment or different distributor network from those in the domestic market. Many luxury goods 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 depend heavily 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 three dozen countries.
Aggregation
Aggregation is about creating economies of scale or scope as a way of dealing with differences (Figure 8.1). The objective is to exploit similarities among geographies rather than adapt to differences but stop short of complete standardization that would destroy concurrent adaptation approaches. The key is to identify ways to introduce 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 done effectively—is probably the most widely used aggregation strategy. 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, however. The other, nongeographic dimensions of the CAGE framework introduced in Chapter 3—cultural, administrative or political, 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 European Union (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 one or the other.
Arbitrage
A third generic strategy for creating a global advantage is arbitrage (Figure 8.1). Arbitrage is based on exploiting differences rather than adapting to them or bridging them and defines the original global strategy: buying low in one market and selling high in another. Outsourcing and offshoring are modern day equivalents; Wal-Mart saves billions of dollars a year by buying goods from developing countries. Other economies can be created through 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 3 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 one hundred 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. One well-known version of this strategy consists of creating a holding company in the Cayman Islands, which allows a company to deduct interest payments on the debt used to finance acquisitions from profits generated elsewhere in the world. Through this and other, similar actions, companies can significantly lower their tax liabilities.
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 again. 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.
Although all arbitrage strategies that add value are “economic” in some sense, the term economic arbitrage is primarily 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.
Which ”A” Strategy Should a Company Choose?
A company’s financial statements can be a useful guide to signaling which of the “A” strategies will have the greatest potential to create global value. Firms that rely heavily on branding and 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, seeking to lower cost or access new knowledge, typically first 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 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, which 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 workforce 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 company’s global business units now sell through market development organizations that are aggregated up to the regional level. P&G has successfully evolved to 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.
From “A” to “AA” to “AAA”1
Although most companies will focus on just one “A” at any given time, leading-edge companies—GE, P&G, IBM, Nestlé, to name a few—have embarked on implementing two, or even all three of the As. 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.
There are serious constraints on the ability of any one company to use all three As 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 percent of revenues in the business worldwide: GEH, with 30 percent; Siemens Medical Solutions (SMS), with 25 percent; and Philips Medical Systems (PMS), with 20 percent. 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.
Research shows 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 in the earlier example, has consistently been the most profitable, reflecting its success at aggregation, through (1) economies of scale (for example, GEH has higher total R&D spending than its competitors but its R&D-to-sales ratio is lower), (2) acquisition prowess (GEH has made nearly 100 acquisitions under Jeffrey Immelt before he became GE’s CEO), and (3) 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 become a global product company by migrating rapidly to low-cost production bases. Today, GEH purchases more than 50 percent of its materials directly from low-cost countries and has significant manufacturing capacity 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 post–image 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.
Pitfalls and Lessons in Applying the “AAA” Framework
Most companies would be wise to (1) Focus on one or two of the As. While it is possible to make progress on all three As—especially for a firm that is coming from behind—companies (or, often more to the point, businesses or divisions) usually have to focus on one or at most two As in trying to build competitive advantage; (2) Make sure the new elements of a strategy are a good fit organizationally. If a strategy does embody nontrivially 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 workforce 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; (3) Employ multiple integration mechanisms. Pursuit of more than one of the As requires creativity and breadth in thinking about integration mechanisms. Given the stakes, these factors cannot be left to chance. Essential to making such integration work is an adequate supply of leaders; (4) 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 illustrate that some externalization is a key part of most ambitious global strategies. It takes a diversity of forms: 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; (5) Know when not to integrate. Some integration is always a good idea, but that is not to say that more integration is always better.
The Need for Global Strategic Management
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. 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?
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 often are 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.
The Importance of a Global Mind-set
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, sense and foresee emerging trends and 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 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.”2 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.”3 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 and 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 sometimes is 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: (1) 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/markets it has not yet entered; (2) 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 puts a lot of emphasis on uniformity. Contrast this with a “think local and act global” mind-set that 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 grow rapidly 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 and note that they would perform better—and learn more—if they tailored their operations more effectively 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, which are often seized by local competitors.4
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.
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, P&G, Lucent, Boeing, and GE, come from Asia, or will do so shortly.
As corporate globalization advances, the composition of senior management will also begin to reflect the importance of the BRIC and other emerging markets. At present, with a few exceptions, such as Citicorp and Unilever, C-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.
Organization as Global Strategy5
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 typically have migrated to one of four organizational structures: (1) an international, (2) a multidomestic, (3) a global, or (4) a so-called transnational structure. Each occupies a well-defined position in the global aggregation/local adaptation matrix first developed by Bartlett and Ghoshal and usefully describes the most salient characteristics of each of these different organizational structures (Figure 8.3).6
Figure 8.3 Global aggregation/local adaptation matrix
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 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.7 Companies operating with a multidomestic model typically employ adopt 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.8 By globalizing operations and competing in global markets these companies seek to reduce cost of 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 and is as much a mind-set, idea, or ideal rather than an organization structure found in many global corporations.9
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 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.
The modern multidomestic model is an updated version of the traditional (pure) multidomestic model, which 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 role of the subsidiary is to be locally responsive, the role of the center is to enhance global integration by developing global corporate and competitive strategies, and to play 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 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.
Realigning and Restructuring for Global Competitive Advantage
Creating the right environment for a global mind-set to develop and realigning and restructuring a company’s global operations, at a minimum, require (1) a strong commitment by the right top management, (2) a clear statement of vision and a delineation of a well-defined set of global decision-making processes, (3) anticipating and overcoming organizational resistance to change, (4) developing and coordinating networks, and (5) 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 on strategy, structure, and systems to a one on 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, global competitive environment. Under this new model, middle and upper-middle managers are expected to behave more like business leaders/entrepreneurs rather than administrators/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 approach 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 global competitive 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, 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.