Global Strategy Determinants Roll No’s.

113, 114, 115

G lobal strategy as defined in business terms is an organization's strategic guide

to globalization. A sound global strategy should address these questions:
what must be (versus what is) the extent of market presence in the world's
major markets? How to build the necessary global presence? What must be AND
(versus what is) the optimal locations around the world for the various value chain
activities? How to run global presence into global competitive advantage?

Phases of global strategy

The term ‘global strategy’ has been in use only since the late 1970s, and began
to assume widespread use in the 1990s. Prior to the 1990s, ‘international strategy’ was
the term most often used, and it is still in use now, to describe the strategic activities
of firms operating across borders. In fact, for many, ‘global’ is just a new replacement
for the term ‘international’ and hence ‘international strategy’ and ‘global strategy’ are
sometimes used interchangeably. We take global strategy to mean something new and
different from international strategy. As you will see in this chapter and throughout
this book, there are real differences between international strategic management and
global strategic management. However, before we explain in detail what global
strategic management is, let us first look at the most likely phases firms go through
before they adopt a global strategy. We group them into four main phases.

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Single-country strategy
Most firms operating around the world at one time operated in a single
country. Firms that are now household names around the world started as small
ventures in a single country. Firms operating strictly within the confines of their home
country use single-country strategies to compete in their home market, where they
face only one set of business factors and one set of customers.
In the past, so long as the firm’s home market kept growing and remained profitable,
there was no urgent need to expand into foreign markets. Internationalization was
often considered when the firm’s home market became unprofitable or the prospect
for growth started to diminish, and attractive opportunities to expand internationally
were available.
Given the recent acceleration of the globalization process, successful firms operating
in global industries cannot afford to wait until the home market becomes unattractive
or unprofitable, but must take proactive actions to capture the benefits of operating
around the globe.

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Export strategy
Before a firm establishes subsidiaries outside its home market and becomes
directly involved in their management, it may start by exporting its products and
services outside its home market. In most exporting firms the domestic strategy
remains of primary importance. While an exporting firm makes strategic decisions to
select appropriate countries to export to, determines the appropriate level of product
modification to meet local market peculiarities, and sets and manages export
channels, the thrust of its strategy deals with the management of the firm in the home
country. For this reason, this phase could be considered as a domestic strategy with an
export strategy attached to it.

International strategy
When firms first establish subsidiaries outside their home market, they move
from a domestic strategy phase to an international strategy phase. Firms that
manufacture and market products or services in several countries are called
‘multinational firms’. During this phase, each subsidiary is likely to have its own
strategy, and will analyses, develop, and implement that strategy by tailoring it to its
particular local market. At this phase, adaptation of products to fit local market
peculiarities becomes the main concern for multinational firms. Internationally
scattered subsidiaries act independently and operate as if they were local companies,
with minimum coordination from the parent company. This approach leads to a wide
variety of business strategies, and a high level of adaptation to the local business
environment.

Global strategy
As multinationals mature and move through the first three stages, they become
aware of the opportunities to be gained from integrating and creating a single strategy
on a global scale. A global strategy involves a carefully crafted single strategy for the
entire network of subsidiaries and partners, encompassing many countries
simultaneously and leveraging synergies across many countries. The term
‘simultaneous’ is used here to indicate that most of the activities of the different
subsidiaries are coordinated from headquarters in order to maximize global efficiency,
which allows multinational firms to achieve the economies of scale and scope that are
critical for global competitiveness. Moving from a domestic or international strategy
to a global strategy is not an easy process, and creates various strategic challenges.
The challenge here is to develop one single strategy that can be applied throughout the
world while at the same time maintaining the flexibility to adapt that strategy to the
local business environment when necessary.
“A global strategy involves the carefully crafted single strategy for the entire
network of subsidiaries and partners, encompassing many countries simultaneously
and leveraging synergies across many countries. This stands in contrast to an
international strategy, which involves a wide variety of business strategies across
countries, and a high level of adaptation to the local business environment.”

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Global Strategy Determinants

The extent to which a multinational firm adopts a global strategy is determined
by three broad factors: macro globalizing determinants, namely globalization and
information and communication technology; industry globalizing determinants,
namely market drivers, cost drivers, government drivers, and competitive drivers; and
internal globalizing determinants, namely global orientation and international
experience. The macro globalizing determinants have an overall impact and are not
specific to certain industries or organizations. The industry globalizing determinants
determine the global ability of a sector, industry, or market. The internal globalizing
drivers determine how a firm responds to its globalizing business environment. The
combination of these determinants will be unique for each sector and more unique for
each multinational firm.

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1. Macro globalizing determinants

There are two key macro globalizing determinants: globalization and
information communication technology.

Globalization
Globalization is inescapably a multi-faceted process. There is fundamental
disagreement about what globalization is and, indeed, what it is not. We see
globalization as being a composite of three interrelated elements: the creation of a
global economy, political globalization, and a globalization of ideas and values.
Globalization is simultaneously accelerating and deepening these three elements.

Global Economic integration

For the last few decades we have been witnessing a dramatic increase in the
density and depth of economic interdependence. The number of regional trade
agreements, which has increased from very few in the late 1950s to over 180 in 2002,
is good evidence of the interconnectedness of the global economy. Other indications
include the increase in national regulations in favor of foreign direct investment (FDI)
and other types of foreign investment. The changes countries are making in favor of
FDI and other forms of international investment far exceed the changes that are not in
favor.
The degree of global integration varies from one national economy to another. For
instance, in terms of economic integration the Netherlands is more global than
Switzerland. Further, within countries some sectors are more global than others.

Political globalization
Globalization is also believed to be leading to an unprecedented and growing
consciousness of so-called global problems which require global political systems. As
a result, globalization is leading to the end of strong nation-states. The
interconnectedness of the global economy has significantly reduced national
governments’ ability to control their social, economic, and even political policy, and
as a result, slowly but surely, the role of national governments in economic
development is becoming considerably weaker. For example, in recent decades there
has been a major de-linking of financial activities from their mother countries and the
emergence of supra-territorial financial systems which, some argue, have largely
undermined the capacity of nation-states to regulate financial transactions.

Globalization of ideas and values

Several studies suggest that the increasing globalization of economic
transactions, coupled with global electronic mass media, is generating new sets of
managerial values, especially among young managers. For example, cross-border
music channels such as MTV, greater travel, and better global communication have
encouraged the notion of a ‘global teenager’, that is, the notion that teenagers possess
similar values regardless of their country of origin.
On the basis of the above discussion, we define globalization as a diverse
process embracing economic, political, and cultural change which is deepening the
integration of the world economy, strengthening political interdependence between
countries, and causing values to converge across countries. Also, we must note that
globalization denotes movements in both the intensity and the extent of the above
three elements. It is intensifying cross-border business activities by making
governments and economic policies more integrated, and interdependent on each

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other; and to some degree social and cultural policies are interpenetrating each other.
The extent of globalization refers to the geographical spread of these intensifying
tendencies. The two movements—intensity and extent—are leading to the
compression of the world, universalization of managerial values and practices, and
homogenization of customers’ needs, wants, and behaviors.

Information communication technology (ICT)

Both popular and academic literature claims that, as a result of the ICT
revolution, the ‘conduct of global business will be changed in fundamental ways’. The
ICT revolution, it is believed, is shrinking distances, eliminating intermediaries
between producers and consumers, and bringing about closer integration of the world
economy. For instance, thanks to ICT, geographical distance is not significant for the
transportation of information, and hence global firms are able to collect information
about their global activities faster and cheaper. In the past, exchange of information
among the global firm’s partners was done through paperwork, such as paper
documents and faxes.
This often caused delays in information-sharing and miscommunications among the
different partners. This was an enormous problem for firms operating on a worldwide
scale, because out-of-date and/or incomplete data could translate into a poor
understanding of what customers actually needed and what suppliers actually had in
their warehouses. ICT makes the information flow more complete, and makes the
information more accurate, timely, and accessible. It helps multinational firms to
reduce uncertainties, such as demand, delivery times, quality, and competition in the
global supply chain. For instance, ICT has helped Dell Computers eliminate inventory
from its manufacturing plants, and has been a key in establishing ultra-close ties with
its suppliers. As a result,
Dell has been able to cut inventory to just three to five hours. The reduction has been
so profound that Dell has been able to turn factory storage space into production lines.
Additionally, the company now uses ICT to link suppliers with manufacturers so that
suppliers can eliminate excess inventory. The Dell example shows that ICT enables
managers to develop and analyze new and effective ways to improve competitiveness
through successful management of global supply chains—through, for example,
instant access to information—and information-sharing between different supply-
chain parties in order to meet increasing global customer demands for responsiveness,
quality, and low prices. It is believed that, thanks to ICT, managers are now able to
coordinate their entire global business, including procurement, inventory,
manufacturing, logistic, distribution, sales, and after-sales service, to reduce costs, and
to achieve high speed and precision in delivering their products and services.
Multinational firms are doing this through, for example, having one data entry form
for all partners in the network, one data structure for all partners, and a common
means of access, often via a tightly secured and controlled intranet. This is enabling
firms to collect necessary information to trace in ‘real time’ the history of every single
part in the transformation process. By so doing, ICT provides firms with greater
assurance of product quality and specifications, and enables quick identification of
problems throughout the global network.

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2. Industry globalizing determinants

There are four industry globalization drivers: market globalization drivers,
cost globalization drivers, government globalization drivers, and competitive drivers.

Market globalization determinants

There is a general belief that several markets are converging around the world.
There are several reasons for this. First, the convergence of Gross National Product
(GNP) per capita in the developed world is leading to a convergence in markets
sensitive to wealth and level of income such as passenger cars, television sets, and
computers.
Second, there is evidence to suggest that in some industries, customers’ tastes,
perceptions, and buying behaviors are converging, and that the world is moving
towards a single global market that is basically Western and, more specifically, North
American. In a landmark article titled ‘The globalization of markets’ Levitt (1983)
predicted that globalization drivers such as new technology would lead to
homogenization of consumer desires and needs across the world. He argued that this
would happen because generally consumers would prefer standard products of high
quality and low price to more customized but higher-priced products. Third, in the
quest to build a global brand and company image, multinational firms are increasingly
favoring a global standardization of marketing and advertising efforts. This does not
mean identical marketing and advertising campaigns, but the use of similar themes
that send the same message across the world. Recent developments in broadcast
media, particularly direct-broadcast satellite and international media are making this
more possible. CNN, for example, broadcasts standard adverts around the world.

Cost globalization determinants

Several key cost drivers may come into play in determining an industry
globalization level. One key factor is global scale economies. That is, the costs of
producing a particular product or service are often subject to economies or dis-
economies of scale. Generally, economies of scale arise when a product or a process
can be performed more cheaply at greater volume than at lesser volume. This is often
the case when the product or service is standardized; hence it becomes hard for
multinational firms to differentiate themselves, and cost becomes key in achieving
and sustaining a competitive advantage. Producing different products for different
countries leads to higher cost per unit. This is because multinational firms serving
countries with separate products may not be able to reach the most economic scale of
production for each country’s unique product. Multinational firms could reduce the
cost by using common parts and components produced in different countries. Another
factor is sourcing efficiencies. Global sourcing efficiencies may push multinational
firms towards a global strategy. The prices of key resources used in the production
process have a strong impact on the cost of the product or service. The cost of inputs
depends on the bargaining power of the firm vis-`a-vis suppliers. For example, large
firms purchasing large volumes have more clout with their suppliers than their small
rivals. Hewlett-Packard (HP) is a good example. In the past, country-level subsidiaries
used to solicit bids for insurance coverage independently. Each subsidiary chose the
local provider who bid less than the competition. However, HP now belongs to a
global insurer–insured pool which provides rebates based on business volume. In
addition, as noted earlier, some countries provide a cost advantage because of low
cost of raw material, low cost of labor, or low cost of transport because of location.
Thus multinational firms locate their activities in different countries to benefit from

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these advantages. Further, in sectors where transportation cost is low, closeness to

customers is not important, and urgency to distribute the product is low, multinational
firms tend to concentrate their production in large plants producing large-scale
products. Finally, high cost of product development drives multinational firms to
focus on core products that have universal appeal to control cost.

Government globalization determinants

Governments have different policies for different industries. While the general
trend is lower trade barriers and less regulation, for a few sectors trade barriers are
prohibitive and highly regulated by governments. In addition to trade barriers and
regulations, technical standards are becoming similar around the world. For example,
several countries have accepted new international accounting norms and standards. In
Europe, the International Accounting Standards (IAS) is quickly becoming the norm.
This will allow direct cross-border comparison of financial statements, and facilitate
communication between subsidiaries and the centre. Companies like Nokia and
Novartis are working to bring about a convergence of US accounting standards with
IAS.

Competitive determinants
Because of tight interlinks between key world markets, intense competition
across countries and the continuous increase in the number of global competitors,
multinational firms are adopting a ‘globally centered’ rather than ‘nationally centered’
strategy. The increase in interactions between competitors from different countries
requires a globally integrated strategy to monitor moves by competitors in different
countries. By pursuing a global strategy, competitors create competitive
interdependence among countries. This interdependence forces multinational firms to
engage in competitive battles and to subsidize attacks in different countries. Cross-
subsidization is only possible if the multinational firm has a global strategy that
monitors competitors centrally rather than on a country-by-country basis. Globalize
competitors drive industries to adopt a global strategy. Major competitors, especially
first movers, use a global strategy to introduce customers to global products, late
movers adopt the same strategy so as to achieve economies of scale or scope and
other benefits associated with adopting a global strategy.
Last, the ability to transfer competitive advantage globally drives multinationals to
adopt a global strategy. For example, IKEA succeeded in transferring its locally
developed advantage to a global market. Conversely, sectors where the competitive
advantage is ‘locally rooted’ and hard to transfer across countries, multinationals tend
to adopt an international strategy rather than a global one.

3. Internal globalizing determinants

Two key internal factors significantly influence the extent to which a
multinational firm adopts a global strategy: global orientation and international
experience.

Global orientation
Global orientation is a part of a multinational firm’s culture, and is essentially
the belief that success comes from a worldwide globally integrated strategy rather
than from one operated on a country-by-country-basis. Multinational firms with
worldwide orientations look for similarity between markets and synergies across
countries, and make globally integrated moves. In these multinationals, managers

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have a global mindset and tend not to tolerate differences across countries. For
example, the global orientation of Lotus is articulated by the vice-president’s
question: ‘How can I manage an organization in which I am getting different answers
to the same question depending on location?’ These multinationals have the desire to
raise corporate strategy above subsidiary strategy. This illustrated by a Hewlett-
Packard manager’s comment: ‘We want one solution for the world rather than fifty-
four country solutions. We optimize at the company rather than the country level.’

International experience
There is evidence to suggest that the most experienced multinationals are
likely to adopt a global strategy, whereas the less experienced are unlikely to do so.
Experience gained over the years enables the multinational to take advantage of the
comparative advantages of various countries, to spot and capitalize on synergies
between subsidiaries in different countries, and to establish common needs among the
customer segments worldwide so that core product features are kept intact. While the
multinational may depart from total standardization, as shown in the case of IKEA in
the US, it will keep the core product features to simplify global operations, develop
consistent image globally, and achieve scale economies, synergies, and efficiencies.

THAT IS ALL.