Global strategy : harnessing news markets to extent advantage pot

215 CHAPTER OUTLINE CASE 1 The Boeing Company CASE 2 The Coca-Cola Company Introduction Environmental Factors That Accelerate Globalization Narrowing of Demand Characteristics Across Markets Escalating Costs of Research and Development Rising Economies of Scale and Cost Pressures Role of Government Policy Change in Factor Costs Around the World Rise of New Distribution Channels Overall Reduction in Transportation, Communication, and Storage Costs Strategies for Global Expansion Global Strategy Multidomestic Strategy Benefits of Global Expansion Market Growth and Expansion Recovery of Investment Costs Creating a Strong Image Accelerated Learning Costs of Globalization Cost of Strategic Leverage Loss of Flexibility Costs of Cooperation Corporate Application to Boeing and Coca-Cola Balancing Global and Multidomestic Approaches Automobiles: Combining Scale With Local Response Personal Care Products: Matching Local Response to Global Development Ethical Dimensions Summary Exercises and Discussion Questions Global Strategy: Harnessing New Markets to Extend Advantage WHAT YOU WILL LEARN • Why companies need to develop strategies to expand across national borders • The key environmental factors that promote the need to expand into overseas markets • The two basic strategies used for expanding overseas, including global strategy and multidomestic strategy • Balancing the benefits and costs of overseas expansion • How companies can continue to grow by becoming global players 216 PART 2 Extending Competitive Advantage Throughout the 1990s, the world’s largest commercial aircraft manufacturer, Boeing, has also been the leading U.S. exporting company. Boeing’s wide line of famous aircraft, such as the 737, 747, 757, and 767 jets, are used by most nations’ commercial airlines. From the 1970s and up to the present, Boeing stands as a symbol of this country’s industrial might in what is perhaps one of the most global industries around. It has remained America’s number one exporter for the past five years and derived more than half of its total $45 billion in 1997 sales from customers outside the United States. Despite growing competition from its major European competitor, the Air- bus Industries consortium, Boeing was able to post record earnings of $1.6 billion, while continuing to invest enormous sums (6 percent of sales) in R&D for new aircraft. Although Boeing’s dominance in the commercial aircraft industry remains significant, the company is beginning to feel the competitive heat from a revitalized Airbus in many of its large aircraft market segments (e.g., 747 and the new 777 aircraft). Still, Boeing appears to command roughly 60 percent of the world market for large jets. By the end of 1996, Boeing had delivered over 7,000 aircraft to more than 400 customers worldwide. Its wide range of aircraft models enabled it to win customers in every part of the world. This aspect of Boeing’s strategy—competing in global markets—is the focus of our interest here. Since its beginnings in 1916 and throughout its long history, Boeing has consistently spent large sums to maintain the high pace of innovation required for designing successful aircraft. During the 1970s and 1980s Boeing’s overriding corporate objective was to remain the dominant force in every segment of the commercial aircraft industry. Boeing’s airframe families include the 727 and 737 aircraft for short- range flights, the 757 and 767 for medium-range flights, and the widely successful 747 for intercontinental flights. During the 1980s and early 1990s, however, Boeing has faced a series of growing competitive challenges from both Airbus and McDonnell-Douglas, two companies that aspire to loosen Boeing’s grip over global markets. Airbus, with the ongoing assistance of sponsoring European governments, has steadily increased its market position at Boeing’s expense by winning several key customers’ orders for state-of-the-art aircraft that utilize new fly-by-wire controls with advanced electronics. On the other hand, as the global aircraft industry continues to consolidate, Boeing took the bold step of purchasing its other U.S. rival, McDonnell-Douglas, in a complex transaction that required government approval through much of 1997. McDonnell-Douglas has traditionally sought to challenge Boeing’s dominance of the medium-range aircraft market, but now its expertise in this area greatly complements Boeing product line to fight Airbus for smaller and medium-sized aircraft for customers in emerging and developing markets. Still, with the steady rise of Airbus and potentially new entrants from Japan, China, and elsewhere, Boeing is raising the stakes by investing carefully in new technologies that will enable it to retain the lead in designing new generations of aircraft. Boeing realizes that maintaining its technological and market dominance requires a forward-looking global strategy to enter and serve new markets, particularly as more nations want to establish their own national airlines and industries to support them. To accomplish its cherished goal of industry dominance, Boeing identified several critical factors that are the pillars of its global strategy: R&D investment, economies of scale, focused global marketing, and product enhancement. Investments in R&D. The cost of designing and developing a new generation of aircraft is rising exponentially. Every new plane costs more than double its predecessor to commercialize successfully. Since 1970, Boeing has consistently spent well over $1 billion per year in designing and testing new models of aircraft, such as its famous 747s, 757s, and 767s. Boeing’s newest line of aircraft, the huge 777, cost the company more than $4 billion and four years’ development effort before a single plane was built in 1995. These huge development expenditures serve as a nearly insurmountable barrier to entry and keep competitors from entering this industry on their own. More important, Boeing’s commitment to learning and deploying state-of-the-art R&D and advanced technologies enables the company to learn and use the latest developments in computer- aided design (CAD), metallurgy, electronics, and low-cost assembly techniques, which are invaluable in reinforcing Boe- ing’s unique competence in tackling extremely complex engineering problems. Economies of Scale in Manufacturing. A second pillar vital to supporting Boeing’s global dominance of commercial aerospace is the firm’s centralization of production activities to achieve low-cost economies of scale in production. Manufacturing and (Case 1) The Boeing Company 1 CHAPTER 7 Global Strategy: Harnessing New Markets to Extend Advantage 217 assembly of key aircraft components are highly capital-intensive operations whose costs need to be spread over a wide base of aircraft models. To ensure both high quality and low assembly cost, Boeing has concentrated most of its key component, assembly, and systems integration operations near its main plant in Wash- ington. All assembly operations take place in Boeing’s plant in Everett, Washington, which covers more than 40 square acres of factory and laboratory space. This one plant alone can assemble more than 400 planes a year, or about 65 percent of total world demand. Even though Boeing has consistently managed its costs carefully, the company remains dedicated to investing in the latest manufacturing and testing technologies to further strengthen its hold over the global market. In 1992, a number of additional cutting-edge manufacturing facilities started operations. For example, an extremely advanced development and machining center for new aircraft wings opened up in Tacoma, Washington. Using the latest in computer-aided manufacturing techniques, Boeing can now build new wing panels for its wide-body aircraft in ten days, as opposed to eighty days in the past. In the same location, a similarly advanced development center devoted to applying new composite materials for airframe bodies has also commenced operations. Compos- ite materials are new substances designed to replace metal beams and parts in constructing the aircraft’s frame. These new materials are much lighter than metal, while offering substan- tially more strength and reinforcement to the crucial parts of the airframe. In addition, Boeing opened up an expanded facility in late 1996 (originally opened in 1992) that is dedicated to improving systems integration of the aircraft’s electronics. Using the latest testing equipment, this facility will enable Boeing to fully test new control systems before they are actually installed in its aircraft, thus saving the company from costly refits. Since late 1996, Boeing is currently engaged in the midst of a major reorganization and reengineering of its manufacturing activities, with greater emphasis placed on assimilating new technologies. The company is in the midst of learning and implementing just-in-time (JIT) management of inventory, flexible product designs and tighter management of close relationships with suppliers. These techniques, learned by benchmarking the best practices of competitors in the automobile industry, allow for faster customization of aircraft models according to specific customer’s needs while lowering costs simultaneously. Global Marketing. The third pillar supporting Boeing’s global strategy is its dedication to aggressive and highly focused marketing. Boeing prides itself on having developed aggressive global marketing teams. These teams are able to match any customer’s needs with Boeing’s wide line of aircraft, while also providing generous financing terms and pricing to win the customer. The choice of a particular aircraft model is vital to the customer, since it commits the buyer not only to the operating range of the aircraft, but also to the parts, service, and maintenance costs that are needed to keep the plane afloat. Effective marketing of aircraft requires a highly sophisticated, knowledgeable, and well-trained sales force. To keep Airbus and newly emerging rivals (e.g., Embraer, Bombardier) at bay, Boeing attempts to reach potential new customers before its rivals. Equally important, Boe- ing works closely with each and every customer in terms of customer satisfaction, aircraft pricing, leasing costs, and service requirements. Financing the aircraft (e.g., purchase vs. long-term leasing) has become a critical lever in the firm’s global marketing efforts. Boeing’s sterling reputation in providing immediate, worldwide service is another key competitive advantage. Service is key to keeping customers satisfied since down-time with maintenance failures or lack of parts means huge costs for the customer. With the world’s most prestigious airlines, Boeing will go to almost any length to make sure that it retains their business. For example, with such well-known global carriers as British Airways, Lufthansa, and Japan Airlines, Boeing has even set up satel- lite offices near these airlines’ headquarters to make sure they receive the latest technical developments and immediate servicing of their aircraft. Continuous Product Improvement. The fourth pillar supporting Boeing’s global strategy is continuous improvement and product quality enhancement. To maintain its market position, Boeing constantly searches for new ways to upgrade its aircraft models to accommodate the changing needs of its customers. For example, Boeing has several variations of its widely popular 737 line of short-range aircraft to meet the special needs of regional low-cost carriers such as Southwest Airlines. The acquisition of McDonnell-Douglas’s MD-80 line of smaller aircraft enables Boeing to fill out its product line with streamlined aircraft designed for short and medium- haul markets. Variations of each aircraft model offer advanced features, but without sacrificing the commonality of design that makes for easy servicing and parts requirements. Offering product enhancements and upgrades enables Boeing not only to experiment with new aircraft derivatives, but also to understand more closely and provide for its customers’ special needs. In addition, Boeing has implemented continuous improvement programs that further reduce the costs, waste, and delays associated with designing and improving new aircraft models. 218 PART 2 Extending Competitive Advantage Perhaps no product is more global than Coca-Cola, or Coke. Customers from St. Louis to Sao Paulo to St. Petersburg and the world over love the taste of Coca-Cola and are demand- ing more of it. Yet, the secret behind Coca-Cola’s enormous popularity and market success lies in the Coca-Cola Com- pany’s continuing efforts to innovate new products and to enter new markets, no matter how prohibitive they seem ini- tially. If one product comes close to setting the standard and symbol for a truly global product, Coca-Cola must surely rank near the top. The Coca-Cola Company (also known as Coke) is one of the world’s most profitable beverage companies. In 1997, its $18.8 billion in total sales earned nearly $4.1 billion in profits for the company, making Coke one of the most profitable large U.S. companies in recent history. What is more startling about Coke is that nearly 75 percent of its profits come from overseas, with Japan as its biggest profit center. Worldwide, Coke employs more than 700,000 people in its value-creation and distribution system (with some 37,000 in the United States). Coke has more than 8 million wholesalers, retailers, and distributors selling a broad range of cola and other soft drink products. From giant, mega-store retailers to individual vendors and vending machines, Coke is distributed in almost every way imaginable. The company can produce in excess of 28 billion cases of soft drinks a year, and is seeking to expand this capacity by 5 percent to 10 percent in its newly growing markets such as Eastern Europe, China, Latin America, and parts of the former Soviet Union. Coca-Cola products are clearly stunning successes, but what is equally remarkable is that the company itself has grown its market value to its shareholders by more than 20 percent a year since 1989, with a staggering valuation of $185 billion at the end of 1997 (making it the second most valuable company in the S & P 500 list of companies at that time). Unlike its archrival PepsiCo, Coke has remained extremely focused on its beverage businesses. While PepsiCo has restructured its international operations, divested its restaurant units (KFC, Taco Bell, and Pizza Hut are now in newly created spin-off known as Tricon) and invested more heavily in its snack food (Frito-Lay) operations, Coke now avoids entering businesses that do not relate to beverages. At one point Coke owned a 49 percent stake of Columbia Pictures but sold its holdings to Sony Corporation in 1989 for a large profit. Earlier, in the mid-1980s, Coke attempted to enter the wine and coffee businesses, but found that they did not fit Coke’s style of marketing and strategic mission. Coke defines its strategic mission as making sure that its products are “within an arm’s reach of desire,” no matter where that customer may be. This overriding strategic direc- tion forms the basis of its far-reaching global strategy. Coke believes globalization is the key to its future because of the five billion people (or customers in Coke’s view) who can share in the quality and message that Coke brings. What makes Coke’s globalization push so potent is that its late chairman and CEO, Roberto Goizueta, personally exempli- fies and embodies Coke’s strong global flavor. A chemical engineer born in Cuba, Mr. Goizueta worked in a Coca-Cola plant prior to his arrival in the United States in the early 1960s. Until Mr. Goizueta’s untimely death in 1997, Coke has continuously pushed the frontier and aggressively entered newly developing markets. Even now under a new leadership, Coke stays remarkably patient in developing new products and entering new markets. In China, for example, Coke committed over twenty years and several million dollars before it became a major presence and turned a profit. In fact, Coke sees serving the developing markets of China, India, Russia, and Eastern Europe—about half the world’s population—as pivotal to its future success. Most of these regions have only just begun to open up their economies to the global market. More important, Coke sees itself not only as the producer and distributor of soft drinks, but also as a messenger of good feelings, such as joy and laughter, refreshment, fun, a new start, sports, and music. As such, the cornerstone of Coke’s global strategy is to do whatever it takes to create opportunities to reach customers with exciting new products that fit their tastes, however they may want them. Crucial elements of Coke’s global expansion include (1) a unifying message, (2) global distribution, (3) new products, and (4) community involvement. A Unifying Message. Coke believes that success in the global marketplace demands not only high-quality, instantly visible products, but also a central theme, symbol, or idea that binds together its products with its customers and distributors. For American travelers going to new places, Coke symbolizes a friendly reminder of home. For people in newly developing markets, Coke represents a potential avenue and opportunity to enjoy prosperity. The image of Coca-Cola as a beverage, (Case 2) The Coca-Cola Company 2 CHAPTER 7 Global Strategy: Harnessing New Markets to Extend Advantage 219 outlined by flowing white letters in a red background, symbolizes instant refreshment and awareness, no matter where you are in the world. Yet, Coke sees its trademark as more than simply a medium for advertising; the Coca-Cola label ought to convey a deeper message of fun, refreshment, and joyful memories to people who consume it. Global Distribution and Business Systems. Central to Coke’s mission of being within arm’s reach of its customers is its globe-spanning distribution system. The global Coca-Cola distribution system functions as a well-oiled machine, in which 700,000 employees work together to produce and dis- tribute Coca-Cola products in every market. Coke’s distribution system relies heavily on a combination of both wholly owned subsidiaries and long-standing partnerships with local bottlers and distributors that share the same common passion toward Coke’s products. Coke’s distribution system varies across every country and region that it serves, although the company prefers to own as many of its facilities where possible to improve timely delivery and logistical concerns. Most important, Coke tries to achieve the maximum market pene- tration in every market through extensive market research, inventory control, and ownership of key bottling and distribution channels. No outlet is considered too small to sell Coca- Cola products. In Japan, for example, Coke has advertised in local retailing trade magazines and even presented seminars to mom-and-pop stores on the virtues and profits of selling Coca-Cola. As such, marketing activities, with the exception of the company’s corporatewide image, tends to be managed locally. Coke’s distribution pipeline includes everything from concentrate and bottling plants to vending machines, restaurant sales, grocery stores, and even soft drink stands in every conceivable market. Coke tends to rely heavily on dedicated local managers and personnel to oversee significant distribution operations. In the United States, for example, Coca-Cola Enterprises is a separate company that handles distribution of all Coke and affiliated products throughout the country. Coca-Cola Enter- prises, in turn, franchises many local bottlers and distributors to handle the flow of Coke products through the system. In overseas markets, Coke has aggressively bought or estab- lished new bottling facilities to further extend its reach and to deny access to its rival Pepsi. Most recently in late 1996, Coke was able to break Pepsi’s once strong position in Venezuela by acquiring new bottlers in that critical growth market. Franchising is important, especially in Coke’s more distant locations, where local managers and owners are better attuned to their markets’ specific needs. In newly developing markets such as China and Eastern Europe, Coke relies on a combination of company-owned bottlers and distributors and local joint ventures to understand and to serve more distant customers better. New Products and New Variations. Coke spends large sums annually to conduct market research to locate unserved markets. Successful market research in every major country or region of the world allows Coke to carefully match the taste of its products with local preferences. Market research also enables Coke to produce numerous variations of its underly- ing beverage products. For example, in Europe, Coke developed Coke light to compete not only with its own mainstream Coke products, but also with new soft drink products from Pepsi and other producers. In Spain, Coca-Cola is often used as a mixer for wines. In Japan, Coke introduced such new products as Georgia Ice Coffee and Cafe Au Lait Premium products to enter a new market segment. Also, Coke introduced betacarotene-enriched VegitaBeta and Bonaqua flavored mineral water in Japan during 1992. Through the early 1990s, Coke introduced two new drinks tailored specifically for the Australian market—Lift and Skysurfer. In Indonesia, Coke sells strawberry, pineapple, and even banana-flavored sodas. Coke also sports a broad range of soft drink products, such as Sprite, New Coke, Coke light, Fanta, Diet Coke, and Mello Yellow in the United States, as well as Minute Maid orange juice. Amazingly, Coca-Cola USA represents less than a third (33 percent) of total worldwide sales. Yet, in all of these and other markets, regular Coke in its familiar red-and- white label is always available to serve as the basis for the company’s worldwide recognition. In addition to offering such a wide variety of tastes, Coke offers an incredible array of beverage sizes, ranging from the omnipresent two-liter bottles to aluminum cans and glass bottles of varying sizes. By offering a countless assortment of sizes and tastes of its broadly expanding product line, Coke keeps local store shelves, vending machines, and other distribution outlets well stocked. Paradoxically, offering a wide variety of tastes and sizes keeps the product price low to the customer and limits the effective actions of other beverage competitors. Community Involvement. A key pillar to Coke’s global strategy is its strong belief in local community involvement. Coke believes good marketing goes beyond traditional advertising and distribution. Coke’s distribution system is committed to making Coca-Cola products part of every community. This means that Coke, its local bottlers, and many of its distributors are active supporters of community activities ranging from sports and holiday celebrations to local charities. 220 PART 2 Extending Competitive Advantage INTRODUCTION This chapter focuses on how firms can develop strategies for global expansion that extend their competitive advantage to worldwide markets. For firms in almost every imaginable industry, the need to think about strategies for global expansion and operations is rising fast. In fact, in some industries (high fashion and Hollywood movies and Internet-driven, on-line businesses, for example) where products are in such high demand, the need to think about global expansion begins on day one. Rapidly changing technologies, the growth of computer networks that make the Internet ever-more perva- sive around the world, the rise of new competitors from newly developed markets, the global desire for exciting new products and services, and the availability of new sources of production make global strategy issues a critical consideration for senior managers in all types and sizes of companies. Business leaders from North and South America, the Far East, and Europe all agree that going global is essential to their future business success. Yet, few managers actually agree on which factors are most important in pursuing successful global expansion strategies. 3 In other words, the term globalization often con- jures up different images in the minds of people from different industries. In this book, we define globalization as viewing the entire world as a potential market or source of inputs for the firm. The issue of globalization is a complex one. Firms operating in many national markets face different strategic considerations and issues than do firms operating solely in their home market. Developing effective global expansion strategies requires managers to think beyond their home market and into many markets. When carefully understood and matched to their firm’s products and practices, global expansion strategies can dramati- cally help firms extend their distinctive competence and sources of competitive advantage to new markets. We begin by examining the environmental changes and factors that accelerate the trend toward globalization in many industries. Second, we focus on the broad types of global expansion strategies that firms can undertake to expand their operations overseas. Third, we look at the benefits and costs that underscore global operations and examine how managers can balance the risks and rewards inherent in each type of global strategy. Finally, we examine some of the ethical issues that surround globalization. As firms move to set up operations abroad, managers begin to realize that other cultures some- times have their own interpretation of what constitutes sound business practices and ethics. ENVIRONMENTAL FACTORS THAT ACCELERATE GLOBALIZATION Throughout the 1980s and into the 1990s, companies in a growing range of industries have looked overseas to expand their operations. Industries ranging from semiconductors to consumer electronics, automobiles, computers, watches, tools, medical equipment, aerospace, and others have also seen global competitors from other nations make serious inroads into the United States. Some of the most important environmental factors that promote globalization within and across industries are the following: (1) narrowing of demand characteristics among countries and regions, (2) escalating costs of R&D, (3) pressures for cost reduction and higher economies of scale, (4) the rise of government “industrial” policies that promote globalization, (5) reduction of factor— capital and labor—costs in many markets, (6) the availability of new distribution channels, and (7) reduction in transportation, communication, and storage costs. 4 (See Exhibit 7-1.) globalization: viewing the world as a single market for the firm; the process by which the firm expands across different regions and national markets. On an industry level, globalization refers to the changes in economic factors, such as economies of scale, experience, and R&D, that make competing on a worldwide basis a necessity. CHAPTER 7 Global Strategy: Harnessing New Markets to Extend Advantage 221 Narrowing of Demand Characteristics Across Markets One of the most important factors promoting faster globalization is the rising level of incomes and awareness of new products and services in regions around the world. Since the 1970s, rising prosperity in countries such as Brazil, Chile, South Korea, Taiwan, Sin- gapore, South Africa, Saudi Arabia, Greece, and Turkey has vastly increased the amount of disposable income available for purchasing new products. In addition, more mature markets, such as Europe, North America, and Japan, have been experiencing steadily rising incomes as well, albeit at a slower rate. Even though many countries still exhibit varying rates of economic development, the rise of new middle classes in once underdevel- oped nations has opened up new markets for products such as Sony Walkmans, Levi’s jeans, McDonald’s restaurants, Coca-Cola, and even Motorola cellular phones and pagers. Entirely new markets are being created over a span of a few years. Products and services that once were confined primarily to wealthier people in the United States and Europe (financial services, luxury automobiles, commercial banking, golfing equipment, tennis rackets, cellular phones) are now available to anyone, anywhere around the world who can afford them. In fact, rising prosperity around the world is opening up huge new markets annually—to firms willing to enter and serve them—populated by millions of wealthier people. In the new millennium, even greater opportunities may abound. The fast growth rates of China, the opening up of Eastern Europe, and the massive growth of new middle classes in Indonesia, India, and Southeast Asia are all contributing to the marked rise of incomes, aspirations, and business opportunities for designing and selling new products. Increasing demand worldwide has direct and more specific effects on the competitive nature of many industries. In some industries, globalization of demand means a leveling of demand patterns, whereby people’s desires for products and services are becoming steadily more homogeneous. Homogeneity of demand means that regardless of where customers are physically located, buyers are likely to want the same kind of product or service with certain similar features. In other words, customers are becoming increasingly similar in some industries where tastes, preferences, and desires for certain product attrib- utes are converging into one larger, more homogeneous market. Demand characteristics in one region are likely to be nearly if not identical to those characteristics found in another region. For example, in the cellular phone and paging industry, companies such as Motorola of the United States, Fujitsu of Japan, and Nokia of Finland are designing, producing, and selling hundreds of thousands of these devices to customers worldwide, Factors Promoting the Globalization of Industries • Narrowing of demand characteristics • Escalating costs of R&D • Cost reduction pressures and economies of scale • Government industrial policies • Reduction of factor costs (e.g., labor, capital) • Rise of new distribution channels • Reduction of transportation, communication, and storage costs • Internet access • Reduction of tariffs worldwide exhibit(7-1) homogeneity of demand: similarity of demand patterns and wants across customers, regardless of where they are located. 222 PART 2 Extending Competitive Advantage with few substantive changes in the way the products look or function. Perhaps the best example of the growing homogeneity of demand in the consumer electronics industry is the Sony Walkman. Consumers in New York, Nanking, and Nairobi are all likely to be wearing the same style of headsets and listening to music from a radio/cassette player that is interchangeable across markets. However, a product does not necessarily have to be tangible to be wanted by millions of global consumers. For example, blockbuster movies and television shows produced by Hollywood studios are clearly hits wherever they are shown worldwide. See Exhibit 7-2 for examples of products with worldwide markets and increasingly shared tastes and uses. Homogeneity of demand, however, is perhaps more prevalent in industries that produce and sell products that serve as components to some other product or cannot be truly differentiated in their use. For example, semiconductors, telecommunications equipment, and other electronic devices are clearly designed to serve the same purpose and function, no matter where the end user is located. Microprocessors run computers, tele- phones, and even automobile engines, regardless of where the end product is located. Fiber optics transmit telephone calls across regions, countries, and continents, no matter what language is spoken. Commercial aircraft, such as the Boeing 747 and 777, serve the same purpose of carrying passengers and freight, whether they are sold to American Airlines, Air France, or Aerolineas Argentinas. Homogeneity of operating standards, such as software and word-processing systems, also contributes to rising globalization of these industries. Witness the impact of Microsoft’s various operating systems (DOS, Windows 95, Windows 98, Windows NT) in shaping the evolution of future add-on software, video games, and other programs by other software design companies throughout the world. Other industries exhibiting a growing convergence of tastes and demand characteristics include certain types of automobiles (luxury, four-wheel drive, and sporty segments), soft drinks (Coke vs. Pepsi), and even high fashion to some degree (the prevalence of Italian cut suits in Europe, Asia, and the Americas), where a growing common desire for high-quality products transcends languages, ethnic differences, political systems, and religions. exhibit(7-2) Examples of Growing Homogeneity of Demand • Communications equipment • Cellular phones • Sony Walkmans • Levi’s jeans • Commercial banking • Financial services • Color televisions and VCRs • Semiconductors • Machine tools • Computers • Pharmaceuticals • Construction equipment • Commercial aircraft • Hollywood films • Television shows • Data and computer networks CHAPTER 7 Global Strategy: Harnessing New Markets to Extend Advantage 223 Escalating Costs of Research and Development The exponentially rising costs of research and development (R&D) in some industries make it absolutely essential for companies in these industries to sell their products globally. For example, Boeing, Airbus, and McDonnell-Douglas face costs up to $4 billion to design a new model or line of commercial aircraft. In this industry, neither Boeing nor its competitors can afford to design a line of aircraft solely for manufacture and distribution in its home markets; the R&D costs involved are too high. High R&D costs mean that firms must leverage their R&D costs across a greater volume of products that inevitably must be sold across many markets. For example, Boeing’s new 777 line of aircraft has been so expensive to develop that the company first had to secure orders from various national airlines before a single plane was built. The semiconductor, biotechnology, pharmaceutical, and composite materials industries also face a similar economic imperative of rising R&D costs. Developing a new generation of memory chip, for example, can easily exceed $1 billion, as IBM, Toshiba, Motorola, and Siemens found out before they even committed to joint production of the 256-megabit chip. Intel, for example, routinely spends over $2.5 billion a year on R&D to design advanced generations of microprocessors. Intel must sell vast quantities of its Pentium II and Pentium III lines of chips to global computer manufacturers before it can recoup its development costs fully. Its next generation Merced chip, developed in conjunction with Hewlett-Packard, will similarly cost the two companies over $1.5 billion in total R&D expenditures alone. In the biotechnology and pharmaceutical industries, designing a new line of anticancer drugs is a costly proposition. The research and development costs of testing, developing, and finally commercializing new medications can easily exceed $500 million to $600 million, so selling globally as fast as possible is a must. Companies that manufacture “new wave” materials, such as hybrid composites used in tennis rackets (graphite), golf clubs (titanium, tantalums, and carbon fibers), engineering structures (super strong composite metals), and new syn- thetic fibers (advanced polyester blends) must also amortize their R&D costs over a global volume of business. For example, graphite tennis rackets are expensive to develop and sell, but few people in one market alone are likely to buy enough of them to justify a firm’s ini- tial investment in that business. Companies in this and other industries must view the entire world as their market before they can undertake costly product development. Thus, firms in industries that face rising R&D costs accelerate the broader trend towards globalization. See Exhibit 7-3 for examples of global, R&D-intensive industries. Examples of R&D-Intensive Industries • Semiconductors • Software • Biotechnology • Communications systems • Pharmaceuticals • Commercial aircraft • Electronics • Composite materials • Advanced imaging systems • Medical equipment • Fiber optics exhibit(7-3) 224 PART 2 Extending Competitive Advantage Rising Economies of Scale and Cost Pressures Many industries are currently exhibiting rising levels of economies of scale in production. For example, the steel industry is characterized by a high minimum efficient scale (MES). Minimum efficient scale refers to the production volume at which a plant must operate to achieve full efficiency. New integrated steel mills that turn out high-quality, continuously cast steel face rising levels of MES to the point where a brand new steel mill must be able to produce a sizable fraction of total world demand before it breaks even. South Korea’s newest integrated steel mill, owned and operated by the Pohang Iron and Steel Company (POSCO), can produce high-quality steel for export at 75 percent of the cost of compara- ble U.S. integrated mills. However, POSCO’s plant is so huge that it must produce approx- imately 3 percent of total world demand before it achieves full efficiency. Thus, high economies of scale in production mandate high-volume exports to other nations, thus accelerating globalization of the industry. Global economies of scale can also promote related experience curve effects in production. Experience curve effects resulting from global volume production are important, because they can help firms to reduce costs even further. In technologies where costs decline from both cumulative volume and learning, firms may be more inclined to sell more products across different regions. As costs decline, the company will be better able to price its product to penetrate new markets. In addition, faster learning and experience means that the company will be able to remain at a lower cost position than its rivals for an extended period. The economies of scale and cumulative experience effects gained by Japanese automakers, such as Toyota, Honda, and Nissan, have helped these companies penetrate both the U.S. and European markets, while sustaining the momentum of global volume production. See Exhibit 7-4 for examples of products in industries with rising economies of scale. Role of Government Policy Government policy can often accelerate the trend towards globalization in one or a group of industries. For example, the rise of Japanese integrated steel producers during the 1960s and 1970s was largely due to the coordination and preferential tax treatment (particularly in depreciation) accorded to steelmakers by the government. Companies such as Nippon Kokan, Nippon Steel, Sumitomo Metal, and others were encouraged by the government to share their technological innovations and to build steel mills that exhib- ited ever higher minimum efficient scale (such policies can, of course, have very mixed blessing when these industries enter a protracted cyclical downturn). In turn, many of these steel companies started to export to the United States, where older mills owned by exhibit(7-4) Examples of Rising Economies of Scale/Cost Pressures • Steel • Automobile engines • Color television tubes • Semiconductors • Fiber optics • Office equipment • Telecommunications • Aircraft • Chemicals minimum efficient scale (MES): a level of production volume that a factory must reach before it achieves full efficienty. [...]... flowers would seem to represent the one product least subject to global shipment and export (because of perishability), the ability to mass produce and to ship flowers on airplanes overnight to the United States has instantly transformed the growing of flowers and plants into a new global business Custom-made Swiss chocolates CHAPTER 7 Global Strategy: Harnessing New Markets to Extend Advantage 227 and... locate their most sophisticated plants closest to their most important markets (cellular phone companies); or they may CHAPTER 7 Global Strategy: Harnessing New Markets to Extend Advantage build only one or two giant, world-scale plants to serve the entire global market (steel and semiconductor companies) Thus, the decision to locate plants and laboratories globally is predicated on a systemic view of... competing globally to build leverage across markets by transferring funds, skills, low-cost production, or market insights from one market to another Cross-subsidization, in its most sophisticated form, is the deployment of resources and products across markets to maximize opportunities to CHAPTER 7 Global Strategy: Harnessing New Markets to Extend Advantage build leverage The presence of several large, global. .. specific industry-driven factors have prompted firms from around the world to develop a global strategy These factors include growing homogeneity of demand, rising economies of scale, increasing technological intensity of new products, the pressure to amortize high costs of R&D or other proprietary investments, and the need to avoid Global Strategy: Harnessing New Markets to Extend Advantage CHAPTER 7 229... skills CHAPTER 7 Global Strategy: Harnessing New Markets to Extend Advantage 241 advantage The lack of global awareness was a big problem with the Big Three automakers during the 1970s and 1980s Although General Motors and Ford had substantial European operations, senior management in the United States was primarily concerned with “milking” the domestic market Japanese competitors, such as Toyota, Nissan,... electronics, automobiles, personal care products, and even financial services and high fashion Let us examine how a few companies in these industries have attempted to move toward a blended global/ multidomestic strategy to secure the benefits of both Automobiles: Combining Global Scale with Local Response Several leading companies in the automobile industry are moving toward a blended global/ multidomestic strategy. .. demand Moreover, a global strategy helps firms extend their distinctive competences to build leverage across markets The mutually interdependent, systemwide view of a global strategy is shown in Exhibit 7-7 Firms pursuing global strategies tend to undertake the following actions to build leverage across markets: (1) standardize products as much as possible, (2) build their plants and factories in locations... ability to produce its aircraft at low cost according to standardized airframe designs Boeing’s reputation for product excellence and durability, highly refined assembly techniques, and commitment to global service enhances its prospects to open additional markets for its aircraft Locating Plants to Maximize Systemwide Advantage Another central facet of a global strategy is to maximize the total systemwide... STRATEGIES FOR GLOBAL EXPANSION global strategy: a strategy that seeks to achieve a high level of consistency and standardization of products, processes, and operations around the world; coordination of the firm’s many subsidiaries to achieve high interdependence and mutual support multidomestic strategy: a strategy that seeks to adjust a firm’s products, processes, and operations for markets and regions... mix of U.S.-made parts, such CHAPTER 7 Global Strategy: Harnessing New Markets to Extend Advantage as glass and rubber, from local manufacturers Thus, Honda seeks to blend the benefits of a global strategy for its core scale-sensitive and technology-intensive components (to secure low-cost production and shared development of advanced designs), with a multidomestic strategy for assembly and distribution . into a new global business. Custom-made Swiss chocolates CHAPTER 7 Global Strategy: Harnessing New Markets to Extend Advantage 227 and candies are now often shipped directly from Switzerland to. Questions Global Strategy: Harnessing New Markets to Extend Advantage WHAT YOU WILL LEARN • Why companies need to develop strategies to expand across national borders • The key environmental factors. subsidiaries to tailor their products, marketing, and other activities according to the needs of their specific markets. CHAPTER 7 Global Strategy: Harnessing New Markets to Extend Advantage 229 duplication

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