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COVER STORY

GLeBAL

STRATEGY

UNDERSTANDING THE GAME

by Arvind Bhambri Associate Professor Management & Organization

n elegantly simple definition of global strategy was given by Narayana Murthy, the CEO of Infosys, one of the leading high technology software companies in India. In an interview, he described global strategy as "raising capital where it is cheapest, producing where

it is most cost effective, and selling where it is most profitable."

In that one sentence, Mr. Murthy captures the essence of what global strategy is all about. In spite of the current brouhaha about outsourcing, globalization and global strategy are about much more than the supply chain, sourcing and offshore production. Typically, what we think of as a global supply chain is buying products where they are cheapest and most efficiently manufactured, and raw materials from where they are most easily available. But we must also think about capital and customers on a global basis-about accessing capital markets, financial instruments, and valuable customers in the world wherever they are at a moment of time.

Illustration by Polly Becker

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Multinationals have been using global financial markets for a while but now, even smaller companies can list themselves in overseas financial exchanges and look at customers on a global basis, to find in which geographies customers will experience the most value for a product and are therefore willing to pay for the value of that experience. The underlying message here is that to capture value, the company must go to where the customers who will get the most value from its product reside. Integrating these different dimensions is what globalization and global strategy is about. An executive who only takes advantage of one of these is not capturing the full globalization potential of their business.

Global Thinking is a necessity for survival

Several years ago I did a research project with a consulting firm and one of the issues that we studied was how long after the founding of the business a company started to do business in multiple geographies and markets. We found that companies that were founded in the 1950s would often have their first international experience 10 years or more after they had really solidified their domestic market. Companies that were founded in the late '80s would often be international four or five

BECAUSE MARKETS ARE COALESCING AND INFORMATION IS BEING SHARED ACROSS THEM, THE INTERNATIONAL PRODUCT LIFE CYCLE OF SELLING OLDER TECHNOLOGIES IN SECONDARY MARKETS NO LONGER WORKS.

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years after they were founded. But now we see companies as global startups and from the day they are founded they think of themselves as global entities. Even when they are still funded by venture capitalists, they will start to source their software in India and look for customers and alliances in Europe and other parts of Asia. Before they are even generating revenues they already have global relationships and global sourcing and global customers. They are essentially being founded with a different kind of global DNA, a different kind of makeup from day one. That results in a different mindset and in a different perspective with which they look at every opportunity. But again, it does not mean that every business is globalizing in the same way, because which activities you would get the most benefit from varies from business to business.

Traditionally companies globalized because their domestic markets became mature and they would look for new opportunities, or they would access key suppliers, or they would look for sourcing their products in low cost markets. A couple of decades ago managers and researchers accepted the validity of an international product life cycle that worked in technology businesses--companies would launch a product in their domestic market and when that technology became mature in their domestic market (this was particularly true if the domestic market happened to be one of the "developed" markets in Europe or America), they would take that product and technology and in effect start a new life cycle in a "developing" market. Companies that have tried this approach recently have experienced disastrous consequences. Mercedes set up a venture in India to make an older model Mercedes-Benz which they were discontinuing in Germany. They thought that the market in India would be appropriate for the car, but it was a complete failure. Instead they found that the local customers were importing higher-end, more expensive cars, rather than buying the older model cars available domestically. Now executives at Mercedes have realized that their assumption of unsophisticated local consumers was completely faulty. Because markets are coalescing and information is being shared across them, the international product life cycle of selling older technologies in secondary markets no longer works. Technological trends now being set in parts of Asia are current or sometimes more advanced than the trends that we observe in Europe and America.

Because competition is emerging from different markets, companies are forced today to globalize in non-traditional ways. They need to have a presence in markets just so that they know wbat competlturs irtthat market are dolllg and usc it as a window on new trends and new competitive strategies. As product life cycles get increasingly shorter and the investment

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••• THE IMPORTANT POINT TO KEEP IN MIND IS THAT WHAT GLOBALIZATION SPECIFICALLY MEANS IN ANY ONE BUSINESS IS UNIQUE.

required in research and development rises, companies find that the only way to recover investments is to exploit multiple markets in as short a cycle as possible. These are just some of the reasons that require companies today to have a global mindset-it is an essential factor for survival.

But there is no one way to globalize a business

A twofold logic underlies the concept of global strategywhich is the essence of how we discuss globalization in our strategy courses today at Marshall. The first premise is that there are differences between countries, and those differences occur on many different dimensions. There are differences in terms of costs of different raw materials and labor, in the skills that are available, and in the institutionalized infrastructures, and in the competitive make-up of different markets. If the executive adopts a global perspective, in other words, if s/he adopts a perspective that cuts across countries, then by definition s/he must recognize the differences across countries and account for them in the strategic decisions made for the firm. Those decisions may have to do with customers, raw materials, manufacturing, capital or any of the dimensions on which strategic decisions are made. Thus, a company in a labor intensive business that fails to account for labor cost differentials across countries is doomed to failure. This does not imply that outsourcing is the only answer, but it does require that the company have a strategy that addresses it.

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COVER STORY

That second premise is that there are significant similarities across countries and because there are significant similarities, it means that products, skills and investments that are made or developed for one market have the potential to be leveraged in multiple geographic markets. The similarities imply that a product that a company develops in one market can be sold in another market without having to be reinvented. What that enables a company to do, for example, is to leverage its research and development dollars by selling a proven product from one market, usually the company's home market, in different countries. This advantage is particularly significant in businesses like pharmaceuticals that are R&D intensive. A company that spends half a billion dollars on developing a new drug must sell that drug in many different markets to recoup its R&D investment, and it is able to do so only because the efficacy profile of pharmaceutical products is relatively uniform across countries.

These two dimensions of similarities and differences across markets are not opposite ends of one scale. Rather they are orthogonal dimensions and should both be leveraged. An executive needs to ask, for each individual business and for each piece of its value chain, what are the similarities across markets and what are the differences across markets. It then becomes a matter of strategic choice and execution priorities whether one first exploits similarities or differences or both simultaneously, to take advantage of the global potential that lies inherent in each business.

The specifics of how a company leverages these dimensions of global potential vary business by business. One of the key issues we emphasize in our strategy courses at Marshall is that globalization and global strategy are catch-all phrases that are of little help to an executive decision-maker. Everyone today talks about "being in a global era:' "our business is a global business:' "there is no such thing as a local business anymore." While that may be increasingly true, the important point to keep in mind is that what globalization specifically means in anyone business is unique. It depends on the unique economics of a particular business, on the unique skills that are required in a particular business, on the unique competitive structure of a particular business, on the advantages from manufacturing in scale in a particular business, and on the transferability of products and designs in the particular business.

As a result, we should not talk about a global business, we should talk about what it is that globalization specifically means in a particular business. We should be talking about what are the speCific acl1vW-es In the business that would most benefit from being managed on a global scale, and what are the activities in a business that would most benefit from being

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COVER STORY

highly localized for a particular market. The glue that binds all this together therefore is really a way of thinking. In today's era the executive must have a mindset that goes beyond the label of globalization and think instead of every activity in the business from a global point of view and then craft a business model that fully leverages the opportunities that exist in different geographies for that particular business. Companies that are able to do that fastest and most effectively get a competitive advantage.

Global Strategy, like any other strategic decision, requires fundamental choices

Companies have to make fundamental choices in global strategy. The most obvious decisions involve a choice of markets and a choice of products. Related decisions are about mode of entry. Stated simply, the choices are: which markets should we enter? With which products? In what way? Each of these seemingly simple choices involve a myriad of considerations. Sometimes, the optimal strategy is to license a company's technology rather than to enter directly; at other times, a joint venture is appropriate, and sometimes anything other than a wholly owned subsidiary is sub-optimal. What makes global strategy such an interesting challenge is that there is no one right answer. As a result, there is opportunity to differentiate oneself.

Though each product, each business, and each market must be looked at uniquely, there is an underlying logic to the dimensions that must be assessed. Typically, these dimensions involve considerations of 1) operations and costs, 2) customers and markets, 3) competition, and 4) government policies. In assessing operations and costs, for example, we analyze the extent to which a product benefits from manufacturing on a large scale? Will it in fact reduce costs, and therefore, should there be a few large plants located strategically to meet the needs of multiple geographies? Are there products that can be transported easily? In terms of global business, does it have a high value to weight ratio, or favorable logistics? Is it a product that is transferable because the needs of customers are relatively similar across geographues? Is it a eoncept or a brand that hits appeal across markets? Is it a product where selling in multiple markets will increase competitive advantage in the home market? Are the competitors in that particular market already global and therefore does the company need to have a presence in multiple markets to be able to defend against the competitors? Sometimes, answering these questions in the context of a company's organization is as much a political as an economic and sl'nllegic: process. Does the product. have a committed. champion? Does the manager have credibility? Will s/he attract resources? These are all questions that help to guide the funda-

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WE SHOULD BE TALKING ABOUT WHAT ARE THE SPECIFIC ACTIVITIES IN THE BUSINESS THAT WOULD MOST BENEFIT FROM BEING MANAGED ON A GLOBAL SCALE, AND WHAT ARE THE ACTIVITIES IN A BUSINESS THAT WOULD MOST BENEFIT FROM BEING HIGHLY LOCALIZED FOR A PARTICULAR MARKET.

mental decisions to be made.

Pharmaceuticals, for example, is a high research and development intensive business, but if a product is developed in the U.S. and tested on humans in the U.S. and reduces blood pressure in the U.S., there is a very high likelihood it will be effective on treating blood pressure in other parts of the world. So, the R&D developed in the U.S., in effect, can be ne:veraged in multiple markets. Also, most pharmaceutical products are high value and low weight so they are easily transported. There is a high degree of capital intensity in many of the activities of the pharmaceutical value chain so the business can benefit tremendously from having a globally coordinated strategy. But at the same time, the pharmaceutical industry is also unique in that they are highly regulated in each country. Each country has unique: requirements in 11.':Tm.s of Iocal health care systems, in terms of local hospital networks, in terms of whether drugs are sold by prescription or sold by doctors or sold by pharmacies,

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and how customers pay for the drugs, to what extent they are subsidized by the government. The distribution channels are so unique in the pharmaceutical business and the regulation of the business is so tailored to the politics of each country, that even though there are significant components of a pharmaceutical company value chain that benefit from similarities across countries, there are also unique differences and market requirements in each country that force countries to have significant local presence and significant local investments in terms of distribution and doctor relationships and regulatory management.

Now, compare the pharmaceutical industry with another industry, like the automobile industry which has very different requirements. The automobile industry also has high economies of scale and high capital requirements and requires a lot of investment in research and development, but the distribution channels are different and the regulatory issues are very different. There are not the same kinds of approval processes in selling automobiles as you have in pharmaceuticals and you have to make different kinds of investments in local distribution channels. So, there are many similarities in those industries but it is the differences between those industries that force companies to adapt their strategies.

Winning requires a global mindset

Much of strategy requires making decisions with incomplete information. In no case is this more true than in decisions about global strategy, because much of the debate about entry strategies into a new geography result from a trade-off, a balancing between market potential and economic and political risk. In international business, the risk dimension becomes quite complex because we have to think about political, or what we call non-market risk factors, in addition to market risk and competitive risk factors. In addition, companies, particularly companies that have multiple product lines, have to make decisions about how they are going to use their resources, and that typically means that they cannot globalize all their product lines at the same time. One of the strategic decisions becomes which business or which product should be globalized earliest.

Regardless of how a company starts, once a company starts to have a presence in multiple markets with multiple products and with sourcing of materials and components and alliances, a company inevitably develops multi-country presence in terms of people, assets, locations, revenues and relationships. In other words, their business is dispersed across geographies. But just because a company has assets and revenues thnt are dispersed across geosrllphi<!S nd it lms presence in multiple geographies does not mean that it is fully leveraging and taking advantage of its assets. In other words, distribu-

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tion of assets in multiple markets does not necessarily mean that the company has fully taken advantage of the resources that it has invested. Just because a company manufactures in multiple locations does not mean that it has optimized its value chain on a global basis. And in global competition, a globally optimized value chain is much more critical than just having geographically dispersed manufacturing locations. Just because a company distributes and sells its products in multiple markets does not mean that it is fully leveraging its brand globally. Leveraging its brand, creating market equity across geographies, can be more important in the long term than making sure that the company has revenues in multiple markets. Just because a company does product development or research and development in different countries and different geographies, or sources components from different geographies, does not mean that they are fully tapping into the knowledge and learning that it is creating in multiple markets. In these days when competitive advantage derives from knowledge, tapping into the intellectual capital that businesses create in multiple markets, making sure that these sources of capital and knowledge, are linked together is a much more defensible and sustainable source of competitive advantage than having dispersed sources of innovation and development.

Ultimately, an executive must take the presence the company has in multiple markets and view it like a global game of chess. The executive must coordinate competitive moves across countries, consciously deciding in which country to launch a product, consciously deciding it on the basis of where the global competitors are strongest, where the cost structure is lowest, and where the company is likely to get the quickest market feedback. Then the executive must decide how to launch the product in other markets and how to manage pricing in multiple markets. It is the global chess game rather than individual market share games being played by local country managers that is more important in determining whether the company will truly optimize its global investments. Unless all these elements fit together, it is difficult if not impossible to fully leverage the global potential of an organization, and deploying assets without fully leveraging and capturing their potential is anathema to a global strategist.

Arvind Bhambri received his DBA from Harvard. His research interests include strategic change, competitive strategy, global business development, and leadership.