DIAGNOSING INDUSTRY GLOBALIZATION POTENTIAL

DIAGNOSING INDUSTRY GLOBALIZATION POTENTIAL

(Excerpts from G. Yip’s Total Global Strategy)

Industry globalization drivers are the underlying conditions in each industry that create the potential for using global strategy. Here we will examine each driver in more depth.

To achieve the benefits of globalization, the managers of a worldwide business need to recognize when industry conditions provide the opportunity to use global strategy levers. These industry conditions can be grouped in four categories of globalization drivers: market, cost, government, and competitive. Each key industry globalization driver affects the potential use of global strategy levers (global market participation, global products and services, global location of activities, global marketing, and global competitive moves). The drivers are as follows (See Figure 1):

Market Globalization Drivers

 Common customer needs
 Global customers
 Global channels
 Transferable marketing
 Lead countries

Cost Globalization Drivers

 Economies of Scale
 Steep Experience Curve
 Country Comparative Advantages
 Decreasing transportation costs
 Decreasing communication costs

Government Globalization Drivers

 Favorable trade policies
 Compatible technical standards
 Common marketing regulations
 Government-owned competitors and customers
 Host government concerns

Competitive Globalization Drivers

 High exports and imports
 Competitors from different continents
 Interdependence of countries
 Competitors globalized
Industry globalization drivers relate to, but are different from, the industry competitive forces identified by Michael E. Porter; threat of entry, rivalry among existing firms, pressure from substitute products or services, bargaining power of suppliers, and bargaining power of buyers. In most cases, but not always, increases in industry globalization will increase the strength of competitive forces. Particularly for the threat of new entrants and rivalry among existing firms, increased industry globalization heightens competition by widening its geographic scope. The specific effects on these two competitive forces vary in interesting ways depending on the specific industry globalization driver, and so will be addressed shortly for each of the drivers. Increased industry globalization also increases the pressure from substitutes by increasing the geographic scope of where these substitutes might come from. This effect is fairly straightforward and consistent, and so need not be discussed for individual industry globalization drivers. Last, the effects of industry globalization on the power of suppliers and the power of buyers can be positive in some cases and negative in others. In particular, the globalization of customers themselves (the global customer driver) increases their bargaining power relative to industry competitors, while the globalization of competitors the (the competitors globalizer driver) reduces the bargaining power of customers. Analogous effects apply the bargaining power of suppliers.

Globalization can also change the fundamental strategy required for managing competitive forces. In Competitive Strategy, published in 1980, Porter, in effect, recommends that companies seek to compete in markets with weak competitors and weak customers. In The Competitive Advantage of Nations, published in 1990, Porter argues instead for participating in national markets with the strongest rivals and most demanding customers, in order to build international competitiveness. The difference between his two positions is explainable by the difference between a closed, domestic industry, and an open, globalized industry. In a closed, domestic industry, a company accustomed to weak competitors and undemanding customers has little to fear-there is no source of new competitors that might grow strong in more demanding competitive arenas. In an open, globalized industry, such newly strong competitors abound. That is why it is important to understand how industry globalization drivers affect the threat of entry and rivalry among existing competitors.

MARKET GLOBALIZATION DRIVERS

Market globalization drivers-common customer needs, global customers, global channels, transferable marketing, and lead countries-depend on the nature of customer behavior and the structure of channels of distribution. These drivers affect the use of all five global strategy levers. As illustrated in Exhibit 2-1, different industries have different levels of market globalization drivers. These comparative rankings are approximate only and will also change with time.

Common Customer Needs

Common customer needs represent the extent to which customers in different countries have the same needs in the product or service category (or the group of products and services) that defines an industry. Many factors affect whether customer needs are similar in different countries. These factors include whether differences in economic development, climate, physical environment, and culture affect needs in the particular product or service category as well as whether the countries are at the same stage of the product life cycle. Common customer needs particularly affect the opportunity to use the global strategy levers of global market participation, global products and services, and global competitive moves. Common needs make it easier to participate in major markets because a few product varieties can serve many markets. Thus few different product offerings need to be developed and supported. Japanese automotive companies have been particularly successful at exploiting common needs when they first entered world automotive markets. Toyota, Nissan, and Honda chose to focus on fundamental needs common to all countries-such as reliability and economy-rather than to focus on peripheral differences-such as styling. The underlying commonality of needs meant that their highly standardized global products were quite acceptable in most countries. Common needs also allow the sequenced invasion of markets with highly standardized products-again, a successful approach of many Japanese companies in different industries.

Even in food and beverages, where national taste seems dominant, the speed of change of eating habits has been one of the most dramatic events of the postwar decades, spurred primarily by travel, tourism and immigration. In only a few years, Japanese were converted to eating donuts, gradually with more cinnamon, until they are now the same recipe as the American donut, but a little smaller to fit the Japanese hand. The conservative British are increasingly abandoning their warm pint of bitter beer for cold American-and-European-style lager. Heineken has successful created a globally standardized beer that its adherents buy all over the world. Americans now drink more and more French mineral water. According to executives in a leading multinational food and beverage concern, it seems to be modern products without a tradition (or at least without a tradition in most countries) that can most easily be globalized. Recent examples of such products include pizza and yogurt.

Common customer needs make entrants more dangerous by reducing the number of products or services that they need to develop for different countries. Success in one country with a global product can be used as a springboard for entering other countries. Thus, it is not surprising that Japanese entrants have been most successful in the last 20 years in markets with fairly common customer needs-electronic and automotive products. The Japanese are now turning to financial services. The common need of corporations around the world for sources of financing from debt or equity has encouraged the Japanese big four brokers-Yamichi, Nomura, Daiwa, and Nikko-to try their luck in the U.S. and European financial markets. The Japanese are entering the New York market by selling the financial equivalent of Toyotas (simple, high-quality products): Treasury bills, mortgage-backed securities, corporate bonds and commercial paper. At the same time, they are establishing a presence in European financial markets.

Common needs across countries also make it more difficult for competitors to differentiate themselves from one another. Rivalry, therefore, becomes more severe. (It might be argued that globalization creates larger, global segments that should have more room for competitors and, therefore, less rivalry. In practice, however, the lure of the large global market seems to raise the ambitions of competitors.) Consumer tastes in magazines are sufficiently common in Europe that publishers can now seel pan-European offerings. Cultural differences do not seem great enough to prevent some magazines from crossing borders; consequently, publishing firms are making an effort to sell those magazines to all of Europe with only slight changes in content. The result is significant heightening of rivalry. In the mid-1980s, Bella was successfully launched as a European womans magazine, first in West Germany, then in Britain and Spain.

How common customer needs are across countries clearly varies greatly by industry and depends on such factors as the importance of national culture and tastes, income elasticity, and physical conditions that might affect the use of the product or service. For customer businesses, the book publishing and magazine industries fall at the low end of the spectrum in commonality of needs because of differences in both content and language, although both these factors are changing rapidly. At the other end of the spectrum, travel-related industries, like airlines and travelers checks, have needs that are inherently common across countries. Among consumer-packaged goods, most food products tend to lie at the low end while household and personal care products are nearer the middle of the spectrum. For industrial businesses, commodities, such as many chemicals and other raw materials tend toward very high commonality of needs. In contrast, more complex industrial products, such as computer equipment and process controls, range from moderate to highly common needs. Pharmaceutical products provide an interesting contrast between prescription (ethical) drugs and over-the-counter (proprietary) drugs. The types of prescription drugs used for a given ailment tend to be more similar across countries than the types of over-the-counter drugs. In the latter case national habits in treatment tend to create differences in what consumer buy for themselves. For example, executives in one major drug company consider that Americans focus on head pains while Japanese focus on stomach pains. The pharmaceutical industry also illustrates the critical difference between the incidence of a particular type of need and the specific products used to meet those needs. While the incidence of each disease varies greatly geographically, the products used to treat each disease are mostly identical.

Customer needs may be more common then most executives think. Managers, particularly those with single-country responsibilities, then do to focus on the differences between countries, because it is the differences that require effort in adaptation. But executives can find more commonality if they look for it. This may also explain the varying strategies of companies. Some companies have looked for commonality and acted accordingly. Canon, for example, did this in developing a global photocopier that sacrificed the ability to copy certain sizes of Japanese paper.
Global Customers and Channels

Global customers buy on a centralized or coordinated basis for decentralized use, or at the least they select vendors centrally. As such, global customers can be distinguished from international customers, foreign customers, and local customers, as shown in Exhibit 2-2. Global customers, compared with other types, have both more internationalized purchasing (in the sense of buying outside domestic markets) and more globalized purchasing (in the sense of global control by headquarters).\

There are two types of global customers: national and multinational. A national global customer searches the world for suppliers but uses the purchased product or service in one country. National defense agencies are a good example. A multinational global customer also searches the world for suppliers and uses the purchased product or service in many countries. Examples are the World Health Organization for medical products and some automotive companies. The existence of global customers affects the opportunity or need for global market participation, global products and services, global activity location, and global marketing. Even if the do not purchase centrally, having global customers drives a business toward developing globally standardized products. Similarly, global customers can compare prices charged by the same supplier in different countries and tend to be unhappy with unexplainable discrepancies. Global customers usually occur in industrial categories, although in some consumer categories, such as cameras, watches, and luxury handbags, a significant portion of sales is accounted for by those buying while outside their home country.

The definition of a global customer or channel can be extended to influencers such as physicians who prescribe drugs, architects who specify building materials, and engineers and other technical experts who specify or recommend equipment and the like. Japanese trading companies, such as Mitsubishi and Mitsui, also act very much like global channels, although they typically make most of their purchases in one country-Japan.

To serve its global customers, the business needs to be present in all the customers major markets. The U.S. advertising agency that used to have the Coca-Cola account (one of the largest in the world) was unable to serve Coca-Cola when it expanded to Brazil. So McCann-Erickson, another American, but more global agency, took the account in Brazil. Then McCann used the Brazilian relationship to win the entire Coca-cola account worldwide. One reason for AT&Ts push to expand globally is the fact that many of its customers are global, and these customers will use rivals like NEC< Siemens, or IBM for advanced voice and data networks if AT&T cannot meet their needs. Offering standardized products can also be a necessity for serving global customers. Increasingly, such global customers are requiring their suppliers play the role of global coordination. General Electric has told many of its suppliers that it expects them to be re

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