Converting Global Presence into Global Competitive Advantage

Arun Kottolli

Overview

Global presence by itself does not confer Global competitive advantage

Global Presence creates value creation opportunities Adapt to local markets Exploit economies of global scale Exploit economies of global scope Tap optimal locations for activities & resources Maximize knowledge transfer across locations

However each opportunity is associated with challenges & obstacles

Overview – Gaining advantage

However each opportunity is associated with challenges & obstacles that prevents firms from exploiting opportunities optimally

To overcome these challenges, firms have to adapt a two step approach for analysis and action First evaluate the optimality of the firm’s global

network for each value-chain activity along the dimensions of activity architectures, competencies of locations and coordination across locations

Then design & execute actions to mitigate the sub-optimality

Case Study - Pepsi

In early 1990’s Pepsi set a goal to triple its international revenue from $1.5 Billion to $5Billion

Pepsi built an extensive and wide ranging global presence by mid-1990’s This global presence did not translate to profits & growth Pepsi took a $1billion loss from International operations Withdrew from South Africa While global market for beverages increased, Pepsi’s

market share decreased – in contrast to Coca Cola which increased its profits from global operations

Pepsi’s experience demonstrates that global presence is not synonymous possessing global advantage

Case Study - Learning

Building a global presence gives you the right to play the game. However it says little about whether or how you win the game. Winning one game does not ensure that you will win the next one.

• Transforming global presence into global competitive advantage requires systematic analysis, purposeful thinking, careful orchestration - and this is a never ending process

Without a disciplined approach, global presence can easily degenerate into a liability that distracts management and wastes resources

Sources of Global Competitive Advantage

To convert global presence into global competitive advantage, firms must exploit five value creation opportunities:

1. Adapt to local markets

2. Exploit economies of global scale

3. Exploit economies of global scope

4. Tap optimal locations for activities & resources

5. Maximize knowledge transfer across locations

Adapt to local markets Direct implication of having global presence is that firms must

respond to inevitable heterogeneity encountered in these markets

Differences in language, culture, income-levels, customer preferences, and distribution systems are only some of the factors to be considered

Even standard products such as cell phones must adapt to local markets: - User interface, language, background noise, color preferences etc.

By responding to country level heterogeneity through local product adaptation, a firm can reap benefits in three fundamental areas: Market Share Price Realization Competitive Position

Increase Market Share

Offering standard products/Services reduces the boundaries of the served market to only those customers whose needs are uniform across countries

Local adaptation of products/service expands the boundaries to include those customers within a country who value different features and attributes Having cell phones in local language – other than

English will widen user base in Asian markets

Improved Price Realization

Tailoring products and services to the preferences of local customers enhances the value delivered to them – A portion of this increased value should translate into higher price realization for the firm. Example: Mercedes cars in middle east are valued

more than others and the cars sell at a premium when compared to other luxury sedans. Mercedes cars have engines made of soft cast iron rather than harder aluminum, this makes the engines more durable in desert conditions

Neutralizing local Competition

One of the natural advantages enjoyed by most local competitors is their deep understanding of and single minded responsiveness to the needs of the local market E.g: Coca Cola introduced several local teas and

fermented milk products in Japan to counter Suntory Ltd. and Asahi Soft Drinks Co – local players in Japan

Whirlpool sells smaller sized movable washing machines in India to compete with Videocon and BPL

Challenges in Local Adaptation Local adaptation of products/services will increase the

company’s cost structure – thus creating a competitive disadvantage on the cost dimension

Local adaptation may prove to be misguided. E.g TGIF in Korea introduced several Korean dishes – to

the dismay of Korean customers who wanted to eat American food at TGIF in Korea

Firms must take the pulse of the local market needs continuously to detect any customer dissatisfaction in their local adaptation

The degree of local adaptation will shift over time – i.e., local adaptation is a continuous process. Sometimes converging towards a global standardization or towards further fragmentation

Local Adaptation – Self Check Have we drawn an accurate distinction between those

attributes where the customer truly values adaptation and those attributes where the customer is either neutral or averse to adaptation?

For those attributes where adaptation adds value, how much is the customer willing to pay for this value?

Do we manage our product design and other activities in such a manner that we can offer the needed inter-country variety at the lowest possible cost?

Do we have mechanisms (such as market research or experimental marketing) that would give us early warning signals about changes in customer preference to local adaptation?

Exploit economies of global scale

Global presence automatically expands a company’s scale of operations giving it larger revenues and larger asset base

However larger scale will give competitive advantage only if the firm undertakes the tough actions needed to convert scale into economies of scale by: Spreading fixed costs Reducing capital and operating costs Pooling purchasing power Creating Critical Mass

Challenges in Creating Economies of Scale

Scale economies can be realized only by concentrating scale sensitive resources & activities in one or a few locations The flip side of concentrating in one location is

increased transportation costs & increased tariffs, so a firm must evaluate the financial benefits against the costs

Concentrating in one location may result in isolation of that activity from the target market – this may result in slow or inadequate market response

Challenges in Creating Economies of Scale

Concentrating in one location for a particular activity makes the entire firm dependent on that location – increasing risks. Unless that location has world-class competencies,

a firm may create a global mess instead of global competitiveness

This creates a challenge of creating world-class competency in that location

“Now if you misjudge the market, you are wrong in 15 countries rather than only one”

Challenges in Creating Economies of ScaleIn situations where global presence was created

by acquisitions creating economies of scale requires massive restructuring – a sensitive issue to Employees, host governments etc. Restructuring also involves large financial

investments May damage reputation with local governments,

local customers, local community & local business partners

Economies of Scale – Self check In designing out products, have we exhausted all

possibilities to utilize concepts such as modularization or standardization of subsystems and components?

Have we accurately drawn the distinction between those activities that are scale sensitive and those that are not?

Have we fully accessed the benefits from economies of scale against any resulting increases in other costs such as transportation, tariffs, insurance etc?

Have we established effective and efficient coordination mechanisms that do not squander the benefits from economies of scale?

Have we built world class competencies in those locations?

Choosing Location

Erroneous decision in choosing location are very difficult, time consuming, and expensive to reverse

“Firms cannot realize the benefits of economies of scale without making tough decisions”

Management must be willing to undertake a comprehensive logical analysis and carryout timely and decisive action

Exploit economies of global scope

Global Scope refers to multiplicity of regions or countries in which a company markets in services or products Vendors need to go global when serving their

global customers – e.g., Wipro’s IT services to GM, Intel has to setup operations in China to serve Dell’s operations in China

The economic value of Global scope is enormous when serving global customers

Competitive advantage is derived from: Providing coordinated services Leveraging their Market Power

Providing coordinated services Consider a case of Intel releasing “Pentium” processor

in more than 40 countries simultaneously – it will need a globally coordinated advertising, PR campaign.

A global customer needs to purchase a bundle of identical or similar products/services across a number of countries

A global customer would like to source it from a single vendor who can serve in a number of countries

A single global supplier will provide value for a global customer through greater consistency in the quality & features of products/Services, faster & smoother transactions, and lower transaction costs across countries

Increased Market Power

A global supplier has the opportunity to understand the strategy and culture of its global customer It takes time & effort to build this type of customer

knowledge

Firms gain competitive advantage over competitors with increased market power E.g- Fed-Ex is the preferred vendor of logistics

services to several MNC in India – thus beating any potential local competition

Challenges to exploiting Economies of Scope

Global vendor serving global customer creates a global network with several centers of power

These centers of power may have conflicting interests and/or competing perspectives on the optimal course of action

Management challenge for the global vendor is to understand the ongoing tug of war that shapes the needs and buying decisions of the customer network

Challenges to exploiting Economies of Scope

Actual delivery of goods/services is done at the local level Local managers do not have freedom in their

operations with global customer accounts Local Managers must orient their actions around

their global customer’s need for consistency in product features/service and in marketing terms & conditions

The Challenge lies in capturing global economies of scale when faced with two conflicting needs – need for central coordination and being locally responsive

Economies of scope – Self Check

Is our internal coordination of marketing activities across locations at least on par with (or ahead of) the extent to which our customers have integrated their own purchasing activities?

How well do we understand the various pulls and pushes shaping the needs & buying decisions of our customer’s global network?

Tap optimal locations for activities & resources

Countries are heterogeneous in nature – differences in culture, economic systems, available resources, human talent

Heterogeneous nature of countries shows up as differences in cost structures and skill levels

A Firm that can exploit this inter-country differences better than its competitors can build significant competitive advantage

Choosing Optimal Location

Firms need to decide on where or which location each activity in the value chain needs to be performed

Optimizing every activity in the value chain can yield the following strategic benefits: Performance enhancement e.g: Nokia’s cell phone

product development in China Cost Reduction e.g. TI’s Software development in

India Risk Reduction e.g. Nike’s manufacturing in

China, Vietnam, & Korea

Impact of Location decision

Location decision affects the quality with which any activity is performed in terms of availability of needed talent, speed of learning, and the quality of internal & external coordination

Location decisions can affect cost structure in terms of cost of local manpower and other resources, cost of transportation & logistics, as well as government incentives and the local tax structure

Location decisions can affect the risk profile of a firm with respect to currency, economic and political risks

Challenges in Choosing Optimal Location

Effectiveness of the activities performed at a location depends not only on the characteristics of factor inputs (from that country) but also on the management’s ability to convert those inputs into value added outputs E.g: Low cost wages in India implies that

management can be selective in whom they hire, higher unemployment implies lower staff turnover. Management must invest in skills training & development to increase productivity. The net effect is that a firm can benefit from low wages and have high productivity

Challenges in Choosing Optimal Location

The optimality of a location depends on the cost and quality of factor inputs at this location relative to all other locations

As cost and quality of factor inputs at this location changes over time today’s choice of location may no longer be optimal few years down the road

Relentless pursuit of optimal locations requires a global firm to be agile – with willingness and ability to shift locations over time.

Challenges in Choosing Optimal Location

Optimal Locations will be different for different resources and activities.

The Challenge in capturing the strategic benefits of optimal locations is to excel in coordination across dispersed locations E.g. H-P’s ProLiant ML150 was designed in

Singapore, design was reviewed and approved Houston, Engineering design was done in Taiwan, manufactured in China & India .

Optimal Location – Self Check

Have we ensured that our location based advantages are neither squandered nor neutralized by competitors because of any weakness in the quality & productivity of our internal operations in those locations?

Do we have the organizational and resource flexibility to shift locations over time as some other locations begin to become more optimal than our current location?

How frictionless is the degree of coordination across the various locations?

Maximize knowledge transfer across locations

Foreign subsidiaries can be viewed as a reservoir of knowledge

Given the heterogeneity of countries, every subsidiary has to create some unique knowledge to exploit the resource and market opportunities of the local market

Some of this locally created knowledge is relevant across multiple countries and if leveraged effectively, can yield significant strategic benefits to a global enterprise such as: Faster product and process innovation Lower cost of innovation Reduce risk of competitive preemption

Examples of Knowledge transfer

Fiat developed Palio – its global car in Brazil. The engineering design for use on rough roads done in Brazil was utilized when Palio was released in India

TI developed TMS320 chip as a collaboration effort between India & US engineers

Procter & Gamble developed liquid Tide as a joint effort of US (technology to suspend dirt in water), Japan (Cleaning agents) and Brussels (agents that fight mineral salts found in hard water)

Challenges to Knowledge transfer Most companies tap only a fraction of the full

potential in realizing the economic value inherent in transferring and leveraging knowledge across borders Subsidiaries and Global HQ must be aware of the existence

of the unique know-how/knowledge at other centers Subsidiaries and Global HQ must be aware of the potential

value of this knowledge Significant geographic, cultural, linguistic distances often

separate subsidiaries The potential knowledge transfer can easily remain buried

under a sea of ignorance Challenge is to create a systematic & routine

mechanisms to uncover opportunities for knowledge transfer

Challenges to Knowledge transfer

A subsidiary with uniquely valuable know-how is likely to enjoy a knowledge monopoly within the firm. Subsidiaries tend to view this knowledge as a source of power and refuse to share that knowledge readily -“Knowledge is Power” syndrome

“Not Invented Here” syndrome – an ego boosting defense mechanism prevents subsidiaries from learning from other subsidiaries

Only a sub-sect of knowledge exists in written form – explicit knowledge. Tacit knowledge usually resides in people – skills, behavior patterns, culture etc. These are difficult to transfer

Knowledge Transfer – Self Check How good are we at routinely and systematically

uncovering opportunities for knowledge transfer? How enthusiastic are our subsidiaries to share

knowledge with other subsidiaries? How eager are our subsidiaries to learn from other

subsidiaries? How good are we at documenting knowledge created

at subsidiaries? Have we built efficient communication mechanism to transfer/share documented knowledge? How good a are we in keeping this knowledge proprietary to our company?

Have we built effective mechanism to transfer tacit knowledge across locations?

Creating Global Competitive advantage

Exploiting any opportunity requires action at levels of the value chain

Capturing this (global competitive advantage) value requires firms to optimize on a global basis the organization and management of each of the value chain activities

Creating and managing an optimal network for each value chain activity requires optimizing network architecture, competencies at the nodes of the network, and coordination across the nodes

Designing Optimal architecture

For any activity network architecture refers to the number of locations in which that activity is performed, as well as identity and specific charter of that location.

Infinite number of choices for optimal architecture exist – the most popular ones are: Concentration in one location e.g: reservation

system at Marriott Differentiated centers of excellence e.g., Intel’s

multiple design centers – US, Israel, India Dispersion to local units e.g., hiring & training at

McDonald’s

Designing Optimal architecture

Activity architecture will shape the organizational architecture Reporting structures are easy to change than the activity

architecture

Issues that must be addressed while designing optimal activity architecture: Are we exploiting economies of scale at each of the

location? For each activity, does the location optimize on quality &

costs? While minimizing political, financial & operational risks?

Is the charter of each location is such that it eliminates duplication across locations?

Designing Optimal architecture

Reassessing the optimality of activity architecture on periodic basis is essential – e.g., IBM’s decision to shift several thousand of consulting jobs to India from US implies that this will increase operational efficiency, lower labor costs, and increase the company’s competitiveness

The star framework can be used to evaluate the activity architecture

The Star Framework

Global Coordination

LocationalCompetencies

ActivityArchitecture

A

A A

FB

CD

B

B

C

C

DD

A – Best in Industry (Ideal)B - Above Average (good)C – Industry Average (Satisfactory)D – Below average (Poor)F – Worst in Industry (Totally unacceptable)

Building world class competencies Once a location for an activity is chosen, world class

competencies must be built at those locations Ford’s manufacturing facilities in Mexico must be on par

with that in Detroit or Japan or Germany Intel’s design center in India must be as good as the one in

Israel, Folsom or Santa Clara Most low-wage countries suffer from low productivity

levels – but by building world class competency in a low wage country, a firm can benefit from lower wages while enjoying high productivity E.g: Motorola in China

Greater the firm’s dependence on a particular location, greater the need to have world-class competencies in the relevant activity there

Ensuring smooth coordination The final component in creating an optimal global

network is to develop & maintain a smooth seamless coordination across locations for efficient operations and transfer of knowledge and skills across locations

Creating smooth coordination requires managers cooperation, setting up mechanisms that will put the desired cooperation into practice

Management should create mechanisms to ensure smooth coordination between locations Formal rules, procedures to enhance communication I.e.,

standard formats/language/syntax for reports Global or regional functional teams which bring key mangers

face-to-face communication on regular basis Corporate culture to cultivate trust & friendship between key

managers of various subsidiaries

Steps to ensure Coordination

Management should create mechanisms to ensure smooth coordination between locations Formal rules, procedures to enhance

communication I.e., standard formats/language/syntax for reports

Global or regional functional teams which bring key mangers face-to-face communication on regular basis

Corporate culture to cultivate trust & friendship between key managers of various subsidiaries

Managers from different subsidiaries must be brought together through rotation programs or through executive training programs

Two Step approach to build Global competitive advantage

Managers should never assume that global presence by itself is same as global competitive advantage

Building global competitive advantage is a two step process Evaluate the optimality of the global network for each

activity in the value chain along three dimensions: activity architecture, locational competencies, and Global coordination

Based on this evaluation, firms should the design & execute actions to eliminate (or at least reduce) any suboptimalities.

Assessment of Global Competitive advantage

Basis for Global Advantage

Typical Criteria for assessment

Optimal Architecture – for each value chain activity

What is the size of the asset and the employment base?Have we captured economies of scale and scope in manufacturing, subcontracting, and raw material purchases?Do we have sales and distribution strength in all the key markets? Are our distribution systems too concentrated or too dispersed?Do we have the needed critical mass in each key technology area? Is there unneeded duplication across technology centers?Do locational choices automatically create push for excellence in the particular activity?Do we have critical talent available?What will be the overall impact on the overall cost structure?What will be the impact of government inducements & tax considerations?What are the currency & political risks?

Assessment of Global Competitive advantage

Basis for Global Advantage

Typical Criteria for assessment

World class competencies – By function for each facility.

Do we define quality from customer’s point of view?Do we define quality narrowly (e.g., product durability) or broadly (quality of products, services and overall management)?Do we use measurable indicators of quality or operate on gut feeling?Do we constantly compare ourselves with external benchmarks?How do we compare with competitors on key attributes or quality and time based competition?In delivering quality and speed are we improving at a slower or faster rate than the competition?

Assessment of Global Competitive advantage

Basis for Global Advantage

Typical Criteria for assessment

Frictionless coordination – Between similar activities and between complimentary activities.

How direct and frictionless are the communication channels for customers’ priorities and concerns to be heard, not just by marketing but also production and R&D personnel? How direct and frictionless are the communication channels between units performing complementary activities? Between units performing similar activities?Do reward systems encourage or discourage needed coordination?Has the company created a frictionless internal market for ideas that rewards both the produces and the buyers of a great idea? Is the head office active or sleepy in carrying out its knowledge-broker activities?

Summary

Global enterprise is a new type of organization. It is not the same as a Multi-National Company, rather it’s a new way of organizing designed to gain competitive advantage.

What distinguishes a MNC from a Global enterprise? How the firm takes advantage of economies of

scale, Rationalize production Develop a worldwide management talent pool Engage in R&D Exchange knowledge, expertise and best practices

across the globe

Summary

Global enterprises leverage five opportunities created by global presence Adapting to local markets Exploiting economies of scale Exploiting economies of scope Tapping the optimal location for a particular

activity Maximizing knowledge transfer across locations

Global enterprises institute an ongoing process of discovery and thoughtful application of gaining global competitive advantages