Global Strategic Management PDF

Global Strategic Management Philippe Lasserre Global Strategic Management Global Strategic Management Philippe Lasserre © Philippe Lasserre 2003 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this public...

Global Strategic Management Philippe Lasserre Global Strategic Management Global Strategic Management Philippe Lasserre © Philippe Lasserre 2003 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2003 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 0–333–79374–9 hardback ISBN 0–333–79375–7 paperback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Lasserre, Philippe. Global strategic management / Philippe Lasserre. p. cm. Includes bibliographical references and index. ISBN 0–333–79374–9—ISBN 0–333–79375–7 (pbk.) 1. International business enterprises—Management. 2. Strategic planning. 3. Globalization—Economic aspects. I. Title. HD62.4.L37 2002 658.4′012—dc21 2002074813 10 9 8 7 6 5 4 3 2 1 12 11 10 09 08 07 06 05 04 03 Printed and bound in Great Britain by J.W. Arrowsmith Ltd, Bristol Contents List of figures xi List of tables xv List of mini-examples xviii List of abbreviations xix Preface and acknowledgements xxi Introduction 1 Why another book on global strategic management? 1 The structure of the book 2 How can this book be used? 2 Appendix I.1 List of potential case studies to be used to support the book 4 Notes 6 References and further reading 6 Part I The process of globalisation 1 Globalisation of markets and competition 9 The phenomenon of globalisation 10 What are the factors that push for globalisation? 12 The benefits of globalisation 17 What are the factors that work against globalisation? The localisation push 19 The benefits of localisation 22 The Global Integration/Local Responsiveness Grid 22 Globalisation: the macro picture 24 Summary and key points 25 Appendix 1.1 Positioning a business on the Global Integration/Local Responsiveness Grid 27 Learning assignments 29 Key words 29 v vi Contents Web resources 29 Notes 30 References and further reading 30 2 Designing a global strategy 32 A company business strategy 33 SONY Corporation globalisation 34 Framework for global strategy 36 Summary and key points 60 Learning assignments 64 Key words 64 Web resources 65 Notes 65 References and further reading 65 3 Designing a global organisation 67 Structure, processes and culture 68 The global functional model 73 The geographical model 76 The single matrix model 78 The multi-business global product division model 80 The multi-business geographical model 82 The multi-business matrix model 84 Hybrid structural models 88 The transnational model 89 Summary and key points 92 Learning assignments 92 Key words 95 Web resource 95 Notes 95 References and further reading 95 4 Global strategic alliances 97 A story of two partnerships: Fuji Xerox and Daewoo–GM 98 Strategic alliances: typology and framework 99 General Electric and SNECMA: the CFMI alliance 102 Understanding the strategic context and spelling out the strategic value of an alliance 104 Partner analysis 107 Negotiation and design 113 Implementation 121 Global multilateral alliances 124 Alliance constellation management 125 Criteria for successful alliances 126 Summary and key points 127 Learning assignments 131 Key words 131 Web resources 132  Contents vii Notes 132 References and further reading 132 5 Global mergers and acquisitions 134 The rationale for cross-border M&As 135 Case examples 136 Cross-border acquisitions performance 138 Deciding on the M&A 140 Integrating the companies: the integration phase 143 Integrating the companies: the transition phase 147 Integrating the companies: the consolidation phase 150 Summary and key points 151 Learning assignments 153 Key words 153 Web resources 153 Notes 154 References and further reading 154 6 Assessing countries’ attractiveness 156 Why is a country attractive? 156 Market and industry opportunities 161 Assessing industry opportunities 166 Country risk analysis 174 Putting it all together 178 Summary and key points 179 Appendix 6.1 Comparison of China and India, household expenditures 183 Learning assignments 184 Key words 184 Web resources 185 Notes 185 References and further reading 186 7 Entry strategies 187 ‘Carrefour’s entry strategy’ 188 Why enter? Defining strategic objectives for a country presence 188 Entry modes: how to enter? 191 Entering a country through wholly-owned subsidiaries 194 Entering a country through acquisitions 195 Entering a country through joint ventures 195 Partner selection 196 Joint venture decay and failure 200 Entering a country through arm’s-length agreements: licensing, franchising, agents and distributors 202 Entering a country through local agents and distributors 203 Entering a country through representatives, procurement or a technical office 204 Entry modes seen as ‘real options’ 204 Comparing entry modes 204 Choosing an entry mode 206 viii Contents Summary and key points 207 Appendix 7.1 Examples of entry modes financial profiles 211 Learning assignments 214 Key words 214 Web resources 215 Notes 215 References and further reading 215 Part II Managing globally 8 Global marketing 219 Customer behaviour, convergence and global segmentation 220 Product standardisation 222 Global branding 223 Advertising 226 Global solution selling 232 Global marketing positioning 234 Summary and key points 236 Learning assignments 238 Key words 238 Web resources 239 Notes 239 References and further reading 239 9 Global operations 241 Global sourcing 247 Global logistics 250 The global management of infrastructure projects 253 Summary and key points 255 Learning assignments 260 Key words 260 Web resources 261 Notes 261 References and further reading 261 10 Global innovation 263 The international product life cycle model 263 Globalisation of R&D: benefits and constraints 266 Design of global R&D networks 268 International transfer of technology 272 Global knowledge management 274 Summary and key points 278 Learning assignments 283 Key words 283 Web resources 283 Notes 284 References and further reading 284  Contents ix 11 Cross-cultural management 286 Failures in cross-cultural interaction 286 The different facets of culture 287 Country clusters 293 Economic cultures 294 The impact of cultures on global management 295 Summary and key points 303 Learning assignments 306 Key words 306 Web resource 306 Notes 306 References and further reading 307 12 Global human resource management 309 Appointing a division manager in France 310 Assignment of personnel: the global human resource wheel 311 Expatriate management 313 Localisation 322 Skills development 326 Summary and key points 328 Learning assignments 331 Key words 332 Web resources 332 Notes 332 References and further reading 333 13 Global financial management 335 Hedging against currency fluctuations 336 Project finance 340 Global capital structure 342 Trade finance 346 Summary and key points 348 Appendix 13.1 Hedging exposure to currency risk – a champagne example 352 Appendix 13.2 Translating financial statements: the monetary/ non-monetary method and current method 357 Appendix 13.3 Surf’n Zap project valuation 361 Appendix 13.4 Development banks providing project equity finance 368 Appendix 13.5 Official Export Credit Agencies of OECD Member Countries 373 Learning assignments 375 Key words 375 Web resources 376 Notes 376 References and further reading 376 x Contents Part III Broad issues in globalisation 14 Globalisation and the Internet 381 The business Internet space 383 Transacting through the Internet: the web-enabled company 384 The contribution of the Internet to globalisation 386 The Internet and global firms 391 Summary and key points 393 Learning assignments 394 Key words 395 Web resources 395 Notes 395 References and further reading 395 15 The social responsibility of the global firm 397 Global companies and corruption 398 The practice of corruption and the role of global companies 401 Global companies and environmental protection 404 Global corporations and labour practices 410 Global companies and human rights 411 Social responsibility and global firms: an on-going challenge 416 Summary and key points 418 Learning assignments 420 Key words 420 Web resources 420 Notes 421 References and further reading 421 16 Global trends 423 Driving forces 424 Future scenarios 432 The future of global corporations 434 Summary and key points 437 Appendix 16.1 Four alternative global futures 441 Learning assignments 443 Key words 443 Web resources 443 Notes 444 References and further reading 445 Index of companies and organisations 447 Index of names 450 Index of subjects 452 List of figures 1.1 A multinational competitive configuration 11 1.2 A global competitive configuration 12 1.3 World trade has grown faster than world output, 1970–98 14 1.4 International transportation and communication costs, 1920–90 15 1.5 Globalisation push factors 17 1.6 Localisation push factors 21 1.7 Global Integration/Local Responsiveness Grid: different businesses have different competitive requirements 23 1.8 Global Integration/Local Responsiveness Grid: different segments have different competitive requirements – example of telecom services 23 2.1 SONY’s global development 36 2.2 Global strategy framework 37 2.3 Mapping of global ambition 42 2.4 Mapping of the consumer electronics industry 42 2.5 The evolution of Whirlpool globalisation 43 2.6 Generic value chain 53 2.7 Typical globalisation of the value chain 53 2.8 A generic global distribution of activities in the value chain 54 2.9 The Integration/Responsiveness grid and global structures 58 3.1 Philips and Matsushita: global organisational designs and their evolution 72 3.2 The global functional organisational design 74 3.3 The geographical organisational design 76 3.4 The single matrix organisational design 79 3.5 The multi-business global product division organisational design 81 3.6 Multi-business geographical organisational design 83 3.7 Multi-business matrix organisational design 85 3.8 The evolution of global organisational models 89 3.9 Convergence of global organisational designs 91 xi xii List of figures 4.1 Various types of international alliances 100 4.2 Framework for the analysis of strategic alliances 102 4.3 Value creation and extraction in alliances 106 4.4 Assessing the strategic fit based on the criticality of the alliance for partners 107 4.5 Strategic fit against partners’ strategic agendas 110 4.6 Method for assessing capabilities’ fit 111 4.7 Capabilities’ fit in the case of GE–SNECMA 111 4.8 Organisational designs in alliances 114 4.9 The GE–SNECMA organisational design, interface and governance 115 4.10 Typical items in a joint venture agreement 116 4.11 Alliance stages and alliance managers’ skills 119 4.12 Communication flows in alliances 120 4.13 The ‘death valley’ spiral 122 4.14 Types of alliance constellations 125 5.1 Trends in cross-border M&As, 1990–9 ($billion) 136 5.2 The pre-acquisition and post-acquisition processes in global M&As 139 5.3 Cash flow-based valuation for M&As 143 5.4 Contingent integration modes 146 6.1 General investment framework 157 6.2 Framework for country market and industry attractiveness assessment 161 6.3 Relationship between GDP per capita and household appliances’ market per capita, 1998 figures in US$ 163 6.4 Demand for household goods and services in China, India, Brazil and Russia, 1994–2012 163 6.5 The ‘middle-class effect’ 164 6.6 The ‘middle-class effect’ in China 165 6.7 Market segmentations 165 6.8 Country life cycles 166 6.9 Adapted industry analysis framework 168 6.10 Cost of labour and technological skills 171 6.11 Overall quality of infrastructure 172 6.12 Porter’s ‘country diamond’ 173 6.13 Framework for country risk analysis 175 6.14 Shareholder risks in regions of the world 176 6.15 Variability of economic growth, India versus Brazil, 1970–2000 177 6.16 Comparison of country risks between China and India 177 6A.1 China and India, risk-profile data, 2000 and 2005 184 7.1 Entry modes 192 7.2 Factors influencing entry modes 192 7.3 Partner choices in country-based joint ventures 197 7.4 Partner fit analysis 198 7.5 Joint venture decay 201 7.6 Cumulative cash profiles for a foreign investor, 2001–12 205 7.7 Mapping of entry modes choices 206 8.1 Western versus Asian hierarchy of needs 221 8.2 Customer segmentation 221 8.3 Global product standardisation types 222  List of figures xiii 8.4 Global brand positioning 225 8.5 A financial global account management network servicing a leading European manufacturer 231 8.6 Global solution selling: An international bid for a power plant in China 232 8.7 Capabilities required for global solution selling 233 8.8 Sales and distribution 234 8.9 Various global marketing positioning 235 9.1 The global operations network 242 9.2 Strategic roles of international factories and their evolution 244 9.3 Different global sourcing designs 247 9.4 Michelin’s European flow of products 251 9.5 Airbus logistics 252 9.6 Players in an international infrastructure project 253 10.1 The international product life cycle 264 10.2 The Nestlé global R&D architecture 266 10.3 Evolution over time of global R&D activities 268 10.4 Global R&D projects 271 10.5 Knowledge-creation, sharing and ‘melding’ in global firms 276 11.1 The three layers of culture 287 11.2 The mapping of countries on the power-distance/ individualism scales 292 11.3 Country clusters 294 12.1 The global human resource issues 310 12.2 The global human resource wheel 312 12.3 Human resource wheels 312 12.4 The expatriate challenge 314 12.5 Expatriates’ acculturation: the ‘four Fs’ 315 12.6 The primary ingredients of individual managerial behaviour required for success in expatriate assignments in Asia 317 12.7 Cost of living in the world, US$ per month 318 12.8 Expatriate tenure 321 12.9 Global management development in a global oil company 328 13.1 Key Issues in global financial management 336 13.2 Variation of major currencies against the US$, 1990–2001, yearly average 337 13.3 Documentary credit in international trade 347 13A.1 The option hedge for the US champagne distributor 356 14.1 Forecast of online trade by 2006 382 14.2 Internet users in 2000 382 14.3 Players in the Internet space 384 14.4 The web-enabled company 385 14.5 Example of an e-marketplace: B2B transactions imply the integration of several marketplaces 386 15.1 Social and ethical issues and the global firm 398 15.2 Corruption and development 401 15.3 The global ethical web 417 16.1 Global driving forces and the global corporation 424 xiv List of figures 16.2 The global income gap, 1952–2015 427 16.3 PPP share of world output, 1980–2020 428 16.4 Industrial CO 2 emissions, 1998, metric tons per capita 431 16.5 Global temperatures and concentration of GHG gases, 1854–1994 431 16.6 Deforestation 432 16.7 Portfolio of processes 435 16.8 A new organisational model 435 List of tables 1.1 Illustrations of the shortening of product life cycles 16 1.2 The societal benefits of globalisation 24 2.1 Distribution of world market, by region, selected industries, 2000 (percentage of US$ value) 39 2.2 Distribution of markets and revenues in consumer electronics 39 2.3 SONY: calculation of the Global Revenue Index 40 2.4 Global positioning 46 2.5 Capabilities leading to competitive advantage 47 2.6 Sources of competitive advantage 47 2.7 Sources of competitive advantage of global companies 50 2.8 Building global sustainable advantage 51 2.9 Organisational designs for global strategies 56 3.1 Philips’ global organisational design until the late 1980s 69 3.2 Matsushita’s global organisational design until the late 1980s 71 3.3 Characteristics of the global functional organisational design 74 3.4 Characteristics of geographical organisational design 77 3.5 Characteristics of the single matrix organisational design 79 3.6 Characteristics of the multi-business global product division organisational design 81 3.7 Characteristics of the multi-business geographical organisational design 83 3.8 Characteristics of the multi-business matrix organisational design 85 3.9 Types of organisational design 93 4.1 Main strategic objectives pursued in various types of alliances 105 4.2 Receptivity in learning 124 4.3 Eight criteria for successful alliances 127 5.1 Cross-border megamergers, 1990s and 2000 136 5.2 Value creation in M&As 141 5.3 Failures in the integration process 144 xv xvi List of tables 5.4 An example of a linear framework for integration 145 6.1 Models and sources of countries’ assessment 158 6.2 Macro indicators’ correlates used in international market assessments 162 6.3 Characteristics of demand according to country life cycle clusters 167 6.4 Reserves of natural resources 170 6.5 Major types of incentives for foreign investments 174 6.6 Cluster characteristics, Asia Pacific 179 6A.1 China and India, statistical data, 2000 and 2005 183 7.1 Entry strategy objectives 190 7.2 Advantages and disadvantages of being a first mover 191 7.3 Types of local partners for country-based joint ventures 193 7.4 Comparing various entry modes 205 7A.1 Analysis of entry alternatives, 2001–2012 212 8.1 Customer needs and value curves 220 8.2 Global brands 223 8.3 Examples of corporations using global and local brands 224 8.4 Major global advertising agencies, 2001 227 9.1 Criteria for facilities’ location 243 9.2 Strategic roles of global factories 245 9.3 Phases in international infrastructure projects 254 10.1 R&D capabilities 265 10.2 Performance evaluation criteria 269 10.3 Classification of technology 273 10.4 Opportunities and constraints for knowledge management in global companies 275 10.5 Tools and approaches used for knowledge management in the metanational corporation 277 10.6 Intellectual property rights and their infringement 278 10.7 Protection of intellectual property rights 278 11.1 Hofstede’s country scores on cultural dimensions 291 11.2 Trompenaars’ six value orientations 292 11.3 Differences in economic cultures 296 11.4 Types of multi-cultural teams 298 11.5 Impact of culture on negotiating behaviour: a comparison of US and Japanese responses 300 11.6 Chinese business negotiating styles 301 11.7 Business practice differences 302 13.1 Summary statistics of monthly returns for some stock markets, 1986–2001, correlation coefficients 343 13.2 Country distribution of overseas listing for various stock exchanges, 1998 344 13.3 Types of international bonds 345 13A.1 Comparison of currency option costs for four exchange rates 355 13A.2 Monetary/non-monetary translation method, applied to the balance sheet of the French subsidiary of Uncle Sam’s Bagel on 31 December, 1997, figures in thousands 358  List of tables xvii 13A.3 Current translation method, applied to the balance sheet of the French subsidiary of Uncle Sam’s Bagel on 31 December 1997, figures in thousands 359 13A.4 Cash flows, the Zap Scan Project, million 362 13A.5 Expected cash flows 363 13A.6 Expected cash flows without country risk, the Zap Scan Project 364 13A.7 Expected cash flows with country risk, the Zap Scan Project 366 13A.8 NPV as a function of the probability of a ‘foreign tax’ 367 14.1 Global Internet B2B exports, US$ billion 388 14.2 Effects of the Internet on globalisation 389 14.3 Organisational requirements for e-business 392 14.4 Internet managerial culture versus Asian managerial culture 393 15.1 Corruption indices 399 16.1 World population, 1995 and 2015, million people 427 16.2 Regional agreements 429 16.3 Four global scenarios 433 16.4 Management competencies for new roles 436 List of mini-examples 1.1 Some global definitions 13 2.1 Origin and content of strategy 33 3.1 Renault 75 3.2 International Service Systems A/S (ISS) 77 3.3 Citibank Global Account Management 80 3.4 Tyco 82 3.5 Vodafone 84 3.6 BASF 86 3.7 ACER 90 8.1 Sub-optimisation 228 8.2 Citibank Global Account Management 230 9.1 Li & Fung’s ‘virtual factory’ concept 248 9.2 Freemarkets Online 249 9.3 Enron in India: the Dabhol Power Plant 255 12.1 Colgate-Palmolive: international assignment policy 319 12.2 ABB’s localisation programme in China, 1990s 325 12.3 Characteristics of global managers 327 13.1 Academic research on international differences in the cost of capital 342 13A.1 Calculating expected exchange rates using the PPP relation 363 14.1 CISCO systems 385 14.2 Reach versus richness trade-off 387 14.3 Yahoo! and anti-racist legislation in France 390 14.4 How do dotcom companies globalise? 390 15.1 Caux Round Table: anti-corruption measures, 2000 403 15.2 Corporations at the root of the environmental crisis 405 15.3 The Global Compact 407 15.4 Child labour and the global firm 410 15.5 Global firms and human rights: a sample 412 15.6 Human rights principles for companies: a checklist 414 xviii List of abbreviations ABB Asea Brown Boveri APV Adjusted Present Value ASEAN Association of South East Asian Nations ATT American Telegraph and Telephone B2B Business to Business BT British Telecom B.O.T Build Operate and Transfer BPI Bribe Payers Index CEO Chief Executive Officer CIA Central Intelligence Agency CIF Cost Insurance Freight CPI Corruption Perception Index EDI Electronic Data Interchange EIU Economist Intelligence Unit FDI Foreign Direct Investments FOB Free on Board GATT General Agreement on Trade and Tariffs GDP Gross Domestic Product GDP/Cap Gross Domestic Product per Capita GE General Electric GNP Gross National Product GNP/Cap Gross National Product per Capita GRI Global Revenue Index GCI Global Capability Index HQ Headquarters ILO International Labour Organisation IMD International Institute for Management Development IMF International Monetary Fund IPR Intellectual Property Rights IRR Internal Rate of Return JV Joint Venture xix xx List of abbreviations LIBOR London Inter Bank Offering Rate M&A Mergers and Acquisitions NAFTA North American Free Trade Agreement NPV Net Present Value NYSE New York Stock Exchange OECD Organisation for Economic Cooperation and Development PCN Parent Country National PPP Purchasing Power Parity RFQ Request for Quotation R and D or R&D Research and Development SME Small and Medium Sized Enterprises SNECMA Société Nationale d’Études et de Construction de Moteurs d’Avions SRI Socially Responsible Investing TCN Third Country National TI Transparency International UNCTAD United Nation Centre for Trade and Development UK United Kingdom UN United Nations USA United States of America US United States WACC Weighted Average Cost of Capital WTO World Trade Organisation Preface and acknowledgements I want to thank particularly my colleagues at INSEAD, from whom I have borrowed much material and many ideas. Amelia Ho contributed to the bibliographical search as well as to the summary at the end of each chapter, and to the text editing. Michelle Gauthier, Joan Lewis and Magdalene Khng also helped me with the manu- script editing. Singapore PHILIPPE LASSERRE xxi To Yamuna Rani Introduction This book is about global firms and global management. Its objective is to help graduate and undergraduate students, as well as company executives, to understand the main issues that companies and their managers confront when they ‘go global’ or ‘manage globally’, and to cope with them. The book has been designed as a support for specialised courses on Strategic Management for Global Firms, equivalent to a series of course notes to be read in preparation for a class or afterwards. Students will normally be assigned a case study for each of the topics covered in the book. It can also be used as a reference guide for managers and executives. WHY ANOTHER BOOK ON GLOBAL STRATEGIC MANAGEMENT? There are a number of excellent textbooks on international business already available.1 So why do we need another one? First, the focus of the book is on business firms and their employees. It has elim- inated from the text the macroeconomical and political factors that traditional international business textbooks cover, such as international trade and investment flows, the problems of economic development in emerging countries, the analysis of international and regional institutions such as the World Trade Organisation (WTO), the United Nations (UN), the World Banks and other Development Banks, the European Union (EU), the North American Free Trade Agreement (NAFTA), the Association of South East Asian Nations (ASEAN) and the like, or the geopolitical analysis of diplomacy and defence. It is assumed that students interested in those topics will read specialised books or attend courses taught by economists or political scientists. Second, the book takes the view that the traditional international business paradigm based on the study of foreign investments in ‘foreign’ countries by 1 2 Introduction ‘home’-country firms is no longer valid for studying global firms. As will be argued, international and multinational firms, controlling a vast array of ‘foreign subsidiar- ies’, have been in existence for a long time. Global firms that progressively abandon their original nationality to manage a network of firms in an integrated and coord- inated way out of ‘centres’ that are no longer necessarily located in their country of origin are a recent phenomenon. Scholars like Chris Bartlett, Sumantra Ghoshal, Yves Doz and C.K. Prahalad, and more recently Peter Williamson and José dos Santos2 have studied this evolution: they came up with the terms still ‘trans- national’ or ‘metanational’ corporations to describe these new entities. Earlier, George Yip analysed what he called ‘Total Global Strategy’.3 This book is inspired largely by their theoretical and empirical work. Obviously, classical issues such as entry strategies or expatriate management will not be forgotten, but the overall tone of the book looks at how, ultimately, international or multinational firms become global and managed globally. Third, the book aims at describing and analysing the key strategic and managerial challenges for firms, but does not pretend to be exhaustive or encyclopaedic. As Michel Montaigne said, it is better ‘d’avoir une tête bien faite qu’une tête bien pleine’ (a well-rounded brain rather than a full one). A lot of theoretical developments have been deliberately omitted: transaction costs theory, locational theory and agency theory, for instance, have been left out. The quotation of a multitude of articles published in academic journals and collections of papers in the field of international business such as the Journal of International Studies, the Strategic Management Journal or the Academy of Management Journal has been strictly limited. Those who want to know more are invited to look at the list of References and further reading at the end of each chapter as well as the works quoted during the text. Fourth, several mini-examples have been inserted in many chapters in order to illustrate the points made in the text. Those are not case studies. Appendix I.1 (p. 4) lists selected relevant cases. Finally, the book borrows considerably from the work done by professors or ex-professors at the European Institute of Business Administration (INSEAD), and has favoured their works rather than others. This has been a deliberate choice, given the long-standing involvement of the author in the intellectual life of this institution. THE STRUCTURE OF THE BOOK As the diagram below shows, the book is organised in three parts of unequal length: The Process of Globalisation, Managing Globally and Broad Issues in Globalisation. HOW CAN THIS BOOK BE USED? This book can be used in three ways: (1) As background reading for a course based on case studies. To that end Appendix I.1 (p. 4) lists potential cases that the author has used to support each chapter of the book. Those cases are available in international clearing  Introduction 3 I THE PROCESS OF GLOBALISATION Why globalisation? Chapter Globalisation of Markets and Competition 1 How to Globalise? Designing a Global Strategy 2 Designing a Global Organisation 3 Global Strategic Alliances 4 Global Mergers and Acquisitions 5 Assessing Countries’ Attractiveness 6 Entry Strategies 7 II MANAGING GLOBALLY Global Marketing 8 Global Operations 9 Global Innovation 10 Cross-Cultural Management 11 Global Human Resource Management 12 Global Financial Management 13 III BROAD ISSUES IN GLOBALISATION Globalisation and the Internet 14 The Social Responsibility of the Global Firm 15 Global Trends 16 houses such the Harvard Business School Clearing House or the European Case Clearing House.4 There are also some excellent casebooks available.5 (2) As a stand-alone textbook for a course based on lectures and exercises. At the end of each chapter there are questions that can serve as learning assignments to prepare for such lectures, or to follow them. (3) As a reference book, particularly in executive programmes or for individual readers who want to get acquainted with global strategic management without being burdened by too much theory and background reading. Appendix I.1 List of potential case studies to be used to support the book (HBS = Harvard Business School, IMD = International Institute for Management Development, INSEAD = Institut Européen d’Administration des Affaires) Chapter Cases Reference 1 Globalisation of a This session is not usually taught by cases. However, HBS, 1993 Markets and Mercedes-Benz can be used to discuss in general all Competition issues surrounding globalisation for the firm 2 Designing a Global a Royal Ahold NV: Shopkeeper to The Global Village. HBS, 1997 Strategy a The Benetton Group HBS, 1995 a TNT Limited’s Logistics Services in Asia (A): The Strategy HBS, 1997 a AXA: The Global Insurance Company HBS, 1993 a Sony Corporation: Globalization HBS, 1991 a Ajinomoto Co., Inc. HBS, 2000 a The Acer Group: Building an Asian Multinational INSEAD, 1997 3 Designing a Global a Eli Lilly, 1998: Emerging Global Organization HBS, 1999 Organisation a Becton Dickinson: Managing the Global Enterprise, 1996 HBS, 1996 a Thorsten AB 1 IMD, 1999 4 Global Strategic a Advance Drug Delivery Systems: Alza and Ciba-Geigy INSEAD, 1994 Alliances a PixTech, Inc. INSEAD, 1998 a General Electric and Snecma INSEAD, 1992 a Renault–Nissan: A Marriage of Reason INSEAD, 2001 5 Global Mergers and a DBS: Thailand INSEAD, 2000 Acquisitions a Electrolux: The Acquisition and Integration of Zanussi INSEAD, 1990 a SmithKline Beecham INSEAD, 1995 a Nestlé-Rowntree IMD, 1989 6 Assessing Countries a Enron Development Corporation: The Dabhol Power HBS, 1997 Attractiveness Project in Maharashtra, India 4  Introduction 5 a China Beer War (A) INSEAD, 1999 a TNT Limited’s Logistics Services in Asia HBS, 1999 7 Entry Strategies a Carrefour in Asia (A) – Taiwan: A Bridgehead into Asia INSEAD, 1995 a Whirlpool: The First Venture into India INSEAD, 1997 a Otis Elevator Company: China Joint Venture HBS, 1991 a Siam Polyester Company INSEAD, 1998 a China Beer War (B1–B10) INSEAD, 1999 a Whirlpool in China INSEAD, 2001 8 Global Marketing a Heineken NV: Global Branding and Advertising HBS, 1998 a Procter and Gamble Europe: INSEAD, 2000 Ariel Ultra’s Eurobrand Strategy a Building A Customer Oriented Networked Organisation: INSEAD, 1999 Ericsson’s ‘Global Account Management Programme’ 9 Global Operations a Li & Fung, Beyond ‘Filling in the Mosaic’, 1995–1998 HBS, 1998 a FreeMarketsOnline HBS, 1998 a Hewlett Packard: Singapore HBS, 1994 a BMW: Globalizing Manufacturing Operations Georgetown University, 1996 10 Global Innovation a Nestlé SA INSEAD, 1993 a McKinsey & Company: Managing Knowledge HBS, 1996 and Learning a Unilever’s Butter-Beater HBS, 1998 a Philips Electronics Singapore: Building a Hotbed INSEAD, 2002 for Innovation, Creativity and Technical Progress 11 Cross-Cultural a Hans Fritz at Novartis Thailand: The First Month HBS, 1999 Management a Blowing in the Wind INSEAD, 1994 a A Difficult Start INSEAD, 1996 a Marks and Spencer INSEAD, 1986 12 Global Human a Ciba Geigy Management Development INSEAD, 1999 Resource a Colgate-Palmolive: Managing International Careers HBS, 1994 Management a Guandong Electronics INSEAD, 1999 a The Evaluation INSEAD, 1996 a The In-Tray INSEAD, 1996 13 Global Financial a NV Philips Electronics – Currency Hedging Policies HBS, 1995 Management a Prince SA: Valuation of a Cross-Border Joint Venture INSEAD, 1995 a Financing the Mozal Project HBS, 1999 14 Globalisation a The Swatch Group: on Internet Time HBS, 1999 and the Internet a My Web Inc.com INSEAD, 2001 a Alibaba.com INSEAD, 2001 a StarMedia: Launching a Latin American Revolution HBS, 2000 15 The Social a SoccerBalls: Made for Children by Children? Child Labor INSEAD, 1999 Responsibility in Pakistan of the Global Firm a Hitting the Wall: Nike and ‘International Labor Practices’ HBS, 2000 a The Oil Business and Climate Change INSEAD, 2001 a Peter Clausen INSEAD, 1986 16 Global Trends No case studies for this session but debates on issues 6 Introduction Notes 1. Hill (2000); Raymond, Wells and Rangan (1996); Segal-Horn (1999). 2. Bartlett and Ghoshal (1989); Prahalad and Doz (1987); Doz, Santos and Williamson (2002). 3. Yip (1992). 4. Harvard Business School Publishing, 60 Harvard Way, Box-5C, Boston, MA 02163 USA ; the European Case Clearing House, Cranfield University, Wharley End, Bedfordshire MK43 0JR UK. 5. Bartlett and Ghoshal (2000); De la Torre, Doz and Devinney (2000). References and further reading Bartlett, Christopher A. and Sumantra Ghoshal, Managing Across Borders: The Transnational Solution. Boston, MA: Harvard Business School, 1989. Bartlett, Christopher A. and Sumantra Ghoshal, Transnational Management: Text, Cases and Readings in Cross-Border Management, 3rd edn. Boston, MA: McGraw-Hill, 2000. De la Torre, José, Yves L. Doz and Timothy Devinney, Managing the Global Corporation: Case Studies in Strategy and Management. Boston, MA: Irwin, McGraw-Hill, 2000. Doz, Yves L., José dos Santos and Peter Williamson, From Global to Metanational: How Companies Win in the Knowledge Economy. Boston, MA: Harvard Business School, 2002. Hill, Charles, International Business: Competing in the Global Market Place. New York: Irwin, 2000. Prahalad, S.K. and Yves L. Doz, The Multinational Mission: Balancing Local Demands and Global Vision, 1st edn. New York: Free Press, 1987. Raymond, Louis T. Wells, Jr and Subramanian Rangan, The Manager in the International Economy. Upper Saddle River, NJ, Prentice-Hall, 1996. Segal-Horn, S. Faulkner, The Dynamic of International Strategy. International Business, London: Thomson Business Press, 1999. Yip, George, Total Global Strategy: Managing for World Wide Competitive Advantage. Englewood Cliffs, NJ: Prentice-Hall, 1992.  Part I The process of globalisation Part I, The Process of Globalisation, looks at why and how a firm globalises. Chapter 1 Globalisation of markets and competition Chapter 1 defines what ‘globalisation’ means for a business enterprise, differentiates it from the traditional process of extending internationally and makes a distinction between a multinational and a global company. It also looks at the factors that have driven globalisation as well as the localisation factors restraining it. It ends by proposing a mapping of industries and firms according to the extent to which they are exposed to globalisation or localisation drivers. Chapter 2 Designing a global strategy Chapter 2 analyses the different components of a global strategy. It includes the formulation of objectives, the choice of countries and regions, the competitive positioning of the products and services, the design of and the investment in a global business system to create and sustain global competitive advantages and the choice of a global organisation. Chapter 3 Designing a global organisation Chapter 3 describes the advantages and disadvantages of various forms of global organisational designs, from pure geographical to global and matrix models. It ends by presenting the transnational organisational culture that is considered necessary to support the structure, processes and system of the global organisation. Chapter 4 Global strategic alliances Chapter 4 looks at strategic alliances as a recent and important form of reaching a global position. A framework for the analysis of global strategic alliances and recommendations for their implementations are given in this chapter. 7 8 The process of globalisation Chapter 5 Global mergers and acquisitions Chapter 5 focuses on mergers and acquisitions (M&As) as means of achieving globalisation. It offers an analysis of the various phases of global M&As, from the pre-acquisition phase, to valuation and post-acquisition. Chapter 6 Assessing countries’ attractiveness Chapter 6 looks at the first step in the decision to develop a presence in a country, the analysis of opportunities and risks. It covers such aspects as country risk analysis, industry and competitive analysis, market opportunities and host government policies. Chapter 7 Entry strategies Chapter 7 discusses the various decision choices in entering a country. It considers the timing of entry and the various forms of entry, ranging from wholly-owned subsidiaries to joint ventures, licensing or other types, each form being analysed in terms of its advantages and disadvantages.  1 Globalisation of markets and competition Chapter 1 defines what globalisation means for a business enterprise. It differentiates globalisation from the traditional process of setting up subsidiaries abroad and makes a distinction between a multinational company and a global company. Based on the example of the Otis Elevator Company, it looks at how a company having multiple international subsidiaries can move towards a global competitive configuration by which its international activities can be strongly co-ordinated and integrated across borders. This transition from a multinational to a global posture was driven by various social, political, economical, technological factors that are described in the chapter. The benefits of globalisation are described, as well as the constraints. Some factors are still pushing towards a local approach to management, on a country-by-country basis, and the factors inducing this localisation are analysed. Finally the global integration/local responsiveness grid is presented as a tool to position industries, companies and businesses according to the relative importance of global versus local competitive pressures. The chapter ends by introducing some of the societal issues associated with globalisation. At the end of the chapter one should be able: a To define what is globalisation and what a global firm is, and how it differs from a multinational company a To identify the forces pushing towards globalisation a To identify the forces pushing for localisation a To position an industry or a business on the global integration/local responsiveness grid. a To spell out the benefits and pitfalls of globalisation. 9 10 The process of globalisation THE PHENOMENON OF GLOBALISATION In today’s business world, managers, politicians, journalists and academics com- monly use the concepts of ‘globalisation’, ‘global industries’, ‘global competition’, ‘global strategies’ and ‘global corporations’. More and more companies are con- fronted with the need to globalise or die. While those concepts are widely used, their meaning is often not well understood. For some people, globalisation means to expand the company’s presence abroad, for others it means standardising a product and selling it to the world, for yet others it denotes an approach to management in which decision-making is centralised at corporate headquarters. There are many reasons for this confusion; one is due to the fact that the concept of globalisation is relatively new. Before the 1970s almost no one talked about globalisation; the most frequently used terminology, when referring to companies operating in various part of the world, was ‘multinational’ or occasionally ‘trans- national’. Multinational companies have been around for many years. Even if we ignore the East India Company, which started in the early seventeenth century, modern corporations like Unilever, Nestlé, and Procter & Gamble were operating all over the world at the end of the nineteenth century. They are known as multi- national companies, but nobody would have called them global. The global concept appeared in the early 1970s and progressively invaded boardrooms, classrooms and editorial offices. What happened, and why? To illustrate the phenomenon of globalisation let us take the example of the elevator industry in Europe in the late 1960s as represented in Figure 1.1. In each country of Europe, different firms fighting for a share of the market contested the elevator market. Competitors were either local companies or sub- sidiaries of large multinational companies like Otis or Schindler. Each competitor designed, marketed, manufactured, installed and serviced elevators for their res- pective markets. The subsidiaries of the multinationals had all the activities of the value chain (marketing, design, production, installation and service) under their control. The French subsidiary of Otis designed elevators for the French market, manufactured them in French factories, sold them with French sales forces and maintained them with a French after-sales organisation; the management was essentially French. In Germany, Otis designed, manufactured, sold, installed and serviced elevators for the German market; and so on in nearly every major country. In smaller countries products or components were exported from major countries’ subsidiaries. The operations were self-contained in each country and the results were evaluated on a country-by-country basis. Such a situation had prevailed since the 1880s. It corresponds to what was referred as a multinational or multi- domestic world, in which multinational companies like Otis were competing in each main market of the planet. By the end of the 1960s several key elements played a role in changing this com- petitive structure. One country manager at Otis perceived that the European busi- ness context was changing. First, the Treaty of Rome in 1957 had created the European Economic Community (EEC), at that time called the Common Market. This meant that tariff barriers across Europe were coming down; it became possible to produce components in one country and export them to other countries. This allowed companies to concentrate on the production of components in one specialised factory and to have a network of specialised factories across Europe,  Globalisation of markets and competition 11 OTIS UK OTIS GERMANY Design Production Marketing Service Design Production Marketing Service Compete against Compete against UK and multinational German and multinational competitors competitors for for the UK market the German market OTIS FRANCE OTIS ITALY Design Production Marketing Service Design Production Marketing Service Compete against Compete against French and multinational Italian and multinational competitors competitors for for the French market the Italian market Figure 1.1 A multinational competitive configuration each of them making one product category or one component. Components would be cross-shipped for ultimate installation in the various client countries. The benefits of such a system were obvious – by concentrating production the company could benefit from economies of scale, some costs could be passed to the customers in the form of price reduction, leading to higher market share. Products could be designed for the whole market (standardised): instead of having country segmentation one would have pan-European segmentation based on utilisation, i.e. high-rise buildings, low-rise buildings, etc. This would be possible only if customers in Europe – architects, engineers, real estate developers, housing departments, etc. – had a common view about what an elevator should be. Despite the differences in housing organisation across coun- tries, elevators were essentially technical products with very little cultural content and therefore able to be standardised. Only selling methods would vary from country to country. The Otis manager perceived this as an opportunity to gain market share in Europe and engaged in the pan-European strategy depicted in Figure 1.2 in which design centres and factories were specialised and inter- dependent. From a management point of view this was a radical change: country managers were no longer responsible for the whole value chain as before, but only for part of it. They were obliged to co-ordinate with other countries and they were depend- ent on a co-ordinating organisation called the European headquarters. This led to a 12 The process of globalisation OTIS UK OTIS GERMANY Design Production Design Production Marketing Service Marketing Service Local market Local market OTIS EUROPE Production Design Production Marketing Service Marketing Service Local market Local market OTIS FRANCE OTIS ITALY Figure 1.2 A global competitive configuration very successful story. By 1975, Otis had captured 40 per cent of the European market, containing Japanese penetration, and competitors if they wanted to survive were obliged to adopt a similar strategy. This concept was further expanded and today Otis is organised by product lines on a worldwide basis. There are still country subsidiaries, which take care of installation, maintenance, public relations and personnel, but otherwise product development, and manufacturing is co-ordinated globally by product lines. From being a ‘multinational’, Otis has become a ‘global’ company. This phenomenon of an active co-ordinated and integrated presence in the main regions of the world is what ‘global company’ means. It is important to observe that this change gave Otis a competitive advantage and that competitors were obliged to adopt a similar approach if they wanted to survive. Globalisation is neither a consultant’s fad nor a management buzzword; it is a competitive imperative in an increasing number of industries (see Mini-Example 1.1 for some definitions). WHAT ARE THE FACTORS THAT PUSH FOR GLOBALISATION? Globalisation became a necessity at the beginning of the 1970s because of the convergence of several political, technological, social and competitive factors.1  Globalisation of markets and competition 13 Mini-Example 1.1 Some global definitions Global industries are industries in which, in order to survive, competitors need to operate in the key world markets in an integrated and co-ordinated way. Industries like aerospace, computers, telecommunication equipment, appliances, power generation, large industrial projects, insurance and re-insurance and corporate data transmission are examples of what a global industry means. In these sectors it is difficult to sustain competition if one does not cover the whole world (or nearly) as a market, and if one does not integrate operations to make them cost and time effective. Global companies are the companies that operate in the main markets of the world in an integrated and co-ordinated way. Companies like Coca Cola, Asea Brown Bovery, Sony and Citibank are global companies. Globalisation is the phenomenon of the transition of industries whose competitive structure changes progressively from multinational to global. Industries such as telecommunications, processed food, personal care and retail are in the process of globalisation. Global integration and co-ordination are the organisational structure and management processes by which various activities scattered across the world are made interdependent on each other. As examples, global manufacturing integration implies the specialisation of factories and the cross-shipment of parts between different production sites; global product development requires the co-ordination of various research centres and marketing teams; global account management demands that different country subsidiaries provide a service according to a plan negotiated centrally, etc. Political factors: liberalisation of trade and investments The main political factor has been the development of free trade among nations. Two main organisations have been the source of trade liberalisation: the General Agreement on Tariffs and Trade (GATT) (now replaced by the World Trade Organ- ization, WTO) and the EEC, to which one may add the progressive opening of emerging nations to foreign investments. The GATT, which was founded in 1946 by 23 nations, initiated a series of negoti- ations, called ‘rounds’, aimed at reducing tariff concessions to create liberalisation of trade. The GATT became the WTO in 1995. The Kennedy Round in the mid-1960s, and the Tokyo Round in the early 1970s created an environment that fostered international trade, as shown in Figure 1.3. The European Community (EC) was established on 25 March 1957 by the Treaty of Rome, signed by Belgium, France, Italy, Germany, Luxembourg and the Nether- lands, with the aim of creating a common market and economic and political integration among the six member states. As a result goods, people and financial flows could move freely across countries. During the 1970s, the EC was enlarged 14 The process of globalisation 300 280 World trade 260 240 220 200 180 World GDP 160 140 120 1970 = 100 100 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Figure 1.3 World trade has grown faster than world output, 1970–98 Source: IMF. with the entry of the United Kingdom, Ireland and Denmark, followed by Spain, Portugal and Greece in the 1980s and by Sweden, Austria and Finland in the 1990s. Companies like Otis could take advantage of European integration to create their own integrated trading network. Finally, in parallel with what was happening in the industrialised countries, third-world nations progressively adopted more positive attitudes towards foreign direct investments (FDI). At first, investment laws were designed to attract foreign investors in order to induce them to produce locally, but over the years the legislation has evolved toward a more open stance, favouring cross-border investments. Technological factors: transport, communication and economies of scale Another set of ‘push factors’ for globalisation is related to technological progress that lowered the cost of transport and communication as well as the unit cost of produc- tion through economies of scale or the localisation of productive capacities and sourcing in low-cost economies.  Globalisation of markets and competition 15 Cost index 100 80 Ocean freight 60 Air transport Telephone 40 Satellite CIF–FOB Index 20 0 1920 1930 1940 1950 1960 1970 1980 1990 Figure 1.4 International transportation and communication costs, 1920–90 Source: World Bank, World Development Report, 1995. Air, rail and road transport and the use of containers in maritime transport have reduced the cost of shipping goods from country to country as well as, in the case of air transport, favouring the travel of managers. The development of telecommu- nications has reduced the cost of information exchange between business units scattered around the globe. Between 1950 and 1990, the transportation costs of air transport, ocean freight and transatlantic phone calls decreased by some 56 per cent, 14 per cent and 29 per cent, respectively. For satellite charges, there was an approximate decrease of 90 per cent between 1970 and 1990 (Figure 1.4). Progress in manufacturing technology gave a tremendous impetus to the need to concentrate production in world-class factories benefiting from huge economies of scale, thus encouraging the rationalisation and integration of production systems. Besides manufacturing concentration, companies have been able to source components or services from low-cost countries, either by setting up their own operations or by purchasing locally. Another source of economies of scale comes from the need to quickly amortise research and development (R&D) expenditures. Companies are confronted with a dual pressure: R&D budgets are increasing and product life cycles (PLCs) are redu- cing (Table 1.1). Companies need to launch products and services at the same time in all major markets in order to be able to recoup their investments. Social factors: convergence of consumer needs International air transport and the diffusion of lifestyles by movies and TV series have increased the brand awareness of consumers worldwide. Brands like Sony, Nike, Levi or Coca Cola are known nearly everywhere. Kenichi Ohmae,2 in his book ‘Triad Power’, has discussed the ‘Californisation of society’ – teenagers in São Paolo, Bombay, Milan or Los Angeles listening to the same music, using the same walkman and wearing the same pair of blue jeans. Convergence of customer behaviour and needs is also facilitated by urbanisation and industrialisation of 16 The process of globalisation Table 1.1 Illustrations of the shortening of product life cycles General product category Time of invention to commercial exploitation (years) Electric motor 65 TV 52 Vacuum tube 33 Zip-fastener 30 X-ray tube 18 Frozen foods 15 Nuclear reactors 10 Radar 5 Solar batteries 3 Appliance category Average length of introductory stage Period 1922–42 12.5 Period 1945–64 7 Period 1965–79 2 Intel microprocessor products Duration of life cycle 286 7 386 6 486 5 Pentium 5 Sources: Baker and Hart (1999, p. 115); Michaels, Olshavsky and Qualls (1981, pp. 77–8); Michel, Salle and Valla (1996, p. 178). societies. The less cultural and the more technical is the product, the more likely it can be standardised and appeal to masses of consumers in all countries: VCRs, PCs, mobile phones or elevators, cranes and robots are products for which national differences do not matter much. Competitive factors The 1960s saw the emergence of Japanese competitors in markets that traditionally had been dominated by American or European competitors. Japanese firms, and later on Korean firms, adopted a global approach at the very beginning of their international expansion. One of the reasons is that they did not have many national subsidiaries and their international expansion was occurring at the time of the opening of trade barriers. Right at the beginning they designed products for the world market, creating global brands such as ‘Sony’ or ‘Panasonic’, and their efficient production system gave them a cost advantage in electronics and automotive parts. Competitors had to adopt a similar strategic posture if they wished to survive. Another competitive force that pushed companies to globalise is the globalisation of customers. During the 1970s, Citibank created a Global Account Management Unit to service those corporate customers who had international subsidiaries. Figure 1.5 summarises these ‘push factors’ in favour of globalisation.  Globalisation of markets and competition 17 Political Factors a GATT a EEC a FDI Reduce trade barriers Technological Social Factors Factors a Transport a Manufacturing a Convergence of a Telecommunication a R&D Globalisation customers’ needs a Travel, TV, movies Reduce the cost of co-ordination Favour standardisation Increase economies and global branding of scale Competitive Factors a Japanese and Korean a Multinational customers Induce integration and co-ordination Figure 1.5 Globalisation push factors THE BENEFITS OF GLOBALISATION The benefits of globalisation can be assessed from two points of views: the business and competitive point of view and the macro socio-economical point of view. In this chapter we will focus only on the business and competitive point of view. A more general discussion on the socio-economic benefits and costs of globalisa- tion will be included later in the chapter, while this part focuses on the benefits for a corporation to adopt a global strategy. The business and competitive benefits can be grouped into four categories: cost, learning, timing and arbitrage. (1) Cost benefits. These come, on the one hand, from economies of scale owing to products/processes standardisation as well as increased bargaining powers over suppliers of raw materials, components, equipment and services and, on the other hand, from the ability to organise a logistic and sourcing network based on location factors. Examples of economies of scale through standardisation are numerous; in the example mentioned earlier, Otis was able to lower the cost of elevators in Europe by 30 per cent after introducing a pan-European manufacturing system. (2) Timing benefits. These are due to the co-ordinated approach in product launch- ing in the early stage of the product life cycle. In a multinational setting, each subsidiary is more or less free to adopt products for its own market. This is sometimes called ‘the shopping caddy’ approach to product adoption. Such an approach generates inefficiencies in the management of the product life cycle 18 The process of globalisation since the optimal volume is obtained only after a lengthy process of product adoption by all subsidiaries. A classic example of the deficiency of the ‘shopping caddy’ approach is the refusal of Philips America to adopt the video system, the V2000, developed by Philips’ mother company in the Netherlands. In the late 1960s a theory of multinational product introduction, known as the ‘International product life cycle’ theory, postulated a progressive adoption of products over time according to the level of economic and scientific develop- ment of countries (see Figure 10.1, p. 264). Such a theory is no longer valid when industries globalise: waiting too long to launch a product can be fatal, particularly if the product has a short life cycle, which is more and more frequently the case. Microsoft launched Window 2000 at the same time every- where in the world. (3) Learning benefits. These accrue from the co-ordinated transfer of information, best practices and people across subsidiaries. Such transfer eliminates the costly ‘reinvention of the wheel’ and facilitates the accumulation of experiences and knowledge. In Thailand, Unilever formulated and implemented an innovative strategy to produce and market ice creams. The Thai experience served as a template for other countries in the Asia Pacific region, giving to the company a first-mover advantage. This example illustrates the benefits that can be gained from a co-ordinated transfer of best practices. (4) Arbitrage benefits. These come from the advantages that a company managing globally can gain in using resources in one country for the benefit of another country subsidiary. These advantages can be direct competitive advantages or indirect cost advantages. A competitive advantage can be gained by playing a ‘global chess game’: for instance, engaging in a price war in one country in order to mobilise the resources of competitors in that country, depriving them of cash flow which could be used elsewhere. This strategy was used by Goodyear, the US tyre giant, when in the early 1970s, Michelin from France moved to North America. Goodyear, who had a small market share in Europe, engaged in a price war that Michelin was obliged to counter by lowering its prices, and de facto reducing its financing scope for its American expansion. Another type of arbitrage comes from differential cost elements such as taxes, interest and possibly risk reduction though the pooling of currencies. Those four benefits are real but achieving them is subject to certain conditions, and their adoption has to be measured against the real competitive advantage they provide to the firms adopting them. The benefits in costs reduction obtained by economies of scale are contingent upon the market responsiveness to standardisation and whether customers are price sensitive. If, on the contrary, customers are not responsive and prefer tailored products and services to standardisation, a global approach is less appropriate. A similar reasoning applies to the benefits of timing. As for purchasing power, it may be limited for culturally sensitive services such as advertising. The benefits of learning are positive if the experience gained in one country is applicable to another. If it is not the case, there is a timing deficit: the time of realis- ing that one has made a mistake plus the time to learn the new environment. At Euro Disneyland near Paris, two years were lost because the transfer of knowledge from Florida or California did not help the European operation.  Globalisation of markets and competition 19 The benefits of arbitrage can be offset by the cost of managing the arbitrage and the legal barriers that may exist in order to prevent such arbitrage. In the case of tax arbitrage, governments are very careful to make sure that global companies do not abuse their arbitrage power. Despite those limitations, more and more companies recognise the competitive benefits of globalisation. However, one should be aware there are still some factors that work against globalisation and this is what the next section will consider. WHAT ARE THE FACTORS THAT WORK AGAINST GLOBALISATION? THE LOCALISATION PUSH As mentioned earlier, globalisation is associated with some degree of standardisation of products and practices plus a high level of co-ordination and integration of activities in the companies’ value chain. Factors that defeat standardisation, co-ordination and integration are working against globalisation. One can group those factors into four main categories: cultural, commercial, technical and legal. (1) Cultural factors: attitudes, tastes, behaviour and social codes When the consumption of a product or a service is linked to traditions and national or religious values, global standardisation is not effective. Some products – for instance, Kretek (tobacco and clove) cigarettes in Indonesia, or the Pachinko (pinball) game in Japan – are unique to one society and their globalisation is nearly impossible, although one can argue that with innovative marketing it may be pos- sible to do so. The example of the arrival of ‘Beaujolais nouveau’ wine, typically a Burgundy and Parisian bistro event before the 1970s, can be now available in Tokyo, Paris, New York on the same day, ‘Halloween’ (trick or treat) masquerades, a typical US festivity, are now celebrated in Europe. This shows that even some highly cultural goods can be appreciated by customers all over the world, but it remains that food and drink tastes, social interactions in the process of negotiating a sale, attitudes towards hygiene, cosmetics or gifts varies from culture to culture, thus hampering a global product design or approach. In the Asia Pacific region, for instance, personal relationship building more than legal contracts is the normal way to conduct business. One has to spend time and effort to build these personal ties, which in a US context would be considered as a waste of time. (2) Commercial factors: distribution, customisation and responsiveness In some sectors, distribution networks and practices differ from country to country and as a consequence the ways of managing the network, motivating dealers and distributors, pricing, and negotiation are hardly amenable to global co-ordination. For instance, the marketing and d