A Global Experience--Reflection on Global Track
Chai Wei Joo, 2005 EMBA Class 1, Finance Manager & Asset Factory Manager of Shanghai Kerry Oils & Grains Industrial Ltd.
The decision to participate in global track module was based on 3 reasons: 1. To have a systematic understanding of cross border strategy in view of the increasing importance of global trade. 2. The exposure gained from meeting with HQ executives of well known MNCs. 3. The opportunity to exchange views with professors and students of a world famous business school.
From the pre-readings and lectures in Wharton, I have the following understanding and perspectives on global strategy:
1. Global strategy is a means to the end, to support the overall strategy of the company. It should not be considered in isolation, nor should it be considered as inevitability. Some companies are experiencing healthy growth in domestic market without going global.
2. A prerequisite to go global is that the company must possess certain core competence to leverage or to build on to compete with host country competitors.
3. When companies do go global, their presence in the host countries can take various forms, and the essence is the ability to exert influence. In the case of strategic alliance, whether by equity investment or through contractual arrangement, the common goals of the alliance may serve different strategic objectives of respective partners.
4. Very rarely do companies have clear global strategy right from the beginning. Global strategy formulation is an evolving process determined by both internal and external factors of a company.
5. There are both similarities and differences between global strategy theories and conventional concepts of company strategy. The similarities include: competition, products positioning, and consumer needs etc. Yet there are also considerations unique to cross border strategy, including country risks, currency risks, and cultural diversity.
6. Theories and models of global strategy are yet to gain the same level of acceptance from companies as conventional strategy theories. Among the existing global strategy theories are the one by Bartlett and Ghoshal and the capability driven framework by Tallman and Lindquist. Both theories are contingency models. Bartlett and Ghoshal analyzed global strategy from 2 dimensions: efficiency (scale and specialization) and effectiveness (responsiveness to market needs), and a matrix of 4 different strategies were discussed. Tallman and Lindquist in their capability driven model formulated a strategy matrix between capability leveraging / building and internationalization / globalization. From the two models, one could understand why neither of the above has gained widespread acceptance. The transnational model advocated by Bartlett and Ghoshal is difficult to implement and there were no persuasive cases that fit the model in the article. The capability driven matrix by Tallman and Lindquist is also conceptually difficult to grasp and implement, especially the capability building globalization strategy.
7. It is interesting to note from the above that although both work used different approaches to analyze global strategy, there is congruence in the 'ideal' models advocated by the authors, i.e. the transnational model and the capability building globalization strategy. Both models attempt to tap into 'sticky' local knowledge bundles to improve market responsiveness while leveraging on cost efficiency from globalization. At the same time, both work included the same caveat: it requires high level of organization architectural capability to maintain an effective global organization structure that is stable, to maintain such structure is very costly hence the benefit must justify the cost, and therefore may not be suitable for cost driven industries. Companies suitable for such model may include those in high tech industry and industry where innovation is vital.
8. Santos, Doz and Williamson pointed out that in this era of innovation chain / "open innovation", companies can generate more innovations of higher value and lower cost by sourcing and integrating knowledge from dispersed geographic locations ? and they dub these companies as "metanational innovators". One challenge is how to mobilize knowledge bundles from different sources and integrate into new knowledge bundles. One MNC cited as a successful example is NOKIA.
9. McDonalds', one of the most global MNCs with highly standardized operation, is demonstrating local responsiveness in its menus and advertising and promotion activities. It will be interesting to see which direction companies like McDonalds will move towards, a more locally responsive transnational as mentioned in 7 or a strategy that exploits efficiency through maximum standardization.
With the above understanding and views on global strategy, the following is a summary of observation from visits of the 9 companies during US trip:
1. Most of the companies visited have very long history, and from the briefing we could see their global strategies as at today were not conceived during initial stage. The strategies gradually evolved during various development stages of the companies: AMEX, Johnson & Johnson.
2. Not all of the companies place strong emphasis on global market expansion. Some may not need to at this stage due to strong domestic growth: Vanguard. Some are interested but taking a more cautious step towards global expansion: Harrahs. Some are yet to streamline and integrate strings of foreign companies acquired over the years: Campbell Soup. Some might want to focus resources and attention to improve performance of domestic operation before going abroad: SAKS 5th Avenue.
3. While different companies might have different strategic consideration for not taking an aggressive approach on global expansion, there are 2 cases where companies clearly need global expansion for growth but lack a proactive global strategy: ABC, Campbell Soup. Both companies experience stagnant or negative revenue growth (Campbell Soup increased its revenue in the past few years through price hikes). ABC while waiting for deregulation in foreign countries has done little to increase its presence and brand awareness in key potential markets including China. Campbell Soup so far has not come out with products with the right pricing and taste for foreign markets, especially Asia. Reasons for inaction of ABC could be mindset of top management (ethnic-centric, poly-centric or geo-centric), or internal integration issue (after acquired by Disney).
4. Most of the companies have built up distinctive core strengths in their respective fields: AMEX ? merchant network and top tier customer base, ABC ? journalism reputation and integrity, Vanguard ? low cost high service model and high investment performance, Harrahs ? high service and high customer relationship management through date mining, SAKS ? reputation in high fashion and high customer relationship management through date mining, Merck ? strong research and development capability. These business component core strengths provide foundation for global expansion. Another important aspect that is required for successful global strategy is the 'soft' aspect, including culture and corporate architectural capability (the ability to design corporate structure that can integrate worldwide operation effectively). Very often it is the soft aspect that determines the success or failure of a global strategy.
5. Some of the companies visited have distinct global strategies that fit into matrix categories discussed earlier. Johnson & Johnson ? globalization with highly standardized products and decentralized management style. Merck ? globalization with highly standardized products and centralized control. AMEX ? somewhere between globalization and transnational (i.e. common platform but with differentiated product offerings for different countries). Campbell Soup ? multinational.
6. Four companies are facing various degree of crisis now. In decelerating order: ABC ? rapid erosion of revenue base (local market competitor ? FOX, international ? CNN). SAKS ? stagnant growth from mature customer base, attempt to stimulate spending through CRM but is slow to develop new market segment. AMEX ? slow in its progress with bank cards since the verdict in its favor last year. So far, it has singed up 4 banks, UBS, Citibank, USAA and MBNA. MBNA will be acquired by Bank of America, which is a pioneer of the rival VISA system. Litigations have strained the relationship with other banks. Its market share on top tier customer segment is being encroached aggressively by VISA. Merchant fee ? another important revenue source, is also under threat. VISA and Master Card are facing class action lawsuit for charging unreasonable merchant fee. AMEX ? with the highest merchant fee rate in the industry, if implicated, will suffer serious erosion of revenue. Campbell Soup ? margin from domestic market is decreasing due to competition and changing consumption habit, also threat from private label. It lacks integrated strategy for global market as engine for growth.
Implications for Chinese Companies: In the short run, company may continue to exploit domestic low cost factors for export to global market. In the long run, however, there is pressure for companies to have global presence beyond export business in order to have sustained growth. The followings are the reasons:
- local markets are becoming too saturated and competitive
- increasing labor cost
- exchange rate risk may affect export competitiveness
- trade barriers in certain foreign markets
- competition from other emerging economies with low cost factors
- logistics cost
It is not inconceivable that one day companies in China will outsource labor intensive production activities to other emerging economies and move up the value chain. And companies must start building up their core competences now. The companies that we visited have very distinct core competence as mentioned earlier. At present stage, there are competency gaps between Chinese companies and MNCs in many areas, including usage of information technology in business and customer relationship management, innovation and research capability, and standard of service. Global operation provides a valuable source to gain new competence. Chinese companies can leverage on local market knowledge to partner with MNCs that intend to enter China market. This provides a learning opportunity to improve competency. Another way to build up competency is through acquisition of companies. In fact, this has already happened in engineering industry where Chinese companies are snatching up under utilized plants in Germany. Also, companies could consider setting up R&D centers at locations of knowledge source. When sufficient competency is accumulated to leverage on, these companies are ready for global expansion. Haier is a successful example for aspiring companies.
