Markets no longer need to be defined in terms of geographic proximity and locations of transaction and organizations has become indeterminate. In Thomas Friedman's book (2005), The World is Flat, globalization is described in three levels. Level one happened after the discovery that the earth was round, which led to the flurry of exploration, expeditions, and global expansion that included discovering and controlling international trade. The second level happened when multinationals followed their countries and took over international trade.
The third level occurred when individuals of diverse backgrounds were able to collaborate and compete globally, wherein the “playing field” had been leveled. Along with globalization, customer needs have become more sophisticated as well as demanding, requiring customization or personalization. The changing needs and wants of customers as well as the heavy market competition define the challenges that companies are facing for the next years.
Theodore Levitt (1983) said that globalization and technology have brought convergence of tastes and preferences of consumers and modern global corporates must seek sensibly to force suitably standardized products and practices in the entire globe. However, this idea was rebutted by Bartlett and Ghoshal (1989), who stated that complete standardization of products is not appropriate because global preferences exist and companies must recognize these differences. Global strategies are developed to increase profitability and profit growth, which will be achieved through value creation.
Based on Global Business Today (Hill, 2007), the more value customers place on the firm's products, the higher the price the firm can charge for those products. Firms can increase profit through differentiation strategy which means adding value to a product so that customers will be willing to pay more for it. Another method is through low cost strategy which means reducing costs of production and lowering the price in order to increase sales volume. Profit growth can be achieved by selling more in existing markets or by entering new markets.
According to Charles Hill (2007), global expansion brings several advantages such as realizing location economies by dispersing individual creation activities to other locations where they can be performed most efficiently and effectively, reducing costs of value creation by realizing greater cost economies, and by earning greater returns by leveraging any valuable skills developed in foreign operations and transferring them to other entities within the firm's global network of operations.
Taking advantage of location economies create a global web of value creation activities. However, transportation costs, trade barriers, and political risks may complicate this strategy. Hill (2007) said that firms competing in the global marketplace face two types of competitive pressures, which are the pressure for cost reductions or global efficiency and the pressure for local responsiveness. These pressures have conflicting demands on the firm.
Pressures for cost reduction may result from the liberalization of world trade and investment environment, industries of standardized or commodity type product that serve universal needs, and meaningful differentiation on non-price factors. Pressures for local responsiveness are caused by the differences in consumer tastes and preferences, infrastructure and traditional practices, distribution channels, and host government demands. Several models emerged to address the two competitive pressures.
International or export strategy is recommended when there are low cost pressures and low pressures for local responsiveness. This involves taking products first produced for the domestic market then selling them internationally with only minimal local customization. Examples of firms that adapted this strategy are Toys R Us, Microsoft, Yahoo, and McDonald's in its early stages. (Hill, 2007) Global strategy is adapted for strong cost reduction pressures and minimal demands for local responsiveness.
The goal is to pursue a low-cost strategy on a global scale through economies of scale, learning effects and location economies. Examples are seminconductor industry, Intel, Texas Instruments, and Motorola. In order to address global efficiency, companies used effective standardization such as Coca-Cola's transnational polar bears and McDonald's Big Mac. On the other hand, adaptation is used for national/local responsiveness such as McMutton Pie in Australia, Wendy's shrimp sandwich in Japan, Campbell's non-condensed soups in UK, and Coca-Cola's 175 ml containers in Japan.
Barbie dolls are sold in 130 countries and its physical features, costumes, and activity sets have national adaptations. (Hill, 2007) Localization strategy is considered most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences and cost pressures are not too intense. The focus of this strategy is on increasing profitability by customizing goods and services in order to provide a good match to the tastes and preferences in different national markets.
Examples are branded processed food and personal care products, small appliances such as Johnson and Johnson and Black and Decker. (Hill, 2007) Lastly, transnational strategy is applicable when cost pressures are intense as well as local responsiveness. Transnational strategies focus in achieving low costs through location economies, economies of scale, and learning effects; it also differentiate product offerings across geographic markets to account for local differences; and it foster a multi-directional flow of skills between different subsidiaries for local differences.
Some value chain activities are standardized and are performed in country locations while others are nationally-adapted and performed in the local market. However, it is difficult to implement this strategy due to its complex structure. Examples are Caterpillar, Wal-Mart, and Procter and Gamble. (Hill, 2007) Bartlett and Goshal (1989) defined transnational strategies as combination of the features of multinational, global, and international models. In this model, resources including technology and managerial talent are distributed among subsidiaries and integrated between them through strong interdependencies.
Building strategic alliances is another international business strategy allowing firms to share fixed cost and associated risks of developing new products or processes and bringing together complementary skills and assests that neither partner could easily develop on its own. Strategic alliances can give competitors low cost routes to new technology and markets, however, it can also give away more than it receives if not careful. For strategic alliances to work, it must carefully consider partner selection, alliance structure, and the manner in which the alliance is managed.
(Hill, 2007) The increasing market competition resulted to a shift from international strategy to global and transnational strategies to sustain the long-term goals of the organization. Companies need to be globally efficient and competitive by integrating activities and coordinating resources across national borders. At the same time, they also need to be sensitive and responsive to national differences in consumer tastes and government resquirements. This tension is at the heart of transnational management (Churchwell, 2003).
According to Hill (2007), Procter and Gamble evolved from using international, to multi-domestic, and later on adapted transnational strategies. In 1930, Procter and Gamble embarked on international strategy by selling its products overseas. In 1950s, P;G adapted multi-domestic strategy by focusing on China, the largest emerging market in the world. In 1980s, P;G devised its global innovation model. Using transnational strategy, it launched Pan-European Brand Development for its Liquid Tide wherein it identified its product characteristics map: high washing temperature, fabric softener, bleach additives, and enzymatic stain removers.
The Vizir experience, which was the precursor to Liquid Tide, facilitated learning and cross fertilization within Procter and Gamble worldwide. This resulted to the development of a world-class technology and product development capabilities worldwide. According to Huston and Sakkab (2006), P;G assessed its aging innovation process and the development of connect and develop. P;G's new strategy, “connect and develop”, broadens the horizon by looking at external sources for innovation.
It uses technology and networks to seek out new ideas for future products and realized that its best innovations had come from connecting ideas across internal businesses as well as external connections. Connect and develop innovation model was developed with P&G's clear sense of consumer needs resulting to 35 percent of its new products in the market have elements that originated from outside P;G and 45 percent of its initiatives in the product development portfolio have key elements that were discovered externally. P;G's innovation success rate had more than doubled while the cost of innovation had fallen.
P& G also put its finger on the pulse of consumers worldwide for its product developers and marketers to understand consumer needs better than its competitors. In order to speed products to market, P&G embraced the inflection provided by the new digital world through the web and the internet. P&G reinvented its marketing by using innovative web-based techniques to improve its consumer listening capabilities. P&G had the capability to conduct online consumer research and concept studies that dramatically reduced time required to gather and analyze consumer opinions.
P&G also implemented an online system called “Web Order Management” that enabled retail customers to connect directly to P&G anytime from anywhere. This online business-to-business network gave retailers full access to P&G promotions, inventory, and scheduling information as well as allowed retailers to easily place and manage orders on the web. Internally, P&G began the evolution to an e-culture by connecting nearly all employees to the internet and providing self-service applications such as online benefits enrollment, salary management, and option exercise.
P&G also implemented a “fast cycle learning” knowledge management solution that allowed storage of critical information in a centralized location where employees can easily access the intelligence, make informed decisions, and move projects more quickly to completion. (Cisco Success Stories, 2002) Another strategy that P&G used was leveraging its scale. In the article, “How P&G Leverages Its Scale In Ways That Competitors Don't Fully Appreciate” (2003), A. G Lafley, P;G CEO, said scale is becoming increasingly important particularly as retailers globalize and continue to drive out supply chain costs.
P;G bring industry-leading supply chain management and the intellectual capital of its people to retail partnerships. Lafley added that P;G is organized to leverage global scale and local knowledge; to connect and develop ideas inside and outside the company; to execute fast, with disciplined excellence. Kerry Clark, P;G President of Market Development and Business Operations, said that with a typical transnational customer, P;G conduct business on a day-to-day basis with their local teams in each of the customers' countries.
They coordinate this work via a very lean, global milti-functional team that quickly and efficiently shares and builds best practices across borders. Procter and Gamble's organizational structure was one of the major keys in achieving success in its global operations. Its organizational structure is composed of three Global Business Units and a Global Operations group. For 2006-2007, Global Business Units were beauty and health, household care, and Gilette. In 2008, the global units were changed to beauty, health and well-being, and household care.
Its global business units leveraged on their consumer understanding to develop overall strategy for all P;G brands identifying common consumer needs, developing new products, and building brands through effective marketing innovations. GBUs include business strategy and planning, brand innovation and design, new business development, and full profit responsibility. Global operations group consist of Market Development Organizations and Global Business Services. The Market Development Organizations develop go-to-market plans at the local level, leveraging understanding of the local consumer and customer.
MDO's are organized along seven geographic regions. Under MDO's are market strategy, customer development, external relations, and recruiting. On the other hand, Global Business Services operates as the “back office” for the GBU and MDO organizations providing world-class technology, processes and standard data tools to better understand the business and better serve consumers and customers. GBS personnel and highly efficeint and effective third-party partners provide key business processes such as accounting, info and technology services, order management, and employee benefits and payroll.
(P;G Global Sustainability Report, 2007) For 2012, P;G have identified five strategies and goals covering policies, management systems, and performance. The strategies include improvement through products, production, responsibility, employees, and stakeholders. Part of P;G's strategy is to concentrate on environmental innovation and accountability for results by producing environmentally friendly products such as concentrated products, refill packagesm and recycled plastic bottles.
P&G is also committed to product safety, chemicals management and sustainability. Science in-the-box had been a tremendous success for P&G, it is a scientific information portal that tells consumers about the science and innovation that make P&G's facial and home care products work, as well as about the safety and sustainability of these products. Presenting such information to consumers helped build trust to P;G brands. (P;G Global Sustainability Report, 2007) Another successful implementation of transnational strategies is McDonald's .
It localized not only its store signages and advertisements but also its menu, offering McAloo Tikki in India, McRin in US, McLobster in Canada, McCalebresa in Brazil, PitaMac and McFarmer in Germany. McDonald's also expanded its Hamburger University from Illinois to Hongkong, Sydney, London, and Munich with 80 classroom hours focusing discussion on Fastfood “the McDonald's way, which include topics on restaurant operations, food preparation, crew selection, training and team building, marketing and promotion, asset management, corporate citizenship and ethics, and leadership, effective supervisory skills.
(Hill, 2007) In an interview with Christopher Bartlett conducted by Cynthia Churchwell (1992), Bartlett discussed the role of global managers in seeing the world not just as collection of national marketplaces, but also a source of scarce information, knowledge, and expertise, which are the key resources required in the development and diffusion of innovation worldwide. Another big challenge is that companies are recognizing that being global is not just about entering incremental overseas markets but it is also accessing scarce resources, particularly human resource, which is the scarcest of all resources.
Bartlett discussed that there is no such thing as universal global manager, rather there are three types of specialists - country subsidiary manager, business manager, and functional manager, who contribute to the overall functioning of a global corporation. The country subsidiary manager has to be sensitive and responsive to national differences in order to understand country differences as strengths and not operational impediments. Bartlett cited Procter and Gamble in Japan for having recognized the needs of sophisticated and demanding Japanese women, who spend more money on cosmetics.
Procter and Gamble seized this opportunity by building R&D and used the environment to spur innovation. As a result, a new product line for skin care called SK-II was launched globally bringing in higher returns. The role of business managers requires a perspective to look across the world and recognize commonalities or see opportunities for economies. In the case of Procter and Gamble, it was the global business manager who assessed the worldwide potential for the SK-II and decided to roll it out in Asia and Europe.
On the other hand, functional managers have to know their speciality, whether it is technology, R&D, or people. It is critical to know where their best practice is and how to leverage it. Functional managers act as pollinators or cross-fertilizers, who are very much in touch with their expertise and with what is happening around the world. Another role is that of the general manager or the CEO, whose focus should be more on managing or framing context, creating an environment in which people can negotiate the best solution for the organization rather than on managing content.
In transnational management, empowerment is very critical, driving more strategic decisions down to peopple who are closest to the customers, competitors, and technology changes. Bartlett further cited that open-mindedness is the most critical global attribute as well as legitimizing diversity in terms of views or perspective including recognition of cultural differences. Moving into transnational strategy entails issues between coordination and centralization. However, the core issue really is specialization in order to drive economies of scale and not centralization.
Specialization is about where the organizational can create centers of excellence and that may or may not be at the corporate center. Creating an integrated network of specialized operations increase coordination needs. The new relationship is that of coordinated interdependence. (Churchwell, 1992) In another interview with Christopher Bartlett conducted by Karen Beaman (2002), the implications of transnational strategy in human capital management were discussed.
Transnational companies are creating organizations that are interdependent and use worldwide operations for the ability to tap knowledge and expertise, to link and leverage it around the world. As companies move into information-based, knowledge-intensive service economy, the critical scarce resources are information, knowledge, and expertise. These scarce resources reside in the heads of individuals, which is called the human capital. In the new organization, people are considered as volunteer investors of scarce knowledge and expertise into the organization.
This entails a radical change of attitude towards employees and focus on building social network to get knowledge and not just information. Knowledge is people and the goal of global knowledge management is the diffusion of innovation around the globe. In building social networks for knowledge transfer, less formal process of socialization is needed which means creating career paths that engage people in moving among different businesses, functions, and geographies. A matrix in the manager's mind is needed rather than a formal matrix structure installed in the organization.
This kind of structure requires enough trust in the relationship. There is no formal relationship that is going to force the parties but because of the trust established in the relationship, each party will contribute to the shared effort. The key is in the informal rather than the formalized structure. The culture of the organization and its values must have that binding effect, making employees feel that they just do not work for the company but they belong in an institution whose values, beliefs and purpose they identify with. Bartlett (Beaman, 2002) also discussed three important macro-processes that fit into the transnational model.
The entrepreneurial process drives bottom up instead of the top-down initiative direction. The horizontal learning process links and leverages across the compartmentalized structures of divisions and departments rather than the vertical capital-allocating process in the old model. The third is continuous renewal process, which is about companies constantly reinventing itself to avoid self-obsolescing. It does not drive down the learning curve but it jumps the curves. In order to illustrate the interaction of these models, Bartlett cited GE as an example.
GE developed a process called “getting workout” wherein frontline people gathered into groups to discuss how to make things better. The inputs are then presented to the boss and this process created a different relationship wherein frontline people are given authority, encouragement, and reward for taking initiative and pushing ideas up creating an entrepreneurial initiative. The second stage of transformation that GE implemented was called “boundarylessness”. It captured best practices world-wide and leverage on them rapidly across the organizational resulting to horizontal macro process, which is linking and leveraging of knowledge.
As a result, GE reengineered its processes, increased inventory out and reduced time to market their products and this was made possible GE studied and benchmarked best practices of the tiny appliance manufacturer in New Zealand. GE also embodied continuous self-renewal when it transformed its business from product only to products and services by putting sensors in their x-rays and CAT scans to monitor when service is needed. Transnational companies are faced with the responsibility to act as global citizens who contribute and do not just exploit resources.
The challenge is to establish the confidence of society at large, particulary the government, and individual consumers to assure them that they are worthy of their trust. Multinational companies have to find ways to balance huge global power with global responsibility. In the article, “Perspective on Trans-National Companies” (2004), enumerated potential benefits that it will bring to developing countries such as generating employment, raising productivity, transferring skills and technology, enhancing exports and contributing to long-term economic development.
On the other hand, negative implications and objections on transnational phenomenon were also discussed such as environmental despoilment; distrust on the impact on vulnerable economies; as much as transnational companies would bring it jobs, money, and technology, it can also take away those benefits like what happened when Sony Corporation left West Java, Indonesia due to a poor business climate; fear that transnational companies will “crowd out” domestic industry and damage “infant industries”; and lastly there are opaque legal/regulatory systemsl corruption, inadequate infrastructure, political uncertainty in the host countries that will discourage transnational corporations.
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Harvard Business Review Press Hill, Charles (2007). Global Business Today. USA:McGraw Hill Hill, Charles (2007). International Business:Competing in the Global Marketplace. USA:McGraw-Hill/Irwin “The New Global Business Manager” by Churchwell, Cynthia (2003). Retrieved from http://hbswk. hbs. edu/item/3827. html “Connect and Develop: Inside Procter and Gamble's New Model of Innovation” by Huston, Larry and Sakkab, Nabil (2006). Retrieved from http://hbswk. hbs. edu/archive/5258. html “Cisco Success Stories, Customer Profile: Procter and Gamble” (2002). Retrieved from http://www. cisco. com/warp/public/779/ibs/solutions/optimization/pgcasestudy1. pdf
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