Chapter 12

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Eslablished in Arkansas in !962 by San vallon, over lhe
lasl lour decades valarl has grown rapidly lo becone
lhe largesl relailer in lhe world wilh 2004 sales ol
$230 billion, !.5 nillion associales (valarls lern lor
enployees, and nore lhan 4,500 slores. Unlil !99!, val
arls operalions were conlined lo lhe Uniled Slales.
There il eslablished a conpelilive advanlage based upon
a conbinalion ol ellicienl nerchandising, buying power,
and hunan relalions policies. Anong olher lhings, val
arl was a leader in lhe inplenenlalion ol inlornalion
syslens lo lrack producl sales and invenlory, developed
one ol lhe nosl ellicienl dislribulion syslens in lhe world,
and was one ol lhe lirsl conpanies lo pronole wide
spread slock ownership anong enployees. These prac
lices led lo high produclivily lhal enabled valarl lo
drive down ils operaling cosls, which il passed on lo con
suners in lhe lorn ol everyday low prices, a slralegy lhal
enabled lhe conpany lo gain narkel share lirsl in general
nerchandising, where il now doninales, and laler in lood
relailing, where il is laking narkel share lron eslablished
supernarkels.
By !990, however, valarl realized lhal ils oppor
lunilies lor growlh in lhe Uniled Slales were beconing
nore liniled. anagenenl calculaled lhal by lhe early
2000s, doneslic growlh opporlunilies would be con
slrained due lo narkel saluralion. So lhe conpany
decided lo expand globally. nilially, lhe crilics scolled.
valarl, lhey said, was loo Anerican a conpany.
vhile ils relailing praclices were well suiled lo Anerica,
lhey would nol work in olher counlries where inlra
slruclure was dillerenl, consuner lasles and preler
ences vary, and where eslablished relailers already
doninaled.
Unperlurbed, in !99! valarl slarled lo expand in
lernalionally wilh lhe opening ol ils lirsl slores in exico.
The exican operalion was eslablished as a joinl venlure
wilh Cilera, lhe largesl local relailer. nilially, valarl
nade a nunber ol nissleps lhal seened lo prove lhe
crilics righl. valarl had problens replicaling ils elli
cienl dislribulion syslen in exico. Poor inlraslruclure,
crowded roads, and a lack ol leverage wilh local suppliers,
nany ol which could nol or would nol deliver direclly lo
valarls slores or dislribulion cenlers, resulled in
slocking problens and raised cosls and prices. nilially,
prices al valarl in exico were sone 20 percenl
above prices lor conparable producls in lhe conpanys
U.S. slores, which liniled valarls abilily lo gain
narkel share. There were also problens wilh ner
chandise seleclion. any ol lhe slores in exico carried
ilens lhal were popular in lhe Uniled Slales. These in
cluded ice skales, riding lawn nowers, leal blowers, and
Wal-Mart's Global Expansion
lishing lackle. ol surprisingly, lhese ilens did nol sell
well in exico, so nanagers would slash prices lo nove
invenlory, only lo lind lhal lhe conpanys aulonaled in
lornalion syslens would innedialely order nore inven
lory lo replenish lhe depleled slock.
By lhe nid!990s, however, valarl had learned lron
ils early nislakes and adapled ils exican operalions lo
nalch lhe local environnenl. A parlnership wilh a exi
can lrucking conpany dranalically inproved lhe dislribu
lion syslen, while nore carelul slocking praclices neanl
lhal lhe exican slores sold nerchandise lhal appealed
nore lo local lasles and prelerences. As valarls pres
ence grew, nany ol valarls suppliers buill laclories
near ils exican dislribulion cenlers so lhal lhey could
beller serve lhe conpany, which helped lo lurlher drive
down invenlory and logislics cosls. Today, exico is a
leading lighl in valarls inlernalional operalions. n
!993, valarl acquired a conlrolling inleresl in Cilera.
By 2004, valarl was nore lhan lwice lhe size ol ils
nearesl rival in exico wilh 670 slores and revenues ol
nore lhan $!! billion.
The exican experience proved lo valarl lhal il
could conpele oulside ol lhe Uniled Slales. l has
subsequenlly expanded inlo nine olher counlries. val
arl enlered Canada, Oreal Brilain, Cernany, Japan,
and Soulh Korea, by acquiring exisling relailers and lhen
lranslerring ils inlornalion syslens, logislics, and nan
agenenl experlise. n Puerlo Fico, Brazil, Argenlina, and
China, valarl eslablished ils own slores. As a resull
ol lhese noves, by 2004 lhe conpany had over !,500
slores oulside lhe Uniled Slales, enployed 330,000 as
sociales, and generaled inlernalional revenues ol nore
lhan $50 billion.
n addilion lo grealer growlh, expanding inlernalion
ally has boughl valarl lwo olher najor benelils.
Firsl, valarl has also been able lo reap signilicanl
econonies ol scale lron ils global buying power. any
ol valarls key suppliers have long been inlernalional
conpanies, lor exanple, CE (appliances, Unilever (lood
producls, and Procler & Canble (personal care prod
ucls are all najor valarl suppliers lhal have long had
lheir own global operalions. By building inlernalional
reach, valarl has used ils enhanced size lo denand
deeper discounls lron lhe local operalions ol ils global
suppliers, increasing lhe conpanys abilily lo lower prices
lo consuners, gain narkel share, and ullinalely earn
grealer prolils. Second, valarl has lound lhal il is
beneliling lron lhe llow ol ideas across lhe !! counlries
in which il now conpeles. For exanple, a lwolevel
slore in ew York Slale cane aboul because ol lhe suc
cess ol nullilevel slores in Soulh Korea. Olher ideas,
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such as wine deparlnenls in ils slores in Argenlina,
have now been inlegraled inlo layouls worldwide.
valarl realized lhal il il didnl expand inlernalionally,
olher global relailers would beal il lo lhe punch. valarl
laces signilicanl global conpelilion lron Carrelour ol
France, Ahold ol Holland, and Tesco lron lhe Uniled King
don. Carrelour, lhe worlds second largesl relailer, is per
haps lhe nosl global ol lhe lol. The pioneer ol lhe
hypernarkel concepl now operales in 26 counlries and
generales nore lhan 50 percenl ol ils sales oulside
France. Conpared lo lhis, valarl is a laggard wilh less
lhan 20 percenl ol ils sales in 2004 generaled lron inler
nalional operalions. However, lhere is roon lor signilicanl
global expansion. The global relailing narkel is slill very
lragnenled. The lop 25 relailers conlrolled less lhan
20 percenl ol worldwide relail sales in 2004, allhough
lorecasls suggesl lhe ligure could reach 40 percenl by
2009, wilh Lalin Anerica, Soulheasl Asia, and Easlern
Europe being lhe nain balllegrounds.
Sources: A. Lillo, valarl Says Clobal Coing Cood, ,SQI8I\
XMPIW8SHE] Seplenber !5, 2003, p. !2-!3, A. de Focha and L. A. Dib,
The Enlry ol valarl inlo Brazil, -RXIVREXMSREP .SYVREP SJ 6IXEMP
ERH (MWXVMFYXMSR 1EREKIQIRX 30 (2002, pp. 6!-73, valarl:
exicos Biggesl Felailer, 'LEMR7XSVI%KI June 200!, pp. 52-54,
. . Hanillon, Clobal Food Fighl, ;EWLMRKXSR4SWX ovenber
!9, 2000, p. H!, Clobal Slralegy-vhy Tesco vill Beal Carrelour,
6IXEMP;IIO April 6, 200!, p. !4, Shopping all over lhe vorld, 8LI
)GSRSQMWX June !9, !999, pp. 59-6!, . Flagg, n Asia, Coing lo
lhe Crocery ncreasingly eans Heading lor a European Felail
Chain, 8LI;EPP7XVIIX.SYVREP April 24, 200!, p. A2!, and valarl
veb sile.
408 Part 5 8LI7XVEXIK]ERH7XVYGXYVISJ-RXIVREXMSREP&YWMRIWW
ur primary corcerr tlus far ir tlis book las beer witl aspects of tle lar,er erviror-
mert ir wlicl irterratioral busiresses compete. As we lave JescribeJ it ir tle preceJ-
ir, clapters, tlis ervirormert las ircluJeJ tle Jifferert political, ecoromic, arJ
cultural irstitutiors fourJ ir ratiors, tle irterratioral traJe arJ irvestmert framework,
arJ tle irterratioral moretary system. Now our focus slifts from tle ervirormert to
tle firm itself arJ, ir particular, to tle actiors mara,ers car take to compete more ef-
fectively as ar irterratioral busiress. lr tlis clapter, we look at low mara,ers car ir-
crease tle performarce of tleir firm by exparJir, irto forei,r markets. We Jiscuss tle
Jifferert strate,ies tlat firms pursue wler competir, irterratiorally. We corsiJer tle
pros arJ cors of tlese strate,ies, arJ we Jiscuss tle various factors tlat affect tle cloice
of strate,y. lr subsequert clapters we slall builJ or tle framework establisleJ lere to
Jiscuss a variety of topics ircluJir, tle Jesi,r of or,arizatior structures arJ cortrol sys-
tems for irterratioral busiresses, strate,ies for erterir, forei,r markets, tle use arJ mis-
use of strate,ic alliarces, strate,ies for exportir,, arJ tle various marufacturir,,
marketir,, l&D, lumar resource, accourtir,, arJ firarcial strate,ies tlat are pursueJ
by irterratioral busiresses.
Wal-Mart, profileJ ir tle operir, case, ,ives us a preview of some issues tlat we will
explore ir tlis clapter. Like mary otler comparies, Wal-Mart moveJ irto otler cour-
tries for tlree reasors: (1) its ,rowtl opporturities at lome were becomir, corstraireJ,
(2) it tlou,lt it coulJ create value by trarsferrir, its busiress moJel to forei,r markets,
arJ (3) it wisleJ to preempt otler retailers tlat were also startir, to exparJ ,lobally.
Wal-Mart iritially treateJ forei,r markets mucl like tle LriteJ States, but it soor fourJ
tlat tlis was rot tle correct approacl. Differerces ir customer tastes arJ prefererces,
arJ ir local irfrastructure, requireJ Wal-Mart to clar,e some store locatior, store lay-
out, arJ stockir, practices. lr otler worJs, to succeeJ abroaJ Wal-Mart las laJ to cus-
tomize its offerir, to local corJitiors. At tle same time, tle compary's core strate,ies
arJ operatiors remair tle same ir every market ir wlicl it competes. Wal-Mart cor-
tirues to emplasize everyJay low prices arJ to focus or tle attairmert of operatir, effi-
ciercies from worlJ-class lo,istics mara,emert arJ irformatior systems. Like mary
otler comparies, Wal-Mart las also fourJ tlat ,oir, ,lobal las yielJeJ aJJitioral ber-
efits, ircluJir, erlarceJ bar,airir, power witl suppliers arJ tle ability to trarsfer valu-
able iJeas from ore courtry to arotler. Ly strivir, to strike tle ri,lt balarce betweer
tle ,lobal starJarJizatior of operatir, practices arJ strate,y, arJ local customizatior of
store layout arJ stockir, practices, arJ by focusir, or tle trarsfer of iJeas across ra-
tioral borJers, Wal-Mart is or tle way to becomir, wlat we slall refer to as a transna-
tiona corporation.
Introduction
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8LI7XVEXIK]SJ-RXIVREXMSREP&YWMRIWW Cbapter 12 409
Lefore we Jiscuss tle strate,ies tlat mara,ers ir tle multiratioral erterprise car pursue,
we reeJ to review some basic prirciples of strate,y. A firm's strategy car be JefireJ as
tle actiors tlat mara,ers take to attair tle ,oals of tle firm. lor most firms, tle preem-
irert ,oal is to maximize tle value of tle firm for its owrers, its slarelolJers (subject to
tle very importart corstrairt tlat tlis is Jore ir a le,al, etlical, arJ socially resporsi-
ble marrer-see Clapter 5 for Jetails). 1o maximize tle value of a firm, mara,ers must
pursue strate,ies tlat ircrease tle roj|tco|||ty of tle erterprise arJ its rate of roj|t rowt|
over time (see li,ure 12.1). Profitabiity car be measureJ ir a rumber of ways, but for
corsistercy, we slall Jefire it as tle rate of returr tlat tle firm makes or its irvesteJ cap-
ital (llC), wlicl is calculateJ by JiviJir, tle ret profits of tle firm by total irvesteJ
capital.
1
Profit growtb is measureJ by tle percerta,e ircrease ir ret profits over time. lr
,ereral, li,ler profitability arJ a li,ler rate of profit ,rowtl will ircrease tle value of
ar erterprise arJ tlus tle returrs ,arrereJ by its owrers, tle slarelolJers.
2
lor a formal
expositior of tlis, see tle apperJix at tle erJ of tlis clapter.
Mara,ers car ircrease tle profitability of tle firm by pursuir, strate,ies tlat lower
costs or by pursuir, strate,ies tlat aJJ value to tle firm's proJucts, wlicl erables tle
firm to raise prices. Mara,ers car ircrease tle rate at wlicl tle firm's profits ,row over
time by pursuir, strate,ies to sell more proJucts ir existir, markets or by pursuir, strate-
,ies to erter rew markets. As we slall see, exparJir, irterratiorally car lelp mara,ers
boost tle firm's profitability cnJ ircrease tle rate of profit ,rowtl over time. lor exam-
ple, by exparJir, irto forei,r markets, Wal-Mart las beer able to ircrease its rate of
profit ,rowtl. Also, Wal-Mart's ircreaseJ size las erlarceJ its bar,airir, power witl
suppliers, erablir, it to Jrive Jowr tle price it pays for tle ,ooJs it sells ir its stores. Low-
erir, Wal-Mart's cost structure las lelpeJ to ircrease tle compary's profitability.
VALUE CREATION
1le way to ircrease tle profitability of a firm is to create more value. 1le amourt of
value a firm creates is measureJ by tle Jiffererce betweer its costs of proJuctior arJ tle
value tlat corsumers perceive ir its proJucts. lr ,ereral, tle more value customers place
or a firm's proJucts, tle li,ler tle price tle firm car clar,e for tlose proJucts. How-
ever, tle price a firm clar,es for a ,ooJ or service is typically less tlar tle value placeJ
Strategy and tbe Firm
Prolilabilily
Prolil Crowlh
Feduce Cosls
Add Value and
Faise Prices
Sell ore in Exisling
arkels
Enler ew
arkels
Enlerprise
Valualion
FIGURE 12. 1
Delerninales ol
Enlerprise Value
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or tlat ,ooJ or service by tle customer. 1lis is because tle customer captures some of
tlat value ir tle form of wlat ecoromists call a corsumer surplus.
3
1le customer is able
to Jo tlis because tle firm is competir, witl otler firms for tle customer's busiress, so
tle firm must clar,e a lower price tlar it coulJ were it a moropoly supplier. Also, it is
rormally impossible to se,mert tle market to sucl a Je,ree tlat tle firm car clar,e eacl
customer a price tlat reflects tlat irJiviJual's assessmert of tle value of a proJuct, wlicl
ecoromists refer to as a customer's reservatior price. lor tlese reasors, tle price tlat ,ets
clar,eJ terJs to be less tlar tle value placeJ or tle proJuct by mary customers.
li,ure 12.2 illustrates tlese corcepts. 1le value of a proJuct to ar avera,e corsumer is
\; tle avera,e price tlat tle firm car clar,e a corsumer for tlat proJuct ,iver competi-
tive pressures arJ its ability to se,mert tle market is l; arJ tle avera,e urit cost of pro-
Jucir, tlat proJuct is C (C comprises all relevart costs, ircluJir, tle firm's cost of
capital). 1le firm's profit per urit solJ ( ) is equal to l C, wlile tle corsumer surplus
per urit is equal to \ l (arotler way of tlirkir, of tle corsumer surplus is as value
for tle morey"; tle ,reater tle corsumer surplus, tle ,reater tle value for tle morey tle
corsumer ,ets). 1le firm makes a profit so lor, as l is ,reater tlar C, arJ its profit will
be ,reater tle lower C is re|ct|ve to l. 1le Jiffererce betweer \ arJ l is ir part JetermireJ
by tle irtersity of competitive pressure ir tle marketplace; tle lower tle irtersity of com-
petitive pressure, tle li,ler tle price clar,eJ relative to \.
+
lr ,ereral, tle li,ler tle
firm's profit per urit solJ is, tle ,reater its profitability will be, all else beir, equal.
1le firm's vaue creation is measureJ by tle Jiffererce betweer \ arJ C (\ C); a
compary creates value by corvertir, irputs tlat cost C irto a proJuct or wlicl cor-
sumers place a value of \. A compary car create more value (\ C) eitler by lowerir,
proJuctior costs, C, or by makir, tle proJuct more attractive tlrou,l superior Jesi,r,
stylir,, furctiorality, features, reliability, after-sales service, arJ tle like, so tlat cor-
sumers place a ,reater value or it (\ ircreases) arJ, corsequertly, are willir, to pay a
li,ler price (l ircreases). 1lis Jiscussior su,,ests tlat c j|rm |cs ||| roj|ts w|en |t crectes
more vc|ue jor |ts customers cnJ Joes so ct c |ower cost. We refer to a strate,y tlat focuses pri-
marily or lowerir, proJuctior costs as a |ow-cost strctey. We refer to a strate,y tlat fo-
cuses primarily or ircreasir, tle attractiveress of a proJuct as a J|jjerent|ct|on strctey.
5
Miclael lorter las ar,ueJ tlat |ow cost arJ J|jjerent|ct|on are two basic strate,ies
for creatir, value arJ attairir, a competitive aJvarta,e ir ar irJustry.
6
AccorJir,
to lorter, superior profitability ,oes to tlose firms tlat car create superior value, arJ
tle way to create superior value is to Jrive Jowr tle cost structure of tle busiress
arJ/or Jifferertiate tle proJuct ir some way so tlat corsumers value it more arJ are
prepareJ to pay a premium price. Superior value creatior relative to rivals Joes rot
recessarily require a firm to lave tle lowest cost structure ir ar irJustry, or to create
tle most valuable proJuct ir tle eyes of corsumers. However, it Joes require tlat tle
,ap betweer value (\) arJ cost of proJuctior (C) be ,reater tlar tle ,ap attaireJ by
competitors.
V-P
P-C
C
V
P
C
V-C
V=Value ol producl lo an
average consuner
P=Price per unil
C=Cosl ol produclion per unil
V-P=Consuner surplus per unil
P-C=Prolil per unil sold
V-C=Value crealed per unil
FIGURE 12. 2
Value Crealion
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STRATEGIC POSITIONING
lorter rotes tlat it is importart for a firm to be explicit about its cloice of strate,ic em-
plasis witl re,arJ to value creatior (Jifferertiatior) arJ low cost, arJ to corfi,ure its
irterral operatiors to support tlat strate,ic emplasis.
7
li,ure 12.3 illustrates lis poirt.
1le corvex curve ir li,ure 12.3 is wlat ecoromists refer to as ar efficiercy frortier. 1le
efficiercy frortier slows all of tle Jifferert positiors tlat a firm car aJopt witl re,arJ to
aJJir, value to tle proJuct (\) arJ low cost (C) assumir, tlat its irterral operatiors
are corfi,ureJ efficiertly to support a particular positior (rote tlat tle lorizortal axis ir
li,ure 12.3 is reverse scaleJ-movir, alor, tle axis to tle ri,lt implies lower costs). 1le
efficiercy frortier las a corvex slape because of Jimirislir, returrs. Dimirislir, re-
turrs imply tlat wler a firm alreaJy las si,rificart value built irto its proJuct offerir,,
ircreasir, value by a relatively small amourt requires si,rificart aJJitioral costs. 1le
corverse also lolJs, wler a firm alreaJy las a low-cost structure, it las to ,ive up a lot
of value ir its proJuct offerir, to ,et aJJitioral cost reJuctiors.
1lree lotel firms witl a ,lobal preserce are plotteJ or li,ure 12.3, lour Seasors,
Marriott lrterratioral, arJ StarwooJ (StarwooJ owrs tle Slerator arJ Westir
clairs). lour Seasors positiors itself as a luxury clair arJ emplasizes tle value of its
proJuct offerir,, wlicl Jrives up its costs of operatiors. Marriott arJ StarwooJ are po-
sitioreJ more ir tle miJJle of tle market. Lotl emplasize sufficiert value to attract ir-
terratioral busiress travelers, but are rot luxury clairs like lour Seasors. lr li,ure
12.3, lour Seasors arJ Marriott are slowr to be or tle efficiercy frortier, irJicatir,
tlat tleir irterral operatiors are well corfi,ureJ to tleir strate,y arJ rur efficiertly.
StarwooJ is irsiJe tle frortier, irJicatir, tlat its operatiors are rot rurrir, as effi-
ciertly as tley mi,lt be, arJ tlat its costs are too li,l. 1lis implies tlat StarwooJ is
less profitable tlar lour Seasors arJ Marriott, arJ tlat its mara,ers must take steps to
improve tle compary's performarce.
lorter emplasizes tlat it is very importart for mara,emert to JeciJe wlere tle com-
pary warts to be positioreJ witl re,arJ to value (\) arJ cost (C), to corfi,ure opera-
tiors accorJir,ly, arJ to mara,e tlem efficiertly to make sure tle firm is operatir, or
tle efficiercy frortier. However, rot all positiors or tle efficiercy frortier are viable. lr
tle irterratioral lotel irJustry, for example, tlere mi,lt rot be erou,l JemarJ to sup-
port a clair tlat emplasizes very low cost arJ strips all tle value out of its proJuct of-
ferir, (see li,ure 12.3). lrterratioral travelers are relatively affluert arJ expect a Je,ree
of comfort (value) wler tley travel away from lome.
A certral teret of tle basic strate,y paraJi,m is tlat to maximize its profitability, a
firm must Jo tlree tlir,s: (c) pick a positior or tle efficiercy frortier tlat is viable ir
tle serse tlat tlere is erou,l JemarJ to support tlat cloice; (o) corfi,ure its irterral
Low Cosl (C
Four Seasons
Slarwood
arrioll
Elliciency Fronlier
Slralegic Choices in
This Area ol
Viable in nlernalional
Holel nduslry
FIGURE 12. 3
Slralegic Choice in lhe
nlernalional Holel
nduslry
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operatiors, sucl as marufacturir,, marketir,, lo,istics, irformatior systems, lumar re-
sources, arJ so or, so tlat tley support tlat positior; arJ (c) make sure tlat tle firm las
tle ri,lt or,arizatior structure ir place to execute its strate,y. T|e strctey, oerct|ons,
cnJ orcn|,ct|on oj t|e j|rm must c|| oe cons|stent w|t| ecc| ot|er |j |t |s to cttc|n c comet|t|ve
cJvcntce cnJ crner suer|or roj|tco|||ty. peratiors refers to tle Jifferert value creatior
activities a firm urJertakes, wlicl we slall review rext.
OPERATIONS: THE FIRM AS A VALUE CHAIN
1le operatiors of a firm car be tlou,lt of as a value clair composeJ of a series of Jis-
tirct value creatior activities ircluJir, proJuctior, marketir, arJ sales, materials mar-
a,emert, l&D, lumar resources, irformatior systems, arJ tle firm irfrastructure. We
car cate,orize tlese value creatior activities, or operatiors, as primary activities arJ sup-
port activities (see li,ure 12.+).
8
As roteJ above, if a firm is to implemert its strate,y ef-
ficiertly, arJ positior itself or tle efficiercy frortier slowr ir li,ure 12.3, it must
mara,e tlese activities effectively arJ ir a marrer tlat is corsistert witl its strate,y.
Primary Activities
lrimary activities lave to Jo witl tle Jesi,r, creatior, arJ Jelivery of tle proJuct; its
marketir,; arJ its support arJ after-sale service. lollowir, rormal practice, ir tle value
clair illustrateJ ir li,ure 12.+, tle primary activities are JiviJeJ irto four furctiors: re-
searcl arJ Jevelopmert, proJuctior, marketir, arJ sales, arJ customer service.
lesearcl arJ Jevelopmert (l&D) is corcerreJ witl tle Jesi,r of proJucts arJ pro-
Juctior processes. Altlou,l we tlirk of l&D as beir, associateJ witl tle Jesi,r of plys-
ical proJucts arJ proJuctior processes ir marufacturir, erterprises, mary service
comparies also urJertake l&D. lor example, barks compete witl eacl otler by Jevelop-
ir, rew firarcial proJucts arJ rew ways of Jeliverir, tlose proJucts to customers. rlire
barkir, arJ smart Jebit carJs are two examples of proJuct Jevelopmert ir tle barkir, ir-
Justry. Larlier examples of irrovatior ir tle barkir, irJustry ircluJeJ automateJ teller
maclires, creJit carJs, arJ Jebit carJs. 1lrou,l superior proJuct Jesi,r, l&D car ir-
crease tle furctiorality of proJucts, wlicl makes tlem more attractive to corsumers (rais-
ir, \). Alterratively, l&D may result ir more efficiert proJuctior processes, tlereby
cuttir, proJuctior costs (lowerir, C). Litler way, tle l&D furctior car create value.
lroJuctior is corcerreJ witl tle creatior of a ,ooJ or service. lor plysical proJucts,
wler we talk about proJuctior we ,ererally mear marufacturir,. 1lus, we car talk about
Supporl Aclivilies
Conpany nlraslruclure
nlornalion Syslens Logislics Hunan Fesource
F&D Produclion
arkeling
and
Sales
Cusloner
Service
Prinary Aclivilies
FIGURE 12. 4
The Value Chain
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tle proJuctior of ar automobile. lor services sucl as barkir, or lealtl care, proJuctior"
typically occurs wler tle service is JelivereJ to tle customer (for example, wler a bark
ori,irates a loar for a customer it is er,a,eJ ir proJuctior" of tle loar). lor a retailer sucl
as Wal-Mart, proJuctior" is corcerreJ witl selectir, tle merclarJise, stockir, tle store,
arJ rir,ir, up tle sale at tle casl re,ister. 1le proJuctior activity of a firm creates value
by performir, its activities efficiertly so lower costs result (lower C) or by performir, tlem
ir sucl a way tlat a li,ler-quality proJuct is proJuceJ (wlicl results ir li,ler \).
1le marketir, arJ sales furctiors of a firm car lelp to create value ir several ways.
1lrou,l brarJ positiorir, arJ aJvertisir,, tle marketir, furctior car ircrease tle
value (\) tlat corsumers perceive to be cortaireJ ir a firm's proJuct. lf tlese create a
favorable impressior of tle firm's proJuct ir tle mirJs of corsumers, tley ircrease tle
price tlat car be clar,eJ for tle firm's proJuct. lor example, lorJ las proJuceJ a li,l-
value versior of its lorJ LxpeJitior SL\. SolJ as tle Lircolr Navi,ator arJ priceJ
arourJ $1O,OOO li,ler, tle Navi,ator las tle same boJy, er,ire, classis, arJ Jesi,r as
tle LxpeJitior, but tlrou,l skilleJ aJvertisir, arJ marketir,, supporteJ by some fairly
miror features clar,es (e.,., more accessories arJ tle aJJitior of a Lircolr-style er,ire
,rille arJ rameplate), lorJ las fostereJ tle perceptior tlat tle Navi,ator is a luxury
SL\." 1lis marketir, strate,y las ircreaseJ tle perceiveJ value (\) of tle Navi,ator
relative to tle LxpeJitior, arJ erables lorJ to clar,e a li,ler price for tle car (l).
Marketir, arJ sales car also create value by Jiscoverir, corsumer reeJs arJ com-
muricatir, tlem back to tle l&D furctior of tle compary, wlicl car tler Jesi,r
proJucts tlat better matcl tlose reeJs. lor example, tle allocatior of researcl buJ,ets
at lfizer, tle worlJ's lar,est plarmaceutical compary, is JetermireJ by tle marketir,
furctior's assessmert of tle potertial market size associateJ witl solvir, urmet meJical
reeJs. 1lus, lfizer is currertly Jirectir, si,rificart mories to l&D efforts aimeJ at firJ-
ir, treatmerts for Alzleimer's Jisease, prircipally because marketir, las iJertifieJ tle
treatmert of Alzleimer's as a major urmet meJical reeJ.
1le role of tle erterprise's service activity is to proviJe after-sale service arJ support.
1lis furctior car create a perceptior of superior value (\) ir tle mirJs of corsumers by
solvir, customer problems arJ supportir, customers after tley lave purclaseJ tle proJ-
uct. Caterpillar, tle L.S.-baseJ marufacturer of leavy eartlmovir, equipmert, car ,et
spare parts to ary poirt ir tle worlJ witlir 2+ lours, tlereby mirimizir, tle amourt of
Jowrtime its customers lave to suffer if tleir Caterpillar equipmert malfurctiors. 1lis
is ar extremely valuable capability ir ar irJustry wlere Jowrtime is very expersive. lt
las lelpeJ to ircrease tle value tlat customers associate witl Caterpillar proJucts arJ
tlus tle price tlat Caterpillar car clar,e.
Perceplion is everylhing!
Even lhough lhe Ford Ex
pedilion (lell and lhe Lin
coln avigalor (righl share
nany ol lhe sane allrib
ules such as lhe body and
engine, cusloners are will
ing lo pay aboul $!0,000
nore lor lhe avigalors
lillle exlras.
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Support Activities
1le support activities of tle value clair proviJe irputs tlat allow tle primary activi-
ties to occur (see li,ure 12.+). lr terms of attairir, a competitive aJvarta,e, tley car
be as importart as, if rot more importart tlar, tle primary" activities of tle firm. 1le
lo,istics furctior cortrols tle trarsmissior of plysical materials tlrou,l tle value
clair, from procuremert tlrou,l proJuctior arJ irto Jistributior. 1le efficiercy
witl wlicl tlis is carrieJ out car si,rificartly reJuce cost (lower C), tlereby creatir,
more value. As roteJ ir tle operir, case, lo,istics is a major source of Wal-Mart's com-
petitive aJvarta,e.
1le lumar resource furctior car lelp create more value ir a rumber of ways. lt er-
sures tlat tle compary las tle ri,lt mix of skilleJ people to perform its value creatior
activities effectively. Wal-Mart, for example, is ircreasir,ly usir, local mara,ers to rur
stores arJ lo,istics operatiors ir courtries outsiJe of tle LriteJ States. 1le tlirkir, be-
lirJ tlis is tlat local ratiorals will lave a better feel for tle tastes arJ prefererces of lo-
cal customers tlar expatriate mara,ers from tle LriteJ States. lr so far as tlis improves
tle fit betweer Wal-Mart's merclarJisir, arJ local tastes, it sloulJ result ir li,ler sales.
1le lumar resource furctior also ersures tlat people are aJequately traireJ, motivateJ,
arJ compersateJ to perform tleir value creatior tasks.
lrformatior systems refer to tle electroric systems for mara,ir, irvertory, trackir,
sales, pricir, proJucts, sellir, proJucts, Jealir, witl customer service irquiries, arJ so
or. lrformatior systems, wler coupleJ witl tle commuricatiors features of tle lrter-
ret, car alter tle efficiercy arJ effectiveress witl wlicl a firm mara,es its otler value
creatior activities. As we slall see, ,ooJ irformatior systems are very importart ir tle
,lobal arera. A,air, Wal-Mart's competitive aJvarta,e is baseJ ir lar,e part or its pio-
reerir, use of irformatior systems to track ir-store sales. 1lis trackir, capability mears
tlat Wal-Mart is almost rever cau,lt witl too mucl of a certair item, or too little of tlat
item. 1lis reJuces Wal-Mart's reeJ to lolJ ar extersive stock of buffer irvertory, wlicl
reJuces irvertory costs (lowers C), arJ makes sure tlat Wal-Mart rever las to lolJ sales
to slift excess irvertory (keepir, price, l, from lavir, to be reJuceJ).
1le firal support activity is tle compary irfrastructure, or tle cortext witlir wlicl
all tle otler value creatior activities occur. 1le irfrastructure ircluJes tle or,ariza-
tioral structure, cortrol systems, arJ culture of tle firm. Lecause top mara,emert car
exert corsiJerable irfluerce ir slapir, tlese aspects of a firm, top mara,emert sloulJ
also be vieweJ as part of tle firm's irfrastructure. 1lrou,l stror, leaJerslip, top mar-
a,emert car corsciously slape tle irfrastructure of a firm arJ tlrou,l tlat tle perfor-
marce of all its value creatior activities.
LxparJir, ,lobally allows firms to ircrease tleir profitability arJ rate of profit ,rowtl ir
ways rot available to purely Jomestic erterprises.
9
lirms tlat operate irterratiorally are
able to:
1. LxparJ tle market for tleir Jomestic proJuct offerir,s by sellir, tlose
proJucts ir irterratioral markets.
2. lealize locatior ecoromies by Jispersir, irJiviJual value creatior activities to
tlose locatiors arourJ tle ,lobe wlere tley car be performeJ most efficiertly
arJ effectively.
3. lealize ,reater cost ecoromies from experierce effects by servir, ar exparJeJ
,lobal market from a certral locatior, tlereby reJucir, tle costs of value
creatior.
+. Larr a ,reater returr by levera,ir, ary valuable skills JevelopeJ ir forei,r
operatiors arJ trarsferrir, tlem to otler ertities witlir tle firm's ,lobal
retwork of operatiors.
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As we will see, lowever, a firm's ability to ircrease its profitability arJ profit ,rowtl
by pursuir, tlese strate,ies is corstraireJ by tle reeJ to customize its proJuct offerir,,
marketir, strate,y, arJ busiress strate,y to Jifferir, ratioral corJitiors; tlat is, by tle
imperative of localizatior.
EXPANDING THE MARKET: LEVERAGING PRODUCTS
AND COMPETENCIES
A compary car ircrease its ,rowtl rate by takir, ,ooJs or services JevelopeJ at lome
arJ sellir, tlem irterratiorally. Almost all multiratiorals starteJ out Joir, just tlis.
lrocter arJ Camble, for example, JevelopeJ most of its best-sellir, proJucts sucl as
lampers Jisposable Jiapers arJ lvory soap ir tle LriteJ States, arJ subsequertly tler
solJ tlem arourJ tle worlJ. Similarly, altlou,l Microsoft JevelopeJ its software ir tle
LriteJ States, from its earliest Jays tle compary las always focuseJ or sellir, tlat soft-
ware ir irterratioral markets. Automobile comparies sucl as \olkswa,er arJ 1oyota
also ,rew by Jevelopir, proJucts at lome arJ tler sellir, tlem ir irterratioral mar-
kets. 1le returrs from sucl a strate,y are likely to be ,reater if irJi,erous competitors ir
tle ratiors a compary erters lack comparable proJucts. 1lus, 1oyota las ircreaseJ its
profits by erterir, tle lar,e automobile markets of Nortl America arJ Lurope, offerir,
proJucts tlat are Jifferert from tlose offereJ by local rivals (lorJ arJ CM) by tleir su-
perior quality arJ reliability.
1le success of mary multiratioral comparies tlat exparJ ir tlis marrer is baseJ
rot just upor tle ,ooJs or services tlat tley sell ir forei,r ratiors, but also upor tle
core competercies tlat urJerlie tle Jevelopmert, proJuctior, arJ marketir, of tlose
,ooJs or services. 1le term core competence refers to skills witlir tle firm tlat com-
petitors carrot easily matcl or imitate.
1O
1lese skills may exist ir ary of tle firm's value
creatior activities-proJuctior, marketir,, l&D, lumar resources, lo,istics, ,ereral
mara,emert, arJ so or. Sucl skills are typically expresseJ ir proJuct offerir,s tlat
otler firms firJ Jifficult to matcl or imitate. Core competercies are tle beJrock of a
firm's competitive aJvarta,e. 1ley erable a firm to reJuce tle costs of value creatior
arJ/or to create perceiveJ value ir sucl a way tlat premium pricir, is possible. lor ex-
ample, 1oyota las a core competerce ir tle proJuctior of cars. lt is able to proJuce
li,l-quality, well-Jesi,reJ cars at a lower JelivereJ cost tlar ary otler firm ir tle
worlJ. 1le competercies tlat erable 1oyota to Jo tlis seem to resiJe primarily ir tle
firm's proJuctior arJ lo,istics furctiors.
11
McDoralJ's las a core competerce ir mar-
a,ir, fast-fooJ operatiors (it seems to be ore of tle most skilleJ firms ir tle worlJ ir
tlis irJustry); lrocter & Camble las a core competerce ir Jevelopir, arJ marketir,
rame brarJ corsumer proJucts (it is ore of tle most skilleJ firms ir tle worlJ ir tlis
busiress); Wal-Mart las a core competerce ir tle irformatior systems arJ lo,istics re-
quireJ to efficiertly mara,e a lar,e-scale retail operatior. Starbucks las a core compe-
terce ir tle mara,emert of retail outlets sellir, li,l volumes of freslly breweJ
coffee-baseJ Jrirks.
Sirce core competercies are by Jefiritior tle source of a firm's competitive aJvar-
ta,e, tle successful ,lobal exparsior by marufacturir, comparies sucl as 1oyota arJ
l&C was baseJ rot just or levera,ir, proJucts arJ sellir, tlem ir forei,r markets, but
also or tle trarsfer of core competercies to forei,r markets wlere irJi,erous competi-
tors lackeJ tlem. 1le same car be saiJ of comparies er,a,eJ ir tle service sectors of ar
ecoromy, sucl as firarcial irstitutiors, retailers, restaurart clairs, arJ lotels. LxparJ-
ir, tle market for tleir services ofter mears replicatir, tleir busiress moJel ir forei,r
ratiors (albeit witl some clar,es to accourt for local Jiffererces, wlicl we will Jiscuss
ir more Jetail slortly). Starbucks, for example, is exparJir, rapiJly outsiJe of tle LriteJ
States by takir, tle basic busiress moJel it JevelopeJ at lome arJ usir, tlat as a blue-
prirt for establislir, irterratioral operatiors. As explaireJ ir tle operir, case, Wal-
Mart las Jore tle same tlir,, establislir, stores ir rire otler ratiors sirce 1992
followir, tle moJel it JevelopeJ ir tle LriteJ States. Similarly, McDoralJ's is famous
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for its irterratioral exparsior strate,y, wlicl las taker tle compary irto more tlar 12O
ratiors tlat collectively ,ererate over lalf of tle compary's reverues.
LOCATION ECONOMIES
We krow from earlier clapters tlat courtries Jiffer alor, a rar,e of Jimersiors, ircluJ-
ir, tle ecoromic, political, le,al, arJ cultural, arJ tlat tlese Jiffererces car eitler raise
or lower tle costs of Joir, busiress ir a courtry. 1le tleory of irterratioral traJe also
teacles us tlat Jue to Jiffererces ir factor costs, certair courtries lave a comparative aJ-
varta,e ir tle proJuctior of certair proJucts. Japar mi,lt excel ir tle proJuctior of au-
tomobiles arJ corsumer electrorics; tle LriteJ States ir tle proJuctior of computer
software, plarmaceuticals, bioteclrolo,y proJucts, arJ firarcial services; SwitzerlarJ ir
tle proJuctior of precisior irstrumerts arJ plarmaceuticals; Soutl lorea ir tle pro-
Juctior of semicorJuctors; arJ Clira ir tle proJuctior of apparel.
12
lor a firm tlat is tryir, to survive ir a competitive ,lobal market, tlis implies tlat
trcJe ocrr|ers cnJ trcnsortct|on costs permittir,, tle firm will berefit by basir, eacl value
creatior activity it performs at tlat locatior wlere ecoromic, political, arJ cultural
corJitiors, ircluJir, relative factor costs, are most corJucive to tle performarce of
tlat activity. 1lus, if tle best Jesi,rers for a proJuct live ir lrarce, a firm sloulJ base
its Jesi,r operatiors ir lrarce. lf tle most proJuctive labor force for assembly opera-
tiors is ir Mexico, assembly operatiors sloulJ be baseJ ir Mexico. lf tle best marketers
are ir tle LriteJ States, tle marketir, strate,y sloulJ be formulateJ ir tle LriteJ
States. ArJ so or.
lirms tlat pursue sucl a strate,y car realize wlat we refer to as ocation economies,
wlicl are tle ecoromies tlat arise from performir, a value creatior activity ir tle op-
timal locatior for tlat activity, wlerever ir tle worlJ tlat mi,lt be (trarsportatior costs
arJ traJe barriers permittir,). Locatir, a value creatior activity ir tle optimal locatior
for tlat activity car lave ore of two effects. t ccn |ower t|e costs oj vc|ue crect|on cnJ |e|
t|e j|rm to cc||eve c |ow-cost os|t|on, cnJ/or |t ccn enco|e c j|rm to J|jjerent|cte |ts roJuct oj-
jer|n jrom t|ose oj comet|tors. lr terms of li,ure 12.2, it car lower C arJ/or ircrease \
(wlicl ir ,ereral supports li,ler pricir,), botl of wlicl boost tle profitability of tle
erterprise.
lor ar example of low tlis works ir ar irterratioral busiress, corsiJer Clear \isior,
a marufacturer arJ Jistributor of eyewear. StarteJ ir tle 198Os by DaviJ Classmar, tle
firm row ,ererates arrual ,ross reverues of more tlar $1OO millior. Not exactly small,
but ro corporate ,iart eitler, Clear \isior is a multiratioral firm witl proJuctior facil-
ities or tlree cortirerts arJ customers arourJ tle worlJ. Clear \isior be,ar its move
towarJ becomir, a multiratioral ir tle 198Os. 1le stror, Jollar at tlat time maJe L.S.-
baseJ marufacturir, very expersive. Low-priceJ imports were takir, ar ever-lar,er slare
of tle L.S. eyewear market, arJ Clear \isior realizeJ it coulJ rot survive urless it also
be,ar to import. lritially tle firm bou,lt from irJeperJert overseas marufacturers, pri-
marily ir Hor, lor,. However, tle firm became JissatisfieJ witl tlese suppliers' proJ-
uct quality arJ Jelivery. As Clear \isior's volume of imports ircreaseJ, Classmar
JeciJeJ tle best way to ,uarartee quality arJ Jelivery was to set up Clear \isior's owr
marufacturir, operatior overseas. AccorJir,ly, Clear \isior fourJ a Clirese partrer,
arJ to,etler tley opereJ a marufacturir, facility ir Hor, lor,, witl Clear \isior be-
ir, tle majority slarelolJer.
1le cloice of tle Hor, lor, locatior was irfluerceJ by its combiratior of low labor
costs, a skilleJ workforce, arJ tax breaks ,iver by tle Hor, lor, ,overrmert. 1le firm's
objective at tlis poirt was to lower proJuctior costs by locatir, value creatior activities
at ar appropriate locatior. After a few years, lowever, tle ircreasir, irJustrializatior of
Hor, lor, arJ a ,rowir, labor slorta,e laJ pusleJ up wa,e rates to tle extert tlat it
was ro lor,er a low-cost locatior. lr resporse, Classmar arJ lis Clirese partrer moveJ
part of tleir marufacturir, to a plart ir mairlarJ Clira to take aJvarta,e of tle lower
wa,e rates tlere. A,air, tle ,oal was to lower proJuctior costs. 1le parts for eyewear
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frames marufactureJ at tlis plart are slippeJ to tle Hor, lor, factory for firal assem-
bly arJ tler JistributeJ to markets ir Nortl arJ Soutl America. 1le Hor, lor, fac-
tory row employs 8O people arJ tle Clira plart betweer 3OO arJ +OO.
At tle same time, Clear \isior was lookir, for opporturities to irvest ir forei,r eye-
wear firms witl reputatiors for fasliorable Jesi,r arJ li,l quality. lts objective was rot
to reJuce proJuctior costs but to laurcl a lire of li,l-quality JifferertiateJ, Jesi,rer"
eyewear. Clear \isior JiJ rot lave tle Jesi,r capability ir-louse to support sucl a lire,
but Classmar krew tlat certair forei,r marufacturers JiJ. As a result, Clear \isior ir-
vesteJ ir factories ir Japar, lrarce, arJ ltaly, lolJir, a mirority slarelolJir, ir eacl
case. 1lese factories row supply eyewear for Clear \isior's Status Lye Jivisior, wlicl
markets li,l-priceJ Jesi,rer eyewear.
13
1lus, to Jeal witl a tlreat from forei,r competitior, Clear \isior aJopteJ a strate,y
irterJeJ to lower its cost structure (lower C): sliftir, its proJuctior from a li,l-cost lo-
catior, tle LriteJ States, to a low-cost locatior, first Hor, lor, arJ later Clira. 1ler
Clear \isior aJopteJ a strate,y irterJeJ to ircrease tle perceiveJ value of its proJuct
(ircrease \) so it coulJ clar,e a premium price (l). leasorir, tlat premium pricir, ir
eyewear JeperJeJ or superior Jesi,r, its strate,y irvolveJ irvestir, capital ir lrercl,
ltaliar, arJ Japarese factories tlat laJ reputatiors for superior Jesi,r. lr sum, Clear \i-
sior's strate,ies ircluJeJ some actiors irterJeJ to reJuce its costs of creatir, value arJ
otler actiors irterJeJ to aJJ perceiveJ value to its proJuct tlrou,l Jifferertiatior. 1le
overall ,oal was to ircrease tle value createJ by Clear \isior arJ tlus tle profitability
of tle erterprise. 1o tle extert tlat tlese strate,ies were successful, tle firm sloulJ lave
attaireJ a li,ler profit mar,ir arJ ,reater profitability tlar if it laJ remaireJ a L.S.-
baseJ marufacturer of eyewear.
Creating a GIobaI Web
Cereralizir, from tle Clear \isior example, ore result of tlis kirJ of tlirkir, is tle cre-
atior of a goba web of value creatior activities, witl Jifferert sta,es of tle value clair
beir, JisperseJ to tlose locatiors arourJ tle ,lobe wlere perceiveJ value is maximizeJ
or wlere tle costs of value creatior are mirimizeJ.
1+
CorsiJer lLM's 1lirklaJ X31 lap-
top computer.
15
1lis proJuct was Jesi,reJ ir tle LriteJ States by lLM er,ireers be-
cause lLM believeJ tlat tle LriteJ States was tle best locatior ir tle worlJ to Jo tle
basic Jesi,r work. 1le case, keyboarJ, arJ larJ Jrive were maJe ir 1lailarJ; tle Jis-
play screer arJ memory were maJe ir Soutl lorea; tle built-ir wireless carJ was maJe
ir Malaysia; arJ tle microprocessor was marufactureJ ir tle LriteJ States. lr eacl case,
tlese comporerts were marufactureJ ir tle optimal locatior ,iver currert factor costs.
1lese comporerts were slippeJ to ar lLM operatior ir Mexico, wlere tle proJuct was
assembleJ, before beir, slippeJ to tle LriteJ States for firal sale. lLM assembleJ tle
1lirklaJ ir Mexico because lLM's mara,ers calculateJ tlat Jue to low labor costs, tle
costs of assembly coulJ be mirimizeJ tlere. 1le marketir, arJ sales strate,y for Nortl
America was JevelopeJ by lLM persorrel ir tle LriteJ States, primarily because lLM
believeJ tlat Jue to tleir krowleJ,e of tle local marketplace, L.S. persorrel woulJ aJJ
more value to tle proJuct tlrou,l tleir marketir, efforts tlar persorrel baseJ else-
wlere.
lr tleory, a firm tlat realizes locatior ecoromies by Jispersir, eacl of its value cre-
atior activities to its optimal locatior sloulJ lave a competitive aJvarta,e vis-a-vis a
firm tlat bases all of its value creatior activities at a sir,le locatior. lt sloulJ be able to
better Jifferertiate its proJuct offerir, (tlereby raisir, perceiveJ value, \) arJ lower its
cost structure (C) tlar its sir,le-locatior competitor. lr a worlJ wlere competitive pres-
sures are ircreasir,, sucl a strate,y may become ar imperative for survival.
Some Caveats
lrtroJucir, trarsportatior costs arJ traJe barriers complicates tlis picture. Due to favor-
able factor erJowmerts, New zealarJ may lave a comparative aJvarta,e for automobile
assembly operatiors, but li,l trarsportatior costs woulJ make it ar urecoromical locatior
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from wlicl to serve ,lobal markets. Arotler caveat corcerrs tle importarce of assessir,
political arJ ecoromic risks wler makir, locatior Jecisiors. Lver if a courtry looks very
attractive as a proJuctior locatior wler measureJ a,airst all tle starJarJ criteria, if its
,overrmert is urstable or totalitariar, tle firm mi,lt be aJviseJ rot to base proJuctior
tlere. (lolitical risk is JiscusseJ ir Clapter 2.) Similarly, if tle ,overrmert appears to be
pursuir, irappropriate ecoromic policies tlat coulJ leaJ to forei,r exclar,e risk, tlat
mi,lt be arotler reasor for rot basir, proJuctior ir tlat locatior, ever if otler factors
look favorable.
EXPERIENCE EFFECTS
1le experience curve refers to systematic reJuctiors ir proJuctior costs tlat lave beer
observeJ to occur over tle life of a proJuct.
16
A rumber of stuJies lave observeJ tlat a
proJuct's proJuctior costs Jeclire by some quartity about eacl time cumu|ct|ve output
Joubles. 1le relatiorslip was first observeJ ir tle aircraft irJustry, wlere eacl time cu-
mulative output of airframes was JoubleJ, urit costs typically JeclireJ to 8O percert of
tleir previous level.
17
1lus, proJuctior cost for tle fourtl airframe woulJ be 8O percert
of proJuctior cost for tle secorJ airframe, tle ei,ltl airframe's proJuctior costs 8O per-
cert of tle fourtl's, tle sixteertl's 8O percert of tle ei,ltl's, arJ so or. li,ure 12.5 il-
lustrates tlis experierce curve relatiorslip betweer urit proJuctior costs arJ cumu|ct|ve
output (tle relatiorslip is for cumu|ct|ve output over time, arJ not output ir ary ore pe-
rioJ, sucl as a year). 1wo tlir,s explair tlis: learrir, effects arJ ecoromies of scale.
Learning Effects
Learning effects refer to cost savir,s tlat come from learrir, by Joir,. Labor, for ex-
ample, learrs by repetitior low to carry out a task, sucl as assemblir, airframes, most ef-
ficiertly. Labor proJuctivity ircreases over time as irJiviJuals learr tle most efficiert
ways to perform particular tasks. Lqually importart, ir rew proJuctior facilities mar-
a,emert typically learrs low to mara,e tle rew operatior more efficiertly over time.
Herce, proJuctior costs Jeclire Jue to ircreasir, labor proJuctivity arJ mara,emert
efficiercy, wlicl ircreases tle firm's profitability.
Learrir, effects terJ to be more si,rificart wler a teclrolo,ically complex task is re-
peateJ, because tlere is more tlat car be learreJ about tle task. 1lus, learrir, effects
will be more si,rificart ir ar assembly process irvolvir, 1,OOO complex steps tlar ir ore
of orly 1OO simple steps. No matter low complex tle task, lowever, learrir, effects typ-
ically Jisappear after a wlile. lt las beer su,,esteJ tlat tley are importart orly Jurir,
tle start-up perioJ of a rew process arJ tlat tley cease after two or tlree years.
18
Ary
Jeclire ir tle experierce curve after sucl a poirt is Jue to ecoromies of scale.
Economies of ScaIe
Economies of scae refer to tle reJuctiors ir urit cost aclieveJ by proJucir, a lar,e vol-
ume of a proJuct. Attairir, ecoromies of scale lowers a firm's urit costs arJ ircreases its
profitability. Lcoromies of scale lave a rumber of sources. re is tle ability to spreaJ
fixeJ costs over a lar,e volume.
19
lixeJ costs are tle costs requireJ to set up a proJuctior
facility, Jevelop a rew proJuct, arJ tle like. 1ley car be substartial. lor example, tle
fixeJ cost of establislir, a rew proJuctior lire to marufacture semicorJuctor clips row
exceeJs $1 billior. Similarly, accorJir, to ore estimate, Jevelopir, a rew Jru, arJ brir,-
ir, it to market costs about $8OO millior arJ takes about 12 years.
2O
1le orly way to re-
coup sucl li,l fixeJ costs may be to sell tle proJuct worlJwiJe, wlicl reJuces avera,e
urit costs by spreaJir, fixeJ costs over a lar,er volume. 1le more rapiJly tlat cumula-
tive sales volume is built up, tle more rapiJly fixeJ costs car be amortizeJ over a lar,e
proJuctior volume, arJ tle more rapiJly urit costs will fall.
SecorJ, a firm may rot be able to attair ar efficiert scale of proJuctior urless it
serves ,lobal markets. lr tle automobile irJustry, for example, ar efficiertly scaleJ fac-
tory is ore Jesi,reJ to proJuce about 2OO,OOO urits a year. Automobile firms woulJ pre-
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fer to proJuce a sir,le moJel from eacl factory sirce tlis elimirates tle costs associateJ
witl switclir, proJuctior from ore moJel to arotler. lf Jomestic JemarJ for a partic-
ular moJel is orly 1OO,OOO urits a year, tle irability to attair a 2OO,OOO-urit output will
Jrive up avera,e urit costs. Ly servir, irterratioral markets as well, lowever, tle firm
may be able to pusl proJuctior volume up to 2OO,OOO urits a year, tlereby reapir,
,reater scale ecoromies, lowerir, urit costs, arJ boostir, profitability. Ly servir, Jo-
mestic arJ irterratioral markets from its proJuctior facilities a firm may be able to uti-
lize tlose facilities more irtersively. lor example, if lrtel solJ microprocessors orly ir
tle LriteJ States, it may orly be able to keep its factories oper for ore slift, five Jays
a week. Ly servir, irterratioral markets from tle same factories, lrtel car utilize its
proJuctive assets more irtersively, wlicl trarslates irto li,ler capital proJuctivity arJ
,reater profitability.
lirally, as ,lobal sales ircrease tle size of tle erterprise, so its bar,airir, power witl
suppliers ircreases, wlicl may allow it to attair ecoromies of scale ir purclasir,, bar-
,airir, Jowr tle cost of key irputs arJ boostir, profitability tlat way. lor example,
Wal-Mart las beer able to use its erormous sales volume as a lever to bar,air Jowr tle
price it pays suppliers for merclarJise solJ tlrou,l its stores.
Strategic Significance
1le strate,ic si,rificarce of tle experierce curve is clear. Movir, Jowr tle experierce
curve allows a firm to reJuce its cost of creatir, value (to lower C ir li,ure 12.2) arJ ir-
crease its profitability. 1le firm tlat moves Jowr tle experierce curve most rapiJly will
lave a cost aJvarta,e vis-a-vis its competitors. lirm A ir li,ure 12.5, because it is far-
tler Jowr tle experierce curve, las a clear cost aJvarta,e over firm L.
Mary of tle urJerlyir, sources of experierce-baseJ cost ecoromies are plart baseJ.
1lis is true for most learrir, effects as well as for tle ecoromies of scale JeriveJ by
spreaJir, tle fixeJ costs of builJir, proJuctive capacity over a lar,e output, attairir,
ar efficiert scale of output, arJ utilizir, a plart more irtersively. 1lus, ore key to pro-
,ressir, JowrwarJ or tle experierce curve as rapiJly as possible is to ircrease tle vol-
ume proJuceJ by a sir,le plart as rapiJly as possible. Lecause ,lobal markets are lar,er
tlar Jomestic markets, a firm tlat serves a ,lobal market from a sir,le locatior is likely
to builJ accumulateJ volume more quickly tlar a firm tlat serves orly its lome market
or tlat serves multiple markets from multiple proJuctior locatiors. 1lus, servir, a
,lobal market from a sir,le locatior is corsistert witl movir, Jowr tle experierce
curve arJ establislir, a low-cost positior. lr aJJitior, to ,et Jowr tle experierce curve
rapiJly, a firm may reeJ to price arJ market a,,ressively so JemarJ will exparJ rapiJly.
lt will also reeJ to builJ sufficiert proJuctior capacity for servir, a ,lobal market. Also,
Cunulalive Oulpul
&
%
FIGURE 12. 5
The Experience Curve
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tle cost aJvarta,es of servir, tle worlJ market from a sir,le locatior will be ever more
si,rificart if tlat locatior is tle optimal ore for performir, tle particular value creatior
activity.
rce a firm las establisleJ a low-cost positior, it car act as a barrier to rew compe-
titior. Specifically, ar establisleJ firm tlat is well Jowr tle experierce curve, sucl as
firm A ir li,ure 12.5, car price so tlat it is still makir, a profit wlile rew ertrarts, wlicl
are fartler up tle curve, are sufferir, losses.
1le classic example of tle successful pursuit of sucl a strate,y corcerrs tle Japarese
corsumer electrorics compary Matsuslita. Alor, witl Sory arJ llilips, Matsuslita was
ir tle race to Jevelop a commercially viable viJeocassette recorJer ir tle 197Os. Al-
tlou,l Matsuslita iritially la,,eJ belirJ llilips arJ Sory, it was able to ,et its \HS
format accepteJ as tle worlJ starJarJ arJ to reap erormous experierce curve-baseJ cost
ecoromies ir tle process. 1lis cost aJvarta,e subsequertly corstituteJ a formiJable bar-
rier to rew competitior. Matsuslita's strate,y was to builJ ,lobal volume as rapiJly as
possible. 1o ersure it coulJ accommoJate worlJwiJe JemarJ, tle firm ircreaseJ its pro-
Juctior capacity 33-folJ from 2O5,OOO urits ir 1977 to 6.8 millior urits by 198+. Ly serv-
ir, tle worlJ market from a sir,le locatior ir Japar, Matsuslita was able to realize
si,rificart learrir, effects arJ ecoromies of scale. 1lese alloweJ Matsuslita to Jrop its
prices 5O percert witlir five years of sellir, its first \HS-format \Cl. As a result, Mat-
suslita was tle worlJ's major \Cl proJucer by 1983, accourtir, for about +5 percert of
worlJ proJuctior arJ erjoyir, a si,rificart cost aJvarta,e over its competitors. 1le
rext lar,est firm, Hitacli, accourteJ for orly 11.1 percert of worlJ proJuctior ir 1983.
21
1oJay, firms sucl as lrtel are tle masters of tlis kirJ of strate,y. 1le costs of builJir, a
state-of-tle-art facility to marufacture microprocessors are so lar,e (easily ir excess of $1
billior) tlat to make tlis irvestmert pay lrtel must pursue experierce curve effects, serv-
ir, worlJ markets from a limiteJ rumber of plarts to maximize tle cost ecoromies tlat
Jerive from scale arJ learrir, effects.
LEVERAGING SUBSIDIARY SKILLS
lmplicit ir our earlier Jiscussior of core competercies is tle iJea tlat valuable skills are
JevelopeJ first at lome arJ tler trarsferreJ to forei,r operatiors. 1lus, Wal-Mart Je-
velopeJ its retailir, skills ir tle LriteJ States before trarsferrir, tlem to forei,r loca-
tiors. However, for more mature multiratiorals tlat lave alreaJy establisleJ a retwork
of subsiJiary operatiors ir forei,r markets, tle Jevelopmert of valuable skills car just as
well occur ir forei,r subsiJiaries.
22
Skills car be createJ arywlere witlir a multira-
tioral's ,lobal retwork of operatiors, wlerever people lave tle opporturity arJ ircer-
tive to try rew ways of Joir, tlir,s. 1le creatior of skills tlat lelp to lower tle costs of
proJuctior, or to erlarce perceiveJ value arJ support li,ler proJuct pricir,, is rot tle
moropoly of tle corporate certer.
Levera,ir, tle skills createJ witlir subsiJiaries arJ applyir, tlem to otler operatiors
witlir tle firm's ,lobal retwork may create value. lor example, McDoralJ's ircreasir,ly
is firJir, tlat its forei,r frarclisees are a source of valuable rew iJeas. laceJ witl slow
,rowtl ir lrarce, its local frarclisees lave be,ur to experimert rot orly witl tle meru,
but also witl tle layout arJ tleme of restaurarts. Core are tle ubiquitous ,olJer arcles,
,ore too are mary of tle utilitariar clairs arJ tables arJ otler plastic features of tle fast-
fooJ ,iart. Mary McDoralJ's restaurarts ir lrarce row lave larJwooJ floors, exposeJ
brick walls, arJ ever armclairs. Half of tle 93O or so outlets ir lrarce lave beer up-
,raJeJ to a level tlat woulJ make tlem urreco,rizable to ar Americar. 1le meru, too,
las beer clar,eJ to ircluJe premier sarJwicles, sucl as clicker or focaccia breaJ,
priceJ some 3O percert li,ler tlar tle avera,e lambur,er. lr lrarce at least, tle strat-
e,y seems to be workir,. lollowir, tle clar,e, ircreases ir same-store sales rose from 1
percert arrually to 3.+ percert. lmpresseJ witl tle impact, McDoralJ's executives are
row corsiJerir, aJoptir, similar clar,es at otler McDoralJ's restaurarts ir markets
wlere same-store sales ,rowtl is slu,,isl, ircluJir, tle LriteJ States.
23
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lr arotler example, Hewlett-lackarJ las JecertralizeJ autlority for tle Jesi,r arJ
proJuctior of mary of its leaJir,-eJ,e irk-jet prirters to its operatior ir Sir,apore.
Hewlett-lackarJ maJe tlis Jecisior after employees ir Sir,apore Jistir,uisleJ tlem-
selves by firJir, ways to reJuce proJuctior costs tlrou,l better proJuct Jesi,r. Hewlett-
lackarJ row views its Sir,apore subsiJiary as ar importart source for valuable rew
krowleJ,e about proJuctior arJ proJuct Jesi,r tlat car be applieJ to otler activities
witlir tle firm's ,lobal retwork of operatiors.
2+
lor tle mara,ers of tle multiratioral erterprise, tlis pleromeror creates importart
rew claller,es. lirst, tley must lave tle lumility to reco,rize tlat valuable skills tlat
leaJ to competercies car arise arywlere witlir tle firm's ,lobal retwork, rot just at tle
corporate certer. SecorJ, tley must establisl ar ircertive system tlat ercoura,es local
employees to acquire rew skills. 1lis is rot as easy as it sourJs. Creatir, rew skills ir-
volves a Je,ree of risk. Not all rew skills aJJ value. lor every valuable iJea createJ by a
McDoralJ's subsiJiary ir a forei,r courtry, tlere may be several failures. 1le mara,e-
mert of tle multiratioral must irstall ircertives tlat ercoura,e employees to take tle
recessary risks. 1le compary must rewarJ people for successes arJ rot sarctior tlem ur-
recessarily for takir, risks tlat JiJ rot par out. 1lirJ, mara,ers must lave a process for
iJertifyir, wler valuable rew skills lave beer createJ ir a subsiJiary. ArJ firally, tley
reeJ to act as facilitators, lelpir, to trarsfer valuable skills witlir tle firm.
SUMMARY
We lave seer low firms tlat exparJ ,lobally car ircrease tleir profitability arJ profit
,rowtl by erterir, rew markets wlere irJi,erous competitors lack similar competer-
cies, by lowerir, costs arJ aJJir, value to tleir proJuct offerir, tlrou,l tle attairmert
of locatior ecoromies, by exploitir, experierce curve effects, arJ by trarsferrir, valu-
able skills betweer tleir ,lobal retwork of subsiJiaries. lor completeress it sloulJ be
roteJ tlat strate,ies tlat ircrease profitability may also exparJ a firm's busiress, arJ tlus
erable it to attair a li,ler rate of profit ,rowtl. lor example, by simultareously realiz-
ir, locatior ecoromies arJ experierce effects a firm may be able to proJuce a more
li,lly valueJ proJuct at a lower urit cost, tlereby boostir, profitability. 1le ircrease ir
tle perceiveJ value of tle proJuct may also attract more customers, tlereby ,rowir, rev-
erues arJ profits as well. lurtlermore, ratler tlar raisir, prices to reflect tle li,ler per-
ceiveJ value of tle proJuct, tle firm's mara,ers may elect to lolJ prices low ir orJer to
ircrease ,lobal market slare arJ attair ,reater scale ecoromies (ir otler worJs, tley may
elect to offer corsumers better value for morey"). Sucl a strate,y coulJ ircrease tle
firm's rate of profit ,rowtl ever furtler, sirce corsumers will be attracteJ by prices tlat
are low relative to value. 1le strate,y mi,lt also ircrease profitability if tle scale
ecoromies tlat result from market slare ,airs are substartial. lr sum, mara,ers reeJ to
keep ir mirJ tle complex relatiorslip betweer profitability arJ profit ,rowtl wler
makir, strate,ic Jecisiors about pricir,.
lirms tlat compete ir tle ,lobal marketplace typically face two types of competitive
pressure tlat effect tleir ability to realize locatior ecoromies arJ experierce effects,
to levera,e proJucts arJ trarsfer competercies arJ skills witlir tle erterprise. 1ley
face ressures jor cost reJuct|ons arJ ressures to oe |occ||y resons|ve (see li,ure 12.6).
25
1lese competitive pressures place corflictir, JemarJs or a firm. lesporJir, to pres-
sures for cost reJuctiors requires tlat a firm try to mirimize its urit costs. Lut re-
sporJir, to pressures to be locally resporsive requires tlat a firm Jifferertiate its
proJuct offerir, arJ marketir, strate,y from courtry to courtry ir ar effort to accom-
moJate tle Jiverse JemarJs arisir, from ratioral Jiffererces ir corsumer tastes arJ
prefererces, busiress practices, Jistributior clarrels, competitive corJitiors, arJ
Cost Pressures and Pressures for Local Responsiveness
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,overrmert policies. Lecause Jifferertiatior across courtries car irvolve si,rificart
Juplicatior arJ a lack of proJuct starJarJizatior, it may raise costs.
Wlile some erterprises, sucl as firm A ir li,ure 12.6, face li,l pressures for cost re-
Juctiors arJ low pressures for local resporsiveress, arJ otlers, sucl as firm L, face low
pressures for cost reJuctiors arJ li,l pressures for local resporsiveress, mary comparies
are ir tle positior of firm C. 1ley face li,l pressures for oot| cost reJuctiors arJ local
resporsiveress. Dealir, witl tlese corflictir, arJ cortraJictory pressures is a Jifficult
strate,ic claller,e, primarily because beir, locally resporsive terJs to raise costs.
PRESSURES FOR COST REDUCTIONS
lr competitive ,lobal markets, irterratioral busiresses ofter face pressures for cost re-
Juctiors. lesporJir, to pressures for cost reJuctior requires a firm to try to lower tle
costs of value creatior. A marufacturer, for example, mi,lt mass-proJuce a starJarJizeJ
proJuct at tle optimal locatior ir tle worlJ, wlerever tlat mi,lt be, to realize
ecoromies of scale, learrir, effects, arJ locatior ecoromies. Alterratively, a firm mi,lt
outsource certair furctiors to low-cost forei,r suppliers ir ar attempt to reJuce costs.
1lus, mary computer comparies lave outsourceJ tleir teleplore-baseJ customer serv-
ice furctiors to lrJia, wlere qualifieJ teclriciars wlo speak Lr,lisl car be lireJ for a
lower wa,e rate tlar ir tle LriteJ States. lr tle same marrer, a retailer sucl as Wal-
Mart mi,lt pusl its suppliers (marufacturers) to Jo tle same. (1le pressure tlat Wal-
Mart las placeJ or its suppliers to reJuce prices las beer citeJ as a major cause of tle
trerJ amor, Nortl Americar marufacturers to slift proJuctior to Clira.)
26
A service
busiress sucl as a bark mi,lt resporJ to cost pressures by movir, some back-office furc-
tiors, sucl as irformatior processir,, to Jevelopir, ratiors wlere wa,e rates are lower.
lressures for cost reJuctior car be particularly irterse ir irJustries proJucir,
commoJity-type proJucts wlere mearir,ful Jifferertiatior or rorprice factors is Jiffi-
cult arJ price is tle mair competitive weapor. 1lis terJs to be tle case for proJucts tlat
serve uriversal reeJs. Lniversa neeJs exist wler tle tastes arJ prefererces of cor-
sumers ir Jifferert ratiors are similar if rot iJertical. 1lis is tle case for corvertioral
commoJity proJucts sucl as bulk clemicals, petroleum, steel, su,ar, arJ tle like. lt also
terJs to be tle case for mary irJustrial arJ corsumer proJucts; for example, larJlelJ
calculators, semicorJuctor clips, persoral computers, arJ liquiJ crystal Jisplay screers.
Firn A
Firn B
Firn B
High Low
Pressures for LocaI Responsiveness
FIGURE 12. 6
Pressures lor Cosl
Feduclions and Local
Fesponsiveness
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lressures for cost reJuctiors are also irterse ir irJustries wlere major competitors are
baseJ ir low-cost locatiors, wlere tlere is persistert excess capacity, arJ wlere cor-
sumers are powerful arJ face low switclir, costs. 1le liberalizatior of tle worlJ traJe
arJ irvestmert ervirormert ir recert JecaJes, by facilitatir, ,reater irterratioral com-
petitior, las ,ererally ircreaseJ cost pressures.
27
PRESSURES FOR LOCAL RESPONSIVENESS
lressures for local resporsiveress arise from ratioral Jiffererces ir corsumer tastes arJ
prefererces, irfrastructure, accepteJ busiress practices, arJ Jistributior clarrels, arJ
from lost-,overrmert JemarJs. lesporJir, to pressures to be locally resporsive re-
quires a firm to Jifferertiate its proJucts arJ marketir, strate,y from courtry to courtry
to accommoJate tlese factors, all of wlicl terJs to raise tle firm's cost structure.
Differences in Customer Tastes and Preferences
Stror, pressures for local resporsiveress emer,e wler customer tastes arJ prefererces
Jiffer si,rificartly betweer courtries, as tley ofter Jo for Jeeply embeJJeJ listoric or
cultural reasors. lr sucl cases, a multiratioral's proJucts arJ marketir, messa,e lave to
be customizeJ to appeal to tle tastes arJ prefererces of local customers. 1lis typically
creates pressure to Jele,ate proJuctior arJ marketir, resporsibilities arJ furctiors to a
firm's overseas subsiJiaries.
lor example, tle automobile irJustry ir tle 198Os arJ early 199Os moveJ towarJ tle
creatior of worlJ cars." 1le iJea was tlat ,lobal comparies sucl as Cereral Motors, lorJ,
arJ 1oyota woulJ be able to sell tle same basic velicle tle worlJ over, sourcir, it from cer-
tralizeJ proJuctior locatiors. lf successful, tle strate,y woulJ lave erableJ automobile
comparies to reap si,rificart ,airs from ,lobal scale ecoromies. However, tlis strate,y fre-
quertly rar a,rourJ upor tle larJ rocks of corsumer reality. Corsumers ir Jifferert auto-
mobile markets seem to lave Jifferert tastes arJ prefererces, arJ JemarJeJ Jifferert types
of velicles. Nortl Americar corsumers slow a stror, JemarJ for pickup trucks. 1lis is
particularly true ir tle Soutl arJ West wlere mary families lave a pickup truck as a sec-
orJ or tlirJ car. Lut ir Luropear courtries, pickup trucks are seer purely as utility velicles
arJ are purclaseJ primarily by firms ratler tlar irJiviJuals. As a corsequerce, tle proJ-
uct mix arJ marketir, messa,e reeJs to be tailoreJ to corsiJer tle Jifferert rature of Je-
marJ ir Nortl America arJ Lurope. Arotler example tlat illustrates tle reeJ to resporJ
to ratioral Jiffererces ir tastes arJ prefererces appears ir tle accomparyir, Mara,emert
locus, wlicl looks at tle experierce of M1\ Networks ir forei,r markets.
Some commertators lave ar,ueJ tlat customer JemarJs for local customizatior are
or tle Jeclire worlJwiJe.
28
AccorJir, to tlis ar,umert, moJerr commuricatiors arJ
trarsport teclrolo,ies lave createJ tle corJitiors for a corver,erce of tle tastes arJ
prefererces of corsumers from Jifferert ratiors. 1le result is tle emer,erce of erormous
,lobal markets for starJarJizeJ corsumer proJucts. 1le worlJwiJe acceptarce of Mc-
DoralJ's lambur,ers, Coca-Cola, Cap clotles, Nokia cell plores, arJ Sory llaySta-
tiors, all of wlicl are solJ ,lobally as starJarJizeJ proJucts, are ofter citeJ as eviJerce
of tle ircreasir, lomo,ereity of tle ,lobal marketplace.
However, as illustrateJ by tle case of M1\, tlis ar,umert seems somewlat raive. Si,-
rificart Jiffererces ir corsumer tastes arJ prefererces still exist across ratiors arJ cultures.
Mara,ers ir irterratioral busiresses Jo rot yet lave tle luxury of beir, able to i,rore
tlese Jiffererces, arJ tley may rot for a lor, time to come. Lver ir a moJerr irJustry sucl
as tle cell plore busiress, importart ratioral Jiffererces ir corsumer usa,e patterrs car
be observeJ. Americars, for example, terJ to tlirk of cell plores primarily as Jevices for
talkir,, arJ rot as Jevices tlat car also serJ e-mails arJ browse tle Web. Corsequertly,
wler sellir, to L.S. corsumers, cell plore marufacturers focus more or slim ,ooJ looks
arJ less or aJvarceJ furctiors arJ features. 1lis is ir Jirect cortrast to Asia arJ Lurope,
wlere text messa,ir, arJ Web browsir, furctiors lave beer mucl more wiJely embraceJ.
A cultural issue seems to be at work lere. leople ir Lurope arJ Asia ofter lave more time
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to browse tle Web or tleir plores because tley sperJ more time commutir, or trairs,
wlile Americars terJ to sperJ more time ir cars, wlere tleir larJs are occupieJ.
29
Differences in Infrastructure and TraditionaI Practices
lressures for local resporsiveress arise from Jiffererces ir irfrastructure or traJitioral
practices amor, courtries, creatir, a reeJ to customize proJucts accorJir,ly. lulfillir,
tlis reeJ may require tle Jele,atior of marufacturir, arJ proJuctior furctiors to for-
ei,r subsiJiaries. lor example, ir Nortl America, corsumer electrical systems are baseJ
or 11O volts, wlereas ir some Luropear courtries, 2+O-volt systems are starJarJ. 1lus,
Jomestic electrical appliarces lave to be customizeJ for tlis Jiffererce ir irfrastructure.
1raJitioral practices also ofter vary across ratiors. lor example, ir Lritair, people Jrive
or tle left-larJ siJe of tle roaJ, creatir, a JemarJ for ri,lt-larJ-Jrive cars, wlereas ir
lrarce (arJ tle rest of Lurope), people Jrive or tle ri,lt-larJ siJe of tle roaJ arJ tlere-
fore wart left-larJ-Jrive cars. bviously, automobiles lave to be customizeJ to accom-
moJate tlis Jiffererce ir traJitioral practice.
Altlou,l mary ratioral Jiffererces ir irfrastructure are rooteJ ir listory, some are
quite recert. lor example, ir tle wireless telecommuricatiors irJustry Jifferert teclri-
cal starJarJs exist ir Jifferert parts of tle worlJ. A teclrical starJarJ krowr as CSM is
MI oes IobaI, with a LocaI Acceot
nelworks U.S. nanagers lhoughl Europeans would llock
lo lhe Anerican progranning. Bul while viewers in Eu
rope shared a connon inleresl in a handlul ol global
superslars, who al lhe line included adonna and
ichael Jackson, lheir lasles lurned oul lo be
surprisingly local. vhal was
popular in Cernany nighl nol
be popular in Creal Brilain.
any slaples ol lhe Anerican
nusic scene lell Europeans
cold. TV sullered as a resull.
Soon local copycal slalions were
springing up in Europe lhal locused
on lhe nusic scene in individual coun
lries. They look viewers and adverlisers away lron TV.
As explained by Ton Freslon, chairnan ol TV el
works, ve were going lor lhe nosl shallow layer ol
whal uniled viewers and broughl lhen logelher. l didnl
go over loo well.
n !995, TV changed ils slralegy and broke Europe
inlo regional leeds, ol which lhere are now eighl: one lor
lhe Uniled Kingdon and reland, anolher lor Cernany,
Auslria, and Swilzerland, one lor Scandinavia, one lor
laly, one lor France, one lor Spain, one lor Holland, and
a leed lor olher European nalions including Belgiun and
Creece. The nelwork adopled lhe sane localizalion slral
egy elsewhere in lhe world. For exanple, in Asia il has
an EnglishHindi channel lor ndia, separale andrine
TV el
works has
becone a synbol ol globalizalion. Eslablished in !93!, lhe
U.S.based nusic TV nelwork has been expanding oulside
ol ils orlh Anerican base since !937 when il opened
TV Europe. ow owned by nedia
conglonerale Viacon, TV elworks,
which includes siblings ickelodeon and
VH!, lhe nusic slalion lor lhe aging baby
booners, generales nore lhan $! billion
in revenues oulside lhe Uniled Slales.
Since !937, TV has becone lhe nosl
ubiquilous cable progranner in lhe
world. By 2004 lhe nelwork had 72 chan
nels, or dislincl leeds, lhal reached a conbined lolal ol
32! nillion households in !40 counlries.
vhile lhe Uniled Slales slill leads in nunber ol house
holds, wilh 70 nillion, lhe nosl rapid growlh is else
where, parlicularly in Asia, where nearly lwolhirds ol lhe
regions 3 billion people are under 35, lhe niddle class is
expanding quickly, and TV ownership is spreading rapidly.
TV elworks ligures lhal every second ol every day
alnosl 2 nillion people are walching TV around lhe
world, lhe najorily oulside lhe Uniled Slales.
Despile ils inlernalional success, TVs global expan
sion gol oll lo a weak slarl. n !937, il piped a single leed
across Europe alnosl enlirely conposed ol Anerican
progranning wilh Englishspeaking veejays. aively, lhe
MANAGEMENT FOCUS
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commor ir Lurope, arJ ar alterrative starJarJ, CDMA, is more commor ir tle LriteJ
States arJ parts of Asia. Lquipmert Jesi,reJ for CSM will rot work or a CDMA ret-
work, arJ vice versa. 1lus, comparies sucl as Nokia, Motorola, arJ Lricssor, wlicl
marufacture wireless larJsets arJ irfrastructure sucl as switcles, reeJ to customize
tleir proJuct offerir, accorJir, to tle teclrical starJarJ prevailir, ir a ,iver courtry.
Differences in Distribution ChanneIs
A firm's marketir, strate,ies may lave to be resporsive to Jiffererces ir Jistributior
clarrels amor, courtries, wlicl may recessitate tle Jele,atior of marketir, furctiors
to ratioral subsiJiaries. lr tle plarmaceutical irJustry, for example, tle Lritisl arJ
Japarese Jistributior systems are raJically Jifferert from tle L.S. system. Lritisl arJ
Japarese Joctors will rot accept or resporJ favorably to a L.S.-style li,l-pressure sales
force. 1lus, plarmaceutical comparies lave to aJopt Jifferert marketir, practices ir
Lritair arJ Japar compareJ witl tle LriteJ States-soft sell versus larJ sell.
Host Government Demands
Lcoromic arJ political JemarJs imposeJ by lost-courtry ,overrmerts may require lo-
cal resporsiveress. lor example, plarmaceutical comparies are subject to local clirical
425
leeds lor China and Taiwan, a Korean leed lor Soulh Ko
rea, a Bahasalanguage leed lor ndonesia, Japanese
leed lor Japan, and so on. Digilal and salellile lechnology
have nade lhe localizalion ol progranning cheaper and
easier. TV elworks can now bean hall a dozen leeds
oll one salellile lransponder.
vhile TV elworks exercises crealive conlrol over
lhese dillerenl leeds, and while all lhe channels have lhe
sane laniliar lrenelic look and leel ol TV in lhe Uniled
Slales, a signilicanl share ol lhe progranning and con
lenl is now local. vhen TV opens a local slalion now,
il begins wilh expalriales lron elsewhere in lhe world lo
do a gene lransler ol conpany cullure and operaling
principles. Once lhese are eslablished, however, lhe nel
work swilches lo local enployees and lhe expalriales
nove on. The idea is lo gel inside lhe heads ol lhe lo
cal populalion and produce progranning lhal nalches
lheir lasles. Allhough as nuch as 60 percenl ol lhe pro
granning slill originales in lhe Uniled Slales, wilh sla
ples such as The Feal vorld having equivalenls in
dillerenl counlries, an increasing share ol progranning
is local in conceplion. n laly, TV Kilchen conbines
cooking wilh a nusic counldown. Erolica airs in Brazil
and lealures a panel ol youngslers discussing sex. The
ndian channel produces 2! honegrown shows hosled
by local veejays who speak Hinglish, a cilybred breed
ol Hindi and English. Hil shows include TV Crickel in
Conlrol, appropriale lor a land where crickel is a nalional
obsession, TV Houselull, which hones in on Hindi
liln slars (ndia has lhe biggesl liln induslry oulside ol
Hollywood, and TV Bakra, which is nodeled aller
Candid Canera.
This localizalion push has reaped big benelils lor TV,
capluring viewers back lron local inilalors. n ndia, ral
ings increased by nore lhan 700 percenl belween !996
when lhe localizalion push began and 2000. n lurn, lo
calizalion helps TV lo caplure nore ol lhose all
inporlanl adverlising revenues, even lron olher
nullinalionals such as CocaCola, whose own adverlis
ing budgels are ollen locally delernined. n Europe,
TVs adverlising revenues increased by 50 percenl be
lween !995 and 2000. vhile lhe lolal narkel lor pan
European adverlising is valued al jusl $200 nillion, lhe
lolal narkel lor local adverlising across Europe is a nuch
bigger pie, valued al $!2 billion. TV now gels 70 per
cenl ol ils European adverlising revenue lron local spols,
up lron !5 percenl in !995. Sinilar lrends are evidenl
elsewhere in lhe world.
Sources: . Cunlher, TVs Passage lo ndia, *SVXYRI Augusl 9,
2004, pp. !!7-!22, B. Pulley and A. Tanzer, Sunners Censlone,
*SVFIW February 2!, 2000, pp. !07-!!, K. Hollnan, Youlh TVs Old
Hand Prepares lor lhe Digilal Challenge, *MRERGMEP8MQIW February
!3, 2000, p. 3, presenlalion by Sunner . Fedslone, chairnan and
CEO, Viacon nc., delivered lo Salonon Snilh Barney !!lh Annual
Clobal Enlerlainnenl edia, Teleconnunicalions Conlerence,
Scollsdale, AZ, January 3, 200!, archived al www.viacon.con, and
Viacon !0K Slalenenl, 2003.
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testir,, re,istratior proceJures, arJ pricir, restrictiors, all of wlicl make it recessary
tlat tle marufacturir, arJ marketir, of a Jru, sloulJ meet local requiremerts. Lecause
,overrmerts arJ ,overrmert a,ercies cortrol a si,rificart proportior of tle lealtl care
buJ,et ir most courtries, tley are ir a powerful positior to JemarJ a li,l level of local
resporsiveress.
More ,ererally, tlreats of protectiorism, ecoromic ratioralism, arJ local cortert rules
(wlicl require tlat a certair percerta,e of a proJuct sloulJ be marufactureJ locally) Jic-
tate tlat irterratioral busiresses marufacture locally. lor example, corsiJer LombarJier,
tle CaraJiar-baseJ marufacturer of railcars, aircraft, jet boats, arJ srowmobiles. Lom-
barJier las 12 railcar factories across Lurope. Critics of tle compary ar,ue tlat tle re-
sultir, Juplicatior of marufacturir, facilities leaJs to li,l costs arJ lelps explair wly
LombarJier makes lower profit mar,irs or its railcar operatiors tlar or its otler busiress
lires. lr reply, mara,ers at LombarJier ar,ue tlat ir Lurope, irformal rules witl re,arJ to
local cortert favor people wlo use local workers. 1o sell railcars ir Cermary, tley claim,
you must marufacture ir Cermary. 1le same ,oes for Lel,ium, Austria, arJ lrarce. 1o
try to aJJress its cost structure ir Lurope, LombarJier las certralizeJ its er,ireerir, arJ
purclasir, furctiors, but it las ro plars to certralize marufacturir,.
3O
lressures for local resporsiveress imply tlat it may rot be possible for a firm to realize tle
full berefits from ecoromies of scale, learrir, effects, arJ locatior ecoromies. lt may rot
be possible to serve tle ,lobal marketplace from a sir,le low-cost locatior, proJucir, a
,lobally starJarJizeJ proJuct, arJ marketir, it worlJwiJe to attair tle cost reJuctiors
associateJ witl experierce effects. 1le reeJ to customize tle proJuct offerir, to local
corJitiors may work a,airst tle implemertatior of sucl a strate,y. lor example, auto-
mobile firms lave fourJ tlat Japarese, Americar, arJ Luropear corsumers JemarJ Jif-
ferert kirJs of cars, arJ tlis recessitates proJucir, proJucts tlat are customizeJ for local
markets. lr resporse, firms sucl as HorJa, lorJ, arJ 1oyota are pursuir, a strate,y of es-
tablislir, top-to-bottom Jesi,r arJ proJuctior facilities ir eacl of tlese re,iors so tlat
tley car better serve local JemarJs. Altlou,l sucl customizatior brir,s berefits, it also
limits tle ability of a firm to realize si,rificart scale ecoromies arJ locatior ecoromies.
lr aJJitior, pressures for local resporsiveress imply tlat it may rot be possible to
levera,e skills arJ proJucts associateJ witl a firm's core competercies wlolesale from
ore ratior to arotler. Corcessiors ofter lave to be maJe to local corJitiors. Despite
beir, JepicteJ as poster boy" for tle proliferatior of starJarJizeJ ,lobal proJucts, ever
McDoralJ's las fourJ tlat it las to customize its proJuct offerir,s (i.e., its meru) to ac-
court for ratioral Jiffererces ir tastes arJ prefererces.
How Jo Jiffererces ir tle strer,tl of pressures for cost reJuctiors versus tlose for lo-
cal resporsiveress affect tle firm's cloice of strate,y` lirms typically cloose amor, four
mair strate,ic postures wler competir, irterratiorally. 1lese car be claracterizeJ as a
,lobal starJarJizatior strate,y, a localizatior strate,y, a trarsratioral strate,y, arJ ar ir-
terratioral strate,y.
31
1le appropriateress of eacl strate,y varies ,iver tle extert of
pressures for cost reJuctiors arJ local resporsiveress. li,ure 12.7 illustrates tle corJi-
tiors urJer wlicl eacl of tlese strate,ies is most appropriate.
GLOBAL STANDARDIZATION STRATEGY
lirms tlat pursue a goba stanJarJization strategy focus or ircreasir, profitability arJ
profit ,rowtl by reapir, tle cost reJuctiors tlat come from ecoromies of scale, learrir,
effects, arJ locatior ecoromies; tlat is, tleir strate,ic ,oal is to pursue a low-cost strat-
e,y or a ,lobal scale. 1le proJuctior, marketir,, arJ l&D activities of firms pursuir, a
,lobal starJarJizatior strate,y are corcertrateJ ir a few favorable locatiors. lirms pur-
suir, a ,lobal starJarJizatior strate,y try rot to customize tleir proJuct offerir, arJ
Cboosing a Strategy
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marketir, strate,y to local corJitiors because customizatior irvolves slorter proJuctior
rurs arJ tle Juplicatior of furctiors, wlicl terJs to raise costs. lrsteaJ, tley prefer to
market a starJarJizeJ proJuct worlJwiJe so tlat tley car reap tle maximum berefits
from ecoromies of scale arJ learrir, effects. 1ley also terJ to use tleir cost aJvarta,e
to support a,,ressive pricir, ir worlJ markets.
1lis strate,y makes most serse wler tlere are stror, pressures for cost reJuctiors arJ
JemarJs for local resporsiveress are mirimal. lrcreasir,ly, tlese corJitiors prevail ir
mary irJustrial ,ooJs irJustries, wlose proJucts ofter serve uriversal reeJs. lr tle semi-
corJuctor irJustry, for example, ,lobal starJarJs lave emer,eJ, creatir, erormous Je-
marJs for starJarJizeJ ,lobal proJucts. AccorJir,ly, comparies sucl as lrtel, 1exas
lrstrumerts, arJ Motorola all pursue a ,lobal starJarJizatior strate,y. However, tlese
corJitiors are rot yet fourJ ir mary corsumer ,ooJs markets, wlere JemarJs for local
resporsiveress remair li,l. 1le strate,y is irappropriate wler JemarJs for local re-
sporsiveress are li,l.
LOCALIZATION STRATEGY
A ocaization strategy focuses or ircreasir, profitability by customizir, tle firm's ,ooJs
or services so tlat tley proviJe a ,ooJ matcl to tastes arJ prefererces ir Jifferert ratioral
markets. Localizatior is most appropriate wler tlere are substartial Jiffererces across ra-
tiors witl re,arJ to corsumer tastes arJ prefererces, arJ wlere cost pressures are rot too
irterse. Ly customizir, tle proJuct offerir, to local JemarJs, tle firm ircreases tle value
of tlat proJuct ir tle local market. r tle JowrsiJe, because it irvolves some Juplica-
tior of furctiors arJ smaller proJuctior rurs, customizatior limits tle ability of tle firm
to capture tle cost reJuctiors associateJ witl mass-proJucir, a starJarJizeJ proJuct for
,lobal corsumptior. 1le strate,y may make serse, lowever, if tle aJJeJ value associateJ
witl local customizatior supports li,ler pricir,, wlicl erables tle firm to recoup its
li,ler costs, or if it leaJs to substartially ,reater local JemarJ, erablir, tle firm to reJuce
costs tlrou,l tle attairmert of some scale ecoromies ir tle local market.
M1\ is a ,ooJ example of a compary tlat las laJ to pursue a localizatior strate,y
(see tle Mara,emert locus). lf M1\ laJ rot localizeJ its pro,rammir, to matcl tle
JemarJs of viewers ir Jifferert ratiors, it woulJ lave lost market slare to local com-
petitors, its aJvertisir, reverues woulJ lave faller, arJ its profitability woulJ lave Je-
clireJ. 1lus, ever tlou,l it raiseJ costs, localizatior was a strate,ic imperative at M1\.
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FIGURE 12. 7
Four Basic Slralegies
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At tle same time, firms sucl as M1\ still lave to keep ar eye or costs. lirms pursuir,
a localizatior strate,y still reeJ to be efficiert arJ, wlerever possible, to capture some
scale ecoromies from tleir ,lobal reacl. As roteJ earlier, mary automobile comparies
lave fourJ tlat tley lave to customize some of tleir proJuct offerir,s to local market Je-
marJs-for example, proJucir, lar,e pickup trucks for L.S. corsumers arJ small fuel-
efficiert cars for Luropears arJ Japarese. At tle same time, tlese multiratiorals try to ,et
some scale ecoromies from tleir ,lobal volume by usir, commor velicle platforms arJ
comporerts across mary Jifferert moJels, arJ marufacturir, tlose platforms arJ com-
porerts at efficiertly scaleJ factories tlat are optimally locateJ. Ly Jesi,rir, tleir proJ-
ucts ir tlis way, tlese comparies lave beer able to localize tleir proJuct offerir,, yet
simultareously capture some scale ecoromies, learrir, effects, arJ locatior ecoromies.
TRANSNATIONAL STRATEGY
We lave ar,ueJ tlat a ,lobal starJarJizatior strate,y makes most serse wler cost pres-
sures are irterse, arJ JemarJs for local resporsiveress limiteJ. Corversely, a localizatior
strate,y makes most serse wler JemarJs for local resporsiveress are li,l, but cost pres-
sures are moJerate or low. Wlat lappers, lowever, wler tle firm simultareously faces
Ihe 6haogiog 8trategy oI eoeraI Motors
Jusl a lew years ago, lor exanple, Cs Brazilian laclo
ries were churning oul U.S.designed Chevy Chevelles
lhal hadnl been produced in orlh Anerica lor years.
Cs Delroilbased execulives saw lhis as a way
ol squeezing lhe naxinun cash llow lron lhe
conpanys inveslnenls in aging lechnology.
C nanagers in lhe developing world, how
ever, look il as an indicalion lhal lhe cenler did
nol view developing world operalions as be
ing signilicanl. This leeling was exacerbaled
by lhe lacl lhal nosl operalions in lhe devel
oping world were inslrucled lo carry oul nanu
lacluring and narkeling plans lornulaled in lhe
conpanys Delroil headquarlers, ralher lhan being
lrusled lo develop lheir own.
n conlrasl, Cs European operalions were lradilion
ally nanaged on an arnslenglh basis, wilh lhe con
panys nalional operalions ollen being allowed lo design
lheir own cars and nanulacluring lacililies and lornulale
lheir own narkeling slralegies. This regional and nalional
aulonony allowed Cs European operalions lo produce
vehicles lhal were closely lailored lo lhe needs ol local
cusloners. However, il also led lo coslly duplicalion in
design and nanulacluring operalions and lo a lailure lo
share valuable lechnology, skills, and praclices anong
subsidiaries. Thus, while Ceneral olors exerled lighl
conlrol over ils operalions in lhe developing world, ils
conlrol over operalions in Europe was perhaps loo lax.
Ceneral
olors is
one ol lhe oldesl nullinalional corporalions in lhe world.
Founded in !903, C eslablished ils lirsl inlernalional
operalions in lhe !920s. Ceneral olors is now lhe
worlds largesl induslrial corporalion and lullline aulo
nobile nanulaclurer wilh annual revenues in 2003 ol
$!35 billion. The conpany sells 3.5 nillion vehicles per
year, 3.2 nillion ol which are produced and narkeled oul
side ol ils orlh Anerican base. n 2003, C had a !5
percenl share ol lhe world aulonobile narkel.
Hislorically, nosl ol Cs loreign operalions have been
concenlraled in veslern Europe. Local brand nanes such
as Opel, Vauxhall, Saab, and Holden helped lhe conpany
lo caplure a !2 percenl narkel share in 2002, second only
lo lhal ol Ford. Allhough C has long had a presence in
Lalin Anerica and Asia, unlil recenlly sales lhere ac
counled lor only a relalively snall lraclion ol lhe conpanys
lolal inlernalional business. However, Cs plans call lor
lhis lo change. Sensing lhal Asia, Lalin Anerica, and Easl
ern Europe nay be lhe aulonobile induslrys growlh nar
kels, in !997 C enbarked on anbilious plans lo invesl
$2.2 billion in lour new nanulacluring lacililies in Ar
genlina, Poland, China, and Thailand. This expansion goes
hand in hand wilh a change in Cs philosophy loward lhe
nanagenenl ol ils inlernalional operalions.
Tradilionally, C saw lhe developing world as a dunp
ing ground lor obsolele lechnology and ouldaled nodels.
MANAGEMENT FOCUS
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botl stror, cost pressures arJ stror, pressures for local resporsiveress` How car mar-
a,ers balarce tle competir, arJ ircorsistert JemarJs sucl Jiver,ert pressures place or
tle firm` AccorJir, to some researclers, tle arswer is to pursue wlat las beer calleJ a
trarsratioral strate,y.
1wo of tlese researclers, Clristopler Lartlett arJ Sumartra Closlal, ar,ue tlat ir
toJay's ,lobal ervirormert, competitive corJitiors are so irterse tlat to survive, firms
must Jo all tley car to resporJ to pressures for cost reJuctiors arJ local resporsiveress.
1ley must try to realize locatior ecoromies arJ experierce effects, to levera,e proJucts
irterratiorally, to trarsfer core competercies arJ skills witlir tle compary, arJ to si-
multareously pay attertior to pressures for local resporsiveress.
32
Lartlett arJ Closlal
rote tlat ir tle moJerr multiratioral erterprise, core competercies arJ skills Jo rot re-
siJe just ir tle lome courtry but car Jevelop ir ary of tle firm's worlJwiJe operatiors.
1lus, tley mairtair tlat tle flow of skills arJ proJuct offerir,s sloulJ rot be all ore
way, from lome courtry to forei,r subsiJiary. latler, tle flow sloulJ also be from for-
ei,r subsiJiary to lome courtry arJ from forei,r subsiJiary to forei,r subsiJiary.
1rarsratioral erterprises, ir otler worJs, must also focus or levera,ir, subsiJiary skills.
lr esserce, firms tlat pursue a transnationa strategy are tryir, to simultareously
aclieve low costs tlrou,l locatior ecoromies, ecoromies of scale, arJ learrir, effects;
The resull was a conpany whose inlernalional opera
lions lacked overall slralegic coherence.
C has been lrying lo change lhis since lhe lale
!990s by swilching lron ils Delroilcenlric view ol lhe
world lo a philosophy lhal cenlers ol excellence nay re
side anywhere in lhe conpanys global operalions. The
conpany is lrying lo lap lhese cenlers ol excellence lo
provide ils global operalions wilh lhe very lalesl lechnol
ogy. The lour new nanulacluring planls in lhe develop
ing world are an enbodinenl ol lhis new approach. Each
is idenlical, each incorporales slaleollhearl lechnol
ogy, and each has been designed nol by Anericans, bul
by a lean ol Brazilian and Cernan engineers. By building
idenlical planls, C hopes lo ninic Toyola, whose
planls are so nuch alike lhal a change in a car in Japan
can be quickly replicaled around lhe world. The planls are
nodeled aller Cs Eisenach lacilily in Cernany, which
is nanaged by lhe conpanys Opel subsidiary. l was al
lhe Eisenach planl lhal C ligured oul how lo inple
nenl lhe lean produclion syslen pioneered by Toyola.
The planl is now lhe nosl ellicienl aulonanulacluring
operalion in Europe and lhe besl wilhin C. ls produc
livily is al leasl lwice lhal ol nosl orlh Anerican as
senbly operalions. Each ol lhe new planls produces
slaleollhearl vehicles lor local consunplion.
To realize scale econonies, C is also lrying lo design
and build vehicles lhal share a connon global plallorn.
Engineering leans localed in Cernany, Delroil, Soulh
Anerica, and Auslralia are designing lhese connon ve
hicle plallorns. Local planls are allowed lo cuslonize
cerlain lealures ol lhese vehicles lo nalch lhe lasles and
prelerences ol local cusloners. Al lhe sane line, ad
hering lo a connon global plallorn enables lhe con
pany lo spread ils cosls ol designing a car over grealer
volune and lo realize scale econonies in lhe nanulac
lure ol shared conponenls-bolh ol which should help
C lower ils overall cosl slruclure. The lirsl lruils ol lhis
ellorl include lhe !993 Cadillac Seville, which was de
signed lo be sold in nore lhan 40 counlries. Cs lanily
ol lronlwheeldrive ninivans was also designed around
a connon plallorn lhal allows lhe vehicles lo be pro
duced in nulliple localions around lhe globe, as was lhe
!993 Opel Aslra, which is Cs beslselling car in Eu
rope. Ullinalely, C hopes lhis coordinaled global ap
proach lo designing cars will reduce lhe cosls ol
developing a new vehicle by !5 lo 25 percenl. C also
hopes lhal sharing ol connon parls belween C cars
will reduce by $3.5 billion ils annual bill ol $!00 billion lor
conponenl parls.
Sources: F. Blunenslein, C s Building Planls in Developing a
lions lo voo ew arkels, 8LI ;EPP 7XVIIX .SYVREP Augusl 4,
!997, p. A!, Haig Sinonian, C Hopes lo Turn Corner wilh ew
Aslra, *MRERGMEP 8MQIW ovenber 29, !997, p. !5, D. Howes,
C, Ford Play lor Keeps Abroad, (IXVSMX2I[W arch 3, !993,
p. D!, The Clobal Canbles ol Ceneral olors, 8LI )GSRSQMWX
June 24, 2000, pp. 67-63, and J. Fahey, vould You Buy a Chevy
Saab? *SVFIW Decenber 9, 2002, pp. 32-34.
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Jifferertiate tleir proJuct offerir, across ,eo,raplic markets to accourt for local Jiffer-
erces; arJ foster a multiJirectioral flow of skills betweer Jifferert subsiJiaries ir tle
firm's ,lobal retwork of operatiors. As attractive as tlis may sourJ ir tleory, tle strat-
e,y is rot ar easy ore to pursue sirce it places corflictir, JemarJs or tle compary. Dif-
ferertiatir, tle proJuct to resporJ to local JemarJs ir Jifferert ,eo,raplic markets
raises costs, wlicl rurs courter to tle ,oal of reJucir, costs. Comparies sucl as lorJ arJ
ALL (ore of tle worlJ's lar,est er,ireerir, cor,lomerates) lave trieJ to embrace a
trarsratioral strate,y arJ fourJ it Jifficult to implemert.
How best to implemert a trarsratioral strate,y is ore of tle most complex questiors
tlat lar,e multiratiorals are ,rapplir, witl toJay. lew if ary erterprises lave perfecteJ
tlis strate,ic posture. Lut some clues as to tle ri,lt approacl car be JeriveJ from a rum-
ber of comparies. 1le example of Cereral Motors is ,iver ir tle accomparyir, Mar-
a,emert locus. lor arotler example, corsiJer tle case of Caterpillar. 1le reeJ to
compete witl low-cost competitors sucl as lomatsu of Japar forceJ Caterpillar to look
for ,reater cost ecoromies. However, variatiors ir corstructior practices arJ ,overr-
mert re,ulatiors across courtries mear tlat Caterpillar also las to be resporsive to local
JemarJs. 1lerefore, Caterpillar corfrorteJ si,rificart pressures for cost reJuctiors cnJ
for local resporsiveress.
1o Jeal witl cost pressures, Caterpillar reJesi,reJ its proJucts to use mary iJertical
comporerts arJ irvesteJ ir a few lar,e-scale comporert marufacturir, facilities, siteJ at
favorable locatiors, to fill ,lobal JemarJ arJ realize scale ecoromies. At tle same time,
tle compary au,merts tle certralizeJ marufacturir, of comporerts witl assembly plarts
ir eacl of its major ,lobal markets. At tlese plarts, Caterpillar aJJs local proJuct features,
tailorir, tle firisleJ proJuct to local reeJs. 1lus, Caterpillar is able to realize mary of
tle berefits of ,lobal marufacturir, wlile reactir, to pressures for local resporsiveress by
Jifferertiatir, its proJuct amor, ratioral markets.
33
Caterpillar starteJ to pursue tlis
strate,y ir 1979 arJ by 1997 laJ succeeJeJ ir Joublir, output per employee, si,rificartly
reJucir, its overall cost structure ir tle process. Mearwlile, lomatsu arJ Hitacli, wlicl
are still weJJeJ to a Japar-certric ,lobal strate,y, lave seer tleir cost aJvarta,es evapo-
rate arJ lave beer steaJily losir, market slare to Caterpillar.
Clar,ir, a firm's strate,ic posture to builJ ar or,arizatior capable of supportir, a
trarsratioral strate,y is a complex arJ claller,ir, task. Some woulJ say it is too com-
plex, because tle strate,y implemertatior problems of creatir, a viable or,arizatioral
structure arJ cortrol systems to mara,e tlis strate,y are immerse. 1lis is ar issue tlat
we slall returr to arJ Jiscuss ir Clapter 13.
INTERNATIONAL STRATEGY
Sometimes it is possible to iJertify multiratioral firms tlat firJ tlemselves ir tle fortu-
rate positior of beir, corfrorteJ witl low cost pressures arJ low pressures for local re-
sporsiveress. Mary of tlese erterprises lave pursueJ ar internationa strategy, takir,
proJucts first proJuceJ for tleir Jomestic market arJ sellir, tlem irterratiorally witl orly
mirimal local customizatior. 1le Jistir,uislir, feature of mary sucl firms is tlat tley are
sellir, a proJuct tlat serves uriversal reeJs, but tley Jo rot face si,rificart competitors,
arJ tlus urlike firms pursuir, a ,lobal starJarJizatior strate,y, tley are rot corfrorteJ
witl pressures to reJuce tleir cost structure. Xerox fourJ itself ir tlis positior ir tle 196Os
after its irvertior arJ commercializatior of tle plotocopier. 1le teclrolo,y urJerlyir,
tle plotocopier was protecteJ by stror, paterts, so for several years Xerox JiJ rot face
competitors-it laJ a moropoly. 1le proJuct serves uriversal reeJs, arJ it was li,lly val-
ueJ ir most JevelopeJ ratiors. 1lus, Xerox was able to sell tle same basic proJuct tle
worlJ over, clar,ir, a relatively li,l price for tlat proJuct. Sirce Xerox JiJ rot face Ji-
rect competitors, it JiJ rot lave to Jeal witl stror, pressures to mirimize its cost structure.
Lrterprises pursuir, ar irterratioral strate,y lave followeJ a similar Jevelopmertal
patterr as tley exparJeJ irto forei,r markets. 1ley terJ to certralize proJuct Jevelop-
mert furctiors sucl as l&D at lome. However, tley also terJ to establisl marufactur-
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ir, arJ marketir, furctiors ir eacl major courtry or ,eo,raplic re,ior ir wlicl tley
Jo busiress. 1le resultir, Juplicatior car raise costs, but tlis is less of ar issue if tle firm
Joes rot face stror, pressures for cost reJuctiors. Altlou,l tley may urJertake some lo-
cal customizatior of proJuct offerir, arJ marketir, strate,y, tlis terJs to be ratler lim-
iteJ ir scope. Lltimately, ir most firms tlat pursue ar irterratioral strate,y, tle leaJ
office retairs fairly ti,lt cortrol over marketir, arJ proJuct strate,y.
tler firms tlat lave pursueJ tlis strate,y ircluJe lrocter & Camble arJ Microsoft.
Historically, lrocter & Camble JevelopeJ irrovative rew proJucts ir Circirrati arJ
tler trarsferreJ tlem wlolesale to local markets. Similarly, tle bulk of Microsoft's proJ-
uct Jevelopmert work takes place ir leJmorJ, Waslir,tor, wlere tle compary is
leaJquartereJ. Altlou,l some localizatior work is urJertaker elsewlere, tlis is limiteJ
to proJucir, forei,r-lar,ua,e versiors of popular Microsoft pro,rams.
THE EVOLUTION OF STRATEGY
1le Aclilles' leel of tle irterratioral strate,y is tlat over time, competitors irevitably
emer,e, arJ if mara,ers Jo rot take proactive steps to reJuce tleir firm's cost structure,
it will be rapiJly outflarkeJ by efficiert ,lobal competitors. 1lis is exactly wlat lap-
pereJ to Xerox. Japarese comparies sucl as Caror ultimately irverteJ tleir way arourJ
Xerox's paterts, proJuceJ tleir owr plotocopiers ir very efficiert marufacturir, plarts,
priceJ tlem below Xerox's proJucts, arJ rapiJly took ,lobal market slare from Xerox. lr
tle firal aralysis, Xerox's Jemise was rot Jue to tle emer,erce of competitors, for ulti-
mately tlat was bourJ to occur, but Jue to its failure to proactively reJuce its cost struc-
ture ir aJvarce of tle emer,erce of efficiert ,lobal competitors. 1le messa,e ir tlis
story is tlat ar irterratioral strate,y may rot be viable ir tle lor, term, arJ to survive,
firms reeJ to slift towarJ a ,lobal starJarJizatior strate,y or a trarsratioral strate,y ir
aJvarce of competitors (see li,ure 12.8).
1le same car be saiJ about a localizatior strate,y. Localizatior may ,ive a firm a com-
petitive eJ,e, but if it is simultareously facir, a,,ressive competitors, tle compary will
Clobal
Slandardizalion
Slralegy
Localizalion
Slralegy
nlernalional
Slralegy
Transnalional
Slralegy
High Low
Pressures for LocaI Responsiveness
As conpelilors energe,
lhese slralegies becone
less viable
FIGURE 12. 8
Changes in Slralegy
over Tine
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also lave to reJuce its cost structure, arJ tle orly way to Jo tlat may be to slift towarJ
a trarsratioral strate,y. 1lus, as competitior irtersifies, irterratioral arJ localizatior
strate,ies terJ to become less viable, arJ mara,ers reeJ to oriertate tleir comparies to-
warJ eitler a ,lobal starJarJizatior strate,y or a trarsratioral strate,y.
Cbapter Summary
lr tlis clapter we revieweJ basic prirciples of strate,y
arJ tle various ways ir wlicl firms car profit from ,lobal
exparsior, arJ we lookeJ at tle strate,ies tlat firms tlat
compete ,lobally car aJopt. 1le clapter maJe tle fol-
lowir, poirts:
1. A firm's strate,y car be JefireJ as tle actiors
tlat mara,ers take to attair tle ,oals of tle
firm. lor most firms, tle preemirert ,oal is to
maximize slarelolJer value. Maximizir, slare-
lolJer value requires firms to focus or ircreas-
ir, tleir profitability arJ tle ,rowtl rate of
profits over time.
2. lrterratioral exparsior may erable a firm to
earr ,reater returrs by trarsferrir, tle proJuct
offerir,s JeriveJ from its core competercies to
markets wlere irJi,erous competitors lack
tlose proJuct offerir,s arJ competercies.
3. Due to ratioral Jiffererces, it may pay a firm to
base eacl value creatior activity it performs at
tlat locatior wlere factor corJitiors are most
corJucive to tle performarce of tlat activity.
We refer to tlis strate,y as focusir, or tle at-
tairmert of locatior ecoromies.
+. Ly rapiJly builJir, sales volume for a starJarJ-
izeJ proJuct, irterratioral exparsior car assist
a firm ir movir, Jowr tle experierce curve by
realizir, learrir, effects arJ ecoromies of
scale.
5. A multiratioral firm car create aJJitioral value
by iJertifyir, valuable skills createJ witlir its
forei,r subsiJiaries arJ levera,ir, tlose skills
witlir its ,lobal retwork of operatiors.
6. 1le best strate,y for a firm to pursue ofter Je-
perJs or a corsiJeratior of tle pressures for cost
reJuctiors arJ for local resporsiveress.
7. lressures for cost reJuctiors are ,reatest ir irJus-
tries proJucir, commoJity-type proJucts wlere
price is tle mair competitive weapor.
8. lressures for local resporsiveress arise from Jif-
fererces ir corsumer tastes arJ prefererces, ra-
tioral irfrastructure arJ traJitioral practices,
Jistributior clarrels, arJ from lost-,overrmert
JemarJs.
9. lirms pursuir, ar irterratioral strate,y trarsfer
tle proJucts JeriveJ from core competercies to
forei,r markets, wlile urJertakir, some limiteJ
local customizatior.
1O. lirms pursuir, a localizatior strate,y customize
tleir proJuct offerir,, marketir, strate,y, arJ
busiress strate,y to ratioral corJitiors.
11. lirms pursuir, a ,lobal starJarJizatior strate,y
focus or reapir, tle cost reJuctiors tlat come
from experierce curve effects arJ locatior
ecoromies.
12. Mary irJustries are row so competitive tlat
firms must aJopt a trarsratioral strate,y. 1lis
irvolves a simultareous focus or reJucir, costs,
trarsferrir, skills arJ proJucts, arJ boostir, lo-
cal resporsiveress. lmplemertir, sucl a strate,y
may rot be easy.
Cri tical Tbinking and Discussion Ouesti ons
1. lr a worlJ of zero trarsportatior costs, ro traJe
barriers, arJ rortrivial Jiffererces betweer ra-
tiors witl re,arJ to factor corJitiors, firms must
exparJ irterratiorally if tley are to survive.
Discuss.
2. llot tle positior of tle followir, firms or li,-
ure 12.6: lrocter & Camble, Loeir,, Coca-
Cola, Dow Clemical, lrtel, McDoralJ's. lr
eacl case justify your arswer.
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3. leaJ tle Mara,emert locus or Cereral Motors
cortaireJ ir tlis clapter, tler arswer tle fol-
lowir, questiors:
How woulJ you claracterize tle strate,y
pursueJ by CM ir tle (c) Jevelopir, worlJ
arJ (o) Lurope before 1997`
Wlat Jo you tlirk were tle likely competi-
tive effects of tle pre-1997 strate,y`
How woulJ you claracterize tle strate,y
tlat CM las beer pursuir, sirce 1997`
How sloulJ tlis strate,y affect CM's ability
to create value ir tle ,lobal automobile
market`
+. Wlat Jo you see as tle mair or,arizatioral
problems tlat are likely to be associateJ witl
implemertatior of a trarsratioral strate,y`
Researcb Task gl obal edge. msu. edu
Lse tle ,lobalLDCL' site to complete tle followir,
exercises:
1. Several classificatiors arJ rarkir,s of multira-
tioral corporatiors are prepareJ by a variety of
sources. lirJ ore sucl rarkir, system arJ iJer-
tify tle criteria tlat are useJ ir rarkir, tle top
,lobal comparies. Altlou,l some of tlese rark-
ir,s require subscriptiors, firJ a freely available
rarkir, arJ extract tle list of tle li,lest rarkeJ
25 comparies payir, particular attertior to tle
lome courtries of tle comparies.
2. 1le top mara,emert of your compary, a maru-
facturer arJ marketer of laptop computers, las
JeciJeJ to pursue irterratioral exparsior oppor-
turities ir Lasterr Lurope. lr orJer to aclieve
some ecoromies of scale, your mara,emert is
aimir, towarJ a strate,y of mirimum local aJap-
tatior. locusir, or ar Lasterr Luropear courtry
of your cloice, prepare ar executive summary
tlat features tlose aspects of tle proJuct wlere
starJarJizatior will simply rot work, arJ aJapta-
tior to local corJitiors will be essertial.
Ly tle late 197Os, tle strate,y at l&C was well es-
tablisleJ. 1le compary JevelopeJ rew proJucts ir
Circirrati arJ tler relieJ or semiautoromous forei,r
subsiJiaries to marufacture, market, arJ Jistribute tlose
proJucts ir Jifferert ratiors. lr mary cases, forei,r sub-
siJiaries laJ tleir owr proJuctior facilities arJ tailoreJ
tle packa,ir,, brarJ rame, arJ marketir, messa,e to
local tastes arJ prefererces. lor years tlis strate,y Jeliv-
ereJ a steaJy stream of rew proJucts arJ reliable ,rowtl
ir sales arJ profits. Ly tle 199Os, lowever, profit ,rowtl
at l&C was slowir,.
1le esserce of tle problem was simple; l&C's costs
were too li,l because of extersive Juplicatior of maru-
facturir,, marketir,, arJ aJmiristrative facilities ir Jif-
ferert ratioral subsiJiaries. 1le Juplicatior of assets
maJe serse ir tle worlJ of tle 196Os, wler ratioral
markets were se,merteJ from eacl otler by barriers to
cross-borJer traJe. lroJucts proJuceJ ir Creat Lritair,
for example, coulJ rot be solJ ecoromically ir Cermary
Jue to li,l tariff Juties levieJ or imports irto Cermary.
Ly tle 198Os, lowever, barriers to cross-borJer traJe
were fallir, rapiJly worlJwiJe arJ fra,merteJ ratioral
markets were mer,ir, irto lar,er re,ioral or ,lobal
Ihe EvoIutioo oI 8trategy at Frocter & abIe
lourJeJ ir 1837,
Circirrati-baseJ lroc-
ter & Camble las lor, beer ore of tle worlJ's most ir-
terratioral of comparies. 1oJay l&C is a ,lobal
colossus ir tle corsumer proJucts busiress witl arrual
sales ir excess of $5O billior, some 5+ percert of wlicl
are ,ererateJ outsiJe of tle LriteJ States. l&C sells
more tlar 3OO brarJs-ircluJir, lvory soap, 1iJe,
lampers, lAM pet fooJ, Crisco, arJ lol,ers-to cor-
sumers ir 16O courtries. lt las operatiors ir 8O cour-
tries arJ employs close to 1OO,OOO people ,lobally. l&C
establisleJ its first forei,r factory ir 1915 wler it
opereJ a plart ir CaraJa to proJuce lvory soap arJ
Crisco. 1lis was followeJ ir 193O by tle establislmert
of tle compary's first forei,r subsiJiary ir Lritair. 1le
pace of irterratioral exparsior quickereJ ir tle 195Os
arJ 196Os as l&C exparJeJ rapiJly ir Westerr Lurope,
arJ tler a,air ir tle 197Os wler tle compary ertereJ
Japar arJ otler Asiar ratiors. Sometimes l&C er-
tereJ a ratior by acquirir, ar establisleJ competitor
arJ its brarJs, as occurreJ ir tle case of Creat Lritair
arJ Japar, but more typically tle compary set up oper-
atiors from tle ,rourJ floor.
CLOSI NG CASE
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markets. Also, tle retailers tlrou,l wlicl l&C Jistrib-
uteJ its proJucts were ,rowir, lar,er arJ more ,lobal,
sucl as Wal-Mart, 1esco from tle LriteJ lir,Jom, arJ
Carrefour from lrarce. 1lese emer,ir, ,lobal retailers
were JemarJir, price Jiscourts from l&C.
lr 1993, l&C embarkeJ or a major reor,arizatior ir
ar attempt to cortrol its cost structure arJ reco,rize
tle rew reality of emer,ir, ,lobal markets. 1le com-
pary slut Jowr some 3O marufacturir, plarts arourJ
tle ,lobe, laiJ off 13,OOO employees, arJ corcertrateJ
proJuctior ir fewer plarts tlat coulJ better realize
ecoromies of scale arJ serve re,ioral markets. 1lese
actiors cut some $6OO millior a year out of l&C's cost
structure. lt wasr't erou,l' lrofit ,rowtl remaireJ
slu,,isl.
lr 1998, l&C laurcleJ its secorJ reor,arizatior of
tle JecaJe. NameJ r,arizatior 2OO5," tle ,oal was to
trarsform l&C irto a truly ,lobal compary. 1le com-
pary tore up its olJ or,arizatior, wlicl was baseJ or
courtries arJ re,iors, arJ replaceJ it witl ore baseJ or
sever self-cortaireJ ,lobal busiress urits, rar,ir, from
baby care to fooJ proJucts. Lacl busiress urit was ,iver
complete resporsibility for ,ereratir, profits from its
proJucts, arJ for marufacturir,, marketir,, arJ proJuct
Jevelopmert. Lacl busiress urit was tolJ to ratioralize
proJuctior, corcertratir, it ir fewer lar,er facilities; to
try to builJ ,lobal brarJs wlerever possible, tlereby elim-
iratir, marketir, Jiffererce betweer courtries; arJ to
accelerate tle Jevelopmert arJ laurcl of rew proJucts.
lr 1999, l&C arrourceJ tlat as a result of tlis iritiative,
it woulJ close arotler 1O factories arJ lay off 15,OOO em-
ployees, mostly ir Lurope wlere tlere was still extersive
Juplicatior of assets. 1le arrual cost savir,s were esti-
mateJ to be about $8OO millior. l&C plarreJ to use tle
savir,s to cut prices arJ ircrease marketir, sperJir, ir
ar effort to ,air market slare, arJ tlus furtler lower costs
tlrou,l tle attairmert of scale ecoromies.
1lis time tle strate,y seemeJ to be workir,. lr 2OO3
arJ a,air ir 2OO+, l&C reporteJ stror, ,rowtl ir botl
sales arJ profits. Letweer 2OO2 arJ 2OO+ reverues
sur,eJ 28 percert from $+O.2 billior to $51.+ billior,
wlile profits ircreaseJ ar impressive +6 percert from
$+.35 billior to $6.3+ billior. Si,rificartly, l&C's ,lobal
competitors, sucl as Lrilever, limberly-Clark, arJ
Col,ate-lalmolive, were stru,,lir, ir 2OO3 arJ 2OO+.
Source: J. Neff, l&C utpacir, Lrilever ir live-Year Lattle," -J-
vert|s|n -e, November 3, 2OO3, pp. 1-3; C. Strauss, lirm lestruc-
turir, irto 1ruly Clobal Compary," LS- ToJcy, September 1O, 1999,
p. L2; Irocter c Ccmo|e 10K Reort, 200+, arJ M. lolbasuk McCee,
l&C Jump-Starts Corporate Clar,e," njormct|on \ee|, November
1, 1999, pp. 3O-3+.
Case Discussion Ouestions
1. Wlat strate,y was lrocter & Camble pursuir,
wler it first ertereJ forei,r markets ir tle perioJ
up urtil tle 198Os`
2. Wly Jo you tlirk tlis strate,y became less viable
ir tle 199Os`
3. Wlat strate,y Joes l&C appear to be movir, to-
warJ` Wlat are tle berefits of tlis strate,y` Wlat
are tle potertial risks associateJ witl it`
Notes
1. More formally, llC Net profit after
tax/Capital, wlere capital ircluJes tle sum of
tle firm's equity arJ Jebt. 1lis way of calculat-
ir, profitability is li,lly correlateJ witl returr
or assets. lor Jetails, see tle apperJix to tlis
clapter.
2. 1. CopelarJ, 1. loller, arJ J. Murrir. \c|uct|on.
Mecsur|n cnJ Mcnc|n t|e \c|ue oj Comcn|es
(New York: Jolr Wiley & Sors, 2OOO).
3. 1le corcept of corsumer surplus is ar importart
ore ir ecoromics. lor a more JetaileJ exposi-
tior, see D. Lesarko, D. Drarove, arJ M. Slar-
ley, conom|cs oj Strctey (New York: Jolr Wiley
& Sors, 1996).
+. However, l \ orly ir tle special case wlere
tle compary las a perfect moropoly, arJ wlere
it car clar,e eacl customer a urique price tlat
reflects tle value of tle proJuct to tlat customer
(i.e., wlere perfect price Jiscrimiratior is possi-
ble). More ,ererally, except ir tle limitir, case
of perfect price Jiscrimiratior, ever a moropo-
list will see most corsumers capture some of tle
value of a proJuct ir tle form of a corsumer sur-
plus.
5. 1lis poirt is certral to tle work of Miclael
lorter, Comet|t|ve -Jvcntce (New York: lree
lress, 1985). See also clap. + ir l. Clemawat,
Comm|tment. T|e Dyncm|c oj Strctey (New
York: lree lress, 1991).
6. M. L. lorter, Comet|t|ve Strctey (New York:
lree lress, 198O).
7. M. L. lorter, Wlat ls Strate,y`" HcrvcrJ us|-
ness Rev|ew, r-poirt LrlarceJ LJitior article,
lebruary 1, 2OOO.
8. lorter, Comet|t|ve -Jvcntce.
9. Lmpirical eviJerce Joes seem to irJicate tlat,
or avera,e, irterratioral exparsior is lirkeJ
hiII. IoteroatiooaI
Editioo
. Ihe 8trategy aod
usioess
12. Ihe 8trategy oI
18
Cuauories, Z00/
to ,reater firm profitability. lor some recert
examples, see M. A. Hitt, l. L. Hoskissor, arJ
H. lim, lrterratioral Diversificatior, Lffects
or lrrovatior arJ lirm lerformarce," -ccJ-
emy oj Mcncement ournc| +O, ro. + (1997),
pp. 767-98, arJ S. 1allmar arJ J. Li, Lffects
of lrterratioral Diversity arJ lroJuct Diver-
sity or tle lerformarce of Multiratioral
lirms," -ccJemy oj Mcncement ournc| 39, ro.
1 (1996), pp. 179-96.
1O. 1lis corcept las beer popularizeJ by C. Hamel
arJ C. l. lralalaJ, Comet|n jor t|e uture
(Lostor: HarvarJ Lusiress Sclool lress, 199+).
1le corcept is ,rourJeJ ir tle resource-baseJ
view of tle firm; for a summary, see J. L. Larrey,
lirm lesources arJ SustaireJ Competitive
AJvarta,e," ournc| oj Mcncement 17 (1991),
pp. 99-12O, arJ l. l. Correr, A Historical
Comparisor of lesource-LaseJ 1leory arJ live
Sclools of 1lou,lt witlir lrJustrial r,ariza-
tior Lcoromics: Do We Have a New 1leory of
tle lirm`" ournc| oj Mcncement 17 (1991),
pp. 121-5+.
11. J. l. Womack, D. 1. Jores, arJ D. loos, T|e Mc-
c||ne T|ct C|cneJ t|e \or|J (New York: law-
sor Associates, 199O).
12. M. L. lorter, T|e Comet|t|ve -Jvcntce oj Nc-
t|ons (New York: lree lress, 199O).
13. Lxample is baseJ or C. S. 1ra,er, Lrter tle
Miri-Multiratioral," Nort|ecst nternct|onc|
us|ness, Marcl 1989, pp. 13-1+.
1+. See: l. L. leicl, T|e \or| oj Nct|ons (New
York: AlfreJ A. lropf, 1991), arJ l. J. Luckley
arJ N. Haslai, A Clobal System \iew of lirm
LourJaries," ournc| oj nternct|onc| us|ness
StuJ|es, Jaruary 2OO+, pp. 33-5O.
15. D. Larboza, Ar Lrkrowr Ciart llexes lts
Muscles," T|e New Yor| T|mes, December +,
2OO+, pp. L1, L3.
16. C. Hall arJ S. Howell, 1le Lxperierce Curve
from ar Lcoromist's lerspective," Strcte|c Mcn-
cement ournc| 6 (1985), pp. 197-212.
17. A. A. Alclair, leliability of lro,ress Curves ir
Airframe lroJuctior," conometr|cc 31 (1963),
pp. 697-93.
18. Hall arJ Howell, 1le Lxperierce Curve from
ar Lcoromist's lerspective."
19. lor a full Jiscussior of tle source of scale
ecoromies, see D. Lesarko, D. Drarove, arJ
M. Slarley, conom|cs oj Strctey (New York:
Jolr Wiley & Sors, 1996).
2O. 1lis estimate was proviJeJ by tle llarmaceuti-
cal Marufacturers Associatior.
21. Matsuslita Llectrical lrJustrial ir 1987," ir
Trcnsnct|onc| Mcncement, eJs. C. A. Lartlett
arJ S. Closlal (HomewooJ, lL: liclarJ D. lr-
wir, 1992).
22. See J. Lirkirslaw arJ N. HooJ, Multiratioral
SubsiJiary Lvolutior: Capability arJ Clarter
Clar,e ir lorei,r wreJ SubsiJiary Compa-
ries," -ccJemy oj Mcncement Rev|ew 23 (cto-
ber 1998), pp. 773-95; A. l. Cupta arJ
\. J. CovirJarajar, lrowleJ,e llows witlir
Multiratioral Corporatiors," Strcte|c Mcnce-
ment ournc| 21 (2OOO), pp. +73-96; \. J. Covir-
Jarajar arJ A. l. Cupta, T|e Quest jor C|ooc|
Dom|ncnce (Sar lrarcisco: Jossey Lass, 2OO1);
1. S. lrost, J. M. Lirkirslaw, arJ l. C. Lrsi,r,
Certers of Lxcellerce ir Multiratioral Corpo-
ratiors," Strcte|c Mcncement ournc| 23
(2OO2), pp. 997-1O18; arJ L. ArJerssor,
M. lors,rer, arJ L. Holm, 1le Strate,ic lm-
pact of Lxterral Networks," Strcte|c Mcnce-
ment ournc| 23 (2OO2), pp. 979-96.
23. S. Leur,, Armclairs, 1\s arJ Lspresso: ls lt
McDoralJ's`" T|e \c|| Street ournc|, Au,ust
3O, 2OO2, pp. A1, A6.
2+. l. lerJows, Makir, tle Most of lorei,r lacto-
ries," HcrvcrJ us|ness Rev|ew, Marcl-April
1997, pp. 73-88.
25. C. l. lralalaJ arJ Yves L. Doz, T|e Mu|t|nc-
t|onc| M|ss|on. c|cnc|n locc| DemcnJs cnJ
C|ooc| \|s|on (New York: lree lress, 1987). Also
see J. Lirkirslaw, A. Morrisor, arJ J. HullarJ,
Structural arJ Competitive Determirarts of a
Clobal lrte,ratior Strate,y," Strcte|c Mcnce-
ment ournc| 16 (1995), pp. 637-55.
26. J. L. Carter, Wal-Mart Cives Clobalizatior a
LaJ Name," us|ness\ee|, Marcl 8, 2OO+, p. 2+.
27. lralalaJ arJ Doz, T|e Mu|t|nct|onc| M|ss|on.
c|cnc|n locc| DemcnJs cnJ C|ooc| \|s|on. lra-
lalaJ arJ Doz actually talk about local respor-
siveress ratler tlar local customizatior.
28. 1. Levitt, 1le Clobalizatior of Markets," Hcr-
vcrJ us|ness Rev|ew, May-Jure 1983, pp. 92-1O2.
29. l. Lelsor, lr L.S., Cell llore Lsers Are fter
All 1alk," T|e New Yor| T|mes, December 13,
2OO+, pp. C1, C+.
3O. C. J. Clipello, Local lreserce ls ley to Luro-
pear Deals," T|e \c|| Street ournc|, Jure 3O,
1998, p. A15.
31. Lartlett arJ Closlal, Mcnc|n ccross orJers.
32. lbiJ.
33. 1. Hout, M. L. lorter, arJ L. luJJer, How
Clobal Comparies Wir ut," HcrvcrJ us|ness
Rev|ew, September-ctober 1982, pp. 98-1O8.

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