Global Strategic Management

Second Edition

Philippe Lasserre Emeritus Professor of Strategy and Asian Business INSEAD

Framework for global strategy

Aglobal strategy is the way a company defines its long-term objectives for the world market; selects its value proposition for the world market; builds, integrates and co-ordinates its business system to gain and sustain a global competitive advantage and puts in place an organisation to manage its operations worldwide.

A global strategy is made up of four major components (see Figure 2.2):

(1) A global strategic ambition

(2) A global strategic positioning

(3) A global business system

(4) A global organisation.

Global ambition

The global strategic ambition expresses the role a company wants to play in the world marketplace and how it views the future distribution of its sales and assets in the key regional clusters of the world. One can identify five types of role:

(1) Global player

(2) Regional player

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THE PROCESS OF GLOBALISATION

GLOBAL BUSINESS SYSTEM

I GLOBAL AMBITION

Relative importance of regions and countries

in terms of sales, assets

GLOBAL POSITIONING

GLOBAL STRATEGY

Choice of: - Countries

- Value proposition

- Investments in resources, assets and competencies to create a global value chain

- Development of

global capabilities through alliances and acquisitions

GLOBAL ORGANISATION

- Global structure

- Global processes

- Global co-ordination

- Global human

resource management

Figure 2.2 Global strategy framework

(3) Regional dominant global player (4) Global exporter

(5) Global operator.

A company whose ambition is to be a Global player aspires to establish a sustainable competitive position in the key markets of the world and to build an integrated business system of designs spread over those key markets. SONY would qualify for such a description of its role, as would Unilever, Ericsson, Nokia, Alcatel, Motorola, Shell, Xerox, Canon, Procter & Gamble and Citibank.

A Regional player defines its role as to capture a strong competitive advantage in one of the key regions of the world - North America, Europe or Asia - and to be a marginal or relatively weak competitor in the other parts. Peugeot or Fiat in automobiles, NEC or Barclays would be examples of such an ambition."

A Global exporter is a company whose role is to sell across the key markets of the world products manufactured or services operated in its home country and which builds foreign operations only to support the export drive. The major aerospace or defence companies like Boeing, Airbus and Raytheon can be classified into this category despite the fact that they have some supporting assets (maintenance, sales offices, etc.) outside their home region.

DESIGNING A GLOBAL STRATEGY 39
Table 2.1 Distribution of World Market by Regions in Selected Industries in 2005 (in Percentage of US$
Value)
Industry Europe North America Asia Pacific Rest of the World
Advertising 19 57 23 1
Clothing and footwear 32 27 25 15
Computer hardware 27 27 39 7
Construction materials 18 9 63 10
Consumer electronics 30 23 38 9
Cosmetics 37 22 27 14
Data processing services 29 52 14 9
Electrical appliances 28 27 34 10
Electrical equipments 23 20 42 15
Environment services 31 39 23 7
Health care equipment 34 46 18 2
Home furnitures 44 22 18 15
Insurance 34 38 25 3
Mobile phones 30 25 42 3
Paint and coatings 26 27 35 12
Pharmaceuticals 28 48 18 6
Retailiing 32 30 23 15
Specialty chemicals 45 39 11 4
GDP billion US$ (2005) 12,900 13,500 10,700 4,400
GDP % (2005) 31 32 26 11
Sources: Various compilations by author A Global sourcer is a company that procures a large fraction of its product components in factories- located outside its base market and which concentrates its sales in its domestic market. In such a case the ambition would hardly qualify as global: however, many managerial issues of integration and co-ordination of activities, both in-house factories or long-term subcontracting, would be quite similar to those that a global company would have to face.

In order to assess the degree of global ambition exhibited by companies, one should look at their distribution of sales, assets and personnel.

In 1999, the world economy produced $30,000 billion of goods and services, 33 per cent in North America, 27 per cent in Asia and 31 per cent in Europe, the rest being spread over Africa, South America, the Middle East and Eastern Europe.

In certain industries the distribution of markets can differ from the distribution of GDP, and growth differentials will make the future distribution of world market different from what it is today. Table 2.1 gives a distribution of world markets by regions.

Ideally one can imagine that a pure global company would exhibit three major characteristics:

• First, it would have a distribution of its sales proportional to the distribution of markets in its industry. For instance SONY's distribution of sales with 28 per cent in North America, 23 per cent in Europe and 39 per cent in Asia replicates very closely the 23, 36, 38 per cent distribution of consumer electronic industry markets.

40

THE PROCESS OF GLOBALISATION

• Second, it would have a distribution of its assets and work force proportional to the distribution of markets in its industry.

• Third, it would manage its activities on an integrated and co-ordinated way across the

globe.

Obviously this may not apply to all industries since no industry has the same degree of global pressure towards globalisation, as has been discussed in Chapter 1. In a global industry like the Tyres industry, in which the distribution of market is 29 per cent in North America, 28 per cent in Europe, 30 per cent in Asia and 13 per cent in the rest of the world, the distribution of revenues of the four major players differs substantially from the industry distribution as shown in Table 2.2.

The globalisation indices

In order to evaluate the extent to which a company has followed a global ambition, one can usefully utilise two of the globalisation indices. Appendix 2.1 gives a technical explanation of the measurement of these indices.

(a) The Transnational Index (TNI) used by the United Nations Conference on Trade and Development (UNCTAD) which is a composite ratio of the proportion of activities made outside the home country of a multinational firm. For instance in the tyre industry Michelin (TNI = 39) and Pirelli (TN I = 47) would have a lower TNI than Goodyear (TNI = 53) or Bridgestone (TNI = 69) because of their higher concentration of activities in Europe.

(b) The Global Revenue Index (GRI) and the Global Capability Index (GCI).

The Global Revenue Index represents the ratio, in percentage, of a company's distribution of sales in the major world regions to the industry's distribution of demand in the same regions.' If in an industry the world market is divided in the proportion of 30 per cent in North America; 30 per cent in Europe,' 30 per cent in Asia and 10 per cent in the rest of the world, the GRI will compare the actual distribution of sales of a company in those three regions with the industry's distribution. A company with a low GRI is more concentrated in one region while a company with a high GRI will have a distribution of sales close to the industry.

The Global Capability Index represents, in a similar way, the distribution of assets or personnel. Companies which rely heavily on external sourcing will have a low GCI score.

Table 2.2 Distribution of markets and revenues in tyres (2005)

Company North America Europe Asia Rest of the
(per cent) (percent) (percent) World (per cent)
Industry 29 28 30 13
Bridgestone 41 15 38 6
Goodyear 50 26 8 13
Michelin 33 53 10 4
Pirelli 8 54 8 13
Source: Companies' annual reports. DESIGNING A GLOBAL STRATEGY

41

Global capability index (GCI)

Global
Player
Global
Sourcer
Regional
Dominant
Global Player
Regional Global
Player Exporter Exporter o

Global revenue index (GRI)

Figure 2.3 Mapping of global ambition

This is because the company cannot deploy resources and capabilities at will but relies on external parties to supply the capability. This reliance on external parties also means that the company can face potential problems such as product/service unavailability, time delays in delivery or price pressure from the overseas suppliers.

If one combines the Gel and the GRI in one chart, we obtain a mapping of the global ambition of players (Figure 2.3).

A company low in both GRI and Gel would be a Regional player, a company low in GRI and high in Gel would be a Global operator, a company low in Gel and high in GRI would be a Global exporter while a company high in both dimensions would be a Global player and a company with an average score in both dimensions would be a Regional dominant global player. Figure 2.4 shows the mapping of the four leading companies in the tyre industry. The tyre industry is considered as a global industry and all four players are in the Global layer quadrant.

A dynamic utilisation of the global indices

As part of the strategy formulation process, companies can use the global indices to analyse their position and set their global ambition. To illustrate, we will take the example of Whirlpool and the global appliance industry. In 1980, Whirlpool was essentially a regional operator. Its sales and assets were concentrated in the United States. Its GRI was 0.35 and its Gel 0.40. The white goods industry (refrigerators, washers, cookers) was at that time primarily a regional industry. For instance, American refrigerators tended to be very big and would not fit easily in European or Japanese homes. Progressively, however, the industry moved towards globalisation because of the huge economies of scale to be gained in components manufacturing, branding and R&D. The Swedish company, Electrolux, moved aggressively in Europe to become a pan-European company and invested in the United States and Asia to become a global player. The Whirlpool management realised that its future would be at stake if it did not follow a globalisation path. The first step of this process was an alliance with the Philips appliance business which was

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THE PROCESS OF GLOBALISATION

100% ,---------,--------------,

80
Global 60
capability
index
(GCI) 40
20
0
0 Pirelli

20

100%

40

60

80

Global revenue index (GCI)

Figure 2.4 Mapping of the tyres industry (The size of the bubbles is proportional to total sales of 2004)

transformed into a straight acquisition. From a single regional player, Whirlpool moved into the position of a dual regional player (GRl 0.55, GCl 0.90) with a strong delocalisation of its factories, particularly in Latin America. Then, in the early 1990s, Whirlpool realised that the Asia Pacific region was going to represent 40 per cent of world sales for refrigerators, washers and cookers. It set up its ambition to gain a significant position in Asia. By the year 2000, Whirlpool had become a global player (GRI 0.68, GCl 0.84) (see Figure 2.5).

100
1999
80
Global 60
capability
index
(Gel) 40
(%)
20 o

20

Global revenue index (GRI)(%)

Figure 2.5 The evolution of Whirlpool globalisation

40

60

80

100

The Global Revenue Index (GRI) and the Global Capabilities Index (Gel)

These indices attempt to evaluate the extent to which a company distribution of sales and capabilities reflect the industry distribution of markets. For instance if in an industry like the tyre industry the world markets are distributed as Europe (28 per cent), North America (29 per cent), Asia Pacific (30 per cent) and the rest of the world (13 per cent), one could argue that a perfect global firm would have its sales and assets distributed in the same proportion: ideally both the industry and the firm would be distributed along the diagonal of Figure A2.1. In fact most or nearly all firms are not located along the diagonal because their sales are somewhat more important in one region than in another one. For instance Goodyear sales are distributed as North America 50 per cent, Europe 26 per cent, Asia Pacific 8 per cent and the rest of the world 16 per cent along the dotted line in Figure A2.1. The two indices described below represent the ratio between the area B (Goodyear distribution) and the area A (Industry distribution).

1 Rugman M. Alan, The Regional Multinationals: MNE's and Global Strategic Management. Cambridge, UK: Cambridge University Press, 2005

64

THE PROCESS OF GLOBALISATION

100%

A

80%

60%

20%

40%

O%~----~~~~--~~~~~--~ 0%

Tyres industry regional distribution

100%

60%

80%

40%

20%

40%

60%

80%

100%

Goodyear regional distribution compared with industry (B/A= 72%)

Figure A2.1 A graphical representation of the Global Revenue Index

The Global Revenue Index (GRI) is calculated by taking the ratio of the company distribution of sales in the major world regions to the industry distribution of demand in the same regions. It is calculated with the formula:

GRI = L [Ix" (cum RX" + cum RX(,,_l)]

1

where n is the number of regions taken into consideration.

In practice n = 4, since there are four major clusters: North America, Europe, Asia and the rest of the world.

Lx; is the industry demand in the region as a proportion of world demand, cum RX" is the cumulative proportion of sales achieved by the company in region n in ascending order; for instance, since Goodyear sales are 26 per cent in Europe, 50 per cent in North America, 8 per cent in Asia and 13 per cent in the rest of the world, Goodyear's cumulative proportion (cum RX) is 8 per cent for ASia, 16 per cent for the rest of the world, 50 per cent for Europe and 100 per cent for North America.

The calculation of Goodyear's GRI is shown in Table A2.2.

A company whose sales distribution matches the exact distribution of its industry market would have a GRI of 100 per cent.

A company that concentrates its sales to one region and sells nothing elsewhere would obtain a GRI corresponding to the percentage of demand in this region. For instance if Goodyear's sales were entirely concentrated in North America, Goodyear's GRI would have been 29 per cent.

GRI is by definition used for measuring how global a company is. For firms engaged in an industry which is local in nature, the GRI will favour the firms that are in countries/regions with the biggest consumption for that industry. For example, in the restaurant business, which is local in nature, US restaurants would have had a higher GRI than that of Asian

DESIGNING A GLOBAL STRATEGY

65

Table A2.2 Goodyear: calculation of the global revenue index

Distribution of sales

Asia (%)

Rest of the World (%)

Europe (%) North America (%)

Industry 30 13 28

Goodyear RX 8 16 26

Cum RX 8 24 50

Cum RX-n 0 8 24

Cum RX+ cum RX-n 8 32 74

Ix '(cum RX + cum RX-n) 2.4 4.16 20.72

Then Goodyear's GRI (%) = 2.4+4.16+20.72+45 = 72.28

Similar calculations will derive the following results for the other players:

Michelin GRI= 65

29 50 100 50 150 45

Bridgestone GRI= Pirelli GRI=

79 58

restaurants during the Asian Crisis simply because US people visited restaurants more often than Asians during that period. In this case, the higher GRI of the US restaurants should not be interpreted as the US restaurants being more global than their Asian counterparts, as the majority of both the US and Asian restaurants are local players.

Also for companies which implement globalisation by competing in small markets (e.g.

South America, Eastern Europe), the GRI does not reflect the extent of global sales the company has. This is owing to the fact that the company's sales are in world markets that the other industry major global players have not yet fully explored. For example, ACER, the Taiwanese PC company, had a relatively low GRI at the early stage of its globalisation strategy where it began to capture the South American markets. Nonetheless the low GRI score correctly reflects the fact that the company did not closely resemble the industry's demand pattern. This type of company will further expand to the major world markets after establishing itself in smaller foreign markets. Once the company has established itself in the major world markets, it will have a higher GRI.

The Global Capability Index (GCI) is calculated in a similar way, but instead of taking the distribution of sales, one takes the distribution of assets for capital-intensive industries or else of personnel. The 'capability' described here is in-house capability, not capability which a firm can acquire through external sourcing like outsourcing, sub-contracting or strategic alliances with overseas companies in which the firm has no ownership in the alliance partner(s) and/or alliance venture. For strategic alliances in which a firm has ownership interest, one can theoretically include in the GCI calculation the proportional amount of assets which the company owns or has control over. When gathering data for the calculation of GCI, care should be taken, and an attempt should be made to account for off-balance sheet assets such as asset finance by sales and leaseback arrangements.

Companies which rely heavily on external sourcing will have a low GCI score. This is because the company cannot deploy resources and capabilities at will but relies on external parties to supply the capability. This reliance on external parties also means that the company can face potential problems such as product/service unavailability, time delays in delivery or price pressure from the overseas suppliers.