THE END OF GLOBAL STRATEGY Alan M. Rugman* and Richard M.

Hodgetts**

*L. Leslie Waters Chair in International Business Kelley School of Business, Indiana University 1309 E. Tenth Street Bloomington, IN 47401-1701 USA Tel: 812-855-5415 Fax: 812-855-3354 E-mail: rugman@indiana.edu and Thames Water Fellow of Strategic Management Templeton College, University of Oxford Oxford, OX1 5NY England Tel: 44(0)1865-422-500 Fax: 44(0)1865-422-501 E-mail: alan.rugman@templeton.oxford.ac.uk **Professor of Management Florida International University Miami, Florida, USA Email: hodgetts@fiu.edu Revised: 2001 The End of Global Strategy

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Autobiographies Alan M. Rugman is L. Leslie Waters Chair of International Business at the Kelley School of Business, Indiana University, Bloomington, IN 476405-1701 US. He is also a fellow at Templeton College, University of Oxford. Previously he was at the University of Toronto in Canada. He is the author of The End of Globalization published by Random House Business Books in Europe and Asia and McGraw-Hill AMACOM in North America. Professor Hodgetts is Professor of Management at Florida International University in Miami, Florida, USA. He has published in the Academy of Management Review and has received the Outstanding Educator Award of the Academy of Management, of which he is a fellow. He is the co-author, with Professor Rugman, of International Business: A Strategic Management Approach (Financial Times/Pearson Education, 2000) Keywords: globalization; multinationals; global strategy; triad; triad-regional strategy; national responsiveness

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END OF GLOBAL STRATEGY Abstract Recent research suggests that globalization is a myth. Far from taking place in a single global market, most business activity by large firms takes place in regional blocks. There is no uniform spread of American market capitalism nor are global markets becoming homogenized. Government regulations and cultural differences divide the world into the triad blocks of North America, the European Union and Japan. Rival multinational enterprises from the triad compete for regional market share and so enhance economic efficiency. Only in a few sectors, such as consumer electronics, is a global strategy of economic integration viable. For most other manufacturing, such as automobiles, and for all services, strategies of national responsiveness are required, often coupled with integration strategies, as explained in the matrix framework of this article. Successful multinationals now design strategies on a regional basis; unsuccessful ones pursue global strategies. COMMON GLOBAL MISUNDERSTANDINGS Globalization has been defined in business schools as the production and distribution of products and services of a homogenous type and quality on a worldwide basis.1 Simply put - providing the same output to countries everywhere. And in recent years it has become increasingly common to hear business executives, industry analysts, and even university professors talk about the emergence of globalization and the dominance of international business by giant, multinational enterprises (MNEs) that are selling uniform products from Cairo, Illinois to Cairo, Egypt and from Lima, Ohio to Lima, Peru.2

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To back up their claims, these individuals often point to the fact that foreign sales account for more than 50 percent of the annual revenues of companies such as Dow Chemical, Exxon, Hewlett Packard, IBM, Johnson & Johnson, Mobil, Motorola, Procter & Gamble, and Texaco.3 These are accurate statements - but they fail to explain that most of the sales of global companies are made on a triad-regional basis. For example, most MNEs that are headquartered in North America earn the bulk of their revenue within their home country or by selling to members of the triad: NAFTA, the European Union (EU), or Japan and a small group of Asian and Oceania nations.4 In fact, recent research shows that: 1. More than 85 percent of all automobiles produced in North America are built in North American factories owned by General Motors, Ford, Daimler-Chrysler, or European or Japanese MNEs; over 90 percent of the cars produced in the EU are sold there; and more than 93 percent of all cars registered in Japan are manufactured domestically.

2. In the specialty chemicals sector over 90 percent of all paint is made and used regionally by triad based MNEs and the same is true for steel, heavy electrical equipment, energy, and transportation. 3. In the services sector, which now employs approximately 70 percent of the work force in North America, Western Europe, and Japan, these activities are all essentially local or regional.5 As a result, top managers now need to design triadbased regional strategies, not global ones The real drivers of globalization are the network managers of large multinational enterprises. But their business strategies are triad/regional and responsive to local

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consumers, rather than global and uniform. For example, the automobile and speciality chemicals business are triad-based, not global. There is no global car. Instead, over 90% of all cars produced in Europe are sold in Europe. Regional production and large local sales also occur in North America and Japan. Another misunderstanding about globalization is the belief that MNEs are globally monolithic and excessively powerful in political terms. Research shows this is not so. MNEs are not monolithic; in fact, the largest 500 multinationals are spread across the triad economies of NAFTA, the EU, and Japan/Asia. Recent research shows that of these 500, there are 198 headquartered in NAFTA countries, 156 in the EU, and 125 in Japan/Asia.6 Additionally, these triad-based MNEs compete for global market shares and profits across a wide variety of industrial sectors and trade services. And this process of regional competition erodes the possibility of sustainable long-term profits and the possibility of building strong, sustainable political advantage.7 A third misunderstanding about globalization is the belief that MNEs develop homogeneous products for the world market and through their efficient production techniques are able to dominate local markets everywhere. In truth, multinationals have to adapt their products for the local market. For example, there is no worldwide, global car. Rather, there are regionally-based American, European, and Japanese factories that are supported by local regional suppliers who provide steel, plastic, paint, and other necessary inputs for producing autos for that geographic triad region. Additionally, the car designs that are popular in one area of the world are often rejected by customers in other geographic areas. The Toyota Camry that dominates the American auto market is a poor seller in Japan. The Volkswagen Golf that was the largest selling car in Europe did not make an impact in

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North America. Even pharmaceuticals, which manufacture medicines that are often referred to as universal products, have to modify their goods to satisfy national and state regulations thus making centralized production and worldwide distribution economically difficult.

WORLD TRADE IS HIGHLY REGIONAL World trade provides a good example of just how regional MNEs are. The amount of trade in terms of exports and imports has grown rapidly over the last decade, but it continues to be dominated by the triad. The latest data show that in 1997 these three groups accounted for 57.3 percent of world exports and 56.5 percent of world imports. If these trade data are examined in terms of what might be called the core triad - the United States, the EU, and Japan - the amount of exporting that each group does to the other is quite small. For example, the United States exports approximately 20 percent of its total to the EU and 10 percent to Japan, while the EU exports 8 percent of its total to the United States and less than 1 percent (.002 to be exact) to Japan. Meanwhile, Japan exports 28 percent of its total to the United States and 16 percent to the EU. An analysis of imports reveals the same general picture. The United States gets 16 percent of its imports from the EU and 11 percent from Japan; the EU receives 8 percent of its imports from the United States and 4 percent from Japan; and Japan gets 24 percent of its imports from the United States and 17 percent from the EU.8 Simply put, the core triad members do not rely on each other for most of their exports or imports. Then on whom do they rely? The answer is: other members of their own triad. For example, as shown in Exhibit 1, over 60 percent of all exports by EU

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countries is to other members of that triad. The core triad members can be expanded by adding Canada and Mexico to the United States, which gives us NAFTA, and then constructing a group of countries for Asia. This group consists of Japan, Australia, New Zealand, China, Taiwan, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, Thailand and also the smaller Asian Pacific economies. This gives us the broad triad. This yields Exhibit 1, which confirms that the worlds trade is controlled by the triad.

(Exhibit 1 goes here)

According to data for 1997 in Exhibit 1, the triads export total US$ 4,145.8 billion, with 60.6 per cent of the EU exports of US$ 2,092.3 being internal, at US$ 1,268.5 billion. The EU exports only 8.7 per cent to NAFTA (US$ 182.1 billion) and 9.4 per cent to Asia (US$ 197.6 billion). NAFTA exports 15.4% per cent of its total to the EU (US$ 155.3 billion) and 22.4 per cent to Asian (US$ 226.0 billion). The internal NAFTA trade at 49.1 percent is surprisingly high, given that Canada is only one twelfth the economic size of the United States and Mexico only about one twentieth its size. Asia exports 21.1 per cent of its total to NAFTA (US$ 220.0 billion) and 14.7 per cent to the EU (US$153.3 billion). But the majority of Asian trade is also intra-regional. In summary, the extent of intra EU exports is 60.6 per cent. For NAFTA internal trade it is 49.1 per cent and for Asia it is 53.1 per cent. The majority of world trade in the European and Asian triads is within their internal markets and for North America nearly half of its trade is also intra-regional. Most of the rest of world trade is between triad members.

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Given the dominance of the triad in world trade (and direct investment data show the same picture) what strategies are appropriate for individual multinationals?

THE INTERNATIONAL MANAGEMENT STRATEGY MATRIX What types of strategies do MNEs use in their international efforts? The answer will vary from firm to firm, but in virtually every case these companies have developed a regional triad-based strategy. They first do well in their home markets and then expand out in their home triad markets. In the process, they carefully analyze costs, revenues, factor conditions, growth potential, political risk, cultural factors, and environmental issues. One of the major strategic tools they use in this effort is an integration/responsiveness framework that helps them address the benefits of economic integration with those of national responsiveness.9 Figure 1 provides an illustration of this international management strategy matrix. (Figure 1 goes here) The vertical axis in Figure 1 represents the benefits of economic integration which yield economies of scale. Some of the characteristics of MNEs that employ high economic integration include centralized, closely integrated and internally coordinated operations, product line managers with high degrees of authority, and a strong headquarters office. The horizontal axis represents the ability of the MNE as an organization to develop skills in national responsiveness. This means adapting its products and services to local cultures and tastes as well as investing to understand local political regulations and public policies. Some of the characteristics of MNEs with high national responsiveness include strong local

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autonomy with decentralization of operations and the ability of country managers to rapidly respond to local market conditions.10 The matrix in Figure 1 yields four generic economic integration/national responsiveness strategies. Quadrant 1 is a pure global strategy and is widely used by firms such as Ericsson and IKEA which focus heavily on going international to achieve the benefits of global integration using a successful home base product or service. We can call this a pure global strategy. Quadrant 4 is a pure national responsiveness strategy and is used by firms such as Unilever and the Kingfisher Group that carefully adapt their approaches to local market conditions.11 Quadrant 3 offers a balance of integration and national responsiveness strategies and is employed by firms such as the Peninsular and Orient Steam Navigation Company and Procter & Gamble, which have found that strong attention to both economies of scale and local customs, tastes, and culture are critical to success. Quadrant 2 is an unsatisfactory set of strategies that offer few or no benefits of either integration or national responsiveness and is avoided by successful MNEs. This matrix links the first part of this paper (with its discussion of the end of globalization) to the second (in which strategies of MNEs will be discussed, in a set of realworld cases). In a sense, Quadrant 1 captures much of the discussion of globalization and global strategy. The MNEs are driven by economic drivers and can succeed in an idealized world of free trade, political interdependence and cultural homogeneity. It is the quadrant of convergence of economic, political and cultural aspects of globalization, as discussed by Giddens, Grey, and Friedman.12 It is the economics-based quadrant of MNE activity, criticized by environmentalists, non-governmental organizations (NGOs) and

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advocates of a new civil society. In other words, most of this literature on globalization is captured quite adequately in Quadrant 1. However, the matrix in Figure 1 has a right hand side column where MNEs can develop capabilities in national responsiveness, i.e. in being both politically aware and also culturally sensitive. The MNEs which can take advantage of the liability of foreignness by internationalizing such organizational capabilities will be able to outcompete both other MNEs stuck with a Quadrant 1 mindset and also domestic triad rivals who have local knowledge and connections. A major contribution of this paper is the recognition that the widespread globalization literature has not discussed the right hand side of Figure 1. Yet, this is where much of the action lies for many MNEs, whose managers today need to wrestle with either Quadrant 4 strategies of pure national responsiveness or with Quadrant 3 type issues of integration and localization.13 When MNEs target their regional triad markets using the appropriate economic integration/national responsiveness, they tend to be successful. We will discuss ten such cases below. Besides the U.S.-based Procter & Gamble, Canadian Nortel, and Japanese Matsushita we shall discuss the strategies of seven E.U.-based MNEs, as some of them may be unfamiliar to North American managers. Before proceeding we shall next discuss three cases of these problems with a Quadrant 1 pure global strategy; two are U.S.-based and one is European.

GLOBAL FAILURES

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Over the past decade a number of MNEs that should have known better have tried to succeed with a globalization strategy. Some of the best-known include Coca-Cola, the Walt Disney Company, and Saatchi & Saatchi. In all three cases, these MNEs have developed a global strategy based on Quadrant 1 of Figure 1, i.e. one where the benefits of global integration are sought and the need to adapt products to local markets is largely ignored. Coca-Cola: Global Is Out, Local Is In After decades of continued success, Coca-Cola found itself facing a series of problems as it entered the millennium. During the 1970s and 1980s the firm had expanded its global reach into almost 200 countries. At the same time the company began to centralize control and to encourage consolidation among all bottling partners. In the 1990s, however, the world began to change. Many national and local leaders began seeking sovereignty over their political, economic, and cultural futures. As a result, the very forces that were making the world more connected and homogeneous were also triggering a powerful desire for local autonomy and the preservation of unique cultural identity. Simply put, the world was demanding more nimbleness, responsiveness, and sensitivity from MNEs, while Coca-Cola was centralizing decision making, standardizing operating practices, and insulating itself from this changing environment. Coke was going global, when it should have been going local.14 Today Coca-Cola is beginning to turn things around. In particular, the firm has begun implementing three principles that are designed to make it more locally responsive. First, Coke is instituting a strategy of think local, act local by putting increased decision making in the hands of local managers. Second, the company is focusing itself as a pure marketing company that pushes its brands on a regional and local basis. Third, the firm is

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working to become a model citizen by reaching out to the local communities and getting involved in civic and charitable activities. In the past Coke succeeded because it understood and appealed to global commonalties. In the future it hopes to succeed by better understanding and appealing to local differences.

Disney: Learning to Say Oui Not Yes Between 1988-1990 three $150 million amusement parks opened in France. By 1991 two of them were bankrupt and one was doing poorly. This track record did not concern the Walt Disney Company, which planned to open Europes first Disneyland in 1992 on a site 20 miles east of Paris. There were over 100 million people within six hours driving distance of the park and company officials were certain that Euro Disney would be a major success. They were quite wrong.15 From opening day there were problems with the operation, as the company tried to implement a global strategy rather than a local one that accommodated the needs of Europeans. One of the problems was that workers were required to speak English at meetings, even if most people in attendance were French. Another was that liquor was not sold in the park, although many visitors were accustomed to having a drink with lunch or dinner. A third was that many of the exhibits and rides did not have a local theme, they were the same as those in Disneyland USA and thus did not appeal to Europeans. A fourth was that labor policies were at odds with worker expectations, resulting in 3,000 employees leaving over pay and working conditions with a month of opening day. By 1994, after heavy losses, Euro Disney was in such poor shape that some observers believed that it would be shut down. Forced to reevaluate its approach, however,

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the company began making a series of changes, abandoning its global approach, and substituting one that appealed to local tastes. The name of the park was officially changed to Disneyland Paris and the company started to stress the regional origins of the fairy tale characters. In addition, the firm began creating European-specific attractions such as history movie shows and a science fiction tour based on Jules Vernes stories; the rules and regulations governing employee behavior were radically altered; and the services provided in the park, including the serving of alcoholic beverages, were changed to reflect local tastes. Today Disneyland Paris is profitable and local anti-Disney hostility is all but gone. The firm has come to realize that what works well in the U.S. cannot be directly transported overseas, as seen by its new regionally-focused strategy.

Saatchi & Saatchi: When In Rome Saatchi & Saatchi, the successful British advertising firm, experienced spectacular growth in the 1980s partly due to a series of acquisitions in Britain and other European countries. The high quality of its advertisements, including those for the Thatcher government, and the vision of the Saatchi brothers enhanced their name in the U.K. The firm then decided to build a global business in order to achieve economies of scale.16 The U.S. market at this time accounted for 55 percent of all worldwide advertising revenue, far higher than the 24 percent that was generated in mainland Europe and the 5 percent accounted for by the UK. So the company decided to enter the North American market, which it did by purchasing the U.S.-based Bates advertising agency. At the same the company decided to build a global service supermarket for multinational enterprise clients by expanding its core advertising business to include a communications and public relations

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division and a consulting division. The objective of these efforts was to become a full service provider across the triad, using a common brand name. Unfortunately, the Saatchi organization lacked the requisite skills for integrating its approach into the local markets. Management failed to realize that advertising, communications, and consulting have to be geared toward local clients and a global, boiler-plate approach will not succeed. As a result, the firms expansion into the U.S. market and its globalization efforts proved to be major failures.

REGIONALIZATION AND STRATEGIC SUCCESSES Successful MNEs do not always use the pure globalization, one-size-fits-all strategy of Quadrant 1. Rather they seek an optimal balance of economic integration and national responsiveness. In some cases MNEs employ high economic integration and low national responsiveness (Quadrant 1); in other instances they use high national responsiveness and low economic integration (Quadrant 4); and in still others they have a high focus on both areas(Quadrant 3). The most famous example of such a Quadrant 3 strategy is ABB, widely discussed in the literature.17 This section reports on examples of ten MNEs that are using one or other of these three strategies. (See Figure 2, which also shows the three MNE discussed in the previous section.)

(Figure 2 goes here)

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Philips and Matsushita: Global Gladiators In terms of triad-based competition, the 1980s saw the emergence of Japanese winners in the consumer electronics industry. One of the most successful Japanese MNEs is Matsushita. Initially successful with color televisions (Panasonic TVs), its best known product was the video cassette recorder (VCR), a field which it denominates by using the VHS system instead of Sonys betamax format and others produced by European and American rivals. In order to dominate world business in VCRs, Matsushita made the VHS format the industry standard. It achieved this, not just by its own massive production and worldwide sales, but by licensing the VHS format to other MNEs such as Hitachi, Sharp, Mitsubishi and even its great European-based rival, Philips. Other companies like GE, RCA and Zenith (who sold VCRs under their own brand name) were tied into the VHS format because of the production and process technology retained by Matsushita in its strong Japanese home base. Massive global economies of scale enabled the firm to cut VCR prices by a half over its first five years. It operates a global strategy in Quadrant 1 of Figure 2. In contrast to Matsushita, Philips was in desperate trouble by the 1980s. Built up in the inter-war period of protectionism and strong government regulations it had developed a very decentralized organizational structure. Individual national country managers held the power in Philips and they were slow to respond to the Japanese threat in the post-war period. As a result Philips lacked economies of scale and its radios, TVs and VCRs were all too expensive, compared with similar Japanese products. Philips had over 600 manufacturing plants across the world, all developing products for local markets. The challenge facing Philips was how to restructure its entire business away from Quadrant 4 of Figure 2 (a locally responsive national organization), towards becoming a more integrated and leaner

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manufacturer capable of reaping the necessary economies of scale through a standard production in the triad markets. This required a move to Quadrant 3 or even to Quadrant 1, to compete with its Japanese rival. In essence, the Japanese had changed the rules of the game in the consumer electronics business. Matsushita, as a centralized, high quality, low price and innovative company was beating the decentralized and nationally responsive European firm. One response by European firms was to lobby their governments for protection in the form of anti-dumping actions and tougher customs inspection of Japanese products. But such triadbased shelter only buys some breathing room before MNEs like Philips need to restructure and fit their organizational capability to the required industry strategy. Finally, the response of Matsushita to more protection has been to switch overseas sales from the export mode to one of foreign direct investment. This means that the Japanese firm can evade European trade barriers such as anti-dumping actions, since it actually manufactures in European countries, such as the United Kingdom, where it has a major plant in Cardiff, Wales. But this also means that Matsushita needs to make its foreign subsidiaries as useful as possible by encouraging local initiatives, (moving from Quadrant 1 to Quadrant 3), even where these conflict with its international, centralized Japanese-based management culture. The same government regulations which made Philips too decentralized are now being reapplied half a century later to make Matsushita less global and more local.

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IKEA: Low CostAnd Designed To Stay That Way In less than 50 years IKEA has grown from a small, privately-held, Swedish furniture retailer into a $7 billion multinational corporation with 140 stores in 30 countries. Focusing heavily on an economic integration strategy, the company introduced knock-down kits that customers can buy at the store and assemble at home. IKEA also brought innovation to the logistics of furniture production by establishing groups of key suppliers to produce components at low cost, while maintaining tight control over product design and quality in order to maintain the IKEA brand name and the distinctive identity of its products. After establishing itself in Sweden as a high quality, low cost producer of modern, functional, durable, and competitively priced furniture, the company began to internationalize and become a strong regional player in Europe and, in more recent years, across the triad. During the 1970s it moved into Switzerland, Germany, Australia, and Canada. In the 1980s it expanded into Europe at large, as well as into the United States. In the past few years it has begun establishing operations in Shanghai. This is a Quadrant 1 strategy of building upon a strong home-based Swedish concept of clean, efficient, well designed, functional, durable and modern furniture. The product is not adapted as international expansion takes place. Today IKEA continues to focus on the high economic integration, low national responsiveness strategy of Quadrant 1. It has been successful by introducing highly differentiated products into a traditional industry and has now established a universally recognized brand name for high quality, inexpensive, and attractive furniture. By combining the generic strategies of differentiation, low cost, and niching,18 the firm has been able to maintain its success as a Quadrant 1 player (again see Figure 2).

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Kingfisher: Where Retail Is Detail In contrast to the Quadrant 1 internationalization strategy of IKEA, other retailers are more nationally responsive. One example is Kingfisher. The Kingfisher Group, a British retail enterprise with annual sales of over $10 billion, was founded in 1989. Today the firm has over 2,500 stores, principally in Great Britain and France, although in recent years the group has made acquisitions in Asia. The firms major holdings include British Woolworth Stores, Comet (electrical products), Superdrug, B&Q (home improvement stores), Darty (electrical retailer), and Castorama (do-it-yourself retailer), as well as an electrical retail chain in Singapore. A recent study of the profitability of foreign assets found that the Kingfisher Group had an annual return on foreign profits in excess of 30 percent, well above the average of 4.78 percent for the worlds top 500 MNEs.19 The company has been increasing its foreign holdings in recent years by acquisitions of leading continental European retailers and now has 40 percent of its assets in overseas markets. The approach that is used in managing these geographically dispersed operations can be best described as: retail is detail and local knowledge is vital. The firm relies heavily on a Quadrant 4 strategy by keeping in place the European managers and workers in its acquired businesses, as they are best suited to deal with local customers. In order to keep costs to a minimum in an industry where price is a key factor, the firm is continually looking for ways to generate logistical savings and scale economies. Should this trend continue, the Kingfisher Group will move into Quadrant 3. However, for the moment it is doing very well with its regionally-focused strategy in Quadrant 4.

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In contrast, Wal-Mart, the worlds largest retailer is using its strong U.S. base to expand abroad, more like IKEA than Kingfisher. Wal-Mart is pursing a Quadrant 1 strategy and this has led it into some difficulty in Europe, especially in Germany and Britain where there are few large suburban shopping malls, and insufficient space for Wal-Mart in the traditional high-street shops.

Nokia And Ericsson: Small Phones But Big Markets Nokia, headquartered in one of the smallest countries in Europe, Finland, is the worlds largest producer of mobile phones. It is the leader in Europe and second only to Motorola in the United States. In the 1970s Nokia transformed itself from a forest products firm into a high technology producer of electronic products, especially cellular phones; and by the end of the millennium the company was operating in 130 countries with annual sales of almost $20 billion.20 Because there are only 3 million people in Finland, Nokia has actively pursued a Quadrant 1 internationalization strategy and today 95 percent of all revenues are generated outside of its borders. A large degree of this success can be attributed to its research and development (R&D) efforts which have resulted in mobile phones that employ global roaming, thus allowing the unit to be used across different telecom systems worldwide. Nokia has also been very successful in forming strategic alliances with U.S. distributors such as Radio Shack and American telecom companies such as AT&T, thus providing it with access to large markets where it can successfully employ its economic integration strategy. In addition, Nokia has worked closely with governments to develop an industry standard (a Quadrant 1 strategy) and has entered into a joint venture with its major rival,

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Ericsson, for this purpose. The two firms are working to establish GSM (Groupe Spciale Mobile) as the standard for mobile phones across Europe, in addition to its becoming one of the key standards globally. L.M. Ericsson is one of the worlds largest producers of digital mobile phones. Like Nokia, its small phones have a worldwide market. Only 6 percent of its $24 billion annual revenue is earned in its home country of Sweden.21 Its biggest revenue markets are Europe (40 percent), Asia (27 percent), and North America (16 percent). Like Nokia, the firm places major emphasis on R&D and innovation and, among other things, has developed telephone switches that compete effectively with Canadas Nortel Networks and Frances Alcatel. Ericsson has also formed alliances with firms such as Compaq, Intel, Hewlett Packard, and Texas Instruments. These firms serve as key suppliers of components and products that Ericsson uses for voice and data transmission. This outsourcing approach also helps the company, like its competitor Nokia, maintain a successful Quadrant 1 strategy. Both Nokia and Ericsson are working for the development of standardized global telecom services which will make Quadrant 1 viable in the long term. At present, different national regulations affecting telecommunications raises the possibility of a Quadrant 3 strategy being necessary.

Nortel Networks: A Transnational Firm Northern Telecom, now called Nortel Networks, had transformed itself from a Canadian-based multinational enterprise in 1977 to a North American-based MNE by 1987 to a quadrant 3 transnational corporation by 1997. Between 1985 and 1998, its revenue

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increased from US$4.2 billion to US$18.7 billion and total employees from 46,500 to 80,000. In 1985, over 90 per cent of its sales were within North America. Today, Nortel has 92 per cent of its sales outside Canada, and 40 per cent of all sales outside of North America. It spends over 15 percent of its sales on R&D. Moreover, one in four of Nortels employees focuses on R&D, working in 42 R&D facilities in 17 countries, along with numerous joint ventures and strategic alliances. Overall, the number of knowledge workers has increased from 42 per cent in 1985 to 66 per cent in 1995, rising to 75 per cent by 1998. While Nortel competes globally in the telecommunications sector, it is not operating as if borders do not exist. Despite the apparent globalization of the telecom sector, there remains a very high degree of government regulation and a set of regionally-separated national markets. Even with the WTOs International Technology Agreement of 1995, there is no single world market for telecommunications. Nortel must be flexible enough to respond to differences in national regulations and consumer tastes, so it has adopted a policy of national responsiveness. With this strategy, a firm like Nortel can be close to the customer and responsive to the local regulator.22 The key managerial challenge for Nortel today is how to organize effective networks with allies and strategic partners across the segmented regional markets characteristic of the telecommunications sector. Nortels objective is to be the global resource for digital network solutions and services. It aims to deliver a total network solution of technical assistance, training, customer service and documentation in partnership with its clients. By building and integrating both wireline and wireless digital networks on a global basis and operating as a transnational corporation (TNC), Nortel has moved towards

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achieving this objective. In 1998, Nortel purchased Bay Networks, a Silicon Valley internet firm for Cdn$11.2 billion. It did this to refocus itself as an internet-based provider of digital networking solutions. It also did this nearly two years before the worlds biggest ever merger, of internet leader AOL and entertainment/magazine leader Time Warner, in January 2000.

Unilever: Local Tastes And Worldwide Profits Unilever is the second largest consumer goods company in the world. This BritishDutch firm currently markets over 1,500 brands (although it is moving to reduce this number to 400)23 of food and home and personal care products in 158 countries and has annual revenues of more than $44 billion. Much of this success can be attributed to its high national responsiveness and low economic integration strategy (Quadrant 4 of Figure 2). Unilevers strategy is to remain close to customers in the local markets while giving regional managers authority to make operating decisions in these geographic areas. The companys national responsiveness strategy has been particularly effective in many regions because it has operated there for decades and understands the local culture. For example, it has been in the Philippines, Chile, Argentina, and Brazil since the late 1920s and in India and Indonesia since the early 1930s. It was in China soon after WW I and when that government opened itself up to outside businesses in the 1980s, Unilever was quick to sign joint venture agreements to reenter the market. As a result, sales in China are now in the range of $500 million. In particular, Unilevers success in emerging markets is a result of its regional perspective. Selling to consumers from diverse cultures with different local tastes requires a

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locally-driven strategy that addresses the unique characteristics of the buyers. Unilever has done a very good job of ensuring that its managers understand the specific needs of their diverse customers. The firm does this with its Quadrant 4 strategy.

P&G: Regional Focus And Global Coordination Procter and Gamble (P&G) with annual sales of almost $40 billion has operations in virtually every country of the world. In carrying out its operations, the firm employs a strategy that combines high national responsiveness with high economic integration. In contrast to Unilever, P&G is using a Quadrant 3 strategy. In its latest organizational restructuring, called Project 2005, the company has grouped its 200+ brand products into seven major business units. Each of these units is now coordinated globally from different locations. For example, some are run from Japan, Venezuela, and Austria, while others are managed from headquarters in Cincinnati, Ohio. These seven product divisions are called global business units, but in practice they operate in a highly decentralized manner with strategies being developed and implemented locally and/or regionally. In particular, product delivery and marketing are local, as befits a customer-based products business, while the back office of payroll, financing, human resource management and other general services and processes is coordinated on a more global basis, in order to achieve internal economies of scale. In addition, P&G uses the best practices of each subsidiary as benchmarks for the others. Simply put, the firm has created an organization structure and an operating strategy that meet the twin goals of economic efficiency and localization. And in recent years, to ensure that it does not drift toward a Quadrant 1 pure globalization strategy that fails to

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address local needs, the company has refashioned its board of directors. Today this group is more international than ever, with membership from South America, Canada, Europe, and Asia, in addition to the United States. As a result, the members bring regional/triad viewpoints to the board, with the objective of ensuring that P&G continues to operate with a Quadrant 3 strategy.

P&O: From Cruises To Containers The Peninsular and Orient Steam Navigation Company (P&O) was the sea transportation backbone of the old British Empire. In the nineteenth century the firm won British government contracts to deliver mail to the Spanish peninsula and, via Africa and the Indian subcontinent, to Australia and the Far East. Today P&O is a $10 billion transportation and service business that is one of the UKs most international firms. P&O uses its familiar brand name as a base for its British Commonwealth cruise ships, cross channel ferries, container ships, and pan European trucking. Meanwhile, in North America, the firm operates the Princess (Sun Princess, Dawn Princess, Grand Princess, and Ocean Princess) cruise ships out of Florida and along the North American west coast to Alaska. This North American operation is run separately from the companys European cruise lines; and using a nationally responsive Quadrant 4 strategy, P&O has been able to appeal to the baby boomers in the North American market. In fact, its strategy has been so successful that these cruise ships often sail with 100 percent occupancy. In Europe, the British and European-based P&O cruise lines are also operated on a regional basis, appealing to the particular needs of these markets.

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P&O is also one of the worlds largest container carrier operators. The business has routes across all the worlds oceans and its container ships are linked up with P&O European Trucks, the largest integrated distribution and transport system in Europe. These need economies of scale as in Quadrant 1. Meanwhile P&O Ferries, the largest operation between Britain and the continent, continues to do well despite competition from the Eurotunnel. Overall the company faces an interesting strategic challenge of managing a series of businesses that range from leisure and entertainment to shipping. The firms long range strategy falls into Quadrant 3 of Figure 2. P&O is a transnational company that manages a marketing, sales and service culture (cruise lines) and an engineering and technical culture (shipping). It has done this in number of ways including the development of extensive senior management training programs at Templeton College, Oxford University, which are designed to increase managerial efficiency and help executives address the specific needs of their varied international markets.24

LESSONS LEARNED The case examples provided here show clearly that a pure globalization strategy of Quadrant 1 that is typified by high economic integration and low national responsiveness will not always work in the 21st century. In fact, firms that attempt this approach tend to be from strong triad-based home markets in consumer electronics or retailing, or hope to develop a global standard (as in mobile phones). Some MNEs in Quadrant 1 have significantly lower returns on their foreign assets than do MNEs that balance a concern for economic integration with that of national responsiveness.25 For example, recently Japanese

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MNEs have used the globalization approach (Quadrant 1 of Figure 2) with disastrous results. The relatively more successful European MNEs tend to opt for strategies in Quadrants 1 and 4, although recent research shows that some of them are now beginning to move into Quadrant 3. Successful American MNEs also tend to adopt a Quadrant 3, transnational approach. Which are sure of the lessons to be learned from analysis of these ten MNEs? Philips has been in trouble as its country managers were too powerful and the firm was too decentralized, in Quadrant 4. The push for a single EU market to provide a home-base to offset the advantages of U.S. and Japanese rivals is a logical response. In contrast, Matsushita has successfully penetrated the U.S. and European triad markets in Quadrant 1 but is now attempting to get more value out of its subsidiaries and be a little nationally responsive. IKEA has followed a Quadrant 1 home-based internationalization strategy whereas Kingfisher has not followed a standardized approach but rather left its French and German acquisitions alone to deal with triad retail customers, a Quadrant 4 approach. Nokia and Ericsson. The two mobile phone producers are successful as domestic champions and have been able to internationalize into larger triad markets, despite strong national telecom regulations, as they are attempting to develop a Quadrant 1 global standard for mobile phones. Nortel has already developed into a Quadrant 3 transnational MNE with strong decentralization within a network combined with integration

2424

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skills in terms of communication and common strategy. P&O has also developed a Quadrant 3 strategy of decentralized cruise ships combined with centralized global logistics. Unilever has been moving to consolidate its many national and regional brands into a manageable number and it is operating on a regional basis. In contrast, Procter and Gamble is attempting to set up seven worldwide product groups, the top management of which is spread around the triad. Both companies are nationally responsive; Unilever in Quadrant 4 and Procter and Gamble in Quadrant 3. What quadrant is best? This will depend on the specific situation, but it is possible to offer some practical strategies for managers who want to increase their companys international revenues and profits. Five of the most useful lessons learned are these: 1. Do not assume an integrated global market. There is more to strategy than Quadrant 1. Instead, be prepared to design strategies that take into account regional trade and investment agreements such as NAFTA or the single market of the EU. Also learn to deal with different cultures and become nationally responsive when necessary. 2. Design organization structures for Quadrants 3 and 4 which recognize triad-based internal know-how capability and develop network organizational competencies, rather than always rely on international divisions or global product divisions, in Quadrant 1. 3. Develop new thinking and knowledge about regional business networks and triad-based clusters and assess the similar attributes of triad

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competitors, rather than always developing pure global strategies. The foreign market is not always the same as your home market.. Make alliances and foster cross-cultural awareness in your senior managers. 4. Develop analytical methods for assessing regional drivers of success rather than globalization drivers because the former may be more useful in the future in gaining and holding market share. 5. Encourage all your managers to think regional, act local - and forget global!

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Exhibit 1 EXPORTS IN THE BROAD TRIAD

NAFTA 1010.9 intra-NAFTA 496.4 (49.1%) 220.0 226.0 ASIA 1042.6 intra-Asia 553.4 (53.1%) 155.3 EUROPEAN UNION 2092.3 intra-EU 1268.5 (60.6%) 182.1

153.3 197.6

Note: Data are for 1997, in US$ billion. Source: Alan M. Rugman The End of Globalization (London: Random House Business Books, 2000 and New York: AMACOM/McGraw-Hill, 2001).

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Figure 1 THE INTERNATIONAL MANAGEMENT STRATEGY MATRIX

National Responsiveness Low Economic Integration High 1 3 High

Low

Source: Adapted from Christopher A. Bartlett and Sumantra Ghoshal. Managing Across Borders : The Transnational Solution. Boston: Harvard Business School Press 1989, 2nd Edition 1998.

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Figure 2 MNE STRATEGIES AND THE INTERNATIONAL MANAGEMENT STRATEGY MATRIX National Responsiveness Low Economic Integration High 1 Coca-Cola Disney Saatchi & Saatchi Matsushita IKEA Nokia Ericsson 3 High Procter & Gamble Nortel Networks P&O

4 Philips Unilever Kingfisher

Low

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ENDNOTES

3030

Rugman, A. and R. Hodgetts. 2000. International Business, 2nd edition. London: Pearson Education /Prentice Hall:

615. The definition of globalization is a subject of intense academic debate. Most business school scholars would adopt the economics-based definition used here, where integration across national borders yields the potential for firm-level economies of scale and/or global brand name products. Contingent upon this definition of pure economic globalization is the need for products to be uniform across markets. A much broader definition of globalization is used by other writers such as Anthony Giddens, a sociologist. He defines globalization as the worldwide interconnection at the cultural, political and economic level resulting from the elimination of communication and trade barriers and he states that globalization is a process of convergence of cultural, political and economic aspects of life, Giddens A. 1999. Runaway World : How Globalisation is Reshaping our Lives. London: Profile Books. Again, convergence (of cultures, tastes, regulations etc) is an extreme version of homogeneity of products and services. The thesis of this article is that such convergence and homogeneity has not occurred; instead of globalization we observe regional/trial production and distribution. Therefore, MNEs do not need global strategies; regional ones are more relevant.

Yip, G. 1995. Total Global Strategy. Englewood Cliffs: NJ: Prentice Hall. However, Schlie and Yip (2000) have

suggested that automobile firms can be observed as following a regional strategy (equivalent to our triad regional strategy.) They argue that, first, any firms develop globally and only selectively regionalize as a second step. Examples of triad products are the Honda Accord (with the flexible-width platform), the VW group cars, and the old Ford and GM European versions of their cars. See Schlie, Erik H. and George S. Yip (2000) Regional Follows Global: Strategy Mixes in the World Automotive Industry, European Management Journal 18 (4), 343356.
3

For more on these firms see the Top 100 TNCs Ranked by Foreign Assets, World Investment Report 1997 New

York: United Nations, 1997.

4

NAFTA consists of the United States, Canada, and Mexico. The European Union is made up of Belgium, France,

Italy, Luxembourg, the Netherlands, Germany, Great Britain, Denmark, Greece, Ireland, Portugal, Spain, Austria, Finland, and Sweden. The major Asian countries included here include Australia, China, India, Indonesia, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Taiwan, and Thailand as well as Japan.

Rugman, A. 2000. The End of Globalization. London: Random House, Chapter 1. (This book is to be published by

AMACOM/McGraw-Hill, 2001 in North America).

6

These data have been adapted from The Fortune Global 500, Fortune, August 2, 1999. Rugman, A. 1996. The Theory of Multinational Enterprises. Cheltenham: Elgar and Rugman, A. and J. DCruz

2000. Multinationals as Flagship Firms: Regional Business Networks. Oxford: Oxford University Press.
8

Rugman, A. 2000. The End of Globalization. London: Random House Business Books, Chapter 7. The initial

focus on the triad is due to the work of former McKinsey consultant, Kenichi Ohmae; Ohmae, K., 1985. Triad Power. New York Free Press. However, Ohmae has subsequently become a strong advocate of Quadrant 1 pure economic globalization and is not supportive of policies of national responsiveness; Ohmae, K., 1990. The Borderless World. New York: Harper Business; Ohmae, K., 1995. The End of the Nation State. New York: Free Press.
9

Bartlett, C. and S. Ghoshal, 1989. Managing Across Borders. Boston: Harvard Business School Press.
A referee has suggested that the axes may be orthogonal. The vertical axis of Figure 1 represents economic integration with

10

centralized decision making at head office and high product line authority (Quadrant 1). The horizontal axis is characterized by strong decentralization and rapid local response (Quadrant 4). The referee wonders how can the MNE be both centralized and decentralized? The answer is that it is in Quadrant 3, where there are organizational tensions in attempting to conduct the two required strategies of integration and localization simultaneously. For further discussion of this matrix, and strategies of the use of it in nine MNEs see Bartlett, A., and S. Ghoshal, 1989. Managing Across Borders Boston: Harvard Business School Press.
11

Yip, building on Levitt and Porter, is representative of many international business and international marketing

professors in advocating a pure global strategy. In terms of Figure 1, Yip would argue that national responsiveness is a sign of weakness for a firm. His vision of global strategy is to exploit foreign markets by using a standard capability, usually developed in the home base. Firms should only go into countries where they can use their core capability; if they need to adapt to the local market then it is better to avoid the liability of foreignness. This logic of Yip, Porter and Levitt is captured entirely by quadrant 1 of Figure 1. Here, indeed, local adaptation is a sign of weakness and firms are successful due to a pure globalization strategy of low cost, differentiation, or niching. Yet, the logic of Figure 1 is that quadrant 4 is, conceptually, just as important. Here success is achieved by national responsiveness alone, and is not due to Yips conventional strategies. Being nationally responsive itself can be a

core competence. Finally, in quadrant 3, firms need to wrestle with both types of strategy and develop an organizational capability to resolve these differentiation. This organizational capability then becomes a core competence in itself. Yip, G. 1995. Total Global Strategy, Englewood Cliffs: NJ: Prentice Hall; Porter, M. 1990. The Competitive Advantage of Nations, New York: Free Press; Levitt, T. 1983 The Globalization of Markets, Harvard Business Review, 61 (May-June): 92-102.
12

Giddens A. 1999. Runaway World: How Globalisation is Reshaping our Lives. London : Profile Books; Friedman, T. 1999.

The Lexus and the Olive Tree; Gray, J. 1998. False Dawn: The Delusions of Global Capitalism. London: Granta Books.
13

Most of the domestic strategy literature also is confined to Quadrant 1, e.g. the work by Michael Porter on the

competitiveness of nations uses a diamond framework, in which MNEs build Quadrant 1 global strategies based on the strengths of their home country diamond. This is also consistent with Vernons product life cycle explanation of the global

spread of U.S. MNEs.

Porter, M. 1990. The Competitive Advantage of Nations. New York: Free Press; Vernon, R. 1966. International Investment and International Trade in the Product Cycle, Quarterly Journal of Economics LXXX.2.
14

Daft, D. Back to Classic Coke, Financial Times, March 27, 2000: pp 20 Greenhouse, S. Playing Disney in the Parisian Fields, New York Times, February 17, 1991, Section 3, pp. 1, 6;

15

Euro Disney Resignation, New York Times, January 16, 1993, p. 10; W. Heuslein, Travel, Forbes, January 4, 1993, p. 178; S. Toy and P. Dwyer, Is Disney Headed for the Euro-Trash Heap? Business Week, January 4, 1994, p. 52; T. Stanger et al. Mickeys Trip to Trouble, Newsweek, February 4, 1994, pp. 34-39; International Briefs: Revenue for Euro Disney Up by 17% in Quarter, New York Times, January 22, 1998; and http://www.clubblue.com/text/headlines/9nment/stories/industry_eurodisney_1.html; http://www.informatik.tumuenchen.de/~schaffnr/etc/disney/his8891.htm; http://www.informatik.tumuenchen.de/~schaffnr/etc/disney/finhist.htm.
16

Levitt, T. 1983. The Globalization of Markets, Harvard Business Review, 61 (May-June): 92-102.
ABB is one of the core nine cases discussed by Bartlett, Christopher and Sumantra Ghoshal (1989) Managing Across Borders.

17

Boston: Harvard Business School Press, Second Edition, 1998. It is also discussed in Ghoshal, Sumantra and Christopher Bartlett (1997). The Individualized Corporation. New York: Harper Business, in which the former CEO of ABB, Percy Barnevik is used as a spokesperson for a Quadrant 3 transnational solution.
18

Porter, M. 1980. Competitive Strategy. New York: Free Press.

19

Gestrin, M., R. Knight and A. Rugman 2000. The Templeton Global Performance Index 2000. Oxford: University

of Oxford: Templeton College Executive Briefings.

20

Nokia annual report, 1999. Ericsson annual report, 1999.

Nortel is a transnational corporation, (TNC) on three grounds.

21

22

First, Nortel has decentralized decision making, to reflect the regional nature of the telecommunications market for products and services. A large degree of autonomy is given to product-sector and country managers. Second, Nortel has an international managerial resource strategy which decentralizes major decision making to some 200 top executives in more than a dozen markets around the world. In 1987, Northern Telecom was run by five to ten people out of head office in Mississauga, Ontario. The 200 top managers making vital decisions today operate with the large degree of autonomy typical of the TNC. Third, Nortels decentralized top management structure is held together by heavy use of the Internet for inter-office communication. Nortel has its own internal electronic voice mail, and data network, which is heavily used by senior managers, as well as all other employees. The senior managers are members of the Presidents Council, which conducts its business through the corporate intranet.
23

Orr, D. A Giant Reawakens, Forbes, January 25, 1999, pp. 52-54; Unilever to Purge Three out of Four

Brands, The Times, September 22, 1999, p. 45; Munching on Change Unilevers food business, The Economist, January 6, 1996, pp. 56-61; http://www.unilever.com.
24

P&O, Annual reports. Gestrin, M., R. Knight and A. Rugman 2000. The Templeton Global Performance Index 2000. Oxford:

25

University of Oxford: Templeton College Executive Briefings.