GLOBAL STRATEGY



Global Strategy 319
Photo by: Benjamin Haas

Global strategy on the micro level pertains to the allocation of a company's resources in a manner that will take advantage of profit opportunities outside of domestic markets. In its broadest interpretation, that definition encompasses activities such as overseas manufacturing, foreign investing, and importing. This text, however, views global strategy primarily within the context of marketing-related activities, such as exporting, licensing, and partnering in foreign countries to sell goods and services abroad.

In general, global marketing strategies encompass three basic decision areas faced by individual organizations: (1) whether or not to engage in foreign trade; (2) what specific markets should be served, including product, geographic, and demographic markets; and (3) how to participate in chosen markets, including strategies related to product planning, financing, promotion, distribution, and price.

On the macro level, global strategy is used by regions, countries, trading partners, and other entities to accomplish broad economic objectives related to foreign trade and competition. For example, most countries impose a variety of tariffs, quotas, and other restrictions on incoming goods. Likewise, groups of nations often form self-serving trade agreements that exclude other countries or global regions. And nations or states may engage in strategies, through tools such as tax incentives or government-sponsored promotions, intended to improve global competitiveness or help companies in their locale. All of these macro-level initiatives influence strategy at the micro level.

Discussed below are three basic theories of global trade, the chief benefits of global marketing, influences that dictate global strategies, and the four fundamental approaches to participating in foreign markets.

FROM MERCANTILISM TO FREE TRADE

The international exchange of goods has been conducted for thousands of years through voluntary trade and by means of military conquest. However, the European mercantilist era, which lasted from about 1500 to 1750, laid the foundation for, and continues to have a strong influence on, the modem practice of international trade. It was during that period that the philosophy of nationalism began to emerge, thus diminishing tribal and regional rivalries and creating unified nation-states. Nationalism gave rise to the view that trade was integral to the national interest, and should therefore be controlled by the government. Foreign trade was generally viewed as a form of rivalry similar to war—one nation gained at the expense of another.

Another ideology that characterized mercantilism was that a nation's wealth is measured in gold and silver, which implied that more bullion should come into the country than should go out. This idea is reflected in modem trade theory by the notion that a country is succeeding in the global trade arena only if it has a favorable trade balance, or exports more than it imports. The contrasting creed, exemplified in the 20th century by both Soviet and Nazi regimes, held that a country should seek to import more goods than it exports as a means of increasing aggregate national wealth. A pivotal difference between the two tenets was that the triumphant mercantilist philosophy is more amenable to individual firms, which seek to maximize sales and thus benefit from increased exports.

Many of the specific prescriptions of mercantilism lost favor during the late 18th and 19th centuries. The belief that gold was the purest measure of wealth, for example, was debunked by the advent of modem economic theory. The superseding wisdom held that a nation's money, or gold, is less of a measure of wealth than it is a determinant of price levels. For instance, the quantity theory posited that as a country's trade balance improved, its prices would rise. As a result, exports would decline in volume and imports would rise because of their comparatively lower price, which would have a balancing effect. Such theories contributed to abandonment of the gold standard by the United States and other nations during the 20th century.

A tenet of mercantilism—that trade is adversarial by nature and necessitates government control—was largely obliterated by Adam Smith's Wealth of Nations. That treatise postulated the "invisible hand" theory of market forces, which essentially displaced mercantilism. Smith's theory called for the reduction of governmental control of foreign trade in favor of a less confrontational trade climate. In addition to evolving economic paradigms, global trade strategy was particularly impacted by the events of the middle 20th century that effectively made world markets more accessible—technological advances related to communications, transportation, refrigeration and preservatives, and manufacturing combined to reduce many of the logistical barriers to international trade. Technological advances also served to minimize cultural and political differences between countries.

Evidencing the notable trend toward trade cooperation have been the numerous efforts by European nations since the 1950s to form trade agreements and establish economic unity. These included the Organization for European Economic Cooperation (OEEC) of 1948, the European Coal and Steel Community (ECSC) in 1952, the European Free Trade Association (EFTA) in 1960, and, ultimately, the European Union today. Major initiatives highlighting this trend in other parts of the world included the Organization of Petroleum Exporting Countries (OPEC); the North American Free Trade Agreement (NAFTA); and the New International Economic Order (NIEO), a consortium of 77 developing countries. On a general level, the sweeping General Agreement on Tariffs and Trade (GATT), as revised in the mid-1990s, is possibly the single largest effort to reduce tariffs and other political trade barriers reminiscent of the mercantilist era.

As a result of overall trade trends, global strategy at the macro level became a vital link to safeguarding economies of scale for developed countries and to moving towards economic progress for many underdeveloped nations during the latter half of the 20th century. Furthermore, these trends were augmented in the 1970s and 1980s by a simultaneous slowdown in U.S. domestic market growth and the resurgence of manufacturing in Europe and Japan. The overall implications of these developments for the United States, and for many other industrialized nations, was a vastly heightened impact of imports and exports on lifestyles and living standards. Furthermore, the dramatic refinement and proliferation of global telecommunications and increasingly liberalized trade highlight the reality of the global economy. Thus, global strategy received greater emphasis on both the micro and macro levels.

Indeed, flows of foreign direct investment (FDI) into the United States reached a record high of $189 billion in 1998, more than double the amount in 1994. Similarly, FDI worldwide was rising briskly during the mid-1990s, growing from $226 billion in 1994 to $349 billion in 1996, a gain of 54 percent. Flows into developing countries in 1996 registered at $129 billion (37 percent of world FDI), with China and Latin America receiving a significant portion, and outflows from developing countries exceeded $50 billion (15 percent of the world total).

GLOBAL TRADE THEORY

There are at least three major theories that explain the dynamics behind macro-level global strategies: classical, proportion, and product life cycle. The classical theory of international trade is based on the notion of economic advantage, which suggests that countries naturally emphasize foreign sales of products (and services) that they can produce cheaper or better—all other factors aside, a nation acting in its best interest will only export products that it has the greatest advantage in producing. And conversely, it will only import goods and services that it has the least advantage in producing itself. The three types of advantages encompassed by classical theory are absolute, comparative, and equal. These advantages are the impetus behind international trade and price differences, and demonstrate the role of exchange rates as defined by the quantity theory.

A nation has an absolute advantage over another country when it is able to produce a product at a lower price or higher quality level. Absolute advantages may be acquired, such as advanced technological abilities, or natural, such as access to natural resources. A comparative advantage exists when a country has an absolute advantage over a trading partner in many products, but the advantages are comparatively different. In this case, the country at a disadvantage may still be able to benefit (because of exchange ratio dynamics) by specializing in, and exporting, the product(s) in which it maintains the least disadvantage. Finally, an equal advantage exists when one country has an absolute advantage in all products. In this case, the countries cannot theoretically gain by trading because exchange ratios would cancel any economic gain.

The second global trade theory is factor proportion. It goes further than the classical theory in explaining the reasons behind prices and costs. It asserts that price levels differ among countries primarily because of factors related to the supply of natural resources. Thus, a country will generally export goods for which it has an abundant and accessible amount of an input, and it will import goods for which inputs are relatively inaccessible. This theory assumes relatively equal levels of production and technological prowess amongst competing countries.

The third trade theory, product life cycle, gained appeal relatively recently. It takes into account factors like technology and innovation to explain foreign trade forces, and places less emphasis on the role of prices and exchange rates. The product life cycle encompasses four phases. During the first, a new product is manufactured in the home country and succeeds partially because of local advantages, such as ease of distribution and marketing. During the second phase, the originating country benefits as the product gains familiarity in other countries (despite localized competitive disadvantages) because of its uniqueness. As a result, manufacturers in other countries begin copying the product. The third phase is characterized by competition, which increases as countries with competitive advantages, such as low labor costs, begin exporting the good or service. Finally, the country that originated the product succumbs to more competitive foreign producers that cannibalize its global and domestic market share. By that time, the product is often considered a commodity.

PRACTICAL GLOBAL BENEFITS

While theories help to provide a framework for the causes and dynamics of global trade, most countries and companies engage in strategic global initiatives to take advantage of very tangible benefits. Nations and regions pursue global trade primarily to capitalize on opportunities related to specialization and advantages, as described above. Individual companies that strive to expand globally may do so for a number of reasons related to improving profits.

A primary and obvious benefit for companies that sell products in foreign countries is access to new markets. Indeed, when markets for many products in the United States began to mature and become saturated in the 1970s and 1980s, many producers found that they could continue to achieve steady sales and profit gains through cross-border sales. This provided relief not only from maturing domestic markets, but also from intensifying competition in the U.S. domestic market from Europe and Japan. Because markets in other countries are often less mature and, at least historically, less competitive, companies can typically achieve rapid sales growth and higher profit margins. For example, although Coca-Cola received less than 40 percent of its revenues from foreign sales in the early 1990s, nearly 60 percent of its total profits came from those sales.

Another impetus for firms to engage in a global strategy relates to product life-cycles. Goods that have become obsolete in U.S. markets, for example, can sometimes be marketed abroad very successfully. By increasing a product's life span, a company is able to reduce new product development costs and capitalize on learned efficiencies particular to the product related to production, distribution, and marketing. Likewise, global selling often provides various tax benefits. Many countries, in fact, strive to attract foreign business activity by offering reduced import, property, or income taxes. Furthermore, companies are often able to allocate revenues, costs, and profits in such a way that reduces their overall tax burden.

Another major benefit of an integrated multinational approach is market risk diversification. In other words, a company can generally lessen its vulnerability to cyclical economic downswings or regional disturbances by extending its geographic reach. For instance, companies that were active in both the United States and Western Europe during the late 1980s likely benefited from the lag between the U.S. recession and the European Community economic slump that peaked several months later, just when the United States was beginning to cycle out of its downturn. In addition, geographic diversification lessens risks affiliated with product cycles, seasonality inherent to some products (such as ski equipment), and increased competition in individual regions.

Besides benefits related to marketing goods and services, global strategy also offers benefits related to overseas manufacturing, partnering with foreign firms to develop or market products, foreign investing, hedging exchange rates, and importing goods or services to augment domestic efforts. For example, firms often profit by eliminating domestic workforces and moving their production facilities to areas that have lower labor costs, cheaper natural resources, less government regulation, more efficient access to neighboring export markets, or other advantages that bolster profitability. Or they may be able to benefit from the effects of diversification through foreign investments—an insurance company, for example, could potentially reduce its financial risk by investing surplus funds in Japan or Germany.

EXTERNAL INFLUENCES ON GLOBAL
STRATEGY

Three realms of influence outside of the control of a country or organization affect the determination of global strategy on both the micro and macro levels: economic and competitive, political and legal, and cultural.

ECONOMIC AND COMPETITIVE
INFLUENCES

Among the most fundamental precepts of global strategy is market concentration. Companies and countries striving to develop a successful global trade or marketing strategy realize, sooner or later, that they should focus their efforts on a small segment of the global market. For instance, although they contain only 20 percent of the world's population, Japan, Europe, and the United States make up a hefty 75 percent of the global economy. Furthermore, within each of those countries the vast majority of the wealth is controlled by a small, tightening segment of the population. Therefore, a company can become truly dominant on a global scale by focusing on a few key markets. Conversely, it can easily fail by spreading its efforts too thin regionally.

Among the most important considerations for a company selecting regions to consider for trade is the stage of a region's economic development. Aside from political and social risks, countries at relatively mature stages of industrialization are most likely to offer healthy markets for imports. They generally have a more equitable distribution of buying power and are more amenable to new products and technologies. In addition, industrial and post-industrial nations offer other key benefits, such as a stable fiscal and monetary infrastructure; currency stability, which reduces risks associated with the rapid rise or fall of the value of investments in the host country; communication infrastructure, which eases marketing efforts; and transportation systems necessary for the efficient distribution of goods and services.

Influences ancillary to the economic environment include competitive forces that help to dictate global strategy. Although industrial societies typically offer better opportunities for global marketing, they also usually entail more acute competitive pressures. For instance, different countries may possess different levels of competition for various products ranging from a monopolistic country or product environment, which would be inaccessible, to pure competition. A company may also be able to compete, and even benefit from, a more oligopolistic environment in which a few major companies dominate the regional market.

Other competitive forces to consider include the threat of new entrants into the market. If barriers to entry are low and a company has few proprietary advantages, competitive risks may be elevated. The product or service is also vulnerable if it can be easily replaced by a substitute when market conditions change. For example, buyers might switch from boxed cereal to oatmeal to save money during a recession. Also important is the bargaining power of buyers and suppliers in the host country. If a company is in a relatively weak bargaining position, particularly in relation to its competitors, its profitability could become overly dependent on supply and distribution channels. Existing competition is also a concern, as established brands and products can wreak havoc on the profitability of a new entrant.

POLITICAL AND LEGAL INFLUENCES

The chief consideration facing a company in choosing to enter a foreign market, or a country trying to determine trade policy, is the political stability and legal environment of the host country. A third-world nation with a history of revolt and instability, for example, would likely make a poor prospect for trade. Even an advanced industrialized nation could be a poor prospect, however, if its legal and political environment is generally hostile toward foreign competitors.

Most governments establish restrictions or trade barriers on foreign competition, most of which are designed to protect domestic industries and companies. These controls often dictate a firm's level of activity in an overseas market. A common control is license requirements, which force importers (exporters) to obtain a license before they can move the product into (or out of) a country. For instance, a country may restrict the exporting of goods deemed to have military value. Or, the host may refuse to license goods for import that compete with a domestic industry that it is trying to support.

A second type of control is tariffs, or taxes, on imports. Tariffs are often used to protect domestic companies and industries from competition. However, tariffs may also be used to ensure that the prices of imported goods are equivalent to domestic substitutes, or to gamer revenue for the government. In addition, tariffs are often used to penalize other countries for trade or political actions. The United States, for instance, may elect to impose a tariff on trucks from Japan to punish it for erecting a large tariff on rice imported from the United States.

A quota is simply a provision that limits the amount of a specific product that can be imported. Like tariffs, quotas may be established for a number of reasons. "Absolute" quotas provide a definite import quantity that can't be exceeded. "Tariff quotas subject import volumes above a specified level to increasingly higher tariffs. Finally, "voluntary" quotas, or voluntary export restraints (VERs), are used to protect domestic companies from a particular competitor or in a special situation in which an industry is trying to regain its ability to compete.

Besides licenses, tariffs, and quotas, other control mechanisms include special taxes, such as excise or processing taxes on certain products; qualitative restrictions, which specify minimum standards of quality or safety that must be achieved before the country will accept it for import or export (this is sometimes done for health and safety reasons in addition to economic purposes); and exchange controls, which effectively limit the amount of foreign currency that an importer can obtain to pay for goods purchased, or that an exporter can hold for goods sold to another country.

Most countries also engage in promotional activities designed to foster foreign exchange. These policies can hurt exporters competing against subsidized products, or help them if their country is doing the promotion. The two principal types of promotions are state trading and subsidies. State trading entails direct government involvement in buying and selling activities. Subsidies, like tariffs and quotas, are often used to help an industry. They include benefits such as lower taxes, lower transportation rates, manipulation of exchange rates in favor of the exporter, or even direct government grants.

CULTURAL INFLUENCES

The third major external factor influencing macro and micro global strategy is the cultural and social environment, including elements such as social class, family structure and decision-making, market segmentation, and consumption patterns. Because a grasp of culture is so integral to the marketing process, companies that try to conduct business in a foreign country typically seek the counsel of someone close to that culture. Or, they will simply form some type of partnership or legal arrangement to have their product or service marketed by a local company.

Of primary concern to the global strategist is the level of material culture in each region considered. For instance, corporations seeking to invest in countries with less advanced material cultures, particularly non- or semi-industrialized nations, will generally demand more limited product lines, and will have to cope with less sophisticated distribution systems, simpler advertisements, and a greater amount of time to accept a new product or service. Likewise, language differences can pose another formidable barrier to multinationals. Even within a single diverse country, such as Spain or China, several different languages or dialects will impact a comprehensive sales strategy.

Another major cultural influence is aesthetics, which refers to a society's stylistic tastes. This element is particularly important for decisions related to advertising, packaging, and product design. Similarly, the general educational level of a society will dictate the sophistication of products, packaging, and promotions. But it may also impact strategy relating to supply and distribution channels that must be staffed by locals. Other social influences include religion, family organization, and consumer attitudes about risk-taking, material gain, and other factors.

Even when a company strives to assimilate its overall sales strategy into another culture, failure can result. Among the most blatant mishaps was General Motors Corp.'s attempt in the 1970s to market the Nova automobile in Mexico—the Spanish translation of "nova" is similar to "no go." A similar misadventure was undertaken by Braniff Airlines when it was advertising its leather-covered seats to Mexican travelers. Braniff s promotional slogan, "Sentando en cuero," translates into "sit naked." A less conspicuous error was Pepsodent's effort to market its teeth-whitening paste in Southeast Asia, where black or yellow teeth are often considered status symbols.

CORPORATE GLOBAL STRATEGIES

There are four basic avenues that companies can take to market their products or services globally: exporting, contractual agreements, joint ventures, and manufacturing. The combination of routes a company elects to pursue is contingent on internal industry and company influences, as well as the external factors described earlier. Important internal company influences include corporate goals, product lines, size and financial strength, knowledge of and access to specific foreign markets, and proprietary competitive advantages and technological strengths.

EXPORTING

Exporting can represent a relatively inexpensive, low-risk means of participating in foreign markets because it is not very hard to initiate, provided local distributors can be found, and may only require minimal up-front capital investment. It can also be a complex endeavor, depending on the type of exporting in which a firm engages: indirect or direct.

Indirect exporting entails simply selling goods for resale in foreign countries, and involves relatively little management or strategy. A common indirect exporting method is selling goods in the home country that the buyer then ships and markets to a foreign market. For instance, a mining company in South Africa might maintain a procurement office in the United States to export its heavy equipment. Similarly, a domestic dealer might act as a middleman, buying the equipment and then selling it to overseas customers. Although it entails little risk or investment, this technique offers at least modest expansion opportunities.

Another common indirect means of exporting is utilizing intermediate exporters, such as export management companies (EMCs). EMCs are trading entities that specialize in exporting goods for domestic suppliers, either through commission arrangements or by purchasing and then reselling the goods. EMCs can give a company slightly more control over its global marketing efforts, provide instant access to knowledge about foreign markets, and offer entry to established distribution channels. The EMC may even use the company's letterhead, serve as a proxy in negotiations, process orders, and handle credit and exchange matters.

Direct exporters sell products directly to companies or consumers in foreign countries. They enjoy greater control over the marketing and distribution of their products than do indirect exporters, and they avoid the cost of paying an EMC. However, the company usually must coordinate research, distribution, marketing, pricing, legal, and other efforts in-house, which typically involves a significant financial commitment. Some of the responsibilities may include establishing a direct sales force, financing customers and hedging exchange rates, packaging and shipping, providing technical support, establishing prices, and dealing with taxes, tariffs, quotas, and other restrictions.

CONTRACTUAL AGREEMENTS

A viable option or complement to exporting is contracting, whereby a multinational reaches an agreement with a company in the host country to handle one or several facets of its strategy in that nation or region. A common type of agreement is contract manufacturing, in which a manufacturer in the host country agrees to manufacture goods at the discretion of the multinational firm. This type of agreement is most advantageous for firms whose competitive advantage lies in marketing or distribution. Importantly, it cuts costs related to shipping goods and building manufacturing facilities, and effectively lowers some investment-related risks. In addition, contract manufacturing may allow the multinational to bypass certain trade restrictions because it is bringing money and jobs into the host country. The main drawback is that the multinational often loses control over the production process (i.e. quality), and may even find itself training its future competitor.

A second popular contract agreement is licensing, whereby a multinational company (the licensor) gives a local firm (the licensee) the rights to trademarks, patents, copyrights, or proprietary information. In return, the licensee typically agrees to produce and market the licensor's products, and to pay the licensor a fee, which is usually based on sales volume. The chief delineation between licensing and contracting is that the licensor's role is much greater than that of the contractor. Licensing works well for firms, particularly smaller ones, that want to enter a market quickly and inexpensively and are seeking to avoid exacting trade restrictions erected by the host government. Nonetheless, the company granting the license maintains ultimate control and can revoke the license if the licensee fails to uphold its side of the agreement. Still, licensing entails some loss of control over the product, and often results in the licensee becoming the licensor's prime competitor when the agreement expires.

Other types of contractual agreements include turnkey agreements, wherein a company in the host country agrees to build a manufacturing facility, train personnel, and execute initial production runs for another company. Similarly, under coproduction agreements a contractor in the host country agrees to build a factory in exchange for some of the output. Those agreements are most common in command economies where multinationals are forced to barter for goods and services in the host nation. Finally, management contracts represent a type of service export; a company agrees to export its expertise to another country, to build and operate a hospital for example, until local people acquire the expertise to assume control of the operation. In return, the company receives a fee.

Examples of U.S. companies that utilize contractual agreements include tobacco manufacturers. Because many overseas countries, particularly in Europe, maintain tobacco monopolies, they are forced to license their brand names to the monopolistic producer. Another example that demonstrates the potential detriments of licensing is Westinghouse. In the 1970s, Westinghouse licensed Framatome, a relatively insignificant French concern, to use its patents to engage in the atomic power industry. When the agreement expired, Framatome became Westinghouse's second strongest global competitor by utilizing processes designed around Westinghouse patents.

JOINT VENTURE

After exporting, joint ventures are the next most common means of getting goods into foreign countries. In a joint venture, a multinational teams up with a company in a host country to share risks and complementary capabilities. Although contractual agreements are similar to joint ventures, the latter differ in the amount of input and control the companies share. The company in the host country may provide important access to local channels of distribution, government contracts, and supply sources. Or, it may bring technological or marketing skills to the table, or serve as a source of capital. Often times, a joint venture allows the multinational to bypass trade restrictions and overcome nationalistic barriers to success in the foreign country.

The primary risk inherent to joint ventures, in additional to normal market risk, is that the interests of both parties might conflict. This usually occurs because the local company is viewing the operation within a local context, while the multinational is looking at the venture as just one element of an overall global program. Discrepancies often arise over how much profit to plow back into the operation, how to handle transfer pricing issues (how much affiliated companies should charge each other for various goods and services), and product and market decisions. In a worst-case scenario, the partnership deteriorates to the point where one or both partners fail to benefit. For this reason, most successful joint ventures have a definite leader that maintains more control, and assumes more risk, in the venture.

An example of a successful joint venture that later soured involved Xerox Corp. In an effort to broaden its global presence, Xerox entered into a 50-50 joint venture in the 1950s with Rank Organization of the United Kingdom. Xerox signed an agreement that essentially gave Rank-Xerox the exclusive rights to manufacture and sell Xerographic machines outside of North America. As time progressed, Xerox outgrew its markets in North America and wanted to sell its machines in other countries. Because it had signed away its valuable rights to conduct business overseas, it was forced to slowly buy back those rights at an estimated cost of $300 million over 20 years.

MANUFACTURING

The fourth approach to getting goods into foreign markets is through wholly owned manufacturing facilities, a form of foreign direct investment. This route represents the most comprehensive and risky avenue to global trade. It usually entails a large investment and leaves the company much more vulnerable to the whims of the government in the host country. However, it can also provide the biggest payoff and ensure the greatest degree of control over production activities.

Two cardinal options are acquisition and construction. A multinational that acquires existing facilities in the host country benefits from faster access and existing management that is familiar with local supply and distribution channels. On the other hand, building a new production facility is often necessary because the government will not allow a company to sell existing operations or because the multinational cannot find a company willing to sell. Sometimes the host country simply does not possess facilities of the magnitude or sophistication needed by the multinational.

SEE ALSO : International Competition ; International Management ; International Marketing

[ Dave Mote ]

FURTHER READING:

Craig, C. Samuel, and Susan P. Douglas. "Developing a Global Marketing Strategy." Chemtech, April 1997, 44-49.

Rosenberg, Jeffrey A. Winning the Global Game. New York: The Free Press, 1998.

Wong Chee, Harold, and Rod Harris. Global Marketing Strategy. London: Financial Times Management, 1998.



Also read article about Global Strategy from Wikipedia

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