WINNING THE GLOBALIZATION GAME Harvard Business Review OnPoint (2004) Three key readings: - Prahalad & Lieberthal,

1. WINNING THE GLOBALIZATION GAME Harvard Business Review OnPoint (2004) Three key readings: - Prahalad & Lieberthal, The End of Corporate Imperialism - Pankaj Ghemawat, Distance Still Matters - Diana Farrell, Beyond Offshoring

2. The End of Corporate Imperialism In order to compete in the emerging markets, the MNCs must answer: 1.- What is the Business Model for the Emerging Middle Class? Consumers in the emerging markets are not “affluent” by Western standards. Three-tiered pyramid structure: Purchasing power (in U.S. dollars) tier 1 Greater than $20,000 (in this tire people have income to afford international brands) $10,000 to $20,000 (people is less attracted to international brands) tier 2 $5,000 to $10,000 (massive group that is loyal to local customs, habits, etc) tier 3 Less than $5,000 (group unlikely to become active customers soon)

3. MNC Business Rethinking Model: Rethinking the Price/Performance Equation: in the emerging markets they receive education in global standards but they do not pay global prices. Rethinking Brand Management: usually, the MNCs overestimate the extent of Westernization. Rethinking the Costs of Market Building: MNCs should provide consumers with a new product that requires no education. Rethinking Product-Design: redesign can be helpful to reflect differences in use and distribution. Rethinking Packaging: it must depend on the distribution infrastructure. Rethinking Capital Efficiency: there is less need for vertical integration than MNCs might think.

4. 2.- How Does the Distribution System Work? MNCs need to invest more in distribution before launching their products. They must understand the unique characteristics of each country. 3.- Will Local or Expatriate Leadership Be More Effective? MNCs leadership should be a blend of local sensitivity and global knowledge. The local managers are market sensitive, cost effective and are committed to local customs. Expatriates transfer technology and management practices, they also have more credibility at the headquarters. 4.- Is It Necessary to Present One Face? There is no right answer to this question--It depends on the level of governmental interference.

5. Conclusion: The End of Corporate Imperialism suggests: -New relationships between the developed and emerging markets, -An end to the era of centralized corporate power, and -A shift to a much more dispersed base of power and influence.

6. Distance Still Matters The Four Dimensions of Distance: 1) Cultural Distance: a country's cultural attributes determine how people interact. Differences in religion, social norms, race and language can create distance between countries. 2) Administrative or Political Distance: historical and political associations shared by countries greatly affect trade betweenthem.

7. 3)Geographic Distance: the further you are from a country the harder it will be to conduct business in that country. It also refers to the country size, access to waterways and ocean, and topography. This attribute has a direct relationship with the cost of transportation. 4) Economic Distance: the wealthy or income of customers creates distance between countries, and has a marked effect on the levels of trade and type of partners a country trades with.

8. Measuring the Impact of Distance on TRADE

9. Conclusions • Managers must always be aware of distance. • The CAGE framework represents a complement to the tools used by most companies. • Technology may be making the world a smaller place, but is not eliminating the “cost of distance”.

10. Beyond Offshoring To measure how global your industry is, calculate the ratio of annual value of trade (include product components and final goods) to the annual value of industry sales. Ratios over 100% indicate industries that are very global

11. The course of Globalization in a company or industry can be determined by three factors: a) Production: the potential for an industry to disaggregate its value chain is determined by the combination of: relocation sensitivity and location-specific advantages. b) Regulatory: host countries´ regulations can inhibit globalization in several ways: tariffs, quotas, etc. c) Organizational: three factors can limit globalization: internal management structure, incentive systems, and unionization. • Standardization is a critical part of Globalization.

12. Stages of Globalization: 1) Stage One: Market Entry: companies enter new countries using production models that are very similar to the ones they deploy in their home markets. 2) Stage Two: Product Specialization: companies transfer the full production process of a particular product to a single-low-cost location and export the goods to various consumer markets. 3) Stage Three: Value Chain Disaggregation: companies start to disaggregate the production process and focus each activity in the most advantageous location.

13. 4) Stage Four: Value Chain Reengineering: companies do not just replicate their production processes abroad, they increase their cost savings by reengineering their processes to suit local market conditions. Stages 3 and 4 together have the potential to reduce costs by more than 50% in many industries. 5) Stage Five: Creation of New Markets: expansion of the market. The value of new revenues generated in this stage is often greater than the value of cost savings in other stages.

14. Cost Savings in new market opportunities can be reached through: • Labor: Data worker in US: $20 per hour Data worker in India: $2 per hour • Re-engineering their production processes: substitute low-cost labor for high-cost capital. - Utilizing their capital equipment more intensively. - Hiring local engineers in low-wage environments to design and build cheaper capital equipment. - Globalization can save as much as 70% of their total costs.

15. How To Win: a) Abandon incremental thinking b) Use global assets, effectively and efficiently c) Tailor your best practices to local conditions d) Aim for higher quality