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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: [email protected] 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: [email protected]
**Professor of ManagementFlorida International University
Miami, Florida, USAEmail: [email protected]
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 triad-
based 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 world’s trade is controlled by the triad.
(Exhibit 1 goes here)
According to data for 1997 in Exhibit 1, the triad’s 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 real-
world 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 Europe’s 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 Verne’s 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 firm’s 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 Sony’s 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 triad-
based “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 Cost—And 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 firm’s 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 world’s 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 world’s 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
world’s 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 Spéciale
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 world’s 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 Canada’s Nortel Networks and France’s
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 Nortel’s 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 WTO’s 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. Nortel’s 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 world’s 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 British-
Dutch 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).
Unilever’s 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 company’s 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, Unilever’s 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 UK’s 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 company’s 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 world’s largest container carrier operators. The business has
routes across all the world’s 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 firm’s 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
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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 company’s
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%)
220.0 182.1 226.0 155.3
ASIA EUROPEAN UNION 1042.6 153.3 2092.3 intra-Asia intra-EU553.4 (53.1%) 197.6 1268.5 (60.6%)
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 High
Economic 1 3Integration
High
2 4
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 High Economic 1 Coca-Cola 3 Procter & Gamble Integration Disney Nortel Networks
Saatchi & Saatchi P&OHigh Matsushita
IKEA Nokia
Ericsson
2 4 Philips Unilever Kingfisher
Low
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ENDNOTES
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1 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.
2 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), 343-
356.
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.
5 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.
7 Rugman, A. 1996. The Theory of Multinational Enterprises. Cheltenham: Elgar and Rugman, A. and J. D’Cruz
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.
10 A referee has suggested that the axes may be orthogonal. The vertical axis of Figure 1 represents economic integration with
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 Yip’s 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 Vernon’s 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
15 Greenhouse, S. “Playing Disney in the Parisian Fields,” New York Times, February 17, 1991, Section 3, pp. 1, 6;
“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. “Mickey’s 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/9…nment/stories/industry_eurodisney_1.html; http://www.informatik.tu-
muenchen.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.
17 ABB is one of the core nine cases discussed by Bartlett, Christopher and Sumantra Ghoshal (1989) Managing Across Borders.
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.
21 Ericsson annual report, 1999.
22 Nortel is a “transnational corporation”, (TNC) on three grounds.
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, Nortel’s 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 President’s 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 – Unilever’s food business”, The Economist,
January 6, 1996, pp. 56-61; http://www.unilever.com.
24 P&O, Annual reports.
25 Gestrin, M., R. Knight and A. Rugman 2000. The Templeton Global Performance Index 2000. Oxford:
University of Oxford: Templeton College Executive Briefings.
