Managing Global Expansion: A Conceptual Framework.
| March 01, 2000 | Gupta, Anil K.; Govindarajan, Vijay | COPYRIGHT 1989 JAI Press, Inc. (Hide copyright information)Copyright [pic] There are at least five reasons why the need to become global has ceased to be a discretionary option and become a strategic imperative for virtually any medium-sized to large corporation. 1. The Growth Imperative. Companies have no choice but to persist in a neverending quest for growth if they wish to garner rewards from the capital markets and attract and retain top talent. For many industries, developed country markets are quite mature. Thus, the growth imperative generally requires companies to look to emerging markets for fresh opportunities. Consider a supposedly mature industry such as paper. Per capita paper consumption in such developed markets as North America and Western Europe is around 600 pounds. In contrast, per capita consumption of paper in China and India is around 30 pounds. If you are a dominant European paper manufacturer such as UPM-Kymmene, can you really afford not to build market presence in places like China or India? If per capita paper consumption in both countries increased by just one pound over the next five years, demand would increase by 2.2 billion pounds, an amount that can keep five state-of-the-art paper mills running at peak capacity. 2. The Efficiency Imperative. Whenever the value chain sustains one or more activities in which the minimum efficient scale (of research facilities, production centers, and so on) exceeds the sales volume feasible within one country, a company with global presence will have the potential to create a cost advantage relative to a domestic player within that industry. The case of Mercedes-Benz now a unit of DaimlerChrysler, illustrates this principle. Historically, Mercedes-Benz has concentrated its research and manufacturing operations in Germany and has derived around 20 percent of its revenues from the North American market. Given the highly scale-sensitive nature of the auto industry, it is easy to see that Mercedes-Benz's ability to compete in Europe, or even Germany, hinges on its market position and revenues from the North American market. 3. The Knowledge Imperative. No two countries, even close neighbors such as Canada and the United States, are completely alike. So when a company expands its presence to more than one country, it must adapt at least some features of its products and/or processes to the local environment. This adaptation requires creating local know-how, some of which may be too idiosyncratic to be relevant outside the particular local market. However, in many cases, local product and/or process innovations are cutting-edge and have the potential to generate global advantage. GE India's innovations in making CT scanners simpler, transportable, and cheaper would appear to enjoy wide-ranging applicability, as would P&G Indonesia's innovations in reducing the cost structure for cough syrup. 4. Globalization of Customers. The term "globalization of customers" refers to customers that are worldwide corporations (such as the soft-drink companies served by advertising agencies) as well as those who are internationally mobile (such as the executives served by American Express or the globe-trotters serviced by Sheraton Hotels). When the customers of a domestic company start to globalize, the company must keep pace with them. Three reasons dictate such an alignment. First, the customer may strongly prefer worldwide consistency and coordination in the sourcing of products and services. Second, it may prefer to deal with a small number of supply partners on a long-term basis. Third, allowing a customer to deal with different supplier(s) in other countries poses a serious risk that the customer may replace your firm with one of these suppliers even in the domestic market. Motivations such as these are driving GE Plastics to globalize....
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