Firms can participate in international activities through three basic mechanisms: licensing, export, and foreign direct investment. Usually a firm‘s first foray overseas involves export or licensing, and only after it has gained some international experience will it consider foreign direct investment. Export or foreign direct investment will be present in industries where competition is truly global. Major flows of exports among many countries are a reliable sign of global com-petition, but major direct foreign investment in an industry may not be. These investments can consist of essentially independent subsidi-aries in foreign countries, with each subsidiary’s competitive posi-tion depending essentially on its assets and particular circumstances in its country of location.
Fundamentally, an industry becomes a global industry because there are economic (or other) advantages to a firm competing in a coordinated way in many national markets. There are a number of distinct sources of such global strategic advantage, as well as impedi-ments to achieving them.2 The task for the analyst is to assess these items for the particular industry under study, understanding either why it is not global or, conversely, which sources of global advan-tage have outweighted the impediments.
1. SOURCES OF GLOBAL COMPETITIVE ADVANTAGE
The sources of global advantage stem broadly from four causes: conventional comparative advantage, economies of scale or learning curves extending beyond the scale or cumulative volume achievable in individual national markets, advantages from product differentia-tion, and the public-good character of market information and tech-nology:3
Comparative Advantage. The existence of comparative ad-vantage is a classic determinant of global competition. When a coun-try or countries have significant advantages in factor cost or factor quality used in producing a product, these countries will be the sites of production and exports will flow to other parts of the world. In such industries, the strategic position of the global firm in those countries possessing a comparative advantage is crucial to its world position.
Production Economies of Scale. If there are economies of scale in production (or providing service) that extend beyond the size of major national markets, the firm can potentially achieve a cost advantage through centralized production and global competition. For example, modern high-speed steel mills have a minimum effi-cient scale that appears to be as much as 40 percent of worldwide de-mand. Sometimes advantages of vertical integration are the key to achieving global production economies, because the efficient scale of the vertically integrated system is greater than the size of national markets. Achieving production economies necessarily implies move-ment of exports among countries.
Global Experience. In technologies subject to significant cost declines due to proprietary experience, the ability to sell similar product varieties in many national markets can bring benefits. Cum–ulative volume per model is greater if the model is sold in many na-tional markets, leading to a cost advantage for the global competi-tor. This situation has probably occurred in the manufacture of light-duty lift trucks, in which Toyota has gained a commanding po-sition. Global competition can allow faster learning, even if the learning curve flattens at cumulative volumes achievable eventually by competing in an individual geographic market. Since a company potentially can gain experience by sharing improvements among plants, a cost advantage from global competition potentially can be gained even if production is not centralized but takes place in each national market.
Logistical Economies of Scale. If an international logistics system inherently involves fixed costs that can be spread by supply-ing many national markets, the global competitor has a potential cost advantage. Global competition may also allow the achievement of economies of scale in logistics that stem from the ability to use more specialized systems, such as specialized cargo ships. For exam-ple, Japanese firms have achieved significant cost savings in the use of specialized carriers to transport raw materials and finished prod-ucts in steel and autos. Operating at world volume may allow a com-plete rethinking of logistical arrangements.
Marketing Economies of Scale. Although many aspects of the marketing function must inherently be carried out in each national market, there may be potential marketing economies of scale that ex-ceed the size of national markets in some industries. The most ob-vious are in industries in which a common sales force is deployed worldwide. In heavy construction and in the manufacture of aircraft or turbine generators, for example, the sales task is highly complex and is carried out infrequently with relatively few buyers. Thus the global firm can spread the fixed costs of a group of highly skilled and expensive salespersons over many national markets.
There may also be potential marketing economies through glo-bal use of proprietary marketing techniques. Since the knowledge gained from one market can be used at no cost in other markets,4 the global firm can have a cost advantage. The McDonald’s “formula” or Timex’s “torture test” marketing campaign have worked world-wide, for example. Some brand names have carryover among geo-graphic markets, although usually the firm must invest to establish its brand name in each one. However, some brand names develop recognition internationally through trade press, technical literature, cultural prominence, or other reasons that do not require invest–ments by the firm.
Economies of Scale in Purchasing. When there are opportun-ities to achieve economies of scale in purchasing as a result of bar-gaining power or lower suppliers’ cost in producing long runs, which go beyond what is needed to compete in individual national markets, the global firm will have a potential cost advantage. For example, worldwide producers of television sets appear to be able to purchase transistors and diodes at lower costs. Such an advantage is most probable when the volumes purchased by the industry are moderate compared to the size of the industry producing the raw materials or components; if purchases are large, most bargaining leverage may well have been exhausted. If the firm is engaged directly in raw mate–rial extraction (minerals) or production (agricultural products), the potential advantage is similar. If the efficient scale of mine for a par-ticular mineral is greater than the firm‘s need for that mineral to compete in a large national market, for example, the firm that mines at efficient scale and competes globally will have a cost advantage. However, the need to compete globally to achieve this advantage presupposes that the firm cannot mine at efficient scale and then sell excess minerals to other firms.
Product Differentiation. In some businesses, particularly technologically progressive ones, global competition can give the firm an edge in reputation and credibility. In the high-fashion cos-metics industry, for example, a firm significantly benefits from a presence in Paris, London, and New York in order to have the image to compete successfully in Japan.
Proprietary Product Technology. Global economies can result from the ability to apply proprietary technology in several national markets. This ability is particularly important when economies of scale in research are large relative to the sales of individual national markets. Computers, semiconductors, aircraft, and turbines are in-dustries in which technological advantages of global-scale firms ap-pear to be particularly great. Some advances in technology are so costly as to virtually require global sales to recoup them. Global competition can also give the firm a series of taps into technological developments worldwide which can improve its technological com-petitiveness.
Mobility of Production. An important special case of econo-mies due to scale and sharing of proprietary technology arises where the production of a product or service is mobile. For example, in heavy construction the firm moves its crew from country to country to build projects; oil tankers can carry oil anywhere in the world; seismic crews, oil rigs, and consultants are also mobile. In such in-dustries, fixed costs of creating and maintaining an organization and developing proprietary technology can be readily spread over opera-tions in many national markets. In addition, the firm can invest in skilled people or mobile equipment whose employment would not be justified by the demand for the product in any one national mar-ket—hence another example of economies of scale exceeding single- market size.
Often the sources of global advantage occur in combination, and there can be interactions among them. For example, production economies can provide the basis for invasion of foreign markets, which then leads to logistical economies or those from purchasing.
The significance of each source of global advantage clearly de-pends on one of two things. First, how significant to total cost is the aspect of the business subject to global economies? Second, how sig-nificant to competition is the aspect of the business in which the glo-bal competitor has an edge? An advantage in an area that represents a fairly low percentage of total costs (e.g., sales force) can still be ex-tremely important to competitive success or failure in some indus-tries. In this case, even a small improvement in cost or effectiveness brought about by global competition can be significant.
It is also important to note that all the sources of advantage also imply the presence of mobility barriers for global firms. This factor will be important to our discussion of competitive issues in global in-dustries.
2. IMPEDIMENTS TO GLOBAL COMPETITION
There are a variety of impediments to achieving these advan-tages of global competition, and they can block the industry from becoming a global industry altogether. Even when the advantages of global competition outweigh the impediments overall, the impedi-ments can still yield viable strategic niches for national firms that do not compete globally. Some of these impediments are economic and raise the direct cost of competing globally. Others do not necessarily affect cost directly but raise the complexity of the managerial task.5 A third category relates to purely institutional or governmental re-straints that do not reflect economic circumstances. Finally, some impediments can relate solely to perceptual or resource limitations of industry incumbents.6
Transportation and Storage Costs. Transport or storage costs offset economies of centralized production, as well as the efficiency of production in an integrated system involving specialized plants in a number of countries and transshipment. For products like pre- stressed concrete, hazardous chemicals, and fertilizer, high transport costs mean that plants must be built in each market, even though production costs alone might be reduced by plants whose scale ex-ceeds individual national market needs. Competition is essentially on a market-by-market basis.
Differing Product Needs. Global competition is impeded when national markets demand different product varieties. Because of differences in culture, state of economic development, income levels, climate, and so on, national markets might demand product varieties differing in trade-offs among cost, quality, and perform-ance; in style; in size; and in other dimensions. For example, al-though computerized sewing machines are being sold in the United States and Western Europe, simpler pedal-powered varieties ade-quately meet the needs of the developing world. Different legal stric-tures, building codes, or technical standards might also compel dif-ferent varieties to be demanded in different national markets even though intrinsic product needs were otherwise the same. The need to produce differing varieties impedes the achievement of global econ-omies of scale or learning. It may also impede benefits from global sourcing if the differing varieties imply differing requirements for raw materials or components.
The barrier to global competition raised by differing product needs clearly depends on the cost of altering products to fit national markets. If required product differences are cosmetic or can other-wise be accommodated without significant cost in an otherwise stan-dard production process, the global firm can still reap most of the global economies of scale.
Established Distribution Channels. The need to gain access to distribution channels in each national market can impede global competition. When customers are numerous and individual purchase amounts are small, the firm may well require access to already estab-lished independent stocking distributors to compete successfully. In electrical products, for example, any individual item, such as a load center or circuit breaker, is too small a sale to justify in-house distri-bution. In such situations it can be very difficult for a foreign firm to penetrate entrenched distribution channels. The channels have little incentive to substitute a foreign firm‘s line for a domestic one unless a significant (and perhaps prohibitive) concession is made. If distri-bution channels are less well established because the industry is new or in flux, this bottleneck may not be so great. Also, if much volume moves through a few channels, the foreign firm may have a better chance of gaining access than if it must convince many small chan-nels to take on its line.
Sales Force. If the product requires a local manufacturer’s di-rect sales force, the international competitor confronts a potential scale economy barrier, most severe if national competitors’ sales forces sell a wide line of products. This factor may be impeding futher globalization in industries such as medical products in which costly detailing to doctors is required.
Local Repair. The need to offer local manufacturer’s repair can impede the international competitor in much the same way as the need for a local sales force.
Sensitivity to Lead Times. Sensitivity to lead times because of short fashion cycles, rapidly moving technology, and the like tends to work against global competition. The distance between the na-tional market and centralized production, product development, or marketing activities tends to create delays in responding to market needs that can be unacceptable in businesses like fashion clothing and distribution. This problem is accentuated if local product needs differ.
A related issue is the lead time required to physically transport goods globally. This lead time generally translates to cost, since in theory every good could be airshipped, although possibly at prohibi-tive expense. The point is that even though the cost of moving a product by a low-cost means might not preclude global shipment, the lead times involved are too great to allow the responsiveness de-manded by the market.
Complex Segmentation Within Geographic Markets. Com-plex price-performance trade-offs among competing brands by cus-tomers in national markets have the same basic effect as national product variety differences in impeding global competition. Com-plex segmentation increases even more the need for product lines with many varieties or the ability to produce custom products. De-pending on the cost of producing additional varieties, it may effec-tively preclude cost advantages from centralization of production in an integrated manufacturing system. The local firm will be well suited to perceive and adapt to the various segments of the local market.
Lack of World Demand. Global competition cannot occur if demand does not exist in a significant number of major countries. This situation could be present because the industry was new or be-cause the product or service only fit the needs of an unusual cus-tomer group which was present in only a few national markets.
That industry newness might imply a lack of world demand fol–lows from the so-called product life cycle of international trade.’ This concept holds that products are initially introduced in markets where their attributes have the greatest value (e.g., labor-saving in-novations in high-wage countries). Eventually product imitation and diffusion result in demand in other countries, leading in turn to ex-port by the pioneering firms and eventually foreign investment by them. Overseas production by foreign firms may also begin once de-mand spreads abroad and technology diffuses. Upon maturity of the industry and subsequent product standardization and price competi–tion, overseas firms may take prominent positions in the industry, based on cost advantages they achieve by starting late in the indus-try’s development or from comparative advantages. All these argu-ments suggest that generally some degree of maturity is necessary for global competition to be present, although it seems clear that less maturity is necessary today than a decade ago because of the preva-lence of multinational competitors with experience in global compe-tition who can rapidly diffuse new products globally.8
Differing Marketing Tasks. Even if globally sold product va-rieties are similar, the marketing task can vary geographically. The nature of distribution channels, marketing media, and cost effective means of reaching the buyer can differ so much from country to country that the global competitors not only are unable to exploit marketing knowledge from other markets but also have a great deal of difficulty being as effective at local marketing as local competi-tors. Although there is no reason why a global competitor could not have centralized production and/or R&D combined with local mar-keting, in practice it may be difficult to manage. In some businesses, there may also be a customer bias toward dealing with local firms for a variety of reasons.
Intensive Local Services. Where intensive localized marketing, service, or other customer interaction is required to compete in the industry, the firm can find it tough to operate on an integrated, glo-bal basis in competition with local rivals. Although a global firm could conceivably perform these functions through decentralized units, in practice the managerial task is so complex that the local firm can be more responsive. Where intensive local marketing and distribution (not subject to global economies) are crucial, the bene-fits achieved by other centralized activities of the global firm can be outweighed by the local firm. Even though a global metal fabricator might gain some production and technological benefits of multina-tional operations, for example, the need for intensive local market-ing, responsive service, and quick turnaround means that the local firm can equal or outperform the global one.
Rapidly Changing Technology. The global firm may have dif-ficulties in operating where rapidly changing technology requires frequent product and process redesign attuned to the local markets.
The self-contained, national firm may well be better able to adapt to such conditions.
Governmental Impediments. There are a wide variety of gov-ernment impediments to global competition, most under the guise of protecting local firms or local employment:
- tariffs and duties, which have the same effect as transport costs in limiting achievement of economies in production;
- preferential procurement from local firms by government and quasi-government entities (e.g., telephone companies, defense contractors);
- governmental insistence on local R&D or requiring locally produced components in the product;
- preferential tax treatment, labor policies, or other operating rules and regulations benefiting local firms;
- bribery laws, tax laws, or other policies by home governments that are disadvantageous to their firms in international opera-tions.
Government impediments can either aid locally owned firms or else require production in the country, which nullifies potential scale economies from global production. Government regulations can also force the sale of product varieties peculiar to the particular country and affect marketing practices in ways that make them more country-specific.
Government impediments will be most likely to occur in indus-tries that are “salient,” or that affect some important government objectives such as employment, regional development, indigeneous sources of strategic raw materials, defense, and cultural significance. For example, government impediments are great in such industries as electric power generating and telecommunications equipment.
Perceptual or Resource Impediments. A final category of im-pediments to global competition relates to perceptual or resource limitations of incumbent firms in the industry. Perceiving the oppor-tunities to compete globally is itself an innovation, particularly since it may involve international issues well beyond the scope of hereto-fore domestic activities. Incumbents may lack the necessary vision.
Information and search costs are high in becoming established. Also substantial resources may be necessary for such things as the con-struction of world-scale facilities or start–up investments in penetrat-ing new national markets. These investments may be beyond the abilities of incumbents, as may be the required managerial and tech-nical skills for global competition.
The impediments to global competition are nearly always pres-ent to some degree in an industry. As a result, even in industries that are generally global in their competitive character, there may be as-pects of “localness” that remain. In some markets, or in some seg-ments, the national firm will be preeminent over global competitors because of the presence of particularly significant impediments to global competition.
Source: Porter Michael E. (1998), Competitive Strategy_ Techniques for Analyzing Industries and Competitors, Free Press; Illustrated edition.