This paper attempts to explore the notion of regionalisation in the global context and critically analyse the theory and practice of regional strategy as a response to Osegowitsch and Sammartino analysis.
Globalization, Regionalisation, Regional Strategy Theory.
It is clear enough that in today’s era it is extremely critical for firms to adopt global and regional business strategies in order to attain sustainable competitive advantage. But the question arises regarding classification of a MNE (Multinational Enterprise) as a global firm.
This essay critically analyses the work on regional strategy as a response to Osegowitsch and Sammartino and attempts to cover the following aspects in detail.
Notion of Globalization and Global Strategy
This section highlights the notion of globalization and way organizations today establish a global presence by adoption of unique business strategies. This part also details the three different kind of global strategies.
Regional Strategy Analysis
This part analyzes the theory and practice of regional strategy concept of Globalization in particular as a response to Osegowitsch and Sammartino (2008). It aims to justify that in today’s era very few global firms exists and secondly that sufficient amount of international business literature and theory is required to draw reflection on regional vs global MNE’s (Multinational Enterprises) strategy.
The Theory of the Regional Strategy
This section explains the concept of regional strategy analysis and illustrates the various regional theories as explained by Osegowitsch and Sammartino.
With the concept of globalization and internationalization gaining more and more momentum everyday, this essay attempts to critically analyse the work of Osegowitsch and Sammartino on regional strategy.
It starts with explaining the concept of globalisation and global strategy and tries to justify that in today’s era very few global firms exist. Secondly, it tries to establish that significant amount of international business literature and theory is demanded in order to draw conclusion on regional vs global MNEs strategy by exploring the theory of regional strategy.
Notion of Globalization and Global Strategy
Globalization can be defined as a complex concept which enables firms to operate in various continents and countries across the globe in order to improve and maximise their profit margins, sustainability, worldwide existence and economies of scale (Blyton et al., 2001, p446). Globalization provides platform not only to consumers but also to organizations to help them satisfy their needs globally. According to Marquardt & Berger (2003, p286), Trade, Travel, Technology and Television are the four major developments that have resulted in Globalization. The four T’s of global development are the outcome of human brain and its creative innovations. These advancements have further encouraged and made possible continuous exchange of ideas, information and knowledge between human resources by breaking the barriers of distance. Moving ahead, Bratton & Gold (2007, p92) state that Globalization is a global process of political convergence, social economies and national sentiments, in which space, time and Government are not given much importance. The paragraph below will now highlight the three different views on “global strategy”.
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The First view states that the global strategy is one of the particular and specific forms of Multinational Enterprise (MNE) Strategy. Further, it highlights the fact that Globalization considers all the countries of the world alike (Levitt, 1983, p97). The Second view considers global strategy as “International Strategic Management” (Bruton et al., 2004, p418) which is no doubt wider concept than “global strategy” mentioned in the first view. Lastly, the third view describes global strategy in even broader term; The strategy of the firms that exist all over the globe and this can be concluded as the firm’s theory of how to become a successful competitor (Peng, 2006).
Having discussed the various forms of global strategies which are adopted by firms today, this essay now moves ahead to analyse the theory and practice of regional strategy concept of Globalization in particular as a response to Osegowitsch and Sammartino (2008). It aims to justify that in today’s era very few global firms exists and secondly that sufficient amount of international business literature and theory is required to draw reflection on regional vs global MNE’s (Multinational Enterprises) strategy.
The Regional Strategy Theories
According to Rugman and Verbeke (2007), recent literature on globalization suggests that a firm is categorised as global if maximum 50% of its total sales are in its home territory (EU) and minimum 20% of sales in each of the NAFTA zone and Asia. He adds to it by bringing to surface the outcome of survey based upon this theory that indicated only nine global firms in Fortune Global 500 and also the orientation of numerous firms towards the home-region.
In response to the above mechanism for classifying the firm as global, Osegowitsch and Sammartino (OS) (2008) have provided three basic criteria and comments that can be helpful in future classification of firms according to their geographic sales dispersion.
Firstly, OS suggest that it is not appropriate to classify statistical data straightaway. It should be realised that since this is a growing area of research, usage of any kind of classification tool is open to criticisms as it is not simply the categorization of Multinational Enterprises (MNEs) following particular regional strategy theories. As an example, OS focus on building and having strong position in the region by illustrating that if the EU, NAFTA region and Asia represents 90% of the total world sales output, an absolute division would require all the three regional triads to have 30% sales each and not 33.3% in order to encourage the strategy of lower thresholds. In other words, a firm can be defined as global if it has at least 20% of the total sales in the two host-triad regions and without any kind of imposition on the maximum sales threshold in the home territory (Rugman and Verbeke, 2007, p2). Additionally, it should also be noted that it is not at all relevant to categorize a firm as having strong position in the market if its threshold is lower than 20% of the total sales. OS even conducted a simulation using threshold value as 10% of the net sales in order to identify a string position in the host region as it would result to USD $1 billion even for the smallest of the Fortune Global 500 firms. But unfortunately, it didn’t present a strong position and can by no means be considered as an essence for strategic decision making in the worlds largest organizations. OS clearly argues that using various thresholds is helpful in assessing the sensitivity of firm’s positions in the classification system but the main function should always be to provide an assessment of the Future Global 500 and to easily track firms whose thresholds are continuously changing from one category of threshold to another. A clear example of this is Nokia which encountered a 4% decline in sales in the year 2002. However, this change in sales pattern reflected a short term failure in inter-regional growth but OS criticizes that it cannot be simply neglected. Movement of Nokia from a global organization in 2001 towards a home based firm in 2001 was a remarkable concern. In one line, it can be stated that having threshold below 20% simply leads to generation of more bi-regional firms and which can’t be regarded as truly global organizations.
Moving ahead, the second regional strategy criterion which OS highlights is that the sales variations are highly industry specific. According to OS, industry plays a significant role and all future researched should aim at exploring the regional vs global strategies at the industry specific levels and try to establish the difference. It is truism that a majority of firms are not properly internationalized and their sizes varies across regions but then its some of the world’s biggest MNEs that have constantly been regarded as capable of compensating for the weaknesses of the other sectors in different regions of the world. The main point to be considered is that our analysis are independent of differential size of numerous industries that exist across the region, as MNEs are able to establish regional markets and to further develop insufficient markets.
Lastly, in third comment it is argued that it would be irrelevant to prefer regional strategy over global strategy. Regional strategies come into existence when it becomes very difficult or impossible to adopt conventional global strategies efficiently, or when they fail to function, keeping in mind that global strategies cannot be evaluated in isolation. Further, it can be said that heterogeneous geographic space beyond the home country border is essential for most of the companies now if not all of them.
Moving ahead, this section of the essay will now make an attempt to tackle the criticism formed by OS concerning the contribution of regional strategy to the international business theory. According to (Rugman and Verbeke, 2007, p3), the regional strategy is structured around three simple but fundamental empirical observations which demand international business theory to be extended and enhanced. First of all, only a small number of MNEs have a balanced geographical sales distribution pattern across the global market, although it counts towards the risk diversification at the downstream end of the value chain. OS illustrate that a balanced and structured distribution of sales geographically would contribute towards enhanced global acceptance by the customers of the company’s products and services. With only the exception of resource-based industries, the triad comprising the EU, NAFTA region and Asia demonstrates a first cut though not certainly a fixed one mechanism to identify the extent to which an MNEs net sales are distributed worldwide. Further, this triad has gained so much importance as it is the home of world’s most large MNEs as well as the locus for a number of outstanding innovations in most industrial sectors. The triad also demonstrates the world demand pattern for most knowledge intensive services and goods. But it’s unfortunate to mention that only a small number of MNEs in the Fortune Global 500 are capable of performing equally well in each of the three regions of the triad. It is often observed that a strong position in the home-triad region is not supported with an equally strong position in both the other two remaining triad environments. Classification tools are now irrelevant as among the firms with international operations only a small percentage are truly global i.e. may be even less than 5% (Ghemawat and Ghadar, 2006). They further add to it and state that different firms rule in different parts of the world.
Second wing of the regional strategy focuses on the fact that several MNEs have regional features in the organizational structure such as geographic divisions and having individual divisions for different regions is supported mainly by the concept of regional heterogeneity demanding idiosyncratic management. In this case, the intra-regional institutional and economic distance is not just smaller but also very different from that of the interregional. It has been observed that for most MNEs, managing operations and work system in EU is very different from functioning system of the NAFTA region or as compared with the work cultural of Asian environment. These differences may further be enhanced if the work unit is further subdivided into smaller units. Fratiannin (2006) states that these differences in work system signal the importance of regional level in the business strategy and structure of MNEs. Today, almost all big firms such as Toyota, General Electric (GE) have embedded regional elements in their business and operational strategies and these companies are often wrongly referred to as global organizations not just because of lack of balanced geographic distribution but also because of their world wide global operations and manufacturing (Ghemawat, 2005, p102).
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Thirdly, it should be noted that more than fifty percent of the geographic area in terms of sales is normally the main source of the firm’s cash flows and the centre point of most of the firms both tangible and intangible assets. In the coming years, the concept of having more than 50% sales in the home territory would not be significant enough in EU and North America specifically but it would gain momentum in Asian region as intra-regional distance is minimizing and thereby driven by a reduction of investment barriers and trade. Competition among industries would be more prevalent at the regional level instead of the national level. OC highlight that attention should now be laid on the development of classification tool that will help bundle the home country sales with the sales in the remainder of the home territory rather than paying attention separately to the sales in the home region and remaining of the home region especially for MNEs based in Asia and EU.
Moving ahead, the above discussed observations and theories clearly demonstrate the need for an extended international business theory. These observations are independent of specific categorization approaches to measure specific home-region vs rest-of-the-world market position of MNEs. A trend has always been seen that all the MNEs are much stronger in their home regions as compared to that in other triad regions. These top MNE firms have formulated their organizational structures around the regional component and a varying market position in each region raises call for a regional approach rather than a global strategy approach. The paragraph below now will bring to surface the three main components for the extension on mainstream international business theory (Rugman and Verbeke, 2007, p3).
Firstly, it is noticed that impact of country border does not provide strong basis for distinguishing between non- location bound (or internationally deployable/exploitable) and location bound. In today’s period of excess regionalization, it is very easy for some companies to exploit and deploy their strengths throughout the home country border. Further, proxies for internationally transferable FSA’s such as firms level predictors of internationalization like firm’s level of R&D do not hold much importance in explaining intra-regional expansion occurring in home region, given the distance gap between the home country and rest of the home region is very less. As a result of well-functioning trans-European transport and logistics networks enabling fast response and just in time strategies covering the whole continent, the significance of geographic distance has decreased in EU. The EU integration process itself has let to decrease in Institutional distance. Further, Economic distance has lost its relevance because of many reasons such as development of new services and products at par with European level, possibility of cross border shopping made possible by web based searches, continuous attempts made by many companies to gain scale and scope efficiencies at the European level and lastly, increased importance of EU as a geographic space to ascertain company’s conduct, structure and importance. Finally, decreased significance of conventional measures of cultural distance mainly in the business to business area as it is easy to get labour in Europe, considerable increase in use of English as the lingua franca inside the region. On sharp contrast between past and present position of conventional location bound FSAs it can be clearly stated that previously they allowed firm expansion only upto country borders but now it can be easily upgraded, and made deployable and exploitable even beyond the home country borders and also in other home region countries.
Secondly, their is a need to reconsider the fact that non-location-bound FSAs like technological knowledge or brand can be easily exploited and deployed nationwide. Today also it is necessary to complement existing FSA bundles with an additional FSA bundle in high distance environments which implies distance still plays an important role. According to Ghemawat (2005, p104), there are several ways to differentiate between low and high distance environments, one major distinction being that between home regions and host regions in a triad context. Moreover, it is clear that extension and scope of mainstream international theory is free from any scholars disagreeing with the concept of the triad region as the best proxy to discriminate between low-distance environments (in this case the home-triad region) and high-distance environment (in this case the two host-triad regions). High distance implies to making more substantial investments in order to complement its present FSA bundles, also enabling maximum and profitable exploitation in the host region environment. Here, the apparent trade off becomes obvious: further the efforts to expand the high-distance environment may not be proved to be as successful and profitable as the expansion of low distance environment, even if it is suggested by macro-level parameters which measure the attractiveness of the high-distance environment that they have strong location advantages. As stated by Nachum and Wymbs (2007, p240) in regard to global cities that FSAs and location advantages are dependent on each other. High distance bundles also has many risk factors along with it like melding the extant FSA bundles with newly developed or accessed resources in the high distance environment may lead to burdened with several operational problems, decreased or disappointing sales, as exemplified by the retreat of some of the world’s largest MNEs from high-distance contexts, for example, Wal-Mart’s exit from Germany and Korea.
Thirdly, the theoretical difference between the two FSAs namely location bound and non-location bound FSAs assume conventionally easy developments and profitable exploitation of FSAs (like brand names or technological knowledge of proprietary) across borders. Moreover, it is very essential to acclimatize the brief contents of these two concepts to the authenticity of regionalization. More particularly, the factors that determine the extent of FSAs are, its distance accompanied by its geographic, institutional, economic and cultural components. The level at which a FSA should be called location-bound vs non-location bound is estimated by decay in value across a space. On the basis of terms like region bound nature of FSAs and the liability of inter regional foreignness it has been highlighted that for international business other geographic borders hold more importance than conventional country borders in our previous study.
After studying the concepts and theories of regional strategy, we now try to establish the extent to which Procter & Gamble could be categorized as a global firm in terms of its business and operational strategies.
The Case of Procter & Gamble
Procter & Gamble Co. – One of the worlds leading consumer goods manufacturer such as Tide, Pantene, Ariel etc was established in 1837 from an original candle and soap company. The firm now operates in 180 nations with more than 138,000 employees. According to Lafley, A. G., Chairman of the Board and chief Executive Officer, P&G, the firm has over 171 years of history and has always been driven by creativity and innovation. Additionally, improved sales and long term success have always been the strategic goals of this corporation. And it understands the fact that these goals can be attained by constantly appreciating changing consumer’s needs, innovation, branding and market needs.
Depending entirely on skunk work such as acquisitions, internal R&D and selective innovations has proved to be inefficient and insufficient for attaining the business target of $4 billion business in a time period of one year. It can be clearly seen that invent- it-ourselves model along with global research facilities and recruiting and holding of the best talent nationwide attained success till the year 2000 but nowadays satisfying high levels of top line growth has become a big challenge for an organization
The approach through which the radical strategy of open innovation helped an organization attain its business mission and goal can be typified in the following lines.
To face the challenge, P&G adopted a brand new technique of innovation: Develop and Connect model in the year 2000 which lays great importance on searching good and new ideas and information outside and bringing them in, in order to give internal capabilities a boost and make most out of them. With the perspective of manufacturing improved and relatively cheaper products faster the business strategy involved in this model was to leverage assets of people, products and property available externally and applying it to their respective R&D labs, purchasing, market capabilities and production. The foremost work of this strategy is to recognize top ten preferences and needs of the consumer. Moreover, it is very essential that the customers are fully satisfied by the products manufactured and which will finally result in increased sales and profit. Moving ahead, alike products or related technologies which already exist in the market and occupy good position are recognized. Lastly, analysing the influence of technological acquisition of one area over the other areas. Networking is the backbone of this approach. Along with having business collaborations with open networking companies such as InnoCentive and Ninesigma, the P&G group has long chain of suppliers and technological entrepreneurs worldwide. They play a crucial role by finding solutions to P&G internal problems in the outside world. Thus, by constructing such type of infrastructure P&G has been able to reduce its investment in technology along with achieving stable top line growth and required sustainability.
According to Huston, L. & Sakkab, N., 2000, p.3 by shifting to Connect and Develop model their has been a remarkable increment in our R&D production by 60% and the progress rate of innovation has undoubtedly doubled.
The Procter & Gamble figures out how an organization can maximize its profitability levels by switching to new and annovative
The Procter & Gamble examples mirrors the way how switching to new and innovative approaches of using information and technology can help maximise profit margins. It is one of the organisations which has developed enabling infrastructure fabricated around innovation with a huge world wide network combining human capital, ideas and technology.
This essay has brought to surface a number of strategies which can help firms to establish strong positions globally like having a threshold of 20% etc. The main aim which was to justify that a firm cannot be simply categorized as global based upon statistical data has been justified. A number of measures have also been illustrated which can help differentiate the firms regional strategy from the global strategy.
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