The process of industry globalization

Industries globalize because shifts in technology, buyer needs, government policy, or country infrastructure create major differences in competitive position among firms from different nations or make the advantages of a global strategy more significant. In automobiles, for example, the industry has been globalizing as Japanese companies have gained substantial competitive advantages in quality and productivity, demand for cars in different nations has become more similar (an important reason being rising fuel costs in the United States), and transportation costs have fallen, among other reasons.

An act of strategic innovation often unlocks the potential for globalization. International industry leadership frequently results from discovering how to make a global strategy feasible. For example, a firm may discover a means of reducing the cost of modifying a centrally designed and manufactured product to meet differing local country needs, such as modularizing the power supply in an otherwise standard product. In central office switching equipment used in telecommunications, for example, Northern Telecom, NEC Corporation, and Ericsson have benefited from product architectures that permit modularization of software and relatively low-cost modification to fit the needs of different national telephone systems. Or a firm may develop a new product variety or marketing approach that has universal appeal, or an innovation that overcomes impediments to competing globally. In disposable plastic syringes, for example, American companies not only pioneered a product with universal appeal but reduced transport costs compared to glass syringes, unlocking possibilities for reaping economies of scale from a single world-scale plant.

Nascent global industry leaders always begin with some advantage created at home, whether it be a preferred product design, a higher level of product quality, a new marketing concept, or a factor cost advantage. However, sustained success usually requires that the firm not stop there. The home- based advantage must then become the lever to enter foreign markets. Once there, the successful global competitor complements the initial home-base advantage with the economies of scale or reputation advantages of worldwide sales. Over time, competitive advantage is supplemented (or home-based disadvantages are offset) by locating selected activities in foreign nations.

Even if the initial home-base advantage is hard to sustain, a global strategy

can contribute to supplementing and upgrading it. A good example is in consumer electronics, where Matsushita, Sanyo, Sharp, and other Japanese firms initially competed on cost in selling simply designed, portable televisions. As they began penetrating foreign markets, they gained economies of scale and further reduced cost by moving down the learning curve. World-wide volume then helped to support aggressive investments in marketing, new production equipment, and R& D and to achieve proprietary technology. Japanese firms have long since graduated from cost focus to producing broader lines of increasingly differentiated televisions, VCRs, and other items, using world-class product and process technology. Today, the Korean competitors such as Samsung and Gold Star have taken over the cost focus position, competing in less sophisticated, standardized products based on low labor costs.

Factor costs, a lower-order advantage, are an elusive and often fleeting source of competitive advantage for an international competitor just as they are for a domestic one. This has been apparent, for example, in apparel and construction. The global competitor, through locating activities abroad, can nullify or even exploit shifts in factor costs that work against its home country. Swedish heavy truck producers (Volvo and Saab-Scania), for example, moved some production years ago to countries such as Brazil and Argentina. Firms whose only advantage is lower factor costs, moreover, rarely supplant previous industry leaders. A strategy of imitating leaders is too easily matched via offshore production or offshore sourcing. Firms possessing low factor costs will be able to supplant established industry leaders only if they combine such advantages with focus on a market segment that has been ignored or vacated by established leaders and/or investment in large-scale facilities employing the best technology available on world markets. They will sustain their advantage only if they compete globally and upgrade it over time. The role of national circumstances in influencing a firm's initial advantage, the ability to exploit it through a global strategy, and the capacity and will to upgrade it over time will be central concerns in later chapters.