Global configuration

In configuring its worldwide activities in an industry, a firm faces two broad choices. One is whether to concentrate activities in one or two nations or disperse them to many nations. The second is the choice of nations in which to locate particular activities.

Concentrating Activities. In some industries, competitive advantage arises from concentrating activities in one nation and exporting components or finished goods to foreign markets. This occurs where there are significant

economies of scale in performing an activity, a steep learning curve that creates advantages from having only one location, or advantages in locating linked activities in the same place to allow better coordination. Concentrated, or export-based, global strategies are typical in industries such as aircraft, machinery, materials, and agriculturally related products. Normally, activities are concentrated at the firm's home base.

Concentrated global strategies are more typical in some nations than others. They are common in Korea and Italy, where today most products are designed and produced at home and only marketing takes place abroad. In Japan, this has also been the pattern in most internationally successful industries, though Japanese firms are rapidly dispersing activities such as purchasing and assembly for various reasons. The types of international strategies that are encouraged or supported in a nation influence the nature of industries in which the nation competes successfully.

Dispersing Activities. In other industries, competitive advantages arise (or home-base disadvantages are overcome) from dispersing activities to several or many nations. Dispersing activities involves foreign direct investment (FDI). It is favored in industries where there are high transportation, communication, or storage costs that make it inefficient to operate from a central location, and by the presence of risks of performing an activity in one location: exchange rate risks, political risks, and risks of supply interruption.

Dispersed activities are also favored where local product needs differ substantially. The resulting need to tailor products extensively to national markets reduces the scale or learning advantages of operating a single large plant or research laboratory. Another important motivation for dispersing activities is to enhance local marketing in a foreign nation, by signaling commitment to local buyers and/or providing greater local responsiveness. Dispersing an activity to many nations can also allow a firm to accumulate expertise in the activity via information gained from several locations (provided the firm can coordinate across subsidiaries).

Government is a powerful force in some industries for dispersing activities, through tariffs, nontariff barriers, and nationalistic purchasing. Government typically wants a firm to locate an entire value chain in its nation, because this is seen as creating benefits and spillovers to the nation that extend beyond local content.²¹ Finally, dispersing some activities may sometimes allow the benefits of concentrating others to be gained. For example, placating the national government by performing final assembly in a nation may allow freer import of components from large-scale, centralized component plants located elsewhere.

The choice of concentrating or dispersing activities depends ultimately on the particular activity. In the truck industry, leaders such as Daimler- Benz, Volvo, and Saab-Scania conduct most R& D and component production

at home but assemble products in a number of countries. The best configuration will differ from industry to industry. It may also differ among segments in the same industry.

Some examples will illustrate a number of these points. Swedish firms have highly dispersed strategies in a number of industries related to mining. Buyers in this sector value an extensive local presence by suppliers to provide service and technical assistance. In addition, local government ownership or involvement in the mining sector is nearly universal. Political considerations demand a local presence to respond to government's preference for a local supplier. Swedish firms such as SKF (ball bearings) and Electrolux (appliances) also tend to have highly dispersed strategies involving extensive FDI and relatively autonomous foreign subsidiaries, a function of differences in product needs among nations, the need for close proximity to buyers in marketing and service, and government pressures. Swiss firms also tend to have dispersed configurations in many industries, among them trading, pharmaceuticals, food, and dyes. Dispersed global strategies, involving substantial foreign direct investment, are also typical in such sectors as consumer packaged goods, health care, telecommunications, and many services.

Locating Activities. Along with a choice about the number of sites for an activity is the nation(s) in which to locate it. Activities are usually all located initially in the home nation. In a global strategy, however, a firm can choose any nation in which to assemble products, fabricate components, or even conduct research, wherever advantage lies.

Locational advantages often apply to individual activities. One of the potent benefits a global firm enjoys is the ability to spread different activities among nations to reflect different preferred locations. Thus, components can be produced in Taiwan, software written in India, and basic R& D performed in Silicon Valley.

The classic reason for locating an activity in a particular nation is factor costs. Assembly takes place in Taiwan or Singapore to take advantage of a pool of educated, motivated, but inexpensive labor. Capital is raised wherever it is available on the best terms. To fund crucial capacity additions in semiconductors, for example, NEC Corporation (Japan) financed convertible debt not in Japan (where this instrument was rare) but in Europe. Indeed, global competition has led to a growing dispersion of activities reflecting such considerations. Many American firms produce in the Far East (virtually all American disk drives are produced there, for example) while Japanese competitors in the sewing machine, sporting goods, electronic components, and other industries are active investors in Korean, Hong Kong, Taiwanese, and now Thai production.

More recently, firms have become more prone to locate activities in other nations not only to tap local factor costs but to perform R& D, gain access to specialized local skills, or develop relationships with pivotal custom-

ers. German plastics processing machinery companies and Swiss surveying equipment firms have both, for example, located research units in the United States to develop electronic controls. SKF (Sweden), a world leader in ball bearings, has a major production and R& D base in Germany, in close proximity to the many world-leading German machinery industries and the German automotive sector, important ball-bearing users.

Firms also locate activities in nations if doing so is a condition for operating there. Locating assembly, marketing, or service activities in a nation is important in some industries to the ability to sell and service more effectively to that nation's customers. A good example is highly engineered commercial air-conditioning equipment, where U.S. leaders such as Carrier and Trane maintain operations in many international locations to support the customization and heavy servicing requirements of this industry.

Government mandates also influence location. For example, many Japanese production investments in the United States and Europe today (such as in cars, auto parts, and consumer electronics) reflect actual or potential import restraints. Similarly, many Swedish, Swiss, and American multinationals moved abroad before World War 11 when trade barriers as well as transport costs were more significant, one reason they often have widely dispersed activities compared to Japanese or German firms in the same industry. A dispersed configuration is frequently hard to integrate and consolidate once in place, because local country managers desire to retain power and autonomy. The inability to shift to more concentrated and coordinated strategies necessary for competitive advantage is one reason why firms lose advantage in some industries.

My discussion of locating activities, however, must at this stage remain incomplete. The best location for the activities that constitute a firm's home base, particularly strategy development, R& D, and the more sophisticated portions of production, is after all one of the principal subjects of this book. Suffice it to say that the motivations for locating in a nation go far beyond the classical explanations outlined here.

GLOBAL COORDINATION

The other important means by which firms gain competitive advantage through a global approach to strategy is by coordinating among activities located in different nations. Coordination involves sharing information, allocating responsibility, and aligning efforts. It can lead to a number of benefits. One is accumulating knowledge and expertise gained at dispersed sites. If a firm learns how to operate the production process better in Germany, transferring that learning may also make the process run smoother in U.S. and Japanese plants. Different countries, with their inevitably differing condi-

tions, provide a basis for comparison as well as opportunities for arbitraging knowledge obtained in different sites about different aspects of the business.

Knowledge accumulates in different countries not only about product or process technology but also about buyer needs and marketing techniques. A firm with a truly global outlook, coordinating among all its marketing units around the world, can receive an early warning of industry changes by spotting industry trends before they become broadly apparent. Coordination among dispersed activities may also lead to economies of scale by allocating subtasks among locations to allow specialization. For example, SKF (Sweden) produces a different range of bearings in each of its foreign plants and transships products among nations to allow each national marketing subsidiary to offer the full line.

Dispersed activities, if they are coordinated, may allow a firm to respond to shifting exchange rates or factor costs. For example, incrementally increasing the production volume at the location that currently enjoys favorable exchange rates can lower overall costs, something that Japanese firms in a variety of industries were pursuing in the late 1980s because of the high value of the Japanese yen.

Coordination can also enhance a firm's differentiation with internationally mobile or multinational buyers. Consistency in product positioning and its approach to doing business on a worldwide basis reinforces a company's brand reputation. The ability to serve multinational or mobile customers wherever they have the need is often valued. Coordination among national subsidiaries can also enhance leverage with local governments if the firm is able to grow or shrink activities in one country at the expense of others.

Finally, coordination across countries yields flexibility in responding to competitors. A global firm can choose where and how to fight a competitor. It might decide to wage a battle in the nation from which a competitor draws its greatest volume or cash flow in order to reduce the competitor's resources for competing in other countries. IBM and Caterpillar have practiced this sort of defensive behavior in their Japanese operations. A competitor with a solely domestic outlook has none of this flexibility.

Large national differences in buyer needs and local business conditions work against coordination. They make learning from one nation inapplicable in other nations. Where such conditions are present, an industry is multi- domestic.

Even when there are significant benefits to coordination, however, achieving coordination among subsidiaries in a global strategy involves formidable organizational challenges because of sheer complexity, linguistic differences, cultural differences, and the need for high levels of open and credible information exchange. Another serious difficulty is aligning the interests of subsidiary managers with those of the firm as a whole. The German branch does not necessarily want to tell the U.S. branch about their latest breakthroughs in

production technology, because it may make it harder for them to outdo the Americans in the annual comparison of plant operating efficiency. These vexing organizational problems mean that country subsidiaries often view each other more as competitors than collaborators, and that full and open coordination is the exception rather than the rule in global companies.²²