Business unit strategies between regionalisation and globalisation

International Business Review 11 (2002) 231–250 www.elsevier.com/locate/ibusrev

Business unit strategies between regionalisation and globalisation H. Proff ∗ Institute of International Management, Mannheim University, Schloss, 68131 Mannheim, Germany Received 12 February 1998; received in revised form 9 July 2001; accepted 7 October 2001

Abstract Although in both the economic literature and in practice the most frequently used catchword is “globalisation”, the current company environment in reality is not characterised by such worldwide multilateralism or an increasing degree of homogeneity in customers’ tastes. Instead, a trend towards regionalism (“regionalisation”) has become evident recently, especially with the current formation of new regional integrations outside the triad-markets, especially in East Asia, South America, and Southern Africa. Nevertheless, some indications point to a transition from regionalisation to globalisation in the long run. Above all, a cluster analysis of environmental conditions in the member countries of these new regional integrations already reveals a degree of inter-regional homogeneity, which characterises the current regionalisation as an “open” rather than a “closed” aggressive stabilisation of trading blocks. Although the transition towards globalisation lies beyond even the most long-term strategic planning, companies have to concentrate their current strategies on an “open” multi-regional economic setting. On the business unit level, this opens possibilities for strengthening hybrid advantages of low costs and differentiation as well as a regiocentric (dual) international orientation for many companies.  2002 Elsevier Science Ltd. All rights reserved. Keywords: Regionalisation; Globalisation; Business unit strategies; Cluster analysis

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1. Introduction

Currently, increasing regionalisation is taking place outside the triad-markets, with the formation of the Asian Free Trade Agreement (AFTA) in East Asia, the Mercado Comun del Sur (MERCOSUR) in South America, and the Southern African Development Community (SADC) in Southern Africa (cf. de la Torre & Kelly, 1992; Hufbauer & Schott, 1994). Such regional free-trade agreements are made within a region to expand trade (cf. Keegan, 1995, p. 23). They become evident in the company environment. Although customs duties in the newly formed regional associations will, in many instances, be abolished completely only after long transition periods, politically and economically more stable environmental conditions are already created at the time the decision to form a regional union is made (cf. Proff, H.V., 1993). This is a direct effect of regionalisation, which, as a result of the stimulation of direct investments is also significant for companies from countries that are not members of these unions (cf. Ethier, 1998, p. 1156). This aspect is particularly important for the involvement of these companies in less developed countries, as higher allowances for risks must be made in a politically and economically unstable environment, thereby rendering many investments unprofitable (cf. Arnold & Quelch, 1998, p. 9; World Bank, 2000, p. 38). Consequently, new regional integrations formed by hitherto less developed partner countries, which are the focus of this paper, are considered particularly attractive fields of operations for all multinational companies. However, it is important for practitioners to understand and structure the complex company environment to be better prepared for strategic reactions towards regionalisation. The aim of the research reported in this article is twofold:

1. to characterise the current company environment outside the triad-markets as an “open” regionalisation on the path towards globalisation (Section 2) and on this basis 2. to recommend possible strategic reactions towards such an “open” regionalisation (Section 3).

This research has long-term relevance, because decisions to start or expand fullfledged production in the less-developed member countries of these new regional integrations in East Asia, South America, and Southern Africa will often only be covered in the second product life cycle. This means a start-up period of around 10 years for most durable consumer goods. The practitioner is confronted with the dilemma of high market opportunities in these regional markets on the one hand and high risks of investments on the other. A conception of possible development in these markets and a guideline for a sensitive strategic reaction is therefore needed. It should be clear that there is no world champion strategy for business units in all market segments. However, major trends and possible strategic reactions can be presented as “guidance for the real world” (Winter, 1987).

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2. Current regionalisation as a step on the path towards globalisation This section gives reasons for the assumption that the currently developing new regional integrations in East Asia, South America, and Southern Africa are not isolated or “closed” but “open” regionalisations, which constitute a step on the path towards globalisation. 2.1. Medium-term economic significance of important new regional integrations In 1995 76% of worldwide GDP was reached in the triad-markets (cf. World Bank, 1997). However, many business areas are characterised by stagnation and predatory competition. A current long term OECD-forecast expects in its “low growth scenario”, which assumes remaining tariffs and trade barriers in the world economy, a decrease in the share of the triad-markets in world-wide GDP. It might be around 62% in the year 2020. Under the assumption of multilateralism, the “high growth scenario” expects an even higher decrease in the share of the triad-markets in worldwide GDP (cf. OECD, 1997). In the three most important new integration areas, AFTA, MERCOSUR, and SADC, where the current share of 6.1% of worldwide GDP appears to be quite low, an increase to 8.2% in the year 2020 is presumed (cf. OECD, 1997, see Fig. 1). A market expansion in these new integration areas is therefore a strategic alterna-

Fig. 1. Economic importance of the new regional integration areas. Source: own calculation based on World Bank (1997) and OECD (1997).

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tive to a product expansion strategy within the triad-markets (see Fig. 1). This should certainly not imply a strict separation between market-based strategies of market optimisation and expansion (cf. for example, Bain, 1956 or Porter, 1980, 1985) concentrating on new markets, on the one hand, and resource-based strategies of competence-based competition and product innovations (cf. Peteraf, 1993; Prahalad & Hamel, 1990; Sanchez, Heene, & Thomas, 1996; Wernerfelt, 1984) in the triadmarkets, on the other hand. Nevertheless, market expansion strategies in the developing member countries of the new regional integrations are more widespread to companies in traditional industries within a stable or, at most, an incrementally changing (evolving) environment, rather than for radical product innovations in dynamically changing environments, which are more typical for companies selling only in the triad-markets (see, for example the distinction pointed out by Sanchez (1997) of stable, evolving, and dynamic environments).1 The economic significance of the new regional integrations also results from changes in the company environment that will be reached with the full realisation of the integration. However, strategic reactions by multinational companies to increasing regionalisation depend on whether they assume an isolated or “closed”, and therefore durable, multi-regional environment or a trend towards a global environment in the near future (“open” regionalisation). 2.2. Long-term transition from regionalisation to globalisation In this section the assumption of an “open” regionalisation outside the triad-markets is tested. A regional integration can be seen as a “club” of countries with similar economic interests. Therefore, the idea of an “open” regionalisation is similar to the “club-convergence”-theory (cf. Quah, 1996), according to which there might be more convergence or homogeneity between members of different clubs (regional integrations) than between members of the same club (regional integration). Club convergence theory is a middle-ground approach in the convergence debate. Convergence is understood as a faster per-capita growth in poorer economies than in richer ones in accordance with the neo-classical assumption of diminishing returns to capital (cf. Barro & Sala-i-Martin 1998, p. 226). The divergence assumption rejects the inverse relationship of per-capita growth and the initial level of output due to the availability of technological progress. A convergence pattern leads to diminishing differences or inequalities in the world economy. “Open” regionalisation is served, for example, if Thailand is economically more homogeneous with Brazil (a member of a different integration area) than with Laos or Viet Nam (members of the same AFTA). If this is the case, members of one regional integration may have heterogeneous policy goals, which prevents closed regionalisation, since the latter is only possible if all member countries and/or all

1 This statement describes only a general trend. There are no world champion market or product expansion strategies for a special geographical region depending on the company environment.

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lobby groups have similar goals (cf. Bac & Raff 1997; Ethier, 1998; Grossman & Helpman, 1995). The assumption of such “open” regionalisation is the hypothesis of an intraregional heterogeneity and some inter-regional homogeneity in the current company environment of all member countries of the most important new regional integrations (AFTA, MERCOSUR, and SADC). Such intra-regional heterogeneity and interregional homogeneity can be taken as indicative of a transition to multilateralism and therefore a globalisation of the company environment in the long run instead of an aggressive stabilisation of trading blocks. This hypothesis of “open” regionalisation can best be tested with the help of a cluster analysis. The objective of clustering is to minimise the within-group variance and maximise the between-group variance (cf. Bernstein, 1988, p. 35; Jambu & Lebeaux, 1983, p. 4). The cases to be clustered consist of all 27 member countries of the three important new regional integration areas. The variables used as criteria for clustering these countries were obtained from analysis of the immediate company environment, namely those determinants of the sales, procurement, and investment conditions that are improved through regionalisation (see Section 1 and for more details Section 3.1). Four relevant determinants of the sales conditions can be used as variables. These are: 1) per-capita income in USD as a three-year average of the latest existing data for all 27 countries (mainly 1993–1995); 2) annual growth in per-capita income (predominantly 1996–2000); 3) income distribution shown by the latest available Gini-coefficients; and 4) tariffs which can be seen in the post-Uruguay Round (WTO) applied rate. A further three relevant determinants of the procurement conditions used as variables are 1) wages in USD, 2) the state of education shown by an education index and 3) infrastructure operationalised by electricity consumption per capita in 1994. For the investment conditions only one relevant determinant is used as a last variable, namely the investment risk shown by the Institutional Investors Ranking, 1995 (cf. Appendix A for sources and detailed information on the cluster analysis). In a first step of clustering, a standardisation through z-transformation was necessary to ensure complementarity between data of different scales (cf. Bernstein,1988, pp. 42–43). In a second step, the Euclidean distance process of minimum squared error was chosen as a distance measure, for it tends to produce more “spherical” (and, hence, different but usually more interpretable) clusters than other algorithms (cf. Harrigan, 1985, p. 60). In the next step of the clustering process, Singapore was identified as an outlier with the single linkage technique (cf. Backhaus, Erichson, Plinke, & Weiber, 1996, p. 31) and was eliminated from the analysis. Then in the fourth step it came to the choice of a clustering algorithm. The Ward technique is commonly recommended as the only technique that simultaneously finds a very good partition and signalises the right number of clusters and was therefore also chosen in this analysis. According to a comparison of the sum of error squares a five-cluster solution seems to be suitable. The elbow-criteria (cf. Backhaus et al., 1996, p. 307) used to choose the cluster solution characterised by the sharp bend in the curve of the sum of error squares is decisive. With the transition from five clusters

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to a four-cluster solution a significant increase in the sum of error squares can be seen. In addition, a comparison of the explained variance of the two canonical discriminant functions within the discriminant analysis shows the highest result (95.5%) for the five-cluster solution compared with all other solutions, for example the sixcluster solution (90.8%). When interpreting the clustering output, which can be seen in Table 1, the hypothesis of intra-regional heterogeneity and some inter-regional homogeneities can be confirmed. The five clusters can be characterised as: 1. “FDI base”, comprising all MERCOSUR members (Brazil, Argentina, Uruguay, Paraguay and Chile), as well as Zimbabwe, Indonesia, and Thailand 2. “Poor SADC”, comprising all SADC member countries besides South Africa, Namibia and Zimbabwe (namely Malawi, Mozambique, Tanzania, Botswana, Lesotho, Swaziland, Zambia, Mauritius, and Angola) 3. “Advanced SADC”, comprising South Africa and Namibia 4. “Advanced AFTA”, comprising Malaysia and Brunei 5. “Poor AFTA”, comprising Viet Nam, the Philippines, Cambodia, Laos, and Myanmar. Table 1 Five cluster-averages for all eight variables Variable

Cluster 1 FDI base

Per-capita 3.067 income (US $) Annual growth 4.86 in per-capita income (%) Income 50.31 distribution (Gini coefficient) Tariffs (%) 31.03 Wages (US $) 3.197 Education index 0.82 Electricity 1.319 consumption per capita (kW/h) Institutional 43.40 Investors Ranking

2 poor SADC

3 advanced SADC

967

4 5 advanced AFTA poor AFTA

2.498

6.772

3.46

2.65

6.75

6.10

46.97

52.65

43.65

36.92

19.40 1.423 0.60 492

19.40 8.685 0.68 2.707

15.15 7.159 0.79 3.364

21.18 1.213 0.67 144

25.40

45.20

69.10

23.64

Source: own compilation based on clustering results.

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Table 1 shows the five cluster-averages for all eight variables. Looking at Table 1 it becomes evident that Malaysia and Brunei, forming cluster 4, (“advanced AFTA”) are very attractive markets and production locations due to high market potential and growth, low tariffs, a high standard of education and good infrastructure. In spite of high wages they have the highest average Institutional Investors Ranking of all clusters. The “FDI base”-cluster (1) has a lower institutional investors ranking because, especially in the MERCOSUR-countries, there is still a high inflation risk. Therefore, production bases should be full-fledged with the greatest possible independence from the local environment or should be relinquished. The average per-capita income in this cluster is lower than that in the two low-populated “advanced AFTA” countries, Malaysia and Brunei. However, due to high purchasing power in a sufficiently extended upper-class market segment, a consequence of the unequal income distribution (high Gini-coefficient), high external tariffs and a high broad education, cluster 1 can be evaluated as quite attractive for multinational companies. “Advanced SADC” on the other hand has the problem of high wages and political uncertainty but good infrastructure, low tariffs but high purchasing power (especially among the white population) due to a very unequal income distribution. “Poor SADC” and “poor AFTA”, the latter despite high GDP growth rates, have very bad environmental conditions. In particular, “poor AFTA” with the quite equal income distribution has no effective demand and the lowest Institutional Investors Ranking of all five clusters. The clustering results show intra-regional homogeneity only between the MERCOSUR-countries, all of which belong to cluster 1, whereas AFTA- and SADC-members are in both cases split up in three clusters. This confirms the hypothesis of intraregional heterogeneities. The heterogeneity of AFTA would have been even higher if Singapore, which constitutes its own cluster, had not been eliminated from the analysis. To verify the clustering results different cluster algorithms were used. They all show similar results. Due to theoretical problems using traditional significance tests for cluster results (cf. Green & Tull, 1978 or Harrigan, 1985, p. 70), profiles of cluster averages for the five clusters were used. They show a clear distinction between the five groups and thus verify the high explained variance of the discriminant analysis. Concerning the relationships among the 26 countries, an inter-regional homogeneity can reversibly be proved because member countries of all three integrations belong to cluster 1. This cluster can be interpreted as an indication of a future transition from a multi-regional to a global environment generally assuming multilateralism (world-wide free trade) and a higher homogeneity of the world market due to heterogeneous goals in the regional integrations. The clustering results show that the current regionalisation will not supersede the multilateral system of free trade. Rather, regionalisation can be seen as a step on the path towards multilateral free trade, which means a global company environment in the far future. In the meantime, multinational companies should try to exploit the improvements initiated by the current formation of new regional integrations because the transition period to a globalisation of the company environment is too long-term to dispense

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with utilisation of the advantages of the multi-regional environment (cf. Ethier, 1998, p. 1161). Nevertheless, companies need to remain flexible enough to be able to react to a further opening of the (new) regional integration areas. In a complex company environment it is the task of the top management to filter the information flood. With the help of the cluster analysis, the data on changes in the company environment can be aggregated as a base for a better analysis of the possible strategic reactions. Possible strategic reactions to the increasing new “open” regionalisation on the business unit level are discussed in Section 3.

3. Strategic reactions to the new “open” regionalisation on the business unit level To assess the potential strategic challenges initiated by the three new regional integrations for multinational companies, the medium-term changes in the broad and immediate company environment resulting from “open” regionalisation have to be analysed first. 3.1. Impacts of an “open” regionalisation on company environment The intended direct effects of regional integrations are as numerous as the integrations themselves (cf. Proff, H.V., 1993, 1994). Even though the connections established in the theory of international trade do not differentiate between the effects of increasing regionalisation on various strategy levels, different effects are placed at the centre of interest according to the differentiation between a broad company environment (primarily the fundamental political and economic conditions) and an immediate company environment (the sales, procurement, and investment conditions). With regard to the effects of increasing regionalisation on the broad company environment, this paper focuses on the political and economic conditions because they are influenced much more directly by regionalisation than the fundamental ecological, technological, or socio-cultural conditions. Among the political effects that are expected to evolve from a regional integration is the development in the partner countries towards more democracy, going hand in hand with increasing market orientation. Moreover, political risks such as revolutions and wars will probably diminish (cf. Vernon-Wortzel & Wortzel, 1990, p. 135), as each partner country takes on the obligation of ensuring greater political stability. Consequently, the country-related risk as a factor influencing corporate decisions decreases. According to the theory of international trade, the (company-related non-monetary) economic effects of a regional integration include primarily, a further decrease in the transaction risks as a result of the abolition of tariffs and non-tariff barriers to trade. This can be explained by a stronger self-commitment of the member countries towards a tax reduction. In addition, it is possible to deduce—with the help of the static theory of international trade—trade-creating effects within a region and trade-

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diverting effects with regard to countries that are not members of these unions. Thus large internal markets are created (cf. Bhagwati, Greenaway, & Panagariya, 1998, pp. 1129–1138). Owing to the decrease in the country-related risks, the reduction of transaction risks, and the development of larger internal markets as a result of increasing regionalisation, the immediate company environment of multinational enterprises is changed as well, namely on the sales-, procurement-, money- and capital-, as well as labour-markets (cf. Clement et al., 1999, pp. 23–60). Regionalisation improves, above all, the sales conditions in the integration area. The tight domestic markets in the individual partner countries of the new regional integrations have frequently precluded a more active involvement of multinational enterprises, because exports were often impeded by import restrictions and the necessary investments were not profitable for a company. In addition to leading to larger internal markets, regional integrations also result in stronger economic growth in the participating countries, so that the sales potential is increased as well. In order to be able to make a more precise estimate of the sales potential, it is necessary to establish, through empirically based hypotheses, a connection between economic growth—induced by the regionalisation—and the sales of specific goods (cf. Arnold & Quelch, 1998, pp. 13–15). With regard to less developed countries, a correlation is frequently established for both disposable and durable consumer goods, between the development in sales of specific goods in more highly developed countries and the per-capita income (cf. for example, Karmokolias, 1990, p. 3). Equally important is a detailed analysis of income distribution, which indicates the expected additional demand for specific goods depending on the development of the economic situation, and which consequently supplies information that is important for the decision of enterprises from countries that are not members of these unions on direct investment. Regional integration also improves procurement conditions for the business units to multinational enterprises active in the integration area, because the range of processed raw materials and intermediate products offered is expanded. In particular, enterprises from countries that are not members of these unions can, at the same time, increase the pressure on their domestic suppliers to invest in these markets. The suppliers in turn, will be able to give in to this pressure more easily, because the overall sales conditions will improve for them, too, in the united markets. Empirical studies, such as that of Kuhlmann (1992), show that sales potential is the location factor that is by far the most important for the supply industry. In contrast, investment conditions will improve as a result of a regional integration, at first only for enterprises of the partner countries, since their governments want to grant advantages primarily to domestic companies (cf. Clement et al., 1999, pp. 23– 60). This becomes evident, above all, by the requirements regarding regional value added for enterprises from countries that are not members of these unions (“regional content”) as a prerequisite for the duty-free sale in the partner countries, and by regulations on foreign currency compensation. These changes in the broad and immediate company environment resulting from the increasing regionalisation have always to be evaluated in terms of the “openness”

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of the current regionalisation (i.e. in view of the possibility of a transition to multiregional free trade). Then even the tariffs and non-tariff barriers to trade between the regions will be reduced. As long as external trade protection exists in the regional integration areas, there is a possibility for higher costs, with similar profits due to higher consumer prices (cf. Gandolfo, 1989). These types of protection, however, will be reduced in the future. Therefore a world class cost structure is necessary in the medium run. The advantages of an external tariff imposed on importers by a regional integration can be internalised via a foreign direct investment. However this rent potential must be viewed as transitional. To sum up, in the medium run, “open” regional integrations are attractive fields of operations for multinational enterprises. However, the durability of the multiregional company environment is limited, because a long-term trend towards multilateralism, and therefore a globalisation of the company environment, is already appearing in outline today and demands high (cost) flexibility of all companies. Therefore, companies need sensitive international strategies for such an “open” regionalisation. Strategies are defined as allocations decisions to obtain competitive advantages (cf. for example, Aaker, 1995, p. 6). On the business unit level the allocation decision comprises the alternative competitive fields “many” or “few” market segments. As the allocation decision is not influenced by the new “open” regionalisation, it can be neglected to clarify the argumentation. However, for international business units the international orientation of the unit, for example a national or global orientation, has to be considered in addition. In the following sub-sections, therefore, first the influence of the new “open” regionalisation on the competitive advantages and then on the international orientation will be considered. This leads finally to an evaluation of the influence of the environmental changes shown in this section on international business unit advantages or strategies.

3.2. Strengthening of hybrid competitive advantages of cost minimal differentiation by the new “open” regionalisation

According to Porter’s thesis of “stuck in the middle”, business units can be successful only with low costs or with differentiation advantages, but not by combining the two advantage categories (cf. Porter, 1980, p. 73). In more recent strategic literature, however, a combination of cost-minimal differentiation seems possible (cf. for example, Miller & Dess, 1980; Miller & Friesen, 1986a, 1986b) and can be successful (cf. for example, Buzzell & Gale, 1987; Phillips, Chang, & Buzzell, 1983). The study of Buzzell & Gale (1987) even showed that such hybrid competitive advantages were significantly more efficient for they resulted in a clear profit lead and a slightly above average rate of growth. (For further empirical evidence and theoretical reasons for hybrid advantages and strategies cf. Proff, 2000.) With such empirical evidence, Porter’s traditional paradigm—which stipulates that quality has a cost equivalent and that only either cost advantages or differentiation (through superior

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quality) are achievable—can be overcome for many products, and a distinction of three competitive advantages on the business unit level is possible.2 The effects of changes in the environment in general, and more specifically, those of increasing regionalisation on the level of business units, involve all competitive advantages: the increase in cost reduction and in differentiation (cf. Fig. 2). They therefore benefit most from the hybrid competitive advantage of cost minimal differentiation. Fig. 2 shows the first two possibilities for reducing costs on the basis of the new regional integration areas resulting from the impacts of the new “open” regionalisation on company environments (see Section 3.1): 1. Manufacturing operations involve cost structures that are dependent upon batch sizes and, given a product-specific minimum volume, marketing/distribution as well as customer service can only be expected in a demand-oriented manner. As noted, the expansion of the sales market as a result of the combination of small individual markets to form one large internal market and the resulting higher economic growth constitutes, from the entrepreneurial perspective, an essential result of regionalisation. 2. Developing countries are currently combining to form regional integrations in

Fig. 2. Strengthening of hybrid competitive advantages by the new “open” regionalisation. Source: personal compilation.

2 The ability of product innovation in radically changing environments to be the fourth competitive advantage on the business unit level is discussed in the resource-based view of strategy. This refers to for example, “deutero learning” (Argyris & Scho¨ n, 1978) and the “Know-what” (Sanchez, 1997) as the strategic understanding of the logic behind the management processes, as being more important inside some of the radically changing triad-markets than in the new regional integration areas (see Section 2.1) and therefore able to be neglected in this discussion.

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AFTA, MERCOSUR, and SADC. The expansion of the sales market is combined with the advantage of lower labour costs in (some) partner countries in the integration area. In addition Fig. 2 shows a way of further differentiating on the basis of the new regional integration, because the higher sales potential makes possible a more customer-specific direction for marketing and sales (see Section 1). On the one hand, there are lower costs in the buyer distant or cost-oriented activities, especially production-operations, which do not necessarily lead to lower benefit of those value activities for the customers. On the other hand, there are higher benefit in buyer-tight or benefit-oriented activities (marketing/sales) that do not necessarily lead to higher costs of these activities. With both effects hybrid (“mixed”) advantages of cost minimal differentiation are stimulated most by the increasing regionalisation. At the same time, the permanent reduction of costs for investments in regional integration areas is, for the companies, a very important preparation for the further opening of regional integration areas on the path towards globalisation. However, the regionalisation will induce a convergence of a regional taste that remains even after the abolition of regulatory restrictions. Therefore it can be assumed that even in a multilateral world there will be different regions due to different buyer preferences. 3.3. Strengthening of a dual international orientation by the new “open” regionalisation Competitive advantages of international companies need to be differentiated from the international orientation of these companies. In international marketing and management most often the three basic orientations observed by Howard Perlmutter (1969) guide the work of scientists and executives. These orientations are: ethnocentric, polycentric, and geocentric. This distinction was later expanded to include a regional orientation and became the EPRG schema (ethnocentrism, polycentrism, regiocentrism, and geocentrism; cf. Heenan & Perlmutter, 1979 and, for example, Keegan, 1995, p. 20).3 3

The ethnocentric orientation has an assumption that the home country is superior. A company with this orientation sees the similarities in markets, and believes that the products and practices that succeed in the home country are superior and should, therefore, be used everywhere. In this orientation, overseas operations are viewed as being secondary to domestic and primarily as a means of disposing of surplus domestic production. The polycentric orientation is the unconscious belief that each host country is unique and different and that the way to succeed in each country is to adapt to each country’s unique differences. In the polycentric stage, subsidiaries are established in overseas markets. Each subsidiary operates independently of the others and establishes its own marketing objectives and plans. In the regiocentric and geocentric phases, the company views the regional or entire world as a market and seeks to develop integrated regional or world market strategies. The geocentric orientation is a synthesis of the ethnocentric and polycentric orientation. This is the so-called world-view that sees similarities and differences in markets and countries, and seeks to create a global strategy that is fully responsive to local needs and wants. The regiocentric or regional orientation is a geocentric orientation that is limited to a region. Management will have a world-view towards its region, but will regard the rest of the world as either an ethnocentric or a polycentric orientation, or a combination of the two.

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The orientations distinguished by Perlmutter are similar to many classifications of international orientations in the “electric field” between globalisation advantage and local adaptation or better localisation advantage (see, for example, Doz, 1980; Fayerweather, 1978; Keegan & MacMaster, 1983; Leonitiades, 1985). They differentiate between a home-country, a national, a global, and a dual orientation (cf. Fig. 3). Companies with a home-country orientation have neither an advantage from globalisation nor a localisation advantage. They correspond to ethnocentric companies. Companies with a national orientation have only advantages over local adaptation because their host markets are very different in relation to customers’ tastes and official standards and regulations. This is the case for example with many food products. Such an orientation corresponds with polycentrism. Companies with a global orientation are able to use the advantages of worldwide standardisation because their products or services compete on markets with worldwide homogeneous customers and with similar technical standards and regulations. This is the case for example in the PC market. In blocked global industries with country- or region-specific technical standards and regulations, such as in the automotive industry with, for example, different heating and cooling systems and slightly different customers’ tastes, a dual orientation is necessary, which means using as much globalisation advantage as possible and doing as much local adaptation as demanded. The new “open” regionalisation will strengthen the regiocentric (dual) orientation for two reasons. First, regional integration will create, according to Section 3.1, a large internal market with a harmonisation process of technical standards and regulations within the regions. Together with a regional convergence in customers’ tastes,

Fig. 3. Strengthening of a dual international orientation by the new “open” regionalisation. Source: personal compilation.

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there will also be globalisation advantages. The harmonisation of internal regulations, however, does not mean that regulations and trade barriers at the outer boarder of the regions will be substituted. There is also no reason why regional integration will affect the regional customers’ tastes in such a way that global convergence will take place. The European Union shows a strong persistence of regional tastes. This is the second reason, why “open” regionalisation will strengthen the dual orientation (cf. Fig. 3). 3.4. Strengthening dual hybrid strategies by new “open” regionalisation The three (company-determined) competitive advantages from Fig. 2 or business unit strategies, if the allocation decision is taken into account (see Fig. 4a) need to be combined with an international orientation (from Fig. 3): at least the polycentric or national, the geocentric or global, and the regiocentric or dual orientation (see Fig. 4b). The ethnocentric or home-country orientation can be neglected as only a

Fig. 4. lation.

Strengthening of dual hybrid strategies by new “open” regionalisation. Source: personal compi-

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first phase of an international orientation. The combination leads to a nine-field matrix of international advantages or international business unit strategies (if the allocation decision is neglected in order to clarify the visualisation): national, global, or dual advantages of low costs, differentiation or cost minimal differentiation, which means the business unit strategies national, global, or dual cost leadership, differentiation, and hybrid strategy (see Fig. 4c). Companies and consultants often use this nine-field taxonomy for positioning of total industries as a reference point for the development of business unit strategies (cf. for example, Bartlett & Ghoshal, 1995; Doz, 1986 or Prahalad & Doz, 1987). Thus, nine alternatives of international strategic positioning of business units can be illustrated. According to Figs. 2 and 3 “open” regionalisation will strengthen dual hybrid strategies (cf. again Fig. 4c). This result will also remain stable in a progressively globalised world due to regional customers’ embedded tastes. However, it would be inadequate to define dual hybrid strategies as a world champion strategy for an internationally oriented company. Fig. 4, as mentioned, gives a reference point for an industry average. If this industry is differentiated in many market segments other international strategic alternatives are also possible. Differentiated, image-sensitive, top-of-the-line products are often demanded as worldwide status symbols that require a global differentiation strategy. In addition, there is a demand for undifferentiated value-for-money bottom-of-the-line products to be as cheap as possible, which hinders any adaptation even for producers in industries with national or dual markets, and requires a global cost leadership strategy. However, with VW, GM, Ford, Toyota, PSA, and Fiat, mass-market producers are moving in a dual hybrid-strategy direction. Platform strategies (cf. Robertson & Ulrich, 1998) combining a differentiated customer approach with low costs and a regional differentiation in the product range, show this clearly. In the automotive industry, for example, the hatchback Golf is sold in the EU or SADC, while in the NAFTA or AFTA there is a demand only for the Jetta sedan, built on the same platform. Perlmutter (1969) and many of the other authors see a development path from an ethnocentric (home-country) orientation via a polycentric (national) orientation to a geocentric (global) orientation, with the current regiocentric orientation as a step on the path between the polycentric and the geocentric. This might be true for the company environment as a whole, as supported by the findings of our cluster analysis (see Section 2.2), but not for the international orientation of the single company. The international orientation is substantially marketand product-driven and especially in relation to luxury products that achieve a high price premium and are worldwide status symbols with a far above average pricequality ratio.

4. Conclusion It has been concluded in this article that the increasing regionalisation outside the triad-markets cannot be characterised as an aggressive block building, but as an

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“open” regionalisation (i.e. as a step on the path towards globalisation). This assumption was supported by a cluster analysis of the environmental conditions in the member countries of the three most important new regional integrations: AFTA, MERCOSUR, and SADC. For some countries in AFTA and SADC the analysis showed more similarities with countries from other regions than with the member countries of their own regional integration area. From a contingency perspective, a company environment that can be described as an “open regionalisation” and a dual hybrid strategy fit together. However, depending on the product offered, some companies still profit from global differentiation strategies (especially those offering world-wide status symbols) or from global cost leadership strategies (especially those selling undifferentiated value-for-money bottom-of-the-line products). Understanding and structuring the complex company environment is important for practitioners to be better prepared for strategic reactions towards regionalisation.

Acknowledgements This article is based on a paper originally presented at the European International Business Academy Conference (EIBA) held in 1997 in Stuttgart, Germany. It has been revised several times since then. I would like to thank two anonymous referees for their helpful comments.

Appendix A. Economic variables of the cluster analysis The variables of the cluster analysis were operationalised as follows: I. Determinants of the sales conditions: 1. Per-capita income in USD as a three-year average of the latest existing data sets of all 27 countries to avoid deviations, for example according to exchange rate fluctuations (in most cases 1993–1995, cf. World Bank, 1997, pp. 214–215 and pp. 222–223; Weltbank, 1996, pp. 214–215 and Weltbank, 1995, pp. 188–189) for Swaziland and Brunei only data for 1996 (cf. United Nations Development Programme, 1997, pp. 158–160) were available. Although per-capita income in USD tends to underestimate the economic power compared with purchasing power parity, it is more important for multinational companies, which usually calculate in USD. 2. Annual growth in per-capita income. Data for some of the AFTA-countries have been taken from the DRI/McGraw-Hill Asian automotive industry forecast report 1996–2000 (DRI/McGraw-Hill, 1996a) and for Argentina and Brazil from the world car industry forecast 1996–2000 (cf. DRI/McGraw-Hill, 1996b). Because

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of a lack of data for the other AFTA- and MERCOSUR-countries, for Brunei, Viet Nam, Cambodia, Laos, and Myanmar, the average of the other AFTA countries (6.1% annual growth rate) was taken and for the other MERCOSUR-countries the annual growth rate of Brazil (5.0%), which was recommended by experts from those countries. For SADC countries growth forecasts for South Africa, Namibia, Botswana were taken from the Centre for Proactive Marketing Research (1996) while for the other SADC-countries only an average growth forecast for sub-Saharan Africa 3.5% was available. 3. Income distribution shown by the latest available Gini-coefficients (cf. World Bank, 1997, pp. 222–223; Deininger & Squire, 1996). For countries which are lacking data the average actual Gini-coefficient for the respective region was used (cf. Deininger & Squire, 1996, p. 548). 4. Tariffs (post-Uruguay applied rate) taken from the statistics on tariff concessions in the Uruguay Round (cf. World Bank, 1996), because these tariffs will be compulsory after 1999. Some data are missing and had to be estimated as average tariff rates, thus for Paraguay the average tariffs of Latin America; for Brunei, Cambodia, Lao, Viet Nam, and Myanmar the average tariffs of East Asia and Pacific; and for all SADC-countries except South Africa the average tariffs of sub-Saharan Africa were used. II. Determinants of the procurement conditions: 1. Wages, were the last available for 1991 (cf. International Labour Office, 1996). The wages were taken as an average of different industries (ISIC 2 categories 29) and had to be converted to USD using statistics from the International Monetary Fund (1997). The lack of wage data was supplemented for the SADC-countries by multiplying the quotient of wages and per capita income for Zimbabwe and Malawi (which are both poor countries) with the per capita income of the countries for which the wage data are not available. The quotient for Singapore (as a city state) was multiplied with the per-capita income for Brunei, and for Viet Nam, Laos, and Cambodia the quotient for Myanmar and Indonesia was multiplied by each of those three countries’ per capita income. 2. State of education operationalised by the education index (cf. United Nations Development Programme, 1997, pp. 146–148), as measured by a combination of adult literacy (two-thirds weight) and combined primary, secondary, and tertiary enrolment ratios (one-third weight). 3. Infrastructure measured by electricity consumption per capita in 1994 (cf. United Nations Development Programme, 1997, pp. 196–197). The unavailable data for Botswana, Namibia, Lesotho, Swaziland and Cambodia were estimated by experts from those countries. III. Determinants of the investment conditions: 1. Investment risk shown by the Institutional Investors Ranking 1995 (cf. O.V., 1996). Unavailable data for Laos and Cambodia were supplemented by the index

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for Myanmar and the unavailable data for Brunei were supplemented by the index for Malaysia. To avoid distortion, these eight variables were not weighted. However, an empirical investigation of the effects of environmental changes for multinational enterprises (cf. Proff, 1994) showed the outstanding importance of sales conditions for the assessment of the business environment, followed by the procurement conditions. To correspond with the importance of these environmental conditions from the companies’ perspective, four variables were chosen concerning the sales conditions, three variables concerning the procurement conditions, and just one variable concerning the investment climate.

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