- Email: [email protected]
Strategies for global competition
102
Long Range Planning, Vol. 22, No. 1, pp. 102 to 109, 1989 Printed in Great Britain
002+6301/89 $3.00 + .OO Pergamon Press plc
Strategies for Global Competition David
Lei
This article analyses the strategic dimensions of global competition. As U.S. companies enter the fight for global markets, a broader definition of corporate strategy as it relates to developing competitive advantage is needed to provide managers with superior tools to improve their strategic thinking. Corporate-level strategy involves both a *foreign policy’ as well as a ‘domestic policy’ dimension, and a time dimension. The foreign policy dimension relates to the company’s endeavours to find a workable balance between internal development and acquisitions for entering and exploiting new technologies on one’s own. The final dimension relates to time, i.e. understanding those conditions where changes in company strategy and structure are needed to help guide the company into the future. Examples are provided to illustrate these dimensions in action.
During recent years, many U.S. companies have substantially restructured not only their internal operations but also their vision of what constitutes a cohesive and effective strategy for competing on a global basis. The fierce level of competition from Japan, Western Europe and other Far Eastern nations in every industry from processed foods to telecommunications is forcing U.S. companies to re-examine their traditional attitudes towards corporate and global strategies. Here are some recent examples of what some major manufacturers are doing to enhance their global competitive advantage. Texas Instruments has formed numerous strategic alliances with customers in Europe, the Far East and the U.S. to focus their R & D in a way to improve their responsiveness to market demands. Philips N.V., the European producer and marketer of consumer electronics, has co-operated extensively with Matsushita ofJapan in developing new products, such as compact discs and VCRs to mutual benefit. Black and Decker’s top focused the company’s
management has reproduct design and
David Lei is Assistant Professor of International at the University of Texas at Dallas.
Management
Studies
manufacturing efforts ‘globalized’ strategy.
towards
implementing
a
IBM is simplifying its product designs and automating its key plants to produce on a lowcost global basis. For those companies whose prosperity and survival have come to depend upon designing, producing and selling their products and services to not only the United States but to much of the world, top management may have to rethink its conventional approaches in understanding and executing a workable set of strategies to meet the new challenge of global competition. Yet, strategy, especially corporate-level, is a difficult issue often construed in competence’, such vague terms as ‘distinctive ‘globalizing’, and ‘seeking focus’. The central point of this article is to demonstrate that corporate strategy is a multi-dimensional concept that requires top management to consider the interplay of one’s own efforts, that of potential competitors and partners, as well as that of time.
A New Look at Competitive Strategy The
conventional
approach
to understanding
and
devising long-term strategy encourages managers to think of two distinct sets of strategies: corporateCorporate strategy level and business-level. addresses the question of ‘what businesses should one compete in?’ Business-level strategy, however, considers a different question of ‘how should we compete in a given business?’ Applied in its simplest interpretation, corporate strategy implies that all top management needs to do is to choose those businesses that best ‘fit’ the company and assimilate them. Issues concerning global competitive advantage are key dimensions of corporate strategy for most large and medium-sized companies because they directly relate to their overall posture and performance over the long term as industries continue their trend of globalization. Thus, what constitutes corporate and
Strategies business levels of strategy has blurred over time. As we are now witnessing the transformation of the modern industrial landscape with such advances as automation, world-wide sourcing and joint ventures with foreign partners in key value-added activities, the concept and practice of separating corporate level strategy from that of business-level may prove obsolete as the level of global competiIncreasingly it is the case that tion intensities. strategic business units (SBUs) with world-wide responsibility now depend upon a certain amount of corporate governance and co-operation with other SBUs to share risks, costs and transfer skills from one to another, as costs and risks rise exponentially with each new global venture. Accordingly, top management has now come to exercise considerable influence in determining how businesses’ units will compete within their own product/market scope, since the entire company’s fate is linked to each business unit’s degree of success in the global environment. Global competition in every industry has blurred the distinction between corporate and business-level strategies as decisions and consequences emanating from one SBU may indeed alter the whole company’s strategic complexion. Multi-dimensionnl complexity. Consequently, corporate strategy in companies with extensive global activities assumes a multi-dimensional character. The number of critical strategic dimensions which top management may need to consider, not only involves the more traditional question of choosing the right businesses, but also encompasses what this author believes are the following critical strategic decisions that directly affect the company’s longterm competitive state:
(1) Strategic (2)
(3)
alliances: the use of joint ventures in sharing development and production costs and in penetrating new markets. Internal development and acquisition of new technologies and businesses: searching for a
balanced approach to entering promising growth areas. Dynamic thinking through time: realizing the inherent fluidity and volatility of change in the global environment.
The use of strategic alliances is what this author terms the ‘foreign policy’ dimension of strategy. It refers to knowing the motives and the long-term effects on one’s own competitive posture when considering the selection of a foreign partner. Finding a balance between internal development and acquisitions relates to the company’s ‘domestic policy’ dimension of strategy. This dimension refers to the development of new technologies and products to achieve distinctive competence in a particular field or range of fields. Finally, the time element is something which American managers especially all too often neglect in their strategic thinking. The global environment promises much greater levels of uncertainty, volatility of change as well as new opportunities to enter industries whose
for Global
103
Competition
barriers were once thought insurmountable. This trichotomy does not imply that these dimensions arc independent from one another, but rather they prove just as important as choosing which business to compete in.
The Foreign Policy Dimension: Strategic Alliances via Joint Ventures Strategic alliances in the form ofjoint ventures offer tremendous potential and pitfalls for co-operation between global companies of different nationalities as we move into the 21st Century. The higher costs and risks of R & D, production, financing and market penetration brighten the prospects for expanded strategic alliances between global companics as top management believes that no company alone can manage all of the high risks associated with world-scale ventures. Yet, joint ventures raise several questions of great corporate strategic importance since this vehicle for co-operation can also the company’s long-term seriously undermine competitivcncss if management is not careful in defining and implementing its ‘foreign policy’. Relationship with corporate strategy. Joint ventures are one critical dimension of global competition and corporate strategy because the company has undcrtaken a major watershed decision to include an external actor directly into its core operational activities. Instead of the more orthodox approach of ‘what businesses do we compete in’, the question becomes more like ‘should we involve an outsider in our businesses?’ Perhaps because joint ventures have largely been viewed as either a market entry vehicle or platform to share risks that top management may have largely reduced the importance of this issue. Although joint ventures have considerable appeal as a means to share risks and markets, they could constrain the company’s future strategy if the venture involves a leakage of either proprietary knowledge or some critical corporate core skill. Especially for those companies whose global competitive advantage arises from high-technology, proprietary knowledge and processes, and specialized production and marketing techniques, the issue of joint ventures becomes ever more paramount, since prospective partners could very well gain a direct searchlight to learn about the company’s core skills and strengths. The issue of joint ventures commands top management’s full attention since they could reveal the company’s key ingredients for its long-term competitiveness to a potential competitor later. This is not to say that companies should not consider joint ventures as a means to enter new markets; only that they should remain cognizant of some of the particular difIiculties involved in retaining proprietary technologies and core skills. Industry structure and global
ventures. Joint
ventures
in
104
Long
Case 1. Texas
Range
Planning
Vol.
22
February
Instruments
Texas Instruments, one of the world’s biggest manufacturers of semiconductors and related products, has undertaken major strides to become a global competitor in all of the markets it serves. Yet, to the fullest extent possible, TI has tried to operate as a wholly-owned subsidiary wherever it has operations, even though it is explicitly seeking long-term alliances with their biggest customers. TI represents an interesting example of how a company can avoid losing its technologies to Japanese competitors through persistence and possession of a unique proprietary knowledge that helped it to eventually become one of a few U.S. companies to actually have wholly-owned subsidiaries in Japan. In 1964, TI believed that Japan would become a major competitor in the world’s budding integrated circuit market. It first set up a marketing centre in Japan and sought permission to build a wholly-owned manufacturing centre, something which MIT1 vehemently opposed. After 4 years persistence, TI worked out an arrangement with Sony that resulted in a joint venture in which TI would buy out Sony’s share after 3 years. In effect, Tl’s subsidiaries in Japan would be free from the constraint of jointventure requirements. Now in 1987, TI has four major plants in Japan that produces important components and semiconductors for the rest of the company’s world-wide operations. Now, TI is engaging in a series of discussions with several other European and U.S. semiconductor and computer manufacturers to build new custom chips for their specific needs. Although the specific mechanism of building strategic alliances may involve joint ventures, the company is committed to remain at the forefront of R & D and production of all processes that would eventually be used in conjunction with key customers to produce better products. Tl’s long-term alliances may involve major players in the telecommunications, computer and even automotive industries. Source: Interviews and discussions with TI managers; supplemented by articles and speeches from the company.
theory convey many benefits to the partners involved. Within the context of global competition, joint ventures fall along two distinct categories. According to Porter and Fuller,’ two distinct types ofjoint ventures may evolve. The first type, known as the X-type coalition, involves sharing complementary activities. An example would include an agreement between two auto manufacturers with one performing the design skills, while the other manufactures the product itself. That is to say, Xtype coalitions involve crossing over and cooperating across different activities in the chain of value-adding activities. The second type of coalition within which ventures occur is that of the Y-type. This venture form involves two or more firms cooperating within the same basic activity in the value-added chain, for example, a joint production agreement (e.g. GM-Toyota), or a joint R & D venture (Boeing and Fuji Heavy Industries in aircraft). The first category (X-type ventures) often concerns a manufacturer of new technologies and products that wishes access to another country’s distribution channels and market. More specifically, this is the
1989
route many Japanese and U.S. firms have taken, as the Japanese partner wishes to avoid costly duplication of existing U.S. facilities. The recent agreement between Toyota and GM stems largely from Toyota’s desire to have a factory in the United States to bypass possible protectionist legislation. N. V. Philips’ agreement with Matsushita and other Japanese manufacturers to market Japanese-made products (e.g. compact disc players) under the Philips label is a clear example of such behaviour. The other global rationale for joint ventures (Ytype ventures) is when a partner seeks another partner’s technology or production skills. The recent decision to jointly design small cars between Ford and Mazda reflects this mutual need. In addition, Toshiba’s recent decision to co-operate with Motorola in securing the latter’s access to hightechnology, specialized semiconductors gives the Japanese partner an edge over its domestic and foreign competitors by allowing it to bypass the costs needed to build the requisite strengths on its own. Recent deals between Boeing and a consortium of Japanese manufacturers interested in producing civilian (and possibly) military aircraft also result from the Japanese desire to seek American design and production skills in a highly lucrative market. Economic motives. Joint ventures warrant top management’s special attention just at a time when many European and American manufacturers are looking to this vehicle as the means by which to regain lost competitive advantage in many industries. Although both X- and Y-type ventures offer the recipient considerable short-term benefits, there are many dangers to watch out, especially with long-term strategic motives. In the case of X-type ventures, the need for vertical integration or to strengthen a weak link in one’s own value-adding activities provides the strongest motive for seeking a prospective partner. Companies that find themselves weak in manufacturing often resort to X-type coalitions to compensate for inability to make the product or high expense associated with local production (e.g. Motorola and Toshiba for new chips). Long-term provision of feed stock or other supplies is a major source of Xtype joint ventures. For Y-type joint ventures, the primary economic motive according to Porter and Fuller hinges upon risk-sharing and the pooling of resources for scale economies and learning curve effects. Because the Y-type venture means that partners will be engaged in the same activity, there is greater potential for cross-fertilization and transfer of new knowledge which may enhance the competitiveness of both partners. Unlike that of X-type ventures, Y-type ventures usually occur when both partners are strong in the same activity, rather than the asymmetrical pattern found in the former agreement.
Strategies Case 2. Philips
N.V.
Philips N.V. is one of the largest manufacturers and distributors of consumer electronics products in Europe and the United States. It is an unusual company by both European and U.S. standards because it seems to thrive on partnerships, co-production and joint ventures with different foreign companies. Nevertheless, the company still commits itself towards massive investment in product R & D and efficient production for its own purposes. One of Philips’ most recent and potentially most successful joint ventures is that with AT&T to manufacture and network information transmissions systems throughout Europe, using the 5ESS/PRX switch. Philips receives access to some AT&T products, while AT&T enters European markets. More important, Philips’greatest endeavour is to work out equitable partnership and technology-sharing agreements with Japanese firms, particularly Matsuchita Electric. By sharing production and technology with the Japanese, Philips hopes to lead the world in standardizing design formats for new products such as compact discs and VCRs. Part of the success attributed to Philips’ ability to co-operate with the Japanese is the fact that the company commands considerable European market share and also political clout within the EEC. More important, many of Philips’ top management know their Japanese counterparts quite well, which lays the foundation for successful co-operation later.
Foreign policy and dependence. Unlike economii C motives, which hinge directly upon the financial benefits accrued to partners from their venture activities, there exists the more fundamental question of strategic or competitiveness motives for entering into joint ventures. This is where the greatest danger of relying upon joint ventures lies. More specifically, there may be direct costs associated with each of the joint ventures that may not surface until the venture is well on its way, but which top management should realize before potential damage spreads malignant effects within the company. Thus, over the long term, unless management recognizes the explicit and implicit vulnerabilities of joint ventures, the company’s competitive strength may diffuse into the hands of a new competitor. Some companies may actually seek to engage prospective partners into a number of joint ventures as a means to collect intelligence data and to monitor their activities. For example, joint ventures of the X-type cede production and technology development away from the owning firm to the partner. The cases of American companies who unwittingly gave away such technologies as transistors, colour television tubes and other consumer electronics show how difficult it is for the U.S. firm to re-enter the market after the technology is ceded away. Further, Y-type ventures may involve subtle damage to the stronger partner, as every link in the value-added chain from technology and core skills, even to marketing techniques eventually become learned by the other firm. Thus, it is easy to see how the strategic use of joint ventures is to serve as a monitor or ‘mole’ which can constantly measure the progress the
for Global
Competition
105
partner firm is making in the development of new technologies. It is entirely conceivable that some companies, particularly Asian, may engage in joint ventures solely to listen to the developments of whom they perceive as leaders in a given product or technology. Foreign policy in action. Robert Reich and Eric Mankin’s* arguments that joint ventures, particularly with the Japanese, prevent the U.S. company from moving further down the experience curve and allow the Japanese to take advantage of U.S. developed technology with surprising ease are especially worth noting. The experience of other European global companies such as N. V. Philips, Thomson and Thorn-EM1 all testify to the extreme difficulty of securing access to Japanese technology while their own strengths wither on the vine. A recent study by Doz, Hamel and Prahalad) suggested that Japanese firms do not enter joint ventures with the intention of working out issues and technical problems in an equitable manner, but to force the U.S. partner into a position of extreme dependency on the Japanese partner by undermining their core strengths and taking over their critical ventures are skills. Japanese-promoted joint designed to place the U.S. firm in a competitive disadvantage in the future by learning what the U.S. firm has done heretofore, and reducing their ability to develop new technologies. Joint ventures with Japan may not be the way for U.S. firms to regain competitive dominance. The recent joint vcnturc between Boeing and a consortium ofJapanese firms to develop the 7Y7 (a future efficient commercial airliner) could bring all kind of problems. Honeywell’s disastrous performance in the computer business through its joint ventures with Bull of France and NEC of Japan offers another lesson to top management of the dangers of top managem&t’s not understanding the full ramifications.
Internal Development Acquisition Policies
and
A topic that bears directly upon global competitiveness concerns finding the right balance between internal development and acquisitions to build the basis for entering new technologies and businesses for the future. Internal development refers to a preference by the company to enter new technologies or businesses through growth by its own indigenous efforts, while an acquisitions-oriented approach depends upon top management’s ability to use the newly introduced technology and acquired management to maximum advantage. The domestic policy question reflects not so much a decision of whether it is necessary to enter new areas of technological growth, but rather how. In either case, internal development or acquisition aims to lead the company into new areas that could complement existing strengths well. It is ‘domestic
106
Long
Range
Planning
Vol.
22
February
Case 3. Honeywell Honeywell’s recent retreat from the computer business reflectssome of the big problemsassociated with a loosely managed joint venture. Established originally in 1962 with Bull of France and later with NEC of Japan in 1970, Honeywell’s joint venture in France was designed as a means to secure entry both in Europe and France’s original colonies throughout Africa. Over time, though, much of the production of the hardware associated with its line of computers moved from the U.S. to Europe and Japan. In 1986, Honeywell, Bull and NEC agreed to create a consortium that would transfer much of Honeywell’s original computer business to the two foreign partners. What is especially telling about this example is that it reveals a U.S. manufacturer can eventually become little more than a distributor for other foreign companies’ products. Within the new three-way company, Honeywell’s role is to serve as the main distributor of N EC products in the U.S., especially personal computers under the Honeywell label and central processing units for its largest computers. Moreover, NEC could perhaps even receive financial support from Honeywell to support its activities, thus even encroaching upon the company’s financial reserves. This is an example known all too well to several other U.S. industries, notably consumer electronics and machine tools, where in many cases the U.S. partner in the joint venture is nothing more than a replaceable distributor, while the Japanese partner retains all of the production advantages and technology development. These problems result from the U.S. partner’s all-too-eager desire to receive new technologies from the Japanese as well as quick profits, with little substantive production undertaken by the U.S. partner in the end.
policy’ to the extent ventures are avoided.
that
partnerships
or joint
A search for focus. Although the topic of internal development and acquisitions has been around for a long time, its relevance to global competition becomes even more telling when one considers that the United States and other countries are in the midst of a new merger wave-one in which companies are trying to achieve focus and specialization. Unlike the mergers of the late 1960s and 197Os, where conglomerates and unrelated diversification proved popular and ultimately less than profitable, today’s mergers and acquisitions represents a massive restructuring of American industry catalysed by tidal waves of foreign competition. With many companies divesting themselves of businesses they know little about and repositioning themselves into those areas in which they have a better chance of competing, internal development and acquisition policies to achieve global competitive advantage have become salient and timely issues. Yet, U.S. management’s ever-broadening push to seek specialization complements well the latest advances in manufacturing and product design technology that are now just surfacing. The issue of internal development has assumed a much more pronounced role within corporate strategy as advances in technology promise to erode away industry barriers and hindrances to serving several different markets simultaneously at low cost.
1989
Internal us external! The choices of internal development and acquisitions have often been considered from an exclusive, either/or viewpoint rather than from a perspective which emphasizes balance and an understanding of the underlying industry structure. Rather, companies which have done very well around the world have used a combination of both policies to maximum advantage. For example, General Electric has encouraged the internal development of new businesses through ‘intrapreneurship’ programmes and hiving off new divisions when new products or technologies look profitable, while at the same time acquiring small companies that complement its own endeavours in entering new technologies, such as Calma-a specialized firm in the CAD/CAM area. AT&T has invested considerable sums in equity arrangements with such companies as Olivetti while simultaneously setting up new manufacturing and design centres around the world, along with several joint ventures. Rockwell International’s celebrated purchase of Allen-Bradley, a manufacturer of automation equipment and industrial controls, has matched the company’s own internally-driven efforts to build cellular manufacturing facilities for its electronics and telecommunications products. Consequently, many companies which have traditionally relied on internal development for the basis of their future growth have also acquired growing companies whenever their technologies or products fit in with the parent’s core skills. The scope of such acquisition activity, however, has tended to remain small and confined to businesses with which management feels comfortable or experienced. Industry structure and acquisition. Corporate strategy of specialization requires top management to understand the versatility and idiosyncracy of its com-
Case 4. Allen-Bradley Allen-Bradley, a major manufacturer of industrial controls and recently acquired by Rockwell International, has developed new advanced technologies which allow it to simultaneously combine economies of scale with economies of scope in manufacturing new control modules. Using computer-integrated manufacturing (CIM) and new plant layouts, A-B has mastered the technique of accommodating product variety with mass production efficiency. While every company can certainly meet a customer’s tailored needs, only A-B can do so without actually shutting down the entire line and disrupting its work flow. Rockwell’s acquisition of A-B represents a major milestone for the parent company as well, especially with its major endeavours in cellular manufacturing and increasing inventory turnover. Both Rockwell and A-B have complementary strengths and their specialized talents will match nicely over the years as the telecommunications, industrial controls, sensor systems and semiconductors industries become more related. Rockwell’scareful acquisition as well as its own major investments in new plant and equipment show how a company may simultaneously pursue both the internal and external modes of domestic policy without excessive reliance on either.
Strategies parry’s core strengths and skills, and that of the underlying industry and technology upon which they are based. Focus brings not only potentially greater competence and experience in competing in any one or several products/markets, but also a need for innovative methods and strategies to enter into different but related markets, usually via new technologies spun off from existing businesses. It is not surprising that companies such as General Electric, IBM, Siemens, Northern Telecom and NEC have tended to shun large-scale acquisitions in competing abroad. These companies, whose sources of competitive advantage derive from long-standing R & D programmes, proprietary knowledge and specialized processes, cannot assimilate major acquisitions easily. Instead, the possession of such core strengths mean that companies in industries such as pharmaceuticals, telecommunications and ofice equipment must compete primarily by relying on their own internally developed products and technologies. On the other hand, companies which rely extensively on acquisitions without a commensurately high level of internally generated skills and technologies have generally emphasized financial controls in lieu of building core skills. This has been the case conglomerates (e.g. ITT in with many U.S. Europe), which arguably have done less well in global competition than their internal development counterparts (e.g. DuPont in Europe). Thus, an explicit strategy of specialization in itself does not imply that companies should exclusively pursue one path to growth and expansion over another, but rather recognizes the importance of creating a home base of technology and products to fall back on when competition assumes an increasingly technological dimension. The implication is clear: even carefully selected acquisitions cannot compensate for the lack of at least some home-grown development of core skills. This trend could prove even more important, when the once-fixed boundaries of industry structure and the barriers to entry change with new technologies. Thus, the foundation for any successful domestic policy must first come from internally generated sources of strength and experience. The technology imperative. What promises to reward (and complicate) manufacturing and strategic planning in those companies pursuing internal development approaches to new businesses is the technology dimension. Critical to any discussion of internal development is the growing role that automation and flexible manufacturing systems (FMS) will play in most companies’ manufacturing strategies in the near future. Automation, as IBM, GE and other big and small manufacturers are finding, allows the company to drive down its manufacturing costs when new process technologies are implemented properly. When designed to incorporate the latest product designs that reduce the number of internal
for Global
Competition
107
and complex parts, automation could offer the company considerable economies of scope, whereby the use of a limited set of fixed assets based in engineering, R & D and production could turn out a greater number and mix of different (but related) product modifications, if not actual products themselves, in shorter time. By taking advantage of such concepts as group technology (modularity) and ‘smarter’ production-based machines, a company can theoretically serve several distinct but related markets. Nonetheless, incorporating these new technological advances will require close attention from corporate management because of the many distinctly new problems they bring with them, such as difficulty in cross-business unit co-operation, obsolescence of performance evaluation standards and the need for closer functional integration within the plant’s activities.
Case 5. IBM IBM in the mid-1980s was bent upon preserving its manufacturing skills and cost efficiency despite enormous pressures from less costlier Far Eastern producers and imitators. Using its own proprietary designs and manufacturing capabilities, IBM is upgrading its U.S. plantstooutcompete Epson of Japan in producing dot-matrix printers for personal computers. A major upgrading of its Louisville, Kentucky plant was designed to become the cost leader in electronic typewriters. The basis for IBM’s cost efficiency and automation drive was a tendency towards producing many different product configurations based on one or two central designs. For example, the typewriters as well as printers use common parts and common manufacturing facilities, thus saving time and inventory. Moreover, subassemblies were built within IBM’s plants as much as possible without relying extensively on many different suppliers, such that plants produced many of the components as well as the final end product. Although the company still relied on some Japanese producers for its laser and colour printers (e.g. Canon), IBM’s strength and willingness to invest in its own customized machines and factories will give it considerable momentum for competing with anyone easily into the next decade.
A new way to diversity. Thus, advances in production technology and new product designs have bestowed on U.S. companies a new opportunity: the potential to garner the benefits of serving diversified markets with new products without acquiring another company in that market. For example, DuPont’s innovation of new chemical technologies has allowed it to compete not only in speciality chemicals, but also in supplying the carpet business with new synthetic fibres, medical supply houses with newly designed synthetic fluids and the electronics industry with composite materials. Automation and economies of scope can, when properly understood and implemented, greatly enhance the competitive range and scope of the company’s efforts to meet the needs of its worldwide markets and even make inroads into another
Long
Range
Planning
Vol.
22
February
competitor’s (or industry’s) domain. In theory, smart and flexible machines could be converted from making printer boards to personal computers within the same factory, thus avoiding the need to duplicate facilities. The ‘focused factory’ concept will move away from rote, dedicated, rigid processes, to one based on a focused technology applied to many potential different market needs. AllenBradley’s newest breakthrough in making numerous types of industrial controls easily within one factory using automated equipment is just the beginning of a new trend that could sweep the world. The key to attaining this kind of flexible and sensitive manufacturing set-up rests with top management’s understanding not only of the engineering tasks associated with the organization of this technology, but also of the technology’s unprccedented capability of breaking down many industry barriers once thought impenetrable. Truly global products. 7 In addition, further advances in automation and more efficient product designs could move many companies towards fulfilling their dreams of a truly ‘globalized’ product. Although Ford’s ‘World Car’ concept met considerable resistance in its early days in Europe, the company has begun to reap the benefits of its more advanced modular designs of such models as the Ford Taurus and the Mercury Sable which apparently has done quite well both in the United States and abroad. Black and Decker has effectively diversified away from its traditional niche of making small power tools towards that of serving the consumer appliance markets through both simpler designs and close co-operation with General Electric to access production facilities. Moreover, Black and Decker’s commitment to remould the company into a globalized strategy may be paying off as its new design techniques apply well to both a broad spectrum of consumer products as well as different markets around the world.
Case 6. Black
and Decker
Black and Decker is one of the largest manufacturers of power tools and consumer household products. Its recent acquisition of some of the light consumer appliance businesses from GE helps buttress the company’s position around the world. Ever since the early 198Os, B & D’s top management has strived to ‘globalize’ the company products to serve many different markets. The company has over 12 manufacturing and assembly sites around the world, selling to over 100 countries. The basis for B & D’s globalization plan is its emphasis on standardizing basic designs for its numerous products. To the extent possible, designs made for one country require very little modification in another, thus capturing economies of scale and specialization. Part of the difficulty surrounding this move has been the relatively large number of components required for some of B & D’S earlier products which have now been streamlined and simplified. A newly introduced tight information system also links up the many subsidiaries with headquarters, thus furthering steps to rationalize product design and manufacturing.
1989
In fact, the whole notion of making a standard ‘global product’ may soon prove moot, as traditional physical obstacles to producing customized goods quickly on the assembly line melt away. One could easily envision a company very rapidly broadening its product line and services to a wide portfolio of markets simply by tailoring its production processes to the market’s particular needs-all without the kind of massive new investments in separate plants characteristic of decades earlier. Whether a truly standardized product for the world has arrived remains to be seen. What one can already see is the arrival of new process technologies and innovative methods to incorporate them into the plant floor that will shift traditional job shop production modes towards a more intermittent or even continuous flow configuration where product variety will prove more of a competitive asset than a hindrance to potentially smoother manufacturing and lower costs.
Understanding Environment
the New Global
Probably the least understood aspect of corporate strategy is that relating to issues of time and space. Today’s rapidly advancing technologies have accelerated the breakdown of traditional barriers to entry in many industries. Companies in the airlines and automobile industries, for example, have found themselves also in the position of indirectly being able to compete in some aspects of the information industry. The use of computers and information hook-ups in these two distinct industries have actually brought them closer to possible competition in an entirely new third area. Thus, one of the facing top management biggest prerogatives around the globe is to better understand how the time dimension can radically alter one’s strategy, Those executives who can understand how industries evolve over time will be better equipped to take their companies into new markets than their counterparts whose thinking has remained static and ossified. Time andglobal thinking. What is most tricky about the time dimension is that it defies easy characterization or quantification, two features demanded by most companies’ strategic planning departments. Unlike the physical, concrete issues such as R & D spending, joint venture partners, and other strategies , the time element is much more akin to a sense of a world view or global thinking and evolution, The success of implementing the first two dimensions of ‘foreign policy’ and ‘domestic policy’ depends upon an understanding of time as much as it does on the specific aspects of any given strategy. While it is arguable that any company could in theory duplicate the success that Philips or IBM has built around the world, those executives who are accustomed to thinking on a dynamic, worldwide
Strategies basis already competitors.
have one major
advantage
over their
109
Olivetti is taking major steps towards becoming both a European and a global producer of computers and information products. The company has invested heavily in joint ventures and equity agreements with many companies around the globe, but its underlying philosophy is to compete everywhere and anywhere around the world. Some of the most recent steps taken by Olivetti include the equity arrangement with AT&T to produce personal computers for the U.S. giant, acquisition of U.S. bank automation supplier Bunker Ramo, joint ventures with EDS Corporation, a specialist in information integration, and a joint venture with Canon of Japan to manufacture medium-sized computers in Europe, and acquisition of Triumph-Adler of West Germany, a manufacturer of typewriters and office automation equipment. The basis for Olivetti’s rapid and sustained involvement with these and other prospective companies reflects top management’s willingness to build market share and presence in every major country. Moreover, Olivetti’s management team seems to understand the issue of time quite well. They realize that perhaps this is the last chance for the company to gain the opportunity to become a major world player, first by becoming more European than Italian. Unless Olivetti acquires enough size and staying power in Europe, top management believes that their global competitiveness will dwindle over time.
Time, strategy and structure. There is little doubt that as communications, information and transportation become much more widely available to everyone, that companies wishing to compete globally must have a presence in every major market. Yet, all too often, managers have considerable difficulty seeing beyond their own market or area, with the usual consequences of poor organization, slow responsiveness and inability to meet customer needs. Thus the biggest problem is to balance worldwide presence with cost competitiveness, especially when product life cycles are becoming increasingly shorter.
Thus, the greatest challenge offered by the time dimension is the willingness of top management to think about change and to redirect their company’s efforts towards new areas of growth. Most executives around the world have a difficult time in conceiving of change as being productive and
Competition
Case 7. Olivetti
It is at this point that U.S. managers may have their greatest difficulty in acclimatizing themselves to the global environment. A 1986 study of 100 executives performed by Egon Zehnder International revealed that about two-thirds of U.S. managers remained totally ignorant of foreign market opportunities. Moreover, U.S. executives still remained hesitant or fearful of committing resources to potentially new markets. Yet, despite these findings, it is important to define exactly what the time dimension means when competing globally.
The time dimension exerts its greatest influence when one analyses the necessary changes in strategy and structure required to compete in different environments. Understanding the time dimension means, on the one hand, knowing when one’s strategy is most appropriate for managing and competing in a particular environment. Equally important, that strategy must have the full support of the company’s planning processes, communications, incentive programmes and other dimensions of internal structure. To the extent that strategy and structure match each other over time, then there is the basis for sustainable global competitive advantage. Consequently, the time dimension requires top management to know when to change course and when to modify their strategies according to the situations they face. Yet, any major change in strategy may necessitate some modification of internal structure too. The example of how Olivetti is determined to transform itself from an Italian computer manufacturer to a worldwide player in the information services industry shows how a company’s top management team can make big strides in plotting a new direction for a once small company.
for Global
Olivetti’s commitment to global thinking and long-term planning is reflected through the company’s emphasis on selling services and software, rather than computer hardware.
potentially beneficial-either because people are accustomed to working and thinking in a particular way, or because the previous strategy has worked so well that their ability to change becomes much reduced over time. Consequently, one of the greatest tests facing top management is how well they can smoothly redirect their company’s efforts towards potential new business opportunities.
References (1)
M. E. Porter and M. Fuller, Coalitions and global strategy, in M. E. Porter (Ed.), Competition in Global Industries, Harvard Business School
(2)
Press, Boston,
MA (1986).
R. B. Reich and E. D. Mankin, Joint away our future, Harvard Business March/April (1986).
Further
ventures Review,
with Japan give 64 (2), 78-86,
reading
T. Hout. M. E. Porter and E. Rudden, How global companies win out, Harvard Business Review, 60 (5), 98-l 08, September/October (1982). K. Ohmae, Triad Power: The Coming Free Press, New York (1985).
Shape
of Global
Competition,
Long Range Planning, Vol. 22, No. 1, pp. 102 to 109, 1989 Printed in Great Britain
002+6301/89 $3.00 + .OO Pergamon Press plc
Strategies for Global Competition David
Lei
This article analyses the strategic dimensions of global competition. As U.S. companies enter the fight for global markets, a broader definition of corporate strategy as it relates to developing competitive advantage is needed to provide managers with superior tools to improve their strategic thinking. Corporate-level strategy involves both a *foreign policy’ as well as a ‘domestic policy’ dimension, and a time dimension. The foreign policy dimension relates to the company’s endeavours to find a workable balance between internal development and acquisitions for entering and exploiting new technologies on one’s own. The final dimension relates to time, i.e. understanding those conditions where changes in company strategy and structure are needed to help guide the company into the future. Examples are provided to illustrate these dimensions in action.
During recent years, many U.S. companies have substantially restructured not only their internal operations but also their vision of what constitutes a cohesive and effective strategy for competing on a global basis. The fierce level of competition from Japan, Western Europe and other Far Eastern nations in every industry from processed foods to telecommunications is forcing U.S. companies to re-examine their traditional attitudes towards corporate and global strategies. Here are some recent examples of what some major manufacturers are doing to enhance their global competitive advantage. Texas Instruments has formed numerous strategic alliances with customers in Europe, the Far East and the U.S. to focus their R & D in a way to improve their responsiveness to market demands. Philips N.V., the European producer and marketer of consumer electronics, has co-operated extensively with Matsushita ofJapan in developing new products, such as compact discs and VCRs to mutual benefit. Black and Decker’s top focused the company’s
management has reproduct design and
David Lei is Assistant Professor of International at the University of Texas at Dallas.
Management
Studies
manufacturing efforts ‘globalized’ strategy.
towards
implementing
a
IBM is simplifying its product designs and automating its key plants to produce on a lowcost global basis. For those companies whose prosperity and survival have come to depend upon designing, producing and selling their products and services to not only the United States but to much of the world, top management may have to rethink its conventional approaches in understanding and executing a workable set of strategies to meet the new challenge of global competition. Yet, strategy, especially corporate-level, is a difficult issue often construed in competence’, such vague terms as ‘distinctive ‘globalizing’, and ‘seeking focus’. The central point of this article is to demonstrate that corporate strategy is a multi-dimensional concept that requires top management to consider the interplay of one’s own efforts, that of potential competitors and partners, as well as that of time.
A New Look at Competitive Strategy The
conventional
approach
to understanding
and
devising long-term strategy encourages managers to think of two distinct sets of strategies: corporateCorporate strategy level and business-level. addresses the question of ‘what businesses should one compete in?’ Business-level strategy, however, considers a different question of ‘how should we compete in a given business?’ Applied in its simplest interpretation, corporate strategy implies that all top management needs to do is to choose those businesses that best ‘fit’ the company and assimilate them. Issues concerning global competitive advantage are key dimensions of corporate strategy for most large and medium-sized companies because they directly relate to their overall posture and performance over the long term as industries continue their trend of globalization. Thus, what constitutes corporate and
Strategies business levels of strategy has blurred over time. As we are now witnessing the transformation of the modern industrial landscape with such advances as automation, world-wide sourcing and joint ventures with foreign partners in key value-added activities, the concept and practice of separating corporate level strategy from that of business-level may prove obsolete as the level of global competiIncreasingly it is the case that tion intensities. strategic business units (SBUs) with world-wide responsibility now depend upon a certain amount of corporate governance and co-operation with other SBUs to share risks, costs and transfer skills from one to another, as costs and risks rise exponentially with each new global venture. Accordingly, top management has now come to exercise considerable influence in determining how businesses’ units will compete within their own product/market scope, since the entire company’s fate is linked to each business unit’s degree of success in the global environment. Global competition in every industry has blurred the distinction between corporate and business-level strategies as decisions and consequences emanating from one SBU may indeed alter the whole company’s strategic complexion. Multi-dimensionnl complexity. Consequently, corporate strategy in companies with extensive global activities assumes a multi-dimensional character. The number of critical strategic dimensions which top management may need to consider, not only involves the more traditional question of choosing the right businesses, but also encompasses what this author believes are the following critical strategic decisions that directly affect the company’s longterm competitive state:
(1) Strategic (2)
(3)
alliances: the use of joint ventures in sharing development and production costs and in penetrating new markets. Internal development and acquisition of new technologies and businesses: searching for a
balanced approach to entering promising growth areas. Dynamic thinking through time: realizing the inherent fluidity and volatility of change in the global environment.
The use of strategic alliances is what this author terms the ‘foreign policy’ dimension of strategy. It refers to knowing the motives and the long-term effects on one’s own competitive posture when considering the selection of a foreign partner. Finding a balance between internal development and acquisitions relates to the company’s ‘domestic policy’ dimension of strategy. This dimension refers to the development of new technologies and products to achieve distinctive competence in a particular field or range of fields. Finally, the time element is something which American managers especially all too often neglect in their strategic thinking. The global environment promises much greater levels of uncertainty, volatility of change as well as new opportunities to enter industries whose
for Global
103
Competition
barriers were once thought insurmountable. This trichotomy does not imply that these dimensions arc independent from one another, but rather they prove just as important as choosing which business to compete in.
The Foreign Policy Dimension: Strategic Alliances via Joint Ventures Strategic alliances in the form ofjoint ventures offer tremendous potential and pitfalls for co-operation between global companies of different nationalities as we move into the 21st Century. The higher costs and risks of R & D, production, financing and market penetration brighten the prospects for expanded strategic alliances between global companics as top management believes that no company alone can manage all of the high risks associated with world-scale ventures. Yet, joint ventures raise several questions of great corporate strategic importance since this vehicle for co-operation can also the company’s long-term seriously undermine competitivcncss if management is not careful in defining and implementing its ‘foreign policy’. Relationship with corporate strategy. Joint ventures are one critical dimension of global competition and corporate strategy because the company has undcrtaken a major watershed decision to include an external actor directly into its core operational activities. Instead of the more orthodox approach of ‘what businesses do we compete in’, the question becomes more like ‘should we involve an outsider in our businesses?’ Perhaps because joint ventures have largely been viewed as either a market entry vehicle or platform to share risks that top management may have largely reduced the importance of this issue. Although joint ventures have considerable appeal as a means to share risks and markets, they could constrain the company’s future strategy if the venture involves a leakage of either proprietary knowledge or some critical corporate core skill. Especially for those companies whose global competitive advantage arises from high-technology, proprietary knowledge and processes, and specialized production and marketing techniques, the issue of joint ventures becomes ever more paramount, since prospective partners could very well gain a direct searchlight to learn about the company’s core skills and strengths. The issue of joint ventures commands top management’s full attention since they could reveal the company’s key ingredients for its long-term competitiveness to a potential competitor later. This is not to say that companies should not consider joint ventures as a means to enter new markets; only that they should remain cognizant of some of the particular difIiculties involved in retaining proprietary technologies and core skills. Industry structure and global
ventures. Joint
ventures
in
104
Long
Case 1. Texas
Range
Planning
Vol.
22
February
Instruments
Texas Instruments, one of the world’s biggest manufacturers of semiconductors and related products, has undertaken major strides to become a global competitor in all of the markets it serves. Yet, to the fullest extent possible, TI has tried to operate as a wholly-owned subsidiary wherever it has operations, even though it is explicitly seeking long-term alliances with their biggest customers. TI represents an interesting example of how a company can avoid losing its technologies to Japanese competitors through persistence and possession of a unique proprietary knowledge that helped it to eventually become one of a few U.S. companies to actually have wholly-owned subsidiaries in Japan. In 1964, TI believed that Japan would become a major competitor in the world’s budding integrated circuit market. It first set up a marketing centre in Japan and sought permission to build a wholly-owned manufacturing centre, something which MIT1 vehemently opposed. After 4 years persistence, TI worked out an arrangement with Sony that resulted in a joint venture in which TI would buy out Sony’s share after 3 years. In effect, Tl’s subsidiaries in Japan would be free from the constraint of jointventure requirements. Now in 1987, TI has four major plants in Japan that produces important components and semiconductors for the rest of the company’s world-wide operations. Now, TI is engaging in a series of discussions with several other European and U.S. semiconductor and computer manufacturers to build new custom chips for their specific needs. Although the specific mechanism of building strategic alliances may involve joint ventures, the company is committed to remain at the forefront of R & D and production of all processes that would eventually be used in conjunction with key customers to produce better products. Tl’s long-term alliances may involve major players in the telecommunications, computer and even automotive industries. Source: Interviews and discussions with TI managers; supplemented by articles and speeches from the company.
theory convey many benefits to the partners involved. Within the context of global competition, joint ventures fall along two distinct categories. According to Porter and Fuller,’ two distinct types ofjoint ventures may evolve. The first type, known as the X-type coalition, involves sharing complementary activities. An example would include an agreement between two auto manufacturers with one performing the design skills, while the other manufactures the product itself. That is to say, Xtype coalitions involve crossing over and cooperating across different activities in the chain of value-adding activities. The second type of coalition within which ventures occur is that of the Y-type. This venture form involves two or more firms cooperating within the same basic activity in the value-added chain, for example, a joint production agreement (e.g. GM-Toyota), or a joint R & D venture (Boeing and Fuji Heavy Industries in aircraft). The first category (X-type ventures) often concerns a manufacturer of new technologies and products that wishes access to another country’s distribution channels and market. More specifically, this is the
1989
route many Japanese and U.S. firms have taken, as the Japanese partner wishes to avoid costly duplication of existing U.S. facilities. The recent agreement between Toyota and GM stems largely from Toyota’s desire to have a factory in the United States to bypass possible protectionist legislation. N. V. Philips’ agreement with Matsushita and other Japanese manufacturers to market Japanese-made products (e.g. compact disc players) under the Philips label is a clear example of such behaviour. The other global rationale for joint ventures (Ytype ventures) is when a partner seeks another partner’s technology or production skills. The recent decision to jointly design small cars between Ford and Mazda reflects this mutual need. In addition, Toshiba’s recent decision to co-operate with Motorola in securing the latter’s access to hightechnology, specialized semiconductors gives the Japanese partner an edge over its domestic and foreign competitors by allowing it to bypass the costs needed to build the requisite strengths on its own. Recent deals between Boeing and a consortium of Japanese manufacturers interested in producing civilian (and possibly) military aircraft also result from the Japanese desire to seek American design and production skills in a highly lucrative market. Economic motives. Joint ventures warrant top management’s special attention just at a time when many European and American manufacturers are looking to this vehicle as the means by which to regain lost competitive advantage in many industries. Although both X- and Y-type ventures offer the recipient considerable short-term benefits, there are many dangers to watch out, especially with long-term strategic motives. In the case of X-type ventures, the need for vertical integration or to strengthen a weak link in one’s own value-adding activities provides the strongest motive for seeking a prospective partner. Companies that find themselves weak in manufacturing often resort to X-type coalitions to compensate for inability to make the product or high expense associated with local production (e.g. Motorola and Toshiba for new chips). Long-term provision of feed stock or other supplies is a major source of Xtype joint ventures. For Y-type joint ventures, the primary economic motive according to Porter and Fuller hinges upon risk-sharing and the pooling of resources for scale economies and learning curve effects. Because the Y-type venture means that partners will be engaged in the same activity, there is greater potential for cross-fertilization and transfer of new knowledge which may enhance the competitiveness of both partners. Unlike that of X-type ventures, Y-type ventures usually occur when both partners are strong in the same activity, rather than the asymmetrical pattern found in the former agreement.
Strategies Case 2. Philips
N.V.
Philips N.V. is one of the largest manufacturers and distributors of consumer electronics products in Europe and the United States. It is an unusual company by both European and U.S. standards because it seems to thrive on partnerships, co-production and joint ventures with different foreign companies. Nevertheless, the company still commits itself towards massive investment in product R & D and efficient production for its own purposes. One of Philips’ most recent and potentially most successful joint ventures is that with AT&T to manufacture and network information transmissions systems throughout Europe, using the 5ESS/PRX switch. Philips receives access to some AT&T products, while AT&T enters European markets. More important, Philips’greatest endeavour is to work out equitable partnership and technology-sharing agreements with Japanese firms, particularly Matsuchita Electric. By sharing production and technology with the Japanese, Philips hopes to lead the world in standardizing design formats for new products such as compact discs and VCRs. Part of the success attributed to Philips’ ability to co-operate with the Japanese is the fact that the company commands considerable European market share and also political clout within the EEC. More important, many of Philips’ top management know their Japanese counterparts quite well, which lays the foundation for successful co-operation later.
Foreign policy and dependence. Unlike economii C motives, which hinge directly upon the financial benefits accrued to partners from their venture activities, there exists the more fundamental question of strategic or competitiveness motives for entering into joint ventures. This is where the greatest danger of relying upon joint ventures lies. More specifically, there may be direct costs associated with each of the joint ventures that may not surface until the venture is well on its way, but which top management should realize before potential damage spreads malignant effects within the company. Thus, over the long term, unless management recognizes the explicit and implicit vulnerabilities of joint ventures, the company’s competitive strength may diffuse into the hands of a new competitor. Some companies may actually seek to engage prospective partners into a number of joint ventures as a means to collect intelligence data and to monitor their activities. For example, joint ventures of the X-type cede production and technology development away from the owning firm to the partner. The cases of American companies who unwittingly gave away such technologies as transistors, colour television tubes and other consumer electronics show how difficult it is for the U.S. firm to re-enter the market after the technology is ceded away. Further, Y-type ventures may involve subtle damage to the stronger partner, as every link in the value-added chain from technology and core skills, even to marketing techniques eventually become learned by the other firm. Thus, it is easy to see how the strategic use of joint ventures is to serve as a monitor or ‘mole’ which can constantly measure the progress the
for Global
Competition
105
partner firm is making in the development of new technologies. It is entirely conceivable that some companies, particularly Asian, may engage in joint ventures solely to listen to the developments of whom they perceive as leaders in a given product or technology. Foreign policy in action. Robert Reich and Eric Mankin’s* arguments that joint ventures, particularly with the Japanese, prevent the U.S. company from moving further down the experience curve and allow the Japanese to take advantage of U.S. developed technology with surprising ease are especially worth noting. The experience of other European global companies such as N. V. Philips, Thomson and Thorn-EM1 all testify to the extreme difficulty of securing access to Japanese technology while their own strengths wither on the vine. A recent study by Doz, Hamel and Prahalad) suggested that Japanese firms do not enter joint ventures with the intention of working out issues and technical problems in an equitable manner, but to force the U.S. partner into a position of extreme dependency on the Japanese partner by undermining their core strengths and taking over their critical ventures are skills. Japanese-promoted joint designed to place the U.S. firm in a competitive disadvantage in the future by learning what the U.S. firm has done heretofore, and reducing their ability to develop new technologies. Joint ventures with Japan may not be the way for U.S. firms to regain competitive dominance. The recent joint vcnturc between Boeing and a consortium ofJapanese firms to develop the 7Y7 (a future efficient commercial airliner) could bring all kind of problems. Honeywell’s disastrous performance in the computer business through its joint ventures with Bull of France and NEC of Japan offers another lesson to top management of the dangers of top managem&t’s not understanding the full ramifications.
Internal Development Acquisition Policies
and
A topic that bears directly upon global competitiveness concerns finding the right balance between internal development and acquisitions to build the basis for entering new technologies and businesses for the future. Internal development refers to a preference by the company to enter new technologies or businesses through growth by its own indigenous efforts, while an acquisitions-oriented approach depends upon top management’s ability to use the newly introduced technology and acquired management to maximum advantage. The domestic policy question reflects not so much a decision of whether it is necessary to enter new areas of technological growth, but rather how. In either case, internal development or acquisition aims to lead the company into new areas that could complement existing strengths well. It is ‘domestic
106
Long
Range
Planning
Vol.
22
February
Case 3. Honeywell Honeywell’s recent retreat from the computer business reflectssome of the big problemsassociated with a loosely managed joint venture. Established originally in 1962 with Bull of France and later with NEC of Japan in 1970, Honeywell’s joint venture in France was designed as a means to secure entry both in Europe and France’s original colonies throughout Africa. Over time, though, much of the production of the hardware associated with its line of computers moved from the U.S. to Europe and Japan. In 1986, Honeywell, Bull and NEC agreed to create a consortium that would transfer much of Honeywell’s original computer business to the two foreign partners. What is especially telling about this example is that it reveals a U.S. manufacturer can eventually become little more than a distributor for other foreign companies’ products. Within the new three-way company, Honeywell’s role is to serve as the main distributor of N EC products in the U.S., especially personal computers under the Honeywell label and central processing units for its largest computers. Moreover, NEC could perhaps even receive financial support from Honeywell to support its activities, thus even encroaching upon the company’s financial reserves. This is an example known all too well to several other U.S. industries, notably consumer electronics and machine tools, where in many cases the U.S. partner in the joint venture is nothing more than a replaceable distributor, while the Japanese partner retains all of the production advantages and technology development. These problems result from the U.S. partner’s all-too-eager desire to receive new technologies from the Japanese as well as quick profits, with little substantive production undertaken by the U.S. partner in the end.
policy’ to the extent ventures are avoided.
that
partnerships
or joint
A search for focus. Although the topic of internal development and acquisitions has been around for a long time, its relevance to global competition becomes even more telling when one considers that the United States and other countries are in the midst of a new merger wave-one in which companies are trying to achieve focus and specialization. Unlike the mergers of the late 1960s and 197Os, where conglomerates and unrelated diversification proved popular and ultimately less than profitable, today’s mergers and acquisitions represents a massive restructuring of American industry catalysed by tidal waves of foreign competition. With many companies divesting themselves of businesses they know little about and repositioning themselves into those areas in which they have a better chance of competing, internal development and acquisition policies to achieve global competitive advantage have become salient and timely issues. Yet, U.S. management’s ever-broadening push to seek specialization complements well the latest advances in manufacturing and product design technology that are now just surfacing. The issue of internal development has assumed a much more pronounced role within corporate strategy as advances in technology promise to erode away industry barriers and hindrances to serving several different markets simultaneously at low cost.
1989
Internal us external! The choices of internal development and acquisitions have often been considered from an exclusive, either/or viewpoint rather than from a perspective which emphasizes balance and an understanding of the underlying industry structure. Rather, companies which have done very well around the world have used a combination of both policies to maximum advantage. For example, General Electric has encouraged the internal development of new businesses through ‘intrapreneurship’ programmes and hiving off new divisions when new products or technologies look profitable, while at the same time acquiring small companies that complement its own endeavours in entering new technologies, such as Calma-a specialized firm in the CAD/CAM area. AT&T has invested considerable sums in equity arrangements with such companies as Olivetti while simultaneously setting up new manufacturing and design centres around the world, along with several joint ventures. Rockwell International’s celebrated purchase of Allen-Bradley, a manufacturer of automation equipment and industrial controls, has matched the company’s own internally-driven efforts to build cellular manufacturing facilities for its electronics and telecommunications products. Consequently, many companies which have traditionally relied on internal development for the basis of their future growth have also acquired growing companies whenever their technologies or products fit in with the parent’s core skills. The scope of such acquisition activity, however, has tended to remain small and confined to businesses with which management feels comfortable or experienced. Industry structure and acquisition. Corporate strategy of specialization requires top management to understand the versatility and idiosyncracy of its com-
Case 4. Allen-Bradley Allen-Bradley, a major manufacturer of industrial controls and recently acquired by Rockwell International, has developed new advanced technologies which allow it to simultaneously combine economies of scale with economies of scope in manufacturing new control modules. Using computer-integrated manufacturing (CIM) and new plant layouts, A-B has mastered the technique of accommodating product variety with mass production efficiency. While every company can certainly meet a customer’s tailored needs, only A-B can do so without actually shutting down the entire line and disrupting its work flow. Rockwell’s acquisition of A-B represents a major milestone for the parent company as well, especially with its major endeavours in cellular manufacturing and increasing inventory turnover. Both Rockwell and A-B have complementary strengths and their specialized talents will match nicely over the years as the telecommunications, industrial controls, sensor systems and semiconductors industries become more related. Rockwell’scareful acquisition as well as its own major investments in new plant and equipment show how a company may simultaneously pursue both the internal and external modes of domestic policy without excessive reliance on either.
Strategies parry’s core strengths and skills, and that of the underlying industry and technology upon which they are based. Focus brings not only potentially greater competence and experience in competing in any one or several products/markets, but also a need for innovative methods and strategies to enter into different but related markets, usually via new technologies spun off from existing businesses. It is not surprising that companies such as General Electric, IBM, Siemens, Northern Telecom and NEC have tended to shun large-scale acquisitions in competing abroad. These companies, whose sources of competitive advantage derive from long-standing R & D programmes, proprietary knowledge and specialized processes, cannot assimilate major acquisitions easily. Instead, the possession of such core strengths mean that companies in industries such as pharmaceuticals, telecommunications and ofice equipment must compete primarily by relying on their own internally developed products and technologies. On the other hand, companies which rely extensively on acquisitions without a commensurately high level of internally generated skills and technologies have generally emphasized financial controls in lieu of building core skills. This has been the case conglomerates (e.g. ITT in with many U.S. Europe), which arguably have done less well in global competition than their internal development counterparts (e.g. DuPont in Europe). Thus, an explicit strategy of specialization in itself does not imply that companies should exclusively pursue one path to growth and expansion over another, but rather recognizes the importance of creating a home base of technology and products to fall back on when competition assumes an increasingly technological dimension. The implication is clear: even carefully selected acquisitions cannot compensate for the lack of at least some home-grown development of core skills. This trend could prove even more important, when the once-fixed boundaries of industry structure and the barriers to entry change with new technologies. Thus, the foundation for any successful domestic policy must first come from internally generated sources of strength and experience. The technology imperative. What promises to reward (and complicate) manufacturing and strategic planning in those companies pursuing internal development approaches to new businesses is the technology dimension. Critical to any discussion of internal development is the growing role that automation and flexible manufacturing systems (FMS) will play in most companies’ manufacturing strategies in the near future. Automation, as IBM, GE and other big and small manufacturers are finding, allows the company to drive down its manufacturing costs when new process technologies are implemented properly. When designed to incorporate the latest product designs that reduce the number of internal
for Global
Competition
107
and complex parts, automation could offer the company considerable economies of scope, whereby the use of a limited set of fixed assets based in engineering, R & D and production could turn out a greater number and mix of different (but related) product modifications, if not actual products themselves, in shorter time. By taking advantage of such concepts as group technology (modularity) and ‘smarter’ production-based machines, a company can theoretically serve several distinct but related markets. Nonetheless, incorporating these new technological advances will require close attention from corporate management because of the many distinctly new problems they bring with them, such as difficulty in cross-business unit co-operation, obsolescence of performance evaluation standards and the need for closer functional integration within the plant’s activities.
Case 5. IBM IBM in the mid-1980s was bent upon preserving its manufacturing skills and cost efficiency despite enormous pressures from less costlier Far Eastern producers and imitators. Using its own proprietary designs and manufacturing capabilities, IBM is upgrading its U.S. plantstooutcompete Epson of Japan in producing dot-matrix printers for personal computers. A major upgrading of its Louisville, Kentucky plant was designed to become the cost leader in electronic typewriters. The basis for IBM’s cost efficiency and automation drive was a tendency towards producing many different product configurations based on one or two central designs. For example, the typewriters as well as printers use common parts and common manufacturing facilities, thus saving time and inventory. Moreover, subassemblies were built within IBM’s plants as much as possible without relying extensively on many different suppliers, such that plants produced many of the components as well as the final end product. Although the company still relied on some Japanese producers for its laser and colour printers (e.g. Canon), IBM’s strength and willingness to invest in its own customized machines and factories will give it considerable momentum for competing with anyone easily into the next decade.
A new way to diversity. Thus, advances in production technology and new product designs have bestowed on U.S. companies a new opportunity: the potential to garner the benefits of serving diversified markets with new products without acquiring another company in that market. For example, DuPont’s innovation of new chemical technologies has allowed it to compete not only in speciality chemicals, but also in supplying the carpet business with new synthetic fibres, medical supply houses with newly designed synthetic fluids and the electronics industry with composite materials. Automation and economies of scope can, when properly understood and implemented, greatly enhance the competitive range and scope of the company’s efforts to meet the needs of its worldwide markets and even make inroads into another
Long
Range
Planning
Vol.
22
February
competitor’s (or industry’s) domain. In theory, smart and flexible machines could be converted from making printer boards to personal computers within the same factory, thus avoiding the need to duplicate facilities. The ‘focused factory’ concept will move away from rote, dedicated, rigid processes, to one based on a focused technology applied to many potential different market needs. AllenBradley’s newest breakthrough in making numerous types of industrial controls easily within one factory using automated equipment is just the beginning of a new trend that could sweep the world. The key to attaining this kind of flexible and sensitive manufacturing set-up rests with top management’s understanding not only of the engineering tasks associated with the organization of this technology, but also of the technology’s unprccedented capability of breaking down many industry barriers once thought impenetrable. Truly global products. 7 In addition, further advances in automation and more efficient product designs could move many companies towards fulfilling their dreams of a truly ‘globalized’ product. Although Ford’s ‘World Car’ concept met considerable resistance in its early days in Europe, the company has begun to reap the benefits of its more advanced modular designs of such models as the Ford Taurus and the Mercury Sable which apparently has done quite well both in the United States and abroad. Black and Decker has effectively diversified away from its traditional niche of making small power tools towards that of serving the consumer appliance markets through both simpler designs and close co-operation with General Electric to access production facilities. Moreover, Black and Decker’s commitment to remould the company into a globalized strategy may be paying off as its new design techniques apply well to both a broad spectrum of consumer products as well as different markets around the world.
Case 6. Black
and Decker
Black and Decker is one of the largest manufacturers of power tools and consumer household products. Its recent acquisition of some of the light consumer appliance businesses from GE helps buttress the company’s position around the world. Ever since the early 198Os, B & D’s top management has strived to ‘globalize’ the company products to serve many different markets. The company has over 12 manufacturing and assembly sites around the world, selling to over 100 countries. The basis for B & D’s globalization plan is its emphasis on standardizing basic designs for its numerous products. To the extent possible, designs made for one country require very little modification in another, thus capturing economies of scale and specialization. Part of the difficulty surrounding this move has been the relatively large number of components required for some of B & D’S earlier products which have now been streamlined and simplified. A newly introduced tight information system also links up the many subsidiaries with headquarters, thus furthering steps to rationalize product design and manufacturing.
1989
In fact, the whole notion of making a standard ‘global product’ may soon prove moot, as traditional physical obstacles to producing customized goods quickly on the assembly line melt away. One could easily envision a company very rapidly broadening its product line and services to a wide portfolio of markets simply by tailoring its production processes to the market’s particular needs-all without the kind of massive new investments in separate plants characteristic of decades earlier. Whether a truly standardized product for the world has arrived remains to be seen. What one can already see is the arrival of new process technologies and innovative methods to incorporate them into the plant floor that will shift traditional job shop production modes towards a more intermittent or even continuous flow configuration where product variety will prove more of a competitive asset than a hindrance to potentially smoother manufacturing and lower costs.
Understanding Environment
the New Global
Probably the least understood aspect of corporate strategy is that relating to issues of time and space. Today’s rapidly advancing technologies have accelerated the breakdown of traditional barriers to entry in many industries. Companies in the airlines and automobile industries, for example, have found themselves also in the position of indirectly being able to compete in some aspects of the information industry. The use of computers and information hook-ups in these two distinct industries have actually brought them closer to possible competition in an entirely new third area. Thus, one of the facing top management biggest prerogatives around the globe is to better understand how the time dimension can radically alter one’s strategy, Those executives who can understand how industries evolve over time will be better equipped to take their companies into new markets than their counterparts whose thinking has remained static and ossified. Time andglobal thinking. What is most tricky about the time dimension is that it defies easy characterization or quantification, two features demanded by most companies’ strategic planning departments. Unlike the physical, concrete issues such as R & D spending, joint venture partners, and other strategies , the time element is much more akin to a sense of a world view or global thinking and evolution, The success of implementing the first two dimensions of ‘foreign policy’ and ‘domestic policy’ depends upon an understanding of time as much as it does on the specific aspects of any given strategy. While it is arguable that any company could in theory duplicate the success that Philips or IBM has built around the world, those executives who are accustomed to thinking on a dynamic, worldwide
Strategies basis already competitors.
have one major
advantage
over their
109
Olivetti is taking major steps towards becoming both a European and a global producer of computers and information products. The company has invested heavily in joint ventures and equity agreements with many companies around the globe, but its underlying philosophy is to compete everywhere and anywhere around the world. Some of the most recent steps taken by Olivetti include the equity arrangement with AT&T to produce personal computers for the U.S. giant, acquisition of U.S. bank automation supplier Bunker Ramo, joint ventures with EDS Corporation, a specialist in information integration, and a joint venture with Canon of Japan to manufacture medium-sized computers in Europe, and acquisition of Triumph-Adler of West Germany, a manufacturer of typewriters and office automation equipment. The basis for Olivetti’s rapid and sustained involvement with these and other prospective companies reflects top management’s willingness to build market share and presence in every major country. Moreover, Olivetti’s management team seems to understand the issue of time quite well. They realize that perhaps this is the last chance for the company to gain the opportunity to become a major world player, first by becoming more European than Italian. Unless Olivetti acquires enough size and staying power in Europe, top management believes that their global competitiveness will dwindle over time.
Time, strategy and structure. There is little doubt that as communications, information and transportation become much more widely available to everyone, that companies wishing to compete globally must have a presence in every major market. Yet, all too often, managers have considerable difficulty seeing beyond their own market or area, with the usual consequences of poor organization, slow responsiveness and inability to meet customer needs. Thus the biggest problem is to balance worldwide presence with cost competitiveness, especially when product life cycles are becoming increasingly shorter.
Thus, the greatest challenge offered by the time dimension is the willingness of top management to think about change and to redirect their company’s efforts towards new areas of growth. Most executives around the world have a difficult time in conceiving of change as being productive and
Competition
Case 7. Olivetti
It is at this point that U.S. managers may have their greatest difficulty in acclimatizing themselves to the global environment. A 1986 study of 100 executives performed by Egon Zehnder International revealed that about two-thirds of U.S. managers remained totally ignorant of foreign market opportunities. Moreover, U.S. executives still remained hesitant or fearful of committing resources to potentially new markets. Yet, despite these findings, it is important to define exactly what the time dimension means when competing globally.
The time dimension exerts its greatest influence when one analyses the necessary changes in strategy and structure required to compete in different environments. Understanding the time dimension means, on the one hand, knowing when one’s strategy is most appropriate for managing and competing in a particular environment. Equally important, that strategy must have the full support of the company’s planning processes, communications, incentive programmes and other dimensions of internal structure. To the extent that strategy and structure match each other over time, then there is the basis for sustainable global competitive advantage. Consequently, the time dimension requires top management to know when to change course and when to modify their strategies according to the situations they face. Yet, any major change in strategy may necessitate some modification of internal structure too. The example of how Olivetti is determined to transform itself from an Italian computer manufacturer to a worldwide player in the information services industry shows how a company’s top management team can make big strides in plotting a new direction for a once small company.
for Global
Olivetti’s commitment to global thinking and long-term planning is reflected through the company’s emphasis on selling services and software, rather than computer hardware.
potentially beneficial-either because people are accustomed to working and thinking in a particular way, or because the previous strategy has worked so well that their ability to change becomes much reduced over time. Consequently, one of the greatest tests facing top management is how well they can smoothly redirect their company’s efforts towards potential new business opportunities.
References (1)
M. E. Porter and M. Fuller, Coalitions and global strategy, in M. E. Porter (Ed.), Competition in Global Industries, Harvard Business School
(2)
Press, Boston,
MA (1986).
R. B. Reich and E. D. Mankin, Joint away our future, Harvard Business March/April (1986).
Further
ventures Review,
with Japan give 64 (2), 78-86,
reading
T. Hout. M. E. Porter and E. Rudden, How global companies win out, Harvard Business Review, 60 (5), 98-l 08, September/October (1982). K. Ohmae, Triad Power: The Coming Free Press, New York (1985).
Shape
of Global
Competition,