Saturday, March 18, 2006

Going Global?

In a few industries, firms have to be global if
they are to achieve leadership. Computer
makers like Dell or Hewlett-Packard have
cost structures that keep improving with the
increased scale of going global.
Pharmaceutical companies like Pfizer, or
software companies like Oracle, must sell
globally to amortise their enormous product
development costs. Investment banks are
driven to expand globally because their core
clients operate in all major financial markets
around the world. The profit economics of
these industries are global: in some cases,
their customers respond to a single, global
value proposition; in others, the companies
can capture benefits of world-scale facilities.
Yet, even in an era of liberalising trade
regulation and, some argue, converging
consumer tastes, international expansion is
more often a choice than a necessity.
Winning in food retailing or beer, for
instance, is the result of building market
power and influence at the national or
regional level, not globally.
It’s important to recognise, however, that
international expansion remains a growth
option even when an industry’s profit
economics are not global. In a ‘naturally
local’ industry like mobile phone service, for
example, Vodafone understood the power of
individual country market share. Regardless
of whether a mobile phone brand is global
or local, customers expect service that’s
tailored for their market. Profits accrue first
to the individual market leader, not to the
service provider with global reach. So when
Vodafone began earnestly pursuing
international growth in the mid-1990s, it
first acquired controlling stakes in leading
wireless players in continental Europe and –
for a while – let them be. Each market had
different characteristics and requirements.
Vodafone’s recognition that relative
market share in each country is the key to
profitability allowed its management team
to ride a well-understood strategy into
unfamiliar markets. Gradually, the company
introduced pan-European service contracts,
and began to integrate product
development and branding at the European
level; it also leveraged its purchasing power
with network equipment and handset
manufacturers.
For companies in ‘naturally global’
industries, on the other hand, the world is
one big market. In microprocessors, for
example, companies cannot afford to
manufacture unless they are a certain size.
A new semiconductor fabrication facility
costs Intel several billion dollars to build, and
produces chips that sell mostly for tens or
hundreds of dollars. To earn a return on its
investment, Intel must sell globally. Other
factors reinforce a global orientation. Once
Intel turns on a fabrication facility, scaling up
to increase production adds only
incremental cost. Computer chips are
inexpensive to transport relative to their
value, so there is no particular reason to
locate the ‘fabs’ close to customer locations.
And customers have comparable needs:
Nokia’s requirements for cell phone chips
are not that different from Motorola’s or
Samsung’s.

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