Lesson 25
Multinational Companies

Once you understand how global your industry is, you need to define globalization’s full potential for your company. Although every company is different, most are affected by the same internal and external forces. The challenge is to figure out how these forces will strengthen or weaken over time – and how to capitalize on that evolution. Three types of factors determine the course of globalization in a company: production, regulatory, and organizational.

Production. There are two factors that determine an industry’s potential for disaggregating its value chain: relocationsensitivity and location-specific advantages.

To figure out your relocation sensitivity, consider metrics such as your typical bulk-to-value ratios, the ease with which your company can ensure quality standards remotely, the volatility of the demand for your service, and any sunk costs. Industries that make items that are hard to transport, such as steel or timber, may have little incentive to move their production processes. Companies that have already made huge capital investments in developed countries may not be able to justify shutting down factories even if the variable costs in developing countries are much lower.

To determine your location-specific advantages, look at variables including labor intensity, skill requirements, natural-resources intensity, and economies of scale and scope. Labor-intensive industries, such as apparel, have a greater incentive to move production to lower-wage countries. The exception would be a business whose workforce must possess specific skills that are not available outside a few countries. Industries that rely heavily on natural resources, such as the furniture sector, may find it advantageous to move to countries where those resources are plentiful and less expensive. Industries in which components are standardized, like consumer electronics, can take advantage of economies of scale in the production of individual components.

Regulatory. Host countries’ regulations can inhibit globalization in several ways. A country can impose tariffs, set import and export quotas, require foreign companies to enter into JVs with local companies, specify minimum local content, ban foreign investment outright, or fail to invest in regulatory infrastructures. Indeed, regulatory factors – particularly countries’ efforts to restrict imports or FDI – are among the biggest constraints to globalization in many industries today.

Organizational. Three organizational factors can limit globalization for a company or an industry: internal management structures, incentive systems, and unionization. For example, offshoring in many U.S. companies has been slowed by midlevel managers’ reluctance to give up some responsibility for the migrated positions. Companies must realign management incentives with global, not local, performance metrics, while still allowing for local innovation and risk taking.

Production, regulatory, and organizational forces evolve over time, and the full potential of globalization for companies and industries changes with the geopolitical and macroeconomic environment. The development of GATT and WTO has enabled rapid growth in global trade for most manufacturing products and, more recently, for services. The decline in cargo costs due to standardization of containers and more efficient transport service has encouraged more companies to ship bulky products globally. GPS technology has allowed some companies to closely monitor their road freight and achieve better logistics control, enabling them to disaggregate their value chains. And the improved quality and radically reduced costs of international telecommunications have created the offshoring opportunities.

Escalating competition, steady trade liberalization, and the continual introduction of new technologies will increase the pressure on companies to globalize. Businesses that view the status quo as fixed and neglect to capitalize on emerging global opportunities will be blindsided; those that find ways around the obstacles and prepare for the next stages in their industries will win out. IKEA has pushed the envelope by creating a new business around low transportation costs. The modular design of its furniture (customer assembly is required for nearly all items) means IKEA can transport its goods worldwide much more cost-effectively than traditional furniture manufacturers can.

Standardization is a critical part of globalization in many industries, but it has been resisted by some. Standards can penetrate an industry in two ways – companies can voluntarily adopt them, or governments can impose them. Consumer electronics was transformed when a critical mass of companies voluntarily embraced standards. By contrast, it’s been hard for manufacturers in the wireless handset business to achieve global economies of scale: Europe mandated the GSM standard, while Japan chose the PDC standard.