The development of global companies

Perlmutter's typology of overseas marketing orientations

Perlmutter has suggested that firms involved in overseas business can be driven by a specific philosophical approach. Traditionally firms who are either small or unfamiliar with overseas marketing pursue an ethnocentric approach to international business. This implies that they see foreign markets as identical to their domestic markets. There is no necessity to change the design of the product nor any of the associated marketing activities. The whole of the marketing mix can be standardised allowing a company to reap the rewards of economies of scale and to minimise the amount of time and expertise devoted to individual markets.

As firms become more committed to overseas markets they realise that individual countries may require a degree of customisation which the ethnocentric approach does not permit. Firms then frequently move to the other end of the spectrum and become polycentric in orientation. Each individual market is seen as distinctive and so products and marketing activities (distribution, promotion and price) are all individually customised. This usually results in sales increases but often at the expense of profit. Customisation inevitably results in increased costs as there is a limited application for scale economies here. (In reality few organisations are totally polycentric but many do have a multiplicity of foreign operations which do curtail their profitability). There is a tendency in certain literature to describe organisations which are polycentric in philosophy as multi-national companies. This is a more specific description of what was originally a generic concept.

There obviously needs to be a ‘happy medium’ where customisation can sit comfortably with standardisation. The popular slogan ‘think global, act local’ springs to mind. Kenichi Ohmae has argued that firms who cannot 'amortise' their capital costs over a large volume of customers are unlikely to be able to survive in the long term. Firms need to be able to take advantage of economies of scale. Firms need to be regiocentric (i.e. focused on a specific geographic area such as Europe or Latin America, or geocentric where the market is seen to be global). According to Ohmae a geocentric company will centralise functions where localisation is inappropriate and will customise those areas where localisation is a benefit.

Functions suitable for centralisation may include manufacturing, R & D, some marketing areas such as branding where a global brand name may be advantageous and certain financial operations such as investment and retrenchment where localised decision-making may be biased. However, certain functions may still need to be localised. For example the design of certain products and advertising may have to reflect local needs and customs. Similarly sales promotions may need to be localised. It may be beneficial to have a standardised product and brand name for a luxury watch, but it will be inappropriate to use an Olympic winter sports champion, acceptable in Europe, to promote it in South East Asia whereas a pop star may have greater impact. By being geocentric the company obtains the benefits of economies of scale whilst also being able to respond to local needs. Furthermore, unlike ethnocentrically oriented companies, a geocentric company is seen to be demand-driven whereas the former style (ethnocentric) is more supply-driven.

The move towards standardisation in a geocentric company is encouraged by a market convergence. Increasingly, transnational segments are being developed whereby consumers in different countries may have similar tastes which are more convergent than those of different segments within the same geographic market. For example the youth segment has similar tastes in music and fashion goods. The youth markets in Tokyo, Munich, New York and London have, almost certainly, a closer affinity with each other than they do with their parents or with segments of that older age group. These geocentric companies are now frequently referred to as global companies.

Reasons why firms are moving towards a globalised position

Kenichi Ohmae, in his book The Borderless World, has identified a number of reasons which might encourage a firm to act geocentrically (globally). He has listed these under a simple 5 Cs model. The first C is the customer. As has just been noted there has been a movement towards market conversion. More and more customers throughout a variety of countries are looking for products with similar characteristics. Where there has always been a financial incentive to standardise products there is now often a demand-led requirement. This leads to a second C - the company. By selling identical products to a number of markets, a company can spread its fixed costs over a larger volume of sales, enabling that company to lower its costs and become more competitive, which brings us to the third C – competition. If other competitors are already reaping the benefits of global commitment, then the company must compete on the same ‘playing field’ otherwise it will operate with a serious disadvantage. It must also become a global player. If it is seen as only a regional or local player its image may be degraded.

Furthermore, the costs of operating on a global scale can be enormous. It could be advantageous to attempt to reduce costs by forming strategic alliances with the previously considered dangerous competitors. The forth

The final C is country. If a company seeks to locate its business activities (other than exporting) overseas, it can gain several benefits – access to cheap labour, raw materials or even finance. It can also be seen to operate as a local company so attracting the goodwill of host governments as well as the goodwill of customers who often prefer to buy from what they consider to be local companies.

These five Cs can all be seen as persuasive factors in influencing organisations to become more global in their philosophy. These factors should not be considered to be the same as the influences that encourage companies to operate overseas. A global company is generally more committed to overseas markets and its commitment is usually more long-term and expensive than those who are mainly export driven.

Comparisons Between the Implementation of Global and Multinational Company Strategies and Objectives

Because of their differing orientations it is not surprising that the two types of companies use different approaches to implement strategies or pursue objectives. I will firstly identify a strategy and then show the difference in the ways they are likely to be implemented.

Maximise world-wide performance

• MNC: by using local competitive advantage to gain profits
• global: through the application of corporate sharing and integration

Seek to benefit from the location of value-added activities

• MNC: all or most aspects of the value chain will be reduced in each country
• global: costs will be reduced by breaking up the value chain so that each activity may be produced optimally in different countries

Which countries will be participants in a world wide trading enterprise?

• MNC: countries are selected for their individual potential for generating profit
• global: countries are chosen to reflect their integrative abilities and their potential contribution for globalisation benefit

Product offering

• MNC: products are tailored to suit local preferences
• global: core products are standardised to minimise need for local adaptation

Marketing approach

• MNC: this function is fully tailored for each country being locally and individually developed
• global: there is a uniform approach to marketing with only minor changes

Competitive approach

• MNC: the managers decide on a strategic response without considering other markets
• global: the competitive strategy is integrated across the various countries

Criteria needed to enable a company to become (and remain) a successful global operator

In addition to the usual criteria for successful firms – factors such as functional competence in marketing, manufacturing and finance – There are a number of other areas where global (geocentric) firms must excel. Because these firms operate in many countries with differing cultures, it is imperative that these firms have unified visions or values which are communicated throughout the organisation so that every employee is pulling in the same direction and there is minimal internal conflict. For this to be established the HR function must be strong, with centralised direction, so that suitable people are recruited and trained.

Senior managers must have strong locational skills as access to reliable infrastrucures, skilled labour and an understanding and appreciation of local cultures can be of paramount importance. Due to the nature of these businesses, (usually large and often strategically significant), senior management must have good political skills as negotiations often take place at senior level.

There also has to be balance in the organisational reporting systems. There needs to be a balance between control and delegation. By resorting to local freedoms there is a chance that duplication of activities may take place. Whilst the HQ may wish to centralise as much as possible, so reducing fragmented activities, there is a consequent danger that such actions may reduce initiative, innovation and motivation. Global corporations must address these conflicting tensions.

Conclusion

It is important to realise that organisations doing business overseas are not identical in their outlooks. They can, and do, have different orientations, which will impact upon their philosophies, structures and strategies. Global organisations, because of their commitments overseas, need to be aware of overseas differences but they must sacrifice their strengths and efficiencies in pursuit of market volume growth.

Bibliography

Warren Keegan, Global Marketing Management: Prentice Hall
Kenichi Ohmae, The Borderless World: Collins
Kenichi Ohmae, Globalisation: BBC Executive Video Seminars

Geoff Gravil is former examiner for Paper 3.5