The Reality of Globalization
Think global, act local is the familiar slogan that perpetuates a narrow view of globalization strategy: Multinational corporations (MNCs) develop one global product for the world market, and are able, through their vast economies of scale, to dominate local markets everywhere. But this perspective fails to acknowledge that most business activity by large firms takes place in regional blocks, not in a single global market. For many firms, we propose a new slogan: Think regional, act local, forget global.
Most MNCs headquartered in North America earn the majority of their sales in their home region of North America, or by selling to members of the Triad, which encompasses North American Free Trade Agreement (NAFTA) and European Union (EU) nations, Japan, and the Asian tigers.
"Regional institutional complexity is the number of countries [in a region] and the diversity," Miller said. "Not just demographic diversity, but aspects of cultural and institutional diversity; so we include the economic environment, the political environment and the regulatory environment within the region."
Her findings suggest that a regional strategy benefits expanding companies when institutional diversity in a region is neither homogenous nor extremely diversified. Instead, companies benefit from a regional strategy most when there is a happy medium; when companies can apply the lessons they have learned from their country of origin to a new region, adopt them accordingly and then expand throughout the region as a whole.
Jeffrey Immelt, CEO of GE, claims that regional teams are the key to his company’s globalization initiatives, and he has moved to graft a network of regional headquarters onto GE’s otherwise lean product-division structure. John Menzer, president and CEO of Wal-Mart International, tells employees that global leverage is about playing 3D chess—at the global, regional, and local levels. Toyota may have gone furthest in exploiting the power of regionalized thinking. As Vice Chairman Fujio Cho says, “We intend to continue moving forward with globalization…by further enhancing the localization and independence of our operations in each region.”
The leaders of these successful companies seem to have grasped two important truths about the global economy. First, geographic and other distinctions haven’t been submerged by the rising tide of globalization; in fact, such distinctions are arguably increasing in importance. Second, regionally focused strategies are not just a halfway house between local (country-focused) and global strategies but a discrete family of strategies that, used in conjunction with local and global initiatives, can significantly boost a company’s performance.
Companies can source goods, technology, information, and capital from around the world, but business activity tends to be centered in certain cities or city regions in a few parts of the world. Prominent examples of new industry clusters include 3G telecommunications in Japan; textiles in the area surrounding Milan, Italy; and the high-tech cluster called Silicon Fen around Cambridge, in the United Kingdom. The United States has Silicon Valley and Boston’s Route 128 for high-tech industry; Houston, Tex., for energy; and Wichita, Kan., for aerospace. The importance of clusters has given cities and states more clout to compete nationally and worldwide to attract new R&D labs, plants, and head offices.
Porter (1990) has suggested that international competitiveness at the level of specific industries depends critically on a favourable configuration of home country diamond conditions. Here, four determinants have been viewed as critical: factor conditions (with a focus on created and advanced production factors); demand conditions (with a focus on total demand and sophistication of demand, based on precursor status); related and supporting industries (with a focus on the presence of world-class firms with which cluster type linkages exist); and strategy, structure and rivalry (whereby strong rivalry and benchmarking against the toughest competitors are critical to innovation). Porter's perspective has led to several follow-up studies, providing extensions and suggestions to augment his path-breaking model.
Globalization presented as a single world market for free trade does not exist; Triad-based production and distribution is today’s reality. We believe corporate strategies that are aligned with this reality will be the most successful long into the future.