Rationale Behind Operational

Globalization
Chapter 3

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Objectives
• To introduce the global strategy theories relevant to operational
globalization analysis.
• To present the primary global strategy frameworks relevant to
operational globalization analysis.
• To explain the drivers of operational globalization.
• To address the benefits of operational globalization.
• To identify the risks of global operations.

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Basic Theories
• Eclectic theory: states that a firm goes global to achieve ownership,
location, and internalization advantages.
• Transaction cost theory (TCT) states that a firm goes global to minimize
transaction costs.
• The competitive advantage of nations (CAN) theory argues that a firm in a
particular industry goes global to build firm-specific competitive
advantages with the characteristics, cultures, and resources of different
nations.
• The resource-based view (RBV) focuses on the rents from scarce firm
specific resources.
• Competency theory focuses on achieving competencies as a source of
sustained competitive advantage.

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Basic Frameworks
• Dunning’s OLI Framework
• Porter’s Five Forces Framework
• Kogut’s Comparative and Competitive Advantage Framework
• Porter’s Configuration-Coordination Framework
• Ghoshal’s Means-Ends Framework
• Prahalad and Doz’s Integration-Responsiveness Framework
• Bartlett and Ghoshal’s Globalization-Localization Framework
• Porter’s Diamond Framework of Nation Advantage

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Dunning’s OLI Framework
• OLI stands for Ownership, Location, and Internalization, the three
advantages that influence a firm’s decision to become an
multinational enterprises (MNE).
• Ownership advantages refer to the specific advantages (e.g., products,
designs, patents, trade secrets, and resources) used to overcome operational
costs in a foreign country.
• Location advantages refer to cheap input factors, transport costs, and trade
barriers. These are used to address the question of where an MNE chooses to
locate.
• Internalization advantages influence a firm’s decision to operate in a foreign
country. They relate to the trade-off between the benefits of a wholly owned
subsidiary and the advantages of other entry modes such as exports,
licensing, or joint ventures.

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Porter’s Five Forces Framework
Five competitive forces are:
• Threat of new entrants,
• Threat of substitute products and services,
• Intense rivalry among existing players,
• Bargaining power of suppliers, and
• Bargaining power of customers.

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Kogut’s Comparative and Competitive Advantage
Framework
• This framework studies the difference between location-specific comparative
advantage and firm-specific competitive advantage

• Competition mode I is mainly related to comparative advantages among countries.

• Competition mode II rests on differences in the chain of comparative advantages among
firms.
• Competition mode III is of relevance to the interplay between competitive and comparative
advantages along a value-added chain

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Porter’s Configuration-Coordination
Framework

• Global configuration refers to where and in how many places the

firm’s value chain activities are located worldwide.
• Global coordination refers to how and to what extent similar value
chain activities are coordinated with each other across countries to
maximize the firm’s competitive edge.
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Ghoshal’s Means-Ends Framework
MNE has three “means” of competitive advantage:
• First, the comparative advantage of a location is one of the most
important sources of competitive advantages in global operations.
• Second, scale economies have been used as a competitive tool for a
long time.
• Third, scope economies can help a firm share physical assets,
including facilities and equipment, share external relations with
suppliers, customers, distributors, and government, and share
learning and knowledge.

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Prahalad and Doz’s Integration-
Responsiveness Framework
• 1. Global integration: If the pressure of global
integration is perceived, this strategy will be
adopted to highlight global coordination.
• 2. Local responsiveness: In this strategy, local
responsiveness will be emphasized if industry
pressures are predominantly perceived at the
domestic level.
• 3. Multifocal: When both local responsiveness
and global integration are perceived as
important, a “multifocal” strategy will be used to
respond to both dimensions

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Bartlett and Ghoshal’s Globalization-
Localization Framework

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Porter’s Diamond Framework of Nation
Advantage

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Drivers for Global Manufacturing

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(1) Market drivers
Market drivers such as increasing demand in emerging countries, changing market
structure and segmentation in developed countries, and growing global channels are
changing global manufacturing. For example, BMW has built manufacturing plants in
China to access the Chinese market.
(2) Cost drivers
As cost pressures become higher, firms continue to move manufacturing activities to
access low cost resources or reduce costs by reconfiguring global manufacturing
systems. For example, the iPhone is designed and marketed by Apple, but its hardware
parts are produced in South Korea (application processor in Samsung), Japan (Flash
memory, display module, and touch screen in Toshiba), and Germany (camera module,
GPS receiver in Infineon). At the final production stage, Foxconn, a Taiwanese company,
assembles all the iPhone components and exports the final product to the US and
other countries. According to this production pattern, Apple has reduced the total
landed cost of the iPhone.
(3) Competitive drivers
Manufacturing globalization can be driven by new competitive marketplaces,
transferring from local competitors to global competitors, and strategically competitive
objectives. Most leading automobile firms from Europe, the US, and Japan
manufacture in China, the largest automobile marketplace, in order to compete with
their rivals. European automobile manufactures, currently taking the largest market
share in China, can use the profits obtained in the Chinese market to support
competition in other marketplaces where Japanese and US automobile makers
dominate.
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(4) Technology drivers
Manufacturing globalization can be driven by access to manufacturing technology, technology
diffusion, technology sharing, global R&D activities, and the advancement of logistics and
communication technologies. In September 2012, Wuhan Steel, a leading Chinese steelmaker,
signed a deal to acquire German giant ThyssenKrupp’s subsidiary “Tailored Blanks Unit”, a
world-class leader in “laser-welded” technology, critical for automotive steel manufacturing.
Wuhan Steel purchased the manufacturer to acquire its “laser-welded” technology and develop
high-end automotive steel manufacturing.
(5) Government drivers
Government drivers include bilateral and regional free trade agreements (e.g., the North
American Free Trade Agreement), privatization of state-dominated economies, reduction of
tariff barriers, creation of export processing zones, and establishment of special economic
zones (e.g., Shenzhen SEZ in China, Mumbai SEZ in India, 16 federal economic zones in Russia).
(6) Macroeconomic drivers
Macroeconomic drivers such as the reduction in interest rates, fluctuation in exchange rates,
fluctuation in inflation rates, reduction in unemployment rates, and difference in tax systems
can influence global manufacturing. A firm may build manufacturing facilities in foreign
locations with low interest rates to facilitate investment, exploit low unemployment rates to
hire labor, use low tax rates to reduce costs, and benefit from high economic growth rates to
access potential markets.

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Drivers for Global Service
(1) Global logistics networks
Global logistics networks can improve customer convenience and reduce costs in
service globalization type 1 “movement of service”, type 2 “movement of customers”,
and type 4 “movement of both” (see Sect. 2.4.2). Without advanced global logistics
networks, global service modes such as the “hub and spoke” airline service cannot be
implemented.
(2) Information technology
Information technology is the critical driver in service globalization type 3 “no physical
movement” (see Sect. 2.4.2). Information technologies make information-intensive
(such as financial services, business services, health care, and education) or
information-based services feasible, while technological features enable globalization
to proceed at low costs. For example, online education provides low-cost global
services and resources for adults, children, parents, and teachers. Without information
technologies, this global service would never be realized.

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(3) Service cost
These drivers are of relevance to service outsourcing to seek low labor costs, or
global service modes to seek low-cost service products. Wipro, an Indian firm
headquartered in Bangalore, uses its 130,000 employees to provide world-class
outsourcing services in HR, tax transactions service, information-based services,
and business processing services.
(4) Global economies of scale
When one country is not large enough to allow the optimal scale of a firm, a
firm may seek global economies of scale. For example, even the US market is
still small to achieve the optimal scale for Public Storage, and so the firm goes
global to pursue optimal scale. The global service of McDonald’s is partially
driven by pursuing optimal global economies of scale. With standardizing
service processes, global service providers enter multiple markets to increase
scale. For example, Starbucks has entered multiple countries with different
drinking cultures. By maintaining a relatively standard service process, it has
achieved global economies of scale and accelerated profitable global growth.

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(5) Global channels
The formulation of global distribution helps services go global. For example,
with the support of global distribution, Starbucks has developed a “hub and
spoke” geographic expansion strategy by firstly selecting a large city to serve as
a “hub”, with teams of professionals. Once the construction of the hub has
been completed, additional stores are opened in surrounding “spoke” areas in
the region. Furthermore, the electronic channel plays a critical role in the
globalization of information-based services. For example, financial consulting
sectors can deliver time-sensitive services via the Internet to global customers.
(6) Global customers
The tastes of some customers are globalized, namely they are standardized and
simplified by a certain global service. These global customers further drive the
globalization of service. Starbucks stores offer a choice of regular or
decaffeinated coffee beverages, a broad selection of Italian-style espresso
drinks, a wide selection of fresh-roasted whole-bean coffees, and a selection of
fresh pastries and other food items. These products and services simplify the
array of services and make a group of global customers. Starbucks can thereby
pursue these global customers when they travel or move.

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Drivers for Sustainable Global Operations
(1) Profit driven
Products or services provided by socially and environmentally friendly companies are
likely to be preferred by consumers or regulators. Consequently, these companies may
be able to earn a higher profit by selling higher quantities at a higher price to offset any
increase in costs.
(2) Planet driven
Business leaders are committed to ensuring sustainable resources for future
generations, especially because there is only “one planet” with finite resources and
rapidly growing consumption in developed as well as developing countries.
(3) People driven
MNEs recognize that to succeed in emerging markets, they need to alleviate poverty by
creating businesses or jobs, by educating the poor to increase productivity, and by
developing new ways to use natural resources in a sustainable manner.

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Benefits

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Growth
Operational globalization can boost growth in two aspects:
• The first one is by entering new markets for potential growth. LVMH enters emerging
markets to increase revenue. Huawei enters developed countries to increase market
share in the telecommunication equipment market.
• The second aspect of growth is increasing revenue, market size, and market share in
existing markets. Apple improves its profits in existing markets by operational
globalization such as outsourcing.
Cost Reduction
a company can acquire labor or raw material resources to gain cost
competency, realize economies of scale, realize economies of scope, and
develop a broader range of products and services to reduce total supply chain
costs in design, manufacturing, and distribution costs.

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Knowledge Generation and Acquisition
With operational globalization, a firm can generate and acquire location-specific
marketing knowledge and general knowledge such as technologies and
management expertise. A firm can learn local knowledge from local suppliers,
customers, competitors, foreign research centers, local professional talents, and
knowledge workers. A firm moving from emerging countries to developed
countries can learn advanced technologies and world-class management skills.
Competitive Leverage
Operational globalization provides competitive leverage to attack rivals or
defend positions. A firm can have more options in terms of locations,
technologies, human resources, and business processes to attack or
counterattack.

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Customer Satisfaction
Operational globalization improves customer satisfaction in three ways.
• First, it can increase access to local customers. By understanding local demand, a firm
can improve customer satisfaction.
• Second, operational globalization can reduce the distance to local customers and
improve customer satisfaction by shortening response time.
• Third, global availability by manufacturing globalization and global serviceability by
service globalization can improve the customer satisfaction of global business travelers
and tourists.
Social and Environmental Value Creation
o Reputation
o Moral appeal
o Sustainability
o Global license to operate
o Inspiring innovations

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Risks
Economic Risks
• Foreign exchange risks
• Macroeconomic fluctuations
• Economic policy uncertainties
Political Risks
• Political violence including war, separatism, terrorism, revolution, insurrection, civil unrest, and
extremist movements.
• Governmental expropriation or confiscation of assets, especially in countries with dictatorial
systems.
• Breach of contract by the government.
• Non-honoring of government guarantees.
• Inconvertibility of foreign currency or the inability to repatriate funds.
• Business interruption. A typical interruption is the restriction on FDI outflows in home countries.
Social, Ethical, and Environmental Risks
• Product boycotts
• Worker abuse
• Poor working conditions
• Environmental objections and obstructions
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