chapter 6 \" International Management It was once said that the sun never set on the British Empire. Today, the sun does set on the British Empire, but not on the scores of global empires, including those of IBM, Unilever, Volkswagen, and Hitachi. Lester Brown LEARNING OBJECTIVES CHAPTER OUTLINE After studying Chapter 6, you will be able to: \" The Global Environment European Unification China and the Pacific Rim The Americas The Rest of the World LO 1 Describe how the world economy is becoming more integrated than ever before. p. 200 LO 2 Discuss what integration of the global economy means for individual companies and their managers. p. 207 LO 3 Define the strategies organizations use to compete in the global marketplace. p. 213 LO 4 Compare the various entry modes organizations use to enter overseas markets. p. 218 LO 5 Explain how companies can approach the task of staffing overseas operations. p. 222 LO 6 Summarize the skills and knowledge managers need to manage globally. p. 224 LO 7 Identify ways in which cultural differences across countries influence management. p. 226 Consequences of a Global Economy The Role of Outsourcing Global Strategy Pressures for Global Integration Pressures for Local Responsiveness Choosing a Global Strategy Entry Mode Exporting Licensing Franchising Joint Ventures Wholly Owned Subsidiaries Managing across Borders Skills of the Global Manager Understanding Cultural Issues Ethical Issues in International Management Management Close-Up HOW CAN IRENE ROSENFELD REFORMULATE KRAFT FOODS? Kraft Foods was struggling in 2006. The world's secondKraftRosenfeld announced a three-year plan designed largest food and beverage companyfounded in 1903 to reorganize the company. and the home of venerable brands like Oreo, Chips Under the turnaround plan, Kraft would focus on its Ahoy!, Oscar Mayer, and Grey Pouponwas experienccheese, snacks, and beverage lines. To accomplish this, ing slumping sales. With American consumers becoming it would close some factories, cut jobs, and sell off sevmore health conscious about eral brands. Her plan included their food choices, suddenly investing as much as $400 milAs she took the reins at Kraft Foods, many Kraft brands were losing lion in marketing and research Irene Rosenfeld declared, \"I genuinely their appeal. To add to the comand development. The turnlove this company, its brands, its people, pany's troubles, sales in develaround, said Rosenfeld, would and its values.\" But the once-great comoping countries were weak. It require aggressive product pany had fallen behind its competitors also didn't help that Kraft was development beyond existing and was in bad shape. Would Rosenowned by Altria Group, one lines. Aside from its North feld's lovecombined with her manageof the world's largest tobacco American markets, clearly one ment skills and experiencebe enough companies. Kraft Foods needed of the greatest opportunities to turn it around? As you read this chapa changeand it got one in for growth lay overseas. ter, consider the unique strategy Irene the form of Irene B. Rosenfeld, Could the plan transform Rosenfeld deployed to capture market named CEO in June of that year. Kraft? Rosenfeld remained share globally. Rosenfeld is a seasoned vetsteadfast, saying it would take eran of the food and beverage about two years for the turnindustry. She had spent 20 years around plan to begin showing at Kraft and General Foods in a variety of senior solid results. She emphasized the need for the entire positions, leading successful turnaround and restruccompany to focus on innovation and to rethink its turing efforts in business units in the United States, approach by considering less what its items contained Canada, and Mexico. Months after taking her place as and more what its consumers wantedincluding those CEOand shortly before Altria's long-awaited sale of in global markets.1 { } 200 Part Two Planning: Delivering Strategic Value The Global Environment LO 1 The global economy is becoming more integrated than ever before. For example, the World Trade Organization (WTO), formed in 1995, now has 153 member countries involved in more than 95 percent of the world's trade. The newest members are Cambodia, Nepal, Russia, Saudi Arabia, Tonga, Ukraine, and Viet Nam. (The International Monetary Fund, set up by the United Nations in 1945, serves a similar purpose and includes 185 countries.) The WTO provides a forum for nations to negotiate trade agreements and procedures for administering the agreements and resolving disputes. Issues that are currently under negotiation because they have been difficult for the parties to resolve include objections to environmental regulations and subsidies to farmers in developed countries, on the grounds that they conflict with free trade. To follow how these issues are playing out, you can explore the \"Trade Topics\" section of the WTO Web site, http://www.wto.org. The global economy is dominated by countries in three regions: North America, western Europe, and Asia. However, other developing countries and regions represent important areas for economic growth as well. Figure 6.1 shows the major international trade areas and countries of the world. European Unification Europe is integrating economically to form the biggest market in the world. Under the Maastricht Treaty, which formally established the European Union (EU), the euro was adopted as a common currency among 13 member countries. Currencies with a long history like the franc and the mark are now relics of the past. The EU is also working on a common constitution, and it allows most goods, services, capital, and human resources to flow freely across its national borders. The goal of unification is to strengthen Europe's position as an economic superpower, particularly vis--vis the United States. And the EU may have good prospects for eventually doing so, with 27 members and counting, a population of more than 490 million, and a GDP (gross domestic product) at least as big as that of the United States.2 The pace of European unification accelerated in 2004, with the addition of former Eastern-bloc countries including Poland and Hungary, and in 2007 Bulgaria and Romania joined. Many of these new members offer a particular challenge to full integration, because as former Communist countries they do not have extensive experience as modern market economies. Other even less wealthy countriesCroatia, Macedonia, and Turkeyhave also applied to join the EU. In addition to the difficulty of integrating widely divergent economies, certain structural issues within Europe need to be corrected for the EU to function effectively. In particular, western Europeans on average work fewer hours, earn more pay, take longer vacations, and enjoy far more social entitlements than do their counterparts in North America and Asia. To be competitive in a global economy, Europeans must increase their level of productivity. In the past, powerful trade unions fiercely defended social benefits, and local governments regulated the labor markets. Some labor markets are slowly being deregulated and more incentives are being offered to create jobs. Deregulation of financial services has already made London a major banking center, attracting an influx of foreign banks, and has permitted the growth of insurance giants such as AXA (based in France), Allianz (Germany), and Generali (Italy).3 But other problems will present even greater challenges, such as Europe's aging population, low birth rates, and low immigration, all of which are threatening to cause Europe's population to drop, even as America's is increasing. Still, unification is creating a more competitive Europe, one that U.S. managers will increasingly have to take into account. One reason is that although growth in the developed economies of western Europe has been modest, it is strong in the eastern part of the continent. Companies are investing in Poland, the Czech Republic, International Management CANADA UNITED STATES MEXICO MAJOR DEVELOPING DEBTOR NATIONS (Countries that have foreign debts to banks or official institutions such as the IMF and World Bank) ARGENTINA BRAZIL COLOMBIA EGYPT KOREA PERU PHILIPPINES POLAND VENEZUELA GROUP OF FIVE (Top five industrial nations in the view of the World Bank and IMF) UNITED STATES BRITAIN FRANCE GERMANY JAPAN 201 Chapter 6 RUSSIA GREAT BRITAIN NEWLY EMERGING DEMOCRACIES FRANCE JAPAN CHINA INDIA HONG KONG TAIWAN PHILIPPINES SINGAPORE COLOMBIA INDUSTRIALIZED COUNTRIES PERU BRAZIL CHILE ARGENTINA MIDDLE-INCOME DEVELOPING COUNTRIES (Developing nations that can borrow sizable sums of money from commercial banks) SOUTH AFRICA BIG EMERGING MARKETS CHINA INDIA BRAZIL MEXICO INDONESIA KOREA TURKEY THAILAND ARGENTINA POLAND MAJOR OIL-EXPORTING COUNTRIES (Economies based on petroleum) LESS-DEVELOPED COUNTRIES (Per capita income is less than $410 a year or they cannot borrow money on the open market) SOURCE: Michael R. Czinkota and Ilkka A. Ronkainen, International Marketing, 7th ed. (Mason, OH: Thomson/South-Western, 2004), p. 91. Adapted and updated from \"The Global Economy,\" The Washington Post, January 19, 1986, H1. Reprinted with permission. Romania, and nearby countries because of their relatively low wages, trained workers, and access to markets. Nokia, the Finland-based maker of telecommunications equipment, is building a factory in Romania, where it can provide products not only to European customers but also to Africa and the Middle East. Moving from the other direction, Chinese and Taiwanese companies have seen central Europe as a convenient and affordable location for building facilities to develop their positions in Europe. For example, Sichuan Changhong, a Chinese electronics company, is building a factory in Numburk, Czech Republic, and Foxconn, a Taiwanese maker of components for name-brand computers, operates a factory in the Czech city of Pardubice.4 The EU also presents a regulatory challenge to the United States and other countries. For example, the EU has supported excluding genetically engineered food products from American firms, over objections from the WTO. It has fined Microsoft for what it says are unreasonable prices Microsoft charges rival software firms to give them the information and documentation they need to develop products compatible with the Windows operating system. The EU required the documentation as a remedy to remove its antitrust charges.5 In another antitrust case, the EU launched an investigation of the proposed merger between music companies Sony and Bertelsmann; other FIGURE 6.1 The Global Economy Globalization requires improvements in all bottom-line practices. 202 Part Two Planning: Delivering Strategic Value potential business deals in the industry are on hold as managers watch to see what the EU will require in that case.6 The EU's more competitive and regulatory environment clearly presents new challenges to managers and their employees. Managers in U.S. companies that wish to export to that market must become more knowledgeable about the new business environment the EU is creating. Management and labor will have to work cooperatively to achieve high levels of quality to make U.S. goods and services attractive to consumers in Europe and other markets around the world. The United States needs managers who will stay on top of worldwide developments and manage high-quality, efficient organizations as well as a well-educated, well-trained, and continually retrained labor force to remain competitive with the Europeans and other formidable competitors. China and the Pacific Rim Among the Pacific Rim countries, and particularly in the United States, Japan dominated world attention toward the end of the last century. Today Japan is America's fourth-largest export market, after Canada, China, and Mexico, as you can see in Figure 6.2. And Japan is in fourth place as a source of U.S. imports. Japanese companies like Toyota are both a major source of goods and, as competitors, a growing influence in the ways U.S. managers seek quality and efficiency. As successful as Japan is, a bigger force is rising in Asia: China. With the world's largest population and increasing industrialization, China is on its way to becoming the largest producer and consumer of many of the world's goods. Its large and growing demand for oil is a cost factor that managers everywhere must consider in their longrange planning. The country has also become the world's largest consumer of basic raw materials like steel and cement, as well as the world's largest cell-phone market. Exports from the United States $400 Imports into the United States Billions of Dollars $300 $200 $100 $0 FIGURE 6.2 Top U.S. Trading Partners, Based on Total Imports and Exports Canada China Mexico Japan Germany United Kingdom SOURCE: U.S. Census Bureau, Statistical Abstract of the United States: 2009, http://www.census.gov. International Management Not only is China the largest source of imports to the United States (see Figure 6.2), but it is on track to surpass the United States as the world's second-largest exporter overall, after Germany.7 As a consuming nation, China's appeal to managers lies in its large population of 1.3 billion people and its extremely rapid economic growth. Even as global economic growth stalled during the recent financial crisis, China's economy continued expanding. During the past decade, it has tripled its imports and quadrupled its exports. The nation was recently ranked as the world's second-largest exporter and third-largest importer, primarily trading manufactured goods but also importing huge quantities of materials used in manufacturing and construction.8 Several American companies have invested heavily in the Chinese market, with some success. Intel recently announced plans to build a silicon wafer fabrication factory in Dalian, China. Building the facility is an element of Intel's strategy to operate closer to China's information technology market, which the company predicts may become the world's largest. The company already operates laboratories and testing and packaging facilities in China.9 Microsoft and Chinese computer-maker Lenovo have entered into a partnership in an effort to expand in the Chinese market, as well. Several U.S. and European companies have sensed opportunity in the estimated 300 million Chinese people learning Englishand presumably many millions more who want to learn, given the chance. British publisher Pearson PLC and Sweden-based school operator English First SV have emphasized adult education, but Walt Disney Company sees a profitable niche market in teaching children. Disney has opened a chain of Disney English schools in Shanghai and drawn up plans to operate in Beijing. Managers insist that the mission of the schools is simply to teach English to Chinese children, but that mission requires books and worksheets, and they just happen to be populated with Buzz Lightyear, Ariel the Mermaid, and other characters from Disney's movies. Young students can earn rewards such as stickers and CDs featuring Disney characters and productions. Rather than being repelled by the marketing angle, Chinese parents see a chance for their children to learn from a company that is familiar and truly international. For Disney, the schools offer an opportunity to connect with families in an environment that is otherwise politically tricky. While the Chinese government limits movie and television distribution of Disney productions, Disney English can offer students all the Disney-themed worksheets, backpacks, and toys they need to develop a lasting love for Mickey Mouse.10 Even with its growing consumption, it is in its role as an exporting nation that China has had an even greater global impact. The enormous size of its labor force, combined with its extremely low labor costs, has given it a huge competitive advantage in manufacturing. Estimates suggest that labor costs in China are less than $1 an hour, compared with $2.92 for manufacturing workers in Mexico and $24.59 for manufacturing workers in the United States.11 These low wage rates have led many managers to relocate operations to China or to import an increasing number and variety of Chinese products instead of continuing to do business with local manufacturers. This trend is one reason that the value of U.S. imports from China is more than five times the value of U.S exports to China. This type of trade imbalance may well have contributed to the loss of manufacturing jobs in the United States and Europe. But it has also led to the continuing availability of comparatively low-priced goods, helping consumers everywhere and leading to overall economic and job growth at home. Yet, jobs in certain industries, such as textiles, may have been transferred abroad permanently to lower-cost producers like Chapter 6 203 204 Part Two The world's leading toy maker, Mattel Inc., has announced three recalls of Chinese-made toys, saying it would take back more than 800,000 units globally that contain \"impermissible\" levels of lead. Now India has specifically banned the import of all Chinese toys for six months, citing public safety and health concerns. Chinese toys dominate a 50 percent market share in the Indian toy industry, with an estimated value of more than $500 million in 2007. How might this affect their ability to continue to offer quality, low-price products? Planning: Delivering Strategic Value China and India. Those affected workers and communities experience real hardships. We will be discussing the effects of outsourcing or offshoring in more detail later in this chapter. Threats to China's growing dominance include political instability, as the growing prosperity of its cities and industrial enclaves leave millions of poor rural residents further behind. Also, countries that have experienced job loss may face growing pressure to restrict Chinese imports, particularly in the EU, with its strong labor unions. But for the foreseeable future, China's growing presence in the world economy, as an importer and exporter, is one that you as a manager will increasingly have to take into account. Other rapidly growing countries in the region that have strong trade relationships with the United States include South Korea, Taiwan, and Singapore. These countries are important trading partners not merely because of their wage rates but because many of their companies have developed competitive advantages in areas such as engineering and technological know-how. South Korea's Samsung has the largest share of the world's markets for flat-screen televisions and flash memory cards, and Taiwan's Hon Hai is the leader in contract manufacturing of electronics. The reason you may not have heard of Hon Hai is that it specializes in making components for brand-name products of other companies, including Sony (PlayStations), Apple (iPods), and Dell (computers).12 These Asian countries and others have joined with the United States, Australia, and Russia to form the 21-member Asia-Pacific Economic Cooperation (APEC) trade group. Combined, APEC members' economies account for more than half of world output (GDP) and almost half of world trade.13 In recent years the APEC countries have been working to establish policies that encourage international commerce and reduce trade barriers. APEC members address these objectives through dialogue and nonbinding commitments, rather than treaties. Another international organization, the Association of Southeast Asian Nations (ASEAN), brings together 10 developing nations, including Indonesia, Malaysia, and the Philippines. Along with economic development, ASEAN is aimed at promoting cultural development and political security. The Americas North American Free Trade Agreement (NAFTA) An economic pact that combined the economies of the United States, Canada, and Mexico into one of the world's largest trading blocs. North and South America constitute a mix of industrialized countries, such as Canada and the United States, as well as countries with growing economies, such as Argentina, Brazil, Chile, and Mexico. The winter fruit you eat may come from Chile, the coffee you drink from Jamaica, and the shirt you wear from Honduras. Increasingly, businesses are looking to establish freer trade among countries in the Western Hemisphereand with other parts of the world. The North American Free Trade Agreement (NAFTA) combined the economies of the United States, Canada, and Mexico into one of the world's largest trading blocs with nearly 400 million U.S., Canadian, and Mexican consumers and a total output of $6.5 trillion. By 2008, virtually all U.S. industrial exports into Mexico and Canada were duty-free. Although the United States has had a longer-standing agreement with Canada, Mexico has quickly emerged as the United States's third largest trading partner as a result of NAFTA. U.S. industries that have benefited in the short run International Management include capital-goods suppliers, manufacturers of consumer durables, grain producers and distributors, construction equipment manufacturers, the auto industry, and the financial industry, which now has privileged access into a previously protected market. Besides importing and exporting, companies in the NAFTA countries have invested in facilities across national borders. Mexico-based CEMEX, the world's third-largest cement company, is actually the largest cement supplier in the United States. Twenty-two percent of CEMEX's employees and 27 percent of its sales are in the United States, and it conducts management meetings in English because the majority of its employees do not speak Spanish.14 Economic growth and the easing of import restrictions have also caused trade to rise in South American countries, particularly in agricultural products. Brazil has become the world's largest exporter of orange juice, coffee, and tobacco, and by 2015 it expects to replace the United States as the largest agricultural producer overall. As in Asia, more South American companies are relying on innovation and technology rather than simply cost to compete in the global marketplace. For example, Brazil's Embraer is known as an innovator in the aerospace industry; it operates its own graduate program in aerospace engineering to keep its employees knowledgeable in the latest technology.15 And one reason that Argentina's Tenaris is the global leader in the market for oil pipes is that management of a predecessor company, Siderca, decided to focus on building a global network of facilities that could research customer needs, develop products, and deliver pipes just as needed by their customers. This focus gave Siderca, now part of Tenaris, a competitive advantage.16 Other agreements have been proposed to promote trade with Central and South America. In 2005, President George W. Bush signed into law U.S. participation in a Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR). Other nations that have agreed to participate include Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. CAFTA-DR creates the second-largest free-trade zone with the United States (NAFTA being the largest). As part of the negotiations for CAFTA-DR, Central American nations promised to protect workers' rights in their countries. Complaints that some countries have not delivered on this promise are making further trade negotiations with Peru, Colombia, and Panama more difficult to sell to the U.S. Congress.17 Still, those country-by-country talks remain a priority, because talks aimed at going beyond NAFTA to create a Free Trade Area of the Americas (FTAA), extending from Canada to Chile, have recently stalled.18 At the same time, the countries of South America have formed their own trading bloc, called Mercosur, to promote trade among nations of that continent. The Rest of the World We can't begin to fully discuss all the important developments, markets, and competitors shaping the global environment. India, for example, has become an important provider of online support for computer software, software development, and other services. Given that country's fast-growing economy and huge populationthe world's second largestmore U.S. businesses are beginning to see India as a source of customers as well as workers. Citigroup, for example, has made plans to open more Chapter 6 205 Among the list of the greatest places to work in Mexico are several U.S.-based companies, including McDonald's, which ranked as the 9th best company in 2007. 206 Part Two Planning: Delivering Strategic Value branches in India and expand service such as microfinance (small loans), as well as to add thousands more staff members there.19 These trends leave huge and promising areas of the worldthe Middle East, parts of South America, and much of Africathat have not yet participated as much in globalization. These regions account for a major share of the world's natural resources, and managers are watching the global environment, looking for areas with potential. The \"From the Pages of BusinessWeek\" feature describes another example of the importance of global business to today's organizations. Ford identified an opportunity in Russia that has enabled the company to ride a wave of growth there even as demand for its vehicles has stagnated at home. Coffee manufacturers have long conducted business with coffee growers in South America and Africa. And Starbucks has been focused on global growth, expanding its operations to roughly 3,000 stores in 40 countries, and finding new coffees to tempt customers. But expansion hasn't come without challenges. Recently, Starbucks and the Intellectual Property Office of Ethiopia have been mired in a disagreement over the name of one coffee Shirkana Sun-Dried Sidamo. Starbucks has applied for trademark status for that name, and Ethiopia is seeking protection from that trademark. The reason? Ethiopian officials believe their country deserves trademark status for the coffee that is produced there, despite the fact that Starbucks applied for it first. \"There is clearly an intangible value in the specialty coffee of Ethiopia,\" explains Getachew Mengistie of the Intellectual Property Office. \"But it's not being captured here.\" Regardless of the outcome of the dispute, Ethiopia is taking a standand hoping to claim its placein the world coffee market.20 F R OM T H E P AG E S OF They've Driven a Ford Lately You would think the world's most successful Ford dealer might be in, say, Detroit or Los Angeles. Think again. Last year, New York Motors, on a commercial strip in southwest Moscow, sold more Fords than any other dealership in the world. All told, salesmen in the crowded showroom moved 10,060 vehicles, helping Ford race past rivals Hyundai, Toyota, and Chevrolet to become the top-selling auto nameplate in Russia. \"This record has pleased and amazed everyone,\" says Andrey Pavlovich, general director of New York Motors. \"Last year was a boom year.\" The brand's success in Russia stands in striking contrast to Ford Motor Company's flagging fortunes elsewhere. The automaker clocked a global loss of $12.7 billion last year, but sales of Ford-branded vehicles in Russia soared 92 percent, to 115,985 cars and trucks, for some $2 billion in revenues. That's partly due to Russia's thriving economy, which has stoked strong demand for foreign models. Last year, foreign brands outsold domestic nameplates for the first time, topping 1 milliona 65 percent increase from 2005 and 20 times the level in 2000, according to the Association of European Businesses in Moscow. Ford, though, has done more than simply ride the market wave. In 1999, Ford made a big bet on Russia, spending $150 million on a plant near St. Petersburgthe country's first foreign-owned auto factory. The facility opened in 2002, and last year production climbed to 62,400 Focus sedans, hatchbacks, and wagons. \"When this decision was taken, in '99, it was of course very daring,\" says Henrik Nenzen, president of Ford Russia. \"But Ford saw that this market would come. . . . And they knew that they needed to enter [it].\" Ford's growing network of dealerships is helping boost sales, too. The company now has 150 outlets, some as far away as Vladivostok on the Pacific coast and Murmansk in the far north. International Management Chapter 6 207 Ford may face a bumpier ride from here on out. Competition is heating up as rivals copy Ford's strategy of local production. Volkswagen, Toyota, General Motors, and Fiat have all announced plans to build plants in Russia. Worse, Ford workers in St. Petersburg, who earn about $650 per month, walked off the job for one day in February 2007 after rejecting an offer of a 14 percent to 20 percent pay raise, interest-free loans, and other benefits. Talks were set to continue. Still, local production has helped Ford keep prices down. Although about 80 percent of the parts used in the Focus are imported, the company sells the cars for as little as $13,000, or about $3,000 less than similarly equipped imports, which are subject to a 25 percent duty [tax on imports]. While that's not exactly pocket change in Russia, it's low enough for a growing number of middle-class consumers. Anton Rabotonov, a 28-year-old Moscow economist kicking tires at New York Motors, chose a Focus with air conditioning, antilock brakes, and air bags for $18,950. To pay for his new wheels, Rabotonov is taking advantage of another Ford innovation in Russia: consumer credit. Ford offers two- and three-year car loans at interest rates of just 4.9 percent, a bit more than half the current inflation rate of 9 percent. As far as Rabotonov is concerned, it all adds up to a bargain. \"I have driven Russian cars,\" he says. \"Of course, a Ford is much more comfortable.\" SOURCE: Excerpted from Jason Bush, \"They've Driven a Ford Lately,\" BusinessWeek, February 15, 2007, http://www.businessweek.com. Consequences of a Global Economy The increasing integration of the global economy has had many consequences. First, even as the output of the world's economies surged during the middle of the past decade, international trade expanded even faster. When trouble in the financial industry sparked an economic downturn, European and North American imports declined, and other world trade growth slowed. But those trends are expected to be temporary, eventually reversing as economic conditions improve.21 Years of emphasis on international commerce by major industrial countries; recent liberalized trading brought about by NAFTA, EU, and APEC; as well as market reforms in China have resulted in lowering the barriers to the free flow of goods, services, and capital among nationstates. The impact of these trends is staggering. The dollar value of international trade (merchandise exports and commercial services) is over $16 trillionup from just a few hundred billion dollars in the 1960s and 1970s. For example, Figure 6.3 shows how the international trade of the United States (particularly for goods) increased relative to the country's output since 1990. The dollar value of trade in goods grew from 12 percent to almost 18 percent of the country's total output of goods, even as total U.S. output also grew. Most experts expect competition to increase as trade is liberalized, and as is often the case, the more efficient players will survive. To succeed in this industrial climate, managers need to study opportunities in existing markets, as well as work to enhance the competitiveness of their firms. A second consequence of increased global integration is that foreign direct investment (FDI) is playing an ever-increasing role in the global economy as companies of all sizes invest overseas. In particular, the foreign direct investment flows to lessdeveloped countries by firms in developed countries has risen substantially.22 Investment by foreign companies and individuals in U.S. firms is also huge: $1.5 trillion, almost four times the 1990 level, with the majority coming from European investors. In recent years, the United States has received more foreign direct investment than any other country.23 To give two examples, the Chinese computer maker Lenovo purchased IBM's personal-computer business, and brewing company SABMiller is now under South African ownership.24 In recent years, China's role as an export LO 2 208 Part Two Planning: Delivering Strategic Value Percent 18 16 14 Goods exports as a share of total goods produced 12 FIGURE 6.3 Growing Proportion of Goods Being Exported 0 1990 1995 2000 2006 SOURCE: Data from U.S. Bureau of Economic Analysis, as cited in James C. Cooper, \"Exports Are Giving the Economy a Surprise Lift,\" BusinessWeek, November 27, 2006, http://www.businessweek.com. powerhouse has allowed the Chinese government to amass about $1 trillion in foreign exchange reserves, of which it is expected to invest hundreds of billions of dollars.25 A third consequence of an increasingly integrated global economy is that imports are penetrating deeper into the world's largest economies. For example, a high percentage of the clothing and textile products, paper, cut diamonds, and electronics consumed in the United States are imported. If you buy power tools with the Ryobi, Milwaukee, and RIGID brands, they were made by Hong Kong's Techtronic Industries. The topselling brand of compact refrigerators and number-three maker of freezers is a Chinese company called Haier, which is preparing to move into more-upscale appliances.26 Figure 6.4 shows how the world trade of manufactured merchandise has grown relative to other product groups. The growth of imports is a natural by-product of the growth of world trade and the trend toward the manufacture of component parts, or even entire products, overseas before shipping them back home for final sale. Finally, the growth of world trade, FDI, and imports implies that companies around the globe are finding their home markets under attack from foreign competitors. This is true in the United States, where Japanese automakers have captured market share from General Motors, Ford, and Chrysler; and in western Europe, where the oncedominant Dutch company Philips N. V. has lost market share in the consumer electronics industry to Japan's JVC, Matsushita, and Sony. What does all this mean for today's managers? Compared with only a few years ago, opportunities are greater because the movement toward free trade has opened up many formerly protected national markets. The potential for export and for making direct investments overseas is greater today than ever before. The environment is more complex because today's manager often has to deal with the challenges of doing business in countries with radically different cultures and coordinating globally dispersed operations. The environment is more competitive because in addition to domestic competitors, the manager must deal with cost-efficient overseas competitors. Companies both large and small now view the world, rather than a single country, as their marketplace. As Table 6.1 shows, the United States has no monopoly on international business. Of the top 25 corporations in the world, 16 are based in countries outside the United States. Also, companies have dispersed their manufacturing, marketing, and research facilities to those locations around the globe where cost and International Management 209 Chapter 6 Volume indices, 1950 = 100 Logscale 10,000 Manufactures 1,000 Fuels and mining products Agricultural products 100 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 SOURCE: World Trade Organization, \"Selected Long-Term Trends,\" International Trade Statistics 2006, pp. 25-32, http://www.wto.org. FIGURE 6.4 skill conditions are most favorable. This trend is now so pervasive in industries such as automobiles, aerospace, and electronics that it is becoming increasingly irrelevant to talk about \"American products\" or \"Japanese products\" or \"German products.\" For example, the headquarters of an automaker no longer says much about where a particular car is made. According to the National Highway Traffic Safety Administration, despite the Jeep Patriot's red-white-and-blue name, only 66 percent of its components are made in the United States. In contrast, although Toyota is a Japaneseheadquartered company, 80 percent of the parts in a Toyota Sequoia are produced in the United States. A U.S. headquarters doesn't limit a U.S. car company either. General Motors reports that it employs more people, sells more cars, and sees its best growth prospects outside the United States.27 Such internationalization is not limited to the largest corporations. An increasing number of medium-size and small firms also engage in international trade. Some companies have limited their involvement to exporting, while others set up production facilities overseas. Jade Corporation, which started out as a tool-and-die maker, operates three facilities with a few hundred employees. The company found it difficult to compete as U.S. manufacturing operations moved overseas, but creative management continued to find opportunities. As the company moved into making more specialized products, it developed its engineering capabilities and its experience in working with a Singapore manufacturer. Eventually, Jade began working with clients to set up manufacturing facilities in Asia. Jade employees first learn about the customer's product and the way to make it, and then they use their overseas connections to get the customer's foreign plant running.28 Responding to the dominance of English on the Internet, an Israeli software start-up developed a program called WhiteSmoke, which uses artificial intelligence to analyze written English, not only checking for spelling and grammar errors but also suggesting ways to make the writing clearer and more natural. The company originally found a customer base among Israeli lawyers and tech workers. Since then, the ease of downloading a program online has expanded the market to computer users in the United States. The company next began negotiating with Relative Growth in World Merchandise Trade by Major Product Group, 1950-2005 210 Part Two Planning: Delivering Strategic Value TABLE 6.1 Top 25 Global Firms Rank Firm Country Revenues, Millions of U.S. $ 1 Royal Dutch Shell Netherlands 458,361 2 Exxon Mobil U.S. 442,851 3 Wal-Mart Stores U.S. 405,607 4 BP Britain 367,053 5 Chevron U.S. 263,159 6 Total France 234,674 7 ConocoPhillips U.S. 230,764 8 ING Group Netherlands 226,577 Sinopec China 207,814 10 9 Toyota Motor Japan 204,352 11 Japan Post Holdings Japan 198,700 12 General Electric U.S. 183,207 13 China National Petroleum China 181,123 14 Volkswagen Germany 166,579 15 State Grid China 164,136 16 Dexia Group Belgium 161,269 17 ENI Italy 159,348 18 General Motors U.S. 148,979 19 Ford Motor U.S. 146,277 20 Allianz Germany 142,395 21 HSBC Holdings Britain 142,049 22 Gazprom Soviet Union 141,455 23 Daimler Germany 140,328 24 BNP Paribas France 136,096 25 Carrefour France 129,134 SOURCE: From http://money.cnn.com/magazines/fortune/global/500/2009/fullist 2009 Time Inc. All rights reserved. outsourcing Contracting with an outside provider to produce one or more of an organization's goods or services. offshoring Moving work to other countries. distributors to sell WhiteSmoke in China and India. The global nature of the Internet has provided both the need and a major means of distributing WhiteSmoke.29 Some of the reasons managers collaborate with their overseas counterparts on trade are obvious. Other countries offer expanded markets for one's own products. In turn, they might have natural resources, products, or cost structures that managers need but that aren't available in the home country. But there are other, perhaps less obvious, benefits to collaborating with other countries on trade. Because trade allows each country to obtain more efficiently what it cannot as easily produce on its own, it lowers prices overall and makes more goods more widely available. This in turn raises living standardsand may broaden the market for a manager's own products, both locally and abroad. Trade also makes new technologies and methods more widely available, again raising the standard of living and improving efficiency. Finally, collaborating with others on trade creates links between people and cultures that, particularly over the long run, can lead to cooperation in other areas. The Role of Outsourcing In recent years, the issues of offshoring and outsourcing have become sources of controversy. Outsourcing occurs when an organization contracts with an outside provider to produce one or more of its goods or services. Offshoring occurs when companies International Management move jobs to another country, typically where wages are lower. This practice does not necessarily require using an outside provider. Companies with large workforces can resource globally. However, most of the concerns expressed about offshoring refer to outsourcing, because people conclude that high-paying U.S. jobs are being lost to low-cost countries overseas. The concern is prompted by widespread reports of major corporations relocating assembly lines, computer programming, help centers, and other parts of their operations to India or China. One study has estimated that by 2015 more than 3 million U.S. jobs will be sent abroad.30 More recently and dramatically, economist Alan Blinder has raised the possibility that communication technology will lead to the offshoring of at least 30 million jobs over the longer term. For example, the work of bookkeepers, accounting clerks, computer programmers, data entry keyers, and financial analysts can be performed anywhere and submitted to the customer or employer electronically.31 The decline in manufacturing employment in the United States is evident. In the first six years of this decade, the United States lost 2 million manufacturing jobs, as well as 1.6 million office and administrative support jobs. But considerable evidence suggests that the cause of this job decline is not offshoring, but innovation. Because of new technology and processes, managers simply need fewer workers to produce the same quantity of goods. Even as manufacturing employment has declined, manufacturing output in the United States has grown. In addition, technology and trade enable the creation of new jobs. Even as manufacturing jobs have been lost, the United States has gained millions of new jobs, including 3.2 million service jobs, 2.5 million professional jobs, and 1.3 million managerial jobs. Thus, the important question may not be how to prevent offshoring from \"taking\" jobs but how to prepare the workforce for the types of jobs that will be needed in the United States of the future jobs requiring personal interaction (such as the work of doctors or counselors), hands-on activity (plumbers, janitors), and tailoring to particular situations (identifying a clients' needs, rather than following a routine).32 The statistics on offshoring often overlook that the job transfers from offshoring represent a small fraction of the 135 million jobs in the United States. Most jobs require workers to be close to their marketspeople still shop at their local supermarket and appliance dealer, visit their doctors, and attend a community school. Perhaps most important, as offshoring increases efficiency, it frees funds for expansion and additional employment. The challenge is primarily one in which individual workers are deeply affected when their jobs are lost. Some organizations determine that they have a social responsibility to participate in retraining programs to help these displaced workers identify and prepare for jobs that are less likely to move overseas. The controversy over offshoring also overlooks the extent to which foreign companies hire workers in the United Statesfor example, when Germany's BMW runs a South Carolina assembly plant for its X5 sport utility vehicle. One less positive effect of offshoring has been wage stagnation in industries where offshoring is common, as workers in those areas compete with their lower-wage counterparts abroad. On the other hand, wages in some of those other countries have Chapter 6 211 An increasing number of American companies are outsourcing and offshoring divisions and departments of their organizations to save money. Many call centers are now located in India where wages are still much lower than in the U.S. Here is a photo of a typical call center in Hyderabad, India. 212 Part Two Planning: Delivering Strategic Value started to rise, reducing the benefits of offshoring.33 Some firms in India have actually begun to offshore some of their work to stay competitive. In recent years automation has reduced the percentage of prod\"Competitiveness is not a zero-sum game and the success of other economies is not uct costs that can be attributed to a failure of U.S. competitiveness. As all nations improve their productivity, wages rise and markets expand, creating the potential for rising prosperity for all.\" labor, making it less necessary to Michael Porter34 consider moving jobs overseas. Also, managers who offshore to achieve wage savings alone often incur unexpected additional costs in travel, training, quality control, language barriers, and the resistance of some customers who prefer to deal with local personnel. However, offshoring is a continuing trend, because in some cases it delivers advantages other than cost. For some types of work, companies use offshoring as a way to find talent that is in short supply at home. A survey of software firms found that the main reasons for offshoring were to enable the company to grow and to get products to market faster. The companies either have difficulty finding enough programmers in the United States, or they determine that they can keep a project moving ahead around the clock as U.S. and overseas teams hand the project back and forth. Similarly, by outsourcing a project to a specialist firm, a company can quickly have hundreds of people devoted to it, dramatically shortening the turnaround time.35 In short, in deciding whether to offshore, managers should not start out with the assumption that it will be cheaper for them to do so. Instead, here are some of the factors they might take into account: What is the competitive advantage of the products they offer? If, say, rapid delivery, reliability, and customer contact are paramount, then offshoring is a less attractive option. But if the product is widely available and standardized, like a calculator, and the only competitive advantage is price, the lowest possible production cost becomes essential and offshoring becomes something managers will consider. Is the business in its early stages? If so, offshoring may well be inappropriate, as managers need to stay close to the business and its customers to solve problems and make sure everything is going according to plan. When the business is more mature, managers can afford to consider moving some operations overseas. Can production savings be achieved locally? Automation can often achieve significant labor-cost savings and eliminate the advantage of moving production abroad. Where automation savings are not feasible, as with computer call centers, then offshoring becomes a more attractive option. Can the entire supply chain be improved? As we discussed in Chapter 2, enormous productivity savings are possible when managers develop an efficient supply chain, from suppliers to manufacturing to customers. These improvements permit both lower cost and high customer responsiveness. If the supply chain is not a major consideration, or is already highly efficient or routine, and more savings are needed, then offshoring may be one way for managers to achieve additional efficiencies.36 These considerations lead to a variety of decisions about where to operate. Hayward Pool Products makes some of its products in China but constantly improves the efficiency of its U.S. factories so that they can do more of the work competitively. And while most clothing sold in the United States today comes from the Asia-Pacific region, Brooks Brothers makes men's ties in New York City, where it can continually adjust production and inventory according to which designs are selling the fastest. For companies selling large volumes or bulky products, a key deciding factor has been transportation costs. When oil prices recently spiked, DESA, which makes heaters, and Emerson, which makes electrical equipment, moved a sizable share of their production from China to North America.37 International Management 213 Chapter 6 Global Strategy One of the critical tasks an international manager faces is to identify the best strategy for competing in a global marketplace. To approach this issue, managers can plot a company's position on an integration-responsiveness grid, such as that shown in Figure 6.5. The vertical axis measures pressures for global integration, and the horizontal axis measures pressures for local responsiveness. LO 3 Pressures for Global Integration Pressures for global integration Managers may have several reasons to want or need a common, global strategy, rather than one tailored to individual markets. These factors include the existence of universal needs, pressures to reduce costs, or the presence of competitors with a global strategy. Universal needs create strong pressure for a global strategy. Universal needs exist when the tastes and preferences of consumers in different countries with regard to a product are similar. Products that serve universal needs require little adaptation across national markets; thus, global integration is facilitated. This is the case in many industrial markets. For example, electronic products such as semiconductor chips meet universal needs. Certain basic foodstuffs (like colas) and appliances (like can openers) are also increasingly available and regarded in similar ways globally. Competitive pressures to reduce costs may cause managers to seek to integrate manufacturing globally. Cost can be particularly important in industries in which price is the main competitive weapon and competition is intense (e.g., as with hand-held calculators). It is also important if key international competitors are based in countries where labor and other operating costs are low. In these cases, products are more likely to be standardized and perhaps produced in a few locations to capture economies of scale. The presence of competitors engaged in global strategic coordination is another factor that creates pressures for global integration. For example, a competitor that centrally coordinates the purchase of raw materials worldwide may achieve significant price reductions compared with firms that allow subsidiaries to handle purchases locally. Global competition can often create pressures to centralize in corporate headquarters certain decisions being made by different national subsidiaries. And once one multinational company adopts global strategic coordination, its competitors may be forced to do the same. GLOBAL Low Specialized facilities permit local responsiveness. Complex coordination mechanisms provide global integration. INTERNATIONAL High MULTINATIONAL Uses existing capabilities to expand into foreign markets. COST The need to lower costs is a key globalization driver. TRANSNATIONAL Views the world as a single market. Operations are controlled centrally from the corporate office. The bottom line Several subsidiaries operating as stand-alone business units in multiple countries. Low High Pressures for local responsiveness SOURCES: Christopher A. Bartlett and Sumantra Ghoshal, Managing across Borders: The Transnational Solution (Boston: Harvard Business School Press, 1991); and Anne-Wil Harzing, \"An Empirical Analysis and Extension of the Bartlett and Ghoshal Typology of Multinational Companies,\" Journal of International Business Studies 31, no. 1 (2000), pp. 101-20. FIGURE 6.5 Organizational Models 214 Part Two Planning: Delivering Strategic Value Pressures for Local Responsiveness In some circumstances, managers need to make sure that their companies are able to adapt to different needs in different locations. Strong pressures for local responsiveness emerge when consumer tastes and preferences differ significantly among countries. In such cases, products and/or marketing messages have to be customized. In the automobile industry, for example, U.S. consumers' demand for pickup trucks is strong in the South and West, where many families have a pickup truck as a second or third vehicle. In contrast, in Europe pickup trucks are viewed as utility vehicles and are purchased primarily by companies rather than by individuals. As a result, automakers must tailor their marketing messages to these differences in consumer demand. Similarly, as described in the \"Management Close-Up: Taking Action\" feature, Kraft's global strategy is shaped by differences in consumers' preferences for various foods. Pressures for local responsiveness also emerge when there are differences in traditional practices among countries. For example, in Great Britain people drive on the left side of the road, creating a demand for right-hand-drive cars, whereas in neighboring France people drive on the right side of the road. Obviously, automobiles must be customized to accommodate this difference in traditional practices. Management Close-Up TAKING ACTION When Irene Rosenfeld unveiled her turnaround plan, she knew Kraft would need to win back customers both at home and abroad. To concentrate on the company's core brands, Rosenfeld sold off Minute Rice, Milk-Bone pet snacks, and Cream of Wheat and Post cereals. Also sold were Kraft's Fruit2O water and Veryfine beverage brands, to Sunny Delight Beverages. Rosenfeld also turned to overseas markets by buying the cookie and cereal division of French firm Groupe Danone, whose LU, Petit Djeuner, and Tuc cookie brands were big throughout Europe. The $7.2 billion acquisition expanded Kraft's snack food division already its largest, representing almost one-third of its revenuesand gave Kraft an even larger global presence. Danone's foothold in China doubled Kraft's business in that huge emerging market. With the acquisition of Groupe Danone, Kraft's international sales increased to over 40 percent of the company's total sales. Rosenfeld's emphasis on the firm's foreign markets yielded strong growth in eastern Europe, Russia, the Middle East, and Africa. Venezuela and Argentina reported double-digit gains, and in Asia, the Oreo and Kraft cheese brands did well.38 What knowledge and skills did Irene Rosenfeld need to include global expansion into her turnaround strategy for Kraft? How did her request for all employees to rethink their products contribute? Why do you think Rosenfeld decided to acquire Groupe Danone rather than build new relationships and factories from scratch? What about Kraft's products makes local responsiveness necessary? Differences in distribution channels and sales practices among countries also may create pressures for local responsiveness. In India, people are used to buying their groceries at small, local shops, creat\"When you travel, remember that a foreign country is not designed to make you ing challenges for Wal-Mart as comfortable. It is designed to make its own people comfortable.\" it develops plans to open superClifton Fadiman markets and larger stores in that International Management country.39 And cultural differences in selling have led Apple to adjust its \"Mac vs. PC\" advertising campaign in some countries. In Japan, people think it's rude to make direct comparisons, so the comedians hired for the Japanese ads deemphasize differences in product features, instead distinguishing them more in terms of the work-oriented PC versus the Mac's appeal for leisure activities. In the United Kingdom, Apple's ad agency hired two British actors to portray the products in terms of the characters the actors play in a sitcom; the more sensible character represents PC, and the more fun-loving character represents Apple. Even with these adjustments, the ads generated some criticism. A poll found that respect for Apple actually declined after the ads started running in Britain, and in Japan the Mac character's casual attire generated some confusion. Instead of seeing the casually dressed character as a hip entrepreneur, some saw him as merely cheap or unsuccessful, wearing low-cost clothing.40 Finally, economic and political demands that host-country governments impose may necessitate a degree of local responsiveness. Most important, threats of protectionism, economic nationalism, and local content rules (rules requiring that a certain percentage of a product be manufactured locally) dictate that international companies manufacture locally. For example, countries may impose tariffs (taxes on imports) or quotas (restrictions on the number of imports allowed into a country) to protect domestic industries from foreign competition perceived to be unfair or not in the nation's interests. Recently, the United States began imposing tariffs on paper imported from China. The U.S. government justified the tariffs as a response to complaints that the Chinese companies were selling the paper below the cost of the raw materials, presumably because the Chinese government was subsidizing the industry. Others interpret this and other protectionist actions as being motivated primarily by political objectives.41 Whatever the reasons for them, tariffs and quotas influence managers' decisions about whether it is economically advantageous, or even possible, to operate locally or rely on exporting. Chapter 6 215 To re-create the delicate dynamic of its popular U.S. ads, Apple used local TV actors in England, shown here in the U.K. advertisement. They did the same with Japanese actors. Apple faced a difficult issue in bringing its series of ads to different countries since what is funny in one culture can seem ill-mannered in another. Choosing a Global Strategy As Figure 6.5 shows, managers can use four approaches to international competition, depending on their company's position on the integration-responsiveness grid: the international model, the multinational model, the global model, and the transnational model. Organizations in each model compete globally, but they differ in the strategy they use and in the structure and systems that drive their operations. international model The International Model In the international model, managers use their organization's existing core capabilities to expand into foreign markets. As the grid suggests, it is most appropriate when there are few pressures for economies of scale or local responsiveness. Pfizer is an example of a company operating in the international model. It is in an industry that doesn't compete on cost, and its drugs obviously don't need to be tailored for local tastes. The international model uses subsidiaries in each country in which the company does business, with ultimate control exercised by the parent company. In particular, while subsidiaries may have some latitude to adapt products to local conditions, core functions such as research and development tend An organizational model that is composed of a company's overseas subsidiaries and characterized by greater control by the parent company over the research function and local product and marketing strategies than is the case in the multinational model. 216 Part Two In this ad, Toyota counters the perception that foreign auto companies take jobs from Americans. The production line above is actually its Georgetown, KY, manufacturing plant. According to the organizational model in Figure 6.5, what type of company is Toyota? The international model helps spread quality and service standards globally. multinational model An organizational model that consists of the subsidiaries in each country in which a company does business, with ultimate control exercised by the parent company. The bottom line SPEED The multinational model helps speed up local response. Planning: Delivering Strategic Value to be centralized in the parent company. Consequently, the dependence of subsidiaries on the parent company for new products, processes, and ideas requires a great deal of coordination and control by the parent company. The advantage of this model is that it facilitates the transfer of skills and know-how from the parent company to subsidiaries around the globe. For example, IBM and Xerox profited from the transfer of their core skills in technology and research and development (R&D) overseas. The overseas successes of Kellogg, Coca-Cola, Heinz, and Procter & Gamble are based more on marketing know-how than on technological expertise. Toyota and Honda successfully penetrated U.S. markets from their base in Japan with their core competencies in manufacturing relative to local competitors. Still other companies have based their competitive advantage on general management skills. These factors explain the growth of international hotel chains such as Hilton International, Intercontinental, and Sheraton. One disadvantage of the international model is that it does not provide maximum latitude for responding to local conditions. In addition, it frequently does not provide the opportunity to achieve a low-cost position via scale economies. The Multinational Model Where global efficiency is not required but adapting to local conditions offers advantages, the multinational model is appropriate. The multinational model, sometimes referred to as multidomestic, uses subsidiaries in each country in which the company does business and provides a great deal of discretion to those subsidiaries to respond to local conditions. Each local subsidiary is a selfcontained unit with all the functions required for operating in the host market. Thus, each subsidiary has its own manufacturing, marketing, research, and human resources functions. Because of this autonomy, each multinational subsidiary can customize its products and strategies according to the tastes and preferences of local consumers; the competitive conditions; and political, legal, and social structures. A good example of a multinational firm is Heineken, a Netherlands-based brewing company. Heineken has three major global brandsHeineken, Amstel, and Murphy's Stoutbut it also offers regional and local brands. The company understands that every country is unique, with its own culture and business practices. So it attempts to adapt its products to local attitudes and tastes while maintaining its high quality. As a result, the company produces more than 170 different brands around the world, from its international brands to local and specialty brews. The localized portfolio includes such brands as Primus and Star in Africa, Vitamalt and Piton in the Caribbean, and Tiger in Asia. Individual countries have considerable autonomy in the beer that is brewed locally.42 A major disadvantage of the multinational form is higher manufacturing costs and duplication of effort. Although a multinational can transfer core skills among its international operations, it cannot realize scale economies from centralizing manufacturing facilities and offering a standardized product to the global marketplace. Moreover, because a multinational approach tends to decentralize strategy decisions (discussed further in Chapters 8 and 9), launching coordinated global attacks against competitors is difficult. This can be a significant disadvantage when competitors have this ability. International Management 217 Chapter 6 The Global Model The global model is designed to enable a company to market global model a standardized product in the global marketplace and to manufacture that product in a limited number of locations where the mix of costs and skills is most favorable. The global model has been adopted by companies that view the world as one market and assume that no tangible differences exist among countries with regard to consumer tastes and preferences. Procter & Gamble, for example, has been successful in Europe against Unilever because it has approached the entire continent as a unified whole. Royal Dutch/Shell has been a multinational company for many years but has moved to a global model to reduce costs, increase integration, and improve efficiency. Companies that adopt the global model tend to construct global-scale manufacturing facilities in a few selected locations so that they can realize scale economies. These scale economies come from spreading the fixed costs of investments in newproduct development, plant and equipment, and the like over worldwide sales. By using centralized manufacturing facilities and global marketing strategies, Sony was able to push down its unit costs to the point where it became the low-cost player in the global television market. This advantage enabled Sony to take market share away from Philips, RCA, and Zenith, all of which used traditionally based manufacturing operations in each major national market (a characteristic of the multinational approach). Because operations are centralized, subsidiaries usually are limited to marketing and service functions. On the downside, because a co