Global Business Speaks English
Global Business Initiative on Human Rights
Even if you do not aspire to compete for the top job at a large company and instead work at a small firm or are self-employed, you may find yourself dealing with foreign-owned suppliers and buyers, competing with foreign-invested firms in your home market, or perhaps even selling and investing overseas. Alternatively, you may find yourself working for a foreign-owned firm, your domestic employer acquired by a foreign player, or your unit ordered to shut down for global consolidation.
Any of these is a likely scenario, because approximately 80 million people worldwide-including 18 million Chinese, six million Americans, and one million British-are employed by foreign-owned firms. Understanding how global business decisions are made may facilitate your own career in such firms. If there is a strategic rationale to downsize your unit, you want to be prepared and start polishing your résumé right away. In other words, it is your career that is at stake. Don’t be the last in the know!
In this age of global competition, “how do you keep from being Bangalored or Shanghaied” (that is, having your job being outsourced to India or China)?
Global business is a vast subject area. It is one of the few courses that will make you appreciate why your university requires you to take a number of seemingly unrelated courses in general education. We will draw on major social sciences, such as economics, geography, history, political science, psychology, and sociology. We will also draw on a number of business disciplines, such as strategy, finance, and marketing. The study of global business is thus very interdisciplinary. It is quite easy to lose sight of the forest while scrutinizing various trees or even branches. The subject is not difficult, and most students find it to be fun. The number-one student complaint is that there is an overwhelming amount of information. A fundamental question acts to define a field and to orient the attention of students, practitioners, and scholars in a certain direction. Our “big question” is: What determines the success and failure of firms around the globe?
To answer this question, we will introduce only two core perspectives:
(1) an institution-based view and
(2) a resource-based view.
What is it that we do in global business? Why is it so important that practically all students in business schools around the world are either required or recommended to take this course?
While there are certainly a lot of questions to raise, a relentless interest in what determines the success and failure of firms around the globe. Globalization and business is fundamentally about not limiting yourself to your home country. It is about treating the entire global economy as your potential playground (or battlefield). Some firms may be successful domestically but fail miserably overseas. Other firms successfully translate their strengths from their home markets to other countries. If you were expected to lead your firm’s efforts to enter a particular foreign market, wouldn’t you want to find out what drives the success and failure of other firms in that market?
Overall, the focus on firm performance around the globe defines the field of international business (or IB) more than anything else. An institution-based view suggests that the success and failure of firms are enabled and constrained by institutions. By institutions, we mean the rules of the game. Doing business around the globe requires intimate knowledge about both formal rules (such as laws) and informal rules (such as values) that govern competition in various countries. If you establish a firm in a given country, you will work within that country’s institutional framework, which consists of the formal and informal institutions that govern individual and firm behavior.
Firms that do not do their homework and thus remain ignorant of the rules of the game in a certain country are not likely to emerge as winners. Formal institutions include laws, regulations, and rules. For example, Hong Kong’s laws are well-known for treating all comers, whether from neighboring mainland China (whose firms are still technically regarded as “non-domestic”) or far-away Chile, the same as they treat indigenous Hong Kong firms. Such equal treatment enhances the potential odds for foreign firms’ success. It is thus not surprising that Hong Kong attracts a lot of outside firms. Other rules of the game discriminate against foreign firms and undermine their chances for success. India’s recent attraction as a site for FDI was only possible after it changed its FDI regulations from confrontational to accommodating.
Prior to 1991, India’s rules severely discriminated against foreign firms. As a result, few foreign firms bothered to show up, and the few that did had a hard time. For example, in the 1970s, the Indian government demanded that Coca-Cola either hand over the recipe for its secret syrup, which it does not even share with the US government, or get out of India. Painfully, Coca-Cola chose to leave India. Its return to India since the 1990s speaks volumes about how much the rules of the game have changed in India. Informal institutions include cultures, ethics, and norms.
They also play an important part in shaping the success and failure of firms around the globe. For example, individualistic societies, particularly the English-speaking countries such as Australia, Britain, and the United States, tend to have a relatively higher level of entrepreneurship as reflected in the number of business start-ups.
Why?
Because the act of founding a new firm is a widely accepted practice in individualistic societies. Conversely, collectivistic societies such as Japan often have a hard time fostering entrepreneurship. Most people there refuse to stick their neck out to found new businesses because it is contrary to the norm.
Overall, an institution-based view suggests that institutions shed a great deal of light on what drives firm performance around the globe.
The institution-based view suggests that the success and failure of firms around the globe are largely determined by their environments. This is certainly correct. Indeed, India did not attract much FDI prior to 1991 and Japan does not nurture a lot of internationally competitive start-ups because of their institutions. However, insightful as this perspective is, there is a major drawback. If we push this view to its logical extreme, then firm performance around the globe would be entirely determined by environments. The validity of this extreme version is certainly questionable.
The resource-based view helps overcome this drawback. While the institution based view primarily deals with the external environment, the resource-based view focuses on a firm’s internal resources and capabilities. It starts with a simple observation: In harsh, unattractive environments, most firms either suffer or exit. However, against all odds, a few superstars thrive in these environments. For example, despite the former Soviet Union’s obvious hostility toward the United States during the Cold War, PepsiCo began successfully operating in the former Soviet Union in the 1970s (!).
Most of the major airlines have been losing money since September 11, 2001. But a small number of players, such as Southwest in the United States, Ryanair in Ireland, and Hainan Airlines in China, have been raking in profits year after year. In the fiercely competitive fashion industry, Zara has been defying gravity.
How can these firms succeed in such challenging environments? What is special about them?
A short answer is that PepsiCo, Southwest, Ryanair, Hainan, and Zara must have certain valuable and unique firm-specific resources and capabilities that are not shared by competitors in the same environments.
Doing business outside one’s home country is challenging. Foreign firms have to overcome a liability of foreignness, which is the inherent disadvantage that foreign firms experience in host countries because of their non-native status. Just think about all the differences in regulations, languages, cultures, and norms. Think about the odds against Mahindra & Mahindra when it tried to eat some of John Deere’s lunch in the American heartland. Against such significant odds, the primary weapons that foreign firms such as Mahindra & Mahindra employ are overwhelming resources and capabilities that can offset their liability of foreignness. Today, many of us take it for granted that the best-selling car in the United States rotates between the Toyota Camry and the Honda Civic that Coca-Cola is the best-selling soft drink in Mexico, and that Microsoft Word is the world’s number-one word-processing software. We really shouldn’t.
Why?
Because it is not natural for these foreign firms to dominate non-native markets. These firms must possess some very rare and powerful firm-specific resources and capabilities that drive these remarkable success stories and are the envy of their rivals around the globe.
This is a key theme of the resource-based view, which focuses on how winning firms acquire and develop such unique and enviable resources and capabilities and how competitor firms imitate and then innovate in an effort to outcompete the winning firms.
Zara is one of the hottest fashion chains. Founded in 1975, Zara’s parent, Inditex, has become a leading global apparel retailer. Since its initial public offering (IPO) in 2001, Inditex quadrupled its sales (to $19.1 billion or €13.8 billion) and profits. It doubled the number of its stores of eight brands, of which Zara contributes two-thirds of total sales. Zara succeeds by first breaking and then rewriting industry rules-also known as industry norms.
Rule number one: The origin of a fashion house usually carries some cachet. However, Zara does not hail from Italy or France-it is from Spain. Even within Spain, Zara is not based in a cosmopolitan city like Barcelona or Madrid. It is headquartered in Arteixo, a town of only 25,000 people in a remote corner of northwestern Spain that a majority of this book’s readers would have never heard of. Yet, Zara is active not only throughout Europe, but also in Asia and North America. As of 2012, the total number of stores is over 4,200 in 64 countries. Zara stores occupy some of the priciest top locations: Champs-Elysées in Paris, Ginza in Tokyo, Fifth Avenue in New York, Galleria in Dallas, and Huaihai Road in Shanghai.
Rule number two: Avoid stock-outs (a store running out of items in demand). Zara’s answer? Occasional shortages contribute to an urge to buy now. With new items arriving at stores twice a week, experienced Zara shoppers know that “If you see something and don’t buy it, you can forget about coming back for it because it will be gone.” The small batch of merchandise during a short window of opportunity for purchasing motivates shoppers to visit Zara stores more frequently. In London, shoppers visit other stores an average of four times a year, but frequent Zara 17 times a year. There is a good reason to do so: Zara makes about 20,000 items per year, about triple what Gap does. “At Gap, everything is the same,” says one Zara fan, “and buying from Zara, you’ll never end up looking like someone else.”
Rule number three: Bombarding shoppers with ads is a must. Gap and H&M spend on average 3% to 4% of their sales on ads. Zara begs to differ: It devotes just 0.3% of its sales to ads. The high traffic in the stores alleviates some needs for advertising in the media, most of which only serves as a reminder to visit the stores.
Rule number four: Outsource. Gap and H&M do not own any production facilities. However, outsourcing production (mostly to Asia) requires a long lead time, usually several months. Again, Zara has decisively deviated from the norm. By concentrating (more than half of) its production in-house (in Spain, Portugal, and Morocco), Zara has developed a super responsive supply chain. It designs, produces, and delivers a new garment to its stores worldwide in a mere 15 days, a pace that is unheard of in the industry. The best speed the rivals can achieve is two months. Outsourcing may not necessarily be “low cost,” because errors in prediction can easily lead to unsold inventory, forcing retailers to offer steep discounts. The industry average is to offer 40% discounts across all merchandise. In contrast, Zara sells more at full price and, when it discounts, it averages only 15%.
Rule number five: Strive for efficiency through large batches. In contrast, Zara intentionally deals with small batches. Because of its flexibility, Zara does not worry about “missing the boat” for a season. When new trends emerge, Zara can react quickly. More interestingly, Zara runs its supply chain like clockwork with a fast but predictable rhythm: Every store places orders on Tuesday/Wednesday and Friday/Saturday. Trucks and cargo flights run on established schedules-like a bus service. From Spain, shipments reach most European stores in 24 hours, US stores in 48 hours, and Asian stores in 72 hours. Not only do store staffs know exactly when shipments will arrive, regular customers know it too, thus motivating them to check out the new merchandise more frequently on those days, which are known as “Z days” in some cities.
Zara has no shortage of competitors. Why has no one successfully copied its business model of “fast fashion”? “I would love to organize our business like Inditex [Zara’s parent],” noted an executive from Gap, “but I would have to knock my company down and rebuild it from scratch.” This does not mean Gap and other rivals are not trying to copy Zara. The question is how long it takes for rivals to out-Zara Zara.
Globalization, generally speaking, is the close integration of countries and peoples of the world. This abstract five-syllable word is now frequently heard and debated. Those who approve of globalization count its contributions to include greater economic growth and standards of living, increased technology sharing, and more extensive cultural integration. Critics argue that globalization undermines wages in rich countries, exploits workers in poor countries, grants MNEs too much power, and destroys the environment.
What exactly is globalization?
Three views on globalization, recommend the pendulum view, and introduces the idea of semiglobalization. Depending on what sources you read, globalization could be
1. A new force sweeping through the world in recent times;
2. A long-run historical evolution since the dawn of human history;
3. A pendulum that swings from one extreme to another from time to time.
An understanding of these views helps put the debate about globalization in perspective.
First, opponents of globalization suggest that it is a new phenomenon beginning in the late 20th century, driven by recent technological innovations and a Western ideology focused on exploiting and dominating the world through MNEs. The arguments against globalization focus on environmental stress, social injustice, and sweatshop labor but present few clearly worked-out alternatives to the present economic order. Nevertheless, anti-globalization advocates and protesters often argue that globalization needs to be slowed down, if not stopped.
A second view contends that globalization has always been part and parcel of human history. Historians are debating whether globalization started 2,000 or 8,000 years ago. The earliest traces of MNEs have been discovered in Assyrian, Phoenician, and Roman times. International competition from low-cost countries is nothing new. In the first century a.d., the Roman emperor Tiberius was so concerned about the massive quantity of low-cost Chinese silk imports that he imposed the world’s first known import quota of textiles. Today’s most successful MNEs do not come close to wielding the historical clout of some MNEs, such as Britain’s East India Company during colonial times. In a nutshell, globalization is nothing new and will probably always exist.
A third view suggests that globalization is the “closer integration of the countries and peoples of the world which has been brought about by the enormous reduction of the costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and (to a lesser extent) people across borders.” Globalization is neither recent nor unidirectional. It is, more accurately, a process similar to the swing of a pendulum. (I defend such theory)
