(1) Globalization & Business
In 1994, when Mahindra & Mahindra (M&M) arrived in the United States, it was already a powerhouse in its native India. The company, founded as a steelmaker in 1945, had entered the agriculture market nearly 20 years later, partnering with International Harvester to manufacture a line of sturdy 35-horsepower tractors under the Mahindra name.
The Mahindra tractors became very popular in India. They were affordably priced and fuel efficient, two qualities highly valued by thrifty Indian farmers, and the machines were sized appropriately for small Indian farms. Over the years, M&M continued to innovate to perfect its offerings, and its tractors proliferated throughout India’s vast agricultural regions. The Mahindra brand became well established and respected. By the mid-1990s, the company was one
of India’s top tractor manufacturers-and it was ready for new challenges. The lucrative US market beckoned. When Mahindra USA (MUSA) opened for business, Deere & Company-famous for its John Deere brand-was the dominant player. Deere’s bread and butter were enormous machines ranging as high as 600 horsepower for industrial-scale agribusiness. Rather than trying to develop a product that could compete head-on with Deere, M&M aimed for a smaller agricultural niche, one in which it could grow and make the most of its strengths.
Mahindra figured its little tractor would be perfect for hobby farmers, landscapers, and building contractors. The machine was sturdy, extremely reliable, and priced to sell. With a few modifications for the US market-such as supersized seats and larger brake pedals to accommodate larger American bodies-Mahindra was good to go. But the company was far from home and hardly a household name. The few Americans who had heard of the brand thought of it variously as “red,” “foreign,” or “cheap.” Even domestic competitors were barely aware of the newcomer. Deere gave more of its attention to Case and New Holland than to Mahindra. Flying below the radar, MUSA decided to make its mark through personalized service.
MUSA built close relationships with small dealerships, particular family-run operations. Rather than saddle dealers with expensive inventory, MUSA allowed them to run on a just-in-time basis, offering to deliver a tractor within 24 to 48 hours of receiving the order. MUSA also facilitated financing. In return, Mahindra benefited from the trust the dealers enjoyed in their communities.
MUSA also built close relationships with customers. Some 10% to 15% of M&M tractor buyers got phone calls from the company’s president, who asked whether they were pleased with the buying experience and their new tractors. The company also offered special incentives-horticultural scholarships, for example-to neglected market segments such as female hobby farmers.
This high-touch strategy paid off handsomely. MUSA’s US sales growth averaged 40% per year from 1999 to 2006. This prompted David C. Everitt, president of Deere’s agricultural division, to remark that Mahindra “could someday pass Deere in global unit sales.” Deere responded with short-lived-and seemingly desperate-cash incentives to induce Mahindra buyers to trade for a Deere. This had the unintended effect of promoting M&M’s brand (“And we didn’t even pay for it,” said Anjou Choudhari, CEO of M&M’s farm equipment sector from 2005 to 2010). Mahindra fired back with an ad featuring the headline: “Deere John, I have found someone new.” As Mahindra enjoyed growing success in America, Deere struggled to gain a foothold in India. Unlike Mahindra, which had innovated both its product and its processes for the US market, Deere tried to tempt Indian farmers with the same product that had underwritten its success at home. The strategy did not work, and Deere was forced to re-engineer its thinking as well as its product.
“We gave a wake-up call to John Deere,” noted Choudhari. “Our global threat was one of the motivations for Deere to design a low-horsepower tractor-in India and for India.”
In the meantime, M&M has become the number one tractor maker worldwide, as measured by units sold.
How do firms such as Mahindra & Mahindra and Deere compete in India, the United States, and elsewhere? What determines the success and failure of these firms-and numerous others-around the world?
Traditionally, international business (IB) is defined as a business (or firm) that engages in international (cross-border) economic activities. It can also refer to the action of doing business abroad. The previous generation of IB textbooks almost always takes the foreign entrant’s perspective. Consequently, such books deal with issues such as how to enter foreign markets and how to select alliance partners. The most frequently discussed foreign entrant is the multinational enterprise (MNE), defined as a firm that engages in foreign direct investment (FDI) by directly investing in, controlling, and managing value-added activities in other countries.
Using our opening case, traditional IB textbooks would focus on how MNEs such as Deere enter India by undertaking FDI there. MNEs and their cross-border activities are, of course, important, but they only cover one side of IB—the foreign side. Students educated by these books often come away with the impression that the other side of IB-namely, domestic firms-does not exist. Of course, that is not true. Domestic firms such as Mahindra & Mahindra do not just sit around in the face of foreign entrants. Domestic firms actively compete and/or collaborate with foreign entrants such as International Harvester. Sometimes strong domestic firms such as Mahindra & Mahindra have also gone overseas themselves. Overall, focusing on the foreign entrant side captures only one side of the coin at best.
International business (IB) -(1) A business (or firm) that engages in international (crossborder) economic activities and/or (2) the action of doing business abroad.
Multinational enterprise (MNE) - A firm that engages in foreign direct investment (FDI).
Foreign direct investment (FDI) - Investment in, controlling, and managing value-added activities in other countries.
There are two key words in IB: international (I) and business (B). However, many previous textbooks focus on the international aspect (the foreign entrant) to such an extent that the business part (which also includes domestic business) almost disappears. This is unfortunate, because IB is fundamentally about B in addition to being I. To put it differently, the IB course in the undergraduate and MBA curricula at numerous business schools is probably the only one with the word “business” in its title. All other courses you take are labeled management, marketing, finance, and so on, representing one functional area but not the overall picture of business.
Does it matter?
Global business includes both (1) international (cross-border) business activities covered by traditional IB books and (2) domestic business activities.
Such deliberate blurring of the traditional boundaries separating international and domestic business is increasingly important today, because many previously national (domestic) markets are now globalized. Not long ago, competition among college business textbook publishers was primarily on a nation-by-nation basis. The Big Three-South-Western Cengage Learning, Prentice Hall, and McGraw-Hill-primarily competed in the United States. A different set of publishers competed in other countries. As a result, most textbooks studied by British students would be authored by British professors and published by British publishers; most textbooks studied by Brazilian students would be authored by Brazilian professors and published by Brazilian publishers, and so on. Now South-Western Cengage Learning (under British and Canadian ownership), Pearson Prentice Hall (under British ownership), and McGraw-Hill (still under US ownership) have significantly globalized their competition. Around the globe, they are competing against each other in many markets, publishing in multiple languages and versions.
Collectively, they now contribute approximately 45% of the global gross domestic product (GDP). Note that this percentage is adjusted for purchasing power parity (PPP), which is an adjustment to reflect the differences in cost of living. Using official (nominal) exchange rates GDP, GNP, GNI, PPP-there is a bewildering variety of acronyms that are used to measure economic development.
It is useful to set these terms straight before proceeding. Gross domestic product (GDP) is measured as the sum of value added by resident firms, households, and governments operating in an economy. For example, the value added by foreign-owned firms operating in Mexico would be counted as part of Mexico’s GDP.
However, the earnings of non-resident sources that are sent back to Mexico (such as earnings of Mexicans who do not live and work in Mexico and dividends received by Mexicans who own non-Mexican stocks) are not included in Mexico’s GDP. One measure that captures this is gross national product (GNP). More recently, the World Bank and other international organizations have used a new term, gross national income (GNI), to supersede GNP. Conceptually, there is no difference between GNI and GNP. What exactly is GNI/GNP? It comprises GDP plus income from non-resident sources abroad.
Global business - Business around the globe.
Emerging economies - A term that has gradually replaced the term “developing countries” since the 1990s.
Emerging markets - A term that is often used interchangeably with “emerging economies.”
Gross domestic product (GDP) - The sum of value added by resident firms, households, and governments operating in an economy.
Purchasing power parity (PPP) - A conversion that determines the equivalent amount of goods and services those different currencies can purchase
How important are emerging economies?
While GDP, GNP, and now GNI are often used as yardsticks of economic development, differences in cost of living make such a direct comparison less meaningful. A dollar of spending in, say, Thailand can buy a lot more than in Japan. Therefore, conversion based on purchasing power parity (PPP) is often necessary. The PPP between two countries is the rate at which the currency of one country needs to be converted into that of a second country to ensure that a given amount of the first country’s currency will purchase the same volume of goods and services in the second country. According to the International Monetary Fund (IMF), the Swiss per capita GDP is $81,161 based on official (nominal) exchange rates-higher than the US per capita GDP of $48,387.
However, everything is more expensive in Switzerland. A Big Mac costs $6.81 in Switzerland versus $4.20 in the United States. Thus, Switzerland’s per capita GDP based on PPP becomes $43,370-lower than the US per capita GDP based on PPP, $48,387 (the IMF uses the United States as benchmark in PPP calculation). On a worldwide basis, measured at official exchange rates, emerging economies’ share of global GDP is approximately 26%. However, measured at PPP, it is about 43% of the global GDP. Overall, when you read statistics about GDP, GNP, and GNI, always pay attention to whether these numbers are based on official exchange rates or PPP, which can make a huge difference.
Gross national product (GNP) - GDP plus income from nonresident sources abroad.
Gross national income (GNI) - GDP plus income from nonresident sources abroad. GNI is the term used by the World Bank and other international organizations to supersede the term GN
Does it make sense to group so many countries with tremendous diversity in terms of history, geography, politics, and economics together as “emerging economies”?
33 countries are classified as “developed economies.” The rest of the world (more than 150 countries) can be broadly labeled as “emerging economies.” Of these emerging economies, Brazil, Russia, India, and China-commonly referred to as BRIC-command more attention. As a group, they generate 17% of world exports, absorb 16% of FDI inflows, and contribute 28% of world GDP (on a PPP basis). Commanding a lion’s share, BRIC contribute 62% of the GDP of all emerging economies (on a PPP basis). BRIC also generate 8% of world FDI outflows. MNEs from BRIC (such as Mahindra & Mahindra) are increasingly visible in making investments and acquiring firms around the world. Clearly, major emerging economies (especially BRIC) and their firms have become a force to be reckoned with in global business. In addition to BRIC, other interesting terms include BRICS (BRIC + South Africa), BRICM (BRIC + Mexico), and BRICET (BRIC + Eastern Europe and Turkey).
As compared to developed economies, the label of “emerging economies,” rightly or wrongly, has emphasized the presumably homogenous nature of so many different countries. While this single label has been useful, more recent research has endeavored to enrich it.
Specifically, the two dimensions can help us differentiate various emerging economies. Vertically, the development of market-supporting political, legal, and economic institutions has been noted as a crucial dimension of institutional transitions in many emerging economies. Horizontally, the development of infrastructure and factor markets is also crucial. Stereotypical or traditional emerging economies suffer from both the lack of institutional development and the lack of infrastructure and factor market development. Most emerging economies 20 years ago would have fit this description.
Today, some emerging economies that have made relatively little progress along these two dimensions (such as Belarus and Zimbabwe) still exist. However, a lot has changed. A great deal of institutional development and infrastructure and factor market development has taken place. Such wide-ranging development has resulted in the emergence of a class of mid-range emerging economies that differ from both traditional emerging economies and developed economies.
For example, the top down approach to government found in China has facilitated infrastructure and factor market development. But China’s political and market institutions tend to be underdeveloped relative to physical infrastructure.
Alternatively, India has strong political institutions supporting market institutions (although there is still significant corruption in government bureaucracies). While Indian government policy reforms have facilitated better market institutions and associated economic development, world-class physical infrastructure is lacking. Brazil and Russia can be placed as examples. In these mid-range emerging economies, there are some democratic political institutions (despite the recent setback in Russia) and some infrastructure and factor market development. Finally, some economies have clearly graduated from the “emerging” phase and become what we call “newly developed economies.” South Korea may be an exemplar country as it has more balanced development in both institutional development and infrastructure/factor markets.
BRIC - Brazil, Russia, India, and China.
Can the global economy be viewed as a pyramid?
Yes. Suppose the top consists of about one billion people with per capita annual income of $20,000 or higher.These are mostly people who live in the developed economies in the Triad, which consists of North America, Western Europe, and Japan. Another billion people earning $2,000 to $20,000 per year make up the second tier. The vast majority of humanity-about five billion people-earns less than $2,000 per year and comprises the base of the pyramid (BOP). Most MNEs focus on the top and second tiers and end up ignoring the base of the pyramid. An increasing number of such lowincome countries have shown a great deal of economic opportunities as income levels have risen.
Triad - North America, Western Europe, and Japan.
Base of the pyramid (BOP) - Economies where people make less than $2,000 per capita per year.
More Western MNEs, such as GE, are investing aggressively in the base of the pyramid and leveraging their investment to tackle markets in both emerging and developed economies.
One interesting recent development out of emerging economies is reverse innovation-an innovation that is adopted first in emerging economies and then diffused around the world. Traditionally, innovations are generated by Triad-based multinationals with the needs and wants of rich customers at the top of the pyramid in mind. When such multinationals entered lower-income economies, they tended to simplify the product features and lower the prices. In other words, the innovation flow is top down. However, as Deere & Company found out in India, its large-horsepower tractors designed for American farmers were a poor fit for the very different needs and wants of Indian farmers. Despite Deere’s efforts to simplify the product and reduce the price, the price was still too high in India. Instead, Mahindra & Mahindra brought its widely popular small-horsepower tractors that were developed in India to the United States, and carved out a growing niche that eventually propelled it to be the world’s largest tractor maker by units sold. In response, Deere abandoned its US tractor designs and “went native” in India, by launching a local design team charged with developing something from scratch-with the needs and wants of farmers in India (or, more broadly, in emerging economies) in mind. The result was a 35-horsepower tractor that was competitive not only with Mahindra in India, but also in the United States and elsewhere. In both cases, the origin of new innovations is from the base of the pyramid. The flow of innovation is bottom up-in other words, reverse innovation. The reverse innovation movement suggests that emerging economies are no longer merely low-cost production locations or attractive new markets (hence the term “emerging markets”). They are also sources of new innovations that may not only grow out of BOP markets, but also have the potential to go uphill to penetrate into the top of the global economic pyramid.
In a Harvard Business Review article, Jeff Immelt, chairman and CEO of a leading practitioner of reverse innovation, GE, noted: To be honest, the company is also embracing reverse innovation for defensive reasons. If GE doesn’t come up with innovations in poor countries and take them global, new competitors from the developing world-like Mindray, Suzlon, Goldwind, and Haier-will. . . GE has tremendous respect for traditional rivals like Siemens, Philips, and Rolls-Royce. But it knows how to compete with them; they will never destroy GE. By introducing products that create a new price-performance paradigm, however, the emerging giants very well could. Reverse innovation isn’t optional; it is oxygen.
As advised by GE’s Immelt, today’s students-and tomorrow’s business leaders-will ignore the opportunities and challenges at the base of the pyramid at their own peril. This book will help ensure that you will not ignore these opportunities.
Reverse innovation - An innovation that is adopted first in emerging economies and is then diffused around the world.
Global business (or IB) is one of the most exciting, most challenging, and most relevant subjects offered by business schools. Why study it? There are at least three compelling reasons why you should study global business-and study hard
First, mastering global business knowledge helps advance your employability and career in an increasingly competitive global economy. You should guess first and then look at the label of your shirt yourself or ask a friend to help you. The key here is international trade. Do you wear a shirt made in your own country or another country? Why?
Smart students typically ask whether the mobile device (such as a smartphone or an iPad) means the motherboard or the components. My answer is: “I mean the whole device, all the production that went into making the machine.” Then some students would respond: “But they could be made in different countries!” My point exactly. Specifically, the point here is to appreciate the complexity of a global value chain, with different countries making different components and handling different tasks. Such a value chain is typically managed by an MNE, such as Apple, Dell, Foxconn, HP, Lenovo, or Samsung. The capabilities necessary to organize a global supply chain hints at the importance of resources and capabilities.
Unfortunately, 100% of students-ranging from undergraduates to PhDs-miss it. Surprise! The Group of 20 (G-20) only has 19 member countries. The 20th member is the European Union (EU)-a regional bloc, not a single country. Ideally, why the G-20 is formed in such an interesting way will make you more curious about how the rules of the game are made around the world. What is special about the EU? Why are other regional blocs not included in the G-20? What about the G-7? What about other groups of countries? A focus on the rules of the game-more technically, institutions-is another key.
Some students would typically clarify: “Do you mean the few security guards looking after the closed plant?” “Not necessarily,” I would point out. “The question is: How many jobs will be kept by the company?” Students would eventually get it: even adding a few jobs as security guards at the closed plant, the most optimistic estimates are that only 30 to 50 jobs may be kept. Yes, you guessed it, these jobs typically are high-level positions such as the CEO, CFO, CIO, factory director, and chief engineer. These managers will be sent by the MNE to start up operations in an emerging economy. You need to realize that in a 2,000-employee plant, even if you may be the 51st-highest-ranked employee, your fate may be the same as the 2,000th employee. You really need to work hard and work smart to position yourself as one of the top 50 (preferably one of the top 30). Doing well in this class and mastering global business knowledge may help make it happen.
Many ambitious students aspire to join the top ranks of large firms, expertise in global business is often a prerequisite. Today, it is increasingly difficult, if not impossible, to find top managers at large firms without significant global competence. Of course, eventually hands-on global experience, not merely knowledge acquired, will be required. However, mastery of the knowledge of, and demonstration of interest in, global business during your education will set you apart as a more ideal candidate to be selected as an expatriate manager (or “expat”)-a manager who works abroad-to gain such an experience.
Thanks to globalization, low-level jobs not only command lower salaries but are also more vulnerable. However, high-level jobs, especially those held by expats, are both financially rewarding and relatively secure. Expats often command a significant international premium in compensation-a significant pay raise when working overseas. In US firms, an expat’s total compensation package is approximately $250,000 to $300,000 (including perks and benefits; not all is take-home pay). When they return to the United States after a tour of duty (usually two to three years), a firm that does not provide attractive career opportunities to experienced expats often finds that they are lured away by competitor firms. Competitor firms also want to globalize their business, and tapping into the expertise and experience of these former expats makes such expansion more likely to succeed.
And yes, to hire away these internationally experienced managers, competitor firms have to pay an even larger premium. This indeed is a virtuous cycle. This hypothetical example is designed to motivate you to study hard so that someday, you may become one of these sought-after globe-trotting managers. But even if you don't want to be an expat, we assume that you don't want to join the army of the unemployed due to factory closings and business failures.
Group of 20 (G20) - The group of 19 major countries plus the European Union (EU) whose leaders meet on a biannual basis to solve global economic problems.
Expatriate manager - A manager who works abroad, or “expat” for short.
International premium - A significant pay raise when working overseas.
(2) Globalization & Business
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.
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.
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)