(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.