Global Business Strategy

This chapter examines management strategy theories for global businesses. What extent of company’s resources should be assigned to overseas operations, and what minimum percentage of revenues should come from overseas operations? Should investments be made in regions such as China or Southeast Asia with existing substantial business establishments, or should expansions into new markets such as India, the Middle East, and Africa be considered? Which corporate functions should be transferred overseas? This chapter attempts to understand the theoretical aspects of decision-making in the allocation of management resources within global businesses.

Understanding economic changes at the global level is critical to the formulation of global business strategies. In Chap. 1, we provided an overview of the economies of newly developing countries, particularly China and India, although many other regions throughout the world—including Southeast Asia, Latin America, and Africa—are expected to become major markets. Advanced countries and regions, such as the U.S. and Europe, are currently the most promising overseas markets for Japanese companies, but how will the rankings of these advanced markets change in the future? In this section, we consider the changes in the global economic environment by focusing on the changes in the GDP of countries around the world.

Global business strategies must conform to business environments in target countries and regions. As repeatedly expressed herein, while the world is becoming flatter, there still are significant barriers in the form of national borders. Chapter 2 discussed ideas and strategies to understand the differences in business environments because of these barriers. According to the CAGE distance framework, the differences in business environments due to national borders are wide-ranging and consist of cultural, administrative, geographical, and economic factors. These differences may be observed in the languages, religions, economic systems, and living standards present in each country. This chapter discusses a more fundamental principle of “institutional theory” in the context of differing business environments between nations, and examines its relationship to global strategy.

Low economic growth has been estimated for developed countries, including Japan, because of decreasing population growth rate, with no future prospects for large market expansion. On the other hand, the rise of economic growth in developing countries, such as China and India, provide great opportunities for Japanese companies. However, a high rate of economic growth can be realized in developing countries only by catching up technologically with developed countries, and establishing competitive local companies that adopt modern management techniques used in developed countries. Therefore, in addition to providing opportunities for Japanese companies, the growth of developing countries indicates the threat of new competitors in international markets.

India is second only to China in terms of population. India’s economic growth since the mid-2000s has risen to around 8 %, and is now considered as having a promising future market. However, the driving force behind this economic growth is the country’s service industry, particularly its IT service industry. As compared to China, India trails in its growth in the manufacturing industry. One reason for this gap is the lack of infrastructure in India. For a manufacturing industry to grow, basic infrastructure, such as power and water, and logistics facilities, such as roads, railways, and ports for imports and exports, are required. However, infrastructure development in India has not progressed as planned. Half of India’s population is under the age of 25, resulting in a relatively low average age. Therefore, creation of employment opportunities for this younger generation is important. For this reason, it is necessary to promote the manufacturing industry having a high employment absorption capacity. Infrastructure creation is thus an important policy issue for the Indian government.

When creating new operations overseas, companies must fulfill various requirements, such as providing benefits for local employees, finding sources for materials and parts, creating logistics infrastructure including new distribution channels, and gaining regulatory approval for the operations. Instead of doing these tasks independently, it is more practical for companies to cooperate with local businesses. In addition, companies can reduce their overseas investment risk through joint ventures (i.e., joint investment companies) with local entities instead of creating wholly owned local subsidiaries. Without cooperation with a local company, it becomes difficult to smoothly launch new business operations in emerging nations such as China and India, which have business environments that are very different from those of advanced countries. As stated in Chap. 4, these emerging countries do not possess adequate market mechanisms or economic legislations such as corporate law, making business transactions unpredictable. Alliances with local companies are effective in filling such institutional voids (Khanna and Palpu 2010). However, expanding operations via joint ventures with local companies does have the disadvantage of diminished autonomy because of the intervention of local firm’s management. Even when companies decide that increasing headquarters’ control in a company-wide global strategy is an appropriate course of action, it is possible that the strategy might not come to fruition because of opposition by joint venture partners. In this chapter, we first analyze the option of a joint venture with a local partner when expanding globally, and then present a formal discussion on strategic alliances. A joint venture is a form of alliance; however, companies can also form contractual alliances, such as licensing agreements and joint operating agreements. In addition, many relationships with strategic alliance partners extend to the long term, and alliance management skills after establishing a joint venture or entering into an agreement have a tremendous impact on performance. In this chapter, we discuss the following three necessary management phases: (1) the alliance project development phase, (2) the alliance structure design phase, and (3) the alliance execution phase.

In 1995, Hitachi Construction Machinery Co., Ltd. (HCM) established a Chinese subsidiary, Hitachi Construction Machinery (China) Co., Ltd. (HCMC). Since then, the company has established close relations with the city of Hefei in the Anhui Province and has steadily built a strong business reputation of being a quality committed local firm. HCM’s operations in China began as a joint venture (JV) with a local, state-owned firm, Hefei Mining Equipment (Hefei Mining). Later dissolving this JV, HCM now operates as a wholly owned subsidiary. HCM’s China business is often cited as a successful example of a global business, although the road to acquiring that success was not often smooth and included negotiations with the JV partner and the creation of an internal management system.

Advancements in emerging countries present new market opportunities for Japanese corporations; however, to do so, they must confront the threats posed by local companies playing catch up by moving from a “build it and it will sell” product model to a customer value model that maximizes the value to the customer. To overcome this dilemma, companies must understand markets in these emerging countries (i.e., customer needs) at product- and service-planning levels, accordingly design products and services that maximize value to the target customers, and create channels to get these products and services to the consumers. These activities comprise marketing activities.

Shiseido is a leading Japanese cosmetics manufacturer that has been in operation for more than a century. With growth in domestic and international markets, specially those of emerging nations such as China, international development within the cosmetics industry is growing in importance. In Shiseido’s mid-term management plan covering the 3 years between 2011 and 2013, the company continued to strive toward its goal of being a “global player representing Asia with its origins in Japan.” The company outlined four growth strategies: the “global megabrand” strategy, the “Asia breakthrough” strategy, the “new frontier” strategy, and the “customer first” strategy. These strategies state that China’s market will receive top priority as engine of growth, where significant management resources will be invested.

In order to enter into foreign markets with technical strength, it has become increasingly critical for Japanese companies to maximize the effectiveness of research and development. In addition to global western firms, companies in Korea, China, and other emerging nations are gaining strength. To maintain a superior position in relation to these competitors, Japanese companies must develop products that are attractive to customers in a timely fashion. For this purpose, research and development (R&D) will require the best personnel in a company and companies must deal with strategically crucial information. Furthermore, as a place to amass cutting-edge information, it is most efficient to determine a base and concentrate the R&D efforts. Accordingly, global firms with many foreign sales and production offices opt to keep R&D activities within their home countries.

When considering the R&D centers of Japanese firms by country, China is second to the US, and the number of R&D centers there is increasing. The importance of China as a center for R&D is not limited to just Japanese firms; western firms are also investing there. According to a UNCTAD survey, China is the most important country for R&D among companies in the advanced nations (UNCTAD 2005). IBM, Microsoft, Motorola, Nokia, Sony, Toshiba, Hitachi, Fujitsu, NEC, Samsung, and other leading high-tech companies have created research centers in China, from where global R&D is conducted.

As the rate of market growth in advanced nations is tapering off, emerging nations are showing great growth potential, with markets expanding alongside increasing income levels of the people of these countries. As such, emerging nations are increasingly becoming attractive as locations for R&D centers to capture their growing markets. Emerging nations themselves are incentivized to attract corporate R&D from advanced nations. These centers make possible the development of highly skilled workers, and are expected to improve the technical abilities of related firms.

Suzuki Motor Corporation (Suzuki) is an automobile and motorcycle manufacturer of compact cars such as Alto and Wagon R. Domestically, the company trails Toyota in terms of the annual car production, and is about the same size as Nissan and Honda. However, it is India’s number one automaker, boasting of more than 30 % share in the passenger vehicle market. Suzuki’s business in India began with a joint venture (JV) in 1982 with the Indian government and an investment in the state-owned Maruti Udyog. The company began manufacturing the Maruti 800 (Alto) in 1983. The Maruti 800 became popularly known as the “people’s car of India,” thereby enabling Suzuki’s Indian subsidiary, Maruti Suzuki India (Maruti Suzuki), to enjoy overwhelming strength due to its brand, product line up, and dealer network.

This chapter uses case studies of management strategy for effective global level operations to discuss how companies from advanced nations can incorporate emerging countries experiencing rapid growth into their operating processes. There are two approaches to corporate strategy theory for maintaining sustainable competitive advantage against competitors over time: an approach focused on management resources held by the company (Barney 1986, 1991), and on a theory of positioning that analyzes the competitive environment of a market to select the optimal position (Porter 1980). Extrapolating these corporate strategies to a global level requires an awareness of national barriers. While the earth may be becoming flatter, there are still significant economic and institutional gaps between advanced and emerging countries.