LOCATION-BASED AND SYSTEM-BASED ADVANTAGES

The competitive advantages of a global firm can be usefully separated into those growing out of location (or nations) and those independent of location and arising from the firm's overall global network of activities.

Nation- or location-based advantages may arise from either the firm's home base or from other nations in which the firm locates particular activities. The global firm employs advantages from its home base to penetrate foreign markets. It is also able to seek out location-based advantages in performing particular activities in other nations to reinforce home advantages or offset home disadvantages.

System-based advantages are a function of the firm's total worldwide sales volume, its cumulative rate of learning in all its facilities, and the ability to coordinate across foreign and domestic locations. Economies of scale in production or R& D are in and of themselves country neutral, for example, because a large-scale plant or research center can, in principle, be located anywhere.

Global competition will not begin initially unless some firms gain an advantage at home that allows them to penetrate foreign markets. Competitive advantage drawn solely from the home base is sufficient to lead to global competition. Over time, however, successful global firms usually combine advantages drawn from their home base with those resulting from locating particular activities in other nations and those emerging from the overall worldwide network. These other advantages add to and upgrade home-based advantages to make them more sustainable, as well as offset home-based disadvantages. Advantages from each of these sources can be mutually reinforcing. The overall scale resulting from a worldwide position, for example, has allowed such German firms as Zeiss (optical instruments) and Schott (glass) to afford more R& D to better exploit the technical and demand advantages of a German home base.

In practice, firms that do not exploit and extend their home-based advantages through competing globally are vulnerable. The combination of home base advantages, the benefits of locating selected activities in foreign locations, and advantages growing out of the worldwide system, not each alone, underpins international success. As the globalization of competition has become widely recognized, attention has been focused on system advantages

and on the benefits of locating in other nations. In fact, home-based advantages are usually more significant to competitive advantage, a recurring theme of later chapters.

CHOOSING A GLOBAL STRATEGY

There is no one type of global strategy, but numerous ways of competing globally involving choices about where to locate and how to coordinate activities. The best pattern depends on the particular industry. Most global strategies involve an integrated combination of trade and foreign direct investment. Finished products are exported from some nations that import components produced elsewhere, and vice versa. Foreign investment reflects the dispersion of production and marketing activities. Trade and foreign investment are complementary, not necessarily substitutes.

Segments of an industry frequently differ in the extent of globalization and in the appropriate global strategy. In lubricants, for example, automotive motor oil tends toward multidomestic competition. Countries have different driving standards, weather conditions, and local laws. Production involves blending various kinds of base oils and additives. It is subject to few economies of scale, and involves high shipping costs. Retail distribution channels, very important to competitive success, differ markedly from country to country. Domestic firms, such as Quaker State and Pennzoil in the United States, or multinationals with highly autonomous country subsidiaries such as Castrol (United Kingdom), are the leaders in most countries. Marine engine lubricant, in contrast, is a global industry. Ships move freely around the world and require that the same oil be available everywhere they stop. Brand reputations become global. Successful marine engine lubricant competitors, such as Shell, Exxon, and British Petroleum, are global.

Another example is lodging, where many segments are multidomestic because the majority of activities in the value chain are tied to buyer location and because differences among national needs and circumstances lead to few benefits from coordination. In business-oriented or luxury hotels, however, competition is more global. Global competitors such as Hilton, Marriott, and Sheraton have many dispersed properties but employ common brand names, common formats, common service standards, and worldwide reservation systems to gain marketing advantages in serving highly mobile business travelers.²³

Vertical stages of an industry also frequently vary in the extent and pattern of globalization. In aluminum, the upstream (alumina and ingot) stages are global industries. The downstream stage, semifabrication (for example, castings, extrusions), consists of a number of multidomestic industries. Product needs vary by country, transport costs are high, and intensive local

customer service is required. Scale economies in the value chain are modest. In general, components and raw materials tend to be more global than finished goods.

Variation in the pattern of globalization among segments, vertical stages, and groups of countries creates the opportunity for global focus strategies. These involve serving a particular industry segment worldwide. Daimler- Benz and BMW adopted this approach in high-performance automobiles, as have Japanese firms such as Toyota, Isuzu, and Hino in small trucks.

The global focuser concentrates worldwide on a segment of the industry that is poorly served by broad-line competitors. Competing globally can make entirely new segmentations of an industry possible, because serving a segment on a worldwide basis provides enough volume to capture economies of scale. High costs may have rendered serving the segment in one country impractical. In some industries, global focus is the only feasible international strategy because the advantages of globalization exist only in particular segments (for example, high-priced business hotels).

Global focus can be the first step toward a broad-line global strategy. A firm begins to compete globally in a segment where its home base provides a unique advantage. In industries such as cars, lift trucks, and television sets, for example, Japanese firms established initial beachheads by focusing on the compact, and neglected, end-of-the-product range. They later broadened their lines and gained commanding worldwide positions.

Smaller companies, not just large ones, can compete globally. Small- and medium-sized companies account for a substantial portion of international trade, especially in nations such as Germany, Italy, and Switzerland. They often focus on narrow segments or compete in relatively small industries. The global focus strategy is also quite common among multinationals from smaller countries such as Finland and Switzerland and among small- and medium-sized firms from all countries. Montblanc (Germany) competes globally in high-priced pens, for example, while nearly all of the many Italian companies in footwear, apparel, and furniture compete internationally in a narrow segment.

Small- and medium-sized companies tend to employ export-based strategies with only modest foreign direct investment. Yet there is a growing number of modest-sized multinationals. Denmark, Switzerland, and Germany, for example, have many relatively modest-sized multinationals, focused in particular segments. With limited resources, smaller firms face challenges in gaining foreign market access, understanding foreign market needs, and providing after-sale support. These problems are solved in different ways in different industries. One is to deal through agents or importers (typical for Italian firms), distributors, or trading companies (typical in Japan and Korea). Another approach is the use of industry associations to create a common marketing infrastructure, organize trade shows and fairs, and

conduct market research. Cooperatives, for example, have been integral to the export success of Danish agriculturally based industries. More recently, smaller firms have been turning to alliances with foreign firms in order to compete globally.