Microsoft globalization strategy

P A R T1 FOUNDATIONS OFGLOBAL STRATEGY

1 Strategizing Around the Globe

2 Managing Industry Competition

3 Leveraging Resources and Capabilities

4 Emphasizing Institutions, Culture, and Ethics

CHAPTER1

STRATEGIZING AROUND THE GLOBE

KNOWLEDGE OBJECT IVES

After studying this chapter, you should be able to

1. Offer a basic critique of the traditional, narrowly defined “global strategy”

2. Articulate the rationale behind studying global strategy

3. Define what is strategy and what is global strategy

4. Outline the four fundamental questions in strategy

5. Participate in the debate on globalization with a reasonably balanced view and a keen awareness of your likely bias

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OPENING CASE

The Global Strategy of Global Strategy

Launched in 2005, Global Strategy has been used by business schools in over 30 countries and is now available in Chinese, Spanish, and Portuguese in addition to English. Global Strategy has also spawned two related books: Glo- bal Business (a more comprehensive, traditional textbook in international business) and GLOBAL (a more compact, innovative paperback). Everybody knows global competi- tion is tough. How do Global Strategy and its sister books compete around the world? In other words, what is the nature of the global strategy of Global Strategy?

Global Strategy and its sister books are published by South-Western Cengage Learning, which is a division of Cen- gage Learning. Cengage Learning serves students, teachers, and libraries in the secondary and higher education markets, as well as government agencies and corporations. While the copyright page of this book indicates an address in Mason, Ohio (a suburb of Cincinnati), note that this is the address for the specific division: South-Western. The corporate headquar- ters of Cengage Learning is in Stamford, Connecticut. Cen- gage Learning is a global company, which is owned by Apax Partners of the UK and OMERS Capital Partners of Canada, two private equity groups. Overall, the global nature of Cen- gage Learning permeates the organization: it is UK- and Canadian-owned and US-headquartered. With annual sales of over $2 billion, Cengage Learning has approximately 5,800 employees worldwide across 35 countries.

In business and economics textbooks, South-Western Cengage Learning vies for number one in the world in terms of market share with McGraw-Hill Irwin and Pearson Prentice Hall, the other two members of the Big Three in this industry. While competition historically focused on the United States and other English-speaking countries, it is now worldwide. Global Strategy targets courses in strategic management and international business. While there is no shortage of textbooks in these two areas, Global Strategy broke new ground by being the first to specifically address their intersection. Thanks to enthusiastic students and pro- fessors in Angola, Australia, Austria, Brazil, Britain, Canada, Chile, China, Finland, France, Denmark, Germany, Hong Kong, India, Ireland, Japan, Macau, Malaysia, Mexico, the Netherlands, Netherlands Antilles, New Zealand, Norway,

Portugal, Romania, Singapore, South Korea, Spain, Swe- den, Taiwan, Thailand, and the United States, Global Strat- egy achieved unprecedented success.

While competition is primarily among the Big Three, Glo- bal Strategy has also attracted new entrants—competing textbooks published by smaller, historically more specialized academic publishers such as Cambridge, Oxford, and Wiley that are interested in breaking into the mainstream textbook market. In addition to new entrants, the publishing industry has also been experiencing another challenge: the digital revolution. E-books have emerged as a viable substitute to the printed version. Amazon now sells more Kindle versions than printed versions of books. To keep up with this movement, the Kindle version of Global Strategy has been available since the second edition.

Although competition, in theory, is global, in practice Cengage Learning needs to win one local market after another—literally, one course taught by one instructor in one school in one country. Obviously, no instructor tea- ches globally, and no student studies globally. Teaching and learning remain very local. For the company as a

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A Global Global-Strategy Book How do firms, such as Cengage Learning, McGraw-Hill, and Pearson, compete around the globe? In the publishing industry in each country, how do various foreign entrants and local firms interact, compete, and/or sometimes collaborate? What determines their success and failure? Since strategy is about competing and winning, this book on global strategy will help current and would-be strategists answer these and other important questions. Setting an example by itself, the book you are reading is a real global product that leverages its strengths, engages rivals, and competes around the world (see Opening Case).

However, this book does not focus on a particular form of international (cross-border) strategy, which is characterized by the production and distribution of standardized products and services on a worldwide basis. For over two decades, this strategy, com- monly referred to as “global strategy” for lack of a better term, has often been advocated by traditional global-strategy books.1 However, there is now a great deal of rumbling and soul-searching among managers frustrated by the inability of their “world car,” “world drink,” or “world commercial” to conquer the world.

whole, the motto is: “Think global, act local.” The hard truth is: Global Strategy does not have a “global strategy” (!). While this statement is provocative, what it really means is that Global Strategy does not have a grand strategic plan around the globe. What defines its strategy is a relentless process to be in touch with the rapidly evolving market and an unwavering commitment to aspire to meet and exceed customer expectations around the world. In other words, Cengage Learning embraces a “strategy as action” perspective, as opposed to a “strategy as plan” perspective. Every step of the way, Cengage Learning literally learns, tests the market, engages custo- mers, and aspires to improve in the next edition. For instance, the Portuguese edition has been developed by two professors in Brazil, who are not mere translators but “revisers” who enhance the local flavor. In the third edi- tion, Global Strategy builds on the already strong coverage of emerging economies in the two previous editions and introduces a new feature on emerging markets in every chapter. This edition has also expanded coverage on the previously under-covered regions such as Latin America and Africa, thus making Global Strategy more global.

Finally, to successfully compete around the globe, a good understanding of the rules of the game is a must. In some countries, foreign publishers are free to publish whatever they please. In other countries, foreign publishers are not allowed to publish anything at all. For example, Brazil allows

Cengage Learning to set up a wholly owned subsidiary that can publish the Portuguese version. However, China does not allow foreign publishers to publish books on their own. Therefore, Cengage Learning licensed the translation of Global Strategy to a leading Chinese publisher: Posts and Telecom Press. Further, Chinese rules dictate that all books published in China—regardless of foreign or domestic origin—have to pass political censorship. A thorough under- standing of these rules is crucial. Experienced editors at Posts and Telecom Press advised that the title be changed to Global Business Strategy (Quanqiu Qiye Zhanlue), to avoid potential confusion in the eyes of the political censors that this might be a book about “global military strategy.” Such important but subtle local knowledge helped avoid misun- derstandings and troubles down the road, and helped a global company to successfully turn a page locally.

Sources: Based on (1) author’s interviews with Cengage Learning executives in Brazil, China, and the United States; (2) Economist, 2010, The future of publishing, April 3: 65–66; (3) M. W. Peng, 2009,Global Strategy, 2nd ed., Cincinnati: South-Western Cengage Learning; (4)M.W. Peng, 2007,Quanqiu Qiye Zhanlue, translated by W. Sun & X. Lui, Beijing, China: Posts & Telecom Press; (5) M. W. Peng, 2008, Estratégia Global, translated by J. C. Racy & G. B. Rossi, São Paulo, Brazil: Cengage Learning; (6) M. W. Peng, 2010, Estrategia Global, segundaedición, translated by A. Alcérreca &M. Muñoz, Mexico City, Mexico: Cengage Learning.

(Continued)

OPENING CASE

4 PART 1 FOUNDATIONS OF GLOBAL STRATEGY

In reality, multinational enterprises (MNEs), defined as firms that engage in foreign direct investment (FDI) by directly controlling and managing value-adding activities in other countries,2 often have to adapt their strategies, products, and services for local markets. For example, the Opening Case clearly shows that in the publishing industry, one size does not fit all. In the automobile industry, there is no “world car.” Cars popular in one region are often rejected by customers elsewhere. The Volkswagen Golf and the Ford Mondeo (marketed as the Contour in the United States), which have dominated Europe, have little visibility in the streets of Asia and North America. The so-called “world drink,” Coke Classic, actually tastes different around the world (with varying sugar content). The Coca-Cola Company’s effort in pushing for a set of “world commercials” centered on the polar bear cartoon character presumably appealing to some worldwide values and inter- ests has been undermined by uncooperative TV viewers around the world. Viewers in warmer weather countries had a hard time relating to the furry polar bear. In response, Coca-Cola switched to more costly but more effective country-specific advertisements. For instance, the Indian subsidiary launched an advertising campaign that equated Coke with “thanda,” the Hindi word for “cold.” The German subsidiary developed a series of commercials that showed a “hidden” kind of eroticism (!).3

It is evident that the narrow notion of “global strategy” in vogue over the past two decades (in other words, the “one-size-fits-all” strategy), while useful for some firms in certain industries, is often incomplete and unbalanced.4 This is reflected in at least three manifestations:

• Too often, the quest for worldwide cost reduction, consolidation, and restructuring in the name of “global strategy” has sacrificed local responsiveness and global learning. The results have been unsatisfactory in many cases and disastrous in others. Many MNEs have now pulled back from such a strategy. MTV has switched from standardized (American) English-language programming to a variety of local languages. With over 5,000 branches in 79 countries, HSBC is one of the world’s largest and most global banks. Yet, instead of highlighting its “global” power, HSBC brags about being “the world’s local bank.”

• Almost by definition, the narrow notion of “global strategy” focuses on how to compete internationally, especially on how global rivals, such as Coca-Cola and Pepsi, Toyota and Honda, and Boeing and Airbus, meet each other in one country after another. As a result, the issue of how domestic companies compete with each other and with foreign entrants seems to be ignored. Does anyone know the nationalities and industries of the following companies: Cemex, Embraer, Foxconn, Huawei, and Tata? Based in Mexico, Brazil, Taiwan, China, and India, these five firms are world-class competitors in, respectively, cement, aerospace, electronics manufacturing, telecommunications equipment, and cars. They represent some of the top MNEs from emerging economies. If such firms are outside your strategic radar screen, then perhaps the radar has too many blind spots (see Emerging Markets 1.1).

• The current brand of “global strategy” seems relevant only for MNEs from developed economies, primarily North America, Europe, and Japan—commonly referred to as the Triad—to compete in other developed economies, where income levels and consumer preferences may be similar. Emerging economies (or emerging markets), a term that has gradually replaced the term developing economies since the 1990s, now command half of the worldwide FDI inflow and nearly half of the global gross domestic product

multinational enterprise (MNE)

A firm that engages in for- eign direct investment (FDI) by directly controlling and managing value-adding activities in other countries.

foreign direct investment (FDI)

A firm’s direct investment in production and/or ser- vice activities abroad.

Triad

Three primary regions of developed economies: North America, Europe, and Japan.

emerging economies (emerging markets)

A label that describes fast- growing developing economies since the 1990s.

C h a p t e r 1 S t r a t e g i z i n g A r o u n d t h e G l o b e 5

E T H I C A L D I L E M M AEMERGING MARKETS 1.1

Foxconn

Until 2010, the vast majority of the endusers of Apple iPhones and iPads, Hewlett-Packard laptops, Amazon Kindles, and Microsoft Xboxes around the world had no clue about the firm that manufactured their beloved gadgets. The firm is Foxconn, which is headquartered in Taipei, Taiwan. Foxconn’s shares (under the name of Hon Hai) are not only listed in Taipei (TWSE: 2317), but also in Hong Kong (SEHK: 2038), London (LSE: HHPD), and NASDAQ (HNHPF). With $110 billion in annual revenue, Foxconn is the global leader in contract manufacturing services. In other words, everybody has heard that leading electronics firms such as Cisco, Dell, Ericsson, Intel, Motorola, Nintendo, Nokia, and Sony—in addition to those named in the first three lines of this box above—have outsourced a large chunk of their manufacturing to “low-cost producers.” But to whom? Only a small number of people know the answer: Foxconn has been scooping up a tremendous number of outsourcing orders.

Starting in 1975 in Taipei with a meager $7,500, Foxconn was founded by Taiwanese entrepreneur Terry Gou, who still serves as its chairman. As Foxconn becomes a giant, of course, industry insiders know and respect it. But outside the industry Foxconn lives in relative obscurity. It is likely to be the largest firm many people around the world have never heard of. Just how big is Foxconn? Worldwide, it has 1.3 million employees. In China alone, it employs over 920,000 workers (300,000 on one factory campus in Shenzhen). To put these mind- boggling numbers in perspective, its worldwide headcount is as large as the entire US military, and its headcount in China is three times the size of the Taiwanese military. In addition to China, Foxconn has factories in 12 countries: Australia, Brazil, the Czech Republic, India, Japan, Mexico, the Netherlands, Poland, Russia, Slovakia, Singapore, and the United States. Foxconn is the largest private employer and the largest exporter in China and the second largest exporter in the Czech Republic.

In 2010, Foxconn stumbled into the media spotlight, not because of its accomplishments, but because a dozen

employees in Shenzhen, China, committed suicide in a span of several months, most of them by jumping from high-rise Foxconn dormitories. Here comes one of the biggest paradoxes associated with such an emerging multinational. What are Foxconn’s secrets for being so successful? Just like 100 years ago when Henry Ford created the mass assembly line by standardizing each worker’s job, Foxconn has pioneered a business model that it calls e-enabled Components, Modules, Moves, and Services (eCMMS) that can help its clients save a ton of money. But why were there so many worker suicides that shocked the world? The business model is certainly a culprit. Working at Foxconn demands a great deal of concentration and repetition that breed enormous stress. Bloomberg Businessweek described Gou as “a ruthless taskmaster.” Although the media and corporate social responsibility gurus criticize Foxconn for treating workers like machines and exploiting cheap labor, there is no evidence that Foxconn has mistreated or abused employees. In fact, in China, labor watchdogs actually give Foxconn credit for exceeding the norms, by paying workers (relatively) higher salaries, on time, and for overtime. In both 2005 and 2006, it was among the Best Employers in China, according to a ChinaHR.com poll. In response to the suicides, Foxconn increased Shenzhen factory workers’ pay by 30% to $176 a month in 2010. Such raises cut earnings per share by about 5% in 2010 and by 12% in 2011. As a result, Gou recently scaled back his annual growth target from 30% to 15%. Despite the setback, this intriguing (and until recently largely hidden) emerging multinational continues to deserve your attention, especially the next time you turn on your iPad.

Sources: Based on (1) Bloomberg Businessweek, 2010, Chairman Gou, September 13: 58–69; (2) Bloomberg Businessweek, 2011, How to beat the high cost of happy workers, May 9: 39–40; (3) www.foxconn.com.

6 PART 1 FOUNDATIONS OF GLOBAL STRATEGY

(GDP) measured at purchasing power parity.5 Brazil, Russia, India, and China—now known as BRIC in the new jargon—command more attention. BRICS (that is: BRIC + South Africa) has become a newer buzzword. Many local firms rise to the challenge, not only effectively competing at home but also launching offensives abroad.6 Overall, more than a quarter of the worldwide FDI outflows are now generated by these emerging multinationals from emerging economies.

As a result, modifying (or even abandoning) the traditional “global strategy” has increasingly been entertained.7 Figure 1.1 illustrates the global economy as a pyramid. The top consists of about one billion people with annual per capita income greater than $20,000. These are mostly people in the Triad and a small percentage of rich people in the rest of the world. Another billion people, making $2,000 to $20,000 a year, make up the second tier. The vast majority of humanity—about five billion people—make less than $2,000 a year and comprise the base of the pyramid (BOP), which has been ignored by traditional “global strategy.” Many MNEs from developed economies believed that there was no money to be made in BOP markets. Recent developments in the global economy have shaken this erroneous belief. General Motors (GM) now sells more cars in China than in the United States, and China has surpassed the United States as the world’s largest car market. If MNEs from developed economies do not pay serious attention to BOP markets in emerging economies, local competitors such as India’s Tata Motors and China’s Geely will (see Emerging Markets 1.2). From the bottom (BOP) up, these new competitors increasingly go after the second and top tier markets overseas, creating serious competitive challenges to MNEs from developed economies.

FIGURE 1.1 The Global Economic Pyramid

Per capita GDP > $20,000 Approximately one billion people

Per capita GDP $2,000–$20,000 Approximately one billion people

Per capita GDP < $2,000 Approximately five billion people

Top Tier

Second Tier

Base of the Pyramid

Sources: Adapted from (1) C. K. Prahalad & S. Hart, 2002, The fortune at the bottom of the pyramid, Strategy+Business, 26: 54–67; (2) S. Hart, 2005, Capitalism at the Crossroads (p. 111), Philadelphia: Wharton School Publishing.

BRIC

Brazil, Russia, India, and China.

BRICS

Brazil, Russia, India, China, and South Africa

base of the pyramid (BOP)

The vast majority of humanity, about five billion people, who make less than $2,000 a year.

C h a p t e r 1 S t r a t e g i z i n g A r o u n d t h e G l o b e 7

EMERGING MARKETS 1.2

GE’s Reverse Innovation from the Base of the Pyramid

Mulitnationals such as General Electric (GE) historically innovate new products in developed economies and then localize these products by tweaking and simplifying them for customers in emerging economies. Unfortunately, a lot of these expensive products meant for well-off customers at the top of the global economic pyramid flop at the base of the pyramid. This is not only because of the products’ price tag, but also due to the lack of consideration for the specific needs and wants of local customers. Being the exact opposite, reverse innovation turns innovative products created for emerging economies into low-cost offerings for developed economies.

Take a look at GE’s conventional ultrasound machines, originally developed in the United States and Japan and sold for $100,000 and up (as much as $350,000). In China, these expensive, bulky devices sold poorly because not every sophisticated hospital imaging center could afford them. GE’s team in China realized that more than 80% of China’s population relies on rural hospitals or clinics that are poorly funded. Conventional ultrasound machines are simply out of reach for these facilities. Patients thus have to travel to urban hospitals to access ultrasound. However, transportation to urban hospitals, especially for the sick and the pregnant, is challenging. Since most Chinese patients could not come to the ultrasound machines, the machines have to go to the patients. Scaling down its existing bulky, expensive, and complex ultrasound machines was not going to serve that demand. GE realized that it needed a revolutionary product—a compact, portable ultrasound machine. In 2002, GE in China launched its first compact ultrasound, which combined a regular laptop computer with sophisticated software. The machine sold for only $30,000. In 2008, GE introduced a newmodel that sold for $15,000, less than 15% of the price tag of its high-end conventional ultrasound models. While portable ultrasounds have naturally become a hit in China, especially in rural clinics, they have also generated dramatic growth throughout the world, including developed economies. These machines combine a new dimension previously unavailable to ultrasound machines—portability— with an unbeatable price in developed economies where

containing health care cost is increasingly paramount. Before the global recession hit, portable ultrasounds by 2008 were a $278 million global product line for GE, growing at 50% to 60% annually. Even in the midst of a severe global recession, this product line has been growing 25% annually in China.

GE’s experience in developing portable ultrasound machines in China is not alone. For rural India, it has pioneered a $1,000 handheld electrocardiogram (ECG) device that brings down the cost by a margin of 60% to 80%. In the Czech Republic, GE developed an aircraft engine for small planes that slashes its cost by half. This allows GE to challenge Pratt & Whitney’s dominance of the small turboprop market in developed economies.

Why is GE so enthusiastic about reverse innovation? GE’s chairman and CEO Jeffrey Immelt wrote in a Harvard Business Review article:

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’s oxygen.

Sources: Based on (1) Economist, 2011, Frugal healing, January 22: 73–74: (2) Economist, 2011, Life should be cheap, January 22: 16; (3) V. Govindarajan & R. Ramamurti, 2011, Reverse innovation, emerging markets, and global strategy, Global Strategy Journal, 1: 191–205; (4) J. Immelt, V. Govindarajan, & C. Trimble, 2009, How GE is disrupting itself, Harvard Business Review,October: 56–65; (5) C. K. Prahalad & R.Mashelkar, 2010, Innovation’s holy grail, Harvard Business Review, July: 132–141; (6) Wall Street Journal, 2011, Medicine on the move, March 28.

8 PART 1 FOUNDATIONS OF GLOBAL STRATEGY

Overall, this book can be considered as part of this broad movement in search of a better understanding of how to effectively strategize and compete around the globe, not being merely about “global strategy” per se. This book differentiates itself from existing global-strategy books by providing a more balanced coverage, not only in terms of the traditional “global strategy” and “non-global strategy,” but also in terms of both MNEs’ and local firms’ perspectives. In addition to developed economies, this book also devotes extensive space to competitive battles waged in and out of emerging economies. In every chapter, at least one box deals with “emerging markets” that refer to competition within emerging economies or multinationals emerging from these economies that enhance your understanding of this new breed of global competitors. No other global-strategy book does this. In a nutshell, this is truly a global global- strategy book.