Global Strategy Framework- An illustration of Tata Steel.
Introduction: Most managers have to face the increasing globalisation of markets and competition. That fact requires each company to decide whether it must become a worldwide competitor to survive. While deciding to go for globalization, the managers face two challenges. . First, they need to figure out what a global strategy is. Then, when they know what to do, they have to get their organisations to make it happen. Developing a global strategy is complicated by the fact that there are at least five major dimensions of globalisation such as playing big in major markets, standardizing the core product, concentrating value- adding activities in a few countries, adopting uniform market positioning and marketing mix and integrating competitive strategy across countries.
Global strategy framework given by George.S. Yip, Pierre .M. Loewe and Michael .Y. Yoshino helps the manager to decide whether it should globalise a particular business and what sort of global strategy should it pursue. The global strategy framework/audit involves seven steps as shown in chart-1.(shown at the end)
1. Identify Strategic business unit to audit: This step involves identifying the particular business unit for which the company is planning for globalisation.
2. Evaluate industry potential for globalisation: Managers should look first to the business’s industry. An industry’s potential for globalisation is driven by market, economic, environmental and competitive factors (see Chart 2 at the end of the paper) Market forces determine the customers‘ receptivity to a global product; economic factors determine whether pursuing a global strategy can provide a cost advantage; environmental factors show whether the necessary supporting infrastructure is there; and competitive factors provide a spur to action.
Market factors like homogeneous market needs, global customers, shortening product life cycle, transferable brands and advertising and internationalising distribution channel determine the potential for global strategy. Factors like economies of scale in manufacturing and distribution, steep learning curve, significant differences in country costs determine the potential for global strategy from economic point of view. Environmental factors like falling transportation costs, govt policies and technology changes push for global strategy in some industries. Competitive interdependence among countries and global moves of competitors also affect the potential of an industry for global strategy.
3. Evaluate current extent of globalization: The current extent of globalization of SBU under study is evaluated from five dimensions such as market participation, product standardization, activity concentration, marketing uniformity and integration of competitive moves.
Playing big in major markets – countries that account for a sizeable share of worldwide volume or where changes in technology or consumer tastes are most likely to start – brings benefits such as, larger volume over which to amortise development efforts and investments in fixed assets, ability to manage countries as one portfolio, including being able to exploit differences in position along the product life cycle, learning from each country, and being at the cutting edge of the product category by participating in the one or two major countries that lead development.
The core product can be standardized while customizing more superficial aspects of the offering. This will help the firm to enjoy the economies of scale relating to production.
Instead of repeating every activity in each country, a pure global strategy provides for concentration of activities in just a few countries. For example. fundamental research is conducted in just one country, commercial development in two or three countries, manufacturing in a few countries, and core marketing programs developed at regional centres, while selling and customer service take place in every country in the network. The benefits include gaining economies of scale and leveraging the special skills or strengths of particular countries.
The more uniform the market positioning and marketing mix, the more the company can save in the cost of developing marketing strategies and programs. Again it is easy to manage one or two brand than having several brand names.
Instead of making competitive decisions in a country without regard to what is happening in other countries, a global competitor can take an integrated approach. Another benefit of integrating competitive strategy is the ability of a company to cross-subsidise. This involves utilising cash generated in a profitable, high-market-share country to invest aggressively in a strategically important but low-market-share country.
4. Identify strategic need for change in the extent of globalisation: From the previous analysis, a firm’s extent of globalisation is compared with the industry potential. In case the firm’s extent of globalisation is less than industry potential, there is a need for global strategy for that firm. Then the next issue would be to check whether the firm has the internal ability to implement such global strategy.
5. Evaluate organisational factors: Organisational factors can support or undercut a business’s attempt to globalise. Therefore, taking a close look at how the organisation will affect the relative difficulty of globalisation is essential. Four factors affect the ability of an organisation to develop and implement global strategy: organisation structure, management processes, people and culture (see chart 3 at the end of this paper)
a) Organisational structure:
· Centralisation of global authority: One of the most effective ways to develop and implement a global strategy is to centralise authority, so all units of the business around the world report to a common sector head. In a company pursuing a global strategy, the business focus should dominate the country focus.
· Domestic/ International split: A common structural barrier to global strategy is an organisational split between domestic and international divisions. The international division oversees a group of highly autonomous country subsidiaries, each of which manages several distinct businesses. A global strategy for any one of these businesses can then be coordinated only at the CEO level.
b) Management processes: The appropriate processes can even substitute to some extent for the appropriate structure..
· Cross Country coordination: Providing cross-country co-ordination is a common way to make up for the lack of a direct reporting structure.
· Global Planning: Too often strategic plans are developed separately for each country and are not aggregated globally for each business across all countries. This makes it difficult to understand the business’s competitive position worldwide and to develop an integrated strategy against competitors who plan on a global basis.
· Global budgeting: Similarly, country budgets need to be consolidated into a global total for each product line to aid the allocation of resources across product lines.
· Global performance review and compensation: Rewards, especially bonuses, need to be set in a way that reinforces the company’s global objectives.
· International groups and forums: Holding international forums allows exchange of information and building of relationships across countries. This in turn makes it easier for country nationals to gain an understanding of whether the differences they perceive between their home country and others are real or imagined. It also facilitates the development of common products and the co-ordination of marketing approaches.
c) People: Being truly global also involves using people in a different way from that of a multinational firm.
· Use foreign nationals: High-potential foreign nationals need to gain experience not only in their home country, but also at headquarters and in other countries. This practice has three benefits: broadening the pool of talent available for executive positions; demonstrating the commitment of top management to internationalisation; and giving talented individuals an irreplaceable development opportunity.
· State global intentions: The senior management of a company that wants to go global needs to constantly restate that intention and to act accordingly.
d) Culture: Culture is the most visible aspect of organisation. If the company lacks global identity and has strong national identity, then it will face difficulty in designing global products and programmes. A high level of autonomy for local business can also be a barrier to globalisation.
6. Identify organisational ability to implement globalisation: From the internal or organisational factor analysis, the firms ability to implement global strategy has to be identified.
7. Diagnose scope and direction of required strategy and organisational changes: From the above analysis, it will be clear whether the firm can implement global strategy or not? What are the changes required in the organisation to implement global strategy?
Illustration of Tata steels global strategy with the use of global strategy framework:
1. Identify business unit: Amongst the various SBU of Tata groups, I have selected Tata steel company (with special reference to their take over of Corus) as the SBU for the study of global strategy framework.
2. Evaluate Industry potential for globalization: Market factors pushed for globalization. The market needs for steel was homogeneous and they had global customers. Because of homogeneity of needs, the brands and advertising were transferable.
Economic factors were also favourable for globalization. Because of standardization of core products, the company was able to enjoy economies of scale in manufacturing. Since the company is ninety nine years old, they also enjoy the benefit of steep learning curve. Again, the raw material cost in U.K. is high. This can be offset by sourcing from India, where raw materials are comparatively cheaper.
Environmental factors increased the potential for global strategy. Since Corus had good sales network at various countries, the transportation costs of Tata steel will be reduced. Again, government policies like easing foreign currency restrictions both in UK and India were favourable for global strategy.
Global moves of competitor i.e. Mittal acquiring Arcelor also forced the Tata steel to go for global strategy.
3. Evaluate current extent of globalization: The current extent of globalization is measured under 5 dimensions.
· Market participation: Tata steel has sales in various countries like USA, Srilanka, Nepal, Shanghai etc but it lacked global identity or image.
· Product standardization: The basic product was standardized throughout the world. At final stages the product was customized as per the requirements.
· Activity concentration: Tata steels technological and integration, finance, strategy etc were concentrated only in India whereas the manufacturing activities were dispersed in India, USA, UK, Thailand, Vietnam, Malaysia etc. Trading was done in Bangladesh, Srilanka, Nepal, South Africa, Hong Kong, etc.
· Marketing uniformity: The market positioning and marketing mix strategy were uniform throughout the world.
· Integration of competitive moves: Tata steel has taken an integrated approach to global competitors. They have tough competition with Mittal steels in almost all countries.
3. Identify strategic need for change in the extent of globalization: From the previous analysis, Tata steel concluded that its extent of globalization was significantly lower than the industry potential and lower than its competitor’s global strategy. The Mittal Arcelor is ranked number one in steel industry in the world whereas the Tata steel ranked fifty sixth (before acquiring Corus). Furthermore, the industry potential for Tata steel had a strong need to develop a more global strategy. The next issue was whether Tata steel would be able to implement such a strategy.
5. Evaluate organisational / internal factors: To internal ability of Tata steel to implement global strategy is tested under the following factors:
· Structure: The head quarter of Tata steel was located in India. The five main functions such as technological and integration, finance, strategy, corporate relation and communication and global minerals were centralized. While the production, selling and distribution was decentralized and the divisions heads were given autonomy to take decisions.
· Management processes: The management processes were favourable for global strategy. Since the strategy and corporate communication was centralized, there was well cross- border co-ordination.
· People: There were no foreign nationals working in India either at corporate or divisional levels. There were many foreign nationals overseas, but these were mostly in their home countries and there was little movement between international and domestic jobs. But the leader Ratan Tata, through his action and statements had a global approach.
· Culture: Tata steel had a strong Indian national identity than a global identity. But some SBU of Tata group like Tetley Tea, Taj group of Hotels had created global identity.
6. Identify organizational ability to implement globalization: Tata steel had the ability to implement globalization because of its rich experience of 99 years of running a business successfully in India. Hence it had the ability to acquire big steel company like Corus.
7. Diagnose scope and direction of required changes: The most important change, the Tata steel has to do is to encourage the transfer of people between nations. According to IISI data, the average hourly rate of pay in UK steel was 6 times that of Brazil and 10 times that of India. So by movement of people, the company can reduce the cost and strengthen its competitive advantage of low cost leadership.
Tata groups in foreign countries should blend into the adopted corporate culture. For better brand visibility, more Tata companies will have to go abroad and learn to flourish abroad.
Conclusion: The global strategy framework provides a relatively simple and quick way to get answers to some of the most complicated questions facing corporate management today. It also greatly facilitates the undertaking of the strategy development phase that follows, because it has identified the major thrusts that are needed. Furthermore, it has the potential for avoiding major errors such as a move towards globalization when none is warranted. Finally it sensitizes the organization to the issues and to the commitments needed if it really decides to compete globally.
- George .S.Yip, Pierre.M. Loewe, Michael .Y.Yoshino, „How to take your company to global market“, Columbia journal of world business, 1988.
- Pocha Jehangir, „Tatas Titan“, Business world, Jan 14th 2008.
- Singh Piya, „Eyes on the World“, Business world, Jan 14th 2008.
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Source by Shilpa Kamath