Internets Impact on Location of Global Firms - Assignment Example

Diamonds and Drivers: Analysing the Internet's Impact on Location of Global Firms This paper analyses the impact of the Internet on the global location of two firms of different sectors, using two different frameworks for our analysis: Yip's Globalisation Drivers and Porter's Diamond. We begin our analysis with a discussion of the problem, which is to analyse the role of location on a firm's global competitiveness and compare the impact, if any, of the Internet on the global firm's location. We then outline the two analysis frameworks used to address the problem, apply each framework to our two sample firms from different sectors, and use the framework to make our comparisons. We conclude with a discussion of the merits of each framework in helping us with our analysis. Definition of the Problem The problem touches on key issues - globalisation and the Internet - that confront managements of several firms, challenging them to discover how to make the Internet a part of global strategy. What is globalisation and global strategy Micklethwait and Wooldridge (2000, p. xvi) called globalisation "the most important economic, political, and cultural phenomenon of our time" characterised by the "integration of the world economy, reshaping business and reordering the lives of individuals, creating social classes, different jobs, unimaginable wealth and, occasionally, wretched poverty." Stiglitz (2002, p. 9) defined global strategy as "the way firms cope with integration of countries and peoples of the world brought about by the enormous reduction of transportation and communication costs, and the breaking down of artificial barriers to the flow of goods, services, capital, knowledge, and people across borders." In other words, a global strategy is a set of objectives that help a firm deal with globalisation, e.g., what goods to sell to world markets, how to sell these goods, and how to transport these goods from where they are produced to where they are consumed. Globalisation affects firms that sell products like autos and appliances, and service firms in banking and retailing. Porter's Diamond Porter's Diamond refers to a framework (Porter, 1990) that a nation or economy can use to analyse and develop its competitive advantage, a concept he explains (Porter, 1985) as the added benefit that a firm's product or service has over that of its competitors so that customers buy from the firm instead of from its competitors. Porter (1985, p. 3) enumerates three basic types of competitive advantage: cost leadership, differentiation, and focus. A firm attains the first through economies of scale and cost minimisation; the second through brand image, technology, product features, service and support quality; and the third by supplying a particular market or niche very well. Applied to nations, the diamond-shaped framework is a map - of what Porter calls Competitive National Advantage - which consists of four determinants that we describe and show in Figure 1: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry (1990, p. 72). [Insert Figure 1 here] These determinants are broad attributes existing in a country that shape the environment in which local firms compete and that promote or impede the creation of competitive advantage. They indicate why a nation is globally successful in a particular industry. He cites examples of how competitive national advantage promoted the success of industry clusters in printing equipment in Germany, pharmaceuticals in Switzerland, home appliances in Italy, and robotics in Japan. Porter's thesis is that each country has a unique set of conditions that enable local firms to compete successfully in the global marketplace. Porter states that the diamond is a system (1990, p. 144), with each determinant affecting the others in a dynamic way, either building up or destroying the competitiveness of firms and affecting their ability to compete globally. Yip's Drivers Firms need to develop global strategies and implement initiatives that will help them succeed globally. The traditional multinational approach in which subsidiaries design, produce, and market products tailored to local needs are being made obsolete by the collapse of trade barriers, fast paced technological advances, and the growing similarity of customer needs worldwide. Yip (1992) claims that firms need a "total global strategy" that combines a successful core strategy in the home market with the ability to effectively adapt and integrate itself internationally. Yip identifies four drivers that determine a firm's ability to compete. We describe and show these in Figure 2. Unlike Porter's diamond, Yip's industry drivers transcend national boundaries. [Insert Figure 2 here] Global competition, therefore, is not limited to finding new markets for the firm's products and services, or finding new products for new markets, but includes finding the best places for the firm's production and innovation sites to enhance competitiveness. Importance of Location according to Porter and Yip From the outline of the two analysis frameworks, we understand the importance of location, which refers not only to a firm's home market but also to the place(s) where it has its head office, production and innovation sites, and its consumers. Porter gives (1990, pp. 57-58) examples of global strategies for locating a firm's activities (head office, production, and markets). Initially, these activities are in the home nation, but as the firm globalises and serves markets beyond its national borders, it may locate production, research, or administrative support sites in other countries, wherever advantage lies. This advantage can be based on factor costs: labour where it is cheap (China), capital where one can get the best terms (London, New York, or Frankfurt), and research where the top brains are (U.S. or Europe). Location advantage may be due to operating preconditions, where global firms maintain facilities in many locations to support the customisation and heavy servicing requirements of clients, or due to government mandates that "force" foreign firms to put up factories in nations that impose high tariffs or other trade barriers. Location is important because a firm has to coordinate and concentrate its strategies to sustain its competitive advantage; not doing so is one reason why firms lose advantage in some industries (Porter, 1990, p. 58). Although the diamond's dynamic quality is affected by the home location of a firm, Porter strongly suggests (1990, p. 608-609) that the firm should disperse particular activities in the value chain to whatever country enjoys advantages, including getting raw materials from foreign suppliers, developing technology and moving production abroad, since these will also benefit local suppliers by forcing them to be competitive. Lastly, Porter recommends (p. 611) that a firm should locate its headquarters in the nation with the most favourable national "diamond", giving as an example DuPont's decision to move its European headquarters in agricultural chemicals from Geneva to Paris to take advantage of a better-developed national cluster in France. Yip's book devotes one chapter (1992, Chapter 5) to the topic of locating global activities, emphasising the importance of home country presence and increased visibility in home markets, concentrating core firm activities in locations where globalisation drivers are favourable, exploiting low-cost locations, and optimising global networks wherever these may be located. Yip's paradigm allows the firm to develop a strategy of moving into key markets in a pre-emptive way to achieve global economies of scale in the fastest possible time, taking advantage of internationally available resources. By moving to locations with these favourable drivers, firms can break down the value chain, globalise without much friction, establish dominance in multiple markets, compete on the basis of price, and gain the benefits of volume. As a result of subsequent changes in the nature of global competition, Yip discussed in a later interview (Powell, 2001) what he calls the maximisation of global networks as a guide to managing globalised firms. In such a networked model, no single national subsidiary exerts control, value chains are "broken up", locating individual activities in as few places as possible so that no part of the organisation, whether head office or subsidiary, is self-sufficient. To be effective, the separate locations need to work together as a network, even if merely virtual, integrating different businesses and functions in different locations. Impact of the Internet on Global Firms and their Locations The rise of the Internet after the publication of the first edition of their books forced Porter and Yip to rethink their analysis frameworks. Both came out with rejoinders on the changed face of global competition, with special emphasis on the Internet's impact. Porter (2001) acknowledged the Internet as an enabling technology that gives global firms the twin advantages of lower costs and increased market demand. By allowing firms to achieve operational effectiveness and strategic positioning, the Internet helps firms attain cost and price advantages that can lead to sustainable competitive advantage. Advantages in operational effectiveness include improved technologies, superior inputs, or better-trained people. Strategic positioning means doing things differently from competitors in a way that delivers a unique type of value to customers, such as offering products with a different features, new services, or efficient logistical arrangements (Porter, 2001, pp. 63-64). Yip's update (2003) includes the effects of the Internet and the rise of global service firms. He emphasises that firms must learn to use the Internet to optimise its global value chain networks through coordination and a minimum of adaptation. He believes that consumer tastes are globalising and becoming more uniform, and sees a decreasing need for firms to adopt product and service offerings to local tastes. Let us take for our examples two global firms: Toyota Motors, a Japanese car manufacturer, and Wal-Mart, an American retailing giant. The diversity of the market to which these firms sell leads us to ask whether the same identical product can be sold worldwide. The answer is no. For example, Toyota cannot sell the same cars it sells in Japan, where the car's steering wheel is on the right side because cars in Japan travel on the left side of the road, to consumers in France, where cars travel on the right side of the road. The same is true with Wal-Mart, which sells large food portions in the U.S. and Europe but need to sell smaller packages in China. We see two reasons why location is important. First, the location may contain subtle differences that require a different product configuration (right-hand cars assembled in Japan cannot be sold a few hundred kilometres away in Seoul). And second, where products are manufactured affect the product's costs and profitability because of transport and other costs. U.S.-grown vegetables are sold in the U.S. but may prove expensive to sell in Europe, where Wal-Mart relies on local suppliers for fresh produce. Location of markets and production sites challenge both a firm like Toyota that wants to sell to the U.S. and Wal-Mart that wants to sell fresh meat in Northern Ireland. Kim and Mauborgne (1997) showed that the Internet creates value innovations that enable firms to reposition themselves radically in existing industries with far-reaching effects on existing industry structures. The result is intense competition that transforms industries, changing the dynamics and structures of market interactions. We summarise our investigation of the Internet's impact on the location of the two global firms in our example, Toyota and Wal-Mart, in Table 1. Porter's Diamond applies to both firms, dominant in their home countries and enjoying a considerable edge over its competitors in each of the determinants of national competitive advantage. Table 2 shows summary applications of the diamond to Wal-Mart, which has annual revenues of $285 billion from 5,200 stores, 1.6 million employees and 68,000 suppliers in sixteen countries (Wal-Mart, 2005). [Insert Tables 1 and 2 here] Yip's Drivers also apply to both firms, but we use it for Toyota, which has net revenues of $173 billion, a sales network in 170 countries, production bases in 26 countries, and a total of over 260,000 employees (Toyota, 2005). Table 3 shows a sample of how the globalisation drivers help Toyota become a successful global firm. [Insert Table 3 here] Park and Yun (2004) discuss the effects of the Internet on three sources of transaction costs and conclude that for firms to take advantage of the technology's benefits like cost reductions, a working supply chain and a good knowledge of how technology can make it more efficient are critical. They cited as an example Wal-Mart's Electronic Data Interchange (EDI) System that linked management to stores and suppliers worldwide, allowing the firm to deliver on its promise to offer low prices every day, anywhere in the world. Coia (2004) discussed six advantages Toyota enjoys in using the Internet: reduce complex transactions, allows it to locate close to the supplier's plants, lower inventory levels throughout the supply chain, raises collaboration with suppliers, improves cost structures and delivery times, and propagation of supply chain technology to other suppliers. In 2004, Toyota saved $100 million in distribution costs and took out $90 million of inventory from its supply chain because of the Internet. The analysis frameworks of Porter and Yip offer firms with modern alternatives to map global strategy that, in the past stages of globalisation (a phenomenon that has been around for some time), used David Ricardo's Theory of Comparative Advantage, which stated that "free trade offers all countries, both rich and poor, chances to gain by specialising in what they do best" (Micklethwait and Wooldridge, 2000, pp. 4-5). By focusing on the firm and allowing for the potential impact of technology, Porter's Diamond and Yip's Drivers give managements a tool for planning strategies that may be around for some time. Conclusions The Internet allows the formation of global networks that firms like Toyota and Wal-Mart use efficiently to compete globally, but we also saw that firms need to have a competitive advantage that the Internet can help to sustain and improve. Porter (2001) considers the Internet an enabling technology that allows firms to achieve operational effectiveness and strategic positioning that build on their competitive advantage. The reason why most so-called dotcom companies failed in recent years is their lack of a substantial competitive advantage over their competitors. In this age of uniformity in global consumer tastes and needs, Yip (2001) suggests that the Internet can be a way of providing "local" content to global products. The Internet (Powell, 2002) speeds up globalisation and allows firms to leverage location as a factor for competitive advantage. For automotive manufacturers like Toyota and retailers like Wal-Mart, physical presence in markets is crucial because this allows them to stay close to customers, even if Toyota's head office and R&D activities are managed from faraway Japan, and remain sensitive to customer needs. For Wal-Mart or its subsidiaries in other countries like Asda in the U.K., physical presence is critical, it being a service firm. This allows Wal-Mart to extend the benefits of its efficient supply chain, managed via the Internet from the U.S. head office, to its hundreds of millions of customers in sixteen countries all over the world. Like Toyota for its global production base, Wal-Mart uses the Internet to link its people from anywhere in the world. Managing and optimising the information network is a critical global strategy for cutting costs, reaching more customers and increasing sales, allowing firms like Toyota and Wal-Mart to transcend geographical boundaries. These efforts are only as good as the firm's competitive advantage. Without the years of competitive experience at home, a firm with the most sophisticated Internet-based information systems would have no chance of survival. Bibliography Coia, A. (2004) Stretch: How Toyota reaches for big goals. Supply Chain Management Review, March, p. 28-35. Kim, C. and Mauborgne, R. (1997) Value innovation: the strategic logic of high growth. Harvard Business Review, January-February, p. 45-53. Micklethwait, J. and Wooldridge, A. (2000) A future perfect: The challenge and hidden promise of globalization. New York: Crown. Park, S. Y. and Yun, G. W. (2004) The impact of Internet-based communication systems on supply chain management: an application of transaction cost analysis. Journal of Computer-Mediated Communication, 10 (1), November, Article 12. Available from: Porter, M.E. (1985) Competitive advantage: Creating and sustaining superior performance. New York: Free Press. Porter, M.E. (1990) The competitive advantage of nations. New York: Free Press. Porter, M.E. (2001) Strategy and the internet. Harvard Business Review. March, p. 63-78. Powell, S. (2001) Spotlight on George Yip: an interview. Emerald Insight. April. Available from: Stiglitz, J.E. (2002) Globalization and its discontents. London: Allen Lane. Toyota Motor Corporation (2005) Positioned for the Future: Annual Report 2005. Toyoda-cho: TMC. Wal-Mart Corporation (2005) Vested Interest: 2005 Annual Report. Bentonville: Wal-Mart. Yip, G. S. (1992) Total global strategy: Managing for worldwide competitive advantage. London: Prentice Hall. Yip, G. S. (2003) Total global strategy II. New Jersey: Prentice-Hall. Table 1 Impact of Internet on Location of Toyota and Wal-Mart according to Yip's Globalisation Drivers and Porter's Diamond Yip's Globalisation Drivers Porter's Diamond Toyota Wal-Mart Toyota Wal-Mart Market [+] Increased market size [+] Presence in 170 countries outside Japan [+] Ability to know customer tastes and needs [+] Discriminating home market consumers influence designs and features [+] Increased market size [+] Ability to reach global markets [+] Presence in 15 countries outside US [+] Can manage 260,000 workers worldwide [+] Presence of domestic and foreign rivals stimulates factor creation [+] Can attract quality workers in other countries [+] Can manage 1.6 million workers worldwide [+] Electronic Data Interchange links suppliers, workers, and head office Factor Conditions Cost [+] Supply chain cost reduction [+] Higher profits from cost leadership [+] Established Global Production Centre in 2003 to train workers and bring down costs [+] Supply chain cost reduction [+] Everyday Low Prices [+] Image of world-class quality shared through marketing information system influences industry competitiveness [+] Sophisticated home market makes company's products highly competitive globally [+] Growing international sales ($56bn in 2005, 20% of total for the year) [+] Consumer society in home market influence product standards useful for international markets [+] Introduction of world-class systems influence whole industries in global markets [+] Cost and price leadership Demand Conditions Government [+] HQ in Japan but has established presence in countries where cars are sold [+] Production base in 26 countries linked by Internet-based information systems [+] Good corporate citizen image [+] Continued presence of head office in US give it political power [+] Ability to work with governments where shops are located [+] Patriotic image in the US [+] Linkages with over 50,000 suppliers and small automotive companies globally [+] Suppliers in Japan are able to establish shops in global production bases [+] Supply chain management leader [+] Linkages with over 68,000suppliers worldwide [+] Home suppliers grow as company expands globally [-] Image problems: close down competitors and small shops Supporting Industries Competitive [+] R&D stays in Japan [+] Innovation leader in the auto industry [+] Internet-based customer information and service system [+] Green technology as consumer taste for development of hybrid cars [+] Economies of scale allows buyout of competing firms [+] Ability to match prices of smaller shops [+] Competition experiences in Japan shared with designers and other countries [+] Adapted designs to local tastes and needs [+] Competing with leading automotive companies globally [+] Global expansion [+] Over 5,000 stores worldwide [+] Buy out competitors [+] World-class logistics Firm strategy structure & rivalry (Sources: Toyota Motor Corporation Annual Report 2005; Wal-Mart Corporation Annual Report 2005) Note: [+] Positive effects and [-] Negative effects Table 2 Application of Porter's Diamond of Competitive National Advantage: Example of Wal-Mart Corporation, U.S. Firm strategy, structure, and rivalry Every Day Low Prices 5,200 stores worldwide Factor Conditions Firm: Wal-Mart Home: U.S. Demand Conditions 1.6 million associates Constant retraining and motivation 138 million customers each week Stores in 16 nations Related and supporting industries Free trade competition 68,000 suppliers Electronic Data Interchange links HQ, stores, and suppliers Table 3 Application of Yip's Globalisation Drivers: Example of Toyota Motors Corporation, Japan Market Drivers Affordable cars at several price points Sophisticated buyers Green technologies create hybrid market Luxury car markets Cost Drivers Firm: Toyota Home: Japan Government Drivers Worker productivity Access to suppliers Dealer networks Tax incentives in US/UK Tariffs on imports Government regulations Competitive Drivers Intense domestic competition Design capability US/EU Large markets (US, EU, China) for cheap cars Presence of global competitors Figures Captions Figure 1. Porter's Diamond Figure 2. Yip's Globalisation Drivers Figure 1. (Source: Porter, 1990) Factor conditions refer to skilled manpower and a technological base. Demand conditions refer to a domestic market where consumers set trends and are very demanding in quality and price, forcing firms to excel. Related and supporting industries are the local suppliers that provide raw materials, labour, and other support activities to the firm. Intense local competition leads to innovation, new techniques, and cost effectiveness that cascades to the firm's suppliers, in turn making them competitive. Firm strategy, structure, and rivalry denote local conditions that affect the firm's manner of setting objectives, forcing it to move beyond basic advantages and allowing it to compete effectively in the local market. Figure 2. (Source: Yip, 1992) Market Drivers Cost Drivers Industry Globalisation Potential Government Drivers Competitive Drivers Market drivers are customers who buy the products or services; domestic and global customers and their needs, incomes, and lifestyles; the available marketing channels, relative strength of global brands, and the growth of regional and global media. Cost drivers are the effects of global economies of scale, the ability of the firm to master the steep experience curve of global competition, cost efficiencies in logistics, transportation, production, and labour, acceleration of technology innovations, and the emergence of industrialising countries that create huge new markets for products and venues for lower-cost production activities. Competitive drivers include the presence or absence of global competitors, levels of world trade and exports and imports in each country, the transferability of the firm's competitive advantage to other markets and locations, interdependence of countries, and new models of innovation and competition. Government drivers relate to government behaviour and market policies and regulations, compatible technical standards, the existence of government-owned customers and competitors, and the strength of world trade institutions. Read More