CLOSING CASE

Globalization at General Electric

General Electric, the company that Thomas Edison founded, and now the largest industrial
conglomerate in America, produces a wide array of goods and services, from medical equipment,
power generators, jet engines, and home appliances, to financial services and even television
broadcasting (GE owns NBC, one of Americas big three network broadcasters). This giant
company with revenues of close to $180 billion is no stranger to international business. GE has
been operating and selling overseas for decades. During the tenure of legendary CEO Jack
Welch, GEs main goal was to be number 1 or 2 globally in every business in which it
participated. To further this goal, Welch sanctioned an aggressive and often opportunistic foreign
direct investment strategy. GE took advantage of economic weakness in Europe from 1989
to1995 to invest $17.5 billion in the region, half of which was used to acquire some 50
companies. When the Mexican peso collapsed in value in 1995, GE took advantage of the
economic uncertainty to purchase companies throughout in Latin America. And when Asian
slipped into a major economic crisis in 19971998 due to turmoil in the Asian currency markets,
Welch urged his managers to view it as a buying opportunity. In Japan alone, the company spent
$15 billion on acquisition in just six months. As a result, by the end of Welchs tenure in 2001,
GE earned over 40 percent of its revenues from international sales, up from 20 percent in 1985.

Welchs GE, however, was still very much an American company doing business abroad. Under
the leadership of his successor, Jeffery Immelt, GE seems to be intent on becoming a true global
company. For one thing, international revenues continue to grow faster than domestic revenues,
passing 50 percent of the total in 2007. This expansion is increasingly being powered by the
dynamic economies of Asia, particularly India and China. GE now sells more wide-bodied jet
engines to India than in the Untied States, and GE is a major beneficiary of the huge
infrastructure investments now taking place in China as that country invests rapidly in airports,
railways, and power stations. By 2012, analysts estimate that GE will be generating 55 to 60
percent of its business internationally.

To reflect the shifting center of gravity, Immelt has made some major changes in the way GE is
organized and operates. Until recently, all of GEs major businesses had head offices in the
United States and were tightly controlled from the center. Then in 2004, GE moved the head
office of its health care business from the United States to London, the home of Amersham, a
company GE had just bought. Next, GE relocated the headquarters for the unit that sells
equipment to oil and gas companies to Florence, Italy. And in 2008, the company moved the
headquarters for GE Money to London. Moreover, it gave country managers more power. Why
is GE doing this? The company believes that to succeed internationally, it must be close to its
customers. Moving GE Money to London, for example, was prompted by a desire to be closer to
customers in Europe and Asia. Executives at GE Health Care like London because it allows
easier flights to anywhere in the world.
GE has also shifted research overseas. Since 2004 it has opened R&D centers in Munich,
Germany; Shanghai, China; and Bangalore, India. The belief is that by locating in those
economies where it is growing rapidly, GE can better design equipment that is best suited to
local needs. For example, GE Health Care makes MRI scanners that cost $1.5 million each, but
its Chinese research center is designing MRI scanners that can be priced for $500,000 and are
more likely to gain sales in the developing world.

GE is also rapidly internationalizing its senior management. Once viewed as a company that
preferred to hire managers from the Midwest because of their strong work ethic, foreign accents
are now frequently heard among the higher ranks. Country managers, who in the past were often
American expatriates, increasingly come from the regions in where they work. GE has found that
local nationals are invaluable when trying to sell to local companies and governments, where a
deep understanding of local language and culture is often critical. In China, for example, the
government is a large customer, and working closely with government bureaucrats requires a
cultural sensitivity that is difficult for outsiders to gain. In addition to the internationalization of
their management ranks, GEs American managers are increasingly traveling overseas for
management training and company events. In 2008, in a highly symbolic gesture, GE
Transportation, which is based in Erie, Pennsylvania, moved its annual sales meeting to
Sorrento, Italy from Florida. It was time that the Americans learnt to deal with jet lag,
according to the head of the unit.

Case Discussion Questions

1. Why do you think GE has invested so aggressively in foreign expansion? What opportunities
is it trying to exploit?

2. What is GE trying to achieve by moving some of the headquarters of its global businesses to
foreign locations? How might such moves benefit the company? Do these moves benefit the
United States?

3. What is the goal behind trying to internationalize the senior management ranks at GE? What
do you think it means to internationalize these ranks?

4. What does the GE example tell you about the nature of true global businesses?

CLOSING CASE

Indias Transformation

After gaining independence from Britain in 1947, India adopted a democratic system of
government. The economic system that developed in India after 1947 was a mixed economy
characterized by a large number of state-owned enterprises, centralized planning, and subsidies.
This system constrained the growth of the private sector. Private companies could expand only
with government permission. It could take years to get permission to diversify into a new
product. Much of heavy industry, such as auto, chemical, and steel production, was reserved for
state-owned enterprises. Production quotas and high tariffs on imports also stunted the
development of a healthy private sector, as did labor laws that made it difficult to fire employees.

By the early 1990s, it was clear that this system was incapable of delivering the kind of
economic progress that many Southeastern Asian nations had started to enjoy. In 1994, Indias
economy was still smaller than Belgiums, despite having a population of 950 million. Its GDP
per capita was a paltry $310; less than half the population could read; only 6 million had access
to telephones; only 14 percent had access to clean sanitation; the World Bank estimated that
some 40 percent of the worlds desperately poor lived in India; and only 2.3 percent of the
population had a household income in excess of $2,484.

The lack of progress led the government to embark on an ambitious economic reform program.
Starting in 1991, much of the industrial licensing system was dismantled, and several areas once
closed to the private sector were opened, including electricity generation, parts of the oil
industry, steelmaking, air transport, and some areas of the telecommunications industry.
Investment by foreign enterprises formerly allowed only grudgingly and subject to arbitrary
ceilings, was suddenly welcomed. Approval was made automatic for foreign equity stakes of up
to 51 percent in an Indian enterprise, and 100 percent foreign ownership was allowed under
certain circumstances. Raw materials and many industrial goods could be freely imported and the
maximum tariff that could be levied on imports was reduced from 400 percent to 65 percent. The
top income tax rate was also reduced, and corporate tax fell from 57.5 percent to 46 percent in
1994, and then to 35 percent in 1997. The government also announced plans to start privatizing
Indias state-owned businesses, some 40 percent of which were losing money in the early 1990s.

Judged by some measures, the response to these economic reforms has been impressive. The
economy expanded at an annual rate of about 6.3 percent from 1994 to 2004, and then
accelerated to 9 percent per annum during 20052008. Foreign investment, a key indicator of
how attractive foreign companies thought the Indian economy was, jumped from $150 million in
1991 to $36.7 billion in 2008. Some economic sectors have done particularly well, such as the
information technology sector where India has emerged as a vibrant global center for software
development with sales of $50 billion in 2007 (about 5.4 percent of GDP) up from just $150
million in 1990. In pharmaceuticals too, Indian companies are emerging as credible players on
the global marketplace, primarily by selling low-cost, generic versions of drugs that have come
off patent in the developed world.

However, the country still has a long way to go. Attempts to further reduce import tariffs have
been stalled by political opposition from employers, employees, and politicians, who fear that if
barriers come down, a flood of inexpensive Chinese products will enter India. The privatization
program continues to hit speed bumpsthe latest in September 2003 when the Indian Supreme
Court ruled that the government could not privatize two state-owned oil companies without
explicit approval from the parliament. State owned firms still account for 38 percent of national
output in the nonfarm sector, yet Indias private firms are 3040 percent more productive than
their state-owned enterprises. There has also been strong resistance to reforming many of Indias
laws that make it difficult for private business to operate efficiently. For example, labor laws
make it almost impossible for firms with more than 100 employees to fire workers, creating a
disincentive for entrepreneurs to grow their enterprises beyond 100 employees. Other laws
mandate that certain products can be manufactured only by small companies, effectively making
it impossible for companies in these industries to attain the scale required to compete
internationally.

Case Discussion Questions

1. What kind of economic system did India operate under during 1947 to 1990? What kind of
system is it moving toward today? What are the impediments to completing this transformation?

2. How might widespread public ownership of businesses and extensive government regulations
have impacted (1) the efficiency of state and private businesses, and (2) the rate of new business
formation in India during the 19471990 time frame? How do you think these factors affected
the rate of economic growth in India during this time frame?

3. How would privatization, deregulation, and the removal of barriers to foreign direct
investment affect the efficiency of business, new business formation, and the rate of economic
growth in India during the post-1990 time period?

4. India now has pockets of strengths in key high technology industries such as software and
pharmaceuticals. Why do you think India is developing strength in these areas? How might
success in these industries help to generate growth in the other sectors of the Indian economy?

5. Given what is now occurring in the Indian economy, do you think the country represents an
attractive target for inward investment by foreign multinationals selling consumer products?
Why?

CLOSING CASE

Wal-Marts Foreign Expansion

Wal-Mart, the worlds largest retailer, has built its success on a strategy of everyday low prices,
and highly efficient operations, logistics, and information systems that keeps inventory to a
minimum and ensures against both overstocking and understocking. The company employs some
2.1 million people, operates 4,200 stores in the United States and 3,600 in the rest of the world,
and generates sales of almost $400 billion (as of fiscal 2008). Approximately $91 billion of these
sales were generated in 15 nations outside of the United States. Facing a slowdown in growth in
the United States, Wal-Mart began its international expansion in the early 1990s when it entered
Mexico, teaming up in a joint venture with Cifra, Mexicos largest retailer, to open a series of
supercenters that sell both groceries and general merchandise.
Initially the retailer hit some headwinds in Mexico. It quickly discovered that shopping habits
were different. Most people preferred to buy fresh produce at local stores, particularly items like
meat, tortillas and pan dulce which didnt keep well overnight (many Mexicans lacked large
refrigerators). Many consumers also lacked cars, and did not buy in large volumes as consumers
in the United States did. Wal-

Mart adjusted its strategy to meet the local conditions, hiring local managers who understood
Mexican culture, letting those managers control merchandising strategy, building smaller stores
that people could walk to, and offering more fresh produce. At the same time, the company
believed that it could gradually change the shopping culture in Mexico, educating consumers by
showing them the benefits of its American merchandising culture. After all, Wal-Marts
managers reasoned, people once shopped at small stores in the United States, but starting in the
1950s they increasingly gravitated towards large stores like Wal- Mart. As it built up its
distribution systems in Mexico, Wal-Mart was able to lower its own costs, and it passed these on
to Mexican consumers in the form of lower prices. The customization, persistence, and low
prices paid off. Mexicans started to change their shopping habits. Today Wal-Mart is Mexicos
largest retailer and the country is widely considered to be the companys most successful foreign
venture.

Next Wal-Mart expanded into a number of developed nations, including Britain, Germany and
South Korea. There its experiences have been less successful. In all three countries it found itself
going head to head against well-established local rivals who had nicely matched their offerings
to local shopping habits and consumer preferences. Moreover, consumers in all three countries
seemed to have a preference for higher quality merchandise and were not as attracted to Wal-
Marts discount strategy as consumers in the United States and Mexico. After years of losses,
Wal-Mart pulled out of Germany and South Korea in 2006. At the same time, it continued to
look for retailing opportunities elsewhere, particularly in developing nations where it lacked
strong local competitors, where it could gradually alter the shopping culture to its advantage, and
where its low price strategy was appealing.

Recently, the centerpiece of its international expansion efforts has been China. Wal-Mart opened
its first store in China in 1996, but initially expanded very slowly, and by 2006 had only 66
stores. What Wal-Mart discovered, however, was that the Chinese were bargain hunters, and
open to the low price strategy and wide selection offered at Wal-Mart stores. Indeed, in terms of
their shopping habits, the emerging Chinese middle class seemed more like Americans than
Europeans. But to succeed in China, Wal-Mart also found it had to adapt its merchandising and
operations strategy to mesh with Chinese culture. One of the things that Wal-Mart has learned is
that Chinese consumers insist that food must be freshly harvested, or even killed in front of them.
Wal-Mart initially offended Chinese consumers by trying to sell them dead fish, as well as meat
packed in Styrofoam and cellophane. Shoppers turned their noses up at what they saw as old
merchandise. So Wal-Mart began to display the meat uncovered, installed fish tanks into which
shoppers could plunge fishing nets to pull out their evening meal, and began selling live turtles
for turtle soup. Sales soared.

Wal-Mart has also learned that in China, success requires it to embrace unions. Whereas in the
United States Wal-Mart has vigorously resisted unionization, it came to the realization that in
China unions dont bargain for labor contracts. Instead, they are an arm of the state, providing
funding for the Communist Party and (in the governments view) securing social order. In mid-
2006 Wal-Mart broke with its long standing antagonism to unions and agreed to allow unions in
its Chinese stores. Many believe this set the stage for Wal-Marts most recent move, the
purchase in December 2006 of a 35 percent stake in the Trust-Mart chain, which has 101
hypermarkets in 34 cities across China. Now Wal-Mart has proclaimed that China lies at the
center of its growth strategy. By early 2009 Wal-Mart had some 243 stores in the country, and
despite the global economic slowdown, the company insists that it will continue to open new
stores in China at a double digit rate.

Discussion Questions

1. Do you think Wal-Mart could translate its merchandising strategy wholesale to another
country and succeed? If not, why not?

2. Why do you think Wal-Mart was successful in Mexico?

3. Why do you think Wal-Mart failed in South Korea and Germany? What are the differences
between these countries and Mexico?

4. What must Wal-Mart do to succeed in China? Is it on track?

5. To what extent can a company like Wal-Mart change the culture of the nation where it is
doing business?