Managing Global Expansion:
A Conceptual Framework
Anil K. Gupta and Vijay Govindarajan
here are at least five reasons why the
T need to become global has ceased to be
a discretionary option and b e c o m e a
strategic imperative for virtually any medium-
sized to large corporation.
1. The Growth Imperative. Companies have
no choice but to persist in a neverending quest
for growth if they wish to garner rewards from
the capital markets and attract and retain top
talent. For many industries, developed country
markets are quite mature. Thus, the growth im-
perative generally requires companies to look to
emerging markets for fresh opportunities.
Consider a supposedly mature industry such
as paper. Per capita paper consumption in such
developed markets as North America and West-
ern Europe is around 600 pounds. In contrast,
per capita consumption of paper in China and
India is around 30 pounds. If you are a dominant
European paper manufacturer such as UPM-
Kymmene, can you really afford not to build
market presence in places like China or India? If
per capita paper consumption in both countries
increased by just one pound over the next five
years, demand would increase by 2.2 billion
pounds, an amount that can keep five state-of-
the-art paper mills running at peak capacity.
2. The Efficiency Imperative. Whenever the
value chain sustains one or more activities in
which the minimum efficient scale (of research
facilities, production centers, and so on) exceeds
the sales volume feasible within one country, a
company with global presence will have the po-
tential to create a cost advantage relative to a
domestic player within that industry. The case of
Mercedes-Benz, n o w a unit of DaimlerChrysler,
illustrates this principle. Historically, Mercedes-
Benz has concentrated its research and manufac-
turing operations in Germany and has derived
around 20 percent of its revenues from the North
American market. Given the highly scale-sensitive
nature of the auto industry, it is easy to see that
Managing Global Expansion: A Conceptual Framework
Mercedes-Benz's ability
to compete in Europe,
or even Germany,
hinges on its market
position and revenues
from the North Ameri-
can market.
3. The Knowledge
Imperative. No two
countries, even close
neighbors such as
Canada and the United
States, are completely
alike. So when a com-
pany expands its presence to more than one
country, it must adapt at least some features of its
products and/or processes to the local environ-
ment. This adaptation requires creating local
know-how, some of which may be too idiosyn-
cratic to be relevant outside the particular local
market. However, in many cases, local product
and/or process innovations are cutting-edge and
have the potential to generate global advantage.
GE India's innovations in making CT scanners
simpler, transportable, and cheape r would appear
to enjoy wide-ranging applicability, as would
P&G Indonesia's innovations in reducing the cost
structure for cough syrup.
4. Globalization of Customers. The term "glo-
balization of customers" refers to customers that
are worldwide corporations (such as the soft-
drink companies served by advertising agencies)
as well as those who are internationally mobile
(such as the executives served by American Ex-
press or the globe-trotters serviced by Sheraton
Hotels). When the customers of a domestic com-
pany start to globalize, the company must keep
pace with them. Three reasons dictate such an
alignment. First, the customer may strongly prefer
worldwide consistency and coordination in the
sourcing of products and services. Second, it may
prefer to deal with a small number of supply
45
 partners on a long-term basis. Third, allowing a
customer to deal with different supplier(s) in
other countries poses a serious risk that the cus-
tomer may replace your firm with one of these
suppliers even in the domestic market. Motiva-
tions such as these are driving GE Plastics to
globalize. Historically, it supplied plastic pellets to
largely U.S.-based telephone companies such as
AT&T and GTE. As these firms globalized and set
up manufacturing plants outside the U.S., GE
Plastics had no choice but to follow them abroad.
5. Globalization o f Competitors. If your com-
petitors start to globalize and you do not, they
can use their global stronghold to attack you in at
least two ways. First, they can develop a first-
mover advantage in capturing market growth,
pursuing global scale efficiencies, profiting from
knowledge arbitrage, and providing a coordi-
nated source of supply to global customers. Sec-
ond, they can use multi-market presence to cross-
subsidize and wage a more intense attack in your
own home markets. It is dangerous to underesti-
mate the rate at which competition can accelerate
the pace of globalization. Look at Fuji's inroads
into the U.S. market, historically dominated by
Kodak. The trend is happening in other indus-
tries as well, such as in white goods, personal
computers, and financial services.
In the emerging era, every industry must be
considered a global industry. Today, globalization
is no longer an option but a strategic imperative
for all but the smallest firms. The following
framework and set of conceptual ideas can guide
firms in approaching the strategic challenge of
casting their business lines overseas and building
global presence:
• H o w should a multiproductfirm choose the
p r o d u c t line to launch it into the global market?
Fttauz 1
A Framework for Choice o f Products:
Attractiveness o f Product Lines as Launch
Vehicles for Initial Globalization
2 1
Moderately Most attractive
attractive (Marriott Full-
Service Lodging)
4 3
Least attractive Moderately
(Marriott Senior attractive
Living Services)
Low High
Expected Payoffs from Glob~li~-Jttion
46
• What factors m a k e some markets more
strategic than others?
• What should companies consider in deter-
mining the right mode o f entry?
• H o w should the enterprise transplant the
corporate DNA as it enters n e w markets?
• What approaches should the c o m p a n y use
to win the local battle?
• H o w rapidly should a c o m p a n y e x p a n d
globally?
CHOICE OF PRODUCTS
W hen any multiproduct firm chooses
to go abroad, it must ask itself
whether it should globalize the en-
tire portfolio simultaneously or use a subset of
product lines. Firms can make this choice ran-
domly and opportunistically or in a well thought
out and systematic manner.
Consider the case of Marriott Corporation,
which was essentially a domestic company in the
late 1980s. It had two principal lines of business:
lodging and contract services~ Besides other ac-
tivities, the lodging sector included four distinct
product lines: full-service hotels and resorts
("Marriott" brand), midprice hotels ("Courtyard"
brand), budget hotels ("Fairfield Inn" brand), and
long-term stay hotels ("Residence Inn" brand).
On the other hand, contract services included the
following three product lines: Marriott Manage-
ment Services, Host/Travel Plazas, and Marriott
Senior Living Services (retirement communities).
As the company embarked on globalization, it
had to confront the question of which one or
more of these product lines should serve as the
starting point for its globalization efforts.
Global expansion forces companies to de-
velop at least three types of capabilities: learning
about foreign markets, learning how to manage
people in foreign locations, and learning how to
manage foreign subsidiaries. Until firms develop
these capabilities, they cannot avoid remaining
strangers in a strange land, with global expansion
posing a high risk. Engaging in simultaneous
globalization across the entire portfolio of prod-
ucts compounds these risks dramatically. So it is
often wiser to choose one or a small number of
product lines as the initial launch vehicles for
globalization. The choice should adhere to the
twin goals of maximizing the returns while mini-
mizing the risks associated with early moves
abroad. These initial moves represent experi-
ments with high learning potential. It is important
that these experiments succeed for the firm be-
cause success creates psychological confidence,
political credibility, and cash flow to fuel further
rapid globalization.
Figure 1 presents a conceptual framework to
identify those products, business units, or lines of
Business Horizons/ March-April2000
business that might be preferred candidates for
early globalization. Underlying this framework
are two essential dimensions by which to evalu-
ate each line of business in the company's portfo-
lio---one pertaining to potential returns (expected
payoffs) and the other to potential risks (required
degree of local adaptation).
The first dimension focuses on the magnitude
of globalization's payoffs, which tend to be higher
when the five imperatives (listed at the beginning
of the article) are stronger. Looking at the case of
Marriott, it is clear that such imperatives are
much stronger for full-service lodging than they
are for the retirement community business. The
primary customers of full-service lodging are
globe-trotting corporate executives. In such a
business, worldwide presence can create signifi-
cant value by using a centralized reservation
system, developing and diffusing globally consis-
tent service concepts, and leveraging a well-
known brand name that assures customers of
high quality and service. In contrast, none of
these factors is of high salience in the retirement
community business, thereby rendering the im-
peratives for globalization much less urgent.
The second dimension of our framework
concerns the extent to which different lines of
business require local adaptation to succeed in
foreign markets. The greater the extent of such
adaptation, the greater the degree to which new
product and/or service features would need to be
developed locally rather than cloned from proven
and preexisting concepts and capabilities. Be-
cause any new development involves risk, the
greater the degree of required local adaptation,
the greater the risks of failure--particularly when
such development entails the already significant
"liability of foreignness." Marriott exemplifies
these principles. Compared with full-service lodg-
ing, the retirement community business is a very
local business and thus requires more local adap-
tation.
Combining both dimensions, as indicated in
Figure 1, full-service lodging emerges as a par-
ticularly attractive candidate for early globaliza-
tion. As the spearhead for globalization moves, it
provides Marriott with a high return/low risk
laboratory for developing the knowledge and
skills needed for foreign market entry and man-
aging foreign subsidiaries. Having thus overcome
the "liability of foreignness," Marriott would be
better positioned to exploit the globalization
potential of its other lines of business.
To reiterate, hardly any line of business today
is devoid of the potential for exploitation on a
global scale. However, any multiproduct firm that
is starting to globalize must remember that a
logically sequenced rather than random approach
is likely to serve as a higher-return, lower-risk
path toward full-scale globalization.
ManagingGlobalExpansion:A ConceptualFramework
CHOICE OF STRATEGIC MARKETS
ot all markets are of equal strategic
N importance. This is a central tenet of
the conceptual framework presented in
Figure 2. The following two dimensions deter-
mine the strategic importance of a market: (1)
market potential, and (2) learning potential.
The concept of market potential encompasses
both current market size and growth expectations
for a particular line of business. For instance, one
of the critical markets for AOL is Japan because
45 percent of the PCs sold in Asia are there. It is
important to remember that, notwithstanding the
importance of the size of a country's economy,
market potential does not always go hand in
hand with the country's GDP. A blindness to this
reality has led some authors to conclude that
companies are not global unless they are present
in the triad of Europe, Japan, and North America.
Such simplistic conclusions can often be dramati-
cally fallacious. If you are managing ABB's power
plant business, the bulk of your market for new
power plants lies outside the triad.
There are two drivers of the learning poten-
tial of any market. The first is the presence of
sophisticated and demanding customers for the
particular product or service. Such customers (1)
force a company to meet very tough standards
for product and service quality, cost, cycle time,
and a host of other attributes, (2) accelerate its
learning regarding tomorrow's customer needs,
and (3) force it to innovate constantly and con-
tinuously. France and Italy are leading-edge cus-
tomer markets for the high fashion clothing in-
dustry--a fact of considerable importance to a
company such as Du Pont, the manufacturer of
Lycra and other textile fibers.
The second driver of a market's learning
potential is the pace at which relevant technolo-
gies are evolving there. This technology evolu-
tion can emerge from one or
more of several sources: lead-
ing-edge customers, innovative
competitors, universities and Drivers o f a Market's Strategic
other local research centers, Importance
and firms in related industries.
As indicated in Figure 2, the
strategic importance of a market
is a joint function of both mar-
ket potential and learning po-
tential. No firm is truly global
unless it is present in all strate-
gic markets. Nevertheless, de-
spite their obvious importance,
the timing of a firm's decision
to enter strategic markets must
also depend on its "ability to Low High
exploit" these markets. Going Learning Potential
after a strategic market without
47
 such an ability is gener- priate mode of entry: The entry mode issue rests
Figure 3 ally a fast track to disaster. on two fundamental questions. The first concerns
A Framework for Choice of Markets The ability to exploit the extent to which the firm will export or pro-
a market is a function of duce locally. Here, the firm has several choices. It
two factors: (1) the height can rely on 100 percent export of finished goods,
Phased-in of entry barriers, and (2) export of components but localized assembly,
entry (create Rapid the intensity of competi- 100 percent local production, and so on.
beachhead Entry
first) tion in the market. Entry The second question deals with the extent of
barriers are likely to be ownership control over activities that will be
lowest when there are no performed locally in the target market. Here also,
regulatory constraints on the firm faces several choices: 0 percent owner-
Ignore Opportunistic trade and investment (as ship modes (licensing, franchising, and so on),
for now Entry in the case of regional partial ownership modes (joint ventures or affili-
economic blocks) and ates), and 100 percent ownership modes (fully-
when new markets are owned greenfield operations or acquisitions).
geographically, culturally, Figure 4 uses these two dimensions to depict the
Low High
and linguistically proxi- array of choices regarding mode of entry that are
Firm's Ability to mate to the domestic open to any firm, and includes examples illustrat-
Exploit the Market market. Even when there ing the variety of available options.
are low entry barriers, the Choosing the right mode of entry is critical
intensity of competition because the choice, once made, is often difficult
can hinder a company's potential for exploiting a and costly to alter. Inappropriate decisions can
market. For example, the large U.S. market in the impose unwanted, unnecessary, and undesirable
retailing industry has historically proven to be a constraints on future development options.
graveyard for foreign entrants such as Marks & Turning to the first question, greater reliance
Spencer, precisely because of the intensity of on local production would be appropriate under
local competition. the following four conditions:
Figure 3 presents a conceptual framework • Size o f local market is larger than mini-
that combines the two key dimensions--"strategic m u m efficient scale of production. The larger the
importance of market" and "ability to exploit"--to size of the local market, the more completely
offer guidelines on how a firm can engage in local production will translate into scale econo-
directed opportunism in its choice of markets. mies for the firm while holding down tariff and
The firm's stance toward markets that have high transportation costs. One illustration of this argu-
strategic importance and high ability to exploit ment is Bridgestone's entry into the U.S. market
ought to be to enter rapidly. By comparison, the by acquiring the local production base of Fire-
firm can afford to be much more opportunistic stone instead of exporting tires from Japan.
and ad hoc with respect to markets that have low • Shipping a n d tariff costs associated with
strategic importance but are easier to exploit. In exporting to the target market are so high that
the case of markets that have high strategic im- they neutralize any cost advantages associated
portance but are also very difficult to exploit, we with producing in any country other than that
recommend an incremental phased approach in market. This is why cement companies such as
which the development of needed capabilities Cemex and Lafarge Coppee engage heavily in
precedes market entry. One attractive way for a local production in every country they enter.
company to develop such capabilities is to first • Need f o r local customization o f p r o d u c t
enter a beachhead market: one that closely re- design is high. Product customization requires
sembles the targeted strategic market but pro- two capabilities: a deep understanding of local
vides a safer opportunity to learn how to enter market needs, and an ability to incorporate this
and succeed there. Some commonly used ex- understanding in the company's design and pro-
• amples of beachhead markets are Switzerland duction decisions. Localizing production in the
and/or Austria for Germany, Canada for the U.S., target market significantly enhances the firm's
and Hong Kong or Taiwan for China. Finally, the ability to respond to local market needs accu-
firm should stay away from those markets that rately and efficiently.
are neither strategic nor easy to exploit. • Local content requirements are strong. This
is one of the major reasons why foreign auto
MODE OF ENTRY companies rely heavily on local production in
markets such as the EU, China, and India.
nce a company has selected the coun- Turning to the second question, given the

O try or countries to enter and designated

the product line(s) that will serve as
the launch vehicles, it must determine the appro-
differing costs and benefits of local market activi-
ties, neither alliances nor complete ownership are
universally desirable in all situations. Unlike the

48 Business Horizons / March-April 2000

complete ownership mode, alliance-based entry
modes have the advantages of permitting the firm
to share the costs and risks associated with mar-
ket entry, allowing rapid access to local know-
how, and giving managers the flexibility to re-
spond more entrepreneurially and much more
quickly to dynamic global competition than the
conquer-the-world-by-yourself approach. How-
ever, a major downside of alliances is their poten-
tial for various types of conflict stemming from
differences in corporate goals and cultures.
Taking into account the pros and cons, then,
alliance-based entry modes are often more ap-
propriate under the following conditions:
• Physical, linguistic, a n d cultural distance
between the home a n d host countries is high. The
more dissimilar and unfamiliar the target market,
the greater the need for the firm to rely on a
local partner to provide know-how and networks.
Conceivably, the firm could obtain the requisite
local knowledge and competencies through ac-
quisition. However, in highly dissimilar and unfa-
miliar markets, its ability to manage an acquired
subsidiary is often very limited. Ford's decision to
enter the Indian market through the joint venture
(JV) mode rested partly on the company's need
to rely on an experienced and respected local
partner, Mahindra & Mahindra.
• The subsidiary would have low operational
integration with the rest of the multinational op-
erations. By definition, tighter integration be-
tween a subsidiary and the rest of the global
network increases the degree of mutual interde-
pendence between the subsidiary and the net-
work. In this context of high interdependence, it
becomes crucial for the subsidiary and the net-
work to pursue shared goals, and for the firm to
be able to reshape the subsidiary according to
the changing needs of the rest of the network.
Shared ownership of the subsidiary puts major
constraints on the firm's ability to achieve such
congruence in goals and have the requisite free-
dom to reshape subsidiary operations as needed.
• The risk of asymmetric learning by thepart-
ner is (or can be kept) low. In a typical JV, two
partners pool different but complementary know-
how into an alliance. Ongoing interaction be-
tween their core operations and the alliance gives
each an opportunity to learn from the other and
appropriate the other's complementary know-
how. In effect, this dynamic implies that the alli-
ance often is not just a cooperative relationship
but also a learning race. If Firm A has the ability
to learn at a faster rate than Firm B, the outcome
is likely to be asymmetric learning in favor of
Firm A. Thus, over time, Firm A may seek to
dissolve the alliance in favor of going it alone in
competition with a still-disadvantaged Firm B.
• The company is short of capital. Lack of
capital underlay Xerox's decision in the 1950s to
Managing Global Expansion: A Conceptual Framework
Figure 4
Alternative Modes o f Entry
100% Exports 100% Local
Exports versus Local Production
enter the European market through an alliance
with the Rank Organization of the U.K.
• Government regulations require local eq-
uityparticipation. Historically, many countries
with formidable market potentials, such as China
and Brazil, have successfully imposed the .IV
option on foreign entrants, even when all other
considerations might have favored the choice of
a complete ownership mode.
A company that decides to enter the foreign
market through local production rather than
through exports faces a secondary decision. It
must decide whether to set up greenfield opera-
tions or use an existing production base through
a cross-border acquisition. A greenfield operation
gives the company tremendous freedom to im-
pose its own unique management policies, cul-
ture, and mode of operations on the new subsid-
iary. In contrast, a cross-border acquisition poses
the much tougher challenge of cultural transfor-
mation and post-merger integration. However,
setting up greenfield operations also has two
potential liabilities: lower speed of entry, and
more intense local competition caused by the
addition of new production capacity as well as
one more competitor. Taking into account both
the pros and the cons, Figure 5 provides a con-
ceptual framework to determine when greenfield
operations and/or cross-border acquisitions are
likely to be the more appropriate entry modes.
This conceptual framework has two dimen-
sions. The first pertains to the uniqueness of the
globalizing company's culture. Nucor is a good
example of a newly globalizing firm with a very
49
 strong and unique American-style investment advisor approach to
F gure 5 culture. It is signifi- build a high-trust image in the securities broker-
Greenfield vs. Cross-border Acquisition cantly different from age industry in Japan. Historically, says Sugawara
other steel produc- (1999), the industry has been
ers in its human
Greenfield Greenfield resource policies, tainted by unsavory practices .... One
operations operations egalitarian work well-known abuse...is "churning"--in
or cross-border (Nucor's environment, per- which sales people persuade naive inves-
acquisitions entry into Brazil) formance-based tors to buy and sell a lot of securities so
incentives, team- the sales people can boost their commis-
work, decentraliza- sions. Merrill Lynch promised that there
Cross-border Greenfield
acquisitions operations tion, and business would be no churning. Instead, its sales
(Int 'l Paper's or cross-border processes. The more people were instructed to try to get an
entry into Europe) acquisitions committed a com- overall picture of customers' finances,
pany is to preserv- ascertain their needs and then suggest
ing its unique cul- investments. Something got lost in the
Low High
ture, the more nec- translation, however. Japanese customers
Uniqueness of Corporate Culture essary it becomes to have complained that Merrill Lynch sales
set up greenfield people are too nosy, asking questions
operations when about their investments instead of just
entering foreign markets. This is because building telling them what stocks to buy.
and nurturing a unique culture from scratch (as
would be feasible in the case of greenfield opera- As this example illustrates, obstacles to trans-
tions) is almost always much easier than trans- planting the corporate DNA can emerge from any
forming an entrenched culture (as would be nec- of several sources: local employees, local custom-
essary in the case of a cross-border acquisition). ers, local regulations, and so forth. Given such
Aside from corporate culture considerations, obstacles, every company needs to develop clar-
the impact of entry mode on the resulting inten- ity regarding what exactly its "core" (as distinct
sity of local competition must also carry consider- from "peripheral") beliefs and practices are. Such
able weight in a firm's decisions. If the local mar- clarity is essential for knowing where the com-
ket is in the emerging or high growth phase pany should stay committed to its own beliefs
(such as the auto industry in China and India), and practices and where it should be willing to
new capacity additions would have little down- adapt. Having achieved .this clarity, the company
side effect on the intensity of competition. In needs to build mechanisms to transfer core be-
contrast, w h e n the local market is mature (such liefs and practices to the new subsidiary. Finally,
as the tire industry in the U.S.), new capacity and most important, it needs to embed these
additions will only intensify an already high de- beliefs and practices in the n e w subsidiary.
gree of local competition. Within the forest prod-
ucts industry, Indonesia-based Asia Pulp & Paper Clarifying and Deflni~tg the Core Beliefs
has used the greenfield mode for expanding into and Practices
other high-growth Asian markets. In the same
industry, the U.S.-based International Paper has Core beliefs and practices can be defined at any
pursued a different path and relied on the acqui- of varying levels of abstraction. Take Wal-Mart's
sition mode for its expansion into the mature practice of promoting "Made in America" goods
European market. in its U.S. stores. Assuming that promoting the
origin-of-manufacture is a core practice for Wal-
TRANSPLANTING THE CORPORATE DNA Mart, the company can define the practice in
more or less abstract terms. A more abstract defi-
H aving decided on a mode of entry for a nition would be, "Wherever we operate, we be-
particular product line into a particular lieve in promoting locally manufactured prod-
target market, the challenge of building ucts." On the other hand, a less abstract defini-
global presence moves on to implementing actual tion would be, "We promote products that are
entry. Among the first issues the globalizing com- made in America." As this example points out,
pany must address is how to transplant the core defining core beliefs and practices in more ab-
elements of its business model, its core practices, stract terms permits a higher degree of local ad-
and its core beliefs----in short, its DNA--to the aptation. At the same time, if the core beliefs and
new subsidiary. The following example illustrates practices become too abstract, they could lose
the challenge of transplanting the corporate DNA. much of their meaning and value.
After acquiring 2,000 employees from Yama- Notwithstanding its criticality, the definition
ichi Securities, Merrill Lynch & Co. counted on an of what constitutes a company's core beliefs and

50 Business Horizons/ March-April2000

practices is and must always be the result of
learning and experimentation over time. This is
because the answers will almost certainly vary
across industries, across firms within an industry,
and, for the same firm, across time. AS observed
astutely by a senior executive of a major global
retailer, "Cut your chains and you become free.
Cut your roots and you die. Note, however, that
differentiating between the two requires good
judgment, something that you acquire only
through experience and over time."
Transplanting Core Beliefs and Practices
to the New Subsidiary
Transplanting core beliefs and practices to a new
subsidiary, whether a greenfield operation or an
acquisition, is always a transformational event--
the challenge of transformation being greater in
the case of an acquisition. The likelihood is very
high that the transplanted beliefs and practices
are likely to be at best partially understood and,
in the case of an acquisition, will often be seen
as alien and questionable. As such, transferring
core beliefs and practices to a new subsidiary
almost always requires transferring a select group
of committed believers ("the DNA carriers") to
the new operation. The size of this group would
depend largely on the scale of the desired trans-
formation effort. If the goal is to engage in a
wholesale replacement of an entire set of preex-
isting beliefs and practices (as in the case of
ABB's acquisitions in Eastern Europe), then it
may be necessary to send in a virtual army of
DNA carriers. On the other hand, if the goal is to
create a new business model (as in the case of
Mercedes-Benz's Alabama plant), then the trans-
plants would need to be much fewer in number
and would need to be very carefully selected.
Obloj and Thomas (1998) describe rather
vividly how the invasion process worked in the
case of ABB Poland:
The transformation began with an influx
and invasion of external and internal
ABB consultants that signaled clearly the
introductory stage of organizational
change. Their behavior was guided by
their perception of the stereotypical be-
havior of an inefficient state-owned firm
typically managed by a cadre of adminis-
trators who do not understand how to
manage a firm in a market economy.
They did not initially perform any so-
phisticated diagnosis or analysis of local
conditions or develop a strategic vision
for the transformation process. Rather,
they forcefully implemented market en-
terprise discipline in the acquired former
state-owned firms by a series of high-
Managing Global Expansion: A Conceptual Framework
speed actions. They implemented mas-
sive training efforts aimed at exposing
employees and managers of acquired
firms to the principles of the market
economy, m o d e m management prin-
ciples, and the ABB management system.
This was adopted in all acquired firms
following Percy Bamevik's dictum that
the key to competitiveness is education
and reeducation.
Embedding the Core Beliefs and Practices
While the process of transplanting the corporate
DNA starts with transferring a select group of
DNA carriers to the new subsidiary, it can be
regarded as successful only when the new beliefs
and practices have become internalized in the
mindsets and routines of employees at the new
subsidiary. Achieving such internalization re-
quires (1) visibly explicit and credible commit-
ment by the parent company to its core beliefs
and practices, (2) deepening the process of edu-
cation and reeducation within the new organiza-
tion right down to middle managers and the local
work force, and (3) concrete demonstration that
the new beliefs and practices yield individual as
well as corporate success.
The approach taken by the Ritz-Carlton chain
at its new hotel in Shanghai, China illustrates
how a company can go about successfully em-
bedding its core beliefs and practices in a new
subsidiary. Ritz-Carlton acquired the rights to
manage this hotel, with a staff of about 1,000
people, under its own name as of January 1, 1998.
The company believed that, consistent with its
image and its corporate DNA, the entire opera-
tion required significant upgrading. As one would
expect, the company brought in a sizable contin-
gent of about 40 expatriates from other Ritz-
Carlton units in Asia and around the world to
transform and manage the new property. What is
especially noteworthy, however, is the approach
the managers took to embed the company's own
standards of quality and service in the hearts,
minds, and behavior of their local associates.
Among its first actions in the very first week of
operations under its own control, the company
decided to start the renovation process from the
employee's entrance and changing and wash
rooms rather than from other starting points, such
as the main lobby. As one executive explained,
the logic was that, through this approach, every
employee would see two radical changes in the
very first week: one, that the new standards of
quality and service would be dramatically higher,
and two, that they, the employees, were among
the most valued stakeholders in the company.
This approach served as a very successful start to
embedding the company's basic beliefs in every
51
 associate's mind: "We Are Ladies and Gentlemen
Serving Ladies and Gentlemen."
WINNING TI-IE IL)C_/ILBAITLE
W inning the local battle requires the
global enterprise to anticipate,
shape, and respond to the needs
and/or actions of three sets of host-country play-
ers: customers, competitors, and government.
Winning Host Country Customers
One of the ingredients in establishing local pres-
ence is to understand the uniqueness of the local
market and decide which aspects of the firm's
business model require little change, which re-
quire local adaptation, and which need to be
reinvented. The global firm faces little need to
adapt its business design if it targets a customer
segment in a foreign market similar to the one it
serves in its home market. However, if the firm
wants to expand the customer base it serves in a
foreign market, then adapting the business model
to the unique demands of the local customers
becomes mandatory.
Consider the case of FedEx when it entered
China. As an element of its entry strategy, FedEx
had to choose who its target customers should
be: local Chinese companies or multinational
corporations. The company chose to target multi-
national companies---a customer segment identi-
cal to the one it has historically served. Given the
choice, FedEx was able to pretty much export the
U.S. business model into China, including the use
of its own aircraft, building a huge network of
trucks and distribution centers, and adopting
U.S.-style aggressive marketing and advertising.
On the other hand, had FedEx selected local
Chinese firms as its targeted customer segment,
winning host country customers would have
required a significantly greater degree of local
adaptation of the business model.
Domino's Pizza is a good example of a com-
pany that has benefited from adapting its busi-
ness model when it entered India. Unlike KFC,
Domino's was successful in its initial entry into
India, primarily because it tailored its approach to
the Indian culture and lifestyle. Even though
pepperoni pizza is one of the most popular items
for Domino's in other markets, the company
dropped it from the menu to show respect for
the value Hindus place on the cow. Domino's
also tailored other toppings, such as chicken,
ginger, and lamb, to suit Indian taste buds.
Winning A4gainst Host Country Competitors
Whenever a company enters a new country, it
can expect retaliation from local competitors as
52
well as from other multinationals already operat-
ing there. Successfully establishing local presence
requires anticipating and responding to these
competitive threats. Established local competitors
enjoy several advantages: knowledge of the local
market; working relationships with local custom-
ers; understanding of local distribution channels;
and so on. In contrast, the new firm suffers from
the "liability of newness." When a global firm
enters a market, local competitors will feel threat-
ened and will have a strong reason to retaliate
and defend their positions. Such response consti-
tutes entry barriers. In such a context, four pos-
sible options are available to the new invader:
1. Enter by acquiring a dominant local com-
petitor.
2. Enter by acquiring a weak local competitor
who can be quickly transformed and scaled up.
3. Enter a poorly defended niche.
4. Engage in a frontal attack on the dominant
and entrenched incumbents.
Acquire a dominant local competitor. Acquir-
ing a dominant local firm will prove to be suc-
cessful if the following three conditions are met:
(1) there is significant potential for synergies
between the acquisition target and the global
firm; (2) the global firm has the capability to
create and capture such synergies; and (3) the
global firm does not give away the synergies
from a huge acquisition premium up-front.
A case of successful entry through acquisition
of a dominant local competitor is Accor, the
French hospitality company, which entered the
U.S. market by acquiring Motel 6--the best man-
aged market leader in the budget lodging cat-
egory. On the other hand, Sony paid a huge pre-
mium to acquire Columbia Pictures; to date, how-
ever, it has had great difficulty in justifying this
premium---despite the significant potential syner-
gies between Sony's hardware competencies and
the "content" expertise of Columbia Pictures.
Acquire a weak player. Acquiring a weak
player in the foreign market is an attractive op-
tion under the following conditions:
1. The global firm possesses the capabilities
that are required to transform the weak player
into a dominant player; and
2. The global firm has the ability to transplant
the corporate DNA in the acquired firm very
quickly.
The sheer act of acquiring a weak player
signals to other local competitors that they will
soon be under attack. It is therefore to be ex-
pected that local competitors will retaliate. If the
global firm is unable to transform the weak
player within a very short time, the player could
become even weaker under attack from local
competitors.
Consider Whirlpool's entry into Europe in
1989 by acquiring the problem-ridden appliance
Business Horizons / March-April 2000
division of Philips. Unfortunately, Whirlpool
could not quickly embed the capabilities to turn
around Philips's struggling appliance business. In
the meantime, two European rivals---Sweden's
Electrolux and Germany's Bosch-Siemens---got a
wake-up call from Whirlpool's European entry.
Quite naturally, the two invested very heavily in
modernization, process improvements, new prod-
uct introductions, and restructuring--all with a
view to improving their competitiveness. The net
result was a disappointment for Whirlpool in
terms of its ambition to consolidate the white
goods industry in Europe. By 1998, Whirlpool
had 12 percent market share in Europe (half of
its expected position) and was also underachiev-
ing in profitability. To quote Jeff Fettig, Whirl-
pool's head of European operations: "We under-
estimated the competition."
Enter a poorly defended niche. If acquisition
candidates are either unavailable or too expen-
sive, the global firm has no choice but to enter
on its own. Under such circumstances, it should
find a poorly defended niche for market entry
under the following conditions:
1. Such a niche exists.
2. The global firm can use that niche as a
platform for subsequent expansion into the main-
stream segments of the local market. That is, the
mobility barriers to move from the niche market
to the mainstream segments are relatively low.
In the early 1970s, the Japanese car makers
entered the U.S. market at the low end, a seg-
ment that was being ignored by the U.S. car com-
panies and was thus a "loose brick" in their for-
tress. The Japanese companies used their domi-
nance of the lower end segment to migrate to the
middle and upper ends very effectively.
Frontal attack. The global company can
choose a head-on attack on the dominant and
entrenched incumbents provided it has a massive
competitive advantage that can be leveraged
outside its domestic market. If this were not true,
taking on an 800-pound gorilla with all the liabil-
ity of "newness" could prove suicidal. Lexus suc-
ceeded in its frontal attack on Mercedes and
BMW in the U.S. market mainly because of a
dominating competitive advantage in such areas
as product quality and cost structure. For in-
stance, Lexus enjoyed a 30 percent cost advan-
tage. For Mercedes, given the high labor costs in
Germany where it manufactured its automobiles,
such a cost advantage could not be neutralized
quickly.
Managing Relationships w i t h the Host-
Country Government
Local government can often be a key external
stakeholder, particularly in emerging markets.
Two points are worth noting in this context.
ManagingGlobal Expansion:A ConceptualFramework
1. The global firm can ill afford to ignore
non-market stakeholders such as the local gov-
ernment. For instance, the Chinese government
recently banned direct selling. This action has an
important bearing on such firms as Mary Kay
Cosmetics and Avon, which depend on a highly
personalized direct marketing approach.
2. Managing the non-market stakeholders
should be seen as a dynamic process. Instead of
simplistically reacting to existing government
regulations, the firm should also anticipate likely
future changes in the regulatory framework and
even explore the possibility of helping shape the
emerging framework. Instead of appeasement or
confrontation, persistence and constructive dia-
logue with the local government are often critical
elements of winning the local battle.
Enron's entry into India is a telling example
of an active approach to transforming the enter-
ing firm's relationship with host governments. In
1995, mostly due to ideological and political rea-
sons, the Maharashtra government put a sudden
halt to Enron's partly built, $2.5 billion power
plant. Yet by 1999, not only had Enron won back
the original contract for the 826-megawatt unit, it
even succeeded in getting a go-ahead to triple
the capacity to 2,450 megawatts, representing
India's largest foreign investment and Enron's
biggest non-U.S, project. Instead of giving up,
Enron persisted and helped shape evolving pub-
lic policy. In the process, the company learned a
lesson, but so did the Indian government.
SPEED OF GLOBAL EXPANSION
aving commenced the journey of glo-
H balization, a company must still ad-
dress one major issue in building glo-
bal presence: How fast should it expand globally?
Microsoft's worldwide launch of Windows 95 on
the same day epitomizes using globalization for
aggressive growth. By moving quickly, a com-
pany can solidify its market position very rapidly.
However, rapid global expansion can also
spread managerial, organizational, and financial
resources too thin. The consequence can be to
jeopardize the company's ability to defend and
profit from the global presence thus created.
Witness Peps!Co's helter-skelter rapid expansion
in Latin America during the first part of the 1990s.
In most cases, Pepsi's ambitious agenda resulted
in market positions that have proven to be both
indefensible and unprofitable.
Taking into account the pros and cons, an
accelerated speed of global expansion is more
appropriate under the following conditions:
• It is easy f o r competitors to replicate y o u r
recipe f o r success. This possibility is obvious for
fast food and retailing companies such as KFC
and Starbuck's, where it is easy for competitors to
53
 take a proven concept from one market and rep-
licate it in another unoccupied market with a
relatively small investment. However, this phe-
n o m e n o n is observable in other, very different
types of industries as well, such as personal com-
puters and software. The rapid globalization of
companies like Compaq, Dell, and Microsoft
reflects their determination to prevent replication
and/or pirating of their product concepts in mar-
kets all around the world.
• Scale economies are extremely important.
Very high economies of scale give the early and
rapid globalizer massive first mover advantages
and handicap the slower ones for long periods of
time. This is precisely why rapid globalizers in
the tire industry, such as Goodyear, Michelin, and
Bridgestone, now hold considerable advantage
over slower ones, such as Pirelli and Continental.
• Management's capacity to manage (or
learn how to manage) global operations is high.
Consider experienced global players like Coca-
Cola, Citicorp, Unilever, and ABB. Should such a
company successfully introduce a new product
line in one country, it would be relatively easy
and logical to globalize it rapidly to all potential
markets around the world. Aside from the ability
to manage global operations, the speed of global-
ization also depends on the company's ability to
leverage its experience from one market to an-
other. The faster the speed with which a firm can
recycle its learning about market entry and mar-
ket defense from one country to another, the
lower the risk of spreading managerial and orga-
nizational capacity too thinly.
ecoming global is never exclusively the
B result of a grand design. At the same
time, it would be naive to view it as little
more than a sequence of incremental, ad-hoc,
opportunistic, and random moves. The wisest
approach would be one of directed opportun-
ism--an approach that maintains opportunism
and flexibility within a broad direction set by a
systematic framework. Our goal here has been to
provide such a framework. [71
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Anil K. Gupta isa professor of strategy
and international business at the Uni-
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Earl C. D a u m 1924 Professor of Interna-
tional Business at Dartmouth College,
Hanover, N e w Hampshire.
Business Horizons / March-April2000