MGT 112

Global Business Strategy

 Introduction – Overview of the day

1. Quick review of first last class

2. What Panasonic Learned in China
3. Adapting to Global Differences
1. Customizing Global Marketing
2. Managing Differences
4. Case study: Zara
 Review

• Developing Markets
– “Developing markets” (or developing countries, emerging markets,
lower-income countries, industrializing countries etc.) include up to
85% of world’s population, 90+% of population and economic growth
– Thus, global economy is becoming more and more defined by these
markets. Understanding how to do business in them is paramount for
the long term strategy of any firm with multinational ambitions
– In addition to growth in these markets, firms who learn to compete
successfully within them will improve their operations in general
 Review

• Developing Markets
– The particular challenges of developing markets can be
understood commonly (though unevenly within and across
nations) as due to poorer infrastructure, worse governance,
weaker economic institutions, differences in demographic and
income distributions (and other consumer differences)
– Each one of these issues changes how firms must operate—
particularly, we’re focusing on the challenge of learning about
consumer tastes and integrating that into the broader business
strategy
 Review

• Developing Markets
– Overarching design philosophy comes from studying
failures/successes in DMs and applies everywhere: design-
to-value
– Learn what customers value using best feasible means,
design products centered around these findings. Be willing
to create product from scratch: if a market is worth
entering, it’s worth succeeding in. Don’t just make
assumptions!
 Review

• Clueing in customers
– Companies frequently face a challenge in convincing
consumers that they are, in fact, high quality
– This is a prominent issue in the medical space, as
consumers might not even be able to ascertain the
quality of care after getting that care
– Companies may make use of applied signaling theory
(evidence management)
 Review

• Clueing in customers
– Signaling theory: consumers can’t directly observe quality of care, but
they can observe signals which should be correlated with high quality
– The link between a signal carrying true information and quality is due to
quality reducing the costs of that signal
• Cheap talk, or uninformative signals, occur when there is no link between the cost
of a signal and the underlying quality type. If a good and bad hospital can equally
put out a nice ad, the ad is worthless from a signaling perspective
– Thus, a hospital (or other firm) doing observable things that would be
more expensive/difficult for a lower quality hospital to do sends credible
signals to consumers
 Review

• Clueing in customers
– Types of clues/signals: people, collaboration, tangibles
– Investing in each of these 3 categories presents patients and
their families with a lot of very noticeable information
indicating that the care they’re receiving is high quality.
– All of these investments would be very difficult for a bad
hospital, hence they are credible signals
– Not only that, there is a virtuous cycle here in which investing
in good signals actually improves care and outcomes
 What Panasonic Learned in China

• A very common set-up in multinational firms is to establish branches in DMs, but the
headquarters stays in the country of origin
• This establishes a hierarchy, where things like ideas and leadership only flow from the
executive offices out to the branches
• Of course, multinational firms are interested in maximizing profits and will do just about
anything to do this—why wouldn’t they be open to learning from branches?
– Assumption that learning is local and thus not applicable to other markets, so any amount spent
learning these local findings is wasted
– Corporate hierarchies matter to the individuals who comprise a corporation. Power hierarchies,
established leadership, being on top of the chain are all very consequential for decision makers.
Consider the case of a middle manager in the executive branch: their perceived leadership over a
branch is very consequential for advancement
– For good reading on corporate hierarchies, I strongly recommend the very readable book “Bullshit
Jobs” by David Graeber
 What Panasonic Learned in China

• These assumptions of overly local findings may be true sometimes, and of

course we can only ever expect decision makers to respond to their own
incentives
– Any firm looking to change the behavior of its employees should focus on
changing incentives
• However, openness to learning from international expansions to
developing markets has potential to change how a company approaches all
of its business, particularly if they know what to look out for
• Particularly, here Sony learned how to better balance its expertise in
integrated, mass scale operations (standardization/aggregation) and
focusing on local consumer needs (personalization/adaptation)
 What Panasonic Learned in China

• Historical background
– Following opening of trade relationship between China and Japan,
Panasonic began establishing a manufacturing base in China
– Over time, Panasonic’s manufacturing operations in China
expanded to being their global production hub, although initially
they were not particularly concerned with the Chinese market itself
– Although Panasonic was deeply and sophisticatedly invested in
understanding Japanese consumers, they did not expend similar
efforts in China, and made typical decision to just sell stripped
down products
 What Panasonic Learned in China

• As the Chinese middle class rapidly expanded and became

wealthier, it was clear Panasonic needed to reorient their strategy
– This is a good example of demographics shifting quickly—you can get
your lunch eaten if you’re not paying attention to big economic forces
• This reorientation was not simple, and Panasonic aggressively
restructured their entire firm, cutting thousands of employees,
shifting management structures, and importantly, established an
executive hub in Beijing to bring expertise and executive attention
to China
 What Panasonic Learned in China

• Soon, Panasonic developed a lifestyle research hub within

Shanghai
– Hub focused not only on collecting huge amounts of useful data, but
also in careful analysis of this data
• Running such a hub successfully requires local talent. This must
be done aggressively and seriously, not as an afterthought.
• Once local talent was brought on board, research hub had staff
fully integrated into the global operations, and gave them
autonomy and ability to influence new products
 What Panasonic Learned in China

• Establishment of this research center, and their

subsequent thorough data gathering, analysis, and
product development also coincided with formal and
informal relationships between employees across
different business units
• Knowledge flowing back and forth meant that the
better Panasonic got at adopting to local conditions, the
more lessons it could potentially apply to all of its units
 What Panasonic Learned in China

• Example: Sterilization Technology

– Panasonic research unit discovered that majority of
Chinese consumers were not washing underwear in
washing machines due to contamination concerns
– Solution: silver ion sterilization technology
– Once this tech was implemented, innovation was to
apply in back in Japanese market to refrigerators
 What Panasonic Learned in China

• A changed company
– Increased attentiveness to studying and identifying consumer needs
– Expand this sort of attentive market research to all product lines
• You don’t know what you’re missing if you’re not even looking
– This has led to strategies such as recognizing that the interplay
between different appliances/products allows for greater adaptation
– Developed an in-house organization called Global Consumer
Marketing to disseminate best practices
– Has Panasonic done enough? Probably not—but this is something to
discuss shortly
 What Panasonic Learned in China

• Discussion
– Please discuss in your breakout rooms the following
prompt
• Panasonic notably did this all in house—they did not pursue
a strategic alliance with a Chinese firm. What is a good
reason they may have made this decision? What is a bad
reason?
Break
 Adapting to International Differences

• Customizing Global Marketing

– Central question faced by any firm is how to address the
challenge of multiple markets
– Even within one nation, there are a multitude of markets
with particular demographics, wealth, tastes, culture, etc.
– For multinational firms this becomes especially
important, as both market differences tend to be larger
and internal coordination becomes tougher
 Adapting to International Differences

• Overall framing is a tradeoff between standardization/aggregation

and adaptation (i.e. personalization), and the correct policy is very
likely a mix, rather than focusing on an extreme. The correct mix
also differs for each firm depending on the particularities or their
goals, abilities, and context.
– Second reading talks additionally about arbitrage, we’ll add that too
• Being clear and explicit about the advantages/disadvantages of each
is key to finding the optimal mix
• This reading presents a framework for understanding what to do
 Adapting to International Differences

• 4 dimensions by which we can evaluate to what

degree there should be standardization or
adaptation
– Business functions
– Products
– Marketing mix elements
– Countries
 Adapting to International Differences

• Business functions
– What is the company’s overall business strategy? Coherence is important!
– Some functions are best done in headquarters (e.g. R&D, manufacturing)
while some are best done locally (e.g. marketing)
• Products
– If the products themselves lend themselves to economies of scale, this
supports standardization
• Economies of scale can come from both manufacturing and spread of
ideas/technology internally
– Cultural grounding: the degree to which a product is culturally specific
• Industrial products are not specific, household products/food are
 Adapting to International Differences

• Marketing mix elements

– Strategic elements like product positioning are better for standardization than
things like advertising, which are very dependent upon execution
– Marketing should be globalized to the extent that it involves efficiently using
good ideas
• Countries
– Small and struggling markets tend to rely upon assistance from headquarters
more (which should be assumed to have greater resources)
– Because there is a power dynamic in that larger markets naturally produce a
greater share of revenue, standardized products/marketing campaigns should
reflect their needs and smaller markets will accept
Adapting to International Differences
 Adapting to International Differences

• How to adopt these changes?

– There’s often gaps between where a company would like to be on
the standardization/adaptation scale, and changes are needed
– Broad idea (see reading for more practical details)“Too far too
fast” it’s important to take into account bureaucratic, logistical,
and internal political issues when considering how to put in
standardized policies, which involve shaking up people’s careers,
internal hierarchies, and sense of control over their branch
– A good idea implemented poorly doesn’t lead to a good outcome
 Managing Differences

• Note on “arbitrage” is that this reading uses the term in a specific way different to what
you may have heard. Typical econ definition is typically to exploit difference in asset price
across markets by buying in low price market and selling in a high price market, often with
implication of 0 or low risk.
• Here, arbitrage simply means exploiting any differences in markets, and typically refers to
moving parts of the value chain to make use of these differences. That is, in this context
arbitrage can mean “we arbitrage labor by moving operations to a lower wage market”
• Reading focuses on labor arbitrage: understandably, wages make up a large portion of a
firm’s spending. The percent of a firm’s spending on labor can be a sign that a firm may
increase profitability through labor arbitrage
• Important thing to always remember with words is to focus on identifying the practical
uses and differences
 Managing Differences

• Aggregation, adaptation, and arbitrage: 3 broad concepts

which describe strategies to gain competitive advantages in
international markets
• While firms definitionally use all 3 to some extent, deciding
which to focus on is difficult
• Rather than expending resources (bureaucratic restructuring,
executive attention, shifting facilities and operations)
attempting to work on all 3, better to just focus on 2
 Managing Differences

• Pursuing the 3 A’s

– Companies will pursue the 3 A’s according to their current
circumstances
– Focus should naturally change over time in response to their own
development and changing market conditions
– There are tensions across the recommendations of this framework
in that it may be beneficial for a firm to pursue aggregation in
service to one strategic goal, and adaption in service of another.
This requires prioritization, but as always, the framework provides
a useful guide for what things to be prioritizing
Managing Differences
Managing Differences
Break
 Zara

• Background
– Zara, based in Spain, is a successful clothing retailer that has expanded
dramatically around the world since 2000
– This involved expanding hundreds of stores per year in multiple
countries in the same year, presenting huge organizational challenges
(think of the hemisphere problem inherent to a clothing retailer)
– Pursued different strategies from many of its competitors, particularly,
they made use of vertical integration and European manufacturing
 Zara

• Market Developments & Conditions

– Market conditions were rapidly changing around Zara
– Downward pressure on prices, new types of competitors
– Rapid consolidation of retailers pushing smaller firms out of the market or
gobbling them up
– Reductions in tariffs and transport costs were rapidly changing the calculus
of how to optimize supply chains across the industry
• International manufacturing became much more appealing
– Additional challenges particular to important markets, e.g. liberalization in
Germany, UK having huge monopolization already, France much the same,
but Italy dominated by fashion houses
 Zara

• To sum up, Zara was facing an organizationally complex set of

international expansions with a rapidly shifting set of market
conditions. How to succeed in such a situation?
• The Zara System
– Contemporary fashion of medium quality at a good price
• Firmly pick a lane that can be won
– Maximum flexibility
• Zero inventories. Production centered around short runs of sellable products
– High speed deliveries, use of subcontracting, and close monitoring of fashion
trends with dedicated and well supported staff
• This all led to the ability to turn a new trend into clothing on the shelf within 15 days
 Zara

• Aggregation
– Zara still maintained about half of production in house, much more
than competitors
– This allowed for a central nexus of expertise and information
which could improve quality across products, not possible with
completely siloed manufacturers
– Synergy: this type of aggregation worked well with short
turnaround times, as being close with manufacturers who trust you
and are properly incentivized is necessary for constant shifting
demands
 Zara

• Managing human resources

– Relatively unique managerial culture
– Emphasis on small details (signaling), humility, constant feedback
– Recruiting process unconcerned with credentials, more concerned
with empathy and people skills (hiring to the job/strategy)
– Emphasis on training, familiarity with company strategy and
operations
– Performance based incentives aligned with the company strategy
 Zara

• Running the stores

– Lots of effort went into store space.
• All decisions made with a clear purpose in mind: brand coherence
– Downtown location, big windows, exciting atmosphere, all
played into their strategy
– Rotating window displays, products, etc. all are credible
signals that this company is actually keeping up with fashion
trends, and thus as a shopper that’s what you’re getting
 Zara

• New challenges
– The further Zara expands, the more challenges it faces
due to a lot of its strategic successes being attributable
to a centralized structure
– Operating in South America, for instance, introduces
seasonality
– How much adaptation can/should Zara pursue in its
international growth?
 Zara

• Discussion
– In your breakout rooms, please discuss the following
prompt:
• What aspects of Zara do you think they should keep or
change in pursuit of international expansion?
– For example, are there any changes to their stores and how they
think about their stores that you think could be helpful?