Chapter 12 Outline

Pressures for Cost Reductions and Local Responsiveness

Firms that compete in the global marketplace typically face two types of competitive pressure. They face pressures for cost reductions and pressures to be locally responsive (see Figure 12.3). These competitive pressures place conflicting demands on a firm. Responding to pressures to reduce costs requires that a firm try to minimize its unit costs. Attaining such a goal may necessitate that a firm base its productive activities at the most favorable low-cost location, wherever in the world that might be. It may also necessitate that a firm offer a standardized product to the global marketplace to ride down the experience curve as quickly as possible. In contrast, responding to pressures to be locally responsive requires that a firm differentiate its product offering and marketing strategy from country to country in an attempt to accommodate the diverse demands that arise from national differences in consumer tastes and preferences, business practices, distribution channels, competitive conditions, and government policies. Because customizing product offerings to different national

Figure 12.3

Pressures for Cost reduction and Local Responsiveness

requirements can involve significant duplication and a lack of product standardization, the result may be to raise costs.

While some firms, such as Firm A in Figure 12.3, face high pressures for cost reductions and low pressures for local responsiveness, and others, such as Firm B, face low pressures for cost reductions and high pressures for local responsiveness, many firms are in the position of Firm C. They face high pressures for cost reductions and high pressures for local responsiveness. Dealing with these conflicting and contradictory pressures is a difficult strategic challenge for a firm, primarily because being locally responsive tends to raise costs. In the remainder of this section, we will look at the source of pressures for cost reductions and local responsiveness. In the next section, we look at the strategies firms adopt to deal with these pressures.

Pressures for Cost Reductions

Increasingly, international businesses face pressures for cost reductions. This requires a firm to try to lower the costs of value creation by mass producing a standardized product at the optimal location in the world to try to realize location and experience curve economies. Pressures for cost reductions can be particularly intense in industries producing commodity products where meaningful differentiation on nonprice factors is difficult and price is the main competitive weapon. This tends to be the case for products that serve universal needs. Universal needs exist when the tastes and preferences of consumers in different nations are similar. This is the case for conventional commodity products such as bulk chemicals, petroleum, steel, sugar, and the like. It also tends to be the case for many industrial and consumer products (for example, handheld calculators, semiconductor chips, personal computers, liquid crystal display screens). Pressures for cost reductions are also intense in industries where major competitors are based in low-cost locations, where there is persistent excess capacity, and where consumers are powerful and face low switching costs. Many commentators have also argued that the liberalization of the world trade and investment environment in recent decades, by facilitating greater international competition, has generally increased cost pressures.¹⁴

Cost pressures have been intense in the global tire industry in recent years. Tires are essentially a commodity product where meaningful differentiation is difficult and price is the main competitive weapon. The major buyers of tires, automobile firms, are powerful and face low switching costs, so they play tire firms against each other to get lower prices. And the decline in global demand for automobiles in the early 1990s created excess capacity in the tire industry, with as much as 25 percent of world capacity standing idle. The result was a worldwide price war with almost all tire firms suffering heavy losses in the early 1990s. In response to the resulting cost pressures, most tire firms are trying to attain a low-cost position. This includes moving production facilities to low-cost facilities and offering globally standardized products to realize experience curve economies.¹⁵

Pressures for Local Responsiveness

Pressures for local responsiveness arise from a number of sources including (a) differences in consumer tastes and preferences, (b) differences in infrastructure and traditional practices, (c) differences in distribution channels, and (d) host government demands.

Differences in Consumer Tastes and Preferences

Strong pressures for local responsiveness emerge when consumer tastes and preferences differ significantly between countries--as they may for historic or cultural reasons. In such cases, product and/or marketing messages have to be customized to appeal to the tastes and preferences of local consumers. This typically prompts delegating production and marketing functions to national subsidiaries.

For example, there is a strong demand among North American consumers for pickup trucks, particularly in the South and West where many families have a pickup truck as a second or third car. In contrast, in European countries, pickup trucks are seen purely as utility vehicles and are purchased primarily by firms rather than individuals. As a consequence, the marketing message needs to be tailored to the different nature of demand in North America and Europe.

But Harvard Business School Professor Theodore Levitt has argued that consumer demands for local customization are declining worldwide.¹⁶ According to Levitt, modern communications and transportation technologies have created the conditions for a convergence of the tastes of consumers from different nations. The result is the emergence of enormous global markets for standardized consumer products. Levitt cites worldwide acceptance of McDonald's hamburgers, Coca-Cola, Levi Strauss jeans, and Sony television sets, all of which are sold as standardized products, as evidence of the increasing homogeneity of the global marketplace.

Levitt's argument, however, has been characterized as extreme by many commentators. For example, Christopher Bartlett and Sumantra Ghoshal have observed that in the consumer electronics industry, consumers reacted to an overdose of standardized global products by showing a renewed preference for products that are differentiated to local conditions.¹⁷ They note that Amstrad, the fast-growing British computer and electronics firm, got its start by recognizing and responding to local consumer needs. Amstrad captured a major share of the British audio player market by moving away from the standardized, inexpensive stereo systems marketed by global firms such as Sony and Matsushita. Amstrad's product is encased in teak rather than metal and has a control panel tailor-made to appeal to British consumers' preferences. In response, Matsushita had to reverse its earlier bias toward standardized global design and place more emphasis on local customization.

Differences in Infrastructure and Traditional Practices

Pressures for local responsiveness emerge when there are differences in infrastructure and/or traditional practices between countries. In such circumstances, customizing the product to the distinctive infra-structure and practices of different nations may necessitate delegating manufacturing and production functions to foreign subsidiaries. For example, North American consumer electrical systems are based on 110 volts, while in some European countries, 240 volt systems are standard. Thus, domestic electrical appliances have to be customized for this difference in infrastructure. Traditional practices also often vary across nations. For example, people drive on the left side of the road in Britain, creating a demand for right-hand drive cars, but in neighboring France, people drive on the right side of the road, creating a demand for left-hand drive cars. Automobiles have to be customized to meet this difference in traditional practices.

Differences in Distribution Channels

A firm's marketing strategies may have to be responsive to differences in distribution channels between countries. This may necessitate the delegation of marketing functions to national subsidiaries. In laundry detergents, for example, five retail chains control 65 percent of the market in Germany, but no chain controls more than 2 percent of the market in neighboring Italy. Thus, retail chains have considerable buying power in Germany, but relatively little in Italy. Dealing with these differences requires detergent firms to use varying marketing approaches. In the pharmaceutical industry, the British and Japanese distribution systems are radically different from the US system. British and Japanese doctors will not accept or respond favorably to an American-style high pressure sales force. Thus, pharmaceutical firms have to adopt different marketing practices in Britain and Japan compared to the United States (soft sell versus hard sell).

Host Government Demands

Economic and political demands imposed by host-country governments may necessitate local responsiveness. For example, the politics of health care around the world requires that pharmaceutical firms manufacture in multiple locations. Pharmaceutical firms are subject to local clinical testing, registration procedures, and pricing restrictions, all of which demand that the manufacturing and marketing of a drug meet local requirements. Also, because governments and government agencies control a significant portion of the health care budget in most countries, they can demand a high level of local responsiveness.

Threats of protectionism, economic nationalism, and local content rules (which require that a certain percentage of a product be manufactured locally) all dictate that international businesses manufacture locally. Consider Bombardier, the Canadian-based manufacturer of railcars, aircraft, jet boats, and snowmobiles. Bombardier has 12 railcar factories across Europe. Some argue that the duplication of manufacturing facilities leads to high costs and lowers profit margins, but Bombardier managers say that informal rules in Europe favor companies that use local workers. To sell railcars in Germany, they claim, you must manufacture in Germany. The same goes for Belgium, Austria, and France. To address its cost structure in Europe, Bombardier has centralized its engineering and purchasing functions, but it has no plans to centralize manufacturing.¹⁸

Implications

Pressures for local responsiveness imply that it may not be possible for a firm to realize the full benefits from experience curve and location economies. For example, it may not be possible to serve the global marketplace from a single low-cost location, producing a globally standardized product and marketing it worldwide to achieve experience curve cost economies. The need to customize the product to local conditions may work against such a strategy. Automobile firms, for example, have found that Japanese, American, and European consumers demand different kinds of cars, and this necessitates producing products that are customized for local markets. In response, firms such as Honda, Ford, and Toyota are establishing top to bottom design and production facilities in each of these regions so they can better serve local demands. While such customization brings benefits, it also limits a firm's ability to realize significant experience curve economies and location economies.

In addition, pressures for local responsiveness imply that it may not be possible to transfer the skills and products associated with a firm's core competencies whole sale from one nation to another. Concessions often have to be made to local conditions. Despite being depicted as "poster boy" for the proliferation of standardized global products, even McDonald's has customized its product (i.e., its menu) to account for national differences in tastes and preferences (see the Management Focus for details).