Pankaj Ghemawat

www.hbrreprints.org

Regional Strategies for Global Leadership

by Pankaj Ghemawat

Included with this full-text

Harvard Business Review

article:

The Idea in Brief—the core idea

The Idea in Practice—putting the idea to work

1

Article Summary

2


A list of related materials, with annotations to guide further

exploration of the article’s ideas and applications

13

Further Reading

It’s often a mistake to set out

to create a worldwide strategy.

Better results come from

strong regional strategies,

brought together into a global

whole.

Reprint R0512F

http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=R0512F

http://www.hbrreprints.org


page 1

The Idea in Brief The Idea in Practice

CO

PYR

IGH

T ©

200

7 H

AR

VA

RD

BU

SIN

ESS

SC

HO

OL

PU

BLI

SHIN

G C

OR

PO

RA

TIO

N. A

LL R

IGH

TS

RE

SER

VE

D.

Many companies competing in foreign markets pin their hopes for success on a single worldwide strategy—only to see lukewarm results. Why the disappoint-ment? Despite globalization, regional dis-tinctions (cultural, political, legal, and eco-nomic) aren’t disappearing. Global powerhouses—including GE, Wal-Mart, and Toyota—capitalize on regional differences, crafting strategies that complement their global and individual country tactics.

How to craft a winning regional strategy? Ghemawat suggests choosing from a menu, depending on your circumstances. For example, use the “home base” strat-egy—locating your R&D and manufactur-ing in your country of origin—if the eco-nomics of concentration outweigh those of dispersion. Or use the “portfolio” strategy—establishing operations outside your home region that report to home base—if you need to average out economic cycles across regions. Shift among the five re-gional strategies—or combine them—as circumstances evolve.

By creatively blending regional strategies, Toyota surpassed Ford as the world’s second-largest automaker in 2004.

Ghemawat identifies five regional strategies for serving foreign markets:

Strategy How to Implement

Example Pros and Cons

Homebase

Locate R&D and manufacturing in your country of origin.

Spanish fashion company Zara designs and makes items near its manufactur-ing and logistics hub in Spain and trucks them to Western European markets.

Lets you get time-sensitive items to market quickly, but you risk eventually running out of room to grow.

Portfolio Establish op-erations outside your home re-gion that report to home base.

Toyota applied its renowned produc-tion system (its distinct competitive advantage) to factories it built in the United States (its most important overseas market).

You accelerate growth in foreign regions and average out economic cycles across regions, but portfolio strate-gies take time to implement.

Hub Build regional bases that provide shared resources and services to coun-try operations.

Toyota began producing a limited number of locally exclusive models in its principal foreign plants. Each plant had its own platform, with products designed for sale within the region.

You add value at the regional level by catering to regional preferences, but you risk sacrificing cross-regional economies of scale.

Platform Reduce the number of basic product plat-forms you offer worldwide.

Toyota has reduced the number of its vehicle platforms from 11 to 6 by allowing customization atop common platforms engineered for adaptability.

You achieve greater econo-mies of scale in design, procurement, and other functions, thus delivering variety more cost-effectively, but taking platform stan-dardization too far can back-fire if regional customization creates excessive disparity across regions.

Mandate Give certain regions man-dates to supply particular prod-ucts or perform certain roles for your entire organization.

Toyota’s innovative International Multi-purpose Vehicle (IMV) project funnels common engines and manual transmissions for pickup trucks, SUVs, and minivans from Asian plants to four assembly hubs there and in Latin America and Africa. These parts are then forwarded on to major global markets except the U.S., where vehicles are larger.

You achieve economies of specialization as well as scale, but broad mandates can’t handle variations in country, national, or regional conditions (which is why IMV excludes the U.S.).


by Pankaj Ghemawat

harvard business review • december 2005 page 2

CO

PYR

IGH

T ©

200

5 H

AR

VA

RD

BU

SIN

ESS

SC

HO

OL

PU

BLI

SHIN

G C

OR

PO

RA

TIO

N. A

LL R

IGH

TS

RE

SER

VE

D.

It’s often a mistake to set out to create a worldwide strategy. Better

results come from strong regional strategies, brought together into a

global whole.

Let’s assume that your firm has a significant in-ternational presence. In that case, it probablyhas something called a “global strategy,” whichalmost certainly represents an extraordinaryinvestment of time, money, and energy. Youand your colleagues may have adopted it withgreat fanfare. But, quite possibly, it has provenless than satisfactory as a road map to cross-border competition.

Disappointment with strategies that oper-ate at a global level may explain why compa-nies that do perform well internationally applya regionally oriented strategy in addition to—or even instead of—a global one. Put differ-ently, global as well as regional companiesneed to think through strategy at the regionallevel.

Jeffrey Immelt, CEO of GE, claims that re-gional teams are the key to his company’s glo-balization initiatives, and he has moved tograft a network of regional headquarters ontoGE’s otherwise lean product-division structure.John Menzer, president and CEO of Wal-MartInternational, tells employees that global lever-

age is about playing 3-d chess—at the global,regional, and local levels. Toyota may havegone furthest in exploiting the power of re-gionalized thinking. As Vice Chairman FujioCho says, “We intend to continue moving for-ward with globalization…by further enhanc-ing the localization and independence of ouroperations in each region.”

The leaders of these successful companiesseem to have grasped two important truthsabout the global economy. First, geographicand other distinctions haven’t been submergedby the rising tide of globalization; in fact, suchdistinctions are arguably increasing in impor-tance. Second, regionally focused strategies arenot just a halfway house between local (coun-try-focused) and global strategies but a discretefamily of strategies that, used in conjunctionwith local and global initiatives, can signifi-cantly boost a company’s performance.

In the following article, I’ll describe the vari-ous regional strategies successful companieshave employed, showing how they haveswitched among the strategies and combined



them as their markets and businesses haveevolved. I’ll begin, though, by looking moreclosely at the economic reasons why regionsare often a critical unit of analysis for cross-border strategies.

The Reality of Regions

The most common pitch for taking regions se-riously is that the emergence of regional blocshas stalled the process of globalization. Im-plicit in this view is a tendency to see regional-ization as an alternative to further cross-bor-der economic integration.

In fact, a close look at the country-levelnumbers suggests that increasing cross-borderintegration has been accompanied by high orrising levels of regionalization. In other words,regions are not an impediment to but an en-abler of cross-border integration. As the exhibit“Trade: Regional or Global?” shows, the surgeof trade in the second half of the twentiethcentury was driven more by activity within re-gions than across regions. The numbers alsocast doubt on the idea (held implicitly by advo-cates of pure global strategies) that economicvitality is promoted more by cross-regionaltrade. It turns out that regions whose internaltrade flows are the lowest relative to tradeflows with other regions—Africa, the MiddleEast, and some of the Eastern European transi-tion economies—are also the poorest eco-nomic performers.

Country-level numbers also suggest that for-eign direct investment (FDI) is quite regional-ized, which is even more surprising than theregionalization of trade. Data from the UnitedNations Conference on Trade and Develop-ment show that for the two dozen countriesthat account for nearly 90% of the world’s out-ward FDI stock, the median share of intrar-egional FDI in total FDI was 52% in 2002, themost recent year for which data are available.

The extent and persistence of regionaliza-tion in economic activity reflect the continuingimportance not only of geographic proximitybut also of cultural, administrative, and, tosome extent, economic proximity.

1

These fourfactors are interrelated: Countries that are rela-tively close to one another are also likely toshare commonalities along the other dimen-sions. What’s more, those similarities have in-tensified in the past few decades through freetrade agreements, regional trade preferencesand tax treaties, and even currency unification,

with NAFTA and the European Union supply-ing the two most obvious examples. Ironically,some differences between countries within aregion can combine with the similarities to ex-pand the region’s overall economic activity. Forinstance, we see U.S. firms in many industriesnearshoring production facilities to Mexico,thereby arbitraging across economic differ-ences between the two countries while retain-ing the advantages of geographic proximityand administrative and political similarities,which more distant countries, such as China,do not enjoy.

Evidence from companies’ internationalsales also points to considerable regionaliza-tion. According to data analyzed by SusanFeinberg at Rutgers Business School, amongU.S. companies operating in only one foreigncountry, there is a 60% chance that the countryis Canada. Even the largest multinational cor-porations exhibit a significant regional bias. Astudy published by Alan Rugman and AlainVerbeke in the Journal of International BusinessStudies shows that around 88% of the world’sbiggest multinationals derive at least 50% oftheir sales—the weighted average is 80%—from their home regions. Just 2% (a total ofnine companies) derive 20% or more of theirsales from each of the triad of North America,Europe, and Asia.

Zooming in on large companies with rela-tively broad regional footprints—roughly akinto the top 12% of the previous sample—we findthat even here competitive interactions areoften regionally focused. Take the case of thealuminum-smelting industry. As we see in theexhibit “Industry: Regional or Global?” in thelast ten years the industry has experiencedsome increase in concentration as measured bythe Herfindahl index (a standard measure ofindustry concentration; the higher the index,the larger the market shares of the largestfirms). But that increase in concentration re-verses less than one-half of the decline of theprevious 20 years, or about one-tenth of thedecline experienced since 1950. In contrast,concentration in North America has doubledin the last ten years after holding more or lesssteady for the previous 20 years. Similar pat-terns appear in a range of other industries: per-sonal computers, beer, and cement, to namejust three. In other words, regions are often thelevel at which global oligopolists try to buildup powerhouse positions.

Pankaj Ghemawat

is the Jaime and Josefina Chua Tiampo Professor of Busi-ness Administration at Harvard Busi-ness School in Boston. He is the author of “The Forgotten Strategy” (HBR No-vember 2003).



Let’s now take a closer look at the menu ofregional strategies from which your companycan choose.

The Regional Strategy Menu

Broadly speaking, regional strategies can beclassified into five types, each with distinctstrengths and weaknesses. I have ordered thestrategies according to their relative complex-ity, starting with the simplest, but that doesnot mean companies necessarily progressthrough the strategies as they evolve. Whereassome companies may indeed adopt the strate-gies in the order in which I present them, oth-ers may find themselves abandoning more-ad-vanced strategies in favor of simpler ones—good business is about striving to maximizevalue, not complexity. And capable companieswill often use elements of several strategies si-multaneously.

The Home Base Strategy. Except for thevery few companies that are virtually bornglobal, such as Indian software services firms,

companies generally start their internationalexpansion by serving nearby foreign marketsfrom their home base, locating all their R&Dand, usually, manufacturing in their countryof origin. The home base is also where thebulk of the Fortune Global 500 still focuses.Even companies that have since moved on tomore complex regional strategies nonethelessrely on a home base strategy—at the regionallevel—for long periods. Thus, for decades, Toy-ota’s international sales came exclusively fromdirect exports. And some companies thatmove on eventually return to a home basestrategy: GE did so in home appliances, as didBayer in pharmaceuticals.

For other companies, however, a focus onthe home region is a matter of neither defaultnor devolution but, instead, the desired long-term strategy. Take the case of Zara, the Span-ish fashion company. In a cycle that takes be-tween two and four weeks, Zara designs andmakes items near its manufacturing and logis-tics hub in northwestern Spain and trucks

Trade: Regional or Global?

In many parts of the world, intraregional trade increased steadily as a percentage of a region’s total trade in the second half of the twentieth century. For example, in 1958 some 35% of trade in Asia and Oceania took place between countries in that geographic region.

In 2000, the proportion was more than 50%. Globally, the proportion of trade within re-gions rose from about 47% to 55% between 1958 and 2000. The only significant decline has been in Eastern Europe, but that is ex-plained by the collapse of communism. In

general, the numbers indicate that increas-ing economic integration through interna-tional trade has been accompanied by in-creasing rather than decreasing regionalization.

Intraregional Trade as a Percentage of Total Trade

0%

10%

20%

30%

40%

50%

60%

70%

80%

1958 2000

EUROPEAMERICAS

ASIA AND OCEANIA

EASTERN EUROPE ANDFORMER USSR

MIDDLE EASTAFRICA

Source: United Nations, International Trade Statistics Yearbooks, 1958 to 2000.



those goods to Western European markets.This rapid response lets the company producewhat is selling during a fashion season insteadof committing to merchandise before the sea-son starts. The enhanced customer appeal andreduced incidence of markdowns have so farmore than offset the extra costs of producingin Europe instead of Asia.

As Zara illustrates, home base strategieswork well when the economics of concentra-tion outweigh the economics of dispersion.Fashion-sensitive items do not travel easilyfrom the Spanish hub to other regions, be-cause the costs of expedited air shipments com-promise the company’s low-price positioning.More generally, the presence of any factor thatcollapses distance within the local region (suchas regional grids in energy) will encouragecompanies to favor a single-region, home basestrategy.

For some companies, the “region” that canbe served from the home base is actually theglobe. Operating in the highly globalized mem-

ory chip business, the Korean giant Samsunghas one of the most balanced worldwide salesdistributions of any major business, but it con-siders the colocation of most R&D and produc-tion at one site in South Korea to be a key com-petitive advantage. Transport costs are so lowrelative to product value that geographic con-centration—which permits rapid interactionsand iteration across R&D and production—dominates geographic dispersion even at theglobal level.

But cases like Samsung are rare. Typically,doing business from the home base effectivelylimits a company to its local region. As a result,the biggest threats to companies pursuing ahome base strategy are running out of room togrow or failing to hedge risk adequately.Growth within Europe will soon be an issue forZara. And risk has already emerged as a majorconcern: As of this writing, the sharp decline ofthe dollar against the euro has inflated Zara’scosts of production relative to competitors thatrely more on dollar-denominated imports

Industry: Regional or Global?

In many “global” industries, competition is playing out at a regional level. The chart below measures concentration in the aluminum-smelting industry as a summary measure of the distribution of market shares within it. The metric used is the Herfindahl

index, which measures the degree to which the industry is fragmented (lots of small to medium-sized companies splitting most of the business) or concentrated (a few players controlling most of the business). The higher the index, the larger the market shares of the

largest companies. As the chart shows, the level of global competition was relatively flat from 1975 to 2000, while concentration in North America over the same period in-creased dramatically.

Concentration in the Aluminum-Smelting Industry

1975

.3000

.2500

.2000

.1500

.1000

.0500

.00001980 1985 1995 20001990

WORLD

NORTH AMERICA

Her

finda

hl in

dex

Source: Fariborz Ghadar, Center for Global Business Studies, Penn State University.



from Asia.

The Portfolio Strategy.

This strategy in-volves setting up or acquiring operations out-side the home region that report directly tothe home base. It is usually the first strategyadopted by companies seeking to establish apresence outside the markets they can servefrom home. The advantages of this approachinclude faster growth in nonhome regions, sig-nificant home positions that generate largeamounts of cash, and the opportunity to aver-age out economic shocks and cycles across re-gions.

A good example of a successful portfoliostrategy is provided by Toyota’s initial invest-ments in the United States, which seemed tiedtogether by little more than the desire to buildup a manufacturing presence in the company’smost important overseas market. What pre-vented this approach from destroying valuewas Toyota’s distinct competitive advantage:the celebrated Toyota Production System(TPS), which was developed and still worksbest at home in Japan but could be applied tofactories in the United States.

Although the portfolio strategy is conceptu-ally simple, it takes time to implement, espe-cially if a company tries to expand organically.It took Toyota more than a decade to establishitself in North America—a process that beganwith a joint venture with General Motors inthe early 1980s. For an automaker lacking anadvantage like TPS, the organic buildup of asignificant presence in a new region could takefar longer. Of course, companies may build aregional portfolio more quickly through acqui-sitions, but even that can take a decade ormore. When Jack Welch began GE’s globaliza-tion initiative in the second half of the 1980s,he targeted expansion in Europe, giving atrusted confidant, Nani Beccalli, wide latitudefor deal making. Thanks to Beccalli’s acquisi-tions, GE built up a strong presence in Europe,but the process of assembling the regionalportfolio lasted until the early 2000s.

Companies that adopt a portfolio strategyoften struggle to deal with rivals in nonhomeregions. That’s largely because portfolio strate-gies offer limited scope for letting regional—asopposed to local or global—considerations in-fluence what happens on the ground at thelocal level. Indeed, this was precisely the expe-rience of GE, whose European businesses re-ported to the global headquarters in the

United States, run by purported “global lead-ers”—many of whom were Americans whohad never lived or worked abroad. Meanwhile,most of GE’s toughest competitors in its nonfi-nancial businesses were European companiesthat knew their increasingly regionalizedhome turf and were prepared to compete ag-gressively there. During a talk at Harvard Busi-ness School in 2002, Immelt described the re-sults: “I think we stink in Europe today.”

The Hub Strategy. Companies seeking toadd value at the regional level frequentlybegin by adopting this strategy. Originally ar-ticulated by McKinsey consultant KenichiOhmae, a hub strategy involves building re-gional bases, or hubs, that provide a variety ofshared resources and services to local (coun-try) operations. The logic is that such re-sources may be hard for any one country tojustify, but economies of scale or other factorsmay make them practical from a cross-countryperspective.

Hub strategies often involve transforming aforeign operation into a stand-alone unit. Inthe early 1990s, for instance, Toyota began pro-ducing a limited number of locally exclusivemodels in its principal foreign plants—previ-ously a taboo—thereby signaling the com-pany’s intention to build complete organiza-tions in each of its regions. These plants thusstarted to serve as regionally distinct hubs,each with its own platform, whose productswere designed for sale within the region.

In its purest form, a hub strategy is simply amultiregional version of the home base strat-egy. For example, if Zara were to add a secondhub in, say, Asia by establishing an operationin China to serve the entire Asian market, itwould shift from being home based to being amultiregional hubber. Therefore, some of thesame conditions that favor a home base strat-egy also favor hubs. It should also be notedthat multiple hubs can be very independent ofone another; the more regions differ in theirrequirements, the weaker the rationale forhubs to share resources and policies.

A regional headquarters can be seen as aminimalist version of a hub strategy. After theEuropean Commission blocked GE’s mergerwith Honeywell, GE felt the need to dedicatemore corporate infrastructure and resources toEurope, partly to attract, develop, and retainthe best European employees and partly to ac-quire a more European face for political rea-

The surge of trade in the

second half of the

twentieth century was

driven more by activity

within regions than

across regions.



sons. In 2001, therefore, GE switched from aportfolio to a hub strategy by establishing a re-gional HQ structure in Europe—completewith a CEO for GE Europe. The company fol-lowed up in 2003 by establishing a parallel or-ganization in Asia.

The impact of the typical regional HQ is lim-ited, however, by its focus on support functionsand its weak links to operating activities. For ex-ample, the regional presidents within Wal-MartInternational perform a communication-and-monitoring role, but otherwise their influenceon strategy and resource allocation seems to bemainly personal. In any event, a regional HQ isseldom a sufficient basis for a regional strategy,even though it may be a necessary part of one.(See the sidebar “A Regional HQ Is NotEnough.”)

The challenge in executing a hub strategy isachieving the right balance between customi-zation and standardization. Companies too re-sponsive to interregional variation risk addingtoo much cost or sacrificing too many opportu-nities to share costs across regions. As a result,they may find themselves vulnerable to attacksfrom companies taking a more standardizedapproach. On the other hand, companies thattry to standardize across regional hubs—and inso doing overestimate the degree of common-ality from region to region—are vulnerable tocompetition from local players. Thus we seeDell, whose product is relatively standardacross its regional operations, forced to modifyits plans in China to respond to local compa-nies competing aggressively on cost by produc-

ing less-sophisticated, lower quality products.The Platform Strategy. Hubs, as we’ve seen,

spread fixed costs across countries within a re-gion. Interregional platforms go a step furtherby spreading fixed costs across regions. Theytend to be particularly important for back-endactivities that can deliver economies of scaleand scope. Most major automakers, for exam-ple, are trying to reduce the number of basicplatforms they offer worldwide in order toachieve greater economies of scale in design,engineering, administration, procurement,and operations. It is in this spirit that Toyotahas been reducing the number of its platformsfrom 11 to six and has invested in global carbrands such as the Camry and the Corolla.

It’s important to realize that the idea behindplatforming is not to reduce the amount ofproduct variety on offer but to deliver varietymore cost-effectively by allowing customiza-tion atop common platforms explicitly engi-neered for adaptability. Ideally, therefore, plat-form strategies are almost invisible to acompany’s customers. Platforming runs intodifficulties when managers take standardiza-tion too far.

Let’s look again at the automobile industry.Sir Nick Scheele, outgoing COO of Ford, pointsout, “The single biggest barrier to globalization[in the automobile industry]…is the relativelycheap cost of motor fuel in the United States.There is a tremendous disparity between theUnited States and…the rest of the world, andit creates an accompanying disparity in…themost fundamental of vehicle characteristics:size and power.” This reality is precisely whatFord ignored with its Ford 2000 program. De-scribed by one analyst as the biggest businessmerger in history, Ford 2000 sought to com-bine Ford’s regional operations—principallyNorth America and Europe—into one globaloperation. This attempt to reduce duplicationacross the two regions sparked enormous inter-nal turmoil and largely destroyed Ford’s Euro-pean organization. Regional product develop-ment capabilities were sacrificed, andunappealingly compromised products werepushed into an unreceptive marketplace. Theresult: nearly $3 billion in losses in Europethrough 2000 and a fall in regional marketshare from 12% to 9%.

The Mandate Strategy. This cousin of theplatform strategy focuses on economies of spe-cialization as well as scale. Companies that

A Regional HQ Is Not Enough

Many companies with explicitly global ambitions have reacted to the regional-ization of the world economy by estab-lishing a set of regional headquarters. This kind of organizational response has, in fact, also been the focus of most of the management literature on re-gions. Michael Enright, for example, has described some interesting patterns in recent articles in the

Management Inter-

national Review

on the functions per-formed by regional management cen-ters. But to focus on regional HQs or any other organizational structure as

the

pri-

mary object of interest is a little like fo-cusing on the briefcase rather than its contents. Without a clear sense of how a regional structure is supposed to add value, it is impossible to specify what the structure should try to achieve. A company with no regional HQs may still use regions as the building blocks of its overall strategy, and a company with many regional HQs may still not have a clearly articulated regional strategy. In other words, having regional headquar-ters doesn’t mean that you actually have a regional strategy.



adopt this strategy award certain regionsbroad mandates to supply particular productsor perform particular roles for the whole orga-nization. For example, Toyota’s Innovative In-ternational Multi-purpose Vehicle (IMV)project funnels common engines and manualtransmissions for pickup trucks, SUVs, andminivans from Asian plants to four assemblyhubs there and in Latin America and Africa,and then on to almost all the major marketsaround the world except the United States,where such vehicles are larger. Similarly,Whirlpool is sourcing most of its small kitchenappliances from India, and a host of globalcompanies are in the process of broadeningthe mandates of their production operationsin China.

As with platforms, the scope for mandatesgenerally increases with the degree of productstandardization around the world, eventhough the mandate strategy involves focusedresource deployments at the regional and locallevels. But interregional mandates can be set

up in some businesses that afford little roomfor conventional platforms. For instance, glo-bal firms in consulting, engineering, financialservices, and other service industries often fea-ture centers of excellence that are recognizedas repositories of particular knowledge andskills, and are charged with making thatknowledge available to the rest of the firm.Such centers are often concentrated in a singlelocation, around an individual or a small groupof people, and therefore have geographic man-dates that are much broader than their geo-graphic footprints.

There are of course several risks associatedwith assigning broad geographic mandates toparticular locations. First, such mandates canallow local, national, or regional interests tounduly influence, or even hijack, a firm’s over-all strategy: More than one professional servicefirm can be cited in this context. Second, broadmandates cannot handle variations in local, na-tional, or regional conditions, which is why thenear-global mandate for Toyota’s Asian pickup

The Toyota Way

This exhibit is an almost exact reproduction of a slide presented to Toyota investors at an informational event in New York City in September 2004. The only change I have made is to label the slide to highlight how the various elements identified in the Toyota strategy correspond to the five strategies described in this article. Toyota’s “global network,” which combines all the other approaches, can be considered a sixth strategy.

Past HereafterDomestic production +Exports

Building afoundation for local production

(Built where sold)

Development of bases- consolidated production- mutual supply

Global network

Locally exclusive

model

Global car

PLATFORM

HUB

MANDATE

HOME BASE

PORTFOLIO

Used by permission of Toyota Motor Corporation.



engine and transmission plants excludes theUnited States. And finally, carrying the degreeof specialization to extremes can create inflexi-bility. A company that produces everythingbased on global mandates would be affectedworldwide by a disruption at a single location.

The reader will have noticed that Toyota fig-ures as an illustration in all the foregoing de-scriptions. Indeed, this is because Toyota pro-vides perhaps the most compelling andcomplete example of how the effective applica-tion of regional strategies can produce a globalpowerhouse. The success is apparent: Toyotasurpassed Ford as the world’s second-largestautomaker in 2004 and is poised to overtakeGeneral Motors in the next two to three years.The exhibit “The Toyota Way” reproduces aslide that the company uses to summarize theevolution of its strategy. It shows both thatToyota looks at strategy through a regionallens and that it has, in fact, progressed throughall the strategies I’ve just described.

What is also interesting about Toyota is thatnew modes of value creation at the regionallevel have supplemented old ones instead ofreplacing them. Although Toyota has movedbeyond a Japanese manufacturing base (thehome base strategy), exports from Japanesemanufacturing facilities to the rest of theworld continue to account for more than one-quarter of the company’s volume and a signifi-cantly larger share of its profits. In regionsother than the two in which it has strong posi-tions—East and Southeast Asia and NorthAmerica—Toyota is still following a portfolioapproach. In terms of regional hubs, the pro-motion of a production and procurement spe-cialist to succeed Fujio Cho as president signalsan increased commitment to transplanting theToyota Production System from Japan to thenewer production hubs at a time when over-seas production is being ramped up rapidly.But even as its hubs gain strength, Toyota con-tinues to reduce the number of its major pro-duction platforms and pursue additional spe-cialization through interregional mandates.The IMV project described earlier plays a criti-cal role in all three respects.

The picture that emerges is not one of Toy-ota progressing through the various regionalstrategies one at a time but of a company try-ing to cover all the bases. One can even arguethat the application of all five regional strate-gies itself represents a new form of strategy—

the “global network” in Toyota’s slide—inwhich various regional operations interactwith one another and the corporate center inmultiple ways and at multiple levels.

Of course, Toyota’s ability to employ a com-plex mix of regional strategies to create value isinseparable from the company’s basic competi-tive advantage: TPS’s ability to produce high-quality, reliable cars at low cost. Without thisfundamental advantage, some of Toyota’s coor-dination attempts would drown in a sea of redink.

Defining Your Regions

As companies think through the risks and op-portunities of various regional strategies, theyalso need to clarify what they mean by theword “region.” I have so far avoided a defini-tion, although most of my examples imply acontinental perspective. My goal is not to beelusive but to avoid restricting the strategies toa particular geographic scale. Particularlywith large countries, the logic of the strategiescan apply to intranational as well as interna-tional regions. Oil companies, for example,consider the market for gasoline in the UnitedStates to consist of five distinct regions. Otherlarge markets where transport costs are rela-tively high in relation to product value, suchas cement in Brazil or beer in China, can besimilarly broken down.

The general point is that one can interpretthe regional strategies at different geographiclevels. Assessing the level—global, continen-tal, subcontinental, national, intranational, orlocal—at which scale is most tightly tied toprofitability is often a helpful guide to deter-mining what constitutes a region. Put differ-ently, the world economy is made up of manyoverlapping geographic layers—from local toglobal—and the idea is to focus not on onelayer but on many. Doing so fosters flexibilityby helping companies adapt ideas about re-gional strategies to different geographic levelsof analysis.

In addition to reconsidering what might con-stitute a geographic region, one can imaginebeing even more creative and redefining dis-tance—and regions—according to nongeo-graphic dimensions: cultural, administrativeand political, and economic. Aggregationalong nongeographic dimensions will some-times still imply a focus on geographically con-tiguous regions. Toyota, for instance, groups



countries by existing and expected free tradeareas. At other times, however, such definitionswill yield regions that aren’t geographicallycompact. After making its first foreign invest-ments in Spain, for example, the Mexican ce-ment company Cemex grew through the restof the 1990s by aggregating along the eco-nomic dimension—that is, by expanding intomarkets that were emerging, like its Mexicanhome base. This strategy created the so-calledring of gray gold: developing markets thatmostly fell in a band circling the globe justnorth of the equator, forming a geographicallycontiguous but dispersed region.

At times, the parts of a region aren’t evencontiguous. Spain, for example, can be thoughtof as “closer” to Latin America than to Europebecause of long-standing colony-colonizerlinks. Between 1997 and 2001, 44% of a surge inFDI from Spain was directed at Latin Amer-ica—about ten times Latin America’s share ofworld FDI. Europe’s much larger regionaleconomy was pushed into second place as adestination for Spanish capital.

Finally, it’s important to remember that thedefinition of “region” often changes in re-sponse to market conditions and, indeed, to acompany’s own strategic decisions. By servingthe U.S. market from Japan, Toyota in its earlydays implicitly considered that market to be onthe periphery of its own region. The NorthAmerican West Coast was easy to access by sea,the United States was open to helping the Jap-anese economy get off the ground, and thecompany’s business there was dwarfed by itsdomestic business. But as Toyota’s U.S. salesgrew, political pressures increased the politicaland administrative distance between the twocountries, and it became apparent that Toyotaneeded to look at the United States as part ofits own self-contained region.

Leading-edge companies are starting tograpple with these definitional issues. For ex-ample, firms in sectors as diverse as construc-tion materials, forest products, telecommuni-cations equipment, and pharmaceuticals haveinvested significantly in modern mapping tech-nology, using such innovations as enhancedclustering techniques, better measures for ana-lyzing networks, and expanded data on bilat-eral, multilateral, and unilateral country at-tributes to visualize new definitions of regions.At the very least, this sort of mapping sparkscreativity.

SCORE

COMPANY FOOTPRINTNumber of countries with significant operations

a. 1–5b. 6–15c. >15 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Percentage of sales from the home region

a. >80%b. 50%–80%c. < 50% _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

COMPANY STRATEGYObjective for interregional dispersion

a. Decreaseb. Maintainc. Increase _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Number of bases of aggregation (or grouping) to be pursued

a. 1b. 2c. >2 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

COUNTRY LINKSPercentage of trade that is intraregional

a. < 50%b. 50%–70%c. >70% _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Percentage of FDI that is intraregional

a. < 40%b. 40%–60%c. >60% _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

COMPETITIVE CONSIDERATIONSDifferences in profitability across regions

a. Smallb. Short-termc. Long-term _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Key competitors’strategies

a. Deregionalizingb. Unchangedc. Regionalizing _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

TOTAL SCORE _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

SCORING:-1 for each (a) response0 for each (b) response1 for each (c) response

Is a Regional Strategy Right for Your Company?

Take a couple of minutes to complete this short questionnaire. First, circle one option for each of the following eight categories. Then complete the scoring. Give yourself -1 for each “a” re-sponse, 0 for each “b” response, and 1 for each “c” response, and then add up the numbers. A positive score may in-dicate a significant need for strategy at the regional level. The higher the score, the greater is your need.

Of course, this kind of questionnaire is no substitute for analyzing your com-pany’s situation—and regionalization options—in detail. But if the results prompt you to look at your regional strategy more carefully, the exercise will have been useful.



Facing the Organizational Challenge

Regional strategies, as I’ve noted, can take along time to implement. One deep-seated rea-son for this is that an organization’s existingstructures may be out of alignment with—oreven inimical to—a superimposed regionalstrategy. The question then becomes how bestto mesh such strategies with a firm’s existingstructures, especially when the established or-ganizational players command most of thepower.

For some pointers, consider Royal PhilipsElectronics, which has been a border-crossingenterprise for virtually all of its 114-year his-tory. Philips’s saga not only points to align-ment challenges but also reminds us that re-gionalization is rarely a triumphal march fromthe home base to interregional platforms ormandates.

Starting in the 1930s, Philips evolved into afederal system of largely autonomous nationalorganizations presided over by a cadre of 1,500elite expatriate managers who championedthe country-oriented approach. But as compe-tition emerged in the 1960s and 1970s fromJapanese companies that were more central-ized and had fewer, larger plants, this highly lo-calized structure became expensive to main-tain. Philips responded by installing a matrixorganization—with countries and product divi-sions as its two legs—and spent roughly twodecades trying, without much success, to rebal-ance the matrix away from the countries andtoward the product divisions. Finally, in 1997,CEO Cor Boonstra abolished the geographic di-mension of the matrix as a way of forcing theorganization to align itself around global prod-uct divisions.

Given this long and sometimes painful his-tory, it would be unrealistic for today’s champi-ons of regional strategies within Philips to ex-pect to overthrow the product divisionstructure. Would-be regionalists have to workwithin it. Jan Oosterveld, who served as CEO ofAsia Pacific from 2003 to 2004—a position cre-ated after Philips announced the combinationof two Asia Pacific subregions into one—sawthat his first task was to facilitate the sharing ofresources and knowledge across product divi-sions within the region. Ultimately, however,he aimed to help develop an Asia Pacific strat-egy for the company. So although the newAsian regional structure has initially focusedon coordinating governmental relations, key

account management, branding, joint purchas-ing, and IT, HR, and other support functions,Oosterveld and others can imagine a day whenmuch more power might be vested in regionalheadquarters in, say, New York, Shanghai, andAmsterdam than at the corporate level. Theyalso recognize, however, that achieving thatkind of regional strategy could take manyyears.

The obvious implication is that strategic ini-tiatives can be pursued at the regional levelonly if some decision rights are reallocated—whether from the local or global levels, or fromthe other repositories of power within the or-ganization (in Philips’s case, product divisions).And just as obviously, no one likes to give uppower. Leadership from the top, aimed at pro-moting a “one-company” mentality, is oftenthe only way forward. One of Oosterveld’s con-ditions for taking the job at Philips was thatthe board of directors hold regional conclavestwice a year to show its commitment to the re-gional initiative. Such conclaves might bemainly symbolic, but symbolism can go a longway.

Philips has approached regional strategyflexibly, putting in place a wide variety of ar-rangements that take into account not only thecompany’s existing structure but also competi-tive realities, region by region. In North Amer-ica, for example, Philips’s principal objectivecontinues to be to rebuild its positions andachieve satisfactory levels of performance inthe all-important U.S. market. Its activitiesthere are organized entirely around the globalproduct divisions, which, because of the size ofthe market and Philips’s stake in it, arethought to be capable of achieving the requi-site geographic focus.

In Europe, where Philips is better estab-lished, the company has rethought the roleand status of the large operations in the homecountry of the Netherlands within the broaderregional structure. In April 2002, when Philipsannounced plans to set up a regional super-structure in Asia Pacific, it also folded theNetherlands into an expanded region compris-ing Europe, the Middle East, and Africa. Thepoint is that irregular or asymmetric structures(in which some regions seem to be muchlarger than others) are often preferable to anaesthetically pleasing (and in some respectssimpler) symmetry of the sort implicitlyevoked by much of the discussion up to this



point. Even Toyota seems to be focusing sepa-rately on China while its other markets aregrouped into multicountry regions.

• • •

If your company has a significant interna-tional presence, it already has a regional strat-egy—even if that strategy has been arrived atby default. But given the variety of regionalstrategies, and the fact that no one approach isbest or most evolved, there is no substitute forfiguring out which ways of coordinatingwithin or across regions make sense for yourcompany. As we have seen, however, embrac-ing regional strategies calls for flexibility, cre-ativity, and hard-nosed analysis of the chang-ing business context—all of which take timeand effort.

In a highly regionalized world, the right re-gional strategy (or strategies) can create morevalue than purely global or purely local onescan. But even so, the regional approaches Ihave been exploring may not make sense foryour company. In that case, here is what youcan take away from this article: Regions repre-sent just one way of aggregating across bordersto achieve greater efficiencies than would beachievable with a country-by-country ap-

proach. Other bases of cross-border aggrega-tion that companies have implemented in-clude products (the global product divisions atPhilips), channels (Cisco, which uses channelsand partners as its primary basis), customertypes or global accounts (many IT servicesfirms), functions (most major oil companies),and technologies (ABB recently, before andafter trying some of the bases that are listedabove and others that aren’t). Each of thesebases of aggregation offers, as regions do, mul-tiple possibilities for crafting strategies inter-mediate to the local and global levels by group-ing things. In a world that is neither truly localnor truly global, such strategies can deliver apowerful competitive advantage.

1. For a systematic way to think about cultural, administra-tive, geographic, and economic distance, see the CAGEframework described in my article “Distance Still Matters:The Hard Reality of Global Expansion” (HBR September2001).

Reprint R0512F

To order, see the next pageor call 800-988-0886 or 617-783-7500or go to www.hbrreprints.org

http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=R0512F



To Order

For


reprints and subscriptions, call 800-988-0886 or 617-783-7500. Go to www.hbrreprints.org

For customized and quantity orders of


article reprints, call 617-783-7626, or [email protected]

page 13

Further Reading

A R T I C L E

The Dubious Logic of Global Megamergers

by Pankaj Ghemawat and Fariborz Ghadar


July 2000Product no. R00405

Huge, pricey cross-border mergers constitute another strategy that, like purely global and country tactics, often don’t deliver the results companies hope for. That’s because execu-tives hold mistaken assumptions about such mergers. They believe that industries will inev-itably become more concentrated as markets become more globalized. Put another way, the spoils of the market will supposedly go to a select few in each industry. If they’re going to be among the winners, firms believe they will have to shore up economies of scale in manufacturing, branding, and research and development. That’s how they hope to scare off potential competitors and sew up new markets.

From this perspective, cross-border mergers are a do-or-die proposition: If you want to thrive, you must be one of the world’s biggest players. Yet in reality, globalizing industries have been marked by steady decreases in con-centration since World War II. For this reason, companies need alternative, more profitable strategies to pursuing the big M&A deal. In-stead of relentless expansion through mega-mergers, consider other options. The authors’ recommendations? Buy up cast-off assets from merging rivals. Focus more on regional or domestic growth rather than global expan-sion. Take advantage of merging rivals’ weak-ened market position during integration by launching an aggressive marketing campaign. And build alliances with other companies rather than buying them up.


http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=R00405

http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=R00405

mailto:[email protected]

Pankaj Ghemawat

Documents