A global strategy is vital for all businesses

PUBLISHED : Wednesday, 20 May, 2009, 12:00am
UPDATED : Wednesday, 20 May, 2009, 12:00am

Tony Frost is associate professor of international business at the Richard Ivey School of Business. He gives his thoughts on the importance of global strategy, and the challenges that businesses face when trying to cross borders.

How important is it for companies to think globally when implementing new strategies?

It is vital for those companies who have already globalised some portion of their value chain, but I think what is important is that all organisations, even small regional companies, think globally. This is true even for companies who focus primarily on serving local markets/customers and intend to maintain that focus. One reason for this is that today all companies are affected (whether they know it or not) by global forces, such as trade regimes, commodity prices, exchange rate fluctuations, customer trends and business cycles. Even companies that have purely domestic operations can have a significant exchange rate risk if their competitors have a different sourcing strategy.

Consider the airline industry. All players, even those that only fly domestically, are greatly affected by global forces on both the revenue side (global business cycles, terrorism, war, pandemics) and the cost side (fuel prices, exchange rates).

Less obvious, globalisation provides potentially important learning and innovation opportunities. New technologies, market trends and new business models can and do pop up all over today.

Has the importance of thinking globally grown over recent years?

It certainly has. We have seen in many industries a clear trend towards global participation and a global consolidation of industries. This has been driven by many things, including governments relaxing trade barriers so global strategies are facilitated and not blocked. Think about previously 'national' industries such as banking, beer, insurance and airlines. Every country used to have its own national champion in beer for example. Now, the industry is dominated by global giants.

The advent of the internet and advances in communication and transport have sped up the rate and lowered the cost of launching global strategies and managing across borders.

Competition itself has driven global strategy development. If your key competitor starts sourcing from China, what are you going to do? You can't allow them to gain a cost advantage. So there is a circularity: everyone is trying to gain an advantage, and a key arena for this competitive one-upmanship has been the launching of global strategies - both front end and back end global strategies. Where one rival goes, the other is forced to follow.

What are the main difficulties that companies may face when implementing strategy in a global context?

The classic difficulty of implementing a global strategy is known as the 'liability of foreignness'. This arises from the position of multinationals as outsiders in foreign markets and the resulting asymmetries they experience relative to domestic (i.e. host country) firms. These asymmetries occur along many dimensions, including access to markets, relationships with governments, regulators and resources.

Probably the key difficulty foreign companies experience is in trying to adapt to local demand cultures as customer preferences are culturally and historically rooted. This knowledge is embedded and is difficult for those not intimately familiar with that context to appreciate.

What negative effects can the introduction of multinationals (MNCs) into emerging markets have on local enterprises?

Research on foreign market entry shows mixed outcomes for local industry. There tends to be an uplifting of productivity in the local industry. MNCs themselves tend to be high productivity enterprises - good for customers and good for local employees of these firms (MNCs tend to pay higher wages).

Weak local firms do tend to die out after MNC entry. Paradoxically, this also helps industry productivity by getting rid of inefficient operations. But strong local firms have shown they can respond to the challenge. In some markets they have driven seemingly superior competitors out of the market.

What methods are used by MBA programmes, such as yours, to teach global strategy? How effective are these methods perceived to be?

Global strategy must be taught through diverse methods because it draws on and requires a diverse set of methods. These include hard, soft and analytical/strategic thinking skills.

Hard skills include macroeconomics, global accounting know-how and exchange rate management. Soft skills include managing in diverse environments and unfamiliar cultures. Market entry, joint venture management and mergers and acquisitions come under analytical and strategic thinking skills.

We teach these primarily by using lots of case studies. They are as close to reality as you can get in a classroom. By doing lots of cases, students build skills in pattern recognition and response. We also get students to make decisions in real-world scenarios. Another important aspect of teaching global strategy is the field projects we do that have a global scope and programmed trips to other countries.