Then & Now: Theodore Levitt's Globalization of Markets

Prof. Theodore Levitt (Harvard Business School) stated almost two decades ago that "[t]he globalization of markets is at hand. With that, the multinational commercial world nears its end, and so does the multinational corporation"

How does today's global business environment comport with his vision? He may not have been prescient, but he pointed the way foreshadowing the tumultuous developments.

Whether called “Multinational Corporation” (MNC) or “Global Corporation” (GC), the animal is the same - only that it has gone through evolutions across the decades. Levitt used the name of MNC for the previous form, and the name of “Global Corporation” for the next evolved form. At the time of Levitt’s writing (1983) he characterized the MNC as "operating in a number of countries, adjusting its products and practices in each – at relatively high costs." He contrasted this “old” MNC form to the “new” corporation, the “Global Corporation” (GC), as one which "operates in difference countries without adjusting its products and practices – and at relatively low costs."

I think the current iteration of management practices and the corporation’s role in globalization is evolving - at an accelerated rate - and this may be the “new” nature of the GC: adaptability. (A return to “old” MNC, Levitt may say.)

Several trends contribute to this evolving form:
- Our times are driven by technology
- Our times are driven by the leadership of certain countries’ companies and their associated larger culture - particularly American.
- The dotcom boomers such as web-related companies, IT/SW companies on the network side, telecom companies, and even companies which supported these companies (management consulting firms) all colluded, hand-in-hand with voracious VC’s, to the feeding of new funding practices, management practices, and expectations.
- Wall Street catapaulted along, and international money markets fed the tidal ripple effect in the rest of the world.

It is no wonder then, as instant cable news and the Internet bandied about American firms’ ridiculously large valuation numbers achieved in embarrassingly short times; as MTV and other tv shows made American culture and material desires the standards-bearer for personal consumption; as McDonald’s, Nike, Coca-Cola, Starbucks, and Citibank made the American culture physically ubiquitous; and as Americans/Europeans and “western” ways of conducting business dominated WTO/IMF/World Bank/UNDP negotiations; that there should be backlash and resentment against all things American/western – not least of all the capitalist way of doing things and its tentacled manifestation, the Global Corporation.

Now, in our post-dotcom, 9-11 and domestic terrorist attacks era, the nature of the corporation is once again evolving to the changing landscape. Levitts’ perspective, that the global/human commonality of scarcity drives the efficiency model and the desire for money, is valid…

But I’d like to add that our era now requires GCs to pay more attention to the needs of locals - and that some measures of social responsibility need to be taken. Human life and the operation of corporations cannot be all about efficiencies and profitability.

Levitt’s perspective is essentially based on the need for standards - an agreeable position that is difficult to reinforce - because human being are inherently territorial, and seek to differentiate… Particularly under situations of duress (New Zealanders or Native Americans losing their land, heritage) or even of age (teens across races, religious, are affected by raging hormones).

Today’s industrial revolution of technology has made communication instantaneous, feeding the creation and fast growth of a global culture. In the world of technology, without a doubt this need is great – IEEE has made good inroads in this, along with the W3 Consortium (Tim Berners-Lee’s group).

In the realm of trade, certainly the need for standards is also clear. WTO has made significant steps in addressing the need for all countries to abide by the same set of rules. Further, in commercial products, the human desire for the newest or the best is as naturally unavoidable as crows’ attraction to shiny objects, so standardization of “high quality” is an ever rising bar as innovations percolate.

However, today’s global era demands that GCs do need to adapt to the local tastes, they should understand what the customer wants, and not presume to know the customer better than the customer himself. Purchases are not based upon price alone, unless they are generic products… Broadly speaking, purchases are emotionally driven – which is why “brand” means more now than ever as homogenization spreads. Even with technology-related products.

Today’s GC is both “fox” and “hedgehog” - Ikea’s success makes it methodology an attractive model to study. It has maintained both its own standards, as well as made regional/local adaptations. Toys-R-Us and McDonalds have also found it beneficial to pay attention to “[d]ifferent cultural preferences, national tastes and standards, and business institutions”. Any GC seeking future profit must be both in China. So, Levitt’s example of Hoover is for me an indication for the “new” GC to make adjustments in its attitude. Lacking knowledge about new features available, buyers stated what they thought they wanted. With new marketing promotions, they discovered other more desirable features. But the corporation’s attitude, I think, should still be of giving the customer what he wants – not being “thoughtlessly accommodating” - but of thoughtfully sharing.

Several trends have catalyzed the arrival of today’s era:
- Technology at the enterprise level has transformed economies of scale across industries, contributing to M&As.
- M&As have proliferated across media, communications, consumer products, and distribution channel industries, contributing to the homogenization of information as well as products offered.
- But perhaps the most powerful of all, the “product” and brand of American culture has homogenized the global “taste” for products. As with Italian fashion culture, the “brand” of a culture is a powerful motivator to purchases, in addition to the individual- and country-level trends mentioned above, which drive the GC’s evolution. Low price regardless of features, or heavy promotions regardless of price, are alone not the primary drivers of purchases. Brand associations are very powerful – and as GCs continue to merge and acquire each other and homogenize products, and consumers get swept up in common consumption tastes, product lines will increasingly rely upon “perceived” value differentiations that branding cloaks products in.

Convergence is happening, yes. But not to the exclusion of addressing sub- or micro-level overseas sensitivities or practices. Some markets (China) are simply too large or variegated to be forcibly and quickly changed by GCs without the GCs themselves making significant adaptations in their own practices and products. GCs who adapt to standards but also address local environmental conditions, cultural and institutional needs are the ones that find a smoother path to market entrance and market share.

Innovation and Michael Porter's Five-Forces Model

Prof. Michael Porter (Harvard) states that "companies achieve competitive advantage through acts of innovation." How does "innovation" fit within the process of strategic decision-making? How different is the process of a sovereign state achieving national competitiveness from that of a single firm or industry?

In corporations as in individuals, continual growth is key to success in life. “If it ain’t broke, leave it be” is philosophy difficult to sustain for our era of global corporations. Porter’s perspective rings true. I do believe technology’s effects and the involvement of an ever increasing number of nations in the global economy make constant innovation and change a requirement for global corporate survival.

There are many product innovation examples in the Porter uses, where “relentlessly improving productivity in existing industries by raising product quality, adding desirable features, improving product technology, or boosting production efficiency” are illustrated with examples of German auto manufacturers, Japanese home electronics manufacturers, Italian ceramic tile manufacturers, and so on.

But there are other areas of innovation too – such as internal process innovations – which can lend competitive advantage. For example, in cases of M&A, the inevitable reorganization of internal operations often give entrenched “ways of doing things” a fresh airing, sometimes adding to competitive advantage. Here’s a case where it does so: A multinational financial institution recently undergoing post-M&A reorganization has created a new way of approaching security which is giving them a significant competitive advantage. Previous to the 9-11 Attack and the merger, the Security Divison and the IT Divisions seldom spoke with each other, much less worked with each other. Security was long perceived as an operational expense only. After the trauma of 9-11 and M&A layoffs, a consultant advised this institution that there is a need to address the corporation’s security from a holistic vision, whereby Security and IT would work together to decrease costs incurred by dishonest or disgruntled employees. This is a new operational approach which will decrease the financial institution’s operational expenses. In addition, this internal innovation in conducting business will also contribute to insurance rates reductions, further saving the institution money.

In Porter’s Five-Forces Model, "innovation" is a critical element within the process of strategic decision-making. Innovation can be, as Porter observed, “mundane and incremental”, and it can be in the realms of technology or in the ways of doing things. This leaves a lot of room for good ideas from managers involved in strategic decision-making. Any changes or improvements in these areas can lend the corporation competitive advantage.

For example, military strategy can be applied to address two of Porter’s Forces: Intensity of Rivalry Among Industry Competitors, and Barriers to Entry – If two competitors in the same industry focus upon different niches, and one discovers a low barrier to entry of the other firm’s core business, it can erode that competitor’s competitive advantage in many ways… Physical presence alone in retail outlets can significantly affect brand perception. The attacked competitor can counterattack by using a “multipoint strategy” – counterattacking in related areas of business with similarly low barriers to entry. Cosmetic companies are a prime example of this, and utilizing a multipoint product strategy to gain shelf space and brand positioning is easily seen in any drugstore.

For other industries such as aerospace or biotechnology or software, innovation is the integral core of companies’ R&D efforts, without which they rapidly lose their competitiveness. Their strategy must wholly include factors such as needs and costs of physical facilities, acquisition of new talent, and the development or acquisition of patented technologies. At a very high level of barriers to entry, the entrenched become even more highly competitive as the buyers of their products are not the mass market, and limited in numbers. This sometimes gives the buyer some leverage to negotiate for particular specifications, especially if there is intense rivalry amongst the few suppliers.

When the question is enlarged to examine the process of achieving national competitiveness of a sovereign state as opposed to a firm or industry, it becomes much more difficult to quantify. How to go about improving national competitiveness must first start with what to measure, and how. Porter examines various traditional measures: macroeconomic variables of exchange rates, interest rates, government deficit levels; or abundant inexpensive labor; or ample natural resources; or government policy developments; or balance of trade; or management practices. He also asks, just what is it we’re trying to measure? What is “competitiveness”? No nation has companies dominating every industry in the world.

Porter settles on “productivity” as the most meaningful concept of competitiveness at the national level. The process of increasing productivity in a nation versus a firm or an industry is tied to the strength of its industries, and the health of its companies within those leading industries. There is a symbiotic relationship between the nation and its companies. The improvement of a nation’s productivity (and hence its competitive advantages) lies in, according to Porter, four broad attributes of a nation: Factor Conditions; Demand Conditions; Related and Supporting Industries; Firm Strategy, Structure, and Rivalry. These determinants create the national environment in which companies can become strong and competitive. Companies can then return the benefits to the nation by feeding the nation’s collective productivity, and thereby its national competitiveness. The process then must include: ample resources (including skills) for particular industries chosen; good data on markets and other information necessary for solid strategic decisions; harmonious company and owner goals to the development of the industry and the nation; investment in R&D. Standard economic considerations of labor, land, natural resources, flow of capital, must thus be expanded. In today’s knowledge-based economy, domestic demand is important, but even more important are sustained and significant investments in specialized human skills as well as science/ engineering are key for future growth. (We must watch our recent tendencies to “import” intellectual capital – much of this brainpower returns to their motherlands, creating brain-drain.)