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Don’t Think Global — Think Regional

(originally published by Booz & Company)

Think global, act local is the familiar slogan that perpetuates a narrow view of globalization strategy: Multinational corporations (MNCs) develop one global product for the world market, and are able, through their vast economies of scale, to dominate local markets everywhere.

But this perspective fails to acknowledge that most business activity by large firms takes place in regional blocks, not in a single global market. For many firms, we propose a new slogan: Think regional, act local, forget global.

Most MNCs headquartered in North America earn the majority of their sales in their home region of North America, or by selling to members of the Triad, which encompasses North American Free Trade Agreement (NAFTA) and European Union (EU) nations, Japan, and the Asian tigers.

In only a few industries — consumer electronics, for example — is a global strategy superior. In fact, for most manufacturing and virtually all services, a national or regional approach is more sensible than a global one. And for a growing number of MNCs, a regional strategy works best. Sectors such as bulk chemicals, automobiles, and pharmaceuticals have shifted from a national to a regional focus in North America, with companies setting up regional headquarters responsible for NAFTA countries.

Statistics reveal the power of regional markets. For instance, more than 85 percent of automobiles sold in North America are built in North American factories; more than 90 percent of the cars produced in the EU are sold in that region; and more than 93 percent of all cars registered in Japan are manufactured domestically. In specialty chemicals, more than 90 percent of all paint is produced and sold regionally by MNCs in the Triad. The same is true for steel, heavy electrical equipment, and energy. Nearly all activity in New Economy services, which employ about 70 percent of the work force in North America, Western Europe, and Japan, is essentially local or regional.

Companies can source goods, technology, information, and capital from around the world, but business activity tends to be centered in certain cities or city regions in a few parts of the world. Prominent examples of new industry clusters include 3G telecommunications in Japan; textiles in the area surrounding Milan, Italy; and the high-tech cluster called Silicon Fen around Cambridge, in the United Kingdom. The United States has Silicon Valley and Boston’s Route 128 for high-tech industry; Houston, Tex., for energy; and Wichita, Kan., for aerospace. The importance of clusters has given cities and states more clout to compete nationally and worldwide to attract new R&D labs, plants, and head offices.

What does the regionalization of business mean for managers of MNCs? First, businesses need to view the world as four entities: city clusters, nations, regions, and the globe. Second, with few exceptions, regions are becoming the focus of strategy analysis and organization. DuPont and Procter & Gamble Company, for example, have rolled their three separate country subsidiaries for the U.S., Canada, and Mexico into one regional organization. This is true of other MNCs operating in the NAFTA region. The same is happening in Europe with the EU’s push toward greater economic integration.

Many foreign subsidiaries will assume the role of sales and service organizations, responding to the local needs of foreign customers. However, subsidiaries that take on a more demanding leadership role in a region, and in the parent’s global network, can add considerably more value to the firm worldwide. One of the theoretical advantages of being global is the ability to tap into learning and innovation worldwide; an MNC’s leading subsidiaries can make this happen. In addition, leading subsidiaries can take on global and regional responsibilities for R&D, manufacturing, product management, and key marketing functions. (See “STMicroelectronics: The Metaphysics of a Metanational Pioneer”)

The top executives of foreign subsidiaries have a special role to play in turning their operations into more than mere sales and service outlets. Specifically, subsidiary leaders can promote the development of world-class business capabilities that position their unit of the company to win broader regional responsibilities for achieving corporate goals. For example, a subsidiary’s capability could be its skill in developing and manufacturing a product line. Pratt & Whitney Canada manages a critical line of engines for P&W worldwide. Nokia in the U.K. leads the Finnish telecommunications company’s product development for several key products. Panasonic in Spain handles key aspects of pan-European strategy, and so on.

Lead subsidiaries, especially those operating in the Triad, usually have earned their roles rather than been given them by an authoritarian head office. Our research suggests foreign operations build their stature in the global corporate network by working diligently to establish world-class capabilities, and by communicating those competencies to the head office as well as other lead subsidiaries.

Globalization presented as a single world market for free trade does not exist; Triad-based production and distribution is today’s reality. We believe corporate strategies that are aligned with this reality will be the most successful long into the future.

Karl Moore,
Karl Moore  is a professor at McGill University’s Faculty of Management and an associate fellow at Templeton College, Oxford University. He is coauthor of Foundations of Corporate Empire: Is History Repeating Itself? (Financial Times Prentice Hall, 2000).

Alan Rugman,
Alan Rugman is the L. Leslie Waters Chair of International Business at Indiana University’s Kelley School of Business, and the author of The End of Globalization (AMACOM, 2001).
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