19 Dec 2005  Research & Ideas

The Regional Slice of Your Global Strategy

A regional understanding should be part of your overall global strategy, says Professor Pankaj Ghemawat. One key: Recognize that regions don’t stop at national borders. An excerpt from Harvard Business Review.

 

Editor's Note— Harvard Business School professor Pankaj Ghemawat has long argued that the best international strategy also includes recognition of differences in local markets. In the December 2005 issue of Harvard Business Review, Ghemawat highlights opportunities to improve companies' global strategy by maximizing regional opportunities. Ghemawat discusses five regional strategies while leaving the meaning of a "region" open for interpretation. This excerpt describes the challenges of designating a meaningful definition of region for your company and working within an existing, and often inflexible, organizational structure to successfully execute a strategy.

As companies think through the risks and opportunities of various regional strategies, they also need to clarify what they mean by the word "region." I have so far avoided a definition, although most of my examples imply a continental perspective. My goal is not to be elusive but to avoid restricting the strategies to a particular geographic scale. Particularly with large countries, the logic of the strategies can apply to intranational as well as international regions. Oil companies, for example, consider the market for gasoline in the United States to consist of five distinct regions. Other large markets where transport costs are relatively high in relation to product value, such as cement in Brazil or beer in China, can be similarly broken down.

The general point is that one can interpret the regional strategies at different geographic levels. Assessing the level—global, continental, subcontinental, national, intranational, or local—at which scale is most tightly tied to profitability is often a helpful guide to determining what constitutes a region. Put differently, the world economy is made up of many overlapping geographic layers—from local to global—and the idea is to focus not on one layer but on many. Doing so fosters flexibility by helping companies adapt ideas about regional strategies to different geographic levels of analysis.

In addition to reconsidering what might constitute a geographic region, one can imagine being even more creative and redefining distance—and regions—according to nongeographic dimensions: cultural, administrative and political, and economic. Aggregation along nongeographic dimensions will sometimes still imply a focus on geographically contiguous regions. Toyota, for instance, groups countries by existing and expected free trade areas. At other times, however, such definitions will yield regions that aren't geographically compact. After making its first foreign investments in Spain, for example, the Mexican cement company Cemex grew through the rest of the 1990s by aggregating along the economic dimension—that is, by expanding into markets that were emerging, like its Mexican home base. This strategy created the so-called ring of gray gold: developing markets that mostly fell in a band circling the globe just north of the equator, forming a geographically contiguous but dispersed region.

At times, the parts of a region aren't even contiguous. Spain, for example, can be thought of as "closer" to Latin America than to Europe because of long-standing colony-colonizer links. Between 1997 and 2001, 44 percent of a surge in FDI from Spain was directed at Latin America—about ten times Latin America's share of world FDI. Europe's much larger regional economy was pushed into second place as a destination for Spanish capital.

Finally, it's important to remember that the definition of "region" often changes in response to market conditions and, indeed, to a company's own strategic decisions. By serving the U.S. market from Japan, Toyota in its early days implicitly considered that market to be on the periphery of its own region. The North American West Coast was easy to access by sea, the United States was open to helping the Japanese economy get off the ground, and the company's business there was dwarfed by its domestic business. But as Toyota's U.S. sales grew, political pressures increased the political and administrative distance between the two countries, and it became apparent that Toyota needed to look at the United States as part of its own self-contained region.

Regional strategies can take a long time to implement.

Leading-edge companies are starting to grapple with these definitional issues. For example, firms in sectors as diverse as construction materials, forest products, telecommunications equipment, and pharmaceuticals have invested significantly in modern mapping technology, using such innovations as enhanced clustering techniques, better measures for analyzing networks, and expanded data on bilateral, multilateral, and unilateral country attributes to visualize new definitions of regions. At the very least, this sort of mapping sparks creativity.

Facing the organizational challenge

Regional strategies, as I've noted, can take a long time to implement. One deep-seated reason for this is that an organization's existing structures may be out of alignment with—or even inimical to—a superimposed regional strategy. The question then becomes how best to mesh such strategies with a firm's existing structures, especially when the established organizational players command most of the power.

For some pointers, consider Royal Philips Electronics, which has been a border-crossing enterprise for virtually all of its 114-year history. Philips's saga not only points to alignment challenges but also reminds us that regionalization is rarely a triumphal march from the home base to interregional platforms or mandates.

Starting in the 1930s, Philips evolved into a federal system of largely autonomous national organizations presided over by a cadre of 1,500 elite expatriate managers who championed the country-oriented approach. But as competition emerged in the 1960s and 1970s from Japanese companies that were more centralized and had fewer, larger plants, this highly localized structure became expensive to maintain. Philips responded by installing a matrix organization—with countries and product divisions as its two legs—and spent roughly two decades trying, without much success, to rebalance the matrix away from the countries and toward the product divisions. Finally, in 1997, CEO Cor Boonstra abolished the geographic dimension of the matrix as a way of forcing the organization to align itself around global product divisions.

Given this long and sometimes painful history, it would be unrealistic for today's champions of regional strategies within Philips to expect to overthrow the product division structure. Would-be regionalists have to work within it. Jan Oosterveld, who served as CEO of Asia Pacific from 2003 to 2004—a position created after Philips announced the combination of two Asia Pacific subregions into one—saw that his first task was to facilitate the sharing of resources and knowledge across product divisions within the region. Ultimately, however, he aimed to help develop an Asia Pacific strategy for the company. So although the new Asian regional structure has initially focused on coordinating governmental relations, key account management, branding, joint purchasing, and IT, HR, and other support functions, Oosterveld and others can imagine a day when much more power might be vested in regional headquarters in, say, New York, Shanghai, and Amsterdam than at the corporate level. They also recognize, however, that achieving that kind of regional strategy could take many years.

The obvious implication is that strategic initiatives can be pursued at the regional level only if some decision rights are reallocated—whether from the local or global levels, or from the other repositories of power within the organization (in Philips's case, product divisions). And just as obviously, no one likes to give up power. Leadership from the top, aimed at promoting a "one-company" mentality, is often the only way forward. One of Oosterveld's conditions for taking the job at Philips was that the board of directors hold regional conclaves twice a year to show its commitment to the regional initiative. Such conclaves might be mainly symbolic, but symbolism can go a long way.

Philips has approached regional strategy flexibly, putting in place a wide variety of arrangements that take into account not only the company's existing structure but also competitive realities, region by region. In North America, for example, Philips's principal objective continues to be to rebuild its positions and achieve satisfactory levels of performance in the all-important U.S. market. Its activities there are organized entirely around the global product divisions, which, because of the size of the market and Philips's stake in it, are thought to be capable of achieving the requisite geographic focus.

In Europe, where Philips is better established, the company has rethought the role and status of the large operations in the home country of the Netherlands within the broader regional structure. In April 2002, when Philips announced plans to set up a regional superstructure in Asia Pacific, it also folded the Netherlands into an expanded region comprising Europe, the Middle East, and Africa. The point is that irregular or asymmetric structures (in which some regions seem to be much larger than others) are often preferable to an aesthetically pleasing (and in some respects simpler) symmetry of the sort implicitly evoked by much of the discussion up to this point. Even Toyota seems to be focusing separately on China while its other markets are grouped into multicountry regions.

Is a Regional Strategy Right for Your Company?

by Pankaj Ghemawat

First, circle one option for each of the following eight categories. Then complete the scoring. Give yourself -1 for each "a" response, 0 for each "b" response, and 1 for each "c" response, and then add up the numbers. A positive score may indicate 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 company'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.

scoring
footprint questionnaire

About the author

Pankaj Ghemawat is a professor at Harvard Business School.

Excerpted with permission from "Regional Strategies for Global Leadership," Harvard Business Review, Vol. 83, No. 12, December 2005.

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