What types of competitive pressures exist in the global marketplace

International competition. Citizens from most of the older industrialized countries have become obsessed with it since the first Japanese cars started selling well. Vulnerability has replaced invincibility as the word many would use to describe once firmly established international companies. But this disquiet obscures the steady achievements a number of corporations have made against competition from companies based outside their countries.

These companies rely on global strategies to succeed in today’s world. That calls on a company to think of the world as one market instead of as a collection of national markets and sometimes requires decisions as unconventional as accepting projects with low ROIs because of their competitive payoff. An organization with such a global focus formulates long-term strategy for the company as a whole and then orchestrates the strategies of local subsidiaries accordingly.

The power of global strategies is illustrated here by the histories of three companies (one American, one European, and one Japanese) that have what the authors think it takes to win the new competitive game. These case studies should help managers decide whether a global strategy is appropriate for their companies.

Hold that obituary on American manufacturers. Some not only refuse to die but even dominate their businesses worldwide. At the same time Ford struggles to keep up with Toyota, Caterpillar thrives in competition with another Japanese powerhouse, Komatsu. Though Zenith has been hurt in consumer electronics, Hewlett-Packard and Tektronix together profitably control 50% of the world’s industrial test and measurement instrument market. American forklift truck producers may retreat under Japanese pressure, but two U.S. chemical companies—Du Pont and Dow—dramatically outperform their competitors.

How do these American producers hold and even increase profitability against international competitors? By forging integrated, global strategies to exploit their potential; and by having a long-term outlook, investing aggressively, and managing factories carefully.

The main reason is that today’s international competition in many industries is very different from what it has been. To succeed, an international company may need to change from a multidomestic competitor, which allows individual subsidiaries to compete independently in different domestic markets, to a global organization, which pits its entire worldwide system of product and market position against the competition. (For a more complete discussion of this distinction, see the sidebar, “What Is a Global Industry?”)

The global company—whatever its nationality—tries to control leverage points, from cross-national production scale economies to the foreign competitors’ sources of cash flow. By taking unconventional action, such as lowering prices of an important product or in key markets, the company makes the competitor’s response more expensive and difficult. Its main objective is to improve its own effectiveness while eroding that of its competitors.

Not all companies can or should forge a global strategy. While the rewards of competing globally are great, so are the risks. Major policy and operating changes are required. Competing globally demands a number of unconventional approaches to managing a multinational business to sometimes allow:

• Major investment projects with zero or even negative ROI.

• Financial performance targets that vary widely among foreign subsidiaries.

• Product lines deliberately overdesigned or underpriced in some markets.

• A view of country-by-country market positions as interdependent and not as independent elements of a worldwide portfolio to be increased or decreased depending on profitability.

• Construction of production facilities in both high and low labor-cost countries.

Not all international businesses lend themselves to global competition. Many are multidomestic in nature and are likely to remain so, competing on a domestic-market-by-domestic-market basis. Typically these businesses have products that differ greatly among country markets and have high transportation costs, or their industries lack sufficient scale economies to yield the global competitors a significant competitive edge.

Before entering the global arena, you must first decide whether your company’s industry has the right characteristics to favor a global competitor. A careful examination of the economies of the business will highlight its ripeness for global competition.1 Simply put, the potential for global competition is greatest when significant benefits are gained from worldwide volume—in terms of either reduced unit costs or superior reputation or service—and are greater than the additional costs of serving that volume.

Identifying potential economies of scale requires considerable insight. Advantages to increased volume may come not only from larger production plants or runs but also from more efficient logistics networks or higher volume distribution networks. Worldwide volume is also particularly advantageous in supporting high levels of investment in research and development; many industries requiring high levels of R&D, such as pharmaceuticals or jet aircraft, are global. The level of transport or importing costs will also influence the business’s tendency to become global. Transport is a relatively small portion of highly traded optical goods, for example, while it is a barrier in trading steel reinforcing bars.

Many businesses will not be able to take the global step precisely because their industries lack these characteristics. Economies of scale may be too modest or R&D spending too closely tied to particular markets. Products may differ significantly across country boundaries, or the industry may emphasize distribution, installation, and other local activities. Lead times may be short, as in fashion-oriented businesses and in many service businesses, including printing. Also, transportation costs and government barriers to trade may be high, and distribution may be fragmented and hard to penetrate. Many consumer nondurable businesses or low-technology assembly companies fall into this category, as do many heavy raw-material processing industries and wholesaling and service businesses.

Our investigation into the strategies of successful global companies leads us to believe that a large group of international companies have global potential, even though they may not know it. Almost every industry that is now global—automobiles and TV sets, for example—was not at one time. A company must see the potential for changing competitive interaction in its favor to trigger a shift from multidomestic to global competition. And because there is no guarantee that the business can become global, the company must be willing to risk the heavy investment that global competition requires.

A company that recognizes its business as potentially global but not yet so must ask itself whether it can innovate effectively and must understand its impact on the competition to find the best answers to these three questions:

• What kind of strategic innovation might trigger global competition?

• Is it in the best position among all competitors to establish and defend the advantages of global strategy?

• What kind of resources—over how long a period—will be required to establish the leading position?

The Successful Global Competitor

If your industry profile fits the picture we’ve drawn, you can better judge your ability to make these kinds of unconventional decisions by looking at the way three global companies have succeeded. These organizations (American, European, and Japanese) exemplify the global competitor. They all perceive competition as global and formulate strategy on an integrated, worldwide basis. Each has developed a strategic innovation to change the rules of the competitive game in its particular industry. The innovation acts as a lever to support the development of an integrated global system but demands a market position strong enough to implement it.

Finally, the three companies have executed their strategies more aggressively and effectively than their competitors. They have built barriers to competitive responses based on careful assessment of competitors’ behavior. All three have the financial resources and commitment needed to compete unconventionally and the organizational structure to manage an integrated system.

We will take a careful look at each of these three and how they developed the strategic innovation that led, on the one hand, to the globalization of their industries and, on the other, to their own phenomenal success. The first company’s innovation was in manufacturing; the second, in technology; and the third, in marketing.

The Caterpillar case: warring with Komatsu

Caterpillar Tractor Company turned large-scale construction equipment into a global business and achieved world leadership in that business even when faced with an able Japanese competitor. This accomplishment was difficult for a variety of reasons. For one thing, specifications of construction equipment varied widely across countries. Also, machines are expensive to transport, and field distribution—including user financing, spare parts inventories, and repair facilities—is demanding and best managed locally.

Navy Seabees who left their Caterpillar equipment in other countries following World War II planted the seeds of globalization. The company established independent dealerships to service these fleets, and this base of units provided a highly profitable flow of revenue from spare parts, which paid for inventorying new units. The Caterpillar dealers quickly became self-sustaining and to this day are larger, better financed, and do a more profitable parts business than their competitors. This global distribution system is one of Cat’s two major barriers against competition.

The company used its worldwide production scale to create its other barrier. Two-thirds of the total product cost of construction equipment is in heavy components—engines, axles, transmissions, and hydraulics—whose manufacturing costs are capital intensive and highly sensitive to economies of scale. Caterpillar turned its network of sales in different countries into a cost advantage by designing product lines that use identical components and by investing heavily in a few large-scale, state-of-the-art component manufacturing facilities to fill worldwide demand.

The company then augmented the centralized production with assembly plants in each of its major markets—Europe, Japan, Brazil, Australia, and so on. At these plants Cat added local product features, avoiding the high transportation cost of end products. Most important, Cat became a direct participant in local economies. The company achieved lower costs without sacrificing local product flexibility and became a friend rather than a threat to local governments. No single “world model” was forced on the customer, yet no competitor could match Caterpillar’s production and distribution cost.

Not that they haven’t tried. The most recent—and greatest—challenge to Caterpillar has come from Komatsu (see Exhibit I for a financial comparison). Japan’s leading construction equipment producer forged its own global strategy based on exporting high-quality products from centralized facilities with labor and steel cost advantages. Over the last decade Komatsu has gained some 15% of the world construction-equipment market, with a significant share of sales in nearly every product line in competition with Cat.

Exhibit I Financial comparison of Caterpillar and Komatsu Source: Financial statements.

Caterpillar has maintained its position against Komatsu and gained world share. The two companies increasingly dominate the market vis-à-vis their competitors, who compete on a domestic or regional basis. What makes Caterpillar’s strategy so potent? The company has fostered the development of four characteristics essential to defending a leading world position against a determined competitor.

1. A global strategy of its own.

Caterpillar’s integrated global strategy yields a competitive advantage in cost and effectiveness. Komatsu simply plays catch-up ball rather than pulling ahead. Facing a competitor that has consciously devised a global strategy, Komatsu is in a much weaker position than were Japanese TV and automobile manufacturers when they took off.

2. Willingness to invest in manufacturing.

Caterpillar’s top management appears committed to the kind of flexible automated manufacturing systems that allow full exploitation of the economies of scale from its worldwide sales volume.

3. Willingness to commit financial resources.

Caterpillar is the only Western company that matches Komatsu in capital spending per employee; in fact, its overall capital spending is more than three times that of the Japanese company. Caterpillar does not divert resources into other businesses or dissipate the financial advantage against Komatsu by paying out excessive dividends. Because Komatsu’s profitability is lower than Caterpillar’s, it must exhaust debt capacity in trying to match Cat’s high investment rates.

4. Blocking position in the Japanese market.

In 1963, Caterpillar formed a joint venture in Japan with Komatsu’s long-standing but weaker competitor, Mitsubishi. Operationally, the venture serves the Japanese market. Strategically, it acts as a check on the market share and cash flow of Komatsu. Japan accounts for less than 20% of the world market but yields over 80% of Komatsu’s worldwide cash flow. The joint venture is number two in market position, serving to limit Komatsu’s profits. Japanese tax records indicate that the Cat-Mitsubishi joint venture has earned only modest profits, but it is of great strategic value to Caterpillar.2

L.M. Ericsson: Can small be beautiful?

L.M. Ericsson of Sweden has become a successful global competitor by developing and exploiting a technological niche. Most major international telephone-equipment producers operated first in large, protected home markets that allowed the most efficient economies of scale. The additional profits helped underwrite R&D and provided good competitive leverage. Sweden’s home market is relatively small, yet Ericsson translated the advent of electronic switching technology into a powerful global lever that befuddled competitors in its international market niche. In the electromechanical era of the 1960s, the telephone switching equipment business was hardly global. Switching systems combine hardware and software. In the electromechanical stage, 70% of total installed costs lay in hardware and 70% of hardware cost was direct labor, manufacturing overhead, and installation of the equipment.

Each country’s telephone system was unique, economies of scale were low, and the wage rate was more important than the impact of volume on costs. In the late 1960s, major international companies (including Ericsson) responded by moving electro-switching production to LDCs not only to take advantage of cheaper labor but also to respond to the desire of government telephone companies to source locally.

Eventually, each parent company centrally sourced only the core software and critical components and competed on a domestic-market-by-domestic-market basis. For its part, Ericsson concentrated investment in developing countries without colonial ties to Europe and in smaller European markets that lacked national suppliers and that used the same switching systems as the Swedish market.

The telecommunications industry became global when, in the 1970s, electronic switching technology emerged, radically shifting cost structures and threatening the market position Ericsson had carved for itself. Software is now 60% of total cost; 55% of hardware cost is in sophisticated electronic components whose production is highly scale sensitive. The initial R&D investment required to develop a system has jumped to more than $100 million, which major international companies could have amortized more easily than Ericsson. In addition, the move to electronics promised to destroy the long-standing relationships Ericsson enjoyed with smaller government telephone companies. And it appeared that individual electronic switching systems would require a large fixed-cost software investment for each country, making the new technology too expensive for the smaller telephone systems, on which Ericsson thrived.

Ericsson knew that the electronic technology would eventually be adapted to small systems. In the meantime, it faced the possibility of losing its position in smaller markets because of its inability to meet the ante for the new global competition.

The company responded with a preemptive strategic innovation—a modular technology that introduced electronics to small telephone systems. The company developed a series of modular software packages that could be used in different combinations to meet the needs of diverse telephone systems at an acceptable cost. Moreover, each successive system required fewer new modules. As Exhibit II shows, the first system—Sodertalje in Sweden—required all new modules, but by the third year, the Abo system in Finland required none at all. Thus the company rapidly amortized development costs and enjoyed economies of scale that steepened as the number of software systems sold increased. As a result, Ericsson was able to compete globally in small systems.

Exhibit II Ericsson’s technology lever: reduction of software cost through modular design Source: Boston Consulting Group, A Framework for Swedish Industrial Policy (Uberforlag, Stockholm, 1978).

Ericsson’s growth is accelerating as small telephone systems convert to electronics. The company now enjoys an advantage in software cost and variety that continually reinforces itself. Through this technology Ericsson has raised a significant entry barrier against other companies in the small-system market.

Honda’s marketing genius

Before Honda became a global company, two distinct motorcycle industries existed in the world. In Asia and other developing countries, large numbers of people rode small, simple motorcycles to work. In Europe and America, smaller numbers of people drove big, elaborate machines for play. Since the Asian motorcycle was popular as an inexpensive means of transportation, companies competed on the basis of price. In the West, manufacturers used styling and brand image to differentiate their products. No Western market exceeded 100,000 units; wide product lines and small volumes meant slight opportunities for economies of scale. Major motorcycle producers such as Harley-Davidson of the United States, BMW of West Germany, and Triumph and BSA of the United Kingdom traded internationally but in only modest volumes.

Honda made its industry global by convincing middle-class Americans that riding motorcycles could be fun. Because of the company’s marketing innovations, Honda’s annual growth rate was greater than 20% from the late 1950s to the late 1960s. The company then turned its attention to Europe, with a similar outcome. Honda invested for seven full years before sustaining profitability in Europe, financing this global effort with cash flows earned from a leading market position at home and in the United States.

Three crucial steps were decisive in Honda’s achievement. First, Honda turned market preference around to the characteristics of its own products and away from those of American and European competitors. Honda targeted new consumers and used advertising, promotions, and trade shows to convince them that its motorbikes were inexpensive, reliable, and easy to use. A large investment in the distribution network—2,000 dealerships, retail missionaries, generous warranty and service support, and quick spare-parts availability—backed up the marketing message.

Second, Honda sustained growth by enticing customers with the upper levels of its product line. Nearly half of new bike owners purchased larger, more expensive models within 12 months. Brand loyalty proved very high. Honda exploited these trends by expanding from its line of a few small motorcycles to one covering the full range of size and features by 1975. The result: self-sustaining growth in dollar volume and a model mix that allowed higher margins. The higher volume reduced marketing and distribution costs and improved the position of Honda and other Japanese producers who invaded the 750cc “super bike” portion of the market traditionally reserved for American and European companies. Here Honda beat the competition with a bike that was better engineered, lower priced, and whose development cost was shared over the company’s wide product line.

The third step Honda took was to exploit economies of scale through both centralized manufacturing and logistics. The increasing volume of engines and bike assemblies sold (50,000 units per month and up) enabled the company to use less costly manufacturing techniques unavailable to motorcycle producers with lower volumes (see Exhibit III). Over a decade, Honda’s factory productivity rose at an average annual rate of 13.1%—several times higher than European and American producers. Combined with lower transportation cost, Honda’s increased output gave it a landed cost per unit far lower than the competition’s. In turn, the lower production cost helped fund Honda’s heavy marketing and distribution investment. Finally, economies of scale in marketing and distribution, combined with low production cost, led to the high profits that financed Honda’s move into automobiles.

Exhibit III The effect of volume on manufacturing approaches in motorcycle production Source: Strategy Alternatives for the British Motorcycle Industry, a report prepared for the British Secretary of State for Industry by the Boston Consulting Group, July 30, 1975.

What can we learn?

Each of these successful global players changed the dynamics of its industry and pulled away from its major competitors. By achieving economies of scale through commonality of design, Caterpillar exploited both its worldwide sales volume and its existing market for parts revenues. Competitors could not match its costs or profits and therefore could not make the investment necessary to catch up. Ericsson created a cost advantage by developing a unique modular technology perfectly adapted to its segment of the market. Its global strategy turned electronics from a threat to Ericsson into a barrier to its competitors. Honda used marketing to homogenize worldwide demand and unlock the potential for economies of scale in production, marketing, and distribution. The competition’s only refuge was the highly brand-conscious, small-volume specialty market.

In each case, the industry had the potential for a worldwide system of products and markets that a company with a global strategy could exploit. Construction equipment offered large economies of scale in component manufacture, allowing Caterpillar to neutralize high transportation costs and government barriers through local assembly. Ericsson unlocked scale economies in software development for electronic switches. The modular technology accommodated local product differences and governments’ desire to use local suppliers. Once Honda’s marketing techniques raised demand in major markets for products with similar characteristics, the industry’s economies of scale in production combined with low transportation costs and low tariff barriers to turn it into a global game.

In none of the cases did success result from a “world product.” The companies accommodated local differences without sacrificing production costs. The global player’s position in one major market strengthened its position in others. Caterpillar’s design similarities and central component facilities allowed each market to contribute to its already favorable cost structure. Ericsson’s shared modules led to falling costs each time a system was sold in a new country. Honda drew on scale economies from the centralized production of units sold in each market and used its U.S. marketing and distribution experience to succeed in Europe.

In addition to superior effectiveness and cost advantages, a winning global strategy always requires abilities in two other dimensions. The first is timing. The successful global competitor uses a production cost or distribution advantage as a leverage point to make it more difficult or expensive for the competitor to respond. The second is financial. The global innovator commits itself to major investment before anyone else, whether in technology, facilities, or distribution. If successful, it then reaps the benefits from increased cash flows from either higher volume (Honda and Ericsson) or lower costs (all three companies). The longer the competitor takes to respond, the larger the innovator’s cash flows. The global company can then deploy funds either to increase investment or lower prices, creating barriers to new market entrants.

A global player should decide against which of its major competitors it must succeed first in order to generate broad-based success in the future. Caterpillar located in the Far East not only to source products locally but also to track Komatsu. (Cat increasingly sources product and manufacturing technology from Japan.) Ericsson’s radical departure in technology was aimed squarely at ITT and Siemens, whose large original market shares would ordinarily have given them an advantage in the smaller European and African markets. Honda created new markets in the United States and Europe because its most powerful competitors, Yamaha and Kawasaki, were Japanese. By exploiting the global opportunity first, Honda got a head start, and it remained strong even when competitors’ own international ambitions came to light.

Playing the Global Chess Game

Global competition forces top management to change the way it thinks about and operates its businesses. Policies that made sense when the company was multidomestic may now be counterproductive. The most powerful moves are those that improve the company’s worldwide cost position or ability to differentiate itself and weaken key worldwide competitors. Let us consider two potential moves.

The first is preempting the leading positions in major newly industrializing countries (NICs). Rapid growth in, for example, Mexico, Brazil, and Indonesia has made them an important part of the worldwide market for many capital goods. If its industry has the potential to become global, the company that takes a leading position in these markets will have made a decisive move to bar its competitors. Trade barriers are often prohibitively high in these places, and a company that tries to penetrate the market through a self-contained local subsidiary is likely to fall into a trap.

The astute global competitor will exploit the situation, however, by building a specialized component manufacturing facility in an NIC which will become an integral part of a global sourcing network. The company exports output of the specialized facility to offset importing complementary components. Final assembly for the domestic and smaller, neighboring markets can be done locally. (Having dual sources for key items can minimize the risk of disruption to the global sourcing network.)

A good illustration of this strategy is Siemens’s circuit breaker operation in Brazil. When the company outgrew its West German capacity for some key components, it seized the opportunity presented by Brazilian authorities seeking capital investments in the heavy electrical equipment industry. Siemens now builds a large portion of its common components there, swaps them for other components made in Europe, and is the lowest-cost and leading supplier of finished product in Brazil.

Another move that can be decisive in a global industry is to establish a solid position with your largest customers to block competitors. Many businesses have a few customers that dominate the global market. The global competitor recognizes their importance and prevents current or prospective competitors from generating any sales.

A good example is a British company, BSR, the world’s largest producer of automatic record changers. In the 1970s, when Japanese exports of audio equipment were growing rapidly, BSR recognized that it could lose its market base in the United States and Europe if the Japanese began marketing record changers. BSR redesigned its product to Japanese specifications and offered distributors aggressive price discounts and inventory support. The Japanese could not justify expanding their own capacity. BSR not only stalled the entry of the Japanese into the record-changer market but it also moved ahead of its existing competitor, Garrard.

A global company can apply similar principles to block the competition’s access to key distributors or retailers. Many American companies have failed to seize this opportunity in their unwillingness to serve large, private-label customers (e.g., Sears, Roebuck) or by neglecting the less expensive end of their product line and effectively allowing competitors access to their distributors. Japanese manufacturers in particular could then establish a toehold in industries like TV sets and farm equipment.

The decision on prices for pivotal customers must not be made solely on considerations of ROI. Equally important in global competition is the impact of these prices on prospective entrants and the cost of failing to protect and expand the business base. One way to control the worldwide chess game in your favor is to differentiate prices among countries.

Manage Interdependently

The successful global competitor manages its business in various countries as a single system, not a portfolio of independent positions. In the view of portfolio planning theory, a market’s attractiveness and the strength of a company’s position within it determine the extent of corporate resources devoted to it. A company should defend strong positions and try to turn weak ones around or abandon them. It will pursue high-profit and/or high-growth markets more aggressively than lower-profit or lower-growth ones, and it will decide on a stand-alone basis whether to compete in a market.

Accepting this portfolio view of international competition can be disastrous in a global industry. The global competitor focuses instead on its ability to leverage positions in one country market against those in other markets. In the global system, the ability to leverage is as important as market attractiveness; the company need not turn around weak positions for them to be useful.

The most obvious leverage a company obtains from a country market is the volume it contributes to the company’s overall cost or effectiveness. Du Pont and Texas Instruments have patiently won a large sales volume in the sophisticated Japanese market, for example, which supports their efforts elsewhere. Winning a share of a market that consistently supports product innovation ahead of other markets—like the United States in long-haul jet aircraft—is another leverage point. The competitor with a high share of such a market can always justify new product investment. Or a market can contribute leverage if it supports an efficient scale manufacturing facility for a region—like Brazil for Siemens. Finally, a market can contribute leverage if a position in it can be used to affect a competitor’s cash flow.

Organization: The Achilles Heel

Organizational structure and reporting relationships present subtle problems for a global strategy. Effective strategic control argues for a central product-line organization; effective local responsiveness, for a geographic organization with local autonomy. A global strategy demands that the product-line organization have the ultimate authority, because without it the company cannot gain systemwide benefits. Nevertheless, the company still must balance product and area needs. In short, there is no simple solution. But there are some guidelines to help.

No one organization structure applies to all of a company’s international businesses. It may be unnecessarily cumbersome, for example, to impose a matrix structure on all business. Organizational reporting lines should probably differ by country market depending on that market’s role. An important market that offers high leverage, as in the foregoing examples, must work closely with the global business-unit managers at headquarters. Coordination is crucial to success. But the manager of a market outside the global system will require only sets of objectives under a regional reporting system.

Another guideline is that organizational reporting lines and structures should change as the nature of the international business changes. When a business becomes global, the emphasis should shift toward centralization. As countries increase in importance, they must be brought within the global manager’s reach. Over time, if the business becomes less global, the company’s organization may emphasize local autonomy.

The common tendency to apply one organizational structure to all operations is bound to be a disadvantage to some of them. In some U.S. companies, this approach inhibited development of the global strategy their industries required.

Match Financial Policies to Competitive Realities

If top management is not careful, adherence to conventional financial management and practices may constrain a good competitive response in global businesses. While capital budgeters use such standard financial tools as DCF return analysis or risk profiles to judge investments and creditors and stock analysts prefer stable debt and dividend policies, a global company must chart a different course.

Allocating capital

In a global strategy, investments are usually a long-term, interdependent series of capital commitments, which are not easily associated with returns or risks. The company has to be aware of the size and timing of the total expenditures because they will greatly influence competitors’ new investment response. Most troublesome, however, is that revenues from investments in several countries may have to build up to a certain point before the company earns any return on investment.

A global strategy goes against the traditional tests for capital allocation: project-oriented DCF risk-return analysis and the country manager’s record of credibility. Global competition requires a less mechanical approach to project evaluation. The successful global competitor develops at least two levels of financial control. One level is a profit and cost center for self-contained projects; the other is a strategy center for tracking interdependent efforts and competitors’ performance and reactions. Global competitors operate with a short time frame when monitoring the execution of global strategy investments and a long time frame when evaluating such investments and their expected returns.

Debt & dividends

Debt and dividend policies should vary with the requirements of the integrated investment program of the whole company. In the initial stages, a company with a strong competitive position should retain earnings to build and defend its global position. When the industry has become global and growth slows or the returns exceed the reinvestment needed to retain position, the company should distribute earnings to the rest of the corporation and use debt capacity elsewhere, perhaps in funding another nascent global strategy.

Honda’s use of debt over the last 25 years illustrates this logic (see Exhibit IV). In the mid-1950s, when Honda held a distant second place in a rapidly growing Japanese motorcycle industry, the company had to leverage its equity 3.5 times to finance growth. By 1960, the Japanese market had matured and Honda emerged dominant. The debt-equity ratio receded to 0.5 times but rose again with the company’s international expansion in motorcycles. In the late 1960s, Honda made a major move to the automobile market, requiring heavy debt. At that time, motorcycle cash flows funded the move.

Exhibit IV Honda Motor Company’s financial policy from 1954 to 1980 Source: Annual reports.

Which Strategic Road to Take?

There is no safe formula for success in international business. Industry structures continuously evolve. The Caterpillar, Ericsson, and Honda approaches will probably not work forever. Competitors will try to push industrial trends away from the strengths of the industry leaders, and technological or political changes may force the leading companies to operate in a multidomestic fashion once again.

Strategy is a powerful force in determining competitive outcomes, whether in international or domestic business. And although adopting a global strategy is risky, many companies can dramatically improve their positions by fundamentally changing the way they plan, control, and operate their businesses. But a global strategy requires that managers think in new ways. Otherwise the company will not be able to recognize the nature of competition, justify the required investments, or sustain the change in everyday behavior needed.

If the company can successfully execute a global strategy, it may find itself joining the ranks of the truly successful international companies. Whether they be Japanese, American, European, or otherwise, the strategic thread that ties together companies like IBM, Matsushita, K. Hattori (Seiko), Du Pont, and Michelin clearly shows that the rules of the international competitive game have changed.

1. For a more detailed look at globalization see Michael E. Porter, Competitive Strategy.

2. For more on this subject, see Craig M. Watson, “Counter-Competition Abroad to Protect Home Markets,” HBR January–February 1982, p. 40.

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