Profiting from Global Expansion

Expanding globally allows firms to increase their profitability in ways not available to purely domestic enterprises.³ Firms that operate internationally are able to:

1. Earn a greater return from their distinctive skills or core competencies.

2. Realize location economies by dispersing particular value creation activities to those locations where they can be performed most efficiently.

3. Realize greater experience curve economies, which reduces the cost of value creation.

As we will see, however, a firm's ability to increase its profitability by pursuing these strategies is constrained by the need to customize its product offering, marketing strategy, and business strategy to differing national conditions.

Transferring Core Competencies

The term core competence refers to skills within the firm that competitors cannot easily match or imitate.⁴ These skills may exist in any of the firm's value creation activities--production, marketing, R&D, human resources, general management, and so on. Such skills are typically expressed in product offerings that other firms find difficult to match or imitate; thus, the core competencies are the bedrock of a firm's competitive advantage. They enable a firm to reduce the costs of value creation and/or to create value in such a way that premium pricing is possible. For example, Toyota has a core competence in the production of cars. It can produce high-quality, well-designed cars at a lower delivered cost than any other firm in the world. The skills that enable Toyota to do this seem to reside primarily in the firm's production and materials management functions.⁵ McDonald's has a core competence in managing fast-food operations (it seems to be one of the most skilled firms in the world in this industry); Toys "R" Us has a core competence in managing high-volume, discount toy stores (it is perhaps the most skilled firm in the world in this business); Procter & Gamble has a core competence in developing and marketing name brand consumer products (it is one of the most skilled firms in the world in this business); Wal-Mart has a core competence in information systems and logistics; and so on.

For such firms, global expansion is a way to further exploit the value creation potential of their skills and product offerings by applying those skills and products in a larger market. The potential for creating value from such a strategy is greatest when the skills and products of the firm are most unique, when the value placed on them by consumers is great, and when there are very few capable competitors with similar skills and/or products in foreign markets. Firms with unique and valuable skills can often realize enormous returns by applying those skills, and the products they produce, to foreign markets where indigenous competitors lack similar skills and products. For example, as we saw in the opening case, General Motors is trying to create value by leveraging the production skills developed at its Eisenach plant in Germany to new plants being built in Argentina, Poland, China, and Thailand. McDonald's, as detailed later in the chapter, Management Focus, has profited by leveraging its core competence in running fast-food restaurants to foreign markets where indigenous competitors either did not exist or lacked similar skills.

In earlier eras, US firms such as Kellogg, Coca-Cola, H. J. Heinz, and Procter & Gamble expanded overseas to exploit their skills in developing and marketing name brand consumer products. These skills and the resulting products, which were developed in the United States market during the 1950s and 60s, yielded enormous returns when applied to European markets, where most indigenous competitors lacked similar marketing skills and products. Their near-monopoly on consumer marketing skills allowed these US firms to dominate many European consumer product markets during the 1960s and 70s. Similarly, in the 1970s and 1980s, many Japanese firms expanded globally to exploit their skills in production, materials management, and new product development--skills that many of their North American and European competitors seemed to lack at the time. Today, retail companies such as Wal-Mart and financial companies such as Citicorp, Merrill Lynch, and American Express are transferring the valuable skills they developed in their core home market to other developed and emerging markets where indigenous competitors lack those skills.