M/s General Electric (GE) Tractors Ltd. is one of the largest tractor manufacturers in Pakistan. Since its inception, it has grown leaps and bound and has acquired a name for producing quality tractors though in the initial periods it had to face lot of difficulties to make an entry in the export sector. It has been more than 20 years, since this company was formed.
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The company started with a modest 1 billion USD investment in 1999 and the year 2006 saw a growth of 17 % in business with earnings reaching up to 5 billion USD. Since then, slowly but steadily, it has gained a substantial amount of market share in the tractor segment and has been the market leader in this category. With its partnership with Mazda Motors of Japan, it has gained an edge over its competitors regarding the technology part. Presently it is exporting its products to many Asian and African countries.
Strategic Challenges and Problems
Companies that compete globally generally face two types of competitive pressures: pressures for cost reductions and pressures to be locally responsive. International companies must cope with pressures for cost reductions. This is more so for industries producing items for exports for which price is the main competitive weapon. Pressures for cost reductions are also severe in industries in which the competitors are based in low-cost locations.
Liberalization of the world trade environment is also expected to generally increase cost pressures because of greater international competition. Countering pressures for cost reductions requires that a company minimize its unit costs. To attain this goal, the company has to base its value creating activities at the most favorable low-cost location anywhere in the world and offer a standardized product globally in order to ride down the experience curve as quickly as possible.
In contrast, responding to pressures to be locally responsive requires that a company differentiate or customize its product offering and marketing strategy from country to country in an effort to cater to the different consumers’ tastes and preferences, business practices, distribution channels, competitive conditions, and governmental policies. Since differentiation across countries involve significant duplication and a lack of product standardization, it raises costs. Dealing with these conflicting and contradictory pressures is a difficult challenge for the company, mainly because being locally responsive tends to raise costs.
RESPONSIVENESS TO LOCAL NEEDS
Pressures for local responsiveness crop up due to differences in consumers’ tastes and preferences, differences in infrastructure, differences in distribution channels, and the demands of the host government. Consumers’ tastes and preferences differ significantly between countries due to historic or cultural reasons.GE Tractors faced similar problems and hence, the product and marketing messages had to be customized to appeal to the tastes and preferences of local consumers in such cases.
This typically required entrusting the production and marketing decisions to local subsidiaries. Pressures for local responsiveness also cropped up due to differences in infrastructure and traditional practices among countries, creating a need to customize products suitably. This again required the delegation of manufacturing and production functions to local subsidiaries.
Differences in distribution channels among countries required adopting different strategies. This necessitated the delegation of marketing functions to national subsidiaries. Finally, economic and political demands imposed by host governments necessitated a degree of local responsiveness. Generally, threats of protectionism, economic nationalism, and local content rules all dictate that international businesses manufacture locally. Pressures for local responsiveness restrict a firm from realizing full benefits from experience-curve effects and location advantages. In addition, pressures for local responsiveness imply that it may not be possible to transfer from one nation to another the skills and products associated with a company’s distinctive competencies.
Main issues that confronted the management of the company
NEED FOR GLOBAL EXPANSION
Expanding globally allows companies to increase their profitability which is not-possible to purely domestic enterprises. Companies that operate internationally : i) earn a greater return from their unique competencies; ii) realize location advantages by dispersing different value creation activities to those locations where they will be performed most efficiently; and iii) come down the experience curve faster than the competitors, thereby offering more competitive products to the consumers.
Unique competencies are the unique strengths that allow a company to achieve superior efficiency, quality, innovation, or customer responsiveness. Such strengths are typified by product offerings that other companies find difficult to match or imitate. Thus, unique competencies are vital for a company’s competitive advantage. They enable a company to lower costs and also differentiate its product offerings. GE Tractors with valuable distinctive competencies often realized huge returns by applying those competencies and the products they produced to foreign markets, where indigenous competitors lack similar competencies and products.
Location advantages are those that occur from performing a value creation activity in the most advantageous location for that activity- in whichever part of the world that might be. Locating a value creation activity in the most favorable location for that activity have one of two effects. It : i) lowers the costs of value creation, helping the company achieve a low-cost position or ii) enable a company to differentiate its product offering and charge a premium price.
GE Tractors realized location economies by dispersing each of its value creation activities to its optimal location and had a competitive advantage over other companies that concentrates all its activities at a single location. It was better able to differentiate its product offering and lower its cost structure than its single-location competitor. The basic assumption is that by dispersing its manufacturing and design activities, a firm will be able to establish a competitive advantage for itself in the global marketplace.
Experience curve refers to the systematic decrease in production costs that occur over the life of a product. Learning effects and economies of scale lie behind the experience curve and moving down that curve allows a company to lower the costs. GE Tractors that moved down the experience curve more quickly had a cost advantage over its competitors. Most of the sources of experience-based cost economies are generally found at the plant level.
Dispersing the fixed costs of building productive capacity over a large output reduced the cost of producing a product. Hence the answer to riding down the experience curve as rapidly as possible is to increase the accumulated volume produced by a plant as quickly as possible. Global markets are larger than domestic markets and, therefore, GE Tractors that serve a global market from a single location was able to build up accumulated volume faster than companies that focused primarily on serving their home market or on serving multiple markets from multiple production locations.
Business Strategies that that management implemented to turn around the company
Companies use four basic strategies to enter and compete in the international environment. Each of these strategies has its advantages and disadvantages.
GE Tractors pursued an international strategy, created value by transferring valuable skills and products to foreign markets where local competitors lacked those skills and products. Most international companies have created value by transferring differentiated product offerings developed at home to new markets overseas. Consequently, they tend to centralize product development functions, in their home country. However, they also tend to establish manufacturing and marketing functions in each major country in which they do business. Although they may undertake some local customization of product offering and marketing strategy, this tends to be limited in scope. Ultimately, as in most international companies, the head quarters, based in Pakistan, retained tight control over marketing and product strategy.
An international strategy makes sense if a company has valuable unique competencies that local competitors in foreign markets lack and if the company faces relatively weak pressures for local responsiveness and cost reductions. In such situations, an international strategy can be very profitable and GE tried to follow the same strategy. However, when pressures for local responsiveness are high, companies pursuing this strategy lose out to companies that place a greater emphasis on customizing the product offering and market strategy to local conditions. Furthermore, because of the duplication of manufacturing facilities, GE tractors that pursued an international strategy had at times tend to incur high operating costs. Therefore, this strategy is often unsuitable for industries in which cost pressures are high.
GE Tractors pursuing a multidomestic strategy orient themselves toward achieving maximum local responsiveness. As with companies pursuing an international strategy, they tend to transfer skills and products developed at home to foreign markets. However, unlike international companies, multidomestic companies like GE Tractors extensively customize both their product offering and their marketing strategy to different national environments, Consistent with this approach, GE also tend to establish a complete set of activities--including production, marketing, and R&D in each major national market in which it is doing business. As a result, GE generally does not realize value from experience-curve effects and location advantages and, therefore, often have a high cost structure.
A multidomestic strategy makes most sense when there are high pressures for local responsiveness and low pressures for cost reductions. The high cost structure associated with the replication of production facilities makes this strategy inappropriate in industries in which cost pressures are intense. Another limitation of this strategy is that GE Tractors have developed into decentralized groupings in which each national subsidiary functions in a largely autonomous manner. As a result, after some time GE may begin to lose the ability to transfer the skills and products derived from distinctive competencies to its various national subsidiaries around the world.
GE Tractors followed a global strategy, focused on increasing profitability by reaping the benefits of cost reductions that come from experience-curve effects and location economies. That is, the company is pursuing a low-cost strategy. The various activities such as production, marketing, and R&D of GE, pursuing a global strategy, are concentrated in a few favorable locations. Global companies do not tend to customize their product offering and marketing strategy to local conditions.
This is because customization raises costs as it involves shorter production runs and the duplication of functions. Global companies like GE preferred to market a standardized product worldwide so that it can reap the maximum benefits from the economies of scale that lie behind the experience curve. This strategy makes sense in those cases in which there are strong pressures for cost reductions and where demands for local responsiveness are minimal. These conditions exist in many industries manufacturing industrial goods.
GE Tractors whose operations are spread across several locations worldwide and are not confined to any country or a region and since pursue low cost and product differentiation at the same time are referred to as transnational companies. In essence, transnational companies operate on a global level while maintaining a high level of local responsiveness. A transnational strategy makes sense when a company faces high pressures for cost reductions and high pressures for local responsiveness.
GE which pursues a transnational strategy, basically tries to achieve low-cost and differentiation advantages simultaneously. Although this strategy looks attractive, in practice it is a difficult strategy to pursue. Pressures for local responsiveness and cost reductions place conflicting demands on the company. Local responsiveness raises costs, which clearly makes cost reductions difficult to achieve. Although a transnational strategy apparently offers the most advantages, it should be remembered that implementing it raises difficult organizational issues. The appropriateness of each strategy depends on the relative strength of pressures for cost reductions and for local responsiveness.
Lessons that could be drawn from this strategic turnaround
GE Tractors is functioning in a very stable position presently and should seriously consider for international expansion more vigorously.
International expansion involves establishing significant market interests in new countries. Additional foreign markets provide additional sales opportunities for the firm that may be constrained by the relatively smaller number of countries at present exporting. Firms expand globally to seek opportunity to earn a return on large investments such as plant and capital equipment or research and development, or enhance market share and achieve scale economies, and also to enjoy advantages of locations. Other motives for international expansion include extending the product life cycle, securing key resources and using low-cost labor. However, to mould their firms into truly global companies, GE Tractors must develop global mind-sets.
International expansion is fraught with various risks such as, political risks and economic risks. International expansions increases coordination and distribution costs and managing a global enterprise entails problems of overcoming trade barriers, logistics costs.
There are several methods for going international. Each method of entering an overseas market has its own advantages and disadvantages that must be carefully assessed It is common for a firm to begin with progress to licensing, then to franchising finally leading to direct investment. As the firm achieves success at each stage it moves to the next. If it experiences problems at any of these stages, it may not progress further. If adverse conditions prevail or if operations do not yield the desired returns in a reasonable time period, the firm may withdraw from the foreign market. Expansion into foreign markets can be achieved through:
- Joint Venture
- Direct Investment
Licensing: Licensing permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possible for technical assistance. Licensing has the potential to provide a very large ROI since this mode of foreign entry also does require additional investments. However, since the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost.
Joint Venture: There are five common objectives in a joint venture: market entry, risk/reward sharing, technology sharing and joint product development, and conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships.
Joint ventures are favored when:
- The partners’ strategic goals converge while their competitive goals diverge;
- The partners’ size, market power, and resources are small compared to the industry leaders;
- Partners’ are able to learn from one another while limiting access to their own proprietary skills.
The critical issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions. Potential problems include, conflict over asymmetric investments, mistrust over proprietary knowledge, performance ambiguity — how to share the profits and losses, lack of parent firm support, cultural conflicts, and finally, when and how when to terminate the relationship.
Joint ventures have conflicting pressures to cooperate and compete:
- Strategic imperative: the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position.
- The joint venture attempts to develop shared resources, but each firm wants to develop and protect its own proprietary resources.
- The joint venture is controlled through negotiations and coordination processes, while each firm would like to have hierarchical control.
Direct Investment: Direct investment is the ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct investment may be made through the acquisition an existing entity or the establishment of a new enterprise. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment it requires a high degree of commitment and substantial resources.
There are three major strategy options for international expansion:
Multidomestic: The organization decentralizes operational decisions and activities to each country in which it is operating and customizes its products and services to each market. Global: The organization offers standardized products and uses integrated operations. Transnational: The organization seeks the best of both the multidomestic and global strategies by globally integrating operations while tailoring products and services to the local market.
In other words a company ‘thinks globally but acts locally’. Global electronic communications and connectivity can help integrate operations while flexible manufacturing enables firms to produce multiple versions of products from the same assembly line, tailoring them to different markets. This gives more choice in locating facilities to take advantage of cheaper labor or to get the best of other factors of production
Managing Global Supply Chains to Enhance Competitiveness
Logistics capabilities make or mar global operations. Global operations involve highly coordinated international flow of goods, information, cash, and work processes. Setting up a global supply chain to support producing and selling products in many countries at the right cost and service levels is a difficult task.
However the benefits of managing this difficult task has many benefits, which include rationalization of global operations by setting up right number of factories and distribution centers and integration of far-flung operations under a unified command to better manage inventory and order filling activities. Optimizing global supply chain operations can cut the delivery times and costs drastically and improve global competitiveness. Smart supply chain planning may result in locating facilities where they make the most logistical sense.
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