Q: How do you measure the advantage of global products?
A: Let's look at the numbers of a UK company and its German competitor. The UK company dominates its domestic market at 60%. The German company competes globally, with 50% of the German market and 30% of remaining major world-wide markets. The total world-wide market is $500 million, including $50 milllion in both the UK and Germany.
Each company considers developing a new product with a development cost of $30 million. Assuming a 10% profit, the UK company achieves a simple annual return of 10% [Calculation: ($50M × 60% × 10%) ÷ $30M], and its investment is paid back in ten years. At that return and payback period, the UK company may not see this as an appropriate opportunity. The German company, however, designed its product for all major markets and incurs an additional $5 million development cost. But by selling its product globally, its return on investment is 41%. [Calculation: ($50M × 50% × 10% + $400M × 30% × 10%) ÷ ($30M + $5M), and its investment is paid back in 2.5 years.
Q: Does a company need to do more than design a product?
A: Absolutely. Global product strategy is just one element of global strategy. It needs to be managed in conjunction with global market strategy and global product development. Global manufacturing is also vital: Our research shows that companies without international manufacturing sites rarely achieve overseas sales beyond 20 to 25% of total revenues. But having a regional facility overcomes obstacles like non-tariff barriers and a preference for "domestic content," often spurring overseas sales to more than 40% of total revenues.
Will global products dominate world markets?
Pittiglio Rabin Todd & McGrath
A profound change is occurring in the rationale for designing products for global markets. The direction dramatically favors companies that develop global products and severely threatens companies with a narrow geographical focus.
During the 1960s and early 1970s, most high-technology companies designed products primarily for their own domestic markets. Some began to export a small percentage of these products for regional customization. But only a few large multinational companies, like IBM, made international expansion part of their corporate strategy.
But today, global products have a significant competitive advantage over national or regional products, with international sales now representing 40% or more of many companies' total revenues. Successful global competitors are creating new international product strategies by looking closely at regional R&D investment variables, and by leveraging common product standards across multinational markets.
Mapping global barriers. An increasing number of new product opportunities is only justified if the products are sold internationally to achieve higher volumes. For example, in recent years five European companies each developed telephone switching systems for the unique standards in their own countries. Today, at an investment of approximately $1 billion per country, these firms could no longer justify development exclusively for such small markets.
Research and development investments should be weighed against the economies of scale that increase as national requirements become more similar, especially now that customers increasingly expect high-technology products to meet global standards. They are reluctant to pay more for products that, while customized to local preferences, are still less advanced.
This trend is one rationale for the formation of the European Economic Community. Indigenous companies could not compete against larger global competitors, and could not themselves become global competitors without having a larger "domestic" market. As a result, for instance, the GSM (Groupe Special Mobil) standard replaced the six incompatible standards previously used by 18 cellular networks in Europe.
Product commonality. The degree of commonality in product design across world markets is another key factor in determining whether a regional, customized-, or universal-global product strategy makes sense. A regional product strategy is appropriate for certain markets and technologies. For example, Asea Brown Boveri, the leader in long distance electricity power transformers, views their activity in this area as a collection of local businesses since technological requirements are so regionalized.
This trend to increase the competitive advantage of global products raises product design from a tactical issue to a strategic imperative. Companies must fundamentally decide if they are going to compete in markets where global products have a significant advantage; and if they are, they must understand the risks and opportunties of building a global product strategy.