Five regional expansion strategies

There are two important truths about the global economy. First, geographic and other distinctions haven't been submerged by the rising tide of globalisation; they are increasing in importance. Second, regionally focused strategies are not just a half-way house between local or country-focused and global strategies.

by Harvard Business Review, December 2005

In fact, regional strategies are a discrete family which, used in conjunction with local and global initiatives, can significantly boost a company's performance. They can be split broadly into five types, each with strengths and weaknesses.

The home base strategy is where companies generally start their international expansion. They serve nearby foreign markets from their home base and locate all their R&D, and usually their manufacturing, in their country of origin. This provides control but it also brings risks, not least because such a strategy effectively limits a company to its local region.

The portfolio strategy involves setting up or acquiring operations outside the home region that report directly to the home base. It is usually the first strategy adopted by companies seeking to establish a presence outside the markets they can serve from home.

The advantages of this approach include faster growth in non-home regions, significant home positions that generate large amounts of cash and the opportunity to average out economic shocks and cycles across regions.

However, although the strategy looks simple, it takes time to implement. In addition, companies adopting the portfolio strategy often struggle to deal with rivals in non-home regions. This is largely because portfolio strategies offer limited scope for letting regional - as opposed to local or global - issues affect what happens at local level.

The hub strategy was originally articulated by Kenichi Ohmae of McKinsey and involves building regional bases, or hubs, that provide a variety of shared resources and services to local operations. The idea is that such resources might be difficult to justify in one country but economies of scale may make them practical at a regional level.

Many companies see a regional headquarters as a way of achieving this. But the impact of such a move tends to be limited by a focus on support functions and weak links to operating activities. Above all, the challenge for those adopting a hub strategy is to achieve the right balance between customisation and standardisation.

The platform strategy goes a step further than the hub by spreading fixed costs across regions. They tend to be particularly important for back-office activities that can deliver economies of scale and scope. It is important to realise that the idea behind platforms is not to reduce the amount of product variety on offer, but to deliver variety more cost-effectively by allowing customisation atop common platforms explicitly engineered for adaptability. Platforms run into trouble when managers take standardisation too far.

The mandate strategy is related to the platform and focuses on economies of specialisation as well as scale. Companies taking this approach award certain regions broad mandates to supply particular products or perform particular roles for the whole organisation.

There are certain risks with such a strategy. In particular, such mandates can allow local, national or regional interests to unduly influence or even take over a company's overall strategy. In addition, mandates cannot handle variations in local, national or regional conditions, and they can reduce flexibility.

Given that no one approach is best, companies need to work out which best suits them. And they need to be flexible, creative and prepared to engage in hard-nosed analysis of the changing business context.

Source: Regional strategies for global leadership
Pankaj Ghemawat
Harvard Business Review, December 2005

Review by Roger Trapp

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