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Theodore Levitt’s Theory of Globalization

Theodore Levitt’s Theory of Globalization

To most of us, globalization—as a political, economic, social, and technological force—appears all but unstoppable. The ever-faster flow of information across the globe has made people aware of the tastes, preferences, and lifestyles of citizens in other countries. Through this information flow, we are all becoming—at varying speeds and at least in economic terms—global citizens. This convergence is controversial, even offensive, to some who consider globalization a threat to their identity and way of life. It is not surprising, therefore, that globalization has evoked counter forces aimed at preserving differences and deepening a sense of local identity. Yet, at the same time, we increasingly take advantage of what a global economy has to offer—we drive BMWs and Toyotas, work with an Apple or IBM notebook, communicate with a Nokia phone or BlackBerry, wear Zara clothes or Nike sneakers, drink Coca-Cola, eat McDonald’s hamburgers, entertain the kids with a Sony PlayStation, and travel with designer luggage. This is equally true for the buying habits of businesses. The market boundaries for IBM global services, Hewlett-Packard computers, General Electric (GE) aircraft engines, or PricewaterhouseCoopers consulting are no longer defined in political or geographic terms. Rather, it is the intrinsic value of the products and services that defines their appeal. Like it or not, we are living in a global economy.

Levitt’s argument was about new technology has “proletarianized” communication, transport, and travel, a new commercial reality-the emergence of global markets for standardized consumer products, Converging Consumption Pattern: Almost everyone, everywhere wants global products, wish of modernity, Prefer low prices to supposed national characteristics and the Earth is flat. He also argued about Global Corporation vs Multinational Corporation and further more over Multinational corporations knows a lot about great many countries and adapts to supposed differences. Now while doing the critical evaluation of his arguments, he proposed strategies that companies should move from multinational to global corporation because in his view the market for multinationals was sinking. He found much more scope when it comes to operate over the Global market. He also proposed that not to adapt the superficial differences but force suitably standardized products globally. Which means that the market for standardized products should be kept global. He urged over making the standardized products global in order to maintain their market worth and image. Another concept given by Levitt was about offering everyone simultaneously high-quality, more or less standardized products at optimally low prices. This idea was basically approved to satisfy the needs of everyone as the products will be available at optimal prices. People tend to prefer more standardized products so this was the best deal for them. He also wanted few standardized markets instead of many customized markets. Because of this the customization of products was ended and with formulation of few standardized markets the Global corporations maintained a better worth instead of going through the customized markets form. The most important strategy proposed by Levitt was, there is no other appeal like price. People like money, and they want to spread it over as many goods as they can. So if the prices of commodities will be available at low and it will be standardized as well then people will definitely prefer to spend money and the most motivational factor for people to buy something is its good quality on low prices. Levitt quoted about the concept of Standardization that “If a company forces costs and prices down and pushed quality and reliability up while maintaining reasonable concern for suitability –customers will prefer world standardized products”. This statement has got clear linkage with the above strategies evaluated by Levitt’s views.

Now if we put a light over the marketing concepts he proposed, in his opinion the company should know more about what customers wants than the customer himself or herself knows, or at least more than the customer can articulate. The successful global corporation does not abjure customization or differentiation for the requirements of markets that differ in product preferences, spending patterns, shopping preferences and institutional or legal arrangement. But global corporations accepts and adjusts to these differences only reluctantly, only after relentlessly testing their immutability, after trying in various ways to circumvent and reshape them. Global strategy and organization has been strong in the last two decades. Numerous perspectives have been proposed to examine the issue, and so have numerous prescriptions for businesses facing global competition. On the one hand, these perspectives have enriched our understanding of the complexity of competing globally. On the other hand, the diversity of perspectives creates a great deal of ambiguity and confusion about how to compete worldwide, about the definition of a global strategy, about why a business chooses a global strategy, and about the implications of that choice. Without a unified framework to integrate these diverse perspectives, ambiguity and confusion are likely to persist, leading to contradicting theories and discouraging practical application of knowledge. Levitt (1983) argues forcefully that advances in communication and transportation technologies and increased worldwide travel have homogenized world markets. Increasingly, consumers in different parts of the world tend to demand the same products and have the same preferences. In this new era, the strategic imperative for businesses competing globally is to achieve the economies of scale which the global market affords. Thus, multinational corporations which treat individual country markets separately are likely to disappear and be replaced by global corporations which sell standardized products the same way everywhere in the world. A major source of competitive advantage has become the ability to produce high-quality products at lowest cost, since global consumers will sacrifice their idiosyncratic preferences for the high-quality but low-priced products. Instead of a single standardized product, they recommend a broad product portfolio, with many product varieties, so that investments on technologies and distribution channels can be shared. Cross subsidization across products and markets, and the development of a strong world-wide distribution system, are the two moves that find the pride of place in these authors’ views on how to succeed in the game of global chess.

When the global producer offers his lower costs internationally, his patronage expands exponentially. He not only reaches into distant markets, but also attracts customers who previously held to local preferences and now capitulate to the attractions of lower prices. The strategy of standardization not only responds to worldwide homogenized markets but also expands those markets with aggressive low pricing.

According to Levitt (1983), the optimum global strategy is to produce a single standardized product and sell it through a standardized marketing program. The essays argument is that the emergence of global markets for standardized consumer products” of a hitherto undreamed-of magnitude. The era of the “multinational corporation” was drawing to a close, Levitt asserted. The future belonged to the “global corporation.” The global corporation did not cater to local differences in taste. Those differences were being overwhelmed by the ability of the global corporation to market standardized products of high quality at a cost lower than that of competitors due to “enormous economies of scale in production, distribution, marketing, and management.” The global corporation was being called forth by a new era of “homogenized demand.” A few years ago, globalization was the new paradigm in international business, however from a branding perspective it has lost its initial efficiency giving the fact that consumers do not seem to feel a connection anymore with the standardized products of global corporations, catered to them in mass marketing communication programs. With their centralized decision making, most companies simply stopped having a connection with the new global marketplace and neglected its emergence. There are arguments for and against the idea of the globalization of markets. On the one hand, people are gradually seeking high quality/low cost products due to the advancement of technology and communication (Levitt, 1983).

Levitt both overestimated and underestimated globalization. He did not anticipate that some markets would react against globalization, especially against Western globalization. He also underestimated the power of globalization to transform entire nations to actually embrace elements of global capitalism, as is happening in the former Soviet Union, China, and other parts of the world. He was right, however, about the importance of branding and its role in forging the convergence of consumer preferences on a global scale. Think of Coca-Cola, Starbucks, McDonald’s, or Google. A global product is an important element of a global marketing strategy. A product can be defined as global if it can be marketed in different markets, with minimal or virtually no modification or adaptation. The focus of an enterprise is on serving global markets with global products. A global product does not have to sell in every market. For some types of products, the U.S., Japan, and Europe can represent 70% (or even 90%) of the world market demand. And within this increasingly homogeneous “triad, many manufacturers can benefit from “universal” product designs. A global product brings benefits to the producer and the consumer. The advantages to the producer are lower costs and economies of scale in production and management. The consumer benefits through lower prices, better serviceability, increased quality and consistent reliability. However, not all products can become global products. Studies have found that the ability of a product to be global significantly depends on whether the product is regarded as being essential and without close substitutes. Globalization which essentially refers to growth of trade and investment, accompanied by the growth in international businesses, and the integration of economies around the world, advanced in 1990’s and in the twenty first century. The globalization of business is easy to recognize in the spread of many brands and services spreads around the world. Forexample, Japanese electronics and automobiles are common in large part of the world. Moreover, companies have become transnational or multinational those are based in one country but have operations in others. For example, Japan/based automaker Honda operates the largest single factory in the United States, while U.S. based Coca-Cola operates plants in other countries including France and Belgium with about 80% percent ofthat company’s profits come from overseas sales. Nevertheless, the rapid growth of globalization that was considered as a success particularly due to the rapid economic growth and success of Asian Tigers and Taiwan in early 1990’s, was undermined by these countries major economic setbacks in the late 90’s. A number of rallies of anti-globalization forces attempted to portrait that globalization is not a panacea for the world’s problems. Their demonstration in all fronts during the Seattle meetings of the World Trade Organization that turned into a fiasco is an example. Thus, globalization continues through its agents, i.e. MNE by changing strategies to internationalize theirbusinesses. Prof Ghemawat, (2007) believed that the above definition of Levitt still reign the world, he however, challenges it and redefined globalization as it will be explained later. Multinational enterprises (MNEs) are the key drivers of globalization, as they fosterincreased economic interdependence among national markets. The ultimate test to assess whether these MNEs are global themselves is their actual penetration level of markets across the globe, especially in the broad triad markets of NAFTA, the European Union andAsia. A powerful force drives the world toward a converging commonality, and that force is technology. It has proletarianized communication, transport, and travel. It has made isolated places and impoverished peoples eager for modernity’s allurements. Almost everyone everywhere wants all the things they have heard about, seen, or experienced via the new technologies. The result is a new commercial reality—the emergence of global markets for standardized consumer products on a previously unimagined scale of magnitude. Corporations geared to this new reality benefit from enormous economies of scale in production, distribution, marketing, and management. By translating these benefits into reduced world prices, they can decimate competitors that still live in the disabling grip of old assumptions about how the world works.

Gone are accustomed differences in national or regional preference. Gone are the days when a company could sell last year’s models—or lesser versions of advanced products—in the less-developed world. And gone are the days when prices, margins, and profits abroad were generally higher than at home. The globalization of markets is at hand. With that, the multinational commercial world nears its end, and so does the multinational corporation. The multinational and the global corporation are not the same thing. The multinational corporation operates in a number of countries, and adjusts its products and practices in each—at high relative costs. The global corporation operates with resolute constancy—at low relative cost—as if the entire world (or major regions of it) were a single entity; it sells the same things in the same way everywhere. Which strategy is better is not a matter of opinion but of necessity. Worldwide communications carry everywhere the constant drumbeat of modern possibilities to lighten and enhance work, raise living standards, divert, and entertain. The same countries that ask the world to recognize and respect the individuality of their cultures insist on the wholesale transfer to them of modern goods, services, and technologies. Modernity is not just a wish but also a widespread practice among those who cling, with unyielding passion or religious fervor, to ancient attitudes and heritages. Companies may enter the global market through various kinds of international investments.

Companies may choose to make foreign direct investments, (FDI) which allow them to control companies and assets in other countries. Indeed, the largest 500 MNEs account forover 90% of the world stock of foreign direct investment (FDI) and they, themselves, conduct about half the world’s trade, (Rugman, 2004). In addition, companies may elect to make portfolio investments, by acquiring the stock of companies in other countries in order to gain control of these companies. They may participate in the international market by eitherlicensing or franchising. Another way companies tap into the global market is by forming strategic alliances with companies in other countries. While strategic alliances come in many forms, some enable each company to access the home market of the other and there by market their products as being affiliated with the well-known host company. This method ofinternational business also enables a company to bypass some of the difficulties associated with internationalization such as different political, regulatory, and social conditions. The home company can help the multinational company address and overcome these difficulties because it is accustomed to them. Multinational enterprises (MNEs) largely operate within their home region of the triad, or, at best, are bi-regional (competing only across two of the triads of the EU, NAFTA and Asia. Most of the largest 500 MNEs are interested in the deepening of regional trade and investment agreements in Europe, the Americas and Asia. This is a high end ³niche´ of the commonality viewpoint in which they argue that the world’s clearly becoming more unified and homogeneous´. However, basically every aspect oftheir arguments wrong. Instead of one language, one thirst, one food, one car, etc. there are strong regional differences within each part of the triad. Despite their global nature, some argues that companies must customize their products orservices to meet the needs of various international markets, and hence must use a multi-domestic strategy at least in part. For example, a US fast food companies such as KFC, McDonalds although have a standard approach globally, they adapted their strategy to the preference of regions or countries like in China, Japan, Middle-East. KFC introduced smallerpieces of foods to cater to a Japanese preference, and located restaurants in crowded are as along with other restaurants, moving away from independent sites.

As a result of these changes, the fast-food restaurant experienced stronger demand in Japan. As Grant, 2008, indicated, for instance McDonald carefully blends of global standardization and local adaptation in most countries. Its menus feature an increasing number of locally developed items like McVeggie Burger in India, McArabia in Kofta in Saudi Arabia, Kosher food in Israel by still maintaining globally standardized items, i.e. the big Mac and potato fries. Carindustries like Toyota adapt their product also as per region. Product for the US market and other part of the world is different. As the rising tide of globalization, some companies may lost the way or make mistakes to set out to create a worldwide strategy. In fact, better results come from strong regional strategies, which is the bridge that connect the local and global initiatives, and can significantly boost a company’s performance. As indicated earlier, an increasing number ofcompanies regard regions as enabler of cross-border integration because high level ofcross-border integration usually accompany with high level of regionalization. Besides the geographic proximity, the cultural, administrative and economic proximity also become an important competitive advantage in regionalization and contribute a significant weight ofsales. Embracing regional strategies requires flexibility and creativity. Managers must be conscious that markets, supplies, investors, locations, partners, and competitors can be anywhere in the world. Successful businesses will take advantage of opportunities wherever they are and will be prepared for downfalls. Successful managers, in this environment, need to understand the similarities and differences across national boundaries, in order to utilize the opportunities and deal with the potential downfalls. Once this analysis is complete, managers must establish strategic goals, which are the significant goals a company seeks to achieve through a particular pursuit such as entering a new regional market through considering the above five regional strategy model. International strategies refer to those that address competition in each country or region on an individual basis, whereas global strategy refers to addressing competition in an integrated and holistic manner across country and regional boundaries. Hence, multi-domestic international strategies attempt to appeal to the needs of customers in different countries or regions, while global strategies attempt to standardize products and marketing to work across boundaries.

Levitt will be remembered by the world as the man who coined the word “globalization,” but for his former students, his colleagues, and his loved ones, he was above all a man who could bestow down-to-earth advice as well as ground-breaking theory.

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