Global transfer of critical capabilities

Global transfer of critical capabilities

Henry P. Conn

Effective human resource processes and other means, coupled with hard work, help transfer the capabilities so crucial to the success of foreign operations.

In the last decade or so, multinational companies from around the world have eagerly embraced globalization and have striven to develop and implement worldwide strategy. By now we all know how difficult this process is. Numerous barriers stand in the way of successful globalization. Some companies, however, have been spectacularly successful in taking their proven approach and replicating it across a range of markets. Examples include Toyota and Motorola worldwide, Disney in Japan, and, more recently, IKEA in Europe and the United States. Some companies have kept certain core aspects of their approach and significantly modified other aspects to suit local positioning; McDonald’s in Asia Pacific (with common business systems but cuisine adjusted to local tastes) and Sears, Roebuck & Co. in Mexico (upscale image relative to mass merchant positioning in the U.S.) attest to this. Nevertheless, the business press is replete with examples of companies that have stumbled badly in transferring an approach proven in one market to other markets–Disney in Europe, Volkswagen in the U.S., and numerous companies in Japan, to name only a few.

Establishing, supporting, and leveraging foreign ventures is the essential building block in the globalization process. Yet failure can be more common than success, particularly in really tough markets such as Japan and China. In this article, we report that the effective international transfer of critical capabilities constitutes the single most important determinant of foreign venture success. We draw this conclusion from a study of the experiences of 35 major multinational corporations (MNCs) in establishing 120 foreign operations. We also discuss the means for achieving successful transfer of critical capabilities, focusing mainly on the role of global human resource processes.

Much has been written about how to go about developing and compensating managers to compete globally. Our study is, however, one of the first to make the statistical link between effective global human resource processes and superior corporate performance.

Variations In The Performance Of Foreign Operations

What causes some companies to succeed in globalization and others to fail, particularly at the level of foreign operations and subsidiaries? To investigate this and other questions, we structured our research using the framework in Figure 1. Industry globalization drivers, such as internationally common customer needs, global scale economies, barriers to trade, and global competitive threats, influence the worldwide strategy companies try to implement, as well as the organizational structures they adopt to enable that strategy. The automobile and computer industries, for example, face much stronger globalization drivers than most segments of the food or apparel industries. And strategy and organization reinforce each other in their effects. Witness Asea Brown Boveri, whose acclaimed use of global strategy depends on its careful structuring of head office and subsidiary roles.

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But however good the strategy and organizational structure, other key factors–particularly critical capabilities, people, management processes, and culture–intervene to affect implementation. The path to superior performance lies through these gatekeepers, which can accelerate, slow, or even derail the journey.

The Role Of Critical Capabilities

We suspected that the effective transfer of critical capabilities would be a major contributor to success. These capabilities (sometimes called core competencies) are now widely recognized as essential to competitive advantage. In globalizing, therefore, MNCs need to be able to transfer the most critical capabilities within and between their networks of international operations.

McDonalds’ tremendous overseas success has been built on the corporation’s ability to rapidly transfer to foreign entrepreneurs the capability of operating the entire, complex McDonald’s business system. Hong Kong’s luxury hotel chains–The Peninsula Group, The Regent, and Mandarin Oriental–are in the process of a similar transfer as they expand globally. Although the hotels have attained success in the rest of Asia rather quickly, winning over the United States has been tougher. But at least one transfer has succeeded: In fewer than four years since start-up, the Peninsula in Beverly Hills, California has established itself as perhaps the premier hotel in all the Los Angeles area. This success springs in great part from the Peninsula’s ability to transfer the right critical capabilities, especially its immaculate service, while adding other local requirements, such as a “stare-and-be-stared-at” swimming pool setup complete with cabanas for Hollywood negotiations.

In the automotive sector, exchange rate volatility and local content considerations have driven many Japanese manufacturers to push once “sacred” value-added design development activities into their foreign market subsidiaries. Nissan, Toyota, and Honda have all pursued strategies whereby major elements of vehicle development are performed by in-country design teams. For those procedures that remain centralized, such as body engineering, there is heavy cross-fertilization of ideas resulting from temporary staff transfers as well as shared computer databases and telecommunications linkages.

In much the same way, aerospace manufacturers Boeing and McDonnell-Douglas have increasingly shifted value-added design and manufacturing work to “alliance” partners. This process, known as “offset” (in which partner design/ manufacturing resource expenditures are offset, or used as payment for project equity commitments), is largely the result of efforts by the air-frame manufacturers to defray the enormous expense of developing new aircraft and to favorably influence potential foreign customers (hoping, for instance, that JAL, ANA, and JAS will be more inclined to purchase from them if Kawasaki Heavy Industries has a significant level of design and manufacturing effort in the project). Typically, the foreign venture partner is most interested in receiving exactly the critical process/ technology skills that a company such as Boeing designates as proprietary. However this issue is resolved, the success of the project rests on Boeing transferring the required skills and process knowledge to the foreign partner.

Defining Critical Capabilities

In our experience with clients and research participants, we have found the concept of “core competencies” to be ill-understood in practice–despite extensive academic discussion on the topic in recent years. Are core competencies “things we do well”? Activities that are unique to the company? Sources of competitive advantage? Some examples can illustrate the difficulties faced by companies trying to align their organizations on solid definitional ground.

General Motors, Toyota, and Volvo all know how to set up distributorships in markets outside their home base of operations, so none can claim a core competency in this regard. However, the lack of an effective distribution network could well be a significant source of competitive disadvantage. Accordingly, as a “thing we do well,” the ability to define, structure, and manage distribution networks effectively across multiple country markets in the automotive industry is a “cost of doing business” activity, albeit a highly important one.

Likewise, the mere “uniqueness” of an activity clearly provides insufficient grounds for supporting a designation as a core competency. Companies and entire industries–food service, data management outsourcing, contract inventory replenishment–have been founded with the intent to off-load “non-core” activities that, although potentially “unique,” do not pass a value threshold of an activity in which the company must invest its own resources.

Finally, a source of “competitive advantage,” though important to maintain and develop, may have little actionable value for the thousands of employees comprising the global organization. Coca-Cola’s manufacturing infrastructure in Southeast Asia, funded by the U.S. government and later turned over to the company, provided Coca-Cola with a significant cost advantage in the region. However, this asset is region-specific and therefore of limited relevance to other country operations. It is also lacking in “animation,” or the intrinsic ability of a process/knowledge “asset” to be nurtured, redefined, extended, transferred, and so on.

By definition, the term “critical capability” conveys that we are dealing with capabilities (discrete, meaningful, actionable, animate) that are critical (providing sustainable advantage, highly leverageable) to the corporation. Throughout our research, we have spoken to companies about critical capabilities as defined by their business and organizational competencies as well as various forms of intellectual property, such as patents, trademarks, software technology, and other non-patented but exclusive technological products and processes. Superior value is created when the business, organizational, and technological skills of a company are enhanced by or interwoven with key asset “nuggets” (such as brands, patents, and the like). In this regard, some examples of critical capabilities might include:

* Image branding/high-end merchandising

* Rapid commercialization of new technology

* System-wide franchise quality management

* Design for low-cost manufacturing

Collecting And Analyzing The Data

To investigate our framework, we developed a questionnaire structured to collect data from three levels of a company–the corporate CEO, the head of a line of business, and the heads of foreign operations or subsidiaries. Figure 2 summarizes the topics we addressed at each level. We then recruited 35 major MNCs from North America, Europe, and Asia Pacific (listed in Figure 3), and asked each company to select two lines of business and identify three diverse countries it had entered within the last 5 to 15 years for each line of business. The country operations also had to vary in performance and be continentally or regionally dispersed.

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Figure 3 Companies In The Study

North America HQ Amoco Amway AMP Baxter International Dow Chemical Du Pont Eaton Federal Express FMC General Motors Molex Pittston PPG Rockwell Tektronix Tenneco Xerox

Europe HQ Altana Ansaldo Barilla Danfoss Fiat Finemeccanica Jotun Kvaerner Lafarge Coppee Montedison Olivetti Pirelli Volvo

Asia-Pacific HQ BHP Canon National Australia Bank Telstra TNT

The companies responded by identifying 120 foreign operations. About 70 percent of these operations were in developing markets in Asia, Latin America, and Eastern Europe, and the rest were in the United States, Canada, and Western Europe. On average, the companies had nine years of experience in these overseas ventures, and in total we collected more than 600,000 data points.

We measured the transfer of critical capabilities and most other variables, such as the effectiveness of the global processes for human resources, by asking respondents to rate these variables on a scale from 0 (not at all effective) to 10 (completely effective). To supplement the data collected from the questionnaires, we conducted personal interviews with 16 CEOs and 22 senior executives at the line of business head offices and country operations. We used correlation coefficients and multiple regression to estimate the relationships between variables. We also compared the characteristics of foreign operations that were “winners” with those of the “losers.”

How The Foreign Operations Performed

One primary measure, Expected versus Actual Performance, was obtained by asking each Line of Business (LOB) head to rate the company’s performance in each country relative to the firm’s expectations at the time of entry. A rating of 100 meant that expected performance was equal to actual performance. This measure allowed direct comparison of performance across industries and countries, and correlated highly with such traditional measures of performance as sales growth and market share.

The foreign operations varied greatly. Fewer than half had performed satisfactorily relative to expectations at the time of entry. Moreover–and not surprisingly–the spread in performance decreased with the years since entry. This was because the poorest performers were closed down and the companies had time to fix other poor performers.

Successful Transfer Has The Strongest Effect On International Performance

We examined a wide range of factors that might affect the success of foreign ventures. These included the extent of globalization strategy, the fit of this strategy with globalization drivers, organization structure, barriers to entry, entry objectives and strategy, use of performance measures, human resource practices, and localization of strategy and management. But the effectiveness in transferring critical capabilities was far and away the most important in affecting performance. On average, a 20 percent improvement in transfer effectiveness was associated with a better than 7 percent improvement in performance.

In addition, high performers (the upper third of our sample) scored 22 percent better than low performers (the lower third of our sample) in transfer effectiveness. If the average performer were able to improve its capacity to transfer critical capabilities to the level of the highest performer in our study, the performance improvement would exceed 15 percent. Average transfer capability among all participants was 6.8 on a scale of 0 to 10.

Several of the comments made in the interviews were:

* “If only we knew what the company knows” (a country manager).

* “What parts of the past do we want to use as pivots of the future?”

* “The firm does practice the shared services concept in North America, but not in Europe, though we are looking at this now.”

CEOs Want To Improve Critical Capabilities

As could be expected, the CEOs repeatedly identified critical capabilities as being among the issues for which their companies most needed improvement. These are shown in Figure 4. As one CEO put it, “It is still a matter of debate, inside and outside our group, as to whether a large company can be effective in leveraging its critical capabilities when entering a market like, say, China.” Another CEO saw no easy solution:

In terms of leveraging our knowledge

across and around the Group, we do not

have any simple solutions. We try and

get our people around the world to work

on common problems…. [T]hese may

be common issues or ones common to a

business across countries.

Figure 4 Identified Areas Most In Need Of Improvement

Strategic capabilities

* Fully exploiting worldwide capabilities

* Acting on changing globalization drivers

* Making moves against competitors around the world

Organizational capabilities

* Developing talent and leadership for innovation and renewal

* Leveraging global capabilities effectively

* Structuring for optimal global performance

Management process capabilities

* Nurturing global management talent

* Transferring best practices

* Stimulating transfer of critical capabilities

A third said, “We are mediocre, though improving in the exchange of know-how and best practices in manufacturing processes.” The CEOs also recognized the competitive imperative to strengthen critical capability transfer. As one stated, “Early on, [our competitor] globalized their R&D capability, giving them a serious advantage.” But some CEOs are beginning to find solutions. Said one of our respondents, “(We are) establishing a more comprehensive and practical ‘Corpus of Doctrine’ reflecting the Group’s experience in, and approaches to, strategy, marketing, operations, analysis, and reporting . . . to facilitate know-how transfer.”

Many Critical Capabilities Identified

Figure 5 summarizes the critical capabilities identified by each level of management. CEOs in particularly identified the general categories of new product development and technology as their companies’ most critical capabilities. Aspects of these included design for manufacturing, time to market, patents and intellectual property, and technology in general. Other critical capabilities, in order of frequency, included partnering and alliance skills, low-cost manufacturing, customer service, product life cycle management, hiring and developing international managers, information technology, speed and flexibility, and quality management. Many of these capabilities were related to each other. One CEO said, “We have three interlinked capabilities: negotiating, developing contracts, and building relationships.”

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LOB heads were proportionately less concerned about new product development, but it still topped their list. Predictably, they saw operational issues as relatively more important, included capabilities in low-cost manufacturing, marketing, customer service, quality management, sales management, brands and products, channel management, product life cycle management, and hiring and developing global managers. The critical capabilities can also be very specific to individual industries. An LOB head of a mining company said, “Our critical capabilities are the ability to estimate the prospects for significant reserves and the ability to correctly assess political risks in the regions in which we operate.”

The trend toward operational concerns was even more marked for country managers, although new product development was still a major concern. Other critical capabilities at country level were similar to those of the LOB heads.

The dispersion of activities in Figure 5 is noteworthy. Although differences in industries, product markets, and other factors clearly account for some of this spread, there still appears to be widespread confusion around what constitutes a critical capability. For example, “new product development” is defined at too high a level to be meaningful and actionable. Better definitions might be “rapid commercialization of new technologies” or “industry-leading styling”

Mismatch Between Management Levels

Within individual firms, the level of alignment was less than might be expected from the above picture. CEOs and LOB head were each asked to identify six critical capabilities. On average, and even with a generous interpretation of similarity, only 2.1 of their selections matched. When country heads were asked to name three critical capabilities, on average only 1.6 of these could also be found in the LOB list. Given this low degree of alignment, it is not surprising that these firms had difficulty determining exactly what critical capabilities to transfer.

Although the respondents did not agree on what comprised critical capabilities in their companies, we were able to establish that the transfer of those capabilities was the most important factor in the success of foreign operations through the statistical analyses relating such transfer to performance. In other words, we did not have to ask respondents directly whether they thought critical capabilities affected performance, but could deduce that from correlation and regression analysis.

Human Resource Practices As The Key Method For Enhancing Transfer

Certain human resource practices, we found, had a high correlation to the successful transfer of critical capabilities: global compensation systems, transferring managers from country to country and having worldwide training systems. A 20 percent increase in the effectiveness of each of these processes may lead to an increase of 3 to 5 percent in the effectiveness of critical capability transfer (Figure 6).

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At the same time, the use and effectiveness of these processes were all relatively low–in the 3 to 6 range out of a possible 10 (Figure 7). Companies faced many problems in this area. One CEO commented, People from central X-state [location of company HQ] are very loyal, but they do not like to move.” Another CEO said, “I have worked in the international area for almost 40 years. There is no greater need than identifying and nurturing talent for local markets. All U.S. corporations have the same problem.”

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Some firms were beginning to force international experience. “To reach a certain management level,” said one CEO, “it is mandatory to have `out of country experience.” Other firms were working hard on the problem; one was putting together a skills matrix across its global operations and addressing how to take “a 25-year-old and develop him (or her) into a global manager [via, e.g.,] three functional careers, three geographic careers, and at least two business unit careers. Summarizing this issue, another CEO said, “My top globalization issue is people development and building a learning organization.”

The low degree of global coordination of HR processes is not surprising, because country managers have the greatest autonomy in this area. The respondent country managers had more local autonomy in decisions about human resources (7.9 out of 10 overall) than about physical assets, technology, or capital (Figure 8). Among different types of HR processes, country managers did indeed have the lowest autonomy in transferring personnel (6.5). But this relative lack of autonomy was more than offset by very high levels in training (9.0) and evaluating (8.9).

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Consequently, head office managers can exert only limited influence on global strategy execution and capability transfer when most types of HR decisions are beyond their control. Again MNCs face the dilemma of a need for local autonomy versus a need for global coordination.

Need For More Global Managers

The companies surveyed certainly recognize the need to change their HR processes. For instance, they all plan to increase the use of global managers relative to local managers (shown in Figure 9). The executives we interviewed made many telling comments:

* “We have to find a way of managing the free flow of talent and necessary skills around the world with the objective of building a competence-based organization.”

* “The single most important issue is creating internationalists. “

* “The limiting factor for our growth is human capital.”

* “How do we seed the samurai, and how should we manage the development and transfer of excellence?”

* “[The company] now insists that its top 50 managers have both international and cross-functional experience.”

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Global Management Processes Also Help Make The Transfer

In addition to international human resource processes, global management processes in general helped the transfer of critical capabilities. Overall, a 20 percent increase in the use of global, as opposed to regional or local, management processes may lead to a 3 percent increase in the effectiveness of critical capability transfer. The use of global management processes is relatively low today. But companies plan to do much more in this regard and lessen their use of local management processes (Figure 10).

[Figure 10 ILLUSTRATION OMITTED]

In commenting on the problem, one CEO said, “We fragment the understanding, focus, delivery, and leveraging of our critical capabilities through our information systems, patterns of communication, career paths, management reward systems, and processes of strategy development.” Proposing a solution, another CEO said, “We need to weave our critical capabilities into the corporate strategic themes for, and across, each of our business’s plans and budgets.”

Global Culture Plays Key Role

Having a global company culture, rather than regional or local cultures, also plays a powerful role in the transfer of critical capabilities. We found that a 20 percent increase in the extent of having a global culture may lead to a 4 percent increase in the effectiveness of critical capability transfer. Several quotes highlight this effect:

* “A global culture is denationalizing operations and creating a system of values shared by managers around the globe.”

* “Culture is the value-setter and lubricator.”

* “We get what we measure. We need to change our performance measuring and compensation systems to encourage sharing and teaming.

* “Establishing a common culture across the division is also a key globalization factor.”

* “We are more transnational or global than [our competitor] because we grew up as a result of many acquisitions, each with its own culture.”

As with global human resources and other management processes, the companies were gradually shifting from a local orientation to more of a regional and international orientation. Within the next five years, and compared with five years ago, the companies planned to reverse the dominance of local culture relative to global culture (Figure 11).

[Figure 11 ILLUSTRATION OMITTED]

Other Methods Of Transfer

We also asked country managers about three key methods for transferring critical capabilities: rotation of staff, dedicated global teams, and management meetings. As shown in Figure 12, these methods averaged a rating of only 5.2 (on a scale of 0 to 10) in use for transferring critical capabilities from headquarters or other units to a country operation. They rated an even lower average of 4.4 for transfer from country operations to headquarters or other units.

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When asked about other methods of transfer, the country managers identified many different mechanisms. Some entailed the sharing of information: written communications, memos to share lessons, newsletters and magazines, release of information, data transfer, and information technology. One CEO said, “Designing and installing an effective global IT network is critical if we are to keep in touch, share, and deliver the best–internally and to our customers.” But technology will not be the sole answer. Another CEO commented, “I do not see a cybernetic revolution ahead in addressing the issue of knowledge (including best practice) sharing.”

Other transfer mechanisms related to training and education, and included training at home country operations, business academies, dedicated courses, and top-down training and implementation. Coordination mechanisms comprised cross-sector umbrella teams, a global executive committee that met monthly, application segment teams, and a global customer management process. As one CEO put it, “We have started the formation and use of `Country Councils’ whereby they bring the managers of the different businesses in a country together to share views but without getting tangled up in the details of each other’s business.”

Direct involvement by HQ also was cited. This took the form of strategy reviews, country visits, and central and regional control. Both technical support and head office support in general were also mentioned. Centers of excellence are also being used. One CEO mentioned, “We may try and use a `Centers of Excellence’ approach for technology and best practice.” Finally, simply having a customer focus or market focus could also be of help.

Incentives For Adapting Or Sharing Critical Capabilities

Some companies provided incentives for adapting or sharing critical capabilities. Rewards to local managers for adapting corporate critical capabilities to the local market included:

* management incentive programs and other financial rewards;

* recognition programs such as corporate quality awards; and

* praise and recognition in performance appraisals.

One company went so far as to have specific performance objectives defined for implementing capabilities worldwide. Similar, though fewer, rewards were given to local managers for sharing capabilities from their country with headquarters or other units. Being recognized for their local capabilities seemed to be particularly motivating.

Many firms, however, had no specific incentives. And many local managers recognized the operating and strategic benefits of adapting corporate critical capabilities without additional reward. In actuality, there may often be significant disincentives to transfer, such as when a disproportionate level of resource investment must be borne by the capability “source” unit vis-a-vis the “recipient,” or in the midst of political concerns about helping a future rival for promotion.

Methods Of Gaining Cooperation

Many companies used direct mechanisms not only for the transfer of critical capabilities, but also for gaining the cooperation of country managers in global and regional strategies. Of the methods we asked about, approval of local budgets was at the top of the list–rating 8.0 in the extent of its use (Figure 13)–followed by compensation for job performance, evaluation of job performance, allocation of production capacity and volume, and financial contribution from headquarters. Executives also mentioned various other methods, some of which were formal (global policy directions, strategy integration systems, approval of strategic plans, capital authorization, global customer management, business management councils, international project organization, personnel selection) and some informal (training and follow-up, seeding personnel, esprit de corps, personal contact and relationships, and constant international networking).

[Figure 13 ILLUSTRATION OMITTED]

These direct and indirect methods of headquarters control can be seen as counterweights to the autonomy enjoyed by country managers. Percy Barnevik, the CEO of Asea Brown Boveri (not a participant in this study), frequently proclaims the high degree of autonomy given to local managers in his company. Less publicized is the fact that ABB’s head office managers use the allocation of production volume as a powerful weapon to gain compliance. Most of the industries, such as power generation systems, in which ABB’s businesses participate suffer from excess capacity. Moreover, in a given line of business, ABB usually operates factories in more than one country. Getting a production order thus makes a huge difference in whether a local ABB manager will make his or her budget for the year. So ABB’s head office may speak softly but it carries a very big stick! Most MNCs have similar secret weapons for influencing the hearts and minds of their local managers.

If you truly want to be successful at globalizing your company, you need to establish permanent mechanisms for the transfer of critical capabilities. Start with understanding what is critical in your industries and lines of business. Then create and improve those capabilities, identify and recognize the sources and carriers, identify which types are needed in which countries, transfer and adapt them there, and embed them into your foreign operations.

Of course, a continuing feedback and learning loop is essential; Figure 14 summarizes this process. Many of the executives in our study have pointed out what is needed:

* “We know our critical capabilities but have not done a good job in defining, communicating, and installing them.”

* “We must be more explicit, exhaustive, and rigorous in communicating, educating, and practicing our critical capabilities.”

* “Developing the understanding of how to transfer the lessons learned from one market to another [is crucial].”

* “View the company as a competence-based organization that delivers highest market impact through leveraging best practices worldwide.”

[Figure 14 ILLUSTRATION OMITTED]

You also need to recognize that HQ is no longer the owner of critical capabilities. Instead, it is increasingly a facilitator of their transfer. Critical capabilities may be created, adapted, and transferred by many different units: headquarters, line of business, country operation, business process, centers of excellence, teams, or a shared service center. Putting it all together can mean creating a multilevel spider web of transfer capabilities. As the CEOs put it:

* “We have now decided to change from informal networking to a formal comprehensive way of capturing, measuring, and installing best practices around our world…. In fact, it’s not a choice, but a must if we are to be a leader.”

* “In terms of leveraging our knowledge across and around the Group, we don’t have any simple solutions…. [W]e try to get people from around the world to work on common problems. . . . [T]hese may be common issues or ones common to a business across countries.”

* “Our focus is on the management and development of the intellect, information, and tools for tailoring, flexing, leading, and differentiating.”

* “A virtual HQ is rapidly replacing a ‘solid center HQ’ as competence centers and responsibilities are spread across the network into the operating units.”

Returning to the overall framework for this study, we can see that the global transfer of critical capabilities constitutes an essential step in moving from globalization potential to realized international competitive advantage. Even in light of the many ways to effect this transfer, in every case managers will have to work very hard to make it happen.

References

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Joseph H. Boyett and Henry P. Conn, Maximum Performance Management: How To Manage And Compensate People To Meet World Competition, 2nd ed. (Lakewood, CO: Glenbridge, 1993).

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Henry P. Conn is a vice president of A.T. Kearney, a global management consulting firm based in Chicago, Illinois.

George S. Yip is Adjunct Professor at UCLA’s Anderson Graduate School of Management. This article reports on a study conducted by A.T. Kearney. The authors thank the many companies who participated in the study, and the many A.T. Kearney staff members, as well as Professor Phil Smith of Michigan State University, who worked on it.

COPYRIGHT 1997 JAI Press, Inc.

COPYRIGHT 2004 Gale Group