structural and competitive...

Strategic Management Journal, Vol. 16, 637-655 (1995)

STRUCTURAL AND COMPETITIVE DETERMINANTSOF A GLOBAL INTEGRATION STRATEGYJULIAN BIRKINSHAWWestern Business School, University of Western Ontario, London, Ontario, Canada

ALLEN MORRISONAmerican Graduate School of International Management-Thunderbird, Gtendale,Arizona, U.S.A.

JOHN HULLANDWestern Business School, University of Western Ontario, London, Ontario, Canada

Both structural determinants and competitive factors can work to define the relevantenvironment for strategy formulation within an industry. This study examines the effects ofeach of these two sets of factors on global integration strategies, and finds that their impactsvary considerably from one industry to another. The study also investigates the relationshipbetween a business's global integration strategy and its performance, using an industry-specific perspective. In the aggregate, the businesses studied appear to be under-globalized.However, this relationship varied significantly by industry; four of the industries studiedappeared to be under-globalized, while the remaining three industries were at or near anoptimal level of globalization.

Recent literature on international business hasproclaimed a 'new era of globalization' (Bartlettand Ghoshal, 1989) and the 'new reality of globalcompetition' (Prahalad and Doz, 1987). Somehave suggested that globalization has become sopervasive that businesses that do not think andact globally will be at a competitive disadvantagein the 1990s (Levitt, 1983; Ohmae, 1989; Holstein,1990; UNCTAD, 1993). Much of this writinghas captured the attention of practitioners whoare increasingly searching for new ways tocompete in an ever-changing world. For man-agers, the message seems clear: markets are fastbecoming 'borderless,' and strategies that fail to

Key words: global strategy; globalization; globalindustries; performance

recognize the integration of markets are bothshortsighted and misguided.

While few have taken issue with generalizedclaims of the increasing globalization of compe-tition, a growing number of researchers haveraised questions about the appropriateness ofblindly adopting global strategies. Morrison,Ricks, and Roth (1991), for example, highlightedthe success of regional strategies in health careproducts and pharmaceuticals. In other studies,Baden-Fuller and Stopford (1991) and TheEconomist (1991) showed that in white goodsand tires, respectively, businesses pursuing globalstrategies were losing out to smaller, regionalcompetitors. Other studies have shown thatpressures for global integration are often misinter-preted and that competitors frequently adoptstrategies that are either too global or not global

CCC 0143-2095/95/090637-19© 1995 by John Wiley & Sons, Ltd.

Received 7 January 1993Final revision received 2 March 1995

638 J. Birkinshaw, A. Morrison and J. Hulland

enough (Douglas and Wind, 1987; Morrison,1990; Yip, 1992; Stopford, 1993).

The degree to which strategies have or shouldbecome globalized is clearly a matter of debate.This paper examines this issue by studying therelationship between industry globalization, busi-ness strategy, and business performance. The paperbegins by distinguishing an industry's structuralcharacteristics from the competitive actions ofbusinesses. Under a systems-structural view, com-petitive actions should coincide with structuralimperatives (Astley and Van de Ven, 1983).However, evidence in global industries suggests thatcollective competitive actions are often inconsistentwith structural characteristics (Morrison, 1990; Yip,1992; Stopford, 1993). In industries where collectivecompetitive actions coincide with structural charac-teristics, the imperatives for an individual businessare clear and unequivocal. However, in industrieswhere collective strategy is mismatched withstructural imperatives, the determination of anappropriate business strategy is much more difficult.For an individual business, the question is:when structural characteristics conflict with thecompetitive norms, which should drive strategy?Based on a sample of 124 businesses competingin 10 different industries, we address this questionby examining the relationship between structuraldeterminants and competitive action. Issues of fitbetween these two imperatives are then studied inthe context of individual business strategy andperformance on an industry-specific basis.

The paper is organized in six sections. In thefirst section the relevant literature on structuralforces and global competition is reviewed. In thenext section, a conceptual framework is developedthat integrates both the structural and competitiveperspectives of globalization. Propositions aredeveloped in the third section of the paper. In thefourth section, the research methodology and dataare discussed. The empirical analysis and resultsare presented in the fifth section. In the finalsection of the paper, a discussion of the resultsincluding the implications of our findings ispresented.

GLOBAL COMPETITION: STRUCTURALAND COMPETITIVE FORCES

Despite the growing body of literature on theglobalization of competition, confusion remains

over a variety of globalization-related issues.Many managers, for example, continue to associ-ate global with anything international. 'Inter-national' and 'global' are frequently used inter-changeably to describe a variety of strategiesthat mean different things to different people.In reality, however, the term 'global' has uniqueconnotations. 'Global' refers to a particular typeof industry (Porter, 1980, 1986) as well as aspecific type of international strategy (Doz,1980; Porter, 1986; Morrison, 1990; Yip, 1992).Examples of other international industry andstrategy types include muhidomestic, regional,and transnational (Bartlett and Ghoshal, 1989;Prahalad and Doz, 1987; Morrison et al., 1991).All three alternate industry and strategy typeshave 'aspects that are global or potentially global'(Yip, 1992: 1).

At the industry level, globalization can bemeaningfully defined through references to eitherstructural forces or the collective actions ofbusinesses. For an individual business, structuralforces and competitive actions are both relevantaspects of the environment and form the basisof a comprehensive industry analysis. At themacro level, however, the two are distinct inthat the structural imperatives of the industry maywell be different than the collective competitiveactions in the industry (Porter, 1980; Cvar, 1984).

Structural forces perspective

The structural forces perspective has its roots inindustry organization economics and contingencytheory. The synthesis of contingency theory andindustry organization economics has enabledresearchers to identify alternative strategies fordistinct industry contexts. A key assumption ofthis approach is that pressures to globallyintegrate or respond to local markets vary alonga broad spectrum with endpoints that can belabeled 'global' and 'national' (Bartlett. 1987;Morrison and Roth, 1992). By examining relevantstructural forces, researchers and managers canclassify industries with resulting normative impli-cations for business strategy content (Hunt. 1972;Hatten, 1974). For example, Kobrin (1991)developed an empirical measure of 'transnationalintegration' in 56 industries based on intrafirmtrade. Structural forces have also been used toeffectively identify other contexts, includingfragmented industries (Dess, 1987; Keels et

Industry Determinants of Global Strategy 639

al., 1987), mature industries (Harrigan, 1982;Hambrick and Scheter, 1983; ZeithamI and Fry,1984), and emerging industries (Aaker and Day,1986).

The importance of individual structural forcesvaries from industry to industry (Vernon, 1966;Caves, 1977; Porter, 1980; Fiegenbaum, McGee,and Thomas, 1987). In the case of globalindustries, three broad factors have been citedas structural determinants or 'drivers:' (1) thepotential for economies of scale in value addingactivities; (2) differences in comparative advan-tages across countries; and (3) standardizedmarket demand across countries (Porter, 1980;Hout, Porter, and Rudden, 1982; Kogut, 1991).While all industries share in these drivers tovarying degrees, all three determinants functionat high levels in global industries. In contrast,all three drivers would have little functionalityin national or multidomestic industries.

All things being equal, global business strat-egies are encouraged in an industry dominatedby global industry drivers (Hout et al., 1982;Yip, 1992). A global strategy consists of globallyintegrated operations and the cross-subsidizationof international market share battles (Doz, 1986;Graham, 1978; Hamel and Prahalad, 1985; Jolly,1988). In theory, a business which adopts aglobal strategy maximizes its 'fit' with structuralimperatives.

Competitive action perspective

The second stream of literature relating tocompetition in global industries focuses on the'collective' strategies of businesses. Rooted insocial ecology, and with other linkages topopulation ecology (Aldrich, McKelvey, andUlrich, 1984), the competitive action perspectivemakes a clear distinction between individualbusiness strategy and group responses to theindustry pressures. As argued by Astley andFombrun (1983), the collective activities oforganizations overwhelm individual strategies,and while businesses act collectively, they donot independently maintain control over theenvironment. As a result, the common or sharedstrategy of group members overwhelms thestrategy of an individual business (Astley andFombrun, 1983), thus putting intense pressureon individual businesses to develop strategiesconsistent with group norms. Under this perspec-

tive, the collective group represents sharedindustry membership, with strategic norms super-seding exogenous structural forces as the relevantcontingency for individual businesses (Thomasand Venkatraman, 1988; Fiegenbaum, McGee,and Thomas, 1987).

A related body of work that sheds additionallight on the collective action phenomenon isinstitutionaiization theory (Meyer and Rowan,1977; DiMaggio and Powell, 1983). Insti-tutionalization theory views organizations associal (as well as technical) phenomena thatadopt patterns of behavior and activity that areappropriate to their environments. Thus, withinan organizational field^the broad analogue ofindustry in IO Economics—member organizationsmove towards common structures and processes(termed 'isomorphism') through a combinationof coercion, imitation, and normative expectation(DiMaggio and Powell, 1983). What this meansfor collective strategy is that there are typicallystrong social forces at work within an industrythat push members to act in like fashion, evenwhen such actions are in conflict with 'technical'imperatives. As stated by Meyer and Rowan(1977: 340), 'conformity to institutionalized rulesoften conflicts sharply with efficiency criteria.'One of the best examples of imitative behaviordriving strategy in an international context is themovement of Japanese financial institutions anddevelopers into North American real estate inthe late 1980s (Cariton and Barsky, 1992). Inthis example, competitive actions and imitativebehavior dominated decision making for al! butthe first movers in the industry. Structuralimperatives appeared to have only a limitedimpact on Japanese decision making.

In the international domain, the roots of thecompetitive action perspective can be traced toVernon (1966) and Wells (1968). who appliedoligopoly theory developed by Hymer (1960) andlater Kindleberger (1969) to show that theinternationalization of businesses can beexplained by the competitive dynamics of theindustry. Vernon (1966) best articulated therole of collective action by arguing that theinternationalization of competition is tied tothree distinct factors: first, to the individualactions of an innovative business; second, thepresence of favorable international structuralconditions; and third—and most important at theindustry level—the timely, collective reaction of


numerous other businesses to the threat ofmarket loss in emerging international markets.Knickerbocker (1973) also argued that competi-tive actions rather than structural imperativesdominate decisions to go international. In anexamination of U.S. manufacturers, Knicker-bocker (1973) asserted that oligopolists had atendency to follow each other into internationalmarkets to protect their competitive interests.

Thus, under a competitive action perspective,a global industry is one which 'pits one muhina-tional's entire worldwide system of product andmarket positions against another's' (Hout et al.,1982: 103). Using this approach, a great deal ofresearch has relied on high-profile competitorsto identify global industries (see, for example,Cvar, 1984; Flaherty, 1986; Yoshino, 1986; Jolly,1988). In these studies, industries are frequentlyclassified as 'global' because researchers identifiedeither individual businesses or two or threebusinesses competing with global strategies.These global businesses are then cited as represen-tative of collective action or the competitivenorms in the industry.' Aircraft parts, tires,construction equipment, and pet food areexamples of industries that have been classifiedas global through the extrapolation of case studiesof high-profile businesses to all businesses inthe industry. In the construction industry, forexample, the strategies of Caterpillar and Kom-atsu discussed by Hout et al. (1982) were usedby Doz (1987) to illustrate the global nature ofthe entire industry. Looking at the same industrya few years later, Johnson (1991) characterized theentire 1800-member U.S. construction equipmentindustry as global after examining seven keycompetitors in the industry.

BRINGING THE TWO SIDESTOGETHER: A CONCEPTUALFRAMEWORK

The competitive action and structural forcesperspectives represent divergent yet ultimately

' An important implicit assumption in this work is that globalindustry structure is oligopolistic, and hence that individualfirm behavior matters. In the case of an atomistic industrywhere al! participants are price lakers, competitive actionsby individual firms would not be expected to have any impacton business integration.

reconcilable views of global industries and globalstrategy. On the one hand, global competition isshaped through structural drivers (Yip, 1992),while on the other hand, global competitionoccurs through imitative behavior based oncompetitive norms that may or may not bestructurally justified. The distinction betweenthese two perspectives has become increasinglyrecognized in the literature. Bartlett (1987),Ghoshal (1987), Kogut (1989), and Stopford(1993) have ail highlighted the need to distinguishbetween global industry structure and the com-petitive actions of businesses. To this end, Kobrin(1991: 18) has argued that a distinction must bemade 'between the inherent structure or economicorganization of a business or industry and thecharacteristics of competition or the strategy ofcompanies in that industry.'

Global industry is defined here in terms of'the significance of the competitive advantagesof international operations' (Kobrin, 1991: 18).This definition is consistent with both thestructural forces and competitive action perspec-tives, in that competitive advantage is obtainedonly by achieving a low-cost or differentiatedposition (e.g. through international operations)relative to competing businesses in the industry(Porter, 1985). In other words, neither thestructural forces nor competitive action perspec-tives is sufficient on its own to completelyexplain international industry imperatives foran individual business. However, both convergein that they represent the 'broad operatingenvironment' for the business, and thus definethe relevant context of business decision making(Bartlett, 1987). A two-dimensional space withaxes representing structural determinants orthe 'degree to which industry structure favorsglobalization' and competitive determinants orthe 'level of collective global competition inthe industry' can be constructed to representthe interaction of these two approaches (seeFigure 1).

Figure 1 identifies the mismatches that oftenoccur between structural pressures and thecompetitive actions of industry members. Threedomains can be identified in the figure. First, abroad diagonal in which the level of competitionmatches the industry context. The funeralparlor industry, for example, exhibits a lowneed for integration and few economies ofscale, indicating that competition should corre-


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of global competition in industry

Industry responses to pressures for globalintegration

spondingly occur at a local level. The shipbuild-ing industry, in contrast, has the potential forglobal economies of scale as well as a highdegree of integration, suggesting that compe-tition should respond accordingly. Note thatthe diagonal band in Figure 1 representsan ideal 'fit' between industry structure andcompetitive state, and as such it is time specific;as structural drivers evolve so will the optimumlevel of global competition.

The second domain in Figure 1, the top lefttriangle, indicates the condition in which globalcompetition is underdeveloped given the struc-tural pressures of the industry. This area couldinclude a number of 'undiscovered' global indus-tries in which the structure favors globalizationbut the majority of businesses are still competingwith less than global strategies. Over-the-counterpharmaceuticals and credit cards are industriesthat have been cited as having a much higherlatent global potential than currently demon-strated by competitor strategy {Cvar, 1986; Yip,1992). These industries offer potential first moveradvantages for businesses which can rapidlyadopt global strategies.

The third domain in Figure 1, the bottom

right triangle, indicates the condition in whichcompetition has overglobalized vis-a-vis existingindustry pressures. As mentioned above, thetire and white goods industries have beencited as examples of industries that haveoverglobalized. Two possible reasons helpexplain why overly global competition hasoccurred in these industries: first, managementmay have misread the signs and pushed globaliz-ation when the industry could not support it;or second, competition may have become globalbecause of oligopolistic games that, while oftensuboptimizing for the business, may meetulterior corporate objectives (Kim, Hwang, andBurgers, 1989).

Matching business and industry responses

Inherent in the structural forces and competitiveaction perspectives is the recognition that busi-nesses may not always realize the global oppor-tunities and threats in their industry. Because anindustry's structure is defined independent ofbusiness strategy, a large number of internationalindustries may consequentially have 'global poten-tial, even though they may not know it' (Hout,et al., 1982: 99). This suggests that a business cangain a competitive advantage through accuratelyassessing the underlying structural potential forglobalization rather than through examining thedominant competitive patterns in the industry(Bartlett, 1987; Stopford, 1993). As a result,performance can be maximized when businessesdevelop strategies that accurately reflect industrystructure (Ginsberg and Venkatraman, 1985;Hofer, 1975).

The appropriate dimension of strategy hereis the business unit's global integration strategy,which can be defined as 'rationalization thatmay entail standardization of product, centraliz-ation of technological development, or thevertical or horizontal integration of manufactur-ing' (Kobrin, 1991: 18). A similar definitionwas proposed by Prahalad and Doz (1987; 14):'The centralized management of geographicallydispersed activities on an ongoing basis.' How-ever, Kobrin's definition is preferred because'centralization' implies a concentration of activi-ties at head office. In reality, many multin-ational corporations assign world product man-dates to their affiliates that offer a formof 'decentralized centralization' (Roth and

642 /. Birkinshaw, A. Morrison and J. Hulland

Morrison, 1992), which is entirely consistentwith the notion of a global integration strategy.^

While structural conditions can be conceptuallydisentangled from the combined actions ofcompetitors at the industry level of analysis, sucha distinction cannot be made from the perspectiveof an individual business which views both setsof factors as part of its relevant operatingenvironment. In broad terms, three possibleindustry configurations may develop in responseto globalization pressures: an appropriate levelof collective global competition; too much globalcompetition; or too little. In turn, there are threepossible positions that each business can takewith respect to the industry's position, namelymore globally integrated, integrated to an equiva-lent extent, and less globally integrated. All elsebeing equal, one would expect that a businesswhose relative global integration is more closelymatched with environmental pressures wouldperform better. In graphical terms, it would beexpected that the performance-integration plotin suitably global industries would be horizontal,whereas the under-integrated and over-integratedindustries would have upward sloping and down-ward sloping plots respectively (see Figure 2).

It should be stressed here that the proposedrelationships between business unit integrationand performance assume a homogeneous set ofindustry participants that differ primarily in termsof their level of integration. Strategic grouptheory (Hatten and Schendel, 1977; McGee andThomas, 1986; Porter, 1980) challenges thisnotion, by showing that within a given industrydistinct groups can be identified which may beasymmetrically exposed to both structural forcesand competitive actions, on account of mobilitybarriers which exist between the groups. Thereare industries where the appropriate dimensionon which to identify strategic groups is the levelof global integration. For example, Baden-Fuller and Stopford (1991) identified national(exporting), regional, and global players in the

^ Note that high global integration embraces two somewhatdifferent scenarios: one in which all activity is centralized,and the other in which it is dispersed, but centrallycoordinated (Porter, 1986). While this distinction is important,it cannot be captured in a single index, as used in this paperand by Kobrin (19yi). Instead, industry-specific analyses areconducted later in the paper to controi for the differentlevels of configuration and coordination that are found fromindustry to industry.

1. Indusn7 isunder-integrated

2. Industry isoptimallyintegrated

3. Industry isover-integrated

Low Ltnel of Integration ^^Figure 2. Expected performance-integration plots

European white goods market. However, thereare also industries where other dimensions aremore appropriate. Determination of the criticaldimensions for strategic group identificationrequires careful industry analysis. For the pur-poses of our study, the decision to focus on thebusiness-unit level precluded such analysis, butthe possible impact of intraindustry groups onthe results should be kept in mind.

RESEARCH PROPOSITIONS

Structural forces

A number of testable propositions emerge fromthe preceding discussion. Following the structuralforces perspective, structurally determined driverscan be expected to infiuence the global integrationstrategies of businesses. As discussed earlier, onesuch structural driver involves economies of scalethat can be gained from integrating operationsacross countries (Porter, 1986; Ghoshal, 1987).Scale economies are associated with such activitiesas research and development, raw materialprocurement, manufacturing operations, market-ing, and sales. Strictly speaking, the minimumefficient scale (MES) for the activity is the criticalvariable, since there can be no further reductionsin product unit cost above this level. Howeveras Scherer et al. (1975) point out, measurementof the MES is fraught with difficulties. Further-more, the concept has been applied primarily tomanufacturing plants, where unit costs and sizecan be measured with some degree of accuracy.


Because the current study is concerned with thebroader integration of all value-adding activities,and not just manufacturing, MES could not bemeasured adequately. Instead, the broader notionof economies of scale is used here.

Proposition 1: Economies of scale are posi-tively associated with the global integration ofbusiness activities.

A second structural driver is the differentialcomparative advantage that may exist betweencountries. The decision to locate certain value-added activities in a single global location is afunction of both the availability of scale economiesand also the existence of differential comparativeadvantage between countries (Kogut, 1985;Porter, 1986). While there are costs associatedwith globalizing activities—including transpor-tation costs and government-induced tariffs orstandards—evidence suggests that in global indus-tries they are relatively insignificant (Porter,1986). Differences in comparative advantage canbe exploited only in an international context,and are maximized when comparative advantagesfor multiple activities can be linked across thevalue chain (Dunning, 1981; Porter, 1986).Because of this, businesses competing in globalindustries should, all things being equal, hmitforeign direct investment to those countrieswith either low cost resource endowments orcomparatively high national investment incentivelevels (Buckley and Casson, 1981; Casson, 1986;Dunning, 1981). By contrast, in multidomesticindustries, business strategy is based on marketaccess with little global sourcing. Note that theissue of relevance here is whether or notvalue activities are cited according to countryadvantages in general, rather than where specificvalue elements are located.

Proposition 2: Differential comparativeadvantages between countries is positivelyassociated with the global integration of businessactivities.

The third structural driver is the permeability ofborders to the fiow of information and technology.This has led to a gradual homogenization indemand patterns among consumers worldwide,and a corresponding increase in standardizationfor product offerings and distribution systems

(Levitt, 1983; Ohmae, 1989). While a numberof writers (e.g. Douglas and Wind, 1987; Morrisonetal., 1991) have argued that national differencesare converging much more slowly than has beensuggested, linkages between the standardizationof demand and the global integration of businessactivities have considerable support in the litera-ture (Ouelch and Hoff, 1986; Doz, 1987).

Proposition 3: Standardization of marketdemand is positively associated with the globalintegration of business activities.

Competitive action

Research has shown that a business's globalintegration strategy is frequently determined inresponse to the actions of competitors inde-pendent of structural forces (Knickerbocker,1973; Hamel and Prahalad, 1985). In the contextof this study, businesses would be expected toadopt global integration strategies that matchedor improved upon those of competitors. Inparticular, as competitors make decisions toglobalize, businesses are likely to perceive increas-ing pressures to integrate operations.

Proposition 4: Global competitive actionswithin the industry are positively associatedwith the global integration of business activities.

Performance

The industrial organization paradigm suggests thatbusiness performance is contingent on the fitbetween environment and conduct (strategy)(Porter, 1981). We would therefore expect to seesuperior performance in those businesses that haveeffectively matched their global integration strategywith the structural drivers in the industry. UsingFigure 2, this establishes three rival propositionsrelating to global integration and performance.

Proposition 5a: The global integration ofbusiness activities is positively associated withperformance in industries that have undergloba-lized.

Proposition 5b: The global integration ofbusiness activities is negatively associated with


performance in industries that have overgloba-lized.

Proposition 5c: In industries that are neitheroverglobalized nor under globalized, norelationship exists between global integrationof business activities and performance.

Environment-performance relationships

The relationship between industry structure andbusiness performance has been the focus ofconsiderable discussion in the management litera-ture (Porter, 1980; Caves. 1982; Hitt, Ireland,and Stadter, 1982; Ginsberg and Venkatraman,1985). Industry structure helps explain why someindustries are consistently more profitable thanothers (Porter, 1980). However, according tocontingency theory, industry structure has onlyan indirect effect (via business strategy) onbusiness performance. It is only by achieving anappropriate fit between industry demands andstrategy that the business can realize superiorperformance (Drazin and Van de Ven, 1985;Galbraith and Kazanjian, 1986; Miller, 1988).Thus, it is proposed that industry structure willhave a strong effect on business strategy, but nodirect effect on business performance.

Proposition 6: Economies of scale will haveno direct effect on business peformance.

Proposition 7: Differential comparativeadvantage between countries will have no directeffect on business performance.

Proposition 8: Standardization of marketdemand will have no direct effect on businessperformance.

In contrast, the direct relationship between globalcompetitive actions and performance is expectedto be positive. While a traditional microeconomicperspective would suggest that high levels ofcompetition are associated with average returns,there are some factors specific to globalizationthat may challenge this relationship. Specifically,global competition opens up a number of newmarkets to businesses, allowing them to amortizefixed costs over larger sales volumes, realizegreater economies of scale, and sell into national

markets that are often less price discerning.Geringer, Beamish, and DaCosta (1989) showed,for example, that for a sample of 200 largemultinational enterprises the level of inter-nationalization was positively related to perform-ance, without regard to the level of integration.Thus:

Proposition 9: Global competitive actions arepositively associated with business performance.

The nine preceding propositions are summarizedin Figure 3. Propositions 6 through 9 are includedin order to assess the validity of the contingencyframework, and to investigate conditions underwhich this perspective may be too limiting.

RESEARCH METHODOLOGY ANDDATA

Sample

Given that a variety of researchers have identifiedrising trade levels as a key indicator of industryglobalization (Cvar, 1984; Morrison, 1990; Kob-rin, 1991; Yip, 1992), industries were selectedfrom the U.S. International Trade Commissionand industry sources that exhibited high levels(greater than 50%) of international, intraindustrytrade. In all, 12 industries (four-digit SIC code)were selected. Questionnaires were subsequentlysent to the CEO or president of medium andlarge-sized U.S.-based businesses in each of theseindustries (322 in total), as identified in America'sCorporate Families and The Directory of Corpor-ate Affiliations. Responses were received from147 businesses, but for the purposes of this studytwo industries were dropped due to the lowresponse rate of member businesses; a further20 businesses were dropped due to incompletesurvey responses. As a result, the final samplecontained 124 businesses from 10 industries, withbetween 4 and 26 businesses responding perindustry.

Measures

Structural forces and global competitive action

Despite the conceptual distinction between struc-tural drivers and competitive forces, an empiricaldistinction between the two can be difficult to


Figure 3. Summary of proposed relationships

achieve. In part this is due to the fact thatseveral potentially relevant measures are relatedto both constructs. As a result, a principalcomponents factor analysis was performed on aneight-item scale which included measures of boththe structural drivers and the competitive forcesin the industry.^ This analysis yielded four factors:(1) standardization of market demands; (2)evidence of competitive action within the indus-try; (3) economies of scale; and (4) differencesin comparative advantage across countries.''Table1 indicates the individual items associated withthese four factors, along with key statisticalinformation. As a result of this analysis, concep-tual separation between the four independentvariables was confirmed. Evidence of threedistinct structural driver variables was alsoconsistent with Hout et al. (1982). Subsequentanalysis was undertaken using these four factors.

•̂ A preliminary factor analysis was performed for a 12-itemscale. However, four of these items were subsequentlydropped due to either high cross-loadings or a high loadingon a conceptually inconsistent factor.'* Although the eigenvalue for the fourth factor is less thanone, we retained all four factors as suggested by both priortheory and a factor scree plot.

Global integration of business activities

This construct was measured using an eight-itemscale. A principal components factor analysisconducted on this scale indicated a single constructrepresenting the global integration of businessactivities.^ Two of these items (3 and 7) weresubsequently dropped in order to improve thescale reliability.

Given the focus on industry-specificrelationships in this paper, it was importantto measure managers' assessments of theglobal integration of business activities rela-tive to their specific industries. This wasnecessary to control for the variation in overallglobal integration levels between industries. A

' This factor (eigenvalue = 4.19; explained variance = 52%)consists of items assessing the importance of methodspotentially used to compete internationally. These items (andtheir factor loadings): (1) 'international control of themanufacturing cycle from raw materials to distribution offinished product' (0.67); (2) 'control within the organizationof the international transfer of intangible assets (e.g., skills/technology)' (0.73); (3) "sourcing capital funds internationally'(0.60); (4) 'investing in countries which offer investmentincentives (e.g., tax Jiolidays)' (0.66); (5) 'vertically integrateoperations worldwide' (0.70); (6) 'minimizing tax liabilitiesthrough transfer pricing and method of cash remittance'(0.79); (7) 'safeguarding operations from foreign intervention'(0.58); and (8) 'horizontally integrating operations woridwide* (0.62).


Table 1. Factor analysis resuhs confirming distitict structural and competitive drivers

Item Factor Factor 2 Factor 3 Factor 4

1. Buyer/customer needs are standardizedworldwide

2. Standardized purchasing practices existworldwide

3. Standardized product technology existsworldwide

4. Competitors market a standardized productworldwide

5. Competitors exist that have a presence inall key markets

6. International competition is intense7. Business activities are susceptible to scale

economies8. Factor costs (wages, materials, capital)

differ significantly from country to country

Eigenvalue% Variance explained% Cumulative variance

Factor name

0.78

0.60

0.74

0.81

0.86

0.820.86

0.86

2.4730.8%30.8%

1.5419.3%50.1%

1.1314.1%64.2%

0.718.8%

73.1%

Standardized Competitivemarket actionsdemands

Economics of Differences inscale comparative

advantage

Note: Only factor loadings greater than or equal to 0.50 are included in the table.

correlation analysis of individual responseswith the average of all businesses in therelevant industry was conducted. Correlationsranged from 0.92 to 0.97. confirming that theresponses were industry specific and relativerather than absolute.

Performance

Performance was measured using subjectiveassessments of a business's performance relativeto other businesses in the same industry. Whilethere are potential reporting biases in suchmeasures, research has shown that self-reportedperformance data are generally reliable {e.g.Dess and Robinson, 1984). In addition, objectivedata are frequently not available at the business-unit level. Conceptually, it is the ability of thebusiness to generate a superior performancerelative to its industry that was viewed asmost relevant, rather than absolute measures ofperformance. Three aspects of performance wereassessed: return on assets, return on totalinvestment, and sales growth. By combiningfinancial and competitive performance character-

istics in this way, greater construct validity wasachieved.**

RESULTS

Partial least squares

To estimate the paths between the constructsshown in Figure 3, and thereby test the prop-ositions advanced previously, a relatively newand powerful multivariate analysis techniqueknown as partial least squares (PLS) was used(see Fornell and Bookstein, 1982, for a completedescription). Partial least squares belongs to afamily of techniques which also includes thebetter-known LISREL (Lohmoller, 1988).

PLS is most appropriate when sample sizesare small, when assumptions of multivariatenormality and interval scaled data cannot bemade, and when the researcher is primarilyconcerned with prediction of the dependent

*" A confirmatory factor analysis conducted on these threemeasures indicated a single construct (eigenvalue 2.28) whichexplained 76 percent of the variance in the original measures.


variable (Fornell and Bookstein, 1982). PLS isideally suited to the early stages of theorybuilding and testing, and it has been used by agrowing number of researchers from a variety ofdisciplines (e.g., Barclay. 1991; Fornell andRobinson, 1983; Higgins. Duxbury, and Irving.1992).

While it is possible to test the nine precedingpropositions using univariate analysis, this wasviewed as not totally appropriate given that themodel proposed in Figure 3 involves independentequations that need to be estimated simul-taneously. That is, the structural and competitivedrivers are expected to influence business strategyat the same time that business strategy (andpotentially the structural and competitive drivers)influence business performance. To avoidobtaining biased and inconsistent parameterestimates for these equations, the Figure 3 modelmust be analyzed using a multivariate estimationtechnique such as two-stage least squares (Pindyckand Rubinfeld, 1981) or PLS. While bothtechniques will provide acceptable parameterestimates, two-stage least squares requires theuse of single measures for all dependent variables.In contrast, PLS permits multiple measuresof both dependent and independent variables.Because global integration and performance wereboth assessed using multiple measures, use ofPLS appeared to be more appropriate for thecurrent study.

The path coefficients obtained from a PLSanalysis are standardized regression coefficients,while the loadings of items on individual con-structs are factor loadings. Factor scores createdusing these loadings are equivalent to weightedcomposite indices. Thus, PLS results can beeasily interpreted by considering them in thecontext of regression and factor analysis. PLSprovides a clear advantage over regression fortwo reasons: (1) it considers all path coefficientssimultaneously to allow the analysis of direct,indirect, and spurious relationships; and (2) itestimates the individual item weightings in thecontext of the theoretical model rather than inisolation.

Generally, PLS results are presented in twostages. In the first stage, the researcher ensuresthat the measures used as operationalizations ofthe underlying constructs are both reliable andvalid. Once convinced of the adequacy of themeasurement model, the researcher can then

proceed to interpret the resulting model coef-ficients.

Validity and reliability of measures

The acceptabihty of the measurement modelused here was assessed by looking at the reliabilityof individual items, the internal consistencybetween items expected to measure the sameconstruct, and the discriminant validity betweenconstructs. Individual item reliability was deter-mined by examining the loadings of measures ontheir corresponding constructs. In all cases, onlyindividual factor loadings greater than 0.6 wereretained, with most greater than 0.7, indicatinga high degree of individual item reliability.

Internal consistency was assessed using ameasure suggested by Fornell and Larcker (1981).This measure is similar to Cronbach's alpha as ameasure of internal consistency, and interpre-tation of the values obtained is similar. Followingthe guideline proposed by Nunnally (1978), aninternal consistency value of 0.7 or greater isreasonable for exploratory research. In thecurrent study, the internal consistency values forall six contructs exceeded the 0.7 guideline (seeTable 2), indicating good internal consistency.

The discriminant vahdity of constructs used inthe model also needs to be assessed (Fornell andLarcker, 1981). This can be done in two ways.Table 3 shows the correlation matrix of theconstructs. The diagonal elements in this matrixshow the square root of the average varianceextracted. For adequate discriminant validity,the diagonal elements should be greater than allother entries in the corresponding rows andcolumns, as is the case here. Second, no itemloaded more highly on another construct than itdid on its associated construct. Both of thesecriteria indicate that the discriminant validity ofthe constructs used in the current model is morethan adequate.

Tests of propositions

Results for tests of the propositions are shownin Figure 4. All nine of the relationships examinedwere significant. The model explained 36 percentof the variance in global integration, and 12percent of the variance in business performance.

As predicted, the impacts of economies ofscale (PI), differential comparative advantage


Table 2. Measurement model

Construct Number of items Internal consistency

Economies of scaleDifferences in comparative advantageStandard market demandsCompetitive actionsBusiness unit integrationBusiness unit performance

1.0001.0000.8240.8090.8780.857

Table 3. Discriminant validity

Correlations between constructs

Economies of scaleDifferences in comparative advantageStandard market demandsCompetitive actionsBusiness unit integrationBusiness unit performance

1.0000.2010.0480,0920.4590.219

1.-0.0.0.0.

000197013234003

00

-0-0

.736

.088

.230

.096

000

.824

.098

.1740.0.740271 0.817

Figure 4. Summary of results. Note: all path coefficients are significant at p < 0.001

(P2), and competitive actions (P4) on globalintegration were all statistically significant andpositive. In contrast, the relationship betweenstandardized market demand and global inte-gration was statistically significant and negative,contrary to prediction (P3).

The relationship between the global integrationof business unit activities and performance waspositive and significant. At an aggregate level ofanalysis, this finding supports P5a, while refutingP5b and P5c. On average, then, the businessesincluded in this study tended to be underglobalized.


Significant direct effects on performance wereobtained for economies of scale (P6), comparativeadvantage (P7), and standardized marketdemands (P8), contrary to expectations. Competi-tive actions also had a significant positive impacton performance, as predicted (P9). The directeffects of these constructs on performance arein addition to their indirect effects throughintegration.

Although all four drivers have a significantimpact on integration, the economies of scalefactor is more than twice as important as thenext closest driver, standard market demands(i.e., 0.421/0.194 = 2.2). Furthermore, when thedirect and indirect effects of the structuraland competitive factors on performance arecombined, the economies of scale factor emergesas the single most important. That is, the totaleffect of economies of scale on performance(0.126 + (0.421)(0.202) = 0.211) is greater thaneach of the individual total effects of comparativeadvantage (-0.064), market demands (-0.113),and competitive actions (0.166). These resultsalso suggest that use of the contingency frame-work may ignore strong direct effects of structuraland competitive factors on business performance.In part, this may be a reflection of a time lagbetween the strategic and structural responses ofbusinesses relative to industry changes. Althoughthe implicit assumption of contingency theory isthat such time lags do not occur, the removal ofthis assumption would help explain the directrelationship that was observed between perform-ance and structural and competitive factors.

Additional analysis

The preceding analysis provides significantinsights into the relationships between keystructural determinants, global integration, andbusiness performance, and offers a completetest of the nine propositions advanced earlier.However, as indicated in the introductory sectionsof this paper, distinct differences may existbetween individual industries in the relativeimportance of structural and competitive drivers.Furthermore, the nature of the relationshipbetween global integration and performance mayvary substantially from one industry to another.As argued previously, businesses in one industrymay tend to be underglobalized, while businessesin a second may tend to be overglobalized.

In this section, the relationships between thekey structural determinants, global integration,and performance are examined at an industry-specific level of analysis. This was done intwo stages. First, industry-specific multivariateregression analyses were completed, using aglobal integration index based on the six measure-ment items used previously as the dependentvariable, and indices for the structural andcompetive factors (formed by averaging therelevant items identified earlier in Table 1) asthe independent variables.

In the second stage, a second set of regressionanalyses examined the relationship betweenglobal integration and performance at the indus-try-specific level, using a performance index asthe dependent variable and the global integrationindex as the independent variable. Only 7 of the10 industries surveyed were included in theseanalyses due to sample size problems. The threeexcluded industries had six or fewer observations,precluding meaningful analysis. Given the rela-tively small sample sizes for many of theretained industries, the following results shouldbe interpreted with some degree of caution.

Resuhs for the seven remaining industries areshown in Table 4. Each industry is identified byits four-digit SIC code and by its SIC descriptor.Three industries were found to have a significantrelationship {p < 0.10) between at least one ofthe structural and competitive determinants andglobal integration. Furthermore, for four industries,the relationship between global integration andperformance was significant (p < 0.10) and posi-tive, while for the remaining three industries nosignificant relationship was found. There were noindustries for which the globalintegration-performance relationship was found tobe negative. Thus, four of the industries surveyedhere appear to be underglobalized (P5a), whilethe other three are apparently already at anappropriate level of globalization (P5c).

No significant relationships between the struc-tural and competitive determinants and globalintegration were found for the pesticides andagricuhural chemicals industry (F4 n = 1.47),the mining machinery and equipment industry(̂ 4.11 ^ 0.08), the oil and gas field machineryand equipment industry (F4,i4 = 0.20), or theaircraft engines and parts industry (F4 3 = 5.40).Both economies of scale and competitive actionswere found to have a significant positive impact


Table 4. Industry-specific results

SIC

28793532

35333651

367437243728

Industry Name

Pesticides and agricultural chemicalsMining machinery and equipment, exceptoil and gasOil and gas field machinery and equipmentHousehold audio and video equipment

Semiconductors atid related devicesAircraft engines and partsAircraft parts and auxiliary equipment

N

1616

1912

268

14

Significant

determinants ofintegration

NoneNone

NoneEconomies of scale.Competitive actionsCompetitive actionsNoneDifferential comparativeadvantage

Integration-performanceslope

-t-+

0

00-f-

on global integration in the household audio andvideo equipment industry (̂ 4,7 = 24.50, p <0.001), while competitive actions alone had asignificant positive impact on integration in thesemiconductors and related devices industryF4.21 = 6.00, p < 0.01). Finally, differentialcomparative advantage had a significant andpositive influence on global integration for theaircraft parts and auxiliary equipment industry(F4.g = 5.20, p < 0.05).

The relationship between the extent of globalintegration and performance was significant andpositive for pesticides and agricultural chemicals(̂ 1.14 - 3.98, p < 0.10), mining machinery andequipment (F, 14 = 5.35, p < 0.05), oil and gasfield machinery and equipment (F|j7 = 3.44.p < 0.10), and aircraft parts and auxiliary equip-ment (F|.|2 = 7.11, /7 < 0.025). In all four cases,more globally integrated businesses exhibitedsuperior performance, suggesting that these indus-tries tended to be underglobalized on average.In contrast, the relationship between globalintegration and performance was not significantfor businesses in the household audio and videoindustry (fi.io = 0.19), the semiconductor andrelated devices industry (Fi.u = 2.05), and theaircraft engines and parts industry (Fif, = 0.71),indicating an acceptable level of globalization inthese three cases.

DISCUSSION

Three broad findings emerge from the precedingexamination of the relationships between indus-

try, business strategy and performance. First,business strategy (in the form of decisions relatingto the appropriate level of global integration fora business) is responsive to all of the underlyingstructural pressures for global integration,although the direction of the relationship wasopposite to what was predicted in the case ofstandardized market demands. Second, competi-tive action pressures play a somewhat limited,though significant, role in shaping global inte-gration strategies. Third, there is evidence that,in the aggregate, the industries studied here were'underglobalized,' while at the industry-specificlevel there were examples of both 'underglobali-zed' and 'optimally globalized' industries.

Structural pressures

The global integration of business activities wasshown to be heavily influenced by economies ofscale and differences in comparative advantage, aspredicted. The surprising result was a significantnegative relationship between standardized mar-ket demands and global integration. This suggeststhat the businesses surveyed believed that differ-ences between national markets remain importantdespite the trends towards global integration. Anumber of researchers have put forward argu-ments supporting this position. For example,Douglas and Wind (1987) noted that homogeni-zation of demand is not pervasive, and thatdiscerning customers continue to pay a premiumfor nonstandard products. Similarly. Takeuchiand Porter (1986) proposed that certain valueactivities not be integrated to achieve competitive


advantage. Finally, Morrison et al. (1991) havedocumented the increasing use of regional, ratherthan global, strategies.

With regard to direct influences on perform-ance, there was evidence of significant associ-ations from all three structural drivers: positivein the case of economies of scale, and negativefor the other two. While the magnitudes of thesepaths were relatively small, this finding suggeststhat the contingency framework is only partiallysupported here. The implication is that businessunit performance is impacted directly by thesestructural drivers, regardless of the level of globalintegration. 'Fit' between environmental demandsand business strategy is still important, but notto such a degree that direct relationships betweenindustry factors and performance can be overlook-ed.

In broader terms, it is interesting to note thepredominance of economies of scale as a structuraldriver in this study. In a similar study, Johanssonand Yip (1994) found economies of scale, as partof a larger construct called 'structural drivers,'to be significant, but less so than 'market drivers'such as standardization of demand. Kobrin(1991), however, using an objective measure ofthe minimum efficient scale (MES), found nosignificant relationship between MES and globalintegration (r = 0.178). This discrepancy bearsdiscussion.

Kobrin's discussion (1991: 25) of the lack ofrelationship between MES and transnationalintegration made three main points: (1) the MESmeasure was a crude proxy based on a 'top 50'estimate and aggregated at the three-digit SICcode level; (2) the use of CAD-CAM technologyhad gone some way towards reducing thesuperiority of large manufacturing plants; and(3) clear anecdotal evidence, on an industry-by-industry basis, existed both to support and denythe existence of a relationship between MES andintegration. He concluded that the importanceof MES 'across all global industries may havebeen overstated' (1991: 28).

This study actually complements Kobrin'sanalysis quite effectively. The industry-specificanalysis suggested that economies of scale werea significant driver of global integration in onlythree cases, namely mining machinery andequipment, semiconductors and related devices,and aircraft engines and parts. Building onKobrin's anecdotal evidence, and his observation

that the three-digit SIC code represents a verybroad level of aggregation, the implication isthat detailed industry analysis may be the onlyeffective way of truly understanding the natureof economies of scale. Furthermore, the currentstudy did not distinguish between manufacturingeconomies of scale and other capital-intensivebusiness activities such as research and develop-ment. Kobrin actually found a very strong positiverelationship between technological intensity andtransnational integration, which is wholly consist-ent with the findings of the current study. Insum, while the relationship between economiesof scale and integration was strong, it was notsupported in every industry. Kobrin's assessmentof the declining importance of MES as a driverof transnational integration cannot, therefore, berefuted.

Competitive action

The observed relationship between the competi-tive actions of industry players and the globalintegration strategies of businesses was signifi-cant. This is consistent with much of the literatureon global strategy (Knickerbocker, 1973; Hameland Prahalad, 1985) and with institutionalizationtheory (DiMaggio and Powell, 1983; Scott, 1987),although the magnitude of the relationship wasrelatively small. The issue here may, in fact, beless the phenomenon itself, but more the abilityand/or willingness of managers to recognize it.The motives for competitive actions are oftenambiguous; cross-subsidization, for example, canbe undertaken for a variety of reasons includingthe benign (market entry), the devious (a threatof further action), or the illegal (dumping).Management's acknowledgement of the action islikely to depend more on the motive for, thanthe preponderance of, the action. Furthermore,management's rationalization of their actions ona post hoc basis will frequently obscure theirgenuine motives. Thus, while Knickerbocker's(1973) research, based on objective, industry-level data, yielded strong evidence for thephenomenon of competitive actions, Baden-Fuller and Stopford (1991: 504) effectively foundno such evidence. Results from the current studyfall between these two extremes. It is certainlypossible that imitative behavior is less commonnow than it was in the late 1960s, but it wouldtake an objective study akin to Knickerbocker's


study to verify this assertion. A separate,intriguing possibility is that imitative behavior isstill a powerful force, but that U.S. businessesare fixating on overseas competitors not includedin this study.

The existence of a positive relationship betweencompetitive actions and performance was aspredicted. The finding suggests that high levelsof global competition—with or without businessintegration—are sufficient to induce superiorperformance. As discussed earlier, this is probablya facet of the broader relationship previouslyfound between level of internationalization andperformance (e.g., Geringer e/a/., 1989). Further-more, because the current study's findings arebased on management perceptions, it is possibleto speculate that those businesses that haverecognized the intensity and importance of globalcompetitors are also the ones exhibiting superiorperformance, while the poorer performers arethose that have failed to acknowledge the newrealities of global competition.

Global integration-performance

The positive relationship between the globalintegration of business activities and performancesupported the proposition that the majorityof industries are 'underglobalized' through theobservation that the stronger performers are alsothose with more globally integrated strategies. Atthe industry level the proposition was confirmed,with the additional finding that four industriesare 'underglobalized' and three are at an optimallevel of global integration. While this interpre-tation was supported by the data, additionalinformation is required to more fully understandthe details of this relationship. It may be, forexample, that groupings exist, such that the'global' players outperform the 'regional' players,who outperform the 'national' players. This is afruitful line of inquiry, building on a longtradition of research into strategic groups, but itwould be unwise to attempt to infer suehgroupings from the data collected in this study.As noted earlier, meaningful strategic groupsresearch relies on careful industry analysis toensure that groups are constructed along therelevant dimensions, and this was precluded bythe current data.

The broad conclusion that industries areeither underglobalized or optimally globalized is

consistent with the anecdotal evidence of severalresearchers including Hout et al. (1982), Porter(1986), and Yip (1992). However, the findingthat underglobalized industries exist, and evenappear to persist, raises an important question:why do managers in such industries fail torecognize the latent profit potential of integrationand therefore adopt a more globally integratedstrategy? The answer, in part, has to do withthe norms and rules of competitive behavior thatmake managers myopic to paradigm-breakingstrategic moves (Astley and Fombrun, 1983;DiMaggio and Powell 1983; Meyer and Rowan,1977). The presence of groups within the industrycould also be a factor. For example, the capitalinvestment required to move from being aregional to a global player in an underglobalizedindustry may be prohibitively high, and thusconstitute a mobility barrier. In such cases, thehigh-performing global players as well as thelower-performing regional players would beaware of the discrepancy in performance, butthe performance gap would likely persist.

The present study has a number of limitations.The sampling frame included manufacturingbusinesses in industries with high levels ofinternational intraindustry trade. Further researchshould be undertaken to extend this frame tobusinesses from multiple countries, nonmanufac-turing industries, and industries with diverselevels of intraindustry trade. Another concern isthat the 'competitive action' construct isinherently difficult to measure. One possibilitywould be to revert to Knickerbocker's measuresbut this would require detailed time-series dataat the business-unit level. Another possibilitywould be a more focused questionnaire whichhones in on issues such as cross-subsidization. Athird limitation relates to the global integrationconstruct. Bartlett and Ghoshal (1989), amongothers, have suggested that integration is a fine-grained construct that varies according to thenature of the resource flow (product, capital,technology, people). This proposition wasrecently assessed by Rosenzweig (1993), whodemonstrated significant but weak correlationsbetween integration of different types of resourceflows. He concluded that there were limitationsassociated with the use of a single measure(typically physical product flows) of integration.The current study used a reliable six-itemscale reflecting a broader conceptualization of


integration than simply physical product flows.However, our view here of integration as aunidimensional construct is probably constrain-ing, and future research should address thislimitation.

Despite these concerns, the study adds con-siderably to our understanding of global compe-tition. The study uses multiple respondents from10 industries to investigate the impact whichstructural imperatives and competitive actionshave on global integration strategies and perform-ance. While some concerns need to be expressedover the use of a U.S. sample to draw globalconclusions, the results offer tentative findingsregarding the level of globalization in eachof seven industries. It is interesting that no'overglobalized' industries were found: thisbroadly concurs with Yip's findings (1992), butruns counter to one of the original assertions ofthe paper, namely that certain industries (e.g.,tires and white goods) may have become 'overglo-balized'.

ACKNOWLEDGEMENTS

The authors would like to thank Kendall Roth,George Yip, and three anonymous reviewers forthis journal for their helpful comments on earlierversions of this article.

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