Compulsions for Cost Reduction and Responsiveness
Companies that compete globally generally face two types of competitive pressures: pressures for cost reductions and pressures to be locally responsive. International companies must cope with pressures for cost reductions. This is more so for industries producing commodity-type products such as bulk chemicals, petroleum, steel, sugar, etc. for which price is the main competitive weapon. Pressures for cost reductions are also severe in industries in which the competitors are based in low-cost locations.
Liberalisation of the world trade environment is also expected to generally increase cost pressures because of greater international competition. Countering pressures for cost reductions requires that a company minimise its unit costs. To attain this goal, a company may have to base its value creating activities at the most favourable low-cost location anywhere in the world and offer a standardised product globally in order to ride down the experience curve as quickly as possible.
In contrast, responding to pressures to be locally responsive requires that a company differentiate its product offering and marketing strategy from country to country in an effort to cater to the different consumers’ tastes and preferences, business practices, distribution channels, competitive conditions, and governmental policies. Since differentiation across countries can involve significant duplication and a lack of product standardisation, it may raise costs. Dealing with these conflicting and contradictory pressures is a difficult challenge for a company, mainly because being locally responsive tends to raise costs.