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Industry economics matter.
So how they matter is that there are three questions to ask about every industry.
How large are the economies of global scale?
In some industries like semi-conductors,
in pharmaceuticals, and tires,
they can be very large.
Others such as hair cutting, hospitals,
supermarkets, they can be almost non-existent.
Second, how large are the economies of global scope?
By global scope, what I mean is that where the customer says,
"Even if we'd love your product or service,
we want you to be global otherwise we are reluctant to do business with you."
So therefore, this is the customer driven economies of global scope.
Now these economies, for instance,
in enterprise software, those economies are very high.
In certain other industries for example,
look at Walmart, you or I if you live in the United States, yeah,
you may like Walmart, you may shop there,
but you don't really care if Walmart also competes in China or Japan or in the UK.
It's irrelevant but on the other hand,
if you're Procter & Gamble and you're buying software from Oracle,
you do care whether Oracle is a global company or not.
Third, economies of global delivery,
which is how much does it cost as the ratio of the total cost to produce
the product or service in one corner of
the world and have it delivered to another corner of the world.
Think about semi-conductor chips.
The cost of transportation is almost nothing as compared to the cost of the chip itself.
On the other hand, think about a product like toothpaste or Coca Cola bottles.
The cost of delivery would just become
nightmarishly high as compared to the cost of production.
So in some industries,
economies of global delivery can be very high,
in other industries very low.
So if put it together that there are some industries where
essentially these three types of global economies can be high,
high, high and those industries I call "globally integrated industries".
In certain other industries,
these economies are essentially low to
non-existent and then we would call them "multi-domestic industries".
Now examples: take hospitals.
Every country in the world has a hospital industry,
at least one hospital,
even in the tiniest country.
So which means that the hospital industry is worldwide.
But how many multinational hospital chains do you know?
The answer may be almost none.
Which means that the worldwide hospital industry actually is nothing
but an aggregation of domestic hospital industries,
and that's why we call these multi-domestic industries.
At the other end, look at semi-conductors,
and pharmaceuticals and tires.
You go to any country in the world and say,
"Which are the big semi-conductor companies that compete that occupy the market share?"
And it will probably be the same answer, you know,
the Intel and Texas Instruments and Qualcomm and so on.
So what we have here is that the world almost is like one village.
So this becomes strategically important
because it's in globally integrated industries that we're
likely to see an early and more rapid emergence
of global champions in multi-domestic industries.
Yes, globalization is entirely possible, for example, Walmart,
but at the same time it will be relatively a slower pace of
globalization and also the type of strategies that companies need to
put in place in order to globalize will be very different for
globally integrated industries vis-a-vis multi- domestic industries.
