Globalize? Profits or Peril?

By Jon Huggett, Vice-President Bain & Company

Published in The Globe and Mail, Toronto on May 23, 1999

Globalization is often thought to be the panacea for maintaining competitive advantage over “old-style” multinationals with their national fiefdoms of decision making. Yet jumping on the bandwagon of centralized decision making in worldwide operations can be ruinous for a company where conditions are not right. Amidst all the hype, how does the CEO know when to make this decision?

The promise of improved profitability — from increased revenues, reduced costs, or improved asset utilization — is naturally a strong factor behind the decision to globalize. The unwavering and absolute commitment of the CEO to the process of globalization, however, is an equally essential component to the puzzle.

The Promise of Profit

Many companies can increase revenues by developing higher margin products, expanding into more markets, and by extending existing product lives by bringing them in developing countries. Costs can be reduced through global purchasing power, and assets can often be better utilized when deployed on a global basis.

Examples of successful globalizations abound. CEO Percy Barnevik made it central in his successful bid to build shareholder value at ABB of Sweden, by ensuring that the resources of the entire company would be at the disposal of every customer around the world. Goldman Sachs increased its value through globalization by mirroring their customers, who themselves were going global.

Potential for Peril

Capturing the promised profit can be hard, because it is offset by the costs of globalization. Indeed, every opportunity for increased globalization carries a danger of reduced profit. Customer focus may blur, with products appealing to the lowest common denominator, alienating key customer segments and causing market share to fall. Globalization gone wrong can make innovation slow, and price umbrellas crumble. Global companies typically require more administration than the simple multinationals since cross-country teams and responsibilities absorb time and overhead. There are frequently large capital investments such as IT systems.

In the search for global competitive advantage, a worldwide brand name or information system may be essential. These decisions will cause problems somewhere. It’s difficult to invent a brand name that sounds exciting in many languages and is offensive in none. The right decision for three-quarters of the world may not be the best for the other quarter. The classic branding blunder was Chevrolet’s Nova, which means “no go” in Spanish. GM successfully sold the Chevy Nova in North America and the Vauxhall Nova in the UK; but further south “no va” means “does not go” in Spanish.

Globalization, Tailor Made

Globalization need not be an “all or nothing” proposition. In fact, globalization strategies must be tailor-made to get the best bang for the buck. The appropriate degree of globalization depends on the types of products, customers, suppliers and partners that you have.

For Coca-Cola, the optimal strategy was partial globalization. Their marketing reach is global, yet distribution remains locally run. Coca-Cola’s branding is consistent across different countries, cultures and languages. Local managers do not have the freedom to sell Coke in green cans. Yet bottlers have considerable local autonomy, in terms of scheduling, purchasing, and other management decisions.

Wal-Mart is taking a global approach to rolling out its winning format around the world, encouraged by the coming eurodollar and a borderless, unified market in Europe which makes for homogenized consumers and simpler purchasing and distribution.

In contrast, Lloyds Bank, has dismantled an impressive global network, in effect “de-globalizing”, in order to focus on its home market. It applied world-class knowledge to its British operations and increased shareholder value.

How to Decide

Increasing shareholder value is not predicated on globalization, but on sound strategy. Don’t be bulldozed into making huge organizational changes because they are trendy, or because the competition is doing it. Only if you are convinced that the benefits to your business will outweigh the costs, should you follow the trend of globalization, provided that you examine the questions in step two before jumping in.

Step One: Find out if the benefits truly outweigh the costs:

• Will product lines improve due to broader learning, or will they tend towards the lowest common denominator losing key customer segments and market share?
• Will revenue be increased from additional markets and longer product life in developing markets or will innovation be slowed and price umbrellas killed?
• Can cost reductions from global purchasing power offset the increased costs of running a complex organization?
• Are assets better utilized through globalized production and economies of scale, or will new equipment requirements like large IT systems sap these efficiencies?
• Will a global mindset stimulate innovation, or will complexity drive up bureaucracy?
• What parts of the company are best suited to globalization?
• How will this impact my customer and supplier relationships?

Step Two: Organizational resistance; Are you ready?
The best executives in a worldwide firm are often country managers. But, globalization shrinks their power. Some rise to new heights with the organization by taking extra global responsibilities. Some leave. Many fight globalization making it tough for the CEO. Sometimes they win and the CEO loses.

To globalize successfully, it must be the CEO’s key agenda item. A half-hearted globalization will create havoc in the organization and little or no value. Successful globalization requires CEOs to be dedicated, often brutal, and almost never politically correct.

Among the questions to be answered:

• What are the opportunity costs of making globalization my number one priority?
• Should the focus be on something else, such as further penetration of existing markets? (i.e.: Am I sure this is the most important thing I can be doing for my company?)
• What will I do when good people threaten to quit?
• Am I committed to following through despite the inevitable resistance?

In addition to the pressure that comes with increased responsibilities and political infighting, CEO’s can expect relentless travel schedules. Underestimating the dedication required to globalize successfully can be dangerous.

Conclusion: Focus, not Fashion

If your competition is globalizing, don’t let that bother you, they may be wrong. You may be better off where you are. After all, being unfashionable could be more profitable.

There are many ways to create shareholder value, and globalization can be a powerful approach — but only when it makes strategic sense. Globalize if you’re excited by the benefits, confident these will outperform the pursuit of alternative corporate priorities, and then — only then, if you have the stomach to lead radical change.