Economic globalization is viewed by some as the best hope for world stability, by others as the greatest threat. But almost everyone accepts that businesses of all types must embrace it. With this sense of inevitability, it’s easy to forget the serious mistakes some companies have made because of their global strategies.
No one would deny that the business benefits of becoming a global player can be tremendous, but many companies seem to share unquestioned assumptions about the need to go global and are lulled by apparent safety in numbers as they move toward potential disaster. We highlight several industries where this mindset has been prevalent and a number of companies that have paid a high price for adopting it.
AVOIDING ILL-FATED STRATEGIES
From the late 1990s onward, with a brief pause during the 2001-2003 bear market, we have witnessed a head-over-heels rush by companies to globalize as the pursuit of customers in emerging economies grows ever more heated. Although such moves have benefited — or at least not irreparably damaged — many companies, we’re beginning to see fallout. We think that many failures could have been prevented — and would be avoided in the future — if companies seriously addressed three seemingly simple questions.
1. ARE THERE POTENTIAL BENEFITS FOR OUR COMPANY?
The race to globalize sometimes leads people to overestimate the size of the prize. U.K.-based roof tile maker Redland, for example, expanded aggressively around the world beginning in the 1970s with the aim of leveraging its technical know-how beyond its home market. The problem: It often sought opportunities in countries, such as the United States and Japan, where local building practices provided very little demand for concrete roof tiles. Although the company was fully able to transfer the relevant technology, there was no value in doing so in such markets.
2. DO WE HAVE THE NECESSARY MANAGEMENT SKILLS?
The theoretical advantages of globalizing — economies of scale, for example — are devilishly difficult to achieve in practice, and companies often lack the management key needed to unlock the coffer holding the prize. By the late 1990s, industrial conglomerate BTR had developed a presence in many countries. However, each business unit was run as a largely autonomous entity, with little encouragement to work with others. As BTR’s customers globalized, they came to expect coordinated supply and support across borders– and the company found it impossible to implement an approach so alien to its traditions. The 1999 merger with Siebe was seen by many analysts as an admission that BTR simply could not make the changes needed.
3. WILL THE COSTS OUTWEIGH THE BENEFITS?
The full costs of going global may dwarf even a sizable prize — for example, when an effort to harmonize the practices of national business units drives away customers or distracts national management teams from the needs of their markets. The increased complexity of managing international operations is also a threat: TCL, a Chinese maker of electronics and home appliances, has expanded rapidly into the United States and Europe through a series of acquisitions and joint ventures. As a result of these deals, TCL has found itself with four R&D headquarters, 18 R&D centers, 20 manufacturing bases and sales organizations in 45 countries. The cost of managing this infrastructure has outweighed the benefits of increased scale.
GLOBALIZATION’S SIREN SONG
Complacent assumptions about the virtues of going global are reinforced by seductive messages from, among other places, the stock market. Recently the call has been particularly insidious in certain industry contexts, three of which we describe here.
DEREGULATED INDUSTRIES. Many businesses in formerly state-owned industries, such as telecommunications and utilities, have responded to deregulation with aggressive global moves, reasoning that geographic expansion is the best way to exercise their new strategic freedom. This apparently sound logic has turned out in many cases to be just plain flimsy. Companies frequently pay far too much to enter foreign markets. Furthermore, many of the deregulated industries are “glocal”– that is, customer expectations, operating environments and management practices for what seem to be globally standard services can vary greatly depending on location.
Faced with such challenges, a number of companies have struggled with or reversed their global moves: Kelda, a U.K. water utility, sold its U.S. business six years after acquiring it because differences in pricing, environmental regulations and distribution proved so great that the business could be run only on a stand-alone basis.
SERVICE INDUSTRIES. Companies in traditionally national and fragmented service industries, such as retailing, consumer banking and insurance, have viewed globalization as a way to realize scale economies and to generate growth beyond home markets themselves facing an incursion of foreign competition. As in deregulated industries, however, the “global” customer may be more national than anticipated. And obtaining scale economies across borders requires management skills and experience that many companies lack.
Wal-Mart, for instance, has struggled to get its partner firms and employees abroad to adopt its work routines. The outcomes of some other service companies’ global strategies have fallen short of expectations. Starbucks has pursued international growth at a breakneck pace, even though margins abroad have been only about half those of the company’s U.S. operations. Although the globalization strategy hasn’t destroyed value, it also hasn’t added much.
MANUFACTURING INDUSTRIES. Over the past decade, companies in manufacturing industries, such as automobiles and communications equipment, have viewed rapid cross-border consolidation as the only way for companies to obtain the size needed to compete against consolidating rivals, to reduce their reliance on home markets and to gain manufacturing economies of scale. These benefits, however, are often outweighed by operational and organizational challenges.
The merger of Daimler-Benz and Chrysler is a poster child for this problem: The German and U.S. automakers were different in almost every respect, from company cultures to purchasing practices, and they were never able to attain such benefits as the promised billions of dollars in savings from common supply management. The strategic logic for globalization was tenuous, and the skills needed to implement the strategy effectively were in short supply.
A CONTINUING DANGER
We aren’t saying that all globalization strategies are flawed. But the conventional wisdom – that a globalization strategy is a blanket requirement for doing business – leads many companies to insufficiently scrutinize their proposed global initiatives. We expect this trend to continue, as firms in various industries recklessly pursue global strategies.