Geographic cure or curse?

By virtually every measure - growth in international trade, foreign direct investment or cross-border flows of technology - globalization is becoming increasingly pervasive. Many of the barriers that kept the industries and economies of different countries relatively isolated from one another are either declining or vanishing. Witness, for example:

Worldwide ideological shifts from state-controlled economies to market-driven economies (look at China, India, and Russia)

Emergence of regional free-trade zones (such as the EU, ASEAN, NAFTA, and Mercosur)

Creation of the World Trade Organization and its acceptance by virtually every major country

Globalization of currencies (for example, the emergence of the euro)

Globalization of media (such as CNN, BBC, Yahoo, Time, Newsweek, Financial Times)

Revolutionary changes in the cost and effectiveness of international communications and transportation technologies

Given these trends, it is not surprising that globalization is no longer confined to enterprises in industries such as electronics, pharmaceuticals, automobiles, or branded consumer goods. In the last decade, a global footprint has become reality even for companies in historically local businesses such as the neighborhood caf (look at Starbucks), supermarkets (look at Carrefour), and cement (look at Cemex). For most mid- to large-sized companies in almost any industry, globalization is beginning to appear a strategic imperative rather than a discretionary option.

Nevertheless, it can be perilous for managers to overlook the fact that globalization is a double-edged sword. Although a global or globalizing enterprise can reap many benefits from the vast potential of a larger market arena, scale and location-based cost efficiencies, and exposure to new product and process ideas, globalization also exposes the firm to numerous strategic and organizational challenges emanating from a dramatic increase in diversity, complexity, uncertainty and the fixed cost of doing business. How managers address these challenges determines whether globalization yields a competitive advantage or disadvantage.

In this, the first of a series of articles for China Business Weekly, we summarize the most common mistakes that companies make in the quest to spread their wings over the global landscape. The other articles will examine what companies can and should do if they want globalization to result in success rather than disaster.

Mistake No 1: Viewing globalization as an escape from domestic weakness

Global expansion almost always requires upfront investment of capital and the leveraging of technological, cost or other strengths from the home base to foreign markets. Domestic strength gives the company these resources and enables it to ride out the rough learning curve that it is likely to encounter during the early years in foreign markets. However, domestic weakness not only deprives the company of any financial, managerial and organizational slack, it also adds unneeded complexity and distraction at a time when the focus should be on fixing the home market problems. The typical outcome is that escapism often ends up looking like jumping from the frying pan into the fire.

Gateway, the United States-based computer company, provides a good example of such a mistake. Similar to Dell Computer, Gateway had historically followed a direct sales and distribution model whereby customers configure and order their machines over the telephone or the Internet. However, a persistent problem for Gateway has been that they are smaller and operationally less savvy than Dell. Given this competitive scenario, Gateway never became more than an also-ran and has had financial difficulties on a periodic basis. Global expansion proved to be an utter failure for Gateway and, by 2001, the company had announced a complete shutdown of virtually all operations outside the US. In recent months, Gateway was acquired by Taiwan-headquartered Acer.

Mistake No 2: Overlooking or becoming a prisoner of cross-border diversity

Notwithstanding the homogenizing influences of global media, narrowing income gaps across many countries, and widespread fluency in the English language, diversity along multiple dimensions (consumer behavior and buying power, distribution systems, national cultures, language, regulatory regimes, cost structures, and resource availability) is likely to remain an enduring feature of humanity for a very long time. Ignoring it or assuming that it does not matter can be ruinous to corporate health.

China's TCL learned this lesson the hard way. When it acquired the French company Thomson's television and DVD player business in 2003, it was one of China's trailblazing globalizers.

However, given its lack of experience at cross-border acquisitions, TCL was unable to integrate the acquired businesses successfully into its operations. The results have been very painful for TCL as well as Thomson.

It is important to remember that, while sensitivity to cross-border diversity is crucial, it can be equally hazardous to become a prisoner of diversity. Smart globalization requires that managers undertake a fine-grained analysis of diversity in order to make more discriminating decisions: Which elements of diversity are market or operational imperatives and thus necessitate adapting what the company sells and how it operates in a country? Which elements of diversity can be leveraged globally? Which must be treated as fundamental barriers to conducting business within the particular country? And, which are unimportant or likely to be short-lived?

Haier Group has become a master at managing cross-border diversity. Even though the national cultures, industry structures and distribution systems for appliances are quite different in countries as diverse as China, the United States, Germany, and India, Haier has been a growing success in all of these markets.

Mistake No 3: Getting caught up with simplistic notions such as multinational vs transnational

Some of the popular literature on global strategy suggests that globalizing companies should pick a clear strategy to define who they are and what they want to become: multinational vs international vs transnational, etc. Based on our research and consulting work with hundreds of companies, we find this advice at best simplistic and at worst misleading. Every company - be it Intel, Coca-Cola, or Huawei - consists of multiple activities in the value chain: research, product development, sourcing, production, distribution, marketing, selling, after sales service, financing, cash management, etc. No matter the industry or company, some activities need to be centralized globally, some need to be globally coordinated but operationally decentralized, while others need to be decentralized and best left uncoordinated.

Consider, for example, Coca-Cola. It is clear that managing the Coca-Cola brand is an activity that Coca-Cola must carry out on a pretty centralized basis. Yet, decisions such as what portfolio of beverages it must introduce in a market or how it should manage relationships with retailers have to be decentralized to local management. In essence, some activities within Coca-Cola are best managed on a globally centralized basis, others on a coordinated transnational basis, and yet others on a decentralized multinational basis. Coca-Cola is not any one of these. It is all of these. To sum up, simplistic classifications may be good for cocktail conversations. However, they can be very costly when used for decision-making in the boardroom.

Anil K. Gupta is the Ralph J. Tyser Professor of Strategy at the Smith School of Business, The University of Maryland at College Park.

Haiyan Wang is Managing Partner of China India Institute, a research and consulting organization.

They are the co-authors of The Quest for Global Dominance, Jossey-Bass/Wiley, March 2008. They can be reached via agupta@rhsmith.umd.edu and hwang@chinaindiainstitute.com.

(China Daily 01/14/2008 page6)