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When You Shouldn't Go Global

The Idea in Brief


Globalization promises substantial advantages like new growth and scale. For some companies, it's paid off handsomely. But global mania has also blinded many firms to a hard truth: global strategies are devilishly tough to execute.

The landscape has become littered with some of these unfortunates' remains. DaimlerChrysler and ABN Amro--dismembered and bought up by activist shareowners--are particularly painful examples.

To escape this fate, don't assume you should go global, say Alexander and Korine. Instead, determine whether a global move makes sense for your firm. Ask:

  • Could the move generate substantial benefits?
  • Do we have the capabilities (for example, experience in postmerger integration) required to realize those benefits?
  • Will the benefits outweigh the costs (such as the complexity that comes with coordinating far-flung international operations)?

A yes to these questions suggests globalizing may be right for you.


The Idea in Practice

    Three Questions to Ask Before Going Global


  • Could the strategy generate substantial benefits for our firm? The global race can lead you to overestimate the size of the prize.


    Redland, a U.K. manufacturer of concrete roof tiles, expanded around the world to leverage its technical know-how beyond its home market. But it often sought opportunities in countries (such as Japan) where local building practices provided little demand for concrete roof tiles. Thus, there was no value in transferring its technology to such markets.


  • Do we have the capabilities needed to achieve those benefits? Companies often lack the skills needed to unlock the coffer holding the prize.


    Taiwanese consumer electronics company BenQ's acquisition of Siemens's mobile-devices business failed because BenQ lacked integration skills. It couldn't reconcile the two companies' incompatible cultures or integrate R&D activities across the two entities. BenQ's German unit filed for bankruptcy in 2006.


  • Will the benefits outweigh the costs? The full costs of going global can dwarf even a sizable prize.


    TCL, a Chinese maker of TVs and mobile phones, has expanded rapidly into the United States and Europe through acquisitions and joint ventures. It now has numerous R&D headquarters, R&D centers, manufacturing bases, and sales organizations. The cost of managing this complex infrastructure has outweighed the benefits of increased scale--creating large losses for TCL and several of its joint-venture partners.

    Three Industries with Particular Globalization Challenges


  • Deregulated industries. Formerly state-owned industries (telecommunications, utilities) have globalized after deregulation to spur growth and escape stiffened competition at home. They assume they can use their existing competencies in new markets to achieve cross-border economies. But it's been difficult, for example, for utilities to optimize electricity flows over uncoordinated grids.

  • Service industries. Many service businesses (retailing, insurance) go global to generate growth beyond home markets threatened by foreign rivals. Their strategies hinge on coordination of people or processes--no easy feat. Wal-Mart, for instance, has struggled to get its partner firms and employees abroad to adopt its work methods.

  • Manufacturing industries. For automobile and communications equipment makers, for example, global mergers and partnerships seem to offer the size needed to compete against consolidating rivals. But the complexities of integration can cause delays in achieving those gains. These companies thus have become vulnerable to economic slowdowns, which constrain their ability to pay for expansion and consolidation.



Further Reading


Articles


Managing Differences: The Central Challenge of Global Strategy


Harvard Business Review

March 2007

by Pankaj Ghemawat


The main goal of any international strategy should be to manage the large differences that arise at the borders of markets. Yet executives often fail to exploit market and production discrepancies, focusing instead on the tensions between standardization and localization. In this article, Ghemawat presents a new framework that encompasses all three effective responses to the challenges of globalization. He calls it the AAA Triangle, with the As standing for the three distinct types of international strategy. Through adaptation, companies seek to boost revenues and market share by maximizing their local relevance. Through aggregation, they attempt to deliver economies of scale by creating regional, or sometimes global, operations. And through arbitrage, they exploit disparities between national or regional markets, often by locating different parts of the supply chain in different places--for instance, call centers in India, factories in China, and retail shops in Western Europe. Ghemawat draws on several examples that illustrate how organizations use and balance these strategies and describes the trade-offs they make as they do so when trying to build competitive advantage.

Emerging Giants: Building World-Class Companies in Developing Countries


Harvard Business Review

October 2006

by Tarun Khanna and Krishna G. Palepu


As established multinational corporations stormed into emerging markets, many local companies lost market share or sold off businesses--but some fought back. India's Mahindra & Mahindra, China's Haier Group, and many other corporations in developing countries have held their own against the onslaught, restructured their businesses, exploited new opportunities, and built world-class companies that are today giving their global rivals a run for their money. In this article, the authors describe three strategies these businesses used to become effective global competitors despite facing financial and bureaucratic disadvantages in their home markets. Some capitalized on their knowledge of local product markets. Some have exploited their knowledge of local talent and capital markets, thereby serving customers both at home and abroad in a cost-effective manner. And some emerging giants have exploited institutional voids to create profitable businesses. China's Emerge Logistics, for instance, helps foreign companies navigate the country's disjointed transportation system and baffling bureaucracy, guiding them all the way from ports to retail outlets.

Getting Offshoring Right


Harvard Business Review

December 2005

by Ravi Aron and Jitendra V. Singh


Recently a rising number of companies in North America and Europe have experimented with offshoring and outsourcing business processes, hoping to reduce costs and gain strategic advantage. But many businesses have had mixed results. According to several studies, half the organizations that have shifted processes offshore have failed to generate the expected financial benefits. What's more, many of them have faced employee resistance and consumer dissatisfaction. A three-part methodology can help companies reformulate their offshoring strategies. First, prioritize company processes according to two criteria: the value these processes create for customers and the degree to which the company can capture some of that value. Then keep highest-priority processes in-house and consider outsourcing low-priority) processes. Second, analyze the risks that accompany offshoring. Finally, determine possible locations for offshore efforts, as well as the organizational forms--such as captive centers and joint ventures--that those efforts might take.



Copyright (c) 2008 Harvard Business School Publishing Corporation. All rights reserved.

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