Globalization: Profit or Peril?

Globalization is often heralded as the panacea for gaining competitive advantage over old-style multinationals.

Traditional multinationals operate as national fiefdoms of decision-making; globalization means centralized decision-making of worldwide operations.

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But jumping on this bandwagon can be ruinous if conditions are not right. How does the chief executive officer know when to make the globalization decision?

The promise of improved profitability — from increased revenue, reduced costs or improved asset utilization — is a strong factor. But the unwavering and absolute commitment of the CEO is essential to reap the benefits.

The promise of profit. Many companies can increase revenue by developing higher-margin products, expanding into more markets and by extending the lives of existing products by bringing them into developing countries. Costs can be reduced through global purchasing power, and assets often better used.

Examples abound. Percy Barnevik made it central in his successful bid to build shareholder value at ABB Asea Brown Boveri, by ensuring that the resources of the entire company would be at the disposal of every customer around the world.

But capturing profit can be hard, because it is often offset by the costs of globalization. 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 down, and cause price competition to sharpen.

Global companies typically require more administration than the simple multinationals, since cross-country teams and responsibilities absorb time and overhead. There are frequently large information technology investments.

In the search for global competitive advantage, a worldwide brand name or information system may be essential. It's difficult to invent a brand name that sounds exciting in many languages and is offensive in none. General Motors successfully sold the Chevy Nova in North America and the Vauxhall Nova in Britain — but farther south, no va means "does not go" in Spanish.

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

For Coca-Cola, the beststrategy was partial globalization. Its marketing reach is global, yet distribution remains locally run. Coca-Cola's branding is consistent across countries, cultures and languages. Local managers do not have the freedom to sell Coke in green cans. Yet bottlers have considerable local autonomy in 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 borderless, unified market in Europe which makes for homogenized consumers, and simpler purchasing and distribution.

In contrast, Britain's Lloyds Bank PLC has dismantled an impressive global network, in effect "deglobalizing" to focus on its home market. It applied world-class knowledge to its British operations and increased shareholder value.

How to decide. Increased 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 persuaded that the benefits outweigh the costs should you follow the trend.

So, a cost-benefit analysis is in order. Ask yourself:

— Will product lines improve because of broader learning, or will they tend toward the lowest common denominator, losing key customer segments and market share?

— Will revenue increase through additional markets and longer product life in developing markets?

— Can cost reductions from global purchasing power offset the increased costs of running a complex organization?

— Are assets better used through globalized production and economies of scale, or will new equipment requirements such as 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?

— And how will this affect customer and supplier relationships?

Once that's complete, organizational resistance must be dealt with. The best executives in a worldwide firm are often country managers, but globalization shrinks their power. Some rise to new heights within 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.

If globalization is to be successful, it must be at the top of the CEO's agenda. A half-hearted attempt at globalization will create havoc in the organization and will give 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? (That is, am I sure this is the most important thing I can be doing?); What will I do when good people threaten to quit?; and am I committed to following through despite the inevitable resistance?

In addition to increased responsibilities and political infighting, CEOs can expect relentless travel schedules. Underestimating the dedication required to globalize successfully can be dangerous.

Think focus, not fashion. If your competitors are 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.

Jon Huggett is vice-president of Toronto-based Bain & Co. Canada Inc., a global strategy consulting firm.

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