The world may beckon but few reap the rewards of profitable overseas growth. JAMES ROOT and CHARLES ORMISTON look at the key factors in some success stories

COMPANIES have invested billions to expand abroad in recent years, yet only rarely have those investments delivered profitable growth. Most firms that went global in the 1990s failed to prosper.

When we analysed the performance of 729 publicly traded companies from seven developed economies for the years 1996 through 2000, we found that only one in six had achieved sustained, profitable international growth. The percentage of foreign revenue for the group as a whole had barely changed over the five-year period, creeping from 33 per cent of total revenue on average to 35 per cent. In addition, the operating margin attained by companies outside their home countries was often below—and almost never above—the margins earned at home.

Why did going global pay off for so few companies? And what did the winners do differently? To find out, we looked more closely at the success stories among the 729 firms. We defined those as the ones that, on average, grew total revenue, international revenue, total operating income, and international operating income by more than 8 per cent annually—a good approximation of GDP plus inflation for the seven countries during the five-year period.

The 124 companies that met those criteria had delivered extraordinary financial results—proving that executed right, international moves bring attractive rewards. Their foreign revenues had grown by an average of 33 per cent over the five years, more than three times the average rate of all the firms.

The winners' total revenues had grown by 22 per cent on average, compared with 7 per cent for the rest of the sample, and their operating margins were 14 per cent, compared with 8 per cent for the others. The winners' share prices had appreciated 1.7 times faster than the major stock indices in the US, UK and Japan as well.

The power of a strong core

What distinguished the global leaders from the majority? Our research shows that industry, country and size are not good predictors of successful international growth. Neither is scale of operations overseas. Far and away the best predictor of success is starting with a strong core business in the domestic market. More than 90 per cent of profitable foreign growth companies branched out internationally from a solid core business at home.

Building a strong core requires that a management team have a rigorous understanding of how money is made in their industry, recognising clearly which customers, costs and geographies are part of the core, and which are not. Looking through the lens of cost structures and customer profiles for their industry, they can see global expansion either as an essential extension, or as an option to be evaluated alongside other opportunities.

In some industries, firms must be international to achieve market leadership. Computer makers Dell and Hewlett-Packard have cost structures that improve with increased scale as they go global. Pharmaceutical companies like Pfizer or software companies like Oracle must sell globally to amortise enormous product development costs. Investment banks expand overseas because their clients operate in all major world financial markets.

The profit economics of these industries are global: in some cases, their customers respond to a single, global value proposition; in others, the companies can capture benefits of world-scale facilities. Still, in other industries, like food retailing or mobile phone service, winning is the result of building market power at the national or regional level, not globally.

Growth from repeatability: For companies in 'naturally global' industries, however, the world is one big market. In industrial raw food ingredients, for instance, the customers not only have comparable needs—these products are all commodities—but are multinational themselves.

Singapore-based Olam International grew from a start-up distributing one product in one country to a US$1.9 billion multinational business in 13 years. Olam was launched in 1989 as an intermediary between Nigerian producers of cashews and big food processors like Mars and Planters. Those customers had previously been dealing with poorly capitalised local food exporters, who sold forward contracts and simply defaulted if prices turned unfavourable.

But Olam created its own vehicles for hedging commodity prices and foreign currency risks in currencies where there were no forward-exchange markets, offering customers a more secure proposition. The company also insisted that executives spend considerable time living in the supply areas, learning how to bring commodity products out of unruly developing markets. Customers, recognising Olam's expertise in such markets, began asking Olam to handle producers in other countries, and then, other commodities.

Over the years Olam added shea nuts, cocoa, rice, sugar, and sesame seeds, as well as coffee and timber to its portfolio, systematically repeating its business formula as it moved into new products and new markets one by one. Today Olam operates in 35 countries, in nine major agricultural products, and is a global leader of raw materials to packaged food multinationals such as Nestle, Sara Lee and General Foods.

Redefining the core

Hong Kong based Li & Fung took a similar tack to expanding globally. One of the earliest Chinese-financed trading companies to export from China, Li & Fung recognised that trading finished goods alone was not a sustainable business. Yet the company understood that its knowledge of Asian manufacturing was an enormous core strength.

Realising how many international garment and textile manufacturers, who did not want to own manufacturing facilities, were struggling with the ever-shifting Asian manufacturing landscape, Li & Fung saw an opportunity and seized it. The company approached apparel designers like Levi Strauss with an offer to improve their choice—and management—of outsourcers. Over just a couple of years, customer by customer and one value-chain step at a time, Li & Fung moved into adjacent business areas that have transformed the company dramatically.

Today, Li & Fung is a thriving, sophisticated company that manages the complete value chain for its international customers, from raw material negotiation to the delivery of finished goods to Western distribution centres. The company boasts 69 offices in 40 countries.

Successful international expansion is not enough to keep a business growing. Overseas empires rise; they also fall. Corporations that want to avoid the pattern of imperial decline should invest in building a strong core business first, understand if global growth is a must or simply an option, and pursue an expansion plan consistent with how the money gets made in their industries.

James Root is a vice-president with Bain & Company in New York; Charles Ormiston is a Bain director in Singapore.