| Global Growth Models: Past, Present, Future |
|
Before extensive due diligence is complete, many U.S. businesses are hastily lured into specific global markets by competitors and a hunger for market share and quick profits. As such, they neglect to ask the right questions, do their research, gather data, and analyze that data carefully in order to establish a detailed strategy and comprehensive plan for international expansion. Erroneously, some businesses just assume they have to expand and fail to consider the long term versus short term implications of globalization. Consequently, over half of U.S. global ventures end in failure, and valuable resources are squandered. Begin with the End in Mind For many U.S. businesses, globalization is a potential antidote to a shrinking domestic markets and a difficult home economy. But, not so fast. In any expansion effort, it is critical to ask and answer these key questions: Where in the global marketplace is the best market for our product/service? Why? What are the corporate goals for expanding beyond U.S. borders? What data supports these decisions? How does this global expansion fit in with the overall corporate strategy as it is today and as it should be tomorrow (i.e. as the company evolves and world trends and developments change)? The answers to these questions, and many others, come from gathering the right information from the right sources. It's easy to get misdirected or overwhelmed by the staggering quantity of available information. Stay focused on research that includes assessment of consumer demand, consumer profiles, competition, pricing, packaging, foreign regulations, shipping, and distribution to name a few. In addition, companies need to look internally at their strengths and weaknesses in relation to their action plan. That means evaluating corporate resources, manpower, internal knowledge and their own culture (perception, loyalty, motivation) before determining whether or not expansion opportunities are viable and warrant penetration into new markets. Growth Models - Past, Present and Future In response to a rapidly changing global marketplace, U.S businesses must craft flexible business models that leverage the strengths from each global marketplace. For instance, some U.S. business may consider returning certain functions, like high-tech manufacturing, back to the U.S. in order to stay competitive. Then, collaborate with global partners on new ways of outsourcing, generating future innovations and product upgrades. Through this paradigm shift in mindset and strategy, businesses will create and foster a sustainable competitive edge. After a “go-no go” decision has been reached regarding any one market, the next step is to consider how to enter that new market. In other words, what business model will generate the greatest success and move the organization towards achieving its goals today and in the future? No one business model is inherently right or wrong. Yet, when presented with a set of facts unique to one business and one global market, it becomes remarkably clear which business model will deliver the desired results. Likewise, it is equally clear which business model will only lead to trouble. Traditional business models like import/export, outsourcing, franchising, licensing, and joint ventures are still excellent options for today's economy; however, their ability to maximize the potential of certain markets may no longer be possible. After all, it's a new world order with new players and a new playbook that necessitates new tools like emerging business models such as innovation, collaboration and mergers and acquisitions (M&A). Unlike traditional business models, these emerging models are not mutually exclusive. It's a matter of blending different aspects of each model to customize an approach that meets the unique circumstances of the overall corporate strategy and prospective market. Choosing the right recipe is fundamental to success. There is no room for error. So, be prepared to do some homework. Start with an internal look at resources, commitment, experience, and goals. Then, look at the proposed business activities, market opportunities, competition, regulations, tax advantages and other key factors. When choosing a business model, it's always a tradeoff between control and risk. Increased control requires greater financial resources, which in turn opens the door to financial risk. In addition to financial risk, there is what is known as market risk, which also needs to be assessed. It results from holding back the resources necessary to achieve success in the new market. Ironically, businesses create their own failure by withholding resources out of fear of failure. In an effort to minimize financial risk, for example, a business might select the least expensive mode of entry, such as indirect distribution. However, with indirect distribution, the seller is cut-off from important information about consumer buying behavior and product feedback. This creates a serious market risk. Collaboration Entering a new global market requires the same mindset as starting a new business. Never assume that globalization is merely an extension of your domestic business. It is not. Every detail from skill sets necessary to operate and run the company to product design, packaging, and marketing need to be modified appropriately for each new marketplace. Consequently, the process can consume substantial resources including time, money, and personnel. To expedite this process, many newcomers will choose to collaborate with an existing domestic business. Through a partnership or joint venture, U.S. businesses develop a deeper understanding about consumer behavior, the culture, and business practices of a specific market. Equally important, a domestic partner can offer insight into how a product or service will be used and can help a company plan for new upgrades and features that may be necessary moving forward. With this type of relationship, businesses are likely to experience a quicker time to market. The downside of a partnership or joint venture is that the benefits come at the expense of revenue and ultimate control. Fortunately, as international joint ventures progress and the need for control outweighs the limited risk, many businesses transition into wholly owned subsidiaries. This transition is especially important when the protection of intellectual property is a concern. While collaboration provides an effective buffer against exposure and risk, it should never be chosen out of fear. All business is risky, and global business is inherently more risky due to a lack of experience, cultural differences and unfamiliar political structures. Still, with the right investigative work, risk can be identified, and constantly calculated, assessed and measured against the potential benefits. When collaborating with others, it is important to seek the right foreign partners. In international business, more so than U.S. domestic markets, good relationships that are built on trust and honor are essential. Be sure to check your potential partner's financial status, influence and reputation in the local business community as well as the partner’s access to resources and experience in bringing your product to the home market. In smaller countries, also look into the partner’s political influence since politics and business are often intertwined. In any case, remember to proceed with caution and weigh the pros and cons carefully before entering into a foreign partnership. Innovation: The Secret Ingredient Innovation is like that coveted secret ingredient. When skillfully added at just the right time, in the right way and in the right quantity, it never fails to win the blue medal. But, discovering how to deliver innovation to the global scene requires great insight into a specific market, its culture, the business environment and the competition. For example, consider the traditional business model of outsourcing. For decades manufacturers flocked to China for low cost sourcing. But, how many truly maximized the potential of their investment in China? Not many. Very few U.S. companies were forward-thinking enough to foresee the local Chinese citizens as potential consumers. Even fewer were innovative enough to exploit those domestic markets. With an understanding of the local culture, and some innovation, U.S. businesses already on Chinese soil can readily expanded their market base. Necessity can be the mother of innovation, and it comes in many forms: meeting a need through product modification, creating a need through expert marketing of a global brand, or solving market problems like P&G did in Eastern Europe. When P&G chose Eastern Europe as a target market, these formerly communist countries were beyond undeveloped; they were collapsed markets. Still, beyond the lack of any local resources, P&G saw opportunity and enormous market potential. To get started, P&G had to solve a number of local market problems, like the absence of any distribution system. To that end, they funded distributor businesses in the form of vehicles, information technology, working capital and extensive training. The experience gained in the trenches of the local marketplace developed into a significant competitive advantage. In Russia, for example, P&G gained access to 80 percent of the entire population. While this plan was fraught with risk, the risk was calculated, assessed and contrasted with the long-term gains. This innovative approach to Eastern Europe illustrates the trade-off between control and risk. Considerable investment was required of P&G to develop this network from the ground up in a country with renowned distribution challenges; but, tackling the issue head-on rather than waiting for the enabling condition to develop, P&G gained huge leads in market share. Mergers and Acquisitions (M&A) on the Rise Companies choose M&A for a variety of strategic reasons: to obtain new technology, new brands, complimentary products, access to experienced management, or to remove a competitor or potential competitor. Over the past decade, M&A activity has increased substantially because this business model is a natural progression for businesses gaining experience and confidence abroad. The current global crisis is further fueling the M&A frenzy because sellers are generally more distressed and, therefore, more inclined to work with foreign buyers. Also, there is less competition from buyers in the seller's home country, and, most importantly, prices have fallen to attractive levels. Pursuing expansion and growth in the global market through M&A, however, requires a whole new realm of due diligence and risk assessment, and that’s proving to be a significant obstacle for most U.S. businesses. Acquiring or merging with a foreign company is much more than a business deal based primarily on the numbers. In fact, the numbers are generally known well in advance and rarely become deal-breakers. Rather, the critical issues in the due diligence phase – which even includes some aspects of valuation – are strategic and cultural in nature. Success in this area necessitates dealing effectively with differences in corporate cultures, maintaining employee, stakeholder and customer loyalty in a foreign company, and gaining a workable understanding of that company’s human and business values. Unfortunately, the vast majority of acquisitions fail to meet the pre-acquisition objectives two years afterward. Even three years following an acquisition, only a mere 12 percent of companies report that overall growth has surpassed the pre-acquisition period. In other words, 88 percent of acquisitions are still trying to figure out what went wrong three years after the deal is complete. This failure to succeed, at least immediately, is the result of limited time addressing and planning important aspects of the cultural integration of the two unique businesses. Rather, the acquiring company seeks to imprint its own culture on the acquired company and appears surprised by the issues that result—issues that should have been discovered and planned for during the due diligence phase. International due diligence requires a company to go beyond traditional M&A work and consider variables unfamiliar to most American business people. It means obtaining relevant, detailed information and advice concerning the political, national, corporate, and people culture of the target company. To prepare, foreign buyers need a well-thought out integration plan that is sensitive to cultural issues, local practices, and incentives to local management. As part of the integration plan, remember to consider all relevant stakeholders in the target business, including government, regulatory authorities, employees, suppliers, customers and the local community. This is an area where doing things the American way doesn't always work. The Future: Emerging Markets U.S. businesses are increasingly making emerging markets the focus of their global business. In a survey of 247 executives from consumer and industrial product companies with a presence in emerging markets, a Deloitte study revealed that 88 percent of those companies plan to expand their presence in emerging markets. Approximately half of these organizations expect 20 percent or more of their global revenues to have their origins in emerging markets. Equally interesting is their reasoning for establishing functions in these emerging markets: · Cost Savings 71 % · Market Expansion 69% · Speed to Market 55% · Access to talent 36% · Develop new products 31% · Develop new service 28% This information illustrates two key points. First, globalization is not business as usual; secondly, developing countries are fertile soil for innovative companies. No longer satisfied to increase their presence in low-cost regions for the sole purpose of saving money, companies in this survey are seeking innovative ways to maximize their presence and exploit local opportunities to achieve market expansion. In this study, 40 percent of the businesses had established commercial operations that cater to the local market in addition to their manufacturing. Catering to the local population, however, requires understanding and a shift in mindset to prevent U.S. businesses from imposing American ideals into emerging markets with vastly different priorities, needs and expectations. To illustrate, consider an innovative strategy used S&C Electric. S&C became aware of the underserved technological markets of emerging countries and decided to meet their unique technological needs. This was accomplished by not only offering high-tech solutions, which may be popular in the U.S., but also offering the "right" technology for emerging markets. After all, emerging markets are often too poor, lack the necessary infrastructure or simply don’t have the need to utilize state-of-the-art technology. By adapting what was leading technology in the 1970s or 1980s with newly developed applications, many products can still meet the needs of many emerging markets today. Such an approach, however, requires an in-depth understanding of how business is conducted in the target market. "It's important to learn, accept and work along the established lines for how business is performed in various regions/markets", comments Salvador Palafox, VP of international sales & marketing. Only then is it possible to understand both a market's needs and limitations and how a corporate strategy can be aligned to capitalize on both. Most importantly, it requires a shift in mindset and acceptance that business around the world can be conducted differently than in the U.S. Plan, Commit, Action Innovative, collaborative and forward-thinking competitive strategies are the key to success in the future. Don't settle for the same old cookie-cutter global expansion plan that your competitors are already utilizing- it will only skims rewards off the top. Take the initiative to thoroughly evaluate potential markets, get to know the local people, and design a custom business model that will maximize the opportunities of those markets and deliver on your globalization goals. Plan, commit, act and execute with confidence to achieve success. |