Whole world is buying, The

whole world is buying, The

McDermott, Michael J

Developing a globalization strategy is now one of the CEO’s key responsibilities. Your bottom line will thank you.

While society in general may not yet be living in a world without borders, from a business perspective it’s already here. Thanks in large part to the explosive and continuing growth of Internet usage worldwide, having a global strategy is no longer an option for most companies. It is a necessity.

“Globalization represents a permanent change in the way business is conducted, and the Internet is part and parcel of that process,” says Michael S. Levin, chairman, founder and CEO of e-Steel Corp. “There are no more `furthest reaches’ of the world.

It’s no longer possible for one corner of the world to be isolated from another. It may be an exaggeration to say there are no longer any regional markets, but it’s not too much of an exaggeration.”

At the organizational level, research shows a strong correlation between the adoption of a global strategy and successful financial performance. Moreover, it reveals a direct link between a CEO’s involvement in a company’s global strategy and that strategy’s success.

DON’T UNDERESTIMATE THE IMPACT

A multiyear research project conducted by the World Economic Forum and Deloitte Touche Tohmatsu has quantified the impact that going global has on corporate enterprise value. The findings show that 84% of companies ranked highly according to a proprietary Globalization Index have outperformed the S&P 500 over the past five years. (The Index ranks six key organizational capabilities: governance and responsibility; strategy and finance; marketing, sales and service; operations and technology; research and development; and human resources management.)

The project, “Innovative Leaders in Globalization,” confirms that becoming a truly global company serves the interests of all stakeholders, reported Jacques Manardo, Deloitte Touche Tohmatsu’s Global Managing Partner, Strategic Clients, who presented the results earlier this year in Davos, Switzerland. “Required, however, is a steadfast commitment from a corporation’s most senior leadership that globalization be a vital component of all operational and strategic activities,” he said. Other key findings included:

Global leadership is key to global success. Senior executives and board members must have global business experience to succeed at globalization in the long term.

The marketing and R&D functions are the least global at most companies.

The Internet is fundamentally realigning perceptions about markets and customers. Opportunities that were once considered too remote due to distance and language are now prime targets for doing business.

LOOK BEYOND THE NUMBERS

It is instructive for business leaders to look at what an “e-census” of our global village actually reveals. For starters, only a tiny fraction of the Earth’s 6 billion population is online-no more than 4%-and half are Americans. That’s changing rapidly, though. International Data Corporation (IDC) projects that Americans will make up only about one-third of the connected world by 2003.

According to IDC, the number of Internet users in Western Europe is projected to grow to 168.4 million in 2003 from 40.9 million in 1998. In Japan the growth will be to 32 million users in 2003 from 8 million five years earlier, and in Latin America it will be to 14.8 million from 3 million.

All those new users translates into a lot of buyers and sellers. The most explosive growth in global e-commerce sales is taking place in Europe, according to IDC. From just $5.6 billion in 1998 sales, volume is expected to skyrocket to $430.4 billion in 2003. Japan’s e-commerce sales will increase to $44.9 billion from $2 billion over the same period; Latin America’s to $8 billion from $200 million.

Meanwhile, IDC also reports that 70% of U.S. companies’ e-commerce Web sites make more than 90% of their sales at home. The lesson is that the Internet is going to be the great leveler. Wiring many developing nations will be quick and easy, because there is virtually no existing telecommunications infrastructure to replace. Sharing common technology will promote relationship development and speed transaction processes. The growing network of communications satellites will ensure that the flow of information never stops. All of which means that your next customer, supplier-or competitor-can be located almost anywhere. The stakes are much higher in the business-to-business arena. When major companies announce that they are moving their procurement to the Internet-as Ford and General Motors did recently-they create a ripple effect that is felt by thousands of companies around the globe.

CHOOSE THE RIGHT STRUCTURE

How does a CEO deal with the complexity of such an environment? One of the most important decisions to be made is what type of operational structure will best meet the . company’s needs. Globalization experts say there are three basic types, and that companies may need to adopt one or more of them to accommodate different crossborder transactions and processes.

1. The least formal structure is a loose interconnection among local operating groups that facilitates the sharing of information and best practices company-wide while retaining most of the decisionmaking authority within local units. This structure allows companies to respond most effectively in cases where market demands or consumer tastes vary greatly among the countries in which it operates. The tradeoff is often reduced economies of scale and duplication of some support services.

2. A more-disciplined version retains a fairly high level of decentralization but asserts a greater level of control from some central unit, which could be a global or regional headquarters but does not have to be. Individual units retain enough autonomy to respond to local conditions, but operations can be more tightly controlled and coordinated by the central unit. This can be a tough balance to strike, requiring a deep level of multicultural understanding and disciplined implementation of uniform practices.

3. In a highly centralized structure, the authority to make decisions and set standards and practices is concentrated in a single organizational unit. This approach is most effective when there is a strong level of uniformity in market conditions, demand and local practices across all the countries involved. Opportunities for efficiency of scale are greatest with this type of structure, but, obviously, it is the least flexible and least responsive to local conditions.

In practice, developing an effective global strategy often entails using different structural approaches for different processes and divisions within a company. Marketing, for example, may benefit most from an informal structure, while R&D may take advantage of the economies of scale inherent in a highly centralized approach.

“We have been operating outside the U.S. for about 25 years and do business in more than 200 countries worldwide,” says United Parcel Service CEO James P. Kelly. “We find there are always lessons to be learned, and the best strategy to be adopted will be dictated by the specific circumstances of each situation. Sometimes that means relying more on the autonomy of a partner; other times it involves a more centralized strategy.”

CONSIDER OTHER CULTURES

It also involves being sensitive to other cultures. Citizens in many countries around the world are reacting negatively to what they perceive as the long arm of American culture, says Jorden Woods, CEO of Global Sight, a firm that specializes in localizing the Web sites of U.S. companies. One way savvy U.S. companies are improving their performance is by making their Web sites more culture-specific and by partnering with local businesses to increase market penetration.

As Edward G. Boehne, who retired in May after 19 years as president of the Federal Reserve Bank of Philadelphia, points out, globalization offers many benefits, but it also entails costs.

“U.S. firms gain access to new markets through globalization, selling their products in countries around the world,” Boehne said in a speech to the World Affairs Council of Greater Valley Forge last year. “Those activities generate profits for American shareholders and provide companies with access to new sources of raw materials and lower-cost locations for certain operations.

“We know that as consumers we have gained access to new products, and as savers we have gained the ability to diversify more broadly. Firms also benefit from globalization. They gain the ability to diversify more broadly.”

U.S. firms that operate in many countries often find that recessions and booms are out of sync from market to market, which helps to stabilize their profits, Boehne added. They also gain greater access to worldwide financial markets and improved ability to avoid production bottlenecks when maintaining facilities in the U.S. and abroad.

“However, the cost side of globalization comes from the fact that it is expensive to shift resources from one use to another and to retrain workers as the mix of jobs changes,” Boehne said. “In the process of shifting resources, some production facilities are abandoned. Globalization also increases the U.S. economy’s exposure to foreign shocks, and greater international financial linkages mean that the U.S. financial sector is more exposed to foreign financial shocks than used to be the case.”

The challenge facing industry leaders is a simple one, according to Boehne: maximize the benefits while minimizing the costs.

Simply stated, but not so easily achieved. As Trevor R. Stewart, a partner with Deloitte Touche Tohmatsu, has put it, “It’s going to be an exciting but bumpy ride. And if you’re running a business, it will help to have the reflexes of a teenager playing video games.”

Copyright Chief Executive Magazine, Incorporated Aug 2000

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