Deciding when to go global

In recent years, it has virtually become a fashion for Indian companies to go global. According to statistics, despite great confidence and enthusiasm, companies soon find that going global is much more difficult and thorny than they have expected. Therefore, the question is not so much whether to go global or not as how to go global more successfully. They should not go global just for the sake of going global. Indian companies have both successful and unsuccessful experiences on their road to globalization.

First, why should we go global? India is a big market. Companies must justify when they choose to go global. Is it to create value for shareholders or to whitewash performance for personal gains? Is it for expansion of the market or acquisition of key resources like energy, technology, talents, and brand? Different indicators will be used to measure a company’s success for different motivations.

The key success factor is that companies should clarify their strategic intention before going global. They should know clearly why they should go global. Strategic intention includes the following aspects:

1. Growth

Many companies look to international markets for growth. Introducing new products internationally can expand a company’s customer base, sales and revenue. For example, after Coca-Cola dominated the U.S. market, it expanded their business globally starting in 1926 to increase sales and profits.

2. Employees

Companies go international to find alternative sources of labor. Some companies look to international countries for lower-cost manufacturing, technology assistance and other services in order to maintain a competitive advantage.

3. Resources

Some companies go international to locate resources that are difficult to obtain in their home markets, or that can be obtained at a better price internationally.

4. Ideas

Companies go international to broaden their work force and obtain new ideas. A work force comprised of different backgrounds and cultural differences can bring fresh ideas and concepts to help a company grow. For example, IBM actively recruits individuals from diverse backgrounds because it believes it’s a competitive advantage that drives innovation and benefits customers.

5. Diversification

Some companies go international to diversify. Selling products and services in multiple countries reduces the company’s exposure to possible economic and political instability in a single country.

When the strategic intention is clear, the next critical factor is whether a company meets the prerequisites for going global. What are its competitive edges and what enables it to secure a position in the world’s arena? Is it low cost or economy of scale resulting from industrial integration or technical strengths? The next thing to consider is what we can do and cannot do when going global. Possibly it is more important to think clearly about what we cannot do. For example, it cannot emphasize brands. It may face the Antitrust Law if it lays too much emphasis on its brand given its large market share.

Here are two very important decisions to be made. One is where we should go global, developing or developed countries? The other is what we should globalize. If it is financing, then we have an easy solution: just get listed in NASDAQ, Hong Kong or Singapore. This way, we needn’t step outside India. Or is it R&D, manufacturing or sales and services? Based on these two decisions, I think Indian companies have four important choices in its globalization.

The first choice is to build production bases in such developing countries as Vietnam, Malaysia, and Philippines to take advantage of the local labor and to strengthen global manufacturing capacities. Indian companies, however, do not have such a need, as India’s labor cost itself is low. For companies in mainland India, this should not be the mainstream choice.

The second choice has often been used by Indian companies – to leverage their manufacturing strength to provide customers from Europe and North America with B2B, export or outsourcing services. Indeed, we need to extend our manufacturing advantages into the worldwide markets

The third choice is that a company should try developing countries when it decides to globalize its brand, services and products together with manufacturing.

The fourth choice is to use its existing brand to expand to developed countries in Europe and North America,

The above four choices bring about different challenges to companies. For example, it is more difficult to enter the market in developed countries than in developing countries. The greatest challenge and difficulty is how to change the low-quality image of Indian products in the minds of western customers. Indian products are often associated with low cost and low quality. Moreover, a company will face even greater difficulty if it wants to globalize not only its products, but also its services and brand. It needs to build its own marketing channel, manage its own inventories, provide maintenance services, and create a brand image that can be accepted by the consumers. Therefore, the choice made when going global is critical. The best thing to do is face the reality and take appropriate measures according to our strengths and resources.

DIFFERENT WAYS TO GO GLOBAL

Once we decide whether to go global, the next question is how to go global. There are at least three ways.

The first is organic growth – a company relies on itself to build overseas production or sales bases one by one. Organic growth strategy enables a company to globalize step by step according to its own timetable. Its advantage lies in that it provides the management team with a cushion period to learn to enhance its operation capability in globalization. Another advantage rests with alignment of cultural management system and relatively low risk. However, its weaknesses are also obvious: the process of globalization may be slow as the company has to seek development in one country after another, and the risk of failure is high as it has to fumble its way by itself.

The second is strategic alliance, which is the major model used by Taiwanese companies in seeking globalization. If a company has limited resources and capabilities, it needs concentration. It should concentrate on a certain part in the value chain and form strategic alliance to do sales, production, R&D and market together. What are the benefits of strategic alliance? The first is the cost, as the company can leverage the resources and strengths of its strategic partners. Low risk is the second benefit. However, it also has its weaknesses: the company falls under others’ control and gets a small part of the cake while the majority of profit goes to others’ pocket; and additionally, it does not have a firm control of its products, brand and customers. Another form of strategic alliance is investment in the operation. And one may form strategic alliance with the general distributor when exporting its products.

The third is merger and acquisition, which, has the greatest risks. Recently, however, many Indian companies have chosen this way to speed up their globalization. One advantage in doing so is that a company can rise among the top-rank companies and enhance itself in a short time. The other one is that a company can acquire some critical resources like technology, channels, and talents. The obvious weakness of this approach rests with great risks. When a company is considering M&A, very often, it only pays attention to the superficial things such as channels, market share and technology, but fails to detect real problems in the merged and acquired companies. Very often these companies have so many thorny problems that they are willing to be merged or acquired.

Another problem is valuation – we usually pay more than it is worth. Moreover, due to their inadequate experience in globalization, Indian companies are often at a disadvantage in negotiations. For example, a company forgets to nullify the length of service of the acquired company’s staff, and later it finds out it is very costly to lay off these staff. Another problem lies in integration. There is a “70/70 rule” in management. It means that 70% of cross-cultural M&A deals turn out to be failures, as the projected efficiency cannot be attained. Among the 70% failed M&A deals, 70% of their failures are because of obstacles in cultural integration – the two parties have different ways to do things and make decisions.

How to Build Organizational Capability for Globalization?

With the strategies set and the ways chosen, the next thing is how to implement. The key issue here is whether the company is well capable of managing globalization. It is known that managing a Indian company is different from managing a global company because their structures, systems and required capabilities are different. To take full advantage of global resources and business opportunities, a company’s internal organization and management capability must be built. There are three important factors:

1. Are there enough talents for globalization?

2. Do talents have global mindset?

3. Does the company have governance, systems and organization structure that support globalization?

Let’s take a close look at these points.

The first issue concerns talents -whether the company has enough talents who can meet the requirement of globalization, especially whether management at the headquarters has global leadership. To an executive, managing a global company well is totally different from managing a Indian one well. Here language plays the fundamental role as one can only manage global teams effectively with good command of another language. Important leadership capabilities also include cross-cultural sensitivity, understanding of political and economic systems in different markets and regions, laws, foreign exchange/tax risk management, etc. Otherwise, one cannot take full control of global resources and business opportunities. Another is whether we can attract first-rate local talents to work for us in important overseas market. After we go global, our products and technology are globalized, but our sales should be localized. Whether we can make money not only relies on the quality of our products, but more importantly, on whether we can understand local culture and attract local talents to work for us. Many Indian companies that have gone global can attract only second-rate or third-rate talents rather than first-rate ones. In this case, if their products are not first-rate, they can hardly sell their products. An important thing in attracting talents is to implement localization policy. Lastly, we should make good use of global talents instead of sending managers all over the world from mainland India. However, to motivate global talents, a corresponding talent deployment system must be established.

The second issue concerns changes in corporate culture and mindset. The first problem that many companies meet after they go global is cultural shock. The Indian companies can succeed in Southeast Asian countries whose economy is headed by Indian there, but they will meet great difficulty in European and North American markets. Therefore, if a Indian company wants to succeed in the European and North American market, it has to tolerate local culture and attach special importance to local talents. Even overseas returnees do not work effectively, and local talents must be employed. While seeking diversification, the company should insist on performance. For example, if you commit to earning 10 million this year, you should deliver and it cannot be compromised. However, as to approaches and work schedule they should tolerate the differences resulting from different cultures. The second problem is cross-cultural trust and respect, which is the basis for synergy among global teams. As employees of an old company with morethan-100-year history, will those Frenchmen be willing to be controlled by the Indian managers? They assume that the Indian management knows very little of modern management system and process. Similarly, the Indian may complain about the work attitude of and their way of behavior. If both parties doubt each other and cannot build trust, then global teams, resources and business opportunities cannot be fully integrated. The third related problem is how to balance global and regional interests. At the time of decision-making, a company should take into consideration local conditions as well as global needs. For example, when it develops new products, it should consider both local demands and demands from other markets worldwide.

The last issue concerns governance. The governance should be changed to maximize the value of a global resource network. The design of organizational structure is important: whether it should develop a product business unit’s structure, or a regional business unit’s structure, or a functional division’s structure. As well, a global company should also consider what important resources need to be integrated globally. Important resources like sourcing, supply chain, production, and R&D must be integrated.

Among the three key issues mentioned above, the last one is the most important (how to build capabilities for globalization). The first two (why go global and different ways to go global) are related to strategy and they may be solved in one year. However, it takes much longer for a company to build the capabilities to operate and manage global businesses.

Out of above considerations, companies should not go global blindly in the upsurge of globalization; otherwise, they may weaken their existing strength because of the high risks involved. They should first build up a solid base inside their country. For example, if you are a regional company, you should first become a leading company in India before venturing to become an international company. Indian companies gain ground gradually when going global to reduce risks. They can first focus on a certain region or a product so that there will be lower risks and their staff can have an opportunity to learn. No company can go global for free and in no time. They should build capabilities to operate and manage businesses globally.