Going Global: The Risks and The Rewards
May 16, 2006
It should be said right off the bat that I tend to be pro global. But I’m also pro factual. I believe in pragmatic, data-driven decisions vs. the emotional, knee-jerk reactions that sometimes drive otherwise disciplined executives’ decisions to go global. I’ve actually seen companies spend more time on due diligence related to expanding nationally than internationally. Why? Because many companies don’t have global experience, they underestimate what’s involved or simply don’t know where to turn to get the necessary information to position them for success. However, the companies that do their homework up front—who do a thorough self-assessment of their success in the United States and truly understand the risks associated with international expansion—have the most success globally.
So what are those risks? In my experience, I’ve found the top five to be intellectual property control, supply chain management, language/culture/financial risks, management talent, and underutilization of U.S. assets.
First, there is a very real possibility that other companies could duplicate your products or processes and that, as a foreign company, you may be unable to prevent it or recover your losses. For example, although Chinese authorities sing a very happy tune about understanding the importance of intellectual property rights and their intent and ability to enforce them, in reality, that doesn’t always happen. In the end, it’s difficult to sway a Chinese judge or jury to side against Chinese businesses.
Second, if you’re going to operate in China, the supply chain has extended itself as far as it possibly can geographically. This distance elicits a variety of shipping concerns and time constraints. If your product is susceptible to changes in volume or product design, inventory in transit could become obsolete due to these changes. There are also significant time differences and differences in communication styles. Managing international supply chains requires a completely different skill set than managing supply chains within the United States—you have to address shipping, warehousing, customs, and tax issues, as well as the timing of inventory in transit. This makes your manufacturing process less flexible due to volume and design changes.
There are also language/culture/financial risks. If you don’t speak the dominant language and must do business in English, you’re somewhat segregating yourself from the indigenous business population in the market you’re working in. Miscommunication and misunderstandings due to interpreters are always possible. In addition, cultural business norms are very different in the U.S. than they are in other regions. Gift giving, commission arrangements, title and business protocol, meeting protocol, and directness and pace of communication all vary depending upon region. Again, to use a China example, a colleague of mine was on his way to China and had purchased several crystal clocks to give as gifts to his Chinese colleagues. Nice idea, right? Except that to the Chinese, clocks are synonymous with death, as are handkerchiefs and the colors blue, black, and white. It’s crucial to understand these cultural differences prior to initiating business relationships.
Management talent is one of the most overlooked and/or undervalued risks. It’s quite a balancing act. Management must (1) understand the complexities of the domestic business, (2) have experience in operating business in a foreign country—particularly within the target market, and (3) be able to handle the complexity of the international operation without sacrificing the domestic business. This is where many companies don’t do an adequate self-assessment of their abilities and skill sets. They either fail to address the issue altogether or rely on new employees to run their international operations. It might seem like a good idea to hire an American who’s lived in China for 10 years to run your China operation, but if that American doesn’t understand the key components of value in your company, it could be devastating.
Finally, underutilization of U.S. assets is a significant risk. To the extent that there are assets, facilities, and machinery in the United States that will now sit idle due to the foreign operation, those costs won’t go away. In addition, assets are now being underutilized, so the return on assets for your organization is going to go down. Unfortunately, unless the foreign operation is actually increasing overall revenue, your percentage cost of overhead will go up. In some cases, the domestic real estate may be worth less than the book value on the financial statements.
There’s no one-size-fits-all solution to addressing these risks, as each organization is unique. What is universal, however, is the need for all organizations to understand the process involved in going global and do the research to have the data to make informed decisions. The global environment is here; it’s not going away. You don’t necessarily have to play in it, but you do need to understand it.