The next time you order a fish and chip meal, stop and consider. How many of the ingredients of this dish, considered by many to be quintessentially English, actually come from England? In fact, there is an excellent chance that the cod comes from Iceland. The potatoes are probably from southern Europe or North Africa. The oil in which the chips were fried mostly likely comes from France. The salt sprinkled over the food may be Spanish, Turkish or even Indian. The paper in which the meal is wrapped very likely comes from Scandinavia. The plastic cutlery that some chip shops supply is, inevitably, Chinese in origin. Only one item, the malt vinegar, has a high chance of being made in Britain itself. Morgen Witzel, FSN writer and honorary senior fellow at the University of Exeter Business School explains how companies still need to think global.
We live in a global economy, where goods can be and are sourced all around the world and where international competition is a reality for nearly every business, large or small. One of the early prophets of globalisation, the Japanese consultant Kenichi Ohmae, argued in his 1990 book The Borderless World that in future there would be two kinds of businesses: those that mastered the intricacies of global competition and could compete on a global level, and those that failed to do so. The latter group, Ohmae believed, would fall behind in the competitive race and sink into oblivion. Later writers on globalisation, such as the American pundit John Naisbitt in his 1994 book Global Paradox or Thomas Friedman in his 2005 best-seller The World is Flat, have largely concurred with this.
The challenge to businesses and their managers, then, is to learn how to ride the trend of globalisation. But how is this to be done? Does this mean that every business, large or small, needs a global strategy, or at least a strategy that has a global worldview?
The answer is an emphatic yes. Every business, when setting its strategy, needs to be aware of the global environment. It needs to take account of potential opportunities and threats in different corners of the globe, not just in the comfortable security of one’s own country or its immediate neighbours. The phrase ‘global worldview’ may sound tautological, but it was used with deliberate intent. Too many companies have a strategic vision that embraces only their own country or their own locale. As the case of the fish and chip meal shows, this is no longer possible. Competition comes from everywhere.
But when setting a global strategy, where do we begin? First of all, let us recognise that this is nothing new. Businesses have been operating and trading across borders not just for centuries but for millennia. In their 2009 book Origins of Globalization, the academics Karl Moore and David Lewis describe how five thousand years ago in the Ancient Near East, in Babylon and Assyria and Phoenicia, businesses established trading networks running from Western Europe to northern India. Here middlemen connected them to another network, following the Silk Road over the Himalayas to China. Moore and Lewis conclude that many of the strategic imperatives of these businesses – resource-seeking behaviour, exploitation of location advantages, industry and product specialisation and so on – were exactly the same as those of firms today.
So on one level, we are not really doing anything new. And although the perceived wisdom among academics today is that international expansion is risky - thanks to cultural differences, the difficulties of learning about other markets, local regulatory differences, levels of geopolitical risk and so on – this was not always so. During the Middle Ages, European firms expanded international in order to reduce risk. One of the largest, the Medici Bank of Florence, operated with agents as far afield as Iceland, Timbuktu, Persia, India, and even for a time China. The Medici logic was simple. If the business in one region went down, the losses could usually be made good by profits from other regions where business was booming.
Again, that logic still applies today. Over the last eighteen months, Volkswagen like most Western car makers has suffered in its European and American markets, where sales have dropped sharply. But over that same period Volkswagen sales in China have risen even more sharply. Not for the first time in its recent history, Volkswagen is finding that its Chinese division is more than making up for sales lost elsewhere in the world.
This is important, because it mean that ’going global’ is not a completely new experience. The fundamental of successful international expansion and operation have long been known. Here are a few of them.
First, don’t bite off more than you can chew. Despite modern transportation and communications systems, the world is still a very big place. Very few companies have the resources and capability to dominate the globe, or even a single big market such as India or China. In the early 1990s one international drinks giant resolved to dominate the Chinese vodka market. With a worldwide annual production of sixteen million cases, this company was the largest maker of vodka in the world and believed it could easily take a commanding share of the China market. In fact, the total annual consumption of vodka in China amounted to a hundred million cases annually. The company would have had to triple its production in order to take even a modest share of the overall market. Abandoning dreams of conquest, the company instead opted for a more modest strategy, selling limited quantities at high prices as a premium brand.
Second, international strategy, just like domestic strategy, needs to target those customers the company can reach and serve. To some extent that depends on what business the company is in. Some products and services – management consultancy, software engineering, some but by no means all financial services – are relatively homogenous and can be delivered anywhere around the world. Others, like cars, may require significant adaptation in order to comply with local regulations and culture (for example, foreign cars sold in Britain have to be adapted to right-hand drive).
Third, and following on from this, there is product and market choice that companies need to consider. One option is to focus on the company’s core market constituency and then identify similar market segments around the world and try to serve them, customising the product offering as necessary in order to suit local regulations and cultural needs. This is sometimes known as the ‘think global, act local’ approach. It often requires heavy investment in product customisation and branding to get the product established in local markets, but the rewards can be considerable. Coca-Cola, with its policy of developing different regional advertising campaigns and tailoring the recipe of its drink to suit local tastes (yes, Coke in Asia really is different from Coke in America – subtly so, but different nonetheless) has been very successful at this.
The second option is to focus on the product itself, and then seek to identify niche markets, customer groups around the world who are interested in the product as it stands, and then work out how to reach them. This option is sometimes known as ‘think local, act global’. Here, distribution channels often hold the key. The Indian film industry, ‘Bollywood’, has become phenomenally profitable in recent years. For decades, few Bollywood films were watched by audiences outside India. Today, DVDs and Internet downloads make it possible for Bollywood film distributors to reach audiences in the Indian diaspora, as well as the rising number of non-Indian fans of the genre, around the world.
The fourth fundamental of international strategy is that there is no one right answer, no one best strategic solution that guarantees success. In this area as in all strategy, everything is contingent: on the company, its products, its resources, its organisational structure and capacity to deliver on its promises. There are undoubtedly some firms that will find that challenges of globalization too strong to face, and these will slowly slide into obscurity. But for those with the capabilities and mental toughness to overcome these challenges, the global economy offers many opportunities. Global strategy, like any other strategy, requires just two things: set a realistic goal, and then work out a path by which it can be reached.
