Conquering Global Markets: Secrets from the World’s Most Successful Multinationals

By N. Hubbard

Conquering Global Markets offers assessments of the issues, statistics, cases, and best practices of mergers, acquisitions, joint ventures and alliances throughout the world. Using information gleaned interviews with CEOs, the book provides insights into making global M&As successful.

• Language: English
• Publisher: Palgrave Macmillan
• Release date: Mar 8, 2013
• ISBN: 9781137307729

Book preview

Introduction

In January 2012, I attended the Baltimore, Maryland KPMG Business Person of the Year lecture. The speaker, Rand Griffin, was CEO of Corporate Office Properties Trust, a large real estate development corporation that operates in the Baltimore/Washington, DC area, Alabama, Colorado, and Texas. The topic of his talk was Surviving the Turmoil—Today’s Morass of Politics, Finance, and Real Estate. Baltimore, while a large American city—ranked 21st largest in the 2010 US census in terms of population—is not known for international sophistication. On the contrary, it is affectionately known by locals as Smaltimore. Within this context, the opening slide of Mr. Griffin’s talk stunned me; it discussed the main drivers impacting the US housing market. Three of his five main drivers were foreign:

  The Arab Spring

  The Euro zone Financial Crisis

  The Earthquake and Tsunami in Japan

In addition, he said that the areas to keep an eye on this upcoming year included a potential recession in China and a continuing threat of the Euro zone’s disintegration.

How small had the world become when Maryland business people hung on Rand’s every word about the impact of global events on life in Baltimore? Not only did they listen intently, they understood that these events occurring on the other side of the globe did indeed greatly impact their world. How times have changed, and quickly!

Expanding businesses internationally seems like such a good idea especially in times when top-line growth is a godsend. But it isn’t as easy as just setting up shop in another country and instantly watching sales accrue. If it was, there wouldn’t be as many failed internationalization attempts. One only has to open Le Monde, Financial Times, or The Wall Street Journal to read about joint ventures that have gone wrong or recent acquisitions being sold for a fraction of their original purchase price to understand that leaving one’s domestic borders is a complex undertaking.

This book will assess how companies have become internationalized. In simplistic terms, organizations go global in one of several means: greenfield investment, through alliances and joint ventures, or through mergers and acquisitions. Best practices and academic research are this book’s foundation. This is combined with two sets of research data—one is a 162-company anonymous survey sponsored by KPMG in which participants were asked detailed questions about their merger and acquisition activities. The results are analyzed in Chapter 7 which discusses merger and acquisitions.

The second research stream is a series of high-level interviews in which 50 corporate chief executives, chairmen, heads of strategy, finance directors, and executive board members were asked about their overseas expansion history of how and why those organizations went global using the various methods described previously. The pictures painted are candid accounts of the lessons learned when venturing outside of one’s home territory, a detailed description of what today’s challenges and success factors organizations should consider when operating internationally. The companies participating include publicly quoted companies, privately held, and state-owned enterprises, service companies and manufacturers from both the developed and emerging world. Sixteen nationalities are represented. Executives talked about their experiences from the following companies:

  ABB (Switzerland)

  Aditya Birla Group (India)

  Allied Domecq (UK)

  Amcor (Australia)

  Arc International (France)

  Banco de Brasil (Brazil)

  Bank of China (China)

  Bank of Nigeria (Nigeria)

  Bayer (Germany)

  BP (UK)

  British Aerospace (BAe) (UK)

  British American Tobacco (UK)

  BT (UK)

  Cadbury Schweppes (UK)

  Cargill (USA)

  Centrica (UK)

  Costain (UK)

  Diageo (UK)

  EMI (USA)

  Evertec (Caribbean)

  Experian (US)

  Fast Retailing (Japan)

  Ford Motor Company (USA)

  GMR Group (India)

  Hitachi (Japan)

  Illinois Tool Works (ITW) (USA)

  IMAX (USA)

  Japan Tobacco Incorporated (JTI) (Japan)

  JBS (Brazil)

  KPMG (UK)

  Lafarge (France)

  LIXIL Group Corporation (Japan)

  Lonrho (Africa)

  Mitsubishi Chemicals (Japan)

  Nidec (Japan)

  Petrofac (UK)

  Pinault Printemps Redoute (France)

  Rover (UK/China)

  Santander (Spain)

  SAP (Germany)

  Schaeffler (Germany)

  Sony (Japan)

  Standard Bank (South Africa)

  Tele2 (Sweden)

  Teva (Israel)

  United Technologies (USA)

  University of Madrid (Spain)

In addition there were three additional companies, two from the UK and one from India who were included but wanted to remain anonymous.

Those participating had some interesting statistics.

  Three—BT, Diageo, and BAT—operated in more than 170 markets each while many others operated in over 100, including Ford Motor Company, JTI, SAP, and Bayer among others.

  Teva have 96 percent of their income generated from outside their national borders of Israel making them the most international of all survey participants. They must be one of the most international organizations in the world.

  JTI have their international division, Japan Tobacco International, an executive board of 17 members representing 12 different nationalities headquartered in a different country and continent (Switzerland) than their founding even though they are still partially a state-owned enterprise (by the Japanese government).

What is a globalizer?

The term globalization is bantered about quite freely and interchangeably with a host of other terms, but as will be seen the terms are very different. There is a dizzying array of phrases indicating functioning out of one’s operating territory. These include: a regional company, an international company, multinational enterprises, and transnational or global corporations. These will be discussed in turn.

Most consider a domestic company as one that operates in one jurisdiction, usually defined by its political country boundaries, and is commonly called a home market. There are many benefits to operating within one jurisdiction. Companies that operate in a domestic setting can expect the consistent application of legal and accounting systems, linguistic similarities, an absence of tariffs and trade protection barriers, and a uniform political system. They are also more likely, but not necessarily, to experience similar customer and employee characteristics and shorter geographic distances. Exceptions to this include Brazil, China, and India where it was argued by several of the companies participating in this research that while they are each one country in a political sense they are really amalgamations of many highly heterogeneous provinces that make them more complex operationally than most other domestic markets.

A move to new geographies is often driven by a feeling that organizations migrate to markets they can most easily understand, where it is easy to spot opportunities, and where perceived liabilities of foreignness are low (Luo and Tung, 2007, p. 490). The migration of companies as they internationalize is discussed in Chapter 4. But to summarize, once organizations venture outside their home market, they are faced with an increasingly different operating environment.

An enterprise is seen as being international as soon as part of its structure operates outside its home geography. This can run the gamut of foreign manufacturing or licensing agreements all the way to a duplication of home country functions in another geographic arena. There are certain characteristics of an international organization that differ from more multinationals or global enterprises. These include a culture and organizational structure similar to the ‘home’ country; standardized technologies and business processes; similar policies, especially regarding human resources; and transplanted senior management (Hordes, Clancy, and Baddaley, 1995, p. 7).

Multinational enterprises (MNEs) and transnational corporations (TNCs) are those companies that operate in a variety of countries, pursue internationalization further, entering more foreign markets, but not viewing the world with a single market perspective. In essence, they take a model that works in their home market and replicate it in other markets. The research findings suggest that in some cases MNEs operate in geographies close to their home market, in those that share similar cultures or languages, or will follow their network of clients and contacts.

For some a transitional step toward globalization is regionalization or the concerted and organized concentration of operations in one part of the world. If the organizations operate with global characteristics on a regional basis (discussed later in the chapter), they can be seen as being a regional dominant. Some remain regional dominants while others become global. The last step along the spectrum is the globalizer—that is, an organization that takes advantage of an increasingly globalizing business environment. Globalization is defined as the increase in frequency and duration of linkages between countries leading in similarities in activities of individuals, practices of companies, and policies of governments (Czinkota and Ronkainen, 2002, p. 116.). It is characterized by supraterritorial relations or relationships that go beyond geographies (Scholte, 2008).

The business world has been seen as a shrinking environment, getting smaller and smaller as information technology, communications, and transportation have dramatically improved. The meaning of global goes beyond this—the world is no longer seen as just smaller, but faster as well, with the advent of social media and sophisticated technology, meaning that information is known throughout the world simultaneously thereby linking people and organizations beyond their borders.

The globalizer exploits the smaller faster world and has embraced new markets as they have opened up. They have entered these markets through a variety of means, including greenfield investments, strategic alliances, joint ventures, and acquisitions. New globalizers from previously dormant international countries are springing up as the whole nature of globalization is radically shifting. This book will explore this phenomenon and try to understand how those most successful on an international stage reached their global destination. But first the economic trends that facilitated the move toward internationalization are analyzed.

1  The Economics of Globalization

Introduction

There has been a seismic shift in the global business landscape—those companies who clung to previously successful business models are frantically trying to reinvent themselves or dying. One only has to look at the demise of Eastman Kodak and Circuit City to see that the old business models no longer apply. A phrase being bantered about is the global hyper-competitive marketplace (Harvey, Kiessling, and Novicevic, 2003) in which the global landscape is a combination of rapidly changing variables, technology, uncertainty, and quickly appearing competitive threats (Ilinitch, Soderstrom, and Thomas, 1998). The world is increasingly diverse, complicated, and moving quickly. Everyone understands that the nature of competitive advantage is changing but no one is sure what will be required in ten years. Most understand what is needed: flexibility, adaptability, innovation, and the ability to replicate this across a number of markets. It is the ability to manage innate tensions from thinking globally but acting locally, not once but in 190 different locations. Some organizations are able to do this, others have failed, and still others choose not to even try.

Underlying this technology-enabled speed and diversity is a march toward globalization where companies see the world as one marketplace. It is a marketplace with geographic differentiation, but one marketplace nonetheless. This book analyzes that progression toward globalization and how these organizations have made the journey outlining their successes and hindsights.

As seen in the Introduction, globalization differs from internationalization although they are highly related. Internationalization is the process where an organization operates in more than one country. Globalization is much more than that. It is increasing the world’s social and cultural interconnectedness in terms of political interdependence and through economic means of financial and market integrations (Orozco, 2002; Nanda, 2009). It requires a shift in traditional/historic patterns of investment, production, distribution and trade, requiring the development of inter-organizational relationships (i.e. strategic alliances) by organizations in order to meet, efficiently and effectively, the changes in demand for goods and services (Harvey, Kiessling, and Novicevic, 2003, p. 223). Thus, in order to be global, it is nearly impossible to do it alone, as the vast majority of enterprises simply don’t have the resources throughout the world to create and support a truly global organization. These resources can include technology, communication systems, management talent with local market knowledge, or financial resources to fund the expansion. Instead cooperation with other organizations is almost always required. But the end result is worth the effort, as the move to a greater international investment has been found to lead to better firm performance (Hitt, Hoskisson, and Ireland, 1994) and higher returns (Agmon and Lessard, 1977). This finding is not universal because a small but significant group of researchers found that firm performance may actually go down due to the increased organizational complexities and potential losses related to operating in new and unfamiliar markets (Hitt, Hoskisson, and Kim, 1997). In either case, as will be seen in Chapter 3, the investor markets reward those companies seen as being international with higher ratings.

Patterns of globalization

The patterns of globalization have changed quite dramatically over the past 20 years as the world has seen a meteoric rise in the scale and complexities of globalization. Organizations are increasingly investing in overseas economies as measured by their foreign direct investment (FDI). FDI measures the influx of capital investment from a home country’s organization into another and can take many forms such as acquisition, joint ventures, and greenfield sites, which are discussed in the following chapters. As seen in Graph 1.1, the levels of FDI has risen almost tenfold in real terms during the past 20 years to a 2011 high of over $20 trillion, the highest in history (UNCTAD, 2012).

Not only is cross-border investing reaching all-time highs but the composition of investment is changing considerably. Previously investment into the developing world accounted for less than one-quarter of all cross-border investment; in 2011 it accounted for over one-third, signaling an increasing attractiveness of the developing world as both a manufacturing hub and final destination for products (ibid.). As seen from those participating in the study, their organizations’ main objectives in FDI into the developing world was not seeking a source of cheap manufacturing but attempting to reach the rapidly sophisticating consumer markets of those countries.

Where investment is flowing is also pertinent. Statistics shown in Graph 1.2 demonstrate the impact of FDI into the developing world with China overtaking the bulk of the developed world, becoming the second leading recipient of FDI just behind the United States (ibid.). Interestingly, in 2010, Brazil surpassed the United Kingdom and Germany in terms of a larger inflow of investment while the Russian Federation and Singapore surpassed France. India remains surprisingly low both in terms of inward flow (on par with Spain) and outward flow.

Graph 1.1  Levels of foreign direct investment into both the developed and emerging world, 1990–2011

Source: UNCTAD (2012).

Graph 1.2  The top 18 destinations for inflows of foreign direct investment, 2010

Source: UNCTAD (2010).

This investment trend seems set to continue. An UNCTAD survey asked TNC respondents to list their top priorities for inward investment during 2011–2013. Their answers in order of the number of times the country was mentioned are China, the United States, India, Brazil, the Russian Federation, Poland, Indonesia, Australia, Germany, Mexico, Vietnam, Thailand, United Kingdom, Singapore, Taiwan, Peru, the Czech Republic, Chile, Columbia, France, and Malaysia (UNCTAD, 2011). Of the 21 countries, only five are considered highly industrialized with the other 16 being either transition or developing economies. This survey’s participants concur that they are expecting their organizations to replicate this trend in the near future as 80 percent of participants indicated that the bulk of their investment in the next five years would be geared to the developing world. They cite the relative economic slow down in Europe and North America compared to the high growth rates in the developing world as being the main driver.

In the past, developed world organizations were leaders in cross-border investment into lower-cost centers; this pattern has now changed with emerging countries now seeking FDI in other parts of the world. For instance, as seen in Graph 1.3, China, when combined with Hong Kong, is by far and away the second leading source of FDI outflows again only behind the United States (ibid.). They are the biggest investors in Africa than any other country (UNCTAD, 2010). Similarly, the Russian Federation had the seventh largest outward FDI with emphasis being placed on resource-rich investments throughout the world (UNCTAD, 2011). And of the largest 16 investors internationally, one-quarter are now developing nation companies, including Singapore and South Korea. As will be explored more in the next chapter, globalization is now different than it was even 20 years ago.

Graph 1.3  Outflows of foreign direct investment from country of origin

Source: UNCTAD (2010).

Method of global expansion: Modes of entry overview

Once internationalization is the chosen path, there is a spectrum of how an organization wants to invest. There are several ways an organization can enter a market and they form the backbone of this book. In order to discuss them later in the book, it is worth providing a broad outline of what they entail.

The least consumptive of resources and time is a nonequity mode of investment while at the other end of the spectrum is an equity mode of investment. In an equity mode of investment, the internationalizer is investing resources into a venture that can be done through a variety of means, including taking a shareholding in a company via a joint venture, merger or acquisition, or through a greenfield investment (see Diagram 1.1). These are discussed in much greater detail in Chapters 6, 7, and 8.

In some cases, the internationalizing business chooses to enter the market through a nonequity mode of investment—they enter into a relationship with another firm to facilitate their business in that region. Nonequity modes of investment are usually either designed to grow sales or reduce costs. Examples of top-line methods include using an agency to which one exports product for distribution or licensing technology, product, or a brand. Licensing agreements can provide market entry to those assigning a brand to another organization for use in a specific geography usually with the stipulation of quality assurance and adherence to the licensee’s marketing and overall strategy. Outsourcing is often used to reduce costs and can include the transferal of nonkey business operations to a third party whose expertise is the delivery of those operations. Potential areas of outsourcing include product manufacturing or assembly, logistics, back-office support, and customer services. These are discussed more in Chapter 5.

The phrase strategic alliance is often misused and misunderstood. Technically all forms of cooperation, whether it is through an equity position or nonequity modes of investment, are considered strategic alliances. All nonequity modes of investment are considered strategic alliances as are those equity modes of entry in which the internationalizer is sharing control with another company. Thus acquisitions, mergers, and greenfield investments are not considered strategic alliances. Global strategic alliances can be defined as the relatively enduring interfirm cooperative arrangements, involving cross-border flows and linkages that utilize resources and/or governance structures from autonomous organizations headquartered in two or more countries, for the joint accomplishment of individual goals linked to the corporate mission of each sponsoring firm (Kim and Parkhe, 2009, p. 364).

Diagram 1.1  Different types of nonequity and equity entry modes

Note: Bold indicates a strategic alliance.

Strategic alliances run the gamut from a loose, noncontractual collaboration between two or more organizations to one or more organizations taking equity in another organization; if a new entity is established in order to achieve those objectives, it becomes a joint venture (Yin and Shanley, 2009). For clarification, all joint ventures are strategic alliances while not all strategic alliances are joint ventures—only those where there is the investment of assets into a new entity are truly joint ventures. The assets don’t need to be tangible—local relationships and market knowledge are common assets used in the combined venture. The proclivity for internationalizing businesses to use strategic alliances has skyrocketed in the past two decades, as organizations have reacted to rapid changes in technology and deregulation and as no one enterprise, no matter how large, has all the resources they need in order to fully tackle all the world’s ever-changing markets (Shuman and Twombly, 2010).

Even with such a wide scope of definition, a successful strategic alliance brings with it a host of benefits, including the sharing or reduction of risk especially when entering new markets, the sharing of resources comprising technology and innovation, the ability to gain knowledge, as well as to obtain access to markets (Hitt et al., 2000). While the importance of strategic alliances has risen dramatically over the past 20 years, success rates have not, as they continue to demonstrate a high failure rate. A high level of dissatisfaction with actual outcomes relative to expectations has been reported and many are not successful. Although it is difficult to identify precise failure rates, it is estimated that roughly half of strategic alliances fail to meet participants’ expectations, are generally considered unstable, and as a consequence lead to high dissolution rates (Inkpen and Beamish, 1997; Hennart, Kim, and Zeng, 1998; Dyer, Kale, and Singh, 2004).

In terms of equity investments, the least consumptive of management time and resources is to take an equity shareholding in an existing local organization. An example of this is Industrial and Commercial Bank of China’s 20 percent shareholding in Standard Bank of Africa (see Case 6.1 in Chapter 6) or Santander’s creation of a Pan-European bank that was created by the bank taking minority shareholdings of several regional European banks.

The last stage along the spectrum of investment from minority shareholding is when one buys the entire shareholding of an existing organization; this is considered an acquisition, discussed in depth in Chapter 7. Mergers differ from acquisitions in that in the former the management of two or more existing organizations decides to fully combine their operations into one, creating a new entity out of the existing structures. The previous organizations cease to exist and the shares of those organizations transfer into the new company.

Some organizations choose to enter a new geography through organic or greenfield investment eschewing any local partner involvement. This approach brings with it different complications and benefits that are discussed in Chapter 8.

The remainder of the book analyzes not only the various entry modes but also some unique characteristics of one group of globalizers, those from the emerging world. The growth they have accomplished in less than 30 years is truly remarkable and in doing so they bring with them some valuable lessons on how they achieved so much in such a short period of time. They are examined in Chapter 9. Finally, one specific market, China, is deserving of further attention. While other nations are developing rapidly, none have the size, scope, and economic clout of China. In addition, few have the complications of such a multifaceted market. It is examined in Chapter 10.

Conclusion

FDI has hit all-time record highs with not only investment flowing from the developed world into the emerging world but also in reverse. It will take one of the three forms: strategic alliances, mergers and acquisitions, or greenfield investment. Strategic alliances can again be broken into those that require equity or those that do not. All three areas will be discussed in much further detail in the following chapters. But first the globalization trends that have led to record cross-border investment as well as the perceived risks and benefits of being a globalizing organization will be examined.

2  Trends in Globalization

Introduction

The pattern of globalization has been a topic of debate for 40 years. The events toward the end of the twentieth century spurred on a dramatic acceleration of globalization that had yet to be seen on a global stage. This chapter will review those events, their impacts, and the various theories of globalization in light of the study participant’s experiences. In addition, four trends that are currently unfolding in globalization will be further examined.

The facilitators of globalization

The end of the twentieth century saw a dramatic transformation of the world’s corporations, which had an enormous impact on globalization. This was caused by several factors that are grouped into three subcategories: political, technological, and economic.

Political

Several key changes in the political landscape facilitated global organizations as they extended their global reach. The first of these was the fall of the former Soviet bloc. This act, while political in nature, had massive economic implications (Harvey, Kiessling, and Novicevic, 2003). Not only did hundreds of millions of potential consumers become available, the privatization of former Russian state-owned enterprises led to the rise of asset-rich Russian corporations especially in the natural resource and infrastructure industries. They in turn instantly became world players as well as potential venture partners. The most obvious of these are Rosneft, Lukoil, and Gazprom, all of which rank in the world’s top 20 oil companies, and were partly privatized and are still at least owned in part by the Russian government (Pravda, 2009).

The second major political event that transformed the global marketplace was the relaxation of trade relations with many previously closed or restricted markets. The most notable of these, of course, is China that is discussed in more detail in Chapter 10. The 2001 admittance of China into the Word Trade Organization signaled a concerted change in the Chinese government’s philosophy toward capitalism. The sudden inclusion of over one billion Chinese consumers combined with the Chinese government welcoming low-cost manufacturing spurred a massive influx of foreign investment into China and the region as a whole. The end result was threefold: new market opportunities for many globalizers, cheaper manufacturing centers for the same, and a burgeoning assortment of newly developed nation’s corporations who were laying the foundation to expand internationally.

A third political factor was the formation of the European Union economic zone (1994) and ultimately the Euro zone (1999), which spurred on an acquisition wave within European boundaries. A host of cross-border acquisitions occurred in anticipation of European political consolidation. The net result was a rapid increase in the amount of cross-border European acquisition activity thus creating larger multinational organizations and further opportunities (Coeurdacier, DeSantis, and Aviat, 2009).

The final major political trend that transformed the international landscape is related to both of the first two—that is, the wholesale semi-privatization of national assets in many developing world economies. These newly commercialized businesses came with preferential government relationships and excellent sources of funding, as many were still owned in part by the sponsoring government. State-owned enterprises (SOEs) are those enterprises comprising parent enterprises and their foreign affiliates in which the government has a controlling interest (full, majority, or significant minority), whether or not listed on a stock exchange (UNCTAD, 2011, p. 28). The level at which one defines a controlling interest differs: a generally accepted view is that occurs when the government owns more than 10 percent, is the largest single shareholder, or