Explain why some firms have not planned for the development of international systems.

Abstract

Highlighting an important facet of diversity among organizations operating in different institutional environments, this article presents a model of the growth strategy of the firm in planned economies in transition such as Eastern Europe, the former Soviet republics, and China. Focusing on the stylized state-owned enterprises, we explore the interaction between institutions and organizations in these countries. Given the institutional constraints, neither generic expansion nor acquisitions, two traditional strategies for growth found in the West, are viable for firms in these countries. Instead, firms settle on a network-based strategy of growth, building on personal trust and informal agreements among managers. The institutional environment that leads to this unique strategy of growth is examined, and boundary conditions, limitations, and implications of this model are discussed.

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Firms with ill-considered globalization strategies, say Alexander and Korine of London Business School, are poised to become targets for breakup or overhaul by activist share owners. Yet many businesses (particularly in deregulated, service, and manufacturing industries) have made complacent assumptions about the need to go global and moved full steam ahead toward failure. If they had paused to answer three simple questions, they might well have avoided their missteps.

Are there potential benefits for our company? Moves that make sense for some firms won’t necessarily work for others. UK-based roof tile maker Redland learned that lesson when it tried leveraging its technical know-how beyond its home market—without realizing that building practices in certain countries provided very little demand for concrete roof tiles. The company was fully able to transfer the relevant technology, but there was no value in doing so in those markets.

Do we have the necessary management skills? Even if potential benefits do exist for a company, it may not be in a position to realize them. Although industrial conglomerate BTR had developed a presence in many countries, each business unit was run more or less autonomously. As its customers globalized, they came to expect coordinated supply and support across borders. BTR was well positioned to deliver, but its ingrained culture blocked attempts at global integration.

Will the costs outweigh the benefits? Global efforts can be rendered counterproductive through unanticipated collateral damage. TCL, a Chinese maker of electronics and home appliances, has expanded rapidly into the United States and Europe through a series of acquisitions and joint ventures. Along the way, the company’s infrastructure has become unwieldy; the cost of managing it has outweighed the benefits of increased scale and resulted in large losses.

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The Idea in Brief

Globalization promises substantial advantages like new growth and scale. For some companies, it’s paid off handsomely. But global mania has also blinded many firms to a hard truth: global strategies are devilishly tough to execute.

The landscape has become littered with some of these unfortunates’ remains. DaimlerChrysler and ABN Amro—dismembered and bought up by activist shareowners—are particularly painful examples.

To escape this fate, don’t assume you should go global, say Alexander and Korine. Instead, determine whether a global move makes sense for your firm. Ask:

• Could the move generate substantial benefits?

• Do we have the capabilities (for example, experience in postmerger integration) required to realize those benefits?

• Will the benefits outweigh the costs (such as the complexity that comes with coordinating far-flung international operations)?

A yes to these questions suggests globalizing may be right for you.

The Idea in Practice

Three Questions to Ask Before Going Global

Could the strategy generate substantial benefits for our firm? The global race can lead you to overestimate the size of the prize. Example: 

Redland, a U.K. manufacturer of concrete roof tiles, expanded around the world to leverage its technical know-how beyond its home market. But it often sought opportunities in countries (such as Japan) where local building practices provided little demand for concrete roof tiles. Thus, there was no value in transferring its technology to such markets.

Do we have the capabilities needed to achieve those benefits? Companies often lack the skills needed to unlock the coffer holding the prize. Example: 

Taiwanese consumer electronics company BenQ’s acquisition of Siemens’s mobile-devices business failed because BenQ lacked integration skills. It couldn’t reconcile the two companies’ incompatible cultures or integrate R&D activities across the two entities. BenQ’s German unit filed for bankruptcy in 2006.

Will the benefits outweigh the costs? The full costs of going global can dwarf even a sizable prize. Example: 

TCL, a Chinese maker of TVs and mobile phones, has expanded rapidly into the United States and Europe through acquisitions and joint ventures. It now has numerous R&D headquarters, R&D centers, manufacturing bases, and sales organizations. The cost of managing this complex infrastructure has outweighed the benefits of increased scale—creating large losses for TCL and several of its joint-venture partners.

Three Industries with Particular Globalization Challenges

• Deregulated industries. Formerly state-owned industries (telecommunications, utilities) have globalized after deregulation to spur growth and escape stiffened competition at home. They assume they can use their existing competencies in new markets to achieve cross-border economies. But it’s been difficult, for example, for utilities to optimize electricity flows over uncoordinated grids.

• Service industries. Many service businesses (retailing, insurance) go global to generate growth beyond home markets threatened by foreign rivals. Their strategies hinge on coordination of people or processes—no easy feat. Wal-Mart, for instance, has struggled to get its partner firms and employees abroad to adopt its work methods.

• Manufacturing industries. For automobile and communications equipment makers, for example, global mergers and partnerships seem to offer the size needed to compete against consolidating rivals. But the complexities of integration can cause delays in achieving those gains. These companies thus have become vulnerable to economic slowdowns, which constrain their ability to pay for expansion and consolidation.

Economic globalization is viewed by some as the best hope for world stability, by others as the greatest threat. But almost everyone accepts that businesses of all types must embrace it. Even smaller enterprises—urged on by the financial markets, by investment bankers and consultants, by the media, and by the moves they see rivals making—feel the strategic imperative to go global in one form or another. Although the current financial crisis is putting a damper on such activity, the pressure on companies to globalize is likely to persist.

With this sense of inevitability, it’s easy to forget the serious mistakes some companies have made because of their global strategies. Dutch financial-services firm ABN Amro, for example, acquired banks in numerous countries but wasn’t able to achieve the integration needed to generate value with its international network. AES, a U.S.-based energy firm that operates 124 generation plants in 29 countries on five continents, has in recent years struggled to show that it is worth more than the sum of its individual geographic units. Daimler-Benz merged with Chrysler in 1998 in order to create a Welt AG—a world corporation—but never attained the power over markets and suppliers that this global position was supposed to deliver.

And these days, companies can’t always chalk their mistakes up to experience and move on. Industry rivals and activist share owners are increasingly forcing firms to undo their international investments—despite, in many cases, early endorsement by analysts and the market—and even to fire the senior management teams that made them. ABN Amro was dismembered last year by the Royal Bank of Scotland, Fortis, and Banco Santander, largely along geographic lines. AES’s share price has tumbled since investors’ initial enthusiasm for its globalization strategy, and some investment advisers are calling for the firm to be split into three or more parts. The architect of the DaimlerChrysler deal, CEO Jürgen Schrempp, finally yielded to share-owner pressure and resigned, freeing up his successor to sell Chrysler to the private-equity giant Cerberus in 2007.

Indeed, we believe that businesses with ill-considered globalization strategies are poised to become the next targets for breakup or corporate overhaul by activist share owners, just as companies with poorly thought-out business diversification strategies were targets in the past. Today’s activists include private-equity firms, hedge funds, and traditional pension funds, and they wield influence through a variety of means, from vocal use of the platform offered by a minority stake to all-out takeover and sell-off.

All right, even the best executive teams are going to make mistakes in a business environment as complex as today’s. And no one would deny that the forces driving globalization are powerful and that the business benefits of becoming a global player can be tremendous. What concerns us is that so many companies seem to share unquestioned assumptions about the need to go global and are lulled by apparent safety in numbers as they move toward potential disaster. We highlight in this article several industries where this mind-set has been prevalent and a number of companies that have paid a high price for adopting it.

Avoiding Ill-Fated Strategies

Businesses have had international ambitions at least since the founding of the British East India and Hudson’s Bay companies in the seventeenth century. Truly global corporations began appearing early in the last century, and their number has grown—with both successes and failures along the way—ever since.

But the accelerated removal of political and regulatory barriers to cross-border trading and investment over the past 15 years, along with the advent of technology that enables companies to conduct business around the world 24 hours a day, has made a global presence a generally accepted requisite in many industries. From the late 1990s onward, with a brief pause during the 2001–2003 bear market, we have witnessed a head-over-heels rush by companies to globalize: Foreign direct investments are at record levels, cross-border partnerships and acquisitions are burgeoning, worldwide sourcing continues to increase, and the pursuit of customers in emerging economies grows ever more heated.

Although such moves have benefited—or at least not irreparably damaged—many companies, we’re beginning to see fallout. Sometimes firms have failed because their global strategies were deeply misguided, other times because execution was more difficult than anticipated.

We think that many failures could have been prevented—and would be avoided in the future—if companies seriously addressed three seemingly simple questions.

1. Are there potential benefits for our company?

Just because a move makes sense for a rival or for companies in other industries doesn’t mean it makes sense for your own company or industry. The race to globalize sometimes leads people to overestimate the size of the prize.

UK-based roof tile maker Redland, for example, expanded aggressively around the world beginning in the 1970s with the aim of leveraging its technical know-how beyond its home market. The problem: It often sought opportunities in countries, such as the United States and Japan, where local building practices provided very little demand for concrete roof tiles. Although the company was fully able to transfer the relevant technology, there was no value in doing so in such markets.

2. Do we have the necessary management skills?

Even if potential benefits do exist for your company, you may not be in a position to realize them. The theoretical advantages of globalizing—economies of scale, for example—are devilishly difficult to achieve in practice, and companies often lack the management key needed to unlock the coffer holding the prize.

Even if potential benefits do exist for your company, you may not be in a position to realize them.

By the late 1990s, industrial conglomerate BTR had developed a presence in many countries. However, each business unit was run as a largely autonomous entity, with stringent profit accountability and little encouragement to work with others. This approach made sense in a fragmented world, but as BTR’s customers globalized, they came to expect coordinated supply and support across borders. Although the opportunity was clear and BTR seemed well positioned to seize it, the company found it impossible to implement an approach so alien to its traditions. Even after a change of CEO and other senior staffers, the company culture blocked attempts at global integration, and the 1999 merger with Siebe was seen by many analysts as an admission that BTR simply could not make the changes needed.

3. Will the costs outweigh the benefits?

Even if you are able to realize the benefits of a global move, unanticipated collateral damage to your business may make the endeavor counterproductive. Too often, companies fail to see that the full costs of going global may dwarf even a sizable prize—for example, when an effort to harmonize the practices of national business units drives away customers or distracts national management teams from the needs of their markets.

The increased complexity of managing international operations is also a threat. TCL, a Chinese maker of electronics and home appliances, has expanded rapidly into the United States and Europe through a series of acquisitions and joint ventures. As a result of deals in the past few years with Thomson and Alcatel, TCL has found itself with four R&D headquarters, 18 R&D centers, 20 manufacturing bases, and sales organizations in 45 countries. The cost of managing this infrastructure has outweighed the benefits of increased scale and resulted in large losses for both joint ventures.

Globalization’s Siren Song

Companies neglect to ask themselves these seemingly obvious questions because of their complacent assumptions about the virtues of going global—assumptions that are reinforced by seductive messages from, among other places, the stock market. Although the siren song of globalization has lured companies of all kinds into this risky strategic space, recently the call has been particularly insidious in certain industry contexts, three of which we describe here. (For a description of how a management imperative such as “Become more global” can rapidly spread, see the sidebar “The Susceptibility to Managerial Fads.”)

The belief that companies must become more global is the latest in a long line of widely held and generally unquestioned assumptions that can undermine the rational behavior of companies or entire industries.

The management trends—you might even call them fads—that grow out of these assumptions can be dangerous because they often lead to sloppy thinking. For example, the label used to describe a trend may get stretched far beyond its original meaning. “Reengineering” has come to mean nearly any corporate reorganization; “related diversification” is used today to justify acquisitions within categories, such as “communications media” and “financial services,” that are so broad as to be almost meaningless. More troubling, the stampede by companies to join peers in mindlessly embracing such trends can cloud managers’ judgment about what is worthwhile and achievable in their particular case.

The pathology of management fads has an underlying dynamic that is worth exploring:

Company X, with talented people at the helm, pioneers a new management approach. The firm does well, and others take notice. Maybe one or two experiment with similar innovations. Then stock market analysts and journalists spot the new approach. They view it as part of a broader pattern, and someone comes up with a clever-sounding label. The word “paradigm” may even get tossed around. As the phenomenon gains visibility—often in publications like this one—academics develop “frameworks” to help companies understand it. Their codification, intended simply to explain the phenomenon, further validates it. (Consultants also develop frameworks, though usually with the aim of selling the trend as a product.)

Over time, people use the now-familiar label more and more loosely. They group all manner of activities under the heading. Despite its ambiguity, there is a growing sense that activities under the rubric are worthwhile. Investment bankers cite the concept as a reason for companies to make acquisitions or other moves, and in the enthusiasm of deal making everyone glosses over the difficulties of integration and implementation. Financial markets sometimes reward companies just for announcing that they have adopted the new approach.

Sadly, the original insight, not to mention an appreciation of the context that gave rise to it, soon gets lost as companies scramble to become part of the trend. Before long, they are copying all sorts of elements and manifestations that are at best tangential and often irrelevant to the sought-after benefit. By the time a few books have come out on the topic, managers are embarrassed if they can’t point to examples within their own organizations.

As the herd piles in, smart managers are already scanning the horizon for a new idea that will give them a competitive advantage. But others continue to give little thought to whether the trend has played out—or was never likely to benefit a company in their situation. There is always a lag before misapplications of the concept start to affect companies’ numbers. Even when they do, many corporate managers, with stacks of statements and presentations extolling the virtues of the approach, are reluctant to abandon it. The stubborn ones carry on regardless of mounting costs—thereby setting the stage for activist share owners to step in and force a change.

This discouraging scenario doesn’t unfold because the original concept was wrong. (Globalizing isn’t necessarily bad; not globalizing isn’t necessarily good.) It plays out because embracing a trend often precludes careful examination of the pros and cons of the specific choices made by a single company in a particular context.

Deregulated industries.

Many businesses in formerly state-owned industries, such as telecommunications, postal services, and utilities, have responded to deregulation with aggressive global moves. Faced with limited growth opportunities and often increasing competition in their home markets, companies have accepted that geographic expansion is the best way to exercise their new strategic freedom. These companies, the argument goes, can apply existing competencies—providing voice and data communication, delivering letters and parcels, distributing electricity and water, even dealing with the deregulation process itself—in new markets. They will enjoy significant savings by sharing resources across their international operations while “sticking to their knitting.” The latter point—the importance of focusing on what they know how to do—is a key part of the argument, since unrelated diversification, itself once a widely touted strategy, has been largely discredited.

This apparently sound logic has turned out in many cases to be oversold by investment bankers or to be just plain flimsy. Companies frequently pay far too much to enter foreign markets. Furthermore, many of the deregulated industries are “glocal”–that is, customer expectations, operating environments, and management practices for what seem to be globally standard services can vary greatly depending on location. Water distribution, for instance, may not in fact be the same industry in the regulatory settings of two different countries. In addition, cross-border economies, if they exist at all, may be hard to achieve. It is difficult, for example, to optimize electricity flows over uncoordinated grids.

Faced with such challenges, a number of companies have struggled with or reversed their global moves. Kelda, a UK water utility, sold its U.S. business six years after acquiring it because differences in pricing, environmental regulations, and distribution proved so great that the business could be run only on a stand-alone basis.

Partly because of national differences in customer behavior, Deutsche Telekom has ended up running its U.S. unit, T-Mobile USA, as a completely independent business that could be sold off at any time. Rival telecom operator Vodafone has been forced by dissatisfied share owners to unload its Japanese subsidiary, J-Phone.

Deutsche Post, in assembling an international network of mail, express, and logistics services, overpaid significantly for the U.S. express-delivery services DHL and Airborne. Germany’s former state-owned monopoly has also had great difficulty integrating DHL’s entrepreneurial management culture with its own. Some analysts value the sum of Deutsche Post’s separate businesses as 25% greater than the market value of the company—an assessment that is likely to increase pressure to spin off some of those businesses.

Service industries.

Companies in traditionally national and fragmented service industries, such as retailing, consumer banking, and insurance, have viewed globalization as a way to realize scale economies and to generate growth beyond home markets themselves facing an incursion of foreign competition. In some cases, globalization seems to make sense because customers and suppliers are also becoming more global.

As in deregulated industries, however, the “global” customer may be more national than anticipated. And obtaining scale economies across borders requires management skills and experience that many companies lack. For example, serving a customer that is truly global in a consistent way from multiple national offices is no easy task.

Service businesses seeking to capture the benefits of a globalization strategy must, like firms in deregulated industries, pay attention to a mix of global and local factors. Purchasing can benefit from careful coordination across borders, but marketing and sales may suffer from too much standardization. Certain services travel much better than others that seem remarkably similar. In shoe retailing, for instance, offerings targeted at the wealthy or the young are far more global than those aimed at the middle market, which remains doggedly local.

In service businesses, many of the implementation challenges of a global strategy involve the coordination of people or processes. Wal-Mart, for instance, has struggled to get its partner firms and employees abroad to adopt its work routines. ABN Amro’s global empire was dismantled by predators because the international business was a collection of mostly unrelated operations in countries ranging from Brazil to Monaco. The company achieved few economies of scale: In marketing, for example, it didn’t enjoy the efficiencies resulting from a single global brand, because local banks mostly kept their original names. Furthermore, its attempts at sharing information systems, management processes, and other bits of infrastructure were repeatedly delayed and then implemented haphazardly, creating few savings.

The outcomes of some other service companies’ global strategies have not been so dire—but they have still fallen short of expectations. Starbucks has pursued international growth at a breakneck pace, even though margins abroad have been only about half those of the company’s U.S. operations. Axa, the global French insurance group, has enjoyed satisfactory financial performance from its many units around the world but has so far been unable to reduce its global cost base or convincingly roll out innovations, such as its U.S. variable-annuity program, internationally. Thus, although the globalization strategy hasn’t destroyed value, it also hasn’t added as much as originally envisioned.

Manufacturing industries.

Over the past decade, companies in manufacturing industries, such as automobiles and communications equipment, have viewed rapid cross-border consolidation as necessary for survival. Global mergers and partnerships seem to be the only way for companies to obtain the size needed to compete against consolidating rivals, to reduce their reliance on home markets, and to gain manufacturing economies of scale.

These benefits, though arguably easier to achieve than those sought by service companies (because local differences seem less problematic), are often outweighed by operational and organizational challenges. The complexities of integrating organizations and operations can cause costly delays or failures. And companies haven’t had the luxury of much time to realize the benefits of integration. Counting on the benefits of size and scale to drop quickly to the bottom line, many manufacturers have become particularly vulnerable to economic slowdowns, which constrain their ability to pay for expansion and consolidation before an increasing debt-to-equity ratio forces their executive teams to cede control to financiers or new management.

The merger of Daimler-Benz and Chrysler is a poster child for this problem: The German and U.S. automakers were different in almost every respect, from company cultures to purchasing practices, and they were never able to attain such benefits as the promised billions of dollars in savings from common supply management.

Taiwanese consumer electronics company BenQ’s acquisition of Siemens’s mobile-device business followed a similar story line, including incompatibility of cultures and processes, as well as difficulties in integrating R&D activities. In a haunting echo of the scramble by Daimler-Benz and Chrysler to merge, BenQ didn’t visit Siemens workshops and production lines before inking the deal, relying only on due diligence documents. Although BenQ continues to be active in mobile equipment, its German unit was declared bankrupt in 2007.

In both of these cases—and in numerous others—the strategic logic for globalization was tenuous, and the skills needed to implement a globalization strategy effectively were in short supply.

A Continuing Danger

We aren’t saying that all globalization strategies are flawed. Telefónica, Spain’s former telephone monopoly, has successfully expanded throughout much of the Spanish-speaking world. The past five years have seen General Electric’s Commercial Finance business move rapidly and effectively into dozens of non-U.S. markets. Renault’s pathbreaking alliance with Nissan has to this point proved beneficial for the French and Japanese automakers.

But focusing on such success stories only reinforces the conventional wisdom that a globalization strategy is a blanket requirement for doing business—which in turn leads many companies to insufficiently scrutinize their proposed global initiatives. (For a discussion of one of the gravest cases of failed globalization, see the sidebar “Royal Ahold’s Downfall.”)

Dutch supermarket operator Royal Ahold is best known in recent years for an accounting scandal that led to the resignation of its CEO and its CFO in 2003. The financial irregularities must be seen in light of the company’s ambitious, and ultimately unsuccessful, globalization strategy.

Royal Ahold began its international expansion in the 1970s and accelerated it in the 1990s, eventually acquiring businesses throughout Europe, Asia, Latin America, and the United States, to become the fourth-largest retailer in the world. But the benefits of owning this network of stores were hard to realize or didn’t exist in the first place.

Global economies of scale are one of the main rationales for international expansion. However, such economies, difficult to attain in many businesses, are particularly elusive in food retailing. Purchasing economies can be achieved only with items furnished by global suppliers to all markets—and these typically represent at most 20% of all supermarket items, because of cultural differences and the frequent need to source fresh food locally. Even apparently “international” products, such as hummus, must be adapted to different countries’ distinct tastes.

Additionally, realizing synergies across a far-flung network requires common information systems and management processes, and Ahold made little effort to integrate its acquired businesses into the existing organization. Different information systems thus continued to coexist across the company, sometimes even within the same country.

Ironically, the lack of integrated systems and processes needed to secure global benefits helped conceal the company’s financial irregularities. And the failure to attain those benefits undoubtedly put pressure on top managers to produce favorable—if false—financial results. When the new executive team finally introduced common management processes in the wake of the scandal, those processes did little to improve such activities as common purchasing across markets. As recently as last year, key suppliers were charging Ahold different prices in different countries.

Ahold’s 2007 sale of most of its U.S. operations to private equity firms highlighted the nearly complete abandonment, under pressure from dissatisfied minority share owners, of its once ambitious globalization strategy. The dissidents were concerned not about the usual over-diversification of business types—after all, Royal Ahold remained focused on retailing—but about the over-diversification of geographic locations. (Tests for suitable business diversification are discussed in “Corporate Strategy: The Quest for Parenting Advantage,” by Andrew Campbell, Michael Goold, and Marcus Alexander, in the March–April 1995 issue of HBR.) With the focus on governance at Ahold, the underlying story of failed globalization did not receive adequate attention until activist share owners jumped on it.

We expect this trend to continue, as firms in various industries recklessly pursue global strategies. Take the emerging renewable-energy industry—companies developing technologies for biofuel, solar energy, and wind energy. We have talked with executives who, racing to establish a global position in this booming field, are planning rapid expansion over the next few years in Africa, Asia, and Latin America—and completely underestimating the management challenges involved. Many will, after initial applause from the financial markets, find their hastily conceived strategies challenged after the fact by activists.

We also anticipate that problems will recur in industries that earlier rushed to adopt globalization strategies, with activist share owners ready to pounce on companies as evidence of poor management choices surfaces. Activist share owners have already taken significant positions in some companies mentioned in this article. Other target companies, perhaps not quite ripe for direct intervention—and temporarily shielded from attack by the current credit crisis and turbulent equity markets—are nonetheless being discussed in the boardrooms of rivals and by the investment committees of pension funds and private equity firms.

Ironically, some predators, having spotted the weaknesses of other companies’ global strategies, may be poised to fall into the same trap. For example, the Royal Bank of Scotland is known for its highly successful 2000 acquisition of NatWest, a much larger UK rival, and for the subsequent overhaul of its target’s culture. But RBS may find it difficult to achieve similar results with the disparate banking assets—spread across more than 50 countries—that it acquired from ABN Amro. And though the recent government bailouts of RBS and Fortis aren’t a direct result of the firms’ international strategies, the acquisition of ABN Amro assets stretched their balance sheets and made the companies more vulnerable to the financial crisis.

We also worry that activist share owners and private equity firms may reproduce flawed globalization strategies in their own portfolios. The largest of these players are now more diversified, both in type of business and in international footprint, than many of the giant conglomerates of 30 years ago that were subsequently broken up and sold off. Indeed, as you look out on a landscape littered with the remains of dismembered companies weakened by failed globalization strategies, you have to wonder: Could today’s predators be tomorrow’s prey?

A version of this article appeared in the December 2008 issue of Harvard Business Review.

What are the major management issues in developing international systems?

Which of the following is a reason some firms do not engage in strategic planning?

What are the major factors driving the international information systems architecture?

What are the major challenges posed by the global information systems?