5 ways smart companies take on the worldMarch 25, 2013: 11:01 AM ET
Here are five techniques smart companies are using to narrow their focus and adjust their global market strategies.
By Pankaj Ghemawat
FORTUNE -- Should the truly global company aim to compete in all major markets? 64% of the respondents to a survey I ran before the financial crisis agreed with this dubious proposition. Some companies still cling to this view of globality-as-ubiquity. Think of General Motors (GM) hanging on (so far) to Opel, despite horrible over-capacity in Europe that is unlikely to be filled any time soon by growth. GM ranks 4th on market share, and has a weak brand image. Even if Opel meets its optimistic target of break-even by mid-decade, some analysts estimate that its losses since 2000 will cumulate to $20 billion by then. Yet according to GM CEO Dan Akerson, "Opel is not for sale."
But many companies have since pulled in their horns, and it's not just firms exiting recession-plagued markets like Greece. Suzuki is pulling out of the U.S. car market after almost three decades. According to a 2012 survey, 22% of European companies in China were considering exiting, and electronic retailer Media Markt has already left, as has Home Depot (HD). And analysis of the Fortune Global 100 indicates a recent tendency to reduce their equity stakes in their international affiliates
Even more interesting than this trend, though, are the various strategic approaches companies are employing. Here are five techniques smart companies are using to narrow their focus and adjust their global market strategies:
Chopping deadwood. Even before the crisis, an analysis of internal financial data from 16 multinationals indicated that eight of them had large geographic units -- units bringing in as much as one-quarter of their revenues -- that destroyed value after accounting for their financing costs. Post-crisis, with generally higher capital costs and lower growth forecasts, the deadwood to be chopped should be even larger. Multinationals are starting to take a harder look at the P&Ls of their country businesses with an eye toward shedding the losers. Avon (AVP), for example, recently announced that it would exit South Korea and Vietnam.
Manning the bridges. This is the idea of cutting back not just based on financial performance but to focus on sets of countries whose natural connections can help firms cut down on costs and complexity. What kinds of bridges ease business flows? Some examples: I estimate that one country's stock of FDI in another is boosted nearly 60% by a common official language, nearly 275% by a colony-colonizer link in their past, 30% by common membership in a regional trade agreement, and more than 150% by a halving of the geographic distance between them! Indian pharmaceutical firm Dr. Reddy's narrowed its secondary markets from 36 to 5 using a model that gave priority to markets sharing connections to India along such dimensions.
Fortifying regions. Globalization has not erased the special ties that bind countries within their own regions. 50-60% of the world's trade, FDI, international phone calls, and migration all take place within regions rather than across them, which is unsurprising when one recognizes that countries in the same region tend to share particularly strong connections of the types described above. Therefore, as companies look for natural bridges to promising markets, it often makes sense to start close to home. South Africa's Standard Bank is "tightening" its strategy to focus on Africa rather than across emerging markets, selling its Argentine unit and cutting back in Europe, while expanding in Kenya, Angola, Zambia, and Ghana. But focusing on Africa hasn't meant ignoring the rest of the world. China's largest bank, ICBC, owns 20% of Standard, a partnership that only becomes more complementary as Standard becomes more rooted in Africa.
Riding the Big Shift. This technique adds a dynamic perspective to the historical and structural focus of the first three. Emerging markets not only account for 38% of world GDP today but also 79% of all GDP growth since the onset of the crisis and for all of the growth in merchandise trade! This big shift poses particularly acute questions for Western multinationals -- and sometimes leads not just to more commitment to emerging markets but less commitment to mature ones. Consider Danone's recent cutbacks at home in Europe -- which still dominates dairy product demand -- while continuing to push growth in emerging markets.
Cherrypicking. Finally, even if a company maintains a broad footprint, it can be useful to designate a subset as key markets. Doing so can help focus the deployment of limited resources, including managerial attention. HSBC, for example, identified 20 key markets outside of its two "homes" in the U.K. and Hong Kong. While HSBC (HBC) operates in 85 countries, those 22 provide 92% of its profits. Maybe its new realism about its own business will someday get it to cut back on "globaloney" like its ads featuring multi-currency lemonade stands with the outlandish tagline that "in the future, even the smallest business will be multinational." Less than 0.1% of U.S. companies are multinational, and among "multinationals," the majority operate in only one or two foreign countries.
These techniques aren't all mutually exclusive but the conceptions of global strategic management underlying them vary greatly. Chopping deadwood, while often important, represents no more than passive, purely financial portfolio management. Cherrypicking involves more active management based on broader criteria but ignores the insight that where you should go depends on where you're coming from, which is the emphasis of Manning the Bridges and Fortifying Regions. CEOs who look at distance as well as size in deciding which markets to focus on, recognize that globalization usually involves operating in one or two regions rather than everywhere, and are clear about the Big Shift and whether and how to ride it will have a leg up on their competitors.
Pankaj Ghemawat is a professor at IESE and author of World 3.0