Discussions of Global Global for the Entrepreneur
As we have discussed, strategic motives must drive the decisions to conduct business globally. But what is your action plan? Where do you begin? How do you begin? Which markets should be entered first? What would be the optimal mode of entry? How rapidly should you expand globally?
Definition of global entrepreneur:
- A global entrepreneur seeks out and conducts new and innovative business activities across national borders. These activities may consist of exporting, licensing, opening a new sales office, or acquiring another venture.
We are living in a world where all the major business functions in the value chain are highly globalized and deeply integrated. According to McKinsey and Company, 80 percent of the world’s GDP will be sold across international borders by 2027, compared to about 20 percent in 2001. Multinational business activity will grow from approximately $5 trillion to $70 trillion by 2027.
To understand how this is happening consider your desktop computer. It might have been assembled in Mexico with Chinese components; it uses chips designed in the United States, manufactured in Malaysia, and preinstalled with software applications that were jointly developed in India and Ireland. According to a United Nations World Investment Report, there are about 40,000 multinational corporations in the world with nearly 300,00 foreign affiliates. A global business is a multinational venture incorporated in one country that has operations in one or more other countries.
Do you have a global mindset?
A global mindset is a way of being rather than a set of skills. It is an orientation and a state of mind able to understand a product, a business, an industry sector, or a particular market, on a global basis. The executive with a global mindset has the ability to see across multiple territories, focusing on “commonalties across many markets.” Having a global mindset means the ability to scan the world from a broad perspective; “always looking for unexpected trends and opportunities that may constitute a threat or an opportunity to achieve personal, professional or organizational objectives.”
Global expansion favors smaller, entrepreneurial companies. It gives them access to capital, technology, talent, and markets that previously only big firms could reach. In fact, over 63,000 or 77 percent of all the companies involved in exporting from the United States had fewer than 100 employees.
Benefits to Going Global
There are many benefits for entrepreneurs participating in global business activities. We group them in three categories: strategic, financial, and production related.
Examples of strategic benefits are:
- enhancing domestic competitiveness
- reduction of dependence on existing markets
- capitalizing on the growth potential of the new country market and neighboring countries
- protecting foreign markets
- stretching and building marketing capability
- global brand building and awareness
- finding new talent
- transferring competitive information and new product ideas from those markets to other markets, or what we call “learn local and share global” activities.
Examples of financial benefits include:
- finding new customers
- increasing profits and sales
- earning a greater return from set of core competencies
- increasing the universe of potential investors
- capitalizing on tax advantages
- minimizing impact of seasonalities in local markets
Production-related benefits include:
- guaranteeing supply of raw materials
- acquiring technology and R&D capabilities
- cutting costs through global outsourcing
- improving purchasing power for customers buying locally
- realizing greater experience curve economies in production
- extending lifecycle for current products or services
- selling excess production capacity
Creating Your Global Business Strategy
There are five steps to your action plan for going global:
1. Conduct an internal analysis to examine how well you are prepared to approach the global markets
2. Conduct a market analysis for your products
3. Formulate a business strategy
4. Choose the mode of entry
5. Finance your selected strategy.
Step 1. Conducting an Internal Analysis
An internal analysis can lead to three findings. You are proactive, reactive, or defensive. SAP, the German enterprise software company, is a great example of being proactive. The company is fourth in the software world behind Microsoft, Oracle, and Computer Associates. SAP earns more than 80 percent of its revenues from outside of Germany. Hasso Plattner, CEO and co-founder, advises that “companies that wish to expand internationally have to think like missionaries and first establish small advance groups to learn the language, business climate, and culture. You cannot just arrive and preach about your product.”
However, most small and medium-size businesses are reactive. They respond to the tide of global pressures by simply “preaching” about their products. A defensive approach is designed to deny growth and profitability to competitors by, for example, attempting to market and sell before competitors are established, or by attempting to capture critical capital resources (suppliers, supplies, and partnerships) and denying them to any competitors.
Step 2. Conducting a Market Analysis
The new country market analysis process includes the following steps: conducting a preliminary screening, checking fit with strategy and resources; in-depth screening; final selection; forecasting country sales; and predicting competitors’ moves which includes existing local, potential new entrants, and competitors in domestic markets. There are some recent works by Michael Porter that offer a good place to start thinking about which countries offer the best advantages.
The key factors you should research are GDP per capita, economic freedom, ICT investments, access to local capital markets, and industry specific information. For looking at economic freedom, examines the Fraser Institute’s excellent publications. Their comprehensive studies provide in-depth coverage of 123 nations. The Institute tracks free countries, changes in their economic freedom, and freedom for entrepreneurs to enter and compete in their markets. The reports from the Milken Institute can help you monitor ICT investments on a global basis, including ICT investments per capita. Finally, you should review Milken’s Global Capital Access Index (CAI) reports which ranks countries by the ability of its entrepreneurs to gain access to capital.
Consider the fact that each business has industry specific issues and questions to answer.
- For example, look at customers and competitors, what are they doing?
- What is the penetration of technology in the sector?
- How about the adoption rates of innovations?
- What about regulatory openness and the ability to start and run entrepreneurial ventures in particularly the legal practices established by the country?
- What is the professional service infrastructure like?
- How easy is it to get a banking account and find professional service providers?
Finally, we follow the money.
- What is the investment activity in the local venture capital community?
- Are there mechanisms for harvesting in place?
Step 3. Formulating a Global Business Strategy
Today, the relevant question is no longer “Should we be global?” but rather “Which global strategy is appropriate for our company?” Unfortunately, there is no specific strategy or approach that is suitable for all ventures, all markets, or all industries because no two are exactly the same.
A global business strategy should be based on differences in customer tastes and preferences, differences in infrastructure and traditional practices, differences in distribution channels, local governmental demands, and localization of products needs, which means developing, manufacturing, and marketing products best suited to the demands of local customers. A venture’s orientation to global markets can be characterized as one of the five business strategies profiled here.
A. Exporting Strategy. There are two types. First, indirect exporting which involves the selling to domestic customers who then in turn sell the products globally. And direct exporting is selling directly to customers in overseas markets. Exporting makes sense if a company is not actively seeking global business and cares to make little investment to get involved in global trade.
B. International Strategy. The foreign markets are viewed as extensions of the domestic markets and likewise, the domestic products are offered, as is, to foreign buyers. Basically it is foreign involvement without investment, leveraging critical capital resources of partners in host countries. Makes sense if the venture has a valuable core competence that indigenous competitors in foreign markets lack, to establish distribution channels and/or production facilities, and if the venture faces relatively weak pressures for local responsiveness and cost reductions.
C. Multi-domestic Strategy. Each country market is viewed as being culturally unique and involves creating a customized product for each market. Makes sense most when there are high pressures for local responsiveness and low pressures for cost reductions.
D. Global Strategy. Views the world as a set of markets and sources of supply. Wherever cost and culturally effective, a standardized product is developed for the entire set of leading country markets. Takes advantage of the experience curve, reaping the maximum benefits from the economies of scale that underlie the experience curve. Makes sense where there are strong pressures for cost reductions and where demands for local responsiveness are minimal.
E. Transnational Strategy. Uses local thinking, knowledge and local assets. The venture develops core competencies locally, paying close attention for local responsiveness. It involves detailed foreign investment, establishing management and/or production facilities in host countries. Makes sense when a venture faces high pressures for cost reductions and high pressures for local responsiveness.
Step 4. Choosing Your Mode of Market Entry
The tactics for implementing a multinational business strategy is a most complicated task even for the experienced professionals. We can only briefly review them here. There are two very broad choices for your modes of entry into new country markets: nonequity and equity routes.
A. Nonequity Route. Nonequity includes exporting, indirect or direct, and contractual agreements like licensing and franchising. As discussed above, exporting is a relatively conservative approach to test foreign markets and foreign competition inexpensively without investing locally. It is a popular strategy with entrepreneurs. We found that 77 percent of United States exporters have fewer than 100 employees, and almost half of the ventures in the United States with revenues under $100 million said they exported products from the United States.
Licensing involves granting the rights to intangible property for a specified period of time. Management contracts are similar to licensing as they provide some cash flow from a foreign source without significant investment or exposure. Global consulting and engineering firms have traditionally conducted their foreign business on the basis of a management contract.
Partnering involves distribution agreements, contract manufacturing, R&D, joint ventures, and “piggy-back” co-marketing agreements. Franchising is similar to licensing, although franchising tends to involve longer-term commitments than licensing and includes not just product or intangible property like a trademark, but also rules on how to run and manage the business and business models.
B. Equity Route. The equity route includes creating joint ventures, strategic alliances, mergers and acquisitions, and greenfield start-ups. Ventures merge with or acquire an established foreign firm and use that footprint to launch and to promote their products into that country’s marketplace. A greenfield start-up, or wholly owned subsidiary, is an approach to establish new foreign subsidiaries, and to set up a new operation from scratch. It is expensive, but it can be tailored to exactly fit your needs.
Step 5. Special Issues in Multinational Financing
Although foreign operations may be similar to domestic operations, when expanding your venture globally you must also consider the many complexities that do not exist at home. Therefore you will need to communicate your global business activities to your stakeholders and investors. For example, in your business plan, you will need to add the appropriate attachments to the financials, and incorporate explanations in your assumptions that support your financials.
There are five key financial activities that are particular to conducting multinational business, and need to be discussed, regardless of the strategic approach you choose to go global. They are listed here.
A. Capital budgeting decisions. Involves the analysis of investment opportunities, looking for entering new markets, for sourcing raw materials, for production efficiencies, for gaining access to local expertise. These decisions are about what activities to finance, capital budgeting for new projects and analyzing parent cash flows, and adjusting for political and economic risk.
B. Financing decisions. Looking long-term at how to finance those activities including in what currency, sources of financing and short-term issues like how to finance trade activities and to offset foreign receivables.
C. Capital structure decisions. What proportions of debt and equity are necessary for the global operations. Looks at who owns what and for how much. Important to conform to the local norm where the subsidiary operates or vary to take advantage on opportunities to lower taxes and take advantage of other market imperfections.
D. Cash management decisions. Focuses on how to optimize cross-border cash flows. Includes decisions about how to manage the venture’s financial resources most efficiently, how to minimize cash balances, reducing transaction costs and tax management. Examines the moving of money across borders for attaining efficiencies and reducing taxes, the investment of excess cash balances and how to minimize tax exposure on cash flows.
E. Working capital management decisions. Establishing invoicing policies (which currency), pricing strategies (how much) cash flow networks, accelerating cash flow repatriation and funds positioning. In essence, how to bring money earned overseas through distributed earnings, royalties and license fees, net interest on loans, and distributed charges for services.
Case In Point: Starbucks Coffee – Going Global One Cup at a Time
Howard Schultz, who led the purchase of Seattle-based Starbucks Coffee in 1987 for $250,000, later boasted, “Starbucks is going to be a global brand, in the same genre as Coke and Disney.” By 2003, Starbucks has grown from 15 stores and 100 employees in 1987 to more than 65,000 employees serving more than 22 million customers worldwide each week. It is the leading retailer, roaster and brand of specialty coffee in the world, earning more than $3.3 billion in revenues from 6,200 retail locations in 30 countries.
It was recognized by Fortune magazine as “One of the Most Recognized and Respected Global Companies.” During the annual shareholders meeting in early 2003, Starbucks Corporation celebrated the worldwide acceptance of its brand by customers around the world. “Over the past several years Starbucks has become an integral part of customers’ everyday lives,” said Schultz.
In 1983 Schultz traveled to Italy, where he was impressed with the popularity of espresso bars in Milan. He saw the potential in Seattle to develop a similar coffee bar culture and a couple of years later he founded Il Giornale, a shop that offered brewed coffee and espresso beverages made from Starbucks coffee beans. In 1987, with the backing of local angel investors, Il Giornale acquired the assets of Starbucks and changed its name to Starbucks Corporation.
By the end of the year they had 17 stores, with one in Vancouver, BC. In 1995 Starbucks Coffee International was created and formed a joint venture with SAZABY Inc., to develop Starbucks coffeehouses in Japan. A few years later they acquired the Seattle Coffee Company in the United Kingdom with more than 60 retail locations.
Ten years after Schultz purchased the company, Starbucks had reached $1 billion in global sales and he transitioned from chairman and CEO to chairman and chief global strategist.
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