Robert Salomon, Professor, NYU’s Stern School of Business
Globalization is an exciting trend and a catchphrase that now defines our modern era. Despite recent economic slowdowns in China and other emerging markets, a record breaking $1 trillion’s worth of cross-border deals were completed in 2015. And this figure is only set to rise as technological advances continue to connect the globe, presenting abundant opportunity.
Unfortunately, when it comes to globalization, managers – however smart and qualified – have been unable to capitalize on its potential. This is because they often exhibit a tendency to overestimate globalization’s benefits while underestimating its costs. Managers typically focus on opportunities to generate fantastic sales growth or significant cost reductions by tapping global markets. In the process, however, they fail to account for real and salient political, economic, and cultural challenges that they will face in global markets.
And it is not just small and mid-sized companies that overlook these important challenges. Even the largest, most sophisticated companies struggle with globalization. Walmart, for example, entered China two decades ago, confident that the business model it developed in the US would translate effortlessly to the Chinese market. Yet Walmart neither adequately assessed, nor prepared for, the differences in political, economic, and cultural institutions between the US and China, …and this significantly hindered its success. It did not understand local Chinese consumers – their consumption patterns and their product preferences. It failed to take into account how China’s underdeveloped infrastructure would impact its ability to transplant its efficient supply chain from the US to China. And it ran into myriad problems dealing with local and national politicians. As a result, Walmart has little profitability to show for its foray into China, and its operations there have systematically underperformed.
How can managers avoid making the same mistakes? The first thing that leaders with global responsibilities can do is to recognize just how important political, economic, and cultural institutions are to operating profitably in global markets. They can begin by thinking about the factors that make their businesses successful in their respective home markets. They should then ask themselves: Are these factors similar in the countries in which I seek to do business? Starting off with that simple thought experiment will help leaders unpack some of their assumptions about the institutional (political, cultural, and economic) features of their domestic country and in turn, consider the institutional features of the countries in which they plan to do business. Leaders should understand that the greater the differences between their home country and the country (or countries) to which they would like to expand, the greater the risks they will face and the greater the need to appropriately account for those risks.
Yet the methodology hardly ends there. Beyond a mere realization that countries differ in politically, economically, and culturally meaningful ways, managers should try to quantify those differences and incorporate them into their strategic and financial decision models. They can even develop tools that express those differences (and the risks they create) as additional costs to doing business in global markets. They can build in cost contingencies that help them better weather global market risks. Alternatively, they can build in risk adjustments to their domestic financial return requirements. Doing so will help managers avoid the mistakes that so many companies commit in global markets.
In short, managers must embrace the following realities:
● Globalization is more difficult and more expensive than it seems.
● Differences in political, economic, and cultural institutions between countries do matter.
● These institutional differences create risks that make it much more costly to do business in global, versus domestic, markets.
● These political, economic, and cultural differences are all too often misunderstood and overlooked.
● It is important to understand differences in political, cultural, and economic institutions between countries and to take them into account.
● Institutional differences can be reliably quantified and measured.
● Measures of institutional differences can be used to express globalization’s financial risks and build cost contingencies to help manage those risks.
By following these steps, leaders will be better equipped to avoid the common pitfalls of globalization and better positioned to profitably capitalize on globalization’s potential.
[Image courtesy of twobee at FreeDigitalPhotos.net]
About the Author
Robert Salomon is a professor of International Management and Faculty Scholar at NYU’s Stern School of Business, and is author of GLOBAL VISION: How Companies Can Overcome the Pitfalls of Globalization (Palgrave Macmillan, Feb). An award-winning scholar and educator, Salomon has been teaching and conducting research on globalization and global strategy for some 20 years.