The small and medium sized companies I work with see global expansion as a natural way to grow their business such as gaining access to new markets, new talent and leveraging economies of scale.  However, doing so is not without risks involving: added complexity, increased workload for employees back home, increased complexity in doing business, culture clashes, less than receptive local responses from competitors and governments.  These challenges can take companies by surprise.

Recently, McKinsey published some findings that I thought should be looked at in more detail, specifically, they showed that high performing global companies consistently score lower than more locally focused ones on several critical dimensions of organizational health—direction setting, coordination and control, innovation, and external orientation.  Companies need to understand the causes and work to reduce the impact.

Weaknesses

McKinsey surveyed over 600,000 employees, and assessed the health of nearly 500 corporations.  From this research they identified 20 “local champions” that outperformed their industries over the past ten years, and 18 “global champions,” which did the same.  They compared these companies across various elements of organizational health that they defined as the ability to align around a strategy or change program, to execute, and to renew a company faster than their competitors.  They found:

• High-performing global organizations are consistently less effective at setting a shared vision and engaging employees around it than are their local counterparts.
• These global leaders also find maintaining professional standards and encouraging innovation of all kinds more difficult.
• Because they do business in multiple countries, they find it more challenging than local leaders do to build government and community relationships and business partnerships.

These findings are not encouraging for global expansion as the  weaknesses hit three major areas of organizational health—alignment, execution, and renewal.  McKinsey pointed out that related research from Scott Keller and Colin Price indicates that at least 50% of an organization’s long-term success is a function of its organizational health, this globalization penalty should cause concern for any company with expansion goals.   McKinsey also emphasized that the companies interviewed were at the top of their game with strong financials and significant global scale and scope.   Given that fact, they rightly asked, "Can any company overcome the challenges and enjoy global growth?"

Where to Focus?

Almost everyone interviewed struggled with the tension of balancing local adaption with global scale, scope and coordination.  Naturally the question arose of which portions of the operations should be standardized and which should remain adaptable to the local needs.  The companies struggled with finding the answers to such questions as:

• To what extent does managing high-potential emerging markets on a country-by-country basis make sense?
• When is it better to leverage scale and synergies across business units in managing governments, regulators, partners, and people?

Many of the companies interviewed indicated that existing internal networks and linkages are ineffective for managing global/local trade-offs, and only add cost and complexity.  For example, many companies cannot transfer lessons about bottom of the pyramid consumers in one emerging market and apply them in another.   Others struggle to generate focused responses to local competitors who undermined previously successful strategies and traditional business models.

Many executives are just wrestling with delineating the headquarter’s role in increasingly globalized institutions.  Successfully centralizing three traditionally main office functions, specifically human resources, finance, and marketing (including brand and reputation management) was considered a key challenge.  "Can it be done?", and "Should it be done?" are questions well worth considering, and are best answered on a case by case basis as companies assess the trade offs for such decisions.

With these challenges in place, never mind daily activities its easy to see how global companies can be at a disadvantage against their local competitor, as they still have to struggle to achieve the basic business fundamentals of clear strategy, building alignment and sustaining innovative thinking.  Given that globalization is not going away, and if anything will become more pervasive its important to recognize the challenges and then develop ways to overcome them.

Addressing the Challenges

While there are no easy solutions that can be universally applied part of the answer is knowing where the potential pitfalls lie, and developing plans to address the challenges.  Let's face it, any company entering a foreign markets brings baggage.  Specifically, they bring the cultural values from home.  However, the most success firms in international expansion consciously limit this influence and focus on adopting approaches that fit the local culture, even if it runs counter to their beliefs.

In the study,  Strategic Decision-Making Processes in Internationalization: Does National Culture of the Focal Firm Matter? researchers surveyed CEO's of over 500 global SMEs based in the United States, the United Kingdom, Greece, and Cyprus, across many industries.  The countries were selected because of their diverse cultural groups that placed different values on decentralized decision making, strong individual personalities, and the willingness to let employees think creatively.  For example, the US and UK cultures prize decentralized decision making, strong individual personalities, and a willingness to let employees think creatively. By contrast, Greek and Cypriot cultures follow a more autocratic management style with better teamwork and group decision making, and more formal employee training to follow.

Each country assigns different values on individualism, uncertainty and authority, all critical to strategic decisions.  The companies all had international ventures they were engaged in that consumed significant resources, and portions of these projects were often “unplanned or spontaneous,” with managers making decisions on the fly.  Those decisions, frequently reflected the managers’ cultural values, which sometimes put the companies at odds with their new markets.

The best companies adopted approaches from a variety of cultures, cherry picking might be a more apt term.  Decentralized power companies had the highest performance (in line with Anglo-Saxon values), where managers must communicate across a variety of departments, so locally hired managers contribute insights into a foreign market’s challenges and opportunities.  But wait there's more.  According to the study, the most successful firms also used, (aligning with Greek/Cypriot values) a formal decision making process — thus reining in the propensity for local managers to revert to their cultural roots when calling the shots.

The researchers found that when firms used this blended approach, they could analyze information, create common goals throughout the company, and implement strategic decisions. What’s more, the researchers said, enhanced international performance offered longterm effects on strategic decision-making processes throughout the firm, leading to successful future international efforts.

Bottom Line

Simply put, one secret of success for companies that expanded internationally is to control the impact of national culture on operations abroad.  Focus on the international component, otherwise the inclination is to revert back to the familiar cultural norms of the home country.  The most successful global firms adopt a blended approach that recognizes different cultural values. They decentralized power and formal operating guidelines to limit the impact of their culture on their new environment.

Further Reading:

McKinsey's Understanding your globalization penalty

strategy + business:  Optimal Decision Making in Foreign Markets