Ready to learn how to take your business global from the man who controlled international operations for IT giant Fujitsu?
This article summarizes the major points of the keynote speech delivered at the 2013 International Entrepreneurship Symposium by Richard Christou, former President of Fujitsu’s Global Business Group. This symposium was organized by the Anima Investment Network, Sophia Business Angels, and the Fondation Sophia Antipolis.
In his role as President of Fujitsu’s Global Business Group, Christou managed all operations outside of Japan for this approximately 180,000-employee company. During his career, he purchased many entrepreneurial businesses, and is now taking the opportunity to share his knowledge of what makes a new company stand out.
Note that the following article is a paraphrased summary of Christou’s speech and does not necessarily reflect my own views. I actually put it together last year, but had to find a break in my busy schedule in order to post it.
Three Ways to Organize a Global Business
In theory, there are 3 basic ways to organize a global business: the conglomerate, centralized, and transnational models. Each model comes with advantages and disadvantages that entrepreneurs need to understand.
In the conglomerate model, a small holding company owns many subsidiaries around the world, all of which are basically autonomous. The holding company exercises little oversight, perhaps just appointing a chief executive to sit on the board and requiring subsidiaries to make approved business plans every year. The holding company may also make decisions that affect the conglomerate as a whole and deal with additional financing for subsidiaries.
- Simple model
- Offers local decision making
- Gives acquired CEOs the best chance of succeeding in the new company
- Efficient for very localized products or services
- Works well with regional or geographic distribution of resources
- Little synergy
- Break-up value can be greater than shareholder value (as a whole)
- Unpopular in modern business environment
- Makes sharing information across borders difficult
- Inefficient for global distribution of resources
With the centralized model, there is a very strong company headquarters with subsidiaries or branch offices that execute the orders they get from central management. The headquarters is where research and development takes place, the marketing strategy is updated, and all major decisions are made. There is close oversight over subsidiaries, which function like sales outlets or delivery outlets.
- Popular in the modern business environment
- Offers strong control over subsidiaries
- Efficient for highly standardized products (i.e. software, cars)
- Requires very competent central management
- Gives acquired CEOs the worst odds of succeeding in the new company
- Does not work well for products that require local customization
The transnational model is set up like a net with nodes spread throughout. It uses a web of relationships between different subsidiaries, each of which have their own specialities and assigned tasks. Each node transmits their knowledge or the results of their development around the net to subsidiaries in other locations. The headquarters practices more oversight than in a conglomerate, but unlike in the centralized model, central management is more focused on matters like general strategy than on managing subsidiaries.
- Allows for synergy between different centers of excellence
- Efficient for global products that need local customization
- Works well with regional or geographic distribution of resources
- Very effective for most service businesses
- Requires trustworthy, competent management at each node
- Relationships can be complex
- Inefficient for standardized, global products
- Requires uniformly strong subsidiaries
In practice, there is no best model, since every market, product, and service is different. The best model for any particular company is the one that allows its offerings to reach its intended market in the most efficient way.
In the real world, it is also never possible to start with a blank slate. Taking a company following the conglomerate model and trying to implement a completely centralized model, for example, is both expensive and impractical. So, the amount of distance between models is worth considering, with the conglomerate and centralized models being the furthest apart. When adapting to a new model, subsidiaries that don’t fit in will need to be developed, shut down, or sold, and new subsidiaries may need to be set up.
There are also two important issues to keep in mind when considering the conglomerate, centralized, and transnational models: how headquarters are set up and the effects of acquisitions.
Most companies don’t evolve from having one local base to using international subsidiaries entirely on their own. Instead, they grow through acquisitions over a period of many years. Thus, the importance of integrating acquired companies is something an entrepreneur should keep in mind when considering how they will handle subsidiaries when their company goes global. As a warning, no company should acquire a company larger than itself, as it will be swallowed by the bigger company rather than integrating it.
Another important consideration when looking at the conglomerate, centralized, and transnational models is the type of headquarters they are associated with.
To effectively do business on a global scale, one must have a global headquarters with a mix of people of different nationalities who speak different languages. Beyond that, what makes a headquarters effective depends on the model being used.
A conglomerate’s headquarters is very small. For example, the former General Electric Company was an international conglomerate with turnover in the billions that was run out of a U.K. office with a staff of 50.
However, with the conglomerate model, there is the danger of creating way too much overhead by replicating headquarters. For example, a company can end up with a headquarters for each country, a headquarters for each region, and a main headquarters.
Under the centralized model, the main headquarters is very involved in managing subsidiaries, so it needs highly skilled professionals. However, this headquarters doesn’t need to be huge. IBM, for example, avoids having more than about 500 people in their headquarters at a time, but all of the people they have are very technically astute.
With transnational nodes, there is no need to duplicate headquarters, although the danger of high overhead is still there, as in the conglomerate model. Christou was able to manage transnational cooperation with a staff of about 300 in central headquarters, so again, a large headquarters is unnecessary.
Rules of Globalization
Naturally, many factors contribute to a global company’s success besides the organizational model it chooses. While a global business may seem very different from an entrepreneurial business planning to go global, they both must deal with many of the same “rules of globalization,” summarized below:
1. Be the Big Fish Wherever You Go
It’s good to be a big fish in a small pond or a big fish in a big pond, but a small fish in any pond gets eaten. Whether a new company is a big or small fish depends on the geography and target market it is serving.
In terms of geography, an IT business in the U.S. will not get noticed until it has a turnover of about 5 billion USD (~19 billion SAR). In Australia, an IT company could be one of the biggest in the country with a turnover of 1.5 billion Australian dollars (~5.4 billion SAR).
In terms of target market, a company can be a big fish in a very small pond without heavy investment by focusing on the right niche. That way, big companies in that market will be interested in buying the small company in order to gain a niche advantage.
However, with this strategy, entrepreneurs must be careful not to spread out too thinly geographically, especially if their company’s main offering is its product rather than its customer base, as is usually the case. Unprofitable locations will only subtract from the selling price that the entrepreneurial company can command.
2. Focus on the Bottom Line When Expanding
Never spread to a new region for the sake of expanding. Expansion is only valuable if it improves the bottom line. Locations that are not making money will increase overhead costs, sap revenue, and just end up being subsidized by locations in big income-producing economies. Before expanding to a new location, a business owner should consider whether that market is right for their company, and whether they can be a big fish in their chosen market there.
3. Avoid the Matrix Management Strategy
A matrix strategy can combine, for example, managing employees according to both the geography they are responsible for and the product or products they are responsible for. Unfortunately, this system can lead to confusion in terms of responsibilities, incentives, and authority. The simpler path is to determine whether the company should be organized according to geography, product lines, or service lines, then stick to that so that employees stay focused.
4. Consider Starting with a Local Distributor
When spreading to a new area, control and risk come together. With more control comes more risk and higher costs. This is why, with the right product and careful planning, entering an area through a distributor can be a good, low-risk alternative to opening or buying a subsidiary.
If the agreement works well, the option is buy the distributor is there. Otherwise, terminating the agreement is no major loss.
5. Put Trust First When Delegating
Having a close, honest, trusting relationship with those one delegates to is crucial. This is especially true in a small business, since one person’s failure can destroy the entire company. Ultimately, the most important factor is whether one selects trustworthy people.
6. Go Local When Selecting National or Regional Reps
Large companies can fall victim to the fatal idea that expatriates know everything, even though they often don’t speak the local language and just end up sitting in their office when they arrive in the host country.
Most of the time, these expats either become totally isolated by delegating everything to a local chief operating officer, or try to run the business on their own and fail. While having an expat in charge can work with standardized physical products, like computers or cars, a local should be selected as the regional or national representative when some localization is expected, as with services and most products. A local is the best choice for making contact with and gaining the trust of local customers.
7. Be Careful with Joint Ventures
When considering a joint venture, a small business must choose its partner and write the joint venture agreement very carefully.
Most companies look at which partner has more shares, then focus on minority protection, or on the ability to veto changes. However, the most empowering request is for the ability to appoint, remunerate, or dismiss the CEO. The people who can choose between paying and firing the CEO get what they want, while those who just have veto power can only argue, and too many arguments will eventually lead to the dissolution of the joint venture.
8. Make a Clean Break When Exiting
If an entrepreneur’s exit strategy is to be bought by a large company, the best thing to do after being bought out is to make a clean break. Retaining some shares creates friction, and the entrepreneur tends to lose value by going this route.
Likewise, after a buy-out, each company tends to tell the founder that they will be retained as the CEO or as another type of employee. But, after the honeymoon period wears off in about six months, most entrepreneurs find that they don’t like the structured, political, hierarchical atmosphere of a big company, and end up leaving or being let go with high severance pay. That’s why it is better for the entrepreneur to take an as-needed consulting role, with pay tied to profits or earnings, rather than staying in the company.
So, what do you think of Christou’s advice?
The crowd at the International Entrepreneurship Symposium seemed to like Christou’s speech, but what do you think? Do you agree or disagree with his point of view?
Please let me know by posting comments below, and be sure to check back soon for other another story from the International Entrepreneurship Symposium: my summary of the best criticism I’ve ever received.