Managing a Global Enterprise

Edward E. Lucente

Vice President, Worldwide Sales and Marketing Digital Equipment Corporation

Let me begin by telling you a little about how I came to be here. I've spent the bulk of my 33 years since graduating from Carnegie Institute of Technology, with two rather large international corporations, one in computing and one in telecommunications.

I was with IBM for 30 years, where my final assignment was president of its Asia Pacific Group. Following IBM, I was with Northern Telecom for 2 years where I managed its worldwide sales and marketing organization. Last month, I joined Digital Equipment Corporation in a similar capacity.

So, I've managed global organizations and, something just as important, I've also been managed in global organizations.

I'm going to talk about my experiences, and I would ask you to take into consideration that while these experiences are applicable to the industries with which I am most familiar, I'll leave it to you to judge their applicability to other industries.

Let me begin back in 1981, when I was asked by IBM's chairman, Frank Cary, to do some research. At the time, I was director of IBM's corporate business plans. In that position, I headed a small staff, and our job was to review the strategic and operating plans of each of the business units, assess their do-ability, consolidate those plans and then report to the corporate management committee on the areas of risks and opportunities.

One very important yardstick in assessing the submitted plans was comparing the unit performance against that of the competition. I was asked to look into IBM's business in Japan and the Japanese competitors there. The concern was simple and straightforward. Since 1976, IBM had been steadily losing market share to Fujitsu, NEC and Hitachi. While the industry's growth was in double digits, IBM Japan was barely growing at all.

Overall, more than half of IBM's business came from outside the U.S.. At the time, IBM Japan was touted as the success model of an American company doing business abroad. We had:

18,000 IBM employees, half in manufacturing and development
strong market share position
reasonably self-sufficient

Yet losing share

Here was the most disturbing thing. IBM was losing share to the very Japanese computer manufacturers who represented the greatest threat to IBM's worldwide markets. If we couldn't "keep them on the beach," would this eroding market share spill over to other markets around the world? Would IBM be able to succeed against them elsewhere if we couldn't in Japan?

This was my assignment. I assembled a team of three people:

one, a market researcher buried in the bowels of IBM's headquarters, who had read every book and paper there was on Japanese computer manufacturers;
another, a brilliant Japanese employee, educated at Stamford with 18 years experience in IBM's U.S. organization;
and the third, me.

As you can imagine, the people responsible for managing IBM's World Trade subsidiaries were not particularly pleased with our mandate. Nor, would they be terribly supportive of the eventual recommendations. But, that was the nature of the job.

What I thought would be a very complicated and unstructured assignment turned out to be rather simple. All we needed to do was to talk to the right people. In this case, the right people were the general management of IBM Japan . . . all of them Japanese nationals, having many years of IBM experience, and each having had international assignments in the U.S.. They knew the Japanese markets and customers. They knew the Japanese competition. They also knew how to communicate with an American from headquarters.

This is the remarkable thing. For the most part, no one had asked them what was wrong; or if they were asked, those asking didn't seem to listen to the responses. Perhaps, it just wasn't Japanese culture to confess to problems. It was actually a combination of all of these.

Here was the situation. IBM's strength in Japan had traditionally been large mainframes with almost half the revenues coming from the banking industry, where English was the language of doing business. Most of the remaining revenues came from large manufacturing companies who looked to IBM's worldwide presence to support them not only in Japan but around the world. They looked to IBM's global experience as the role model for their own globalization strategies. For these large multi-national manufacturing companies, business was conducted in both Japanese and English.

However, growth was not occurring in large banks and large manufacturing companies where IBM's business was. Rather, growth was occurring in the public sector, which in Japan included communications, utilities and transportation; and in small businesses, particularly the distribution industry. Simply stated, IBM was well positioned in Japan's maturing markets, but lacked significant presence in growing markets.

There were three problems, and the first was market access. The public sector accounts were obliged by the government to do business with indigenous suppliers, local manufacturers, and the small distributors were doing business with local value-added re-marketers called "daireten," distributors in the business of acquiring hardware and systems software and packaging it with application software. The problem was that this was a channel of distribution in which IBM didn't even participate.

The second problem was product fit. Unlike the large sophisticated banks and manufacturers, public sector customers and small businesses wanted total solutions and needed products like ticket issuing machines, point of sale devices and other terminals with a high-degree of man-machine interface. Moreover, these products needed to generate output ... not in English ... but in Kanji, the Japanese ideogram character. This required that systems have double byte architecture instead of a single byte architecture. It's complicated technically, but what it means is that the products needed to "speak Japanese."

I recently saw an example of another product that needed to "speak Japanese." Believe it or not, it wasn't until January of this year, 1993, that Chrysler became the first American automobile manufacturer to import cars into Japan with the steering wheel on the right hand side for Japanese roads. How has Detroit expected to sell any cars in Japan? This, in fact, was pretty much the same situation IBM faced. We were trying to sell English speaking computers with English soft and hard copy output, to the Japanese. In effect, our steering wheel was on the wrong side.

I also felt that our organization structure was itself the third problem. The president of IBM Japan ... who was not even an IBM officer (even though Japan revenues were second only to the U.S.)... was four levels removed from the chairman and CEO. Japan was part of an organization that included not only the Far East, but also all of Central and South America, Canada and Mexico.

The result was that the investments required to implement a market share strategy in Japan were being siphoned off to support investments not only in the rest of Asia Pacific, but also in Canada, Mexico, and Latin America. Japan was the cash cow for all of the other investments which, in total, were somewhat artificially constrained by a financial investment and return model from corporate business plans.

Since that time, many changes have taken place.

The manufacturing capacity in Japan was significantly increased so that all products sold in Japan were made there. In fact, by 1990, over $2 billion worth of products produced in plants in Yasu and Fujisawa were being exported to other parts of Asia Pacific.
A development laboratory was established in Yamato, just outside of Tokyo, with the mission of converting standard products to meet Japanese needs and developing products unique to the Japanese markets.

Today, these Japan-unique products account for more than one-third of total Japanese revenues.

More than 40 joint ventures were formed between IBM Japan and value-added re-marketers to strengthen IBM's presence in the small and intermediate business market. Today, an entirely separate division of IBM Japan, with its own president, manages that channel of distribution; and it is the fastest growing division.

Many other changes took place as well:

American Embassy pressure on MITI, the Ministry of International Trade and Industry.
More frequent visits by top IBM executives to Japanese executives and government officials.
A change in IBM reporting structure and the transfer of key Japanese development engineers to IBM's U.S. personal computer organization.
Positioning Japanese nationals to call upon Japanese companies located in the U.S., Europe and Southeast Asia.
Appointment of the president of IBM Japan as a corporate officer.

All these actions helped turn the tide against market share loss.

Let me give you another anecdotal example concerning IBM's operations in Korea, which deals with the soft part of doing business. First a few facts:

We had 850 employees in Korea.
Korean headquarters was made up of American/Australian expats.
Marketing management was American expats.
Sales management was Korean nationals.

This took place in 1988 at a time when there was a high level of labor unrest. The won was strengthening. Korean companies were reporting record revenues and profit. Yet, Korean wages were relatively stable and company strikes were commonplace.

The immediate problem for IBM started when the employees formed a union and demanded bargaining rights. They staged a sit-in in the lobby with their families ... wives, children, parents. To the people back in Armonk, this sounded liked an insurrection. Families just don't do this. Needless to say, a team from corporate headquarters staff was dispatched. Hot lines were set up. A strategy was set in place.

If we'd had more Korean involvement, if we had thought Korean, we would have realized three things:

We overreacted. We didn't understand the culture. We didn't listen, since policy didn't allow it. Interestingly, the demands were minimal, and the matter was resolved within a week. The total number of people in the union dropped to 30 and eventually the union disappeared. The point is that the whole matter could've been resolved much more easily, if Koreans had made the decisions rather then expats or headquarters.

The lesson of the Japan and Korea examples is perhaps an obvious one. It is a great advantage having local nationals running a subsidiary instead of expats. Nationals have an incomparable ability to get closer to the people, to the market, to the customers, and to understand the local competition. This may seem obvious and simplistic, but consider this. When I went to manage IBM's Asia Pacific operations in 1988, 6 of the 10 major countries were managed by expatriates . . . not nationals. Today, all are managed by nationals with the exception of Hong Kong.

Let me now draw from some of my experiences at Northern Telecom. Northern Telecom is one of the largest developers and manufacturers of digital telecommunications equipment. Its major customers are telephone operating companies and large companies who deploy private communications networks. It is a Canadian-based company, once an integral part of AT&T. Today, Northern Telecom is AT&T's major competitor in North America and an increasingly important equipment supplier outside of North America.

At one time, not too long ago, all products were developed in Canada, manufactured in Canada and sold only to Canadian companies. In the seventies, the independent telco's in the U.S. looked for an AT&T alternative and discovered Northern Telecom. In the eighties, when AT&T divested itself of the Regional Bell Companies, the U.S. market opened. By the end of the 1980's, Northern Telecom's U.S. revenues exceeded Canadian revenues, and development and manufacturing resources were almost evenly divided between Canada and the U.S.

But what about the 90's? With the mature and maturing Canadian and U.S. markets, future growth will come from:

Europe ...growing more than 20%
Latin America ...growing more than 30%
Asia Pacific ...growing more than 40%.

Here are just a few of the challenges:

Herbert Rammrath ...the president of G.E. Plastics Limited, once based in Tokyo, now in Singapore, and a business colleague of mine while in Tokyo ... wrote something in the Wall Street Journal (4/6/92) last year, that sums up the change in thinking that every company seeking to sell overseas must adopt. He wrote, "First, outlaw the use of the word 'domestic.' Where's 'domestic' when the world is your market?" One way to eliminate the 'domestic' mentality in corporate is to ensure that all executives experience an in-country non-U.S. assignment and that at a minimum, one European and one Asian executive are a part of the policy making body at headquarters. Beyond that, Board of Director membership must include appropriate multi-national representation.

I have also learned a few other things about the dangers of insularity. For example:

I learned that you need to adapt to the distribution infrastructure or you will have a long and expensive avenue to market.
I learned that your central manufacturing may be efficient, but your manufacturing strategies must complement your market strategies.
I also learned that the drive of headquarters staffs for integration, consistency, and a common image . . . what I would call neatness . . . often fails against the global diversity needed to run a worldwide business.

These anecdotal lessons prompted me to break down some of the issues a corporation faces as it considers how to handle foreign markets.

Expat versus Local Nationals

A strategy of employing expats has its advantages. Communications are usually easier. Expats understand the corporate culture and often enjoy easier access to support. But, this is an expensive strategy characterized by high turnover and minimal skills transfer. Employing nationals, on the other hand, represents a strategic investment. They are wired into the local business environment and know the local culture. On the downside, they may be more difficult to manage due to cultural differences, and there is more risk involved.

Offshore versus Onshore

The offshore scenario represents a less expensive commitment ...you pay as you go ... but opportunities can be missed. The visible onshore commitment, on the other hand, brings you closer to the local market and provides better access to invaluable local skills. The significant commitment of people and capital required, however, constitutes higher risk, and you may not get a second chance to recover from mistakes.

Import versus In-Country Sourcing

Importing makes better use of assets, and when you are doing business in developing countries, it can provide access to financing. But, it can lead to trade/payment issues. In-country sourcing, on the other hand, gives you a marketing advantage, removes local content restrictions, and provides access to local technology and skills. Again, however, it does bring somewhat higher risks and may not be the lower cost solution.

U.S. versus Local Currency

Standardizing on the dollar simplifies management, makes communications easier, and thus can be less expensive. Further, you don't have to consider hedging strategies and their inherent risk. However, local currency offers an obvious marketing advantage.

Company Maturity

How a company responds to these issues will determine its maturity in competing in the global marketplace. Let me talk about this maturity, which is at the heart of my message to you today. Company maturity is an evolutionary process. Initially, key competencies are centralized, and overseas operations serve primarily as distribution channels. Gradually, local success models are applied worldwide, systems become decentralized, and varying degrees of in-country independence are achieved. In the final stages of the process, mature companies achieve in-country independence and a sophisticated balance between efficiency and decentralization.

Achieving this level of transnationalism requires sophisticated general management and a sophisticated planning process. Regrettably, neither my experience at Northern Telecom, nor at IBM qualify me as an expert in achieving this balance between efficiency and decentralization. I believe that the balance is driven by the financial realities of business performance rather than by what it takes to be viewed as a "transnational" corporation.

As home markets mature and become more competitive, and as market-entry pricing strategies place additional pressure on gross profit margins, corporations "downsize" and/or "reduce staff" and/or "eliminate layers" and/or "delegate and empower." Thus, typical organizations ...with countries reporting to regions, regions reporting to area headquarters, and area headquarters reporting to an international executive ...become un-affordable.

In this type of organization, the process must accommodate review and approval at multiple levels. The further you move from the country level, the higher the probability that the reviewing body has less and less knowledge of the country, the customers, the competition and the culture.

Here are some of the symptoms to watch for:

subregions
international executive
corporate operations (mktg., mfg., etc.)
H.R. staff >1/2% population
finance staff >1% population
centralized legal staff

A few more words about the process. The greater the distance between the markets and corporate headquarters, the more important it is that the budget planning process be market-driven based on product assumptions, rather than vice versa. Budgets that are centrally driven will most likely result in inflated and unachievable business volume and revenue targets, which, in turn, will generate un-affordable levels of resources, capital investment and overall costs and expenses.

With that definition of company maturity in mind, as Ross Perot says, "Hold that thought." Now, let us turn, in a very cursory way, to how you might analyze whether to do business in a certain country. In other words, does the country's maturity match the kind of maturity that you have, or does the country ask too much for your level of maturity? In equestrian terms, does the mount fit the rider?

It would take an entire week for us to adequately discuss whether to go into a market in a certain country, but let me give you four areas to consider:

First, the state of economic development.
A second aspect you would look at is the country's political development. I will not belabor this one.
A third aspect of analysis, also an obvious one, would be the state of the country's market for the product.

Looking at these first three economic, political and market situations is simply a way of turning uncertainty into risk. The American executive David Mahoney has said, "You'll never have all the information you need to make a decision. If you did, it would be a foregone conclusion, not a decision." What we're trying to do here is to get some estimate of risk, because risk can be managed. Uncertainty becomes risk when we have data.

So, the fourth area of analysis . . . and the area that perhaps offers the most potential for new thinking . . . is the distribution infrastructure.

I find Coca-Cola's experience in Japan very illustrative. Today in Japan, Coke sells carbonated soft drinks, and non-carbonated drinks; it sells sports drinks; it sells coffee; it sells tea; it sells iced coffee; it sells iced tea. To succeed in Japan, Coke did a number of things. It realized cultural differences in the Japanese beverage market. It had to sell hot beverages in winter and cold beverages in summer. It had to put in more sugar. It had to be flexible in any number of ways.

Perhaps the area needing the greatest flexibility was distribution. Because on top of all the different kinds of beverages it had to sell, Coke had to sell them through vending machines, which are very big in Japan. What is more, there are 1,100,000 vending dealers. And, the average dealer has only 1.1 machines.

Coke's genius was not in product but in distribution. Coke controls its market through a management information system made up of several mainframe computers, distributed systems and terminals that provide almost automatic supply to those 1.1 million vending dealers. Coke adapted to the infrastructure.

I was just reading a recent Harvard Business Review (March-April '93) article by Mr. Gurcharan Das, the managing director of worldwide strategic planning for health and beauty care at Procter & Gamble. At one time, he was involved in building the Vicks Vaporub business in India. I'd like to read three paragraphs from his article, because it deals with distribution. He writes:

"We could not have succeeded in building the Vicks business in India without the support of the native traders who took our products deep into the hinterland, to every nook and corner of a very large country. Many times we faced the temptation to set up an alternative Western-style distribution network. Fortunately, we never gave into it. Instead, we chose each time to continue relying on the native system.
"Following the practice of British companies in India, we appointed the largest wholesaler in each major town to become our exclusive stock point and direct customer. We called this wholesaler our stockist. Once a month our salesman visited the stockist, and together they went from shop to shop redistributing our products to the retailers and wholesalers of the town.
"Over time, our stockists expanded their functions. They now work exclusively on P&G business under the supervision of our salesmen. They hire local salesmen who provide interim coverage of the market between visits of our salesmen; they run vans to cover satellite villages and help us penetrate the interior; they conduct local promotions and advertising campaigns; and they are P&G's ambassadors and lifeline to the local community. The stockists perform all these services for a five percent commission, and our receivables are down to six days outstanding."

He concludes this section called "On Not Reinventing the Wheel" by saying, "In our own backyard, we found and adopted an efficient low-cost distribution system perfected by Indian traders over hundreds of years." There is a lesson in that for the modern world trader. New and Western is not necessarily better, so study the distribution system carefully.

What I'd like to do now is bring together those concepts of company maturity and country maturity into a template. The Financial Times (10/12/92) got it just right when it wrote ". . .there is no single balance between global, regional and local strategies. . .the ideal mix varies not only across industries but also inside them; between different businesses, product lines and even individual products within the same line. It also changes over time."

Country maturity and company maturity are guiding factors for me in looking at how to assess the promise in foreign markets. Just let me say in closing that I saw a framed little epigram the other day that I should have bought, because it sums up what I'm talking about. It said "Maturity is the art of living in peace with that which you cannot change."

That has great meaning in a business sense. You cannot change a foreign culture, you must find a way to live within it. You cannot change a foreign economy or a foreign infrastructure, you must find a way to adapt to it. Whether you consider yourself a global company, a multinational company, an international company or a transnational company, the trick is to be mature with what you are.