“Business history is littered with examples of firms that overestimated the convergence factors: the degree of similarity between their home base and the overseas markets they were entering.”
by Per Knudsen
for Tokyo American Club magazine, Jan. 2007
Not many years ago, few of us would have speculated that global terrorism and health pandemics would constitute major issues for our firms in 2007. But as we face another year in a world of increasing globalization, such are the factors that impact on our lives.
On a more peaceful business note, a recent article by Marc Jones of Ashridge Management College in the UK outlined clearly and concisely the challenges of globalization that are relevant to many of us doing business in Japan.
In business terms, globalization is the integration of financial, product and labor markets across national boundaries. This implies stronger financial links, similar consumer preferences and increasing labor mobility. It also means that events in one national economy increasingly affect events elsewhere, and that a firm’s activities in one country can impact on its competitive position in other markets.
There are two fundamental features of globalization: the degree of market convergence and the issue of centralization versus decentralization.
Business history is littered with examples of firms that overestimated the convergence factors: the degree of similarity between their home base and the overseas markets they were entering. Many companies acting on their assumptions have been subsequently forced to undertake major restructuring to correct their mistakes. The high levels of convergence necessary to constitute genuinely “global” markets remain relatively scarce. Many of us are constantly trying to convince our head offices and suppliers that the way in which things are done in Japan are not necessarily the same as in, for example, Canada and vice versa.
One famous example of getting globalization wrong involved an American diaper manufacturer, which, in the 1980s, overestimated the similarity between American and Japanese consumers who buy disposable diapers. In fact, it miscalculated the size of Japanese babies, assuming them to be the same as American babies. Then, once the product was launched, the company confused sales with customer satisfaction, as there were no competitors initially. Soon, the company had its market dominance challenged by local Japanese firms that had reengineered the bulky American product for Japanese babies’ bottoms. (The American firm later redesigned its product, but much business had already been lost).
The second issue is the ability to manage the balance between centralization and decentralization. The technology exists for firms to be spatially decentralized, with R&D, manufacturing, and/or distribution placed planetwide, yet linked with both each other and headquarters and centrally coordinated in real time. Increasingly, the span of control extends beyond a firm’s own organization to encompass complex networks of support systems that are maintained as an alternative to high levels of vertical integration. Such firms are thus simultaneously centralized and decentralized along various organizational dimensions.
The challenge is to balance the efficiency-generating benefits of centralization and control with the rewards of fostering entrepreneurship, creativity and flexibility through decentralizing authority to regional or country managers. This is something that many of us deal with.
It is vital for any company involved in overseas operations to have a working knowledge of what internationalization means with respect to its industry environment, competition and key stakeholders’ expectations, including customers, employees, suppliers and the wider issues associated with operating in another country. Any globalization initiative that fails to adequately address these issues can prove extremely harmful to what might otherwise be a promising internationalization strategy.
On that note, I wish you all a healthy and prosperous New Year.
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