Going Global

China is to the U.S. as the U.S. was to Europe

In an intriguing new book out last month entitled "In China's Shadow: The Crisis of American Entrepreneurship", Reed Hundt, former FCC chairman and current senior adviser on the information industry with McKinsey & Company, undertakes a policy analysis of the challenges that China's rise as an economic power poses to the position of the United States in the world.  His take is refreshing in that it is neither a doom and gloom "fall of the modern Roman empire" tome nor a pollyanna look at the U.S.'s "rightful" place atop global commerce.  The book takes a hard and realistic view of the dynamics of China's current engine for economic growth and makes some very specific policy suggestions that Hundt believes would allow the U.S. to successfully meet the inevitable challenges.

The theme of the book is echoed in an op-ed piece that Hundt published in the Denver Post this past weekend.  One of the points that I found both novel and insightful is his comparison of the United States's position vis a vis China today to the relationship between Europe and the U.S. in the 19th century.  He presents Europe's policy responses to the rise of U.S. economic power as a model that we can learn from, mainly by not repeating the same mistakes, in responding to China's similar dramatic rise.  Instead of proactively positioning itself to move to the forefront of the sort of innovative entrepreneurship driving the American experiment forward, Europe tried to protect its historical supremacy by clinging to what it saw as the roots of its rightful position in the global hierarchy while trying to marginalize the extent of changes wrought by the emerging American business model.   The result of course was that the U.S. blew past Europe as the preeminent economy in the world, leaving Europe to struggle with chronic issues of stagnant growth and high structural unemployment which continue to challenge many EU countries today.

So what must the U.S. do to fashion a different fate in the face of the emerging boom in China?  Since I can't improve upon Hundt's own formulation, I'll quote from his op-ed piece:

To be more competitive, American firms have to be more entrepreneurial.  Creating trade barriers would only cut the impetus for American firms to remain at the top in terms of productivity and efficiency.  American firms need open markets in other countries but also in the United States so that competitive zeal can be encouraged and rewarded at home. . . .

The rise of China is a summons to tremendous economic competition.   Both countries will benefit if the fight is benign, fair, vigorous and wealth-creating for the whole world.

Change happens with or without us.  The way to win in the face of change is to embrace its reality and figure out how to win with the new rules of the game rather than to prefer that it not happen and cling desperately to an unsustainable past.

Global Movement of Innovation and the Long Tail to Export Markets

In looking at global trade, we usually focus on the cross border movement of goods and services, but one of the most prolific drivers of the new economy is the globalization of innovation.  There are profound changes in globally integrated commerce resulting from the development and adoption of new business models that expand and accelerate a company's ability to effectively reach farther and broader markets.

An example of one of these new business models was highlighted with the award of the Nobel Peace Prize two weeks ago to Muhammad Yunus and his Grameen Bank.  An unusual recipient of the peace prize, Yunus and the bank won as a result of their efforts to make small loans (known as micro-credit) to poor and largely rural residents in India.  Needless to say, this is a market that is not serviced by typical banks as the amounts to be lent cannot possibly justify the bank administration fees, to say nothing of an innate fear of out-sized loan defaults.   The Grameen Bank was able to overcome these obstacles through an unconventional method of delivering small loans and building an intimate community with each borrower resulting in even higher than usual loan repayment.  The peace angle is that even these small amounts of money can make a huge difference in the positive development of impoverished communities.

As discussed in a post entitled "Peace and Entrepreneurship" on John Hagel's Edge Perspectives blog, this business model innovation is an extension of the Long Tail, a name originally coined by Chris Anderson in an article in the October 2004 edition of Wired magazine.  The essential idea here is that traditional businesses are driven to focus on the central portions of a normal distribution where they can get the biggest bang for the buck.  They ignore the outlying markets where there is not enough population density or not enough income to justify the marginal expense of accessing or servicing those markets.   Because of the long reach of the outlying tail of the normal distribution, all of these outlying markets taken together represent a sizable opportunity which is being largely under-served by traditional business models.  Accordingly, if a company can figure out how to access these markets in an efficient manner they will be the dominant player in a potentially huge market largely unaffected by existing competition -- a desirable place to be.

In order to accomplish this, a business must figure out how to centralize its internal functions so as to greatly reduce unit costs for carrying the inventory necessary to service a broad and diverse  market while decentralizing external functions so as to permit effective community building customer service at a reasonable per customer cost.   

Amazon and Netflix are typically cited as exemplars of this Long Tail business model.  It is similar forces, however, that has enabled so many small businesses to reach global markets in this internet enabled age.  Access to customers and customers' access to information have developed to the point that a company that might have a hard time competing against global behemoths in the most popular target markets can exploit smaller markets, which together can add up to a very attractive export opportunity.

Is Importing Off-shoring without Ever Having In-sourced?

My expertise lies primarily in the areas of export market entry, international market development and the management of foreign operations, so I don't generally write about the import side of the global business equation.  I do get involved in off-shoring issues since they frequently involve developing foreign manufacturing or service capabilities and from an operations development and management point of view I'm not sure it matters much whether the products will be sold as part of a deepening penetration of a foreign market or whether they will be imported back to the company's home market.

I attended a meeting this week about off-shore out-sourcing issues during which I had an insight into the nature of import businesses which I thought was intriguing.  Out-sourcing is driven in large part by the theory that a company can be most successful by focusing on its core competency -- whether its manufacturing, distribution, customer service, etc. -- and allowing someone else to provide the non-core business functions.  The idea is that another company which has a core competency in the out-sourced functions can deliver that part of the business better, more efficiently, at lower cost.   (For some foundational ideas around this concept, one might read the post "Unbundling and Rebundling" on John Hagel's Edge Perspectives blog which discusses his earlier Harvard Business Review piece "Unbundling the Corporation").  Once one looks at out-sourcing as a business strategy, off-shore out-sourcing is a logical extension in a globally integrated market.

So here's my insight -- importers (if they are successful at least) are companies that are good at sales, marketing and distribution logistics.   They have concluded that it is best to leave non-core competencies such as product design and development and manufacturing to other companies.  Further, by definition, those other companies are located in foreign countries.  So aren't importers simply another version of off-shoring out-sourcers that had the good sense never to have in-sourced product design and manufacturing in the first place?  The reason I find this intriguing is that while many people seem to think off-shore out-sourcing is a four letter word, we celebrate the shop that imports the hard to find French wine or the home decor boutique that brings in the beautiful Italian accent pieces.  Are they really so different?

Needs, Wants and Target Markets

One of the continuing threads running through Seth Godin's always thought provoking riffs on the state of modern marketing is that all the needs have been met -- you have to sell people what they want.  Certainly in a developed economy where the vast majority of people are part of a well-developed middle class, purchasing decisions are less about the need for basic transportation, for example, than they are about what a particular car says about your life style or the values you project.  Seth of course writes primarily for audiences in developed economies where marketing has reached this level of sub-surfacial connectedness.

If you have a product or service which is still about what people need -- really need such as sturdier housing, more productive crop land, cleaner water -- then exporting may be a necessary part of reaching your core market.  The fact is that much of the world's population resides in still developing economies where the largest part of the market is driven by acquiring basic needs rather than seeking to enhance one's self image.   Given the concentration of wealth, these populous markets are perhaps not the largest dollar markets, but responding to this needs driven demand is certainly a critical area where the globalization of commerce can have a direct positive impact on the state of our world.

Partners and the Peculiar Perils of Developing Markets

In an effort to more readily attract foreign investment, many developing countries have loosened the rules permitting foreign companies to fully own operations in many industries.  These governments are recognizing that creating more fluid markets for the free flow of investment capital across borders is as critical to capturing the benefits of global market expansion as the creation of freer markets for a country's finished goods.

While the ability to enter developing markets through "wholly owned foreign enterprises" as they are sometimes called certainly creates advantages in management and capital control over the cumbersome enterprises created by the formerly mandated foreign/local joint ventures, the ability to use a WOFE structure doesn't mean that a company no longer need to find the right partners to be successful in penetrating a developing market.   It just means that your partners don't also need to be shareholders in your business entity. 

The fact is that developing markets present some unique challenges including the recruitment and retention of a qualified and motivated workforce and the sourcing of raw materials and logistics on both ends of the supply chain.   These challenges can at times be so daunting that they even stop sophisticated multinationals in their tracks. 

In an article n the October issue of the Harvard Business Review entitled "Emerging Giants - Building World Class Companies in Developing Countries", authors Tarun Khanna and Krishna Palepu look at the impact of these challenges on the ability of companies indigenous to these emerging markets to develop into competitive multinationals themselves. [Access to the on-line article requires a subscription -- the article is found at p. 60 of the print edition currently on nesstands.]  The implications in the article are interesting, however, for companies looking to successfully compete in these same emerging markets as well.   Faced with the particular challenges of the undeveloped business infrastructure in emerging markets, the article notes that well established multinational from other countries frequently "find it difficult to deploy their business models."   Further, given the high risks associated with generating the size of return necessary to make an emerging market interesting to a large business, these established multinationals are reluctant to take on the costs of tailoring their business model and strategies to reach strata of the local market beneath the level of the market looking for standardized global goods.

This phenomenon provides one more case in the 21st century economy where flexibility can trump size.  A smaller company can more readily adapt its business model, exploiting the broader base of the local market and in so doing avoid those parts of the market in which it would have a difficult time competing with the brand recognition and capital strength of larger established global enterprises.  To navigate these deeper waters, however, it is as essential as ever that you find the right local partner who can coordinate the local aspects of executing the adaptable developing market business model that can be the foundation of your success. 

Venture Capital, Internet Gaming and the Future of Global Commerce

I have a new favorite business magazine -- Booz Allen & Hamilton's strategy + business.  In an earlier post playing off an article in the magazine's last issue, we looked at the implications of China's policy change allowing direct investment in its state owned enterprises.  The Fall issue currently on the newsstand is an international business "must read".  For one, it contains an in-depth report on the cutting edges of off-shoring.

The article that I found most interesting, however, is a piece entitled "The Ambassador from the Next Economy" profiling Japan based venture capitalist -- or "venture activist" as he is described -- Joichi Ito.  It's interesting in a number of respects.  First off Joi is a paradigm in and of himself for the new global business person.  He claims to spend more time on the United flight between Tokyo and San Francisco than he spends in his bed at home.  He simultaneously holds executive positions with businesses in Japan including his own venture capital firm, and in the U.S. serving as vice president of international business and mobile devices for weblog tracker Technorati.

A second dimension of interest is the trans-global reach of the venture capital activities that Joi funds -- a Japanese start up here, a new U.S. based technology idea there, each planning on operating on the premise of building communities without national borders.  Even in the information age, the development and growth of companies require capital, and with business life cycles growing ever shorter and the geographic reach of businesses growing ever wider, the fluidity and speed of capital movement becomes ever more critical.

Finally, I'm intrigued by one of Joi's latest entrepreneurial passions.   He apparently is an avid player of the on-line role playing simulation game World of Warcraft.   The on-line gaming world itself has an incredible global dimension with participants playing across the world without any identifiable national boundaries.  The s+b article notes that World of Warcraft (or WoW) has 6 million users worldwide, with 1 million each in China and in the U.S.   Joi's interest, however, is not limited to being a gamer.   Instead he sees WoW as a potential platform for the new new thing in situational business problem solving software.  The essential thought here is that most corporate strategic problem solving techniques are severely limited by the strategists inability to play out the seemingly countless iterations of cause and effect associated with the complex and unpredictable reactions of countless competitors, customers, suppliers and other interested parties.  This, of course, is exactly what a robust on-line simulation game does. 

Imagine the potential predictive power of an on-demand strategic role play session with immediate access to a global community of unbiased participants -- it won't be enough for all those people in marketing just to be checking headlines on Yahoo if they want to be making good decisions in the fast paced, information driven global economy. 

Politics and the Economy -- Two Different Animals in Mexico

By some accounts the state of politics in Mexico is in crisis.  Mr. Calderon won the recent presidential election by the thinest of margins and with only a plurality of the vote cast.  Mr. Obrador has been tying up Mexico City with sit-ins and slow downs and is threatening to establish and preside over a parallel shadow government of the Left.  If all one read was the political news,  you would have to conclude that Mexico was not a particularly good place for business investment.

But while politics dominates the news, the business climate in Mexico tells quite a different story.  In Rich Karlgaard's Digital Rules column in the October 16 issue of Forbes he has a blurb entitled "Time to Invest in Mexico?" [a subscription is required to access the on-line edition -- the column appears on page 31 of the print edition currently on the newsstand].  He points out that Mexico had 3.5% GDP growth this past year with a 4% rate projected ahead.  Inflation is at 3%.   Strong increases in consumer credit reflect increased economic activity and consumer confidence.   The Mexican stock market is undervalued as a percent of GDP.

On a similar note, I saw in a recent blurb from Motley Fool that the investment letter service recently had a favorable write up of Mexican cement goliath Cemex, which I understand to be the first non-U.S. stock that the newsletter has recommended recently. 

Obviously the business news paints a very different picture of Mexico from the political news as a place to invest and do business.  This makes me wonder whether the integration of markets and globalization of business has rendered irrelevant the infighting of national politics which seems to have become a blood sport in so many countries around the world -- at least for countries willing to remain engaged in international commerce.