Going Global

Do You Have a Long Tail Business?

I think the concept of the "long tail" is one of the most powerful business model descriptors to come along in some time.  It's why Chris Anderson's book "The Long Tail: Why the Future of Business is Selling Less of More" is on my list of "Must Read" books.  I've discussed the concept in previous posts on this blog, but it surprises me sometimes how little known this idea is in many business circles.  For example, I teach a regular course in strategic and tactical planning for export market development to business people in companies who are looking to expand their international market presence.  In most of those classes it seems as if one or two people at most know what the long tail is about.

In general terms, the long tail is that portion under a normal distribution curve which stretches endlessly out to the extremes past a couple of standard deviations from the mean.  As a business concept, the model of the long tail was first used by Anderson in an article in Wired magazine to help explain the success of companies such as NetFlix and Amazon.  In a nutshell, the idea is that companies with large decentralized distribution centers that drive up inventory costs (think Blockbuster or Barnes & Noble) necessarily have to focus only on products (book or movie titles) that are going to sell enough copies in a given period to justify the costs of stocking the merchandise.   While the few titles that sell thousands represent a huge market, because of the near endless length of the long tail, the thousands of titles that sell one or two copies presents a market opportunity that is as large or larger.  The key is that in order to exploit this opportunity, the company's cost structure must be such that they have highly centralized decision making coupled with a very low cost of distributing small quantities. 

The concept has been used in international marketing to this point to describe why micro-credit works as a business model.  This has been applied predominantly in the extension of very small loan amounts to a widely dispersed rural population in India -- indeed, as a result of this effort, Muhammad Yunus and his Grameen Bank were awarded the Nobel Peace prize last year.

My own interest in long tail theory in exploring international market opportunities goes beyond this however.  Most companies, it seems, are understandably and automatically drawn to the obvious mega-market opportunities in China, India, Brazil and other large markets.  These are the markets under the mean area of the bell curve -- the part of the market where the Barnes & Nobles and Wal-Marts play.  If you are a small or medium size company, there are certainly opportunities here, but you're going to be competing with the same behemoths you face everyday at home. 

So my question is, does your model meet the low cost-high speed /centralized decision making- decentralized distribution framework necessary to exploit the markets in the long tail -- the many small country markets that aren't on the radar of most companies because they can't make money there?  If so, by understanding how to apply this concept to your export market entry strategy, you could own a very large market opportunity.   

If Wal-Mart Can't Impose a Global Standard, Can You?

Even as it faces new challenges to its business model, Wal-Mart remains an entity with considerable market power and global reach.  As chronicled elsewhere in this blog, at $315 billion in sales (or gross company product if you will), if Wal-Mart were its own country, it would be the 21st largest economy in the world ranked by GDP, ahead of countries such as Austria, Argentina and Indonesia.  And the company has global reach -- with $63 billion in revenues derived from foreign markets, Wal-Mart's foreign sales alone would be sufficient to make the company number 21 on the Fortune 500. 

But among Wal-Mart's challenges is its ability to impose its business model in international markets.  The company is struggling in Japan and recently folded up its tent in South Korea and in Germany, moves that the Wall Street Journal attributes to the retail giant's failure "to adapt to local tastes."

Certainly one would think that if any company has the ability to act as a global corporation imposing standardization wherever possible to achieve economies of scale, one would think that Wal-Mart would be such a force.  But apparently even Wal-Mart needs to adapt to local tastes, cultural preferences and parochial market forces to succeed in its international efforts.  I think this underscores the reality that a small to medium size company seeking to enter global markets needs to go into it with an eye toward flexibility and customization, using the agility of its size as a competitive advantage.  One great thing about foreign markets is that they provide an entirely new playing field in which beating the Wal-Mart's of the world is a very real possibility.   

 

Micro-brews and Micro-markets -- Developing a Global Brand Portfolio

Sorry I'm late with a new post.  Any baseball fans will appreciate the fact that I've been busy reveling in the monumental feat the Colorado Rockies have pulled off over the past 2 weeks, coming from nowhere to climb over 6 teams into the NL playoffs with a story book late season run.  Of course the Rocks play at Coors Field, which is as good a segue as any into the interview with Leo Kiely, CEO of Molson Coors Brewing Co. that appeared in yesterday's Wall Street Journal (note: This on-line link is actually to the article as it appears in a reprint in the Denver Post).

In addition to being the number 3 (by sales) purveyors of beer in the U.S., the company is itself an international amalgamation resulting from the 2005 merger of Colorado's Coors and Canada's Molson.  In terms of international scope, besides its position in the U.S. market, the company is the largest brewer in Canada, the second largest in the U.K. and the third largest in Brazil.  In a testament to the fluidity of international borders in a global market place, even though Canada's Molson was essentially the acquiring company, with Molson shareholders garnering 55% of the combined company and Eric Molson continuing as chairman, the company's world headquarters are in Golden, Colorado -- a nod to the fact that when your shareholders, employees and customers are spread across the globe it may not matter much which flag you fly over the head office.

All of which brings me to the point -- i.e., what does it take for a company to compete in a global marketplace.   A continuing exploration in this blog has been the strategic necessity for global companies to change from Ted Levitt's conception of a global corporation tirelessly pushing standardization across all markets to a need to respond to micro-markets of consumer demand made all the more numerous by a company's geographic reach.  The beer market is another perfect illustration of this phenomenon.

In the foggy days of yore, beer drinkers in the U.S. fancied either Bud if domestic or Heineken for a more worldly palate.  Now it depends whether you're in the mood for a lager or a pale ale or something darker or a seasonal brew.  Local micro-breweries are able to grow into larger successes and the major brewers look to compete in the upscale market with brands that have no visible association with the company flagship.  Rather than attempting to get the world to drink Bud (which was the Levittian approach to global marketing), Anheuser Busch has put together substantial shares in foreign companies such as Grupo Modelo in Mexico and Tsingtao in China to compete effectively for market share among local tastes and preferences.   

When asked by the WSJ what it takes to succeed in today's environment, Mr. Kiely responded:

I think to be a successful global brewer today, you have to be really good at portfolio selling.  Having a strong portfolio of local brands, augmented by a big potential global brand like Coors Light, is really the formula to success looking forward.

I can say from my own experience in industries very different from beer, having a portfolio of local brands that appeal to local tastes and preferences tied to a corporate brand that speaks of global presence and capabilities is indeed a good start on a winning formula.  As for standardization of product offerings, the beer market in the U.S. alone is becoming increasingly fractured as brewers both large and small offer a growing variety of boutique brews aimed at the many micro-markets of tastes and lifestyles.  If standardization no longer works as a strategy in a company's domestic market, it would seem that expanding to international markets would only compound the effect.         

Eirinn Go Brach -- Bridge to the EU

If you are a company whose products or services appeal to the wants and needs of businesses or consumers in a fully developed economy, then Europe has to be on your short list of new markets to explore.  Although the economy of any individual member country is far smaller, when aggregated, the nominal GDP of the EU is larger than that of the US.  And while the go-go growth of emerging markets such as China and India is alluring, as things stand today, the EU's combined economy is over 5 times larger than China's and over 16 times larger than India's. 

As discussed elsewhere in this blog, the EU can be a daunting market to get one's arms around because while it is in some respects a single market, it remains in many respects many separate markets divided by language and cultural preferences.  Among the critical common issues that need to be addressed by the hopeful exporter, however, are fine tuning your value proposition to ensure that it connects with European sensibilities and getting your cost structure, pricing and accounting synched up to effectively do business in Euros instead of dollars.  Until these two issues have been effectively addressed, it doesn't make sense to spend the money to translate literature and get potential sales agents or distributors up to speed in 10 different languages.

So where do you start?  I would suggest that the Republic of Ireland is a grand place to jump in.

Although Ireland retains its native Gaelige as an official language, English is also an official language and is universally spoken and used in both business and everyday life.  Accordingly developing market intelligence through conversations with potential customers, suppliers, distributors and others is easy and comfortable.  While this would also be true in the UK of course, Ireland, I think, presents a few advantages over England as a bridge to business in the EU.  First and most directly, while England is part of the EU for many purposes, it did not adopt the Euro as its currency whereas Ireland did.  More subtly but of equal importance, Ireland seems to be culturally more in tune with the continent in many ways.

Ireland also has a very sophisticated and welcoming business climate with a well developed technology sector and a motivated and educated work force.  Evidence of its well developed economy can be found in the fact that Ireland's per capita GDP is among the highest in the EU, second only to Luxembourg. As with many nations surrounded by sea coast, it also has a lengthy and in-grained history of importing and exporting -- you'll be dealing with people who know how to sell foreign goods. 

If you have a product that requires a certification (an EU equivalent of a UL rating, for example), as a general matter, if you obtain the certification in one EU country, it will be transferable to other jurisdictions within the EU.  Many of the challenges in obtaining this type of certification can be made more navigable by being able to deal with testing agencies and regulatory authorities who speak English as a first language.   So again, clearing these hurdles in Ireland can smooth the way for subsequent entry into other European markets.   

The fact is in many respects Ireland can provide a very effective bridge for any American company seeking to develop new export markets in Europe.

On the downside, you will probably have to go out for one evening of traditional Irish food such as black pudding, but rest assured that, in my experience at least, even the Irish prefer to entertain their out of town guests by taking them to some of the many excellent Italian or Chinese restaurants in Dublin -- and a lovely evening at the Clarence Hotel (owned in part by U2's Bono and Edge)in trendy Temple Bar could well be on the agenda.

Globalization, Change and Education -- What It Takes to Prosper in the 21st Century

In the US and most developed western countries we think of education in terms of math, science, history and literature.  These are the tools necessary to understand and succeed in the secular world.  It's easy to forget that not all the world views education this way and, unfortunately, this difference in educational perspective may have much to do with the gap between the haves and have-nots in the global marketplace of the 21st century.

If you are doing business in predominantly Islamic countries, I commend to you the article in yesterday's Wall Street Journal profiling Azim Premji, the head of Wipro Ltd., the large Indian firm that provides outsourcing services to many global brands.  With a net worth estimated at $17 billion, Mr. Premji is reported to be the world's richest Muslim who has not derived wealth from the royal control of oil resources.  He is also a Muslim thriving in the predominantly Hindu culture of India.

Apparently Mr. Premji is the object of criticism from many struggling Muslim's who are among India's most impoverished residents because his fabulously successful company hires only a small percentage of Muslim employees relative to the proportion of the country's population that adheres to Islam despite the Islamic faith of it's CEO and principle owner.  The limitations imposed upon Mr. Premji by his country's and his faith's perspectives in this regard are instructive about the education gap and the consequent wealth gap found between developed and developing countries in the world today.

As background, one should appreciate the extent to which Wipro is a paradigm of the need to be flexible in order to survive and be successful in a global economy where the rate of change is ever increasing.  When Mr. Premji took the reins of what was then known as Western India Vegetable Product Ltd. in 1966, the company had annual sales of $2 million and produced primarily sunflower oil.  When India took a turn toward socialism in 1977, many multinationals fled the country, leaving a vacuum in India for the products that they had been producing or importing, including electronics and computer hardware.  In a radical departure from the vegetable oil business, Wipro entered the vacuum, becoming one of the country's leading manufacturers of computers and consumer electronics.

In the 1990's, India moved quickly back toward capitalism and the rush of global corporations back into the country displaced much of Wipro's market -- a global economic change that would have been the death knell for many less flexible companies.  But instead of wilting in the face of this onslaught of new international competition, Mr. Premji again saw opportunity instead of threats and once again completely retooled Wipro's business.  Today, of course, Wipro is a global powerhouse listed on the New York Stock Exchange with a $20 billion market value.

So why does Wipro hire so few Muslims?  Being that Wipro's customer base is made up of global companies and that English is the international language of business, they look to hire people with some proficiency in English.  Not surprisingly, they also look to hire people with some education in mathematics, science, engineering and business so that they can understand their client's businesses as well as become successful employees supporting Wipro's own successful business strategies.

Most of India's Islamic population who attend school attend traditional Muslim schools.  Here they work on memorizing the Quran in its original Arabic.  There is no science and no English in the curriculum.  This is not an oversight but done with intention as these schools see a career in a global capitalist market as a bad thing not to be desired or pursued.  The WSJ article reports on an interview with an imam who runs one of the traditional Muslim schools in which he opines that "a future as self-employed shopkeepers or peddlers is preferable to seeking formal work at a large company."  The imam is quoted as adding "A job is like being a slave."

For most of us with a Western world view, education is the principle vehicle through which we would hope to overcome the cultural divides that separate people in a world becoming ever smaller through communication and transportation technology.  We also believe that education is the means for providing people with the opportunity to create a better and more prosperous and vital future for themselves.  Clearly Mr. Premji shares this view, but the fact that it is not a universally held perspective presents some significant challenges for Mr. Premji as a Muslim in a capitalist world -- to say nothing of the challenges faced by companies seeking to be capitalists in the Muslim world. 

LIBOR and National Funds Rates -- How the Globalization of Markets Displaces Politics and Governments

Between hedge funds and mutual funds and international M&A activity, markets for credit and debt instruments have gone global.  As a result, what started as the sub-prime mortgage implosion in the U.S. has caused tightened credit across international financial markets. 

The money used to fund mortgage loans to otherwise uncreditworthy buyers was raised largely by reselling the mortgages in pieces on the secondary markets.  The idea, not unreasonable at the time, was that this spread the risk of default across a wide swath of secondary instrument buyers, each of whom held a diverse portfolio of slices of potentially bad loans.  Unfortunately the result in retrospect has been to spread the credit collapse across the world like a passenger with a bad cold on a long intercontinental flight. 

Large banks around the world wound up holding, either directly or through participation in hedge funds, enormous portfolios of securities whose net asset values were crashing as the underlying loans supporting that value went into default.  As banks saw their asset base declining, they tightened up their lending practices accordingly.  More than just tightening their lending of money, a couple of large banks, most notably in France and Germany, barred certain customers from even withdrawing their own money held on account -- often a sign of a real impending banking meltdown.

Tight credit leads to a corresponding decline in consumer and industrial spending in an era of borrow now and pay later budgeting.  And a sharp decline in private sector spending can quickly lead to an economy spiraling downward into recession.   Not surprisingly in the face of this prospect, and bolstered by nervous constituents about to see a cutback in their credit enhanced lifestyles, governments around the world are trying to loosen up credit markets in the hopes of keeping money on the street and the economic engine well-oiled.

The vehicle that governments use to accomplish this is to lower their equivalents to what in the US is called the federal funds rate, that is the rate which the central bank charges its national constituent banks to borrow overnight money.  By lowering the cost of money from the central bank, the expectation is that the constituent banks will borrow more money which can then be put out onto the street through a chain of loans to each banks respective customers.   

This all worked quite well of course so long as banking was largely a business that operated within national borders so that the principal source of new money to a country's major banking institutions flowed from that country's central bank.  Changes in the federal funds rate would cascade down through the system and each country's government could use this monetary control to ensure that its political / economic agenda was pushed out into the market place.

As with all these national policy constructs, a funny thing happened when the economy went global while governments remained national.    Large international banking companies, it tuns out, raise much of their capital through the trading of securities and purchasing of credit instruments (i.e. borrowing money) from other international banks.  Money flows around the world markets very much like every other good and service.  In order to regulate this commerce through a market price mechanism, international interbank borrowing is generally pegged not to an individual county's federal funds rate equivalent, but to the London Interbank Offered Rate or LIBOR. 

LIBOR is essentially the interest rate charged by banks on short term loans made to each other.  The rate is set daily by a distinctively private sector institution, namely a British banking trade association.  It has become so widely accepted as an international standard for the cost of short term money, that the published rate is also used as a bench mark for a wide variety of private financial transactions, from intra-company lines of credit to adjustable rate mortgages.

Here is the rub -- when lending money gets riskier, in a free market, the cost of borrowing money goes up to adjust for that added perceived risk.  Thus, while government controlled central banks are lowering rates in an effort to ease credit, LIBOR which is a private market based rate is going up to reflect the fact that all these defaults are making credit more risky than previously perceived.  And since so much money flows through international financial markets based on LIBOR pricing rather than the federal funds rate, the increases in LIBOR may well offset any efforts that governments are making at easing credit markets and increasing the flow of funds.

Somewhere here lies a fundamental philosophical question -- i.e. in the long run, are we better off responding to problems like the subprime mortgage mess by having prices reflect changes in supply and demand in private markets or by having prices reflect the government's view of sound political / economic policy (the government being made up of learned experts or bureaucratic buffoons depending on your personal point of view).  Then again, as with many other such questions, the seemingly inevitable globalization of markets may have rendered our individual answers to such questions largely irrelevant.

[Note of Attribution: This post as with most is an application of my thinking over the past couple of months around a plethora of articles and sources on the subprime mortgage mess and the reactions of central banks and financial markets.  To give credit where credit is due, however, the immediate inspiration to get it down in a blog post came from an excellent article on the subject that appeared in this past Wednesday's Wall Street Journal entitled "Why Libor Defies Gravity: Divergence of a Key Global Rate Points to Strain".]

Trade as an Agent of Positive Change - Viva La Revolution!

One of my favorite recurring themes on this blog has been the argument that robust and free international trade can do more to bring about positive political, social and economic change where such change is needed than all the diplomatic maneuvering or well intentioned do-gooder boycotts could ever accomplish.

Along these lines, I would call your attention to a post last week on the China Law Blog entitled "US Consumers Changing China?".  The post discusses an article by Nathan Gardels that appeared in the LA Times under the headline "China's New Revolutionaries: U.S. Consumers".   I won't rehash it all here since Dan Harris does his usual excellent job of getting at the salient point.  I will repeat here the following quote from Gardels' article which I think gets at the heart of it:

Americans won't hesitate to cut the import lifeline and shift away from Chinese products that might poison their children or kill their pets.

Unlike organized labor or human rights groups, consumers don't have to mobilize to effect change; they only have to stop spending.  And their bargaining agents -- Wal-Mart, Target, Toys R Us -- have immensely more clout than the AFL-CIO or Amnesty International in fostering change in China.

Viva la multinational corporation! And, more to the point, their customers voting with their dollars in the open market for goods and services.

Opening a New Office -- Stay Focused and Breathe Deeply

Regular readers are wondering where I've been.  The answer -- opening a new office along with all that entails including locating space, negotiating lease terms, hiring management staff, training new people and making sure they understand our company's culture, making sure we're in compliance with the rules of a new tax jurisdiction .  .  . etcetera, etcetera, etcetera.

In order to ensure a smooth transition for customers in working through the new office, everything had to come together at the right moment.  Neither an office without staff nor a staff without an office would suffice.  And it's always stunning how many little details can throw a monkey wrench in the works.  For example, after assuring us that they could provide DSL service, the principal high speed internet provider in the area told us they could not provide the service just a week before we were to go live.  A secondary provider kept dragging their feet in responding to our back-up order, eventually telling us that there would be a 6 to 8 week delay in getting service installed and functional.   After much teeth gnashing and exasperated phone calls, the original provider came through although we had to delay opening the office by a week,

The office is still not fully furnished, but the good news is that that's primarily because, having gotten everything fully operational, we've been too busy since opening to worry about the final details of decorating.  The most sobering part of all this is the craziness of the past month which kept me from blogging here involved a move into new office space across town to accommodate our expansion.  It brought me right back, however, to a number of the new offices and plants I oversaw in other countries over the years.  Needless to say, the challenges of opening a new office a few thousand miles away with employees who speak a different language present a daunting bur necessary and exciting endeavor.

When opening a new office you must hire a manager whom you can trust implicitly.  You must get on site to resolve mission critical issues effectively.  You must hire employees who are open to learning the company's culture and provide detailed training from day 1, if not sooner.  Stay focused on the business plan driving the new office location and don't get bogged down in issues that detract from the goals of the plan.  Find a quiet place and breathe deeply.

The EU -- One Market or Many?

The EU resuscitated its drive to adopt an updated political structure this past weekend by agreeing to the terms of a proposed treaty that would control the common governance of its member countries.  By calling the document a "treaty" instead of a "constitution", the member governments hope to avoid the need to put the document up for a vote of their constituents which resulted in a messy rejection of the idea last time around.  Presumably governments can enter into treaties that govern their arrangements with their neighboring countries without a plebiscite, while a constitution, at least in a liberal democracy, requires the consent of the governed.

While this end run may allow the EU to act more effectively as a consolidated political entity once it is fully in place, the question remains for a company looking to Europe as a potential export market whether the EU operates as a single economy or as many diverse markets.  Depending on your particular product or service, it may be a little of both.

On the single market side, the EU certainly has

• a common currency
• an integrated transportation infrastructure
• a trans-national regulatory framework.

On the other side of the ledger, the EU has

• individual constituents that speak many different languages
• national regulatory requirements
• local cultural preferences.

The EU in which your company will do business may depend on the level of the market to which your goods or services appeal.  One helpful paradigm for understanding how this might play out is the Global/Glocal/Local framework proposed in a Harvard Business Review article in October 2006.  The idea here is that each country's market operates at several different levels, one being the "global"  level where consumers seek products and services that conform to global standards at global prices, a second being the "glocal" level at which consumers seek global products and services with some local features and at prices somewhat lower than the global price, and a third being the "local" level at which consumers seek products and services appealing to local tastes and preferences at prices determined by local competition.

The more your product plays in the global segment of the market, the more the EU will seem like a single market.  Conversely, the more local your product offering, the more the EU will be comprised of many smaller markets.  Understanding which of the EU's two market personalities you will encounter is critical to your company's success as it affects everything from choosing the locales in which you are likely to be successful, determining whether any product customization's necessary, the need to translate your literature, and the breadth and fluency of your sales force.  And I don't see these market dynamics being altered by a new governing document whether it's a treaty or a constitution.    

Disney's World -- Even a Global Behemoth Must Prove Nimble in the New Global Marketplace

If there is one product category that U.S. companies have been able to export where the American character of the product is itself part of the winning value proposition, it's cultural works such as movies, television and music (as well as cultural clothing such as blue jeans and slogan-bearing T-shirts).  And if there were ever a market that was begging for cultural products that appeal to the "tween" set, it's India where the population under the age of 14 is larger than the entire population of the US.

With that going for it, if there is a company that should be able to act as a global company in the sense that Ted Levitt defined it (i.e. a global company "operates with resolute constancy . . . as if the entire world (or major regions of it) were a single entity"), it should be Disney promoting family friendly movie fare in India.  As illustrated by its co-venture with Bollywood film studio Yash Raj Films to be announced today (and as detailed in an article in today's Wall Street Journal), Disney's efforts in India are in fact the latest illustration of the reality of the global marketplace discussed in previous posts on this blog.  Even a global behemoth must customize its product and service offerings in order to meet the demands presented by foreign consumers, who like internet age consumers everywhere, want what they want, when they want it and how they want it.

In Disney's case, even the tame portrayal of budding boy-girl relationships and sometimes peevish middle school behavior is offensive to the Indian film distribution companies and their audience.  Likewise, story lines based around baseball and basketball don't capture the imagination in a country where cricket is the national pastime.   Bollywood has also produced quite a few Indian movie stars who have much more appeal to the Indian audience than some of the names from Disney's stable of talent in Hollywood. 

In a clear refutation of Levitt's analysis of global corporate power to dictate what consumers buy, according to the WSJ article, Disney has had to change from its "traditional approach [which] was largely to force-feed its US products from its Burbank, Calif. headquarters."  Instead, "the company ultimately concluded the cookie-cutter approach wouldn't work, and now is going country by country."  The new global reality "means discarding Disney's historic obsession with going it alone -- and instead joining forces with local experts to produce culturally customized fare."

It's a global marketplace, but each country presents a different market segment and a different voice of the customer.  To be successful, you must make sure that your value proposition -- the story that you tell your customers -- translates well across cultural differences.