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Doing Business in a Global Economy

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Christopher Rodrigues, chief executive of Visa International, brandished a cell phone to make his point about global expansion during a conference in London last month organized by the Economist and the Wharton/INSEAD Alliance. This, he said, was the unlikely means by which companies like Visa will penetrate new markets, particularly in developing nations. Not that Visa has designs on becoming the next Nokia or DoCoMo. The cell phone, he explained, will allow monetary transactions in even the remotest of locations, where land-lines have not yet been constructed.

Rodrigues was a keynote speaker at the conference, entitled "Delivering Profits in the Global Economy," whose participants focused on such issues as growing a global business, leadership in the global organization, branding, and decentralized vs. centralized management structures.

To illustrate the importance of WiFi transactions to growing economies, Rodrigues pointed to Asia. In the next four years, 100 million cell phones will be used in India. That number should reach 500 million in China within three years. "What we are seeing," said Rodrigues, "is a global shift from paper-based transactions to electronic payments." The benefits of electronic transactions include lowering transaction costs (by reducing the costs of handling cash and reconciling payments), moving economic activity from the informal to the official economy (by mainstreaming more individuals into the banking system) and improving financial transparency. Indeed, the World Bank has cited effective and efficient payment systems as vital elements for economic development in emerging countries.

Rodrigues likens a cash economy to walking, whereas "introducing electronic payments is akin to using the gears on a bicycle." Add in an efficient electronic payments system and you "kick [the economy] into high gear." Add better-controlled consumer and business credit and you notch up economic velocity even further. Rodrigues sees a strong role for Visa in moving cash-based economies into the global financial systems. This includes working with institutions like FINCA International and Mibanco to provide microfinancing for low-income individuals and businesses, and enabling cost-effective funds transfer to support remittance to home countries by guest workers abroad.

In developing countries and transition economies, Visa works closely with governments and lending institutions, Rodrigues said. For example, in Puerto Rico and Brazil, Visa offers card solutions for government grants and loans, thereby facilitating safer and more transparent enterprise initiatives. In South Africa, payroll, pension, and benefit cards are introducing people formerly outside of the system to banking procedures.

"If we stop thinking of the poor as victims, a whole new world opens up," said Rodrigues, citing themes from the book, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, by C.K. Prahalad. Rodrigues believes the way to commercial and societal improvement will require those in the developed world to re-conceive the way they deliver products and services to the developing world.

Indeed, companies that do not understand the economics of developing nations will miss out, noted Donald Hepburn, corporate economist for Unilever. He forecasts a major shift in consumer consumption between 2003 and 2010. Currently, of the $21.6 trillion world consumer spending total, the majority is in the West: $7.8 trillion in the U.S. and Canada and $6.9 trillion in Europe and Russia. South America accounts for just $1.2 trillion in consumer spending, Africa $1 trillion, and Asia $4.8 trillion (at market exchange rates).

By 2010, the world's consumption should be at roughly $41.2 trillion. From the perspective of purchasing power parity, the U.S. and Canada will represent $9.7 trillion, Europe and Russia $9.1 trillion, while Asia will balloon to $15.7 trillion. Africa will move to $3.3 trillion and South America will settle in at $3.4 trillion.

"Collectively, Asia will have huge purchasing power," said Hepburn. At the individual level, it will be a challenge for companies like Unilever to provide products that consumers in these countries can afford. Hepburn mentioned the success that Unilever has had in emerging markets by tailoring existing products sold in other Unilever markets. The example used was innovative packaging for the introduction of single serve shampoo and conditioning products into the Indian market.

The developing world is not the only place Rodrigues sees growth opportunity. In the developed world - where he expects consumer spending to remain constant, a moderate increase in consumer indebtedness, and a continued preference for electronic payment over cash and check - Visa is moving into new markets. They include small transactions, repeat payments, healthcare, and the purchasing arena of business and government. In the UK, for example, the Visa Government Purchasing Card allows the government to streamline its purchasing processes. KPMG estimates that each transaction made via GPC saves taxpayers 70 percent in process costs.

For Visa, the challenge of global expansion has been finding new ways to apply its original vision. Its founder, Dee Hock, believed that giving the average consumer broader access to capital would have a real and positive impact on the economy and society. Rodrigues, who has been CEO only since March 2004, agrees with this vision. Might there come a point when he feels that Visa has exhausted all of its opportunities for expansion? Perhaps when Club Med switches from shells to cards, he joked, he'll be able to take a breather.

Calibrating One's Hold on the Corporate Reins
The conference also included a panel on the challenges of growing a global business. Participants noted that leaders in charge of these businesses must decide, for example, how tightly to hold on to the corporate reins: Pull too hard and you stunt the entrepreneurial activities that emerge at the local level; let go and you risk losing control of your corporate brand and values. Speakers from both the corporate and academic sides agreed that the only constant in managing a global corporation is the ongoing calibration process required to balance corporate and local needs.

Most global firms grow through mergers and acquisitions, which means that bringing companies into the fold and deciding how tightly to control them is a critical decision point. Such was the case for AXA. In just 30 years, the insurance and financial protection company has grown to 71.6 billion - about $89 billion - in annual revenues. The company has 50 million customers in more than 45 countries and 117,000 employees worldwide.

With much of its growth achieved through mergers and acquisitions, AXA faced a critical question early in its development: Do we want to be a centralized or decentralized company? The benefit of the former, said Claude Brunet, a member of the management board, is that "you can have one thing everywhere;" the latter frees up a company "to be entrepreneurial, to respond quickly to new market challenges and opportunities." Instead of compromising, AXA chose to have its cake and eat it too, selecting what they call an "everything decentralized but" strategy.

AXA corporate takes the lead on key functions such as capital allocation, top executive management, brand management, values, and defining AXA standards. But they share with subsidiaries and affiliates the running of specialized units (AXA Business Services and AXA Corporate Solutions), support functions (AXA Risk Management, AXA Procurement, AXA Way, and AXA University), and networking. An example of "everything decentralized but" is AXA Way, the company's methodology for achieving operational excellence. The methodology is based on the same reengineering processes used in manufacturing. The process, said Brunet, is a "fact-based method, it is customer oriented, and it allows for employee ownership and empowerment." An AXA Way governing body creates the methodology, while projects are selected and implemented at a local level."

Rather than acquiring firms along the way to achieve measured growth, Barclays Global Investors became global virtually overnight. A single geographic merger in 1995 between Wells Fargo Nikko Investment Advisors and Barclays de Zoete Wedd Investment Management created BGI, a global institutional asset manager with businesses in all major pension fund markets and 10 offices worldwide. According to Lindsay Tomlinson, vice chairman, the early years of the merger saw global management structures sitting directly over the old organizations. "Eventually we began to ask, 'Why be global?'"

The new company shared a common business strategy but not much else. A first step toward unification came by way of travel. "We told the top 30% of the people in our firm that they had to do training in another office. Two days in one place, three days in another," said Tomlinson. Beyond the windfall to British Airways - some $7 million dollars was spent in air travel - the strategy proved more beneficial than anyone had expected. "People got to know each other and began sharing ideas. Afterward, someone in San Francisco would call a colleague in Europe or Asia without hesitation, with the same ease as they would call a colleague down the hall." BGI further institutionalized the unification by creating a global bottom line and global bonus pool, developing global product lines, and adopting common core infrastructure and technology.

"We had been given a 20 percent chance at success," added Tomlinson, who clearly has beaten the odds. But if the company's success was unexpected, so were some of the negatives associated with going global. It has been "incredibly satisfying, but it has its costs," said Tomlinson. No one had quite predicted the tax on employees' personal lives. "When you have people on planes all the time or on conference calls at 2 a.m. you begin to wonder whether we would all have been better off staying in London and making a fine living doing what we did before."

Branding - Global or Local?
Once a company goes global it faces the question of branding. Should we have one face everywhere or should we adapt to the needs and desires of local markets? To globalize or not to globalize a brand is not necessarily a yes/no question, observed Wharton marketing professor David J. Reibstein. Companies must take into account the differences in various parts of the world: customer needs, competitors, market size, and obviously language. This means a standard offering may lead to different positioning depending where you are. He offered the Canon Sure Shot as an example. The camera is marketed as an introduction to digital in the U.S., as a replacement camera in Japan, and is geared to the high tech community in Germany. "Global name, yes," he said. "Global brand, not really."

Companies need to be quite clear about where their brand falls along the continuum between local and global. Is yours a truly global brand like Starbucks, which is the same everywhere, or are you a local brand like Wish Bone salad dressing, which is only sold in the U.S., asked Reibstein. Or is your brand somewhere in between, like KFC, which is basically KFC the world over but serves tempura in Japan and potato and onion croquets in Holland

The benefits of a strong brand are indisputable, he said. "It improves the efficiency of marketing, intensifies customer loyalty, improves leverage with the trade, and creates a true asset for the firm." That is, of course, if the brand has credibility. Terry Tyrrell, European chairman of Enterprise IG, warned of consumers' waning trust in brand promises. "If an organization's brand is about reputation," he said, "then we're living in a graveyard of broken promises." He suggested that a brand used to be a mask, which companies could hide behind. "Today, those masks have been turned into windows," and companies had better be sure that their words and deeds match up.

The brand must hold up not only externally, but internally, suggested several of the speakers. Indeed, Barry W. Wilson, senior vice-president and president international of Medtronic, said that the group's commitment to its leadership in major medical technology markets was matched with the requisite R&D spending. "Two-thirds of our revenues are from products introduced in the last two years," noted Wilson. Given that innovation is the company's lifeblood, it will spend $851 million on R&D in 2004, equal to 9.4 percent of sales. You cannot expect innovation but not support it through R&D spending, he said.

Similarly, Cisco practices what it preaches, having grown globally by placing significant weight on business processes. Robert Lloyd, president EMEA, senior vice-president, suggested that "strong global processes drive strong global profits." He cited the Net Impact 2003 study by Momentum Research Group which showed that letting business processes drive the Internet business applications, instead of the other way around, produces 25 percent - 30 percent costs savings. Developing Internet business applications first, then building the business processes from there, results in 6 percent - 9 percent cost increases. According to Lloyd, Cisco has realigned around business processes, stating that "basic infrastructure provides competitive advantage."

IQ and EQ
All of the speakers agreed that the skills needed to manage a global company are quite complex and difficult to find. Jean-Philippe Courtois, chief executive officer, EMEA, and senior vice-president, Microsoft Corp., said that he would prefer leaving a position open for a while, with someone serving as "acting" manager, rather than filling a post immediately with someone who might not be the right fit.

According to John Grumbar, chief executive of Egon Zehnder International, the "hard" competencies, such as strategic orientation, customer focus, market knowledge and functional knowledge, are given too much weight. Rather, the "soft" skills, such as team leadership, change leadership and people development skills, are the competencies you find in effective leaders. Indeed, when Egon Zehnder studied 515 managers from three regions (Germany, Japan, and Latin America), it found that among three competencies - relevant experience, IQ, and EQ (emotional intelligence) - the most significant determiner of failure was a low EQ. Said Grumbar: "Most people are hired on IQ, but fired because of EQ."

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