This article was first published in the September 2011 Singapore edition of Accounting and Business magazine.
In his book, The World is Flat, Thomas L Friedman points out that, as globalisation is creating an increasingly level playing field, developing countries must put in place policies to create the right environment for their entrepreneurs to succeed.
But international companies must also be willing to embrace change. In order to survive, Friedman argues, big companies must act small: adapting to local customers’ needs, focusing on niche markets, doing what they do best and outsourcing the rest.
Ernst & Young’s Globalization Index has been increasing since 2009 and is expected to continue to rise until 2014. ‘Globalisation is offering new opportunities to companies, but they must adapt,’ Dilys Boey, advisory partner with Ernst & Young (EY), told a recent executive roundtable session. Participants at Winning in a Polycentric World – a Global and Singapore Perspective, heard that, for example, ‘the traditional business model of having a headquarter rolling out centrally made decisions perhaps might not work anymore in this economy. It’s now really a question of flexibility, adaptability and understanding the different markets.’
A recent survey of business executives in Singapore, conducted by EY and the Economist Intelligence Unit, showed a strong interest in growing overseas operations and research and development (R&D) investments in emerging markets, although those surveyed also recognised that their companies face infrastructural, regulatory and talent management challenges.
About 83% of executives polled in Singapore said that they expect their company’s foreign direct investment to increase over the next three years.
The survey showed that 39% of Singapore respondents currently derive more than half of their company’s sales from markets outside the country (compared with only 18% of global respondents). Furthermore, 53% anticipate that over half of their company’s global sales will be derived from overseas markets in five years (compared with 26% of global respondents).
‘This result is not surprising given the size of Singapore’s domestic demand,’ said Boey. ‘Many are looking beyond our shores to find higher growth sales opportunities.’ She noted that, in a globalised world, there was now a business imperative for companies to go where their consumers and customers are and will be.
Choo Chiau Beng, CEO of Keppel Corporation, agreed, saying that his organisation had adopted a ‘near market, near customer’ strategy, ‘meaning we go where the customers want us’. He pointed out that Keppel’s diversification of its customer base helps it spread risks, and provides greater security in times of economic uncertainty.
But moving overseas is not without its difficulties. About 37% of companies surveyed cited the lack of key skills, such as engineering and finance, as a concern.
Other top issues included low standard or costly infrastructure (34%), difficulties in building senior local management teams (29%), and corruption and weak corporate governance (29%).
Paradoxically, while many companies are interested in investing in R&D overseas because of the availability of local talent, they also face difficulties in finding and retaining that talent, particularly at managerial level, Boey noted.
Leading manufacturer of construction and mining equipment, Caterpillar Asia, is currently considering expanding in the region. Its president and chairman of Caterpillar India, Kevin Thieneman, told the roundtable that the availability of talent, especially at management level, will be key to determining the final location choice.
Vijayan Munusamy, human capital research head for Asia Pacific at The Conference Board, expanded on the findings of a recent study by the business membership and research association, looking at the top human capital challenges over the next few years and how HR managers plan to tackle them. The survey found that as part of their talent retention strategies, employers are providing employees with challenging work (89%), providing clear growth opportunities and career paths (87%) and increasing compensation for key talent (76%).
Regarding leadership development strategies, the study showed growing talent internally by identifying high-performing future leaders is the top strategy (96%) followed by improving leadership succession planning (86%) and improving leadership development programmes (85%).
The EY survey highlighted several other strategies to cope with obstacles to overseas expansion. These include building diverse leadership teams with global experience because skills and capabilities that are required to succeed in emerging markets differ from those in mature ones. ‘In developed markets, success is rooted in process and efficiency, but emerging markets demand experimentation, risk-taking and entrepreneurship,’ the report stated. ‘Companies should review the balance and diversity in their leadership teams and workforce to ensure they have the right mix of talent.’
But not all participants in the roundtable discussion agreed on the need for diversity among leadership teams. ‘The issue of diversity in management can sometimes be misplaced,’ Choo warned. ‘You shouldn’t get diversity just for the sake of diversity; you should get the best people that fit your culture and have the talent to contribute to the objectives of the organisation.’
Engaging with government
The study also suggested that companies should rethink their relationships with government and tax administrations and consider ways to effectively engage with the public sector, given that governments are more embedded in business than before.
Thieneman agreed: ‘It’s necessary today that you engage more with government. Maybe 10 years ago you could get away with benign neglect of the relationship, but today it’s an imperative, particularly in this region. We’re growing fast. There are things government can do to support you, whether it’s export financing, whether it’s the infrastructure.’
Thieneman suggested that companies should engage governments directly, especially when they are planning big investments. ‘I think governments actually want to talk directly to the company that is planning to invest; they don’t want to talk to consultants,’ he said. ‘They want to know what’s really going to make you put down the investment. And I think that’s the time for the relationship to build trust.’
Finally, the report argued, to succeed in a globalised world, companies must put the local customers first – ‘critical in emerging markets’, according to Boey. ‘I think the strategy to adapt or configure global products may be appropriate in certain markets, but certain different consumer preferences and spending powers across markets must be considered in the execution of any global product rollout,’ she said. ‘Further, companies need to focus on tailoring local delivery, including sales and distribution channels and marketing strategies, within the local context.’
As companies expand and internationalise, they must understand that a one-size-fits-all approach is unlikely to work today, Boey added. ‘Business leaders need to strike a balance between local relevance and the benefits of scale, while maintaining consistent values and culture throughout their global operations,’ she argued.
However, she warned that, while regional managers must be given more autonomy, ‘the pendulum should not swing too fast either’, adding that ‘giving them more autonomy does not mean relinquishing control of your regional operations’
Sonia Kolesnikov-Jessop, journalist