Globalization creates opportunities for many domestic companies
Globalization creates opportunities for many domestic companies
Michael Nicholas, Jakarta
Changes in the business environment have made it easier for
small and medium sized companies from countries such as Indonesia
to access international business opportunities in a way never
before possible. But research shows that managers will have to
develop a more innovative and international mindset if they are
to succeed in global markets.
At the recent ASEAN summit in Laos, leaders agreed to proceed
towards a China-ASEAN Free Trade Agreement (FTA) which will
create the world's largest free trade zone with a market of over
two billion people.
ASEAN is also considering similar agreements with Japan, South
Korea, and possibly even Australia and New Zealand. Meanwhile in
January, officials from Indonesia and Japan met to lay the
groundwork for discussions on a bilateral FTA. Falling import
tariffs are just one of several global trends that have created
unprecedented opportunities for companies from smaller markets on
the periphery while at the same time increasing the amount of
competition they will face at home.
Until quite recently, companies were constrained by various
barriers of geography: Import tariffs, market regulation and
expensive telecommunications and transport expenses that
significantly increased the cost of doing business from a
distance.
According to Lowell Bryan and Jane Fraser, these barriers
favored local producers and provided companies that emerged in
the large mass markets of the U.S., Japan and Western Europe
after the World War II with an advantage in economies of scale
that was hard to beat. These companies integrated vertically to
overcome the high interaction costs of the market and then
diversified horizontally into new industries to reduce risk. With
their large size, they were better able to attract and access the
scare resources needed to compete: Capital, skilled managers,
technology and relations with governments.
But, times have changed dramatically. Barriers that once
protected the large incumbents have crumbled under waves of
deregulation, privatization, and new intermediary markets,
allowing smaller companies from locations on the periphery to
compete and win global market share. New technologies, including
new computing and communications technologies, have cut
transaction costs making it possible for companies to specialize
more than ever before.
By combining the same small niche market in dozens of
countries, companies can create one larger more attractive
market. The increased availability and mobility of capital in new
financial markets has diminished the corporation's role as a
financial-portfolio manager. Investors can more easily diversify
risks and generally prefer more focused "pure-play" companies to
broad-scope ones.
This sea change has allowed specialized players to achieve
dramatic growth and global scope rapidly giving rise to the
emergence of small companies that are "born global". A McKinsey &
Company study of Australia's high value-added manufacturing
exporters highlights the rise of numerous small to medium-sized
companies that are now able to successfully compete in global
markets -- virtually from their inception -- against large,
established players. These firms do not slowly build their way
into international trade, but rather are born global in a way
that would have been virtually impossible 20 or even ten years
ago.
Born global companies began exporting on average only two
years after their foundation and achieved about three-quarters of
their total sales through exports. Though small, with total
average sales of US$16 million, these firms can successfully
compete against larger established players once they overcome
set-up hurdles and develop both an innovative and international
mindset.
An International Labor Organization (ILO) report found the
same companies in most OECD countries. According to the report,
the factors that most frequently hindered export growth were
credibility, access to finance, market information, technology,
and, most importantly, the lack of an innovative and
international mindset.
The same phenomenon has also been found in developing
countries such as Indonesia. In a study of companies from India,
Brazil and the Philippines, Christopher Bartlett & Sumatra
Ghoshal found many so-called late movers competing globally once
they developed organizational confidence, a clear strategy,
passion for learning and the leadership to bring these factors
together.
The problem for multinationals in places like Indonesia is
that they typically enter global markets at the bottom of the
value curve and stay there. Managers either lack the confidence
or the courage to climb the curve to higher value-added and
higher margin sectors so the immediate challenge is to break out
of this mind set. Once freed of this psychological burden,
companies must develop a culture of continuous cross-border
learning and find a strategy in which being a late mover is a
source of advantage.
Late mover advantages are typically exploited in a couple of
ways. One is to benchmark established global players and then
maneuver around them, often by exploiting niches the larger
companies overlooked. A riskier way is to challenge the rules of
the game as a newcomer and capitalize on the inflexibility in the
established player's business models.
Companies who enjoy global success understand how to learn
from the constant flow of new demands, opportunities and
challenges that international competition brings. The willingness
to learn is the central skill that allows companies to move up
the value curve.
Leaders of successful late mover companies shared two
characteristics. First, was a commitment to global
entrepreneurialism that was rooted in the belief that the company
could succeed internationally. Second, they all exhibited a
remarkable openness to new ideas that would facilitate
internationalism -- even when those ideas challenged established
practice and core capabilities.
Globalization has created unprecedented opportunities for
companies from the periphery. Unfortunately, with trends such as
the growing number of free-trade agreements, Indonesian companies
no longer have the luxury of deciding if and when to compete
internationally. In today's global markets, you don't have to go
abroad to experience international competition. Sooner or later
the world comes to you.
Michael Nicholas (mnicholas@shaw.ca) is a business manager and
consultant based in Canada who has spent several years in
Indonesia.