Practical Advice for Companies Betting on a Strategy of Globalization

According to Mauro Guillén, director of the Lauder Institute for Management & International Studies at Wharton, a manager must learn four key lessons at business school. Guillén outlined those lessons while moderating a panel on globalization at the recent Wharton Global Alumni Forum in Madrid: First, think strategically, and avoid launching yourself into a venture without analyzing all of the relevant details. Second, diversify with respect to your type of activity and geography in order to avoid the impact of cyclical patterns. Third, assume risks so you don’t perish from the complacency that results from success. Fourth, monitor your costs carefully.

Academic theory was later supplemented with practical lessons provided by chief executives of three major Spanish multinationals — Banco Santander, Telefónica, and Fomento de Construcciones y Contratas (FCC), the construction and contracting firm. Panelist José María Álvarez-Pallete, president of Telefónica Latin America, emphasized the importance of globalization in the development of a multinational firm like Telefónica. In barely 25 years, Telefónica has gone from being a government monopoly with nine million customers, 70,000 employees, revenues of two billion euros — and a presence only in Spain — to being one of the 10 largest telecom companies in the world.

Telefónica now operates in 25 countries and has more than 270 million customers, a staff of about 200,000 workers and annual revenues of about 58 billion euros. “Staying just in Spain was not enough for us in the world that we were imagining,” Álvarez-Pallete said. It was important to have a large enough scale to take on the investments in technology required for becoming the market leader. The first step was to move into Latin America, not just because of the language factor but also “because it was the right time,” given that Latin America was undergoing a process of mergers and privatizations of state-owned companies.

Since it initially decided to go into Latin America, Telefonica has established its business so firmly that the company represents about 1% of GDP in many countries where it does business. In 2004, the company decided it was the right moment to increase its presence in Europe, so it acquired Britain’s O2, which also had corporate interests in the Czech Republic. “This was a way of diversifying our risk,” noted Álvarez-Pallete. “If we had not done that then, we would not have been able to play” in the international telecom market.

A Bank with an International Vocation

Panelist Juan Rodriguez Inciarte, chief executive of Banco Santander, told the Forum that the process of globalization has strengthened his company to such a degree that it has been able to survive any crisis. Santander, with more than 150 years of history, started out quite differently from Telefónica with respect to moving into foreign markets. Santander 25 years ago was a small bank in Cantabria; it took its name from the capital city of that local region in the north of Spain. At the time, Santander had about 700,000 customers. Since venturing abroad, it has attracted more than 91 million total users, making it the biggest financial institution in the euro zone. Bank solvency tests conducted a few weeks ago suggested it is the strongest bank in Europe.

Inciarte is a strong advocate of exhaustive cost controls given that efficiency in management is a key factor that differentiates companies from one another in a sector as mature as banking. When it was time to go abroad, Inciarte did so cautiously, and only after Santander was already strong in its local market. “In banking, it is hard to grow from scratch because this is one of the oldest sectors,” he said, with foundations that go back more than five centuries in Europe. That makes it harder to innovate. Acquisitions have become the best tool for guaranteeing a more stable process of expansion, he noted.

In 1987, Banco Santander made its entrance into the United Kingdom by acquiring a significant portion of the shares of the Royal Bank of Scotland (RBS), followed by a German institution, CC-Bank, in 1989. Next, it was Latin America’s turn. “Once we had muscle at the local level, we went abroad; by then we understood international banking,” said Inciarte. Before definitively expanding outside Spain, Santander had already made significant purchases in the country, such as its acquisition of Banesto and its merger with Central Hispano, creating one of the strongest Spanish institutions. Now, only 20% of Santander’s revenues come from Spain, the same percentage as it derives from its banks in Brazil (Banco Real) and the United States (Sovereign Bank).

According to Inciarte, the company’s success is fundamentally due to two key factors: controlling costs and carefully monitoring risks. “If we control both, we will have controlled our bank,” he noted. By incorporating technology into the management of the company, Santander has become one of the three most efficient banks in the world. As a provider of “financial services that has lower costs, you attract the best customers and, with them, you reduce the risk on your balance sheet,” he added. “Our strategy is based on being strong in all of the markets where we have a presence.”

This idea is strengthened by a geographical diversification plan because “you cannot put all your eggs in one basket…. Spain was a strong country 10 years ago, but now it is not. Today, Brazil, the United States and Mexico are strong economies, but tomorrow, it could be other countries.” Banco Santander has set a goal of achieving a market share of at least 10% in all of the regions where it has a presence.

FCC and Diversification

Panelist Baldomero Falcones, president of Fomento de Construcciones y Contratas, S.A. (FCC), defended both geographic and functional diversification as keys to his firm’s success. He said 50% of his firm’s revenues come from its services division, which complements infrastructure, its leading business activity. Two years ago, the company moved into the renewable energy sector. “It is a way to provide stability to our revenues,” he noted.

Even so, Falcones recognized that before going abroad, “you need to be leaders in your home market and you need to know it well. We wanted a critical mass in order to be able to compete for the big projects against the big companies.” Nowadays, FCC tunneling machines are among the devices that open roads for metro construction projects in Mexico, Singapore and Copenhagen. The next step before going abroad is to “provide sufficient resources, both financial and personnel, so that the project doesn’t just remain on paper,” he said, adding that if you want to be a leader in this type of initiative, you need to “send your best [employees] abroad, rather than send abroad those people whom you want to get rid of.” At FCC, the entire staff knows that the top positions are reserved for those who develop a global career path, “so that it is the best people who wind up far away.”

Regarding globalization, Falcones suggests that each market needs a different strategy. For example, when it comes to the infrastructure sector, “we focus on those countries where there is more money and there is a gap in the infrastructure,” such as China, Singapore, the United States and Algeria. But in the environmental services division, FCC follows the model “of an oil slick, expanding outward from our borders.” Emerging from Spain, Central Europe and Russia were FCC’s first destination. However, the company’s “oil slick” has already crossed the Atlantic Ocean and spread to the United States.

As for its renewable energy sector, Falcones prefers “developing our knowledge first in Spain before moving on to other markets.” FCC is immersed in training teams of locals who can jump into international markets in coming years, he said, adding that nowadays, 70% of the projects on order from FCC’s customers are from outside Spain.

Failed Adventures

Although all three CEOs say they thoroughly study every new market before tackling it, they recognize that not every project can be successful. Inciarte mentioned his company’s venture into Venezuela, where it wound up eventually selling its subsidiary. “Choosing a market carefully doesn’t prevent you from making mistakes.” Pursuing Santander’s philosophy of “being a global bank that has strong local management,” the company decided ultimately that Venezuela did not fulfill all of Santander’s efficiency criteria. It also decided to leave the Italian market after purchasing Antonveneta, an Italian bank.

However, Inciarte says that there were significant differences between the events in Italy and those in Venezuela. “[Italy] was a question of capital,” because in order to grow in Italy and reach sufficient critical mass, Santander needed to make a huge investment. At the same time, the opportunity arose to acquire Banco Brasil, and so “we decided to sell Antonveneta and use the capital to expand ourselves in other markets, such as Latin America.”

Falcones also acknowledged that FCC has wound up leaving some countries it had entered. “When you decide whether or not to invest, one factor to take into account is the rule of law.” According to Falcones, “our ethical code was considered hard to understand in some countries, so we decided to leave during the early stages of the investment.”

When it comes to the process of choosing a foreign country, the three executives all agree that political stability and legal security are key factors. As Inciarte noted, banks “are not currently [viewed as] the heroes” of the global economy. They have been targeted by governments all around the world, and the sector is increasingly regulated. The relationship between financial institutions and governmental administrators has become a strategic concern everywhere. For its part, Santander deploys a “powerful group” of employees who collaborate closely with governmental institutions to draw up and develop all sorts of regulations so that both sides of the relationship understand each other’s positions and everyone benefits from new laws.

Telefónica’s Álvarez -Pallete added that “the rule of law and the normative environment are very important, since the communities where we have a presence are evaluating us day by day.” That is why the public relations department is one of the most important in the company’s organizational chart. For Falcones, “it is crucial to reach an understanding with local authorities,” especially because FCC works in a sector where concessions depend on open competitions and contracts awarded by the public sector.

Managed Locally or from Headquarters?

The success of any international venture also depends on the human resources policy that the company pursues. “It took us years to create local talent,” said Alvarez-Pallete. He believes it is essential “to decide what part of the business you are going to manage locally, and what it is that creates the most value.” As a result, he leaves in charge those people who are closest to the corporate culture and goals laid out by headquarters. Falcones added that “diversification contributes wealth in terms of human resources. It is one of the most important assets brought by globalization. It is incredible how much we can learn about good business practices when we can understand different cultures.”

In the case of Santander, opening its doors to foreign professionals was not merely a result of globalization, but also its cause. In 1978, the Spanish government decided to deregulate the banking sector, permitting international financial institutions to set up shop in Spain. This process forced Spanish banks to learn from their rivals if they wanted to continue in the business. “The only way [for Spanish banks] to compete was to attract talent from foreign banks and hire their employees in order to start thinking in a more global way.” The result was a global firm, one in which decisions of the managerial board are made in English, rather than in Spanish. “If you truly have a global vocation, you have to utilize English as your language of management,” stated Inciarte.

Banking strategy, he added, goes beyond just placing people from headquarters in senior executive posts because they know the corporate culture from close-up. It also involves “attracting local talent in order to grow rapidly, since that is the way you learn about the business on a local level.”

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