Why — and How — Companies Must Go Global

Globalization is often presented by its foes as some kind of corporate plot, but Richard Parsons, the CEO and chairman of the board of Time Warner, describes the trend toward worldwide business consolidation as the product of a number of different economic, demographic, and technological forces.

 

Speaking at a Global Business Forum organized in New York City’s Metropolitan Club on April 3 by the Lauder Institute and the Lauder Institute Alumni Association, Parsons described how just as changes in transportation and communications led to regional and national markets in the last century, transformations in technology are now leading inevitably to a global market that will be served by large, global companies such as Time Warner. “We’ve gone from a place where 200 years ago your market was where you could walk in a day, to a place where your marketplace is the whole globe,” he said.

Explaining the rationale behind the Global Business Forum, John Buggie, president of the Lauder Institute Alumni Association, said: “We recently founded the Lauder Institute Alumni Association (LIAA) as an independent organization dedicated to serving the professional and social needs for all Lauder Institute alumni worldwide. LIAA acts as a platform for  leaders who plant seeds rather than fight fires and serves as a catalyst for soft power in shaping the global agenda. Our organization will offer more thought provoking events programs and activities like today’s Global Business Forum. Today, we are pleased to have over 30 CEOs and captains of industry, foreign policy makers, world class media experts, professors, entrepreneurs and leaders among leaders who will debate key global business issues, identify trends, and exchange ideas alongside our Lauder alumni during six panels and two keynote sessions. If you or any Lauder Institute alumni want to get involved, approach one of our volunteers and let us know your interests.”

Parsons brings a unique perspective to global business issues because he has spent, as he put it, “more than 35 years wandering in the business wilderness.” Before becoming the CEO of Time Warner in 2002 and chairman of the board in 2003, he was the company’s chief operating officer in charge of its content businesses — Warner Bros., New Line Cinema, Warner Music Group and Time Warner Book Group. He joined Time Warner in 1995, before which he was CEO of Dime Bancorp, one of the largest thrifts in the U.S.

   

Better communications and transportation have largely eliminated distance as a constricting factor for business, according to Parsons.  “It always amazes me when you’re traveling in Japan, and they have less than 24-hour-old langoustines from Scotland on the menu…There is no place you can go in the world where you can’t get almost anything from any other part of the world,” he said. “Business has to scale up to meet the demands of this global market. The scaling-up process is ineluctable.”

 

Parsons noted that technological advances, the emergence of global markets and the relentless drive for growth have critical implications for managers, and they are also driving the trend towards consolidation in the media industry. “In the past, there were three sources of television news — ABC, CBS and NBC. Now we have Fox, MSNBC, and several other broadcast and cable channels, and we also have the Internet.” Parsons pointed out that as media consolidation has gathered momentum, huge debates have raged in the government about whether media should consolidate. “The answer, though, won’t be found in government but in the market.”   

 

Parsons used New Line Cinema — a Time Warner company that made the “Lord of the Rings” trilogy — to illustrate how the need for scale is changing the media business. New Line started as a small independent, producing such low-budget films as the Nightmare on Elm Street series. But as it grew, the company found that it could no longer afford to make the outsize bets it needed to in order to compete. “It’s one thing to make a film for $10 million and have $5 million of marketing. It’s another thing to make a film for $50 million and have $25 million of marketing,” he said.

 

After the company suffered a “near death experience,” Parsons said, New Line executives decided to change course. “They realized they needed to have good financial underpinnings in order to expand and grow their business.” To do that, New Line was sold to Turner Broadcasting, which gave New Line the ability to make bigger bets in hopes of gaining bigger rewards in the highly risky film industry. Turner, in turn, faced similar issues of scale, and merged with Time Warner a few years later for the same reason. The merger gave Turner a “stable, bigger balance sheet.”

 

Not only are Time Warner’s deep pockets essential to make such big bets as New Line’s $300 million gamble on the Lord of the Rings cycle, but Time Warner’s access to many forms of media distribution in many countries creates multiple opportunities to decrease the risk of that bet and increase its potential rewards, Parsons said. Although Time Warner runs New Line with the “spirit of an independent, the financial risks are real because the production and distribution costs of multi-million dollar films are incurred up front. “If the film doesn’t open well on a weekend, you write off the investment on Monday. You’re looking at a multi-million dollar hit. If you can’t make that money, you’re out of business.”

 

Such forces pushing economies of scale can be seen not only in media, according to Parsons, but in many industries, including automobiles, telecommunications, and computers. “These are the economic imperatives of competing in a global market. It is driving globalization and consolidation in all industries.”

 

The need to increase profits is another force that is pushing Time Warner to expand outside its home market.  “Basically, we’re a publicly traded company. The way we get value is on the basis of our growth…I’m not sure if in the long term it’s the most sensible way, but it’s a fact. What the market will pay for is growth, predictable earnings growth, quote unquote,” he said.

 

For a large company, achieving that continued growth becomes difficult. Time Warner already has a 20-25% share of most forms of U.S. media. “We’re the fat kid in the boat,” Parsons noted. “For me to go up a half a point or down a half a point in market share is a big swing on the domestic front.”

 

This is especially true in the advanced economies of Europe and the U.S. where the population is not growing, Parsons said. This demographic factor is yet another reason that global companies are looking offshore for new opportunities, to countries such as India and China, where the economy is growing and new consumers are being created at a rapid rate.

 

But serving those markets requires more than just shipping copies of the same material, according to Parsons. Asking, “how do companies globalize?” he answered that most of them go through four stages in their development of international markets. First, they take what they already produce for their national market and export it to overseas markets where there may be an appetite for such products or services. Next, they start to tailor their offerings for the offshore market. Third, they begin using domestic infrastructure in the offshore country to create products for that market. And finally, he says, they establish a deep enough presence in the offshore market that they can use it as a sourcing base to make products that are imported back to the home country.

 

As a result, companies are being forced to look outward in a way that they never did before.  Parsons, who joined Time Warner as its president in 1995, said that when he joined, perhaps 16 of the company’s top 18 managers grew up within 100 miles of New York City – 12 of them from Brooklyn or the Bronx.  Many of these people couldn’t find Europe on a map, let alone Asia,” he said. That geographic limitation led to a conservative, “some people would call it constipated, perspective.”

 

Today, Parsons added, Time Warner and many other companies need people who understand and are open to other cultures. “You have to bring globalization into your organization if want to develop the ability to appreciate a new culture. You have to be a step ahead of change.”

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