Sitting down recently with the head of a leading Spanish bank, Wharton management professor Mauro Guillén asked the CEO if he foresaw any bottlenecks in the bank’s rapid growth around the world. “Managerial talent,” Guillén recalls the CEO replying immediately. Although the bank was able to move easily into Latin America, Europe and other markets that presented low cultural barriers, it had to bypass opportunities in Asia because of a lack of leadership talent, said Guillén, who is also director of the Wharton School’s Lauder Institute.
Growing multinationals, whether they are based in the United States, India or elsewhere, all face a common problem: developing leaders who can manage global enterprises and take advantage of strategic opportunities. But do global leaders require a set of skills entirely different from those needed by their domestic counterparts? And what are the main issues global leaders face when they move beyond domestic markets?
Global leadership “is not about doing business abroad. It’s about managing an integrated enterprise across borders where you encounter different cultural, legal, regulatory and economic systems,” says Stephen Kobrin, a Wharton professor of multinational management. “It’s about operating in multiple environments trying to achieve a common objective.”
To achieve that common objective, Wharton management professor Larry Hrebiniak suggests that leaders focus on the same issues they would focus on with any type of diversification: planning and implementation. “Consider carefully the country or countries you are going into. What are the barriers to entry? Who are the competitors and what is the degree of concentration in the industry? Who are the customers? What cultural issues are relevant and what government regulations apply? Should I consider alliances or joint ventures, or is it more logical to make an acquisition in order to acquire the distribution channels I need to compete?”
Once these and other due diligence issues have been settled, Hrebiniak says, leaders must address the implementation phase: “How do we control performance? Do we use expats or country managers, and what incentives must be developed to ensure attention to both global and local needs? Do we have worldwide systems, and are modifications to our IT processes necessary to support those systems? What kind of organizational structure should we have? What decisions are made at headquarters and which ones are made at the country level?” For example, if a company is a multinational with many divisions and a diverse product line, the answer might be to have a global structure where divisions are independent and relatively self contained. But if there is a need for a coordinated global strategy, similar to that of [Zurich-based] ABB, P&G or Citibank — “in many different countries with many different pieces of product or information that move across borders to be part of a larger product or service — this would require a matrix-type structure with a lot more coordination and integration.”
Toyota, Hrebiniak says, has managed the process well. “When they came to the U.S., they entered into strategic alliances. They spent time getting to know the country, the industry, the competitors and the unions. It meant that when they finally made their move and started building and producing here, they were well prepared.”
Honda managed the process well also, but only after some early mistakes. When entering the U.S., they initially focused on big motorcycles rather than the smaller versions they sold in Japan. “They didn’t do adequate competitive analysis,” Hrebiniak says. “People in the U.S. didn’t want to buy Honda’s big motorcycles because they were buying Harley Davidsons and BMWs. Honda also had early quality problems. They didn’t realize that driving a motorcycle in the U.S. is different than in Japan. Here, there are more open roads and people can go faster more quickly, which stressed the machines’ components and created quality problems.” But Honda recovered. They eventually developed a core competency in engines and power trains that could be applied, not just to motorcycles, but to autos, generators, outboard motors and other products. “Because they learned from their mistakes and built upon an acquired core capability, they were able to successfully expand into new global markets,” Hrebiniak adds.
Kobrin frames the question of global leadership as one of “wrestling with a basic paradigm: the trade-off between integration and fragmentation. Do you respond differently in each market? Or do you operate as one entity? Should the economies of local environments dominate?” How one responds in each individual market depends on the commonalities across markets, he adds. When it comes to technology, for example, “environment matters less. Computer chips are used in the same way by the same sorts of people regardless of what culture they are in or what language they speak. So the question for leaders revolves around the tension of achieving a balance between responding differently in different markets and benefiting from scale efficiencies.”
Kobrin takes exception with the term “going global.” Very few companies, he says, “go global. Instead, international businesses evolve gradually. They begin exporting, then set up licensing arrangements and so forth. They tend to move from cultures and political systems that are more familiar to those that are least familiar. It’s not a big boom, where they go immediately from one country to 50.”
The exceptions, he says, “are some of the newer high-tech firms. For them, the phrase is ‘born global.’ They are driven by technology that requires them to expand in many countries at once. They need scale economies; they need first-mover advantages. The Apple iPod is an example. Any place that has computers understands the iPod immediately.” Companies that are born global, he adds, “tend to have high-tech products that immediately find acceptance in many different cultures and societies. The differences in selling across countries is not as important as they might be if you are selling toothpaste or packaged food or clothes.”
‘The World Is Not Flat’
Whatever the challenges, observers note that running a global company differs significantly from running a domestic one. “A German company that operates only in Germany can manage in a certain way,” says Guillén. But leaders of an international firm, depending on where it operates, need to revisit many of their assumptions about all kinds of things, “from the development and design of products, to HR policy, to marketing. In spite of globalization, the world is not flat. There are so many variations on the ground level that need to be managed. If you ignore those variations, you are likely to underperform.”
And who is likely to perform better than you? Local companies, says Guillén. “You can’t sell products in Germany unless you take into account the local competition. Wal-Mart found this out. They are the largest company in the world, with good management. They are a formidable competitor.” Yet they have floundered in several of their global initiatives. “Leadership was part of the problem,” Guillén notes. For example, “in some countries they acquired existing local supermarkets, then replaced the management quickly and brought in people from other countries.”
Indeed, a lack of flexibility in dealing with local demands may partly explain why Wal-Mart has faced a series of setbacks in its global expansion. In 2006, the company withdrew from Germany and South Korea, while its Japanese unit has struggled this year, and market share has fallen even in Britain, once its showcase for international sales. “Wal-Mart has this wonderful business model, and they said, ‘Let’s go take over the world.’ What they found is, it’s not so easy,” says Guillén, pointing, for example, to the company’s automated restocking system, which led to nonsensical results like skis being sold in Brazilian stores.
Some of the problems Wal-Mart encountered were cultural, according to Robert Slater, author of The Wal-Mart Decade: How a New Generation of Leaders Turned Sam Walton’s Legacy Into the World’s #1 Company. “In Germany, Wal-Mart wanted to keep the doors open seven days a week, but the Germans said ‘no’. Their culture has stores open only five or six days a week. Wal-Mart couldn’t change German culture, so they didn’t really have any options.” Ironically, Wal-Mart’s unwillingness to adapt to local conditions may reflect a shadow side of one of its greatest strengths — its cohesive internal culture. “Culture to Wal-Mart is a vital part of its business, and if it can’t get Wal-Marts in Germany to do things the Wal-Mart way, that really makes it hard,” Slater notes.
The best global leaders, adds Wharton’s Kobrin, are able to find a balance between extremes. “One extreme is thinking that everyone will understand English if only you talk a little louder, and the other is assuming that every country is so different that you can’t possibly intervene and that you need to leave management entirely to locals. You have to find the happy medium and understand that there are differences to be respected, but that you can also have commonalities across borders.”
House Calls to Local Families
J. Stewart Black, Singapore-based director of the INSEAD Center for Human Resources in Asia, conducted research among global business leaders in the late 1990s. He discovered that successful leaders exhibited “a unique global mindset,” as he wrote in the fourth volume of the edited collection, Advances in Global Leadership.
Such leaders “see and think about the world differently than those who would be overwhelmed and exhausted by the challenge of global business,” writes Black. And what is the key trait that defines such a global mindset? According to Black, it’s inquisitiveness. “When in a new country, high-potential global leaders seek out new experiences. They want to try the local food, not the internationalized cuisine at some five-star hotel. They pick up the local newspaper; they talk to local residents.” While such a basic orientation toward new experiences may be an inborn trait rather than a learnable one, Black notes, companies can “select” for inquisitiveness among potential leaders before sending them abroad for international experience. “Without this, they are not likely to engage. If they don’t engage, they are unlikely to learn the lessons that will be of value to them later as global leaders.”
While individual personality traits shape leadership capabilities, company culture plays a vital role as well. In his article, Black describes what John Pepper, one of a number of Procter & Gamble leaders who helped take the consumer products company global in the 1980s and 1990s, would do when he traveled to a new country: visit five local households to learn how families in that country “wash their clothes, clean their house or look after their children’s hygiene.”
Pepper’s attention to local detail was part of the company’s spirit of inquisitiveness that led to its global success, says Davis Dyer, co-author of Rising Tide: Lessons from 165 Years of Brand Building at Procter & Gamble. “The whole company had a certain attitude based on how they researched brands: They launched experiments, tested ideas, gathered data and then acted on that data. That attitude was also how P&G approached foreign markets: experimenting, testing and learning,” says Dyer, a founding partner at the Winthrop Group, a professional services firm focused on corporate history.
According to Dyer, Ed Artzt, former chairman and CEO of P&G, “was an extremely competitive guy. By the early 1980s, both he and [former CEO] John Smale understood that while P&G still had opportunities in the U.S., they had bigger opportunities outside. At that time, a lot of manufacturers woke up to the rest of the world and realized Japan and Europe had fully recovered from the war and were very mature and competitive markets. In the early 1980s, there was a lot of discussion of the Japanese threat, the fact that they were going to overwhelm the U.S. steel, electronics, shipbuilding and auto industries. P&G looked at its competitors, including Japanese consumer goods companies, and thought, ‘Holy cow! They are going to do it to us unless we get our act together.’ Artzt felt strongly that P&G wouldn’t go down without a fight.”
Guillén makes another point: Leaders also need to make sure the management team they have on the local level is making the right decisions at the right time, “and that mechanisms are in place so that everyone else in the company can learn from those decisions. For example, if you come up with a great marketing approach in Germany, based on fully understanding the German market, then sales teams in Japan or the U.S. can learn from that, asking themselves, ‘What principles were they implementing in Germany that might be useful in our situation?’ There has to be some coordinating mechanism to make it possible for the entire company to learn from local successes. That’s a huge challenge for leaders. You do a little of that through rotation, but you need more than rotation. You need information to flow, and you need collaboration.”
Global leaders, adds Hrebiniak, need to understand not just the culture and markets of other countries, but also how to manage the diversity that results from those differences. “They should ask themselves: ‘How do I organize myself to handle country differences but still have a coordinated thrust worldwide for my product? How do I create a structure that builds in local control, side by side with international or global control?’ That’s hard to do. There is always a tension between the country managers and the locals.” Citibank, he says, has done this well: “They have a matrix system set up in their global operations where, in fact, they have people in countries who report to both country managers and people at the home office. They handle this complex system fairly effectively.”
Hrebiniak also notes the difference in skills that are needed for CEOs and top managers vs. line managers. “It comes down to a difference between corporate strategy and business strategy. The leadership at the top is more responsible for managing the portfolio and doing due diligence, and for weighing whether it is better to acquire a firm or develop a strategic alliance. The line managers in businesses or SBUs are concerned with how to compete, how to overcome cultural differences and respond to local tastes, and how to integrate key functions or processes within the business to achieve local success.”
He points to initial efforts by LG Group, the South Korean conglomerate and producer of consumer electronics, home appliances and mobile communications. “Their first crack at differentiating their products failed badly. Originally, they made generic products that were sold under the brands of large retailers like Sears. In an attempt at product differentiation, they tried to sell their own branded products under the name Lucky Goldstar to compete against Sony, Panasonic and other brands being sold in the U.S. It didn’t work, so they pulled back and tried again under the name LG. They have done much better due to more effective marketing backed by an abundance of resources, and LG is now more of a household name. Lucky Goldstar just didn’t have the cachet, nor did the company have experience in marketing” to pull off its early attempts at global and brand expansion, Hrebiniak says. But top management persisted, “committing financial and managerial resources to the task, and finally learning the secrets of competitive success.”
The Global Leadership Pipeline
While finding inquisitive personalities and shaping corporate culture may seem like amorphous tasks, companies have perhaps the most control when it comes to building their leadership pipeline — that is, constructing a series of experiences to rapidly develop the firm’s next leaders. And when it comes to developing global talent, it’s time to dig out the passports: Travel is essential, Wharton and other experts say.
Royal Dutch Shell, based in The Hague, offers a successful model of leadership development, according to Michael Useem, a Wharton professor of management who works with Shell executives through the Shell/Wharton Group Business Leadership Program. Like many companies, Shell rotates high-potential managers through positions in various aspects of the enterprise, including overseas postings, so that “by time they hit 40 and want to enter senior management, they have in their mind’s eye what it looks like to be in an oil field in Nigeria when the call comes that there’s been an explosion and the local mayor wants to shut the operation down,” says Useem.
Moving among multi-year foreign assignments is “very much a part of Shell culture,” adds Mathilde de Boer, who consults on leadership development for Shell Learning, a part of Royal Dutch Shell. Although employees are sometimes reluctant to constantly uproot — “with dual-career couples, it’s more and more of a challenge,” she notes — a willingness to travel and live overseas is a bottom-line requisite for advancement. “When you make a choice to develop yourself into a senior leadership role, you will be faced with a job that will be located somewhere else.”
The benefits of overseas experience are visible when executives get together for more formal leadership training, says de Boer. “You can see it in the way they learn. Because they have experienced so many different situations, they can quickly grasp new ways of doing things. They have had a mirror held up to their leadership styles.”
Diversifying one’s leadership style may be essential to running a large multinational, according to Guillén. “Your managers in different parts of the world may need different kinds of support. In Germany, for example, the CEO of a subsidiary will deal with a board comprised half of shareholders and half of workers. That’s a very different set up. If you are the CEO of an American or Japanese firm in Germany, then you have to pick a leader who is comfortable with the situation, and then empower that person in a very different way than you might empower your top executive in, say, Brazil.”
But talk of developing long-term leadership capacity may seem irrelevant to high-growth multinationals that need international talent immediately. Useem recalled sitting down several weeks ago with Indian executives and asking how they rated Indian leadership talent compared to U.S. and European talent. “The essence of their answer was that it is good, but they primarily have people who have worked only domestically, in India. By contrast, they saw that in European firms, nearly everybody in middle to senior management had worked outside of their home countries,” he says. Guillén agrees that European companies lead the way in giving executives international experience and notes that such rotations are less frequent in U.S. and Japan companies.
When companies find themselves squeezed for internationally experienced talent, they may face the choice of either losing an opportunity or making do with what they have, notes Useem. “Sometimes you might find yourself saying, ‘You’re just going to have to figure it out when you get there.'”