With the worst of the economic crisis behind them, many executives look forward to a period of stability and predictability when companies can return to business as usual. They are likely to be disappointed. Market turbulence did not begin with the fall of Lehman Brothers, and it will not end when the global economy recovers. As I’ve noted in an earlier post, scholars using a variety of measures including stock price volatility, firm mortality, persistence of superior performance, frequency of economic shocks, and speed of technology dissemination. have converged on the finding that volatility at the firm level has increased somewhere between two- and four-fold between the 1970s and 1990s. Turbulence, in other words, was on the rise before the current recession began, and there is little reason to believe it will retreat end when the global economy recovers.

In turbulent markets, business leaders recognize the value of organizational agility in dealing with rapid-fire change. A recent McKinsey survey found that nine out of ten executives ranked Continue reading "Agility to win in a turbulent world"

While trying to understand the sources of economic profit, the economist Frank Knight introduced a powerful distinction between risk and uncertainty. Knight’s distinction is more nuanced and interesting than the caricature view that his critics dismiss. In my view, the difference between risk and uncertainty hinges on the range of possible actions an investor, manager, or entrepreneur can take to achieve their desired result.

Clear choices and risk

People encounter risk when they face what I call a “clear choice,”  where an agent can specify, in advance the possible outcomes relevant to their actions. A gambler, for instance, knows that there are precisely 38 possible pockets where the roulette ball could land, and where the ball lands will influence whether his bet pays off or Continue reading "Clear choices and messy situations"

Market volatility has undermined the credibility of models in macro-economics and finance. Lacking accurate maps to navigate the current turbulence, investors, scholars, and managers are spending more time pondering uncertainty and risk. These topics can lure even hard-nosed thinkers into fuzzy rumination–recall Donald Rumsfeld’s distinction between known unknowns and unknown unknowns. In these unsettled times, it worthwhile revisiting the contribution of Frank Knight, an economist who was among the earliest and most penetrating analysts of what uncertainty and risk meant, and how they influenced a firm’s ability to make a profit.

Although few people recognize his name today, Frank Knight was one of the most influential economists of the last century. Knight joined the economics faculty of the University of Chicago full-time in 1928, and remained there until his retirement in 1972. In his forty four years, he co-founded and shaped the “Chicago School” of economics that produced many of the Twentieth Century’s giants of economics, including Milton Friedman, Ronald Coase, and Gary Continue reading "Frank Knight: An American Socrates"

The final stage in globalizing is less a step and more a long march. After adopting a global mindset and giving their commitment teeth, executives must make a series of organizational changes–large and small–required to execute on their global strategy. To succeed on the global stage, a company must align its organizational realities with its lofty ambition.

Improving the organizational attributes required to compete globally often takes the best part of a decade, particularly for large complex enterprises. Samsung’s Chairman Lee was forced to realign most aspects of the group’s business model to deliver on his commitment to global leadership. When transforming their company to compete globally, owners and executives should focus on five key aspects of the organization: Strategic frames,  Along with the Samsung case described in an earlier post, CEMEX (a leading global cement producer), provides another example of transforming an organization for global competition

Strategic frames refer to what managers see when they look at the world, and include definition of market, focal Continue reading "Good to global: Align your organization"

Committing to a global mindset is only the first step in globalization. Just because the owner is committed to going global, there is no guarantee that the rest of the organization will follow along. Samsung’s Chairman Lee declared a “Second Foundation” in 1987, but found the group had made little progress six years later in moving towards global competitiveness. To commit the organization to globalization, Lee divested businesses, shook up management and made bold public declarations to global leadership in electronics.

Decisive actions to give the global mindset teeth serve several purposes: They convince employees and external stakeholders that top executives mean business, and that globalization is not simply the management fad of the month. Commitments trigger a sense of crisis, but also that management has a way forward. Finally, these Continue reading "Good to global: Give your commitment teeth"

Making the leap from local player to a global firm often takes the better part of a decade. Owners and executives take the first step by committing to a global mindset. Many executives still view the world from the vantage point of their corporate headquarters. This mindset resembles  the route maps found the in-flight magazine of local airlines, that places Chicago, Taipei, or Helsinki in the center of the globe with routes emanating outward in all directions. Only a small fraction of the planet’s population, however, sees the world in the same way. While your company may be doing very well against local rivals, the performance gap relative to global leaders may be enormous.

Entry into the global economy and WTO accession in particular are forcing managers in many emerging markets to develop a new mental map of the world. There are a few concrete steps they can take to accelerate this process. First, they can simply take a field trip to more developed markets to understand how they are viewed outside their home country. In February 1993, Samsung’s Chairman Lee convened a meeting of 23 senior executives of Samsung Electronics in Los Angeles. Before the meeting began, Continue reading "Good to global: Committing to a global mindset"

My last post discussed how Samsung went from a good local competitor to a great global one. Many executives dream of following in Samsung’s footsteps by moving onto the global stage. Successful globalization, however, depends on a firm’s domestic market position, timing, and the owners’ preferences and time-horizon. Before they take the plunge, executives should consider the following questions.

1) Do you have a strong domestic base? Going global is expensive-companies must invest in brand, technology, and distribution. They often incur losses while cracking new markets. A secure home-market position can provide the funds for global expansion. Today, the average Japanese, US, or European multinational produces more than two-thirds of its output at home, generating the profits to fuel expansion abroad. Many governments favor their domestic champions. The Korean government provided low cost funds and allowed domestic concentration among leading firms like Samsung, for example, while Mexico’s government has granted Telmex a near monopoly in telecommunications, which provided the company with the funds to acquire companies outside Mexico.

2) Are you under attack at home? Fighting a two-front war–protecting a home market while expanding Continue reading "Are you ready to go global?"

The rise of emerging market champions is good news, in contrast, for the entrepreneurs and executives who lead firms in developing countries, who draw inspiration from the success of firms like Mittal or AmBev. Inspiration alone is not enough. Executives and owners of emerging market firms must also understand how they can take their firm from a good local player to a globally-competitive firm.  My next few posts will introduce a framework, based on this research, describing the steps that firms such as Mittal, CEMEX, Infosys, and others followed in their rise to global leadership. I will use the case of Samsung to illustrate the framework.

From metal hut to global powerhouse

South Korea in the mid-1980s was a developing country with a per-capita gross domestic product one-sixth that of the United States. The Samsung Group, while large by Korean standards, was small in global terms. Nor was Samsung a significant player in the global electronics industry. Only a few years earlier, Samsung had entered the consumer electronics industry when it produced its first microwave oven in a corrugated metal hut. When switched on, the first prototype microwave melted, and required extensive rework before Samsung could secure a small order as a sub-contractor to a Panamanian customer.

Today, Samsung is a global leader in more than fifty electronic product categories, was number two in terms of US patents granted in 2008, with a brand among the twenty most valuable in the world (ahead of Apple, Pepsi, Continue reading "Good to global: Samsung’s rise"