Playing To Win
Understanding the True Building Blocks of Corporate Strategy
In my previous post, I introduced the topic of Aggregation Strategy, with a focus on its product/service offering dimension. This post deals with the geographic dimension of Aggregation Strategy. My 20th Year II Playing to Win/Practitioner Insights (PTW/PI) post is entitled Understanding the True Building Blocks of Corporate Strategy: Country/Offering Combinations. You can find the 72 previous PTW/PI here.
The Siren Call of Big Markets
The most common rationale for internationalizing from one’s home geographic market tends to be exciting growth opportunities. And the rationale is particularly extreme when the potential expansion market is big — China, Brazil, India, or Indonesia. I hear it all the time: the growth is in China, so we have to be there.
But because I hate human suffering, especially completely unnecessary human suffering, I despise this rationale, because it produces so much suffering. There are just too many examples of blowout geographic expansion failures of very successful companies in big, seemingly attractive markets. Walmart in Japan, UK, and Brazil. Home Depot in China. eBay in China. GM and Ford in India. Danone in India.
I have had and currently have too many clients that are stuck in losing positions in geographic markets. The losing is not only bad for the business in the losing market in question. Funding those losses also damages the company’s ability to compete in its winning markets. I have seen this destroy a client, which was ripped apart and sold in pieces after it saw and leapt on the opportunity to invest in a big market that it felt could enable dramatic sales grow. An alluring but deadly fantasy. I wish I could have stopped them — but it was, and often is, too late
Thinking it Through
For geographic expansion, the same logic applies as for product/service offering broadening, as discussed in Corporate vs. Business Unit Strategy. It must start with geographic Indivisible Strategy, just as with offerings. To review, the indivisible level is the level below which the strategy of any sub-component of the indivisible level is virtually identical to the strategy of the indivisible level. I.e., the strategy of a Microsoft business in Massachusetts is probably indistinguishable from its strategy in Illinois, North Carolina or Arizona.
It is hard to argue that the geographic indivisible level for purposes of strategy is anything bigger than a country. Even in the most globalized of businesses, like pharma, aerospace, software, and consumer electronics, different countries have different regulatory regimes, languages, customer habits, distribution channels, and competitor sets. Each requires a Where-to-Play/How-to-Win (WTP/HTW) strategy choice. The choices may be quite similar across countries, but they need to have distinctive elements tailored to the geography. For very big countries, such as US and China, the Indivisible Strategy level in some industries can be a region. Many segments of the real estate business remain regional in the US, for example, and a national player needs to have a somewhat different strategy for each region.
The moment that you add a second indivisible geographic market to your initial home market, you have an Aggregation Strategy question. The level above — whether it is the corporate level or perhaps a continentally-defined level such as North America or Europe — adds costs to the business competing in that indivisible geography. As is the case with broadening of product/service offerings, there will be allocated overhead costs from the aggregation level above. But in the geographic case, the bigger cost tends to be the enforcement of international or global standards: this is how we do it in the home market — you should do that too. I remember vividly the case of a globalizing client that built factories in developing markets to specifications to which no other factory in the entire country built. As a result, the capital costs of its factories were nearly three times those of every competitor in that market. It is the kind of reasoning that ends up with white packaging (symbolizing death) in China because ‘that is the global standard’ and red packaging (symbolizing masculinity) on products for female customers in Korea.
The resulting challenge for the geographic Aggregation Strategy level is that it must add greater value to the Indivisible Strategy level than the inevitable costs it imposes. If it can’t, then by adding a geography, it has done nothing more than complicate the company and made it less competitive. Growth under that circumstance is a detriment to competitiveness not a benefit. It is bad for the company, and it shouldn’t do it.
If the aggregation level can add net value, it means the company has developed a Reinforcing Rod — a capability that the aggregation level can provide to the units below it. I call it a Reinforcing Rod because it runs through the units (in this case, countries below it) strengthening each of them just as steel reinforcing rods strengthen a building by running between the stories of a building.
There are many examples of geographic Reinforcing Rods in modern business. In high fixed cost businesses, such as software, aerospace, computer & telecom equipment, and pharma, a company can perform all the R&D in one location (typically the home country) and then sell the product of that R&D around the world. In intensely branded industries, such as luxury fashion, spirits, and carbonated beverages, companies invest centrally to build a global brand and then only need to supplement it locally to benefit from the positive effect. But many sectors, such as food, health care, automotive, financial services, and retailing, aren’t nearly as global and the Reinforcing Rods are both harder to build and often less determinative of competitive success.
Because each industry has its own dynamics, it is critical not to assume you have Reinforcing Rods just because you are substantially international. You have to be really clear on the costs you are imposing relative to local competitors and the aggregation value that you bring with which Reinforcing Rods. I remember well working with General Motors in the mid-2000s. At the time, it was then the biggest automotive company in the world and one of the most global. But the work we did together revealed that they brought almost no geographic Reinforcing Rods to bear. GM bore all the costs of being global without any of the benefits. I applaud the work of a series of management teams to unwind unproductive globalization in the intervening years.
The True Building Blocks of Strategy
The best approach to building your strategy is to combine the product/service offering dimension with the geographic dimension of aggregation to produce the country/offering combination (C/O-C), the comprehensive Indivisible Strategy level. That is where competition is going to play out most of the time. Customers in a country buy an offering. If that offering doesn’t win against competition in that country, it isn’t going to be saved by the presence of other offerings and/or countries in the portfolio of the company in question. Customers only care about those attributes to the extent that they positively impact the offering in front of them in that place. That is the proverbial coalface of competition.
If you want to expand from an original C/O-C, you must ask the Aggregation Strategy question: What Reinforcing Rods through country and offering do you intend to exploit? And be very specific: for this offering in this country. Don’t fall prey to general notions like it is an “avenue for growth” or “we have strong capabilities.” It is imperative for you to empower that C/O-C to be a meaningfully stronger competitor in that particular market than it would be on its own, aided by specifically defined Reinforcing Rods. That is smart aggregation, which will further strengthen your Reinforcing Rods in an upward spiral. Dumb aggregation without Reinforcing Rods is a downward spiral into oblivion.
Think of C/O-Cs as the true building blocks of your strategy. Any C/O-C that doesn’t win against its competitive set weakens your overall strategy. Any C/O-C that wins provides an opportunity to strengthen your Reinforcing Rods further and improves your overall strategy. That means that every C/O-C counts!
If you want to broaden your range of C/O-Cs, you need to build Reinforcing Rods that drive through geographies and across offerings. C/O-C strategies need to depend on and incorporate the benefits of Reinforcing Rods. If there is no Reinforcing Rod, don’t enter a C/O-C until you can identify and begin building a decisive Reinforcing Rod. Even if the C/O-C has a big total addressable market (TAM) and/or is fast growing, if you can’t deploy one or more Reinforcing Rods to win there, it is a dumb idea. And I have seen too many painfully dumb ideas on this front in my life to support diving into another one.
As you broaden C/O-Cs beware of adding useless levels of aggregation. If, for example, you enter seven Asia-Pacific countries, don’t automatically add an Asia-Pacific geographic aggregation level. That aggregation level, like all aggregation levels, will add competitiveness-reducing costs to each of the seven countries. That level only makes strategic sense if it builds and deploys a Reinforcing Rod that makes the C/O-Cs in those seven countries net better off. And let me be very clear: having an EVP of Asia-Pacific visit each C/O-C every quarter to meddle in their affairs isn’t making them better off. In that scenario, they would be better off reporting directly to corporate. And corporate would be better off overseeing seven businesses that have one less useless layer of management than accepting the competitive consequences of seven impaired country businesses.
Never take your eyes off your C/O-Cs. Don’t accept your Philippines country manager saying: all good here! Or your Asia-Pacific head saying the same. Or your global head of the Widget business saying the same. Always ask them to specify how each C/O-C under their aggregation is doing competitively. Any C/O-C that is struggling is a problem that needs attention because it needs to be fixed. The competitive health of an entire diversified, global corporation is the product of the collective competitive health of all of its C/O-Cs. Every executive from the CEO on down needs to be focused on the C/O-Cs, ensuring that they are healthy and that they are being helped competitively more than they are hurt by the levels of aggregation above them.
Aggregations do not exist to control and coordinate C/O-Cs; they are there to help each C/O-C. To do that, all executives need to understand the position, the opportunities, and the challenges of every C/O-C under them at the C/O-C level. That is because C/O-Cs are the true building blocks of corporate strategy!