Question

Question: Consider the events/reports from the WSJ articles provided below, and discuss any pros and/or cons which might affect businesses operating in the global economy.

Improving the Odds of Success for Corporate Transformations

My current views on strategy and innovation owe much to the powerful transformational forces that I saw buffeting the IT industry over much of my long career. It’s frankly sobering how many once powerful IT companies are no longer around or are shadows of their former selves. The carnage might be more pronounced in the fast-changing IT industry, but no industry has been immune. It’s all part of what Joseph Schumpeter 75 years ago called creative destruction, or “the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

For a startup a transformative innovation is all upside, an opportunity to take-on established companies with new products that offer significantly better capabilities and/or lower costs. Startups hope that their compelling new offerings will help them establish a foothold in the marketplace and, over time, become leaders in their industry.

But change is often difficult for established companies. Over the years, they’ve amassed a number of valuable assets and extensive organizations. Already consumed with managing their existing operations they may see a transformative innovation as more of a threat or distraction than an opportunity.

Darwinian principles seem to apply in business almost as much as in biology. The similarities between business and biological ecosystems was examined in The Biology of Corporate Survival, a 2016 paper published in the Harvard Business Review by Martin Reeves, Simon Levin, and Daichi Ueda.

After analyzing the longevity of more than 30,000 public US firms over a 50-year span, the authors found that companies are disappearing faster than ever before. “Public companies have a one in three chance of being delisted in the next five years, whether because of bankruptcy, liquidation, M&A, or other causes. That’s six times the delisting rate of companies 40 years ago.”

The paper noted that companies have shorter life spans “because they are failing to adapt to the growing complexity of their environment.”

Corporate mortality is further exacerbated by three broad trends: a more diverse, harsher and less predictable business environment; the faster pace of technological innovation; and the increasing integration of business ecosystems and global markets, which while good for economic vitality, adds to the risks of system-wide shocks.

The subject was further examined in The Truth About Corporate Transformation, published earlier this year in the MIT Sloan Management Review by Martin Reeves, Lars Fæste, Kevin Whitaker, and Fabien Hassan. The Authors developed methods for identifying companies with a demonstrated need for transformative programs, including the analysis of financial and non-financial data of all U.S. public companies with $10 billion or more market cap between 2004 and 2016.  

Patterns of Transformation

“Considering the increasing pace of technological change and volatility in many industries, the patterns suggest that the need for transformation is rising, while the chance of successfully achieving it is falling,” was the study’s overriding conclusion. But surprisingly given the stakes involved, there’s been little research on the design and execution of corporate transformations. Corporate transformation are often guided by anecdotal beliefs rather than by empirical evidence of what has and has not worked in the past. Other key findings include:

Leaders must be ready to transform their companies. At any given point during the 12-year study period, a third of large US companies were going through a severe deterioration in total shareholder value, the leading impetus for transformative projects.

Successful recovery is the exception, not the rule. Only about 25% of the companies in the study were able to arrest their decline by 2012 and outperform their industry average over the long run; 30% were able to do so in 2001.

Both the need for transformation and its associated risks were higher when digital disruption was involved. The need was strongest in the fast changing technology industry, with over 40% of companies suffering severe shareholder value deterioration. In addition, technology companies were among the least likely to succeed in their corporate transformation.

The more severe the downturn, the worse the results. Over 95% of the companies with the most severe downturns, defined as a decline of over 20% of shareholder value, became stuck at a lower level or continued to decline further. Leaders must recognize the performance deterioration in their companies and act before it’s too late.

Patterns of transformation differ across industries. Companies in industries going through rapid change (37%) were more likely to require corporate transformation than those in more stable competitive environments (30%). Their transformations were also more likely to fail.

Factors for Transformation Success

Based on the empirical evidence, the authors suggest several factors that will help companies improve the odds of succeeding in their transformation.

Costs cutting and positive investor expectations. To be successful, companies must regain the confidence of investors with credible operating plans.

Revenue growth . To be successful in the long run, a firm must articulate a new strategy for growth that challenges the previous business model that got the company in trouble.

A long term strategy supported by adequate R&D investments. Companies with an above-average long-term orientation in their strategic and R&D investments outperformed those with a below-average orientation by almost 5 percentage points.

New, external leadership. Almost 25% of the companies involved in a transformation program changed CEOs, compared with almost 19% of all companies in the study. New CEOs performed worse than incumbent CEOs in the first year of recovery. But over the long term, companies that changed CEOs outperformed those that didn’t, with external hires performing somewhat better.

Formalized transformation programs, but with sufficient scope and scale. In the short run, formalized transformation programs boosted investor confidence. In the long run they led to sustainable improvements in the business. The most successful programs were ambitious, with a scope of at least five years.

Irving Wladawsky-Berger worked at IBM for 37 years and has been a strategic advisor to Citigroup and to HBO. He is affiliated with MIT, NYU and Imperial College, and is a regular contributor to CIO Journal.

More Companies Are Selling Assets to Raise Cash for Growth

An increasing number of global companies plan to sell assets in the next two years as a way to narrow strategic focus and funnel funds to stronger areas of the business.

Executives at companies, including Siemens AG SIEGY 0.47% , General Electric Co. and Barry Diller’s IAC/InterActiveCorp . IAC +0.84% , are scanning their portfolios to identify divisions that can be sold. Nearly nine out of 10 companies plan to divest assets in the next two years, up from roughly four out of 10 a year ago, according to a report by Ernst & Young LLC released late February.

Corporate decision makers point to shifts in global tax policy and industry trends, particularly those tied to new technologies, as amplifying the need to sell noncore units and reroute capital to other business areas. Almost three-quarters of the 900 senior corporate and 100 private-equity executives surveyed by E&Y for the report said changes in technology were driving their divestment plans.

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IAC last month hired an investment bank to explore the sale of Dictionary.com, after two parties separately expressed interest in the word-definition site. The move comes after two years of brisk deal making at the media and internet conglomerate during which IAC sold online retailer ShoeBuy.com Inc., British price comparison site PriceRunner International AB, social-networking site ASKfm Europe Ltd. and shed its stake in The Princeton Review.

“We’ve used divestitures as another form of capital allocation,” said Chief Financial Officer Glenn Schiffman. “The decision was made that some of these businesses don’t exactly fit in, some of these businesses aren’t core and we could redeploy some of that capital into other pursuits.”

The main beneficiaries, in this case, were IAC shareholders. The company spent $365 million on stock buybacks between February 2016 and February 2017, roughly half of which was funded through asset sales, Mr. Schiffman said.

Other companies are expected to follow as executives pick off nonessential business lines as companies integrate after three years of brisk deal activity. Global merger and acquisitions reached a record value of $11.34 trillion for the three years ended Dec. 31, 2017, according to Dealogic.

“Companies are seeing divestments much more now as part of their growth strategy and their transformation strategy,” said Paul Hammes, head of EY’s global divestment team. That is a break from the 2008 global financial crisis, when the sale of a business unit was viewed as an admission of failure, he added.

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German engineering company Siemens AG listed 15% of its health-care unit—called Siemens Healthineers —in early March for €4.2 billion ($5.2 billion), said finance chief Ralf Thomas.

Frequent portfolio reviews help Siemens adjust to changes in its core business areas, Mr. Thomas said in an email. “We assess whether there are paradigm shifts ahead we can capitalize on,” he said. “We need to ask ourselves whether Siemens is the best owner and whether there is material and sustainable synergy potential.”

But divestments aren’t always the best strategy. “What always needs to be taken into consideration is what you give up by [selling assets],” said Frank Witter, CFO at Volkswagen AG .

The German auto maker, for instance, wants to wring out more savings and synergies from its commercial-vehicle units, Mr. Witter said.

Some companies, however, miss out on getting a better sale price, or making a sale altogether because they aren’t flexible on the structure of the deal.

U.K. consumer company Reckitt Benckiser Group PLC ended talks to buy Pfizer Inc.’s consumer-health business, which could fetch more than $10 billion, after the U.S. company rejected Reckitt’s plan to buy only part of the assets, according to analysts.

Pfizer continues to evaluate alternatives for the unit, including a spinoff or sale. It could also retain the business, the company said in an email.

By contrast, GE is exploring several hybrid deals that would combine some of its assets with public companies to build bigger businesses that would be better positioned in their sectors. The U.S. industrial conglomerate followed this blueprint when it combined its oil-and-gas operations with oil-field services company Baker Hughes last summer.

GE continues to review its portfolio and is getting a lot of interest for several of the divisions it is trying to shed, said new CFO Jamie Miller. She declined to comment on the market or deal strategy, but said GE is open to all sort of structures including spinoffs, splits, IPOs and straight cash deals.

“The structure can depend on the counter party,” she said in a recent interview. “We are looking to do deals that are smart for the company.”

Answer 1

Managing businesses in a global economy has always been challenging, be it a startup fuelled by transformative innovation while struggling with day to day operations or public companies which need constant tech. upgrades to stay relevant in the changing times. Nevertheless, accelerated growth is predicted to be in emerging markets of Asia, Africa and Latin America, more specifically the emerging economies. Hence, the pros and cons of global businesses can be recognised as:

Pros

• Unparalled and accelerated growth: McKinsey Global Institute research suggests that 400 midsize emerging-market cities, many unfamiliar in the West, will generate nearly 40 percent of global growth over the next 15 years. Companies like IBM, Unilever and conglomerates like the Aditya Birla Group recognise this and have operations in emerging econommies. Infact IBM derived 30% of its growth from emerging economies.
• Strategic confidence: Ability to reach new markets, customers and partners is perhaps the biggest benefit. This can be achieved by organic growth in the region or by a more inorganic approach as cited in the WSJ article.
• People: The locals bring different perspective and micro insights in terms of consumer concerns and product needs. It bestows upon the company to transfer best practice knowledge to them to empower them at global levels.
• Diversification of Risk: It makes sense to hedge risk for a company by operating in different geographies and thus being open to diverse economic trends instead of just sustaining in one.
• Cost of components: Leveraging global supply chains can substantially reduce the cost of goods. Just to understand Mexican suppliers produce 40% parts used in American cars. Setting up and retaining global operations might benefit the overall economics of the business.
• Relevance in local markets: Many local businesses find it hard to stay relevant in local markets because of complacency and competancy. These can benefit hugely from diversification at a global level by expansion and upgradation
• Becoming world class: Businesses benefit by developing the core skills of a region and learning from the whole process. The local communities can help them thrive globally. This adds to their growth story.

Cons

• Challenges in adaptation: The firms in gloal economies struggle to adapt to the local needs and business environment. Building government connect and maintaining relationships with local partners becomes important. Many companies find tough to be actually flexible.
• No prototype: Different businesses have different challenges and hence no one model of gloalization can be applied to businesses. Each business has to develop its own sucess story.
• People: Recruitment, retantion and training cn be very different and hence challenging in different geographies.Recruiting people form the local region has an advantage of them understanding the consumer need but may be difficult to integrate in the company's global culture. Moreover, the locals sometimes prefer being employeed by the local high performing brands.
• Technological innovation: Constant need for tech. innovation may divert businesses from its core operations and brand ideology.
• Legal landscape: Legal aspects may pose challenging to even the biggest players. Just as an example, Uber, finds a new problem statement in every new geography subject to its business model of cabs on demand. Cabs as a service model was challenges in South East Asia and so were the models of Amazon and Ebay.
• Economic challenges: Eurozone Grexit, commodity market slump in China, Russia interventions in Ukraine, global monetary policy divergence and consequent currency volatility, terrorism etc. are challenges posed in a global setting effecting businesses operating in affected zones.  

Apart from this, Global Leadership can become a major challenge for an organisation looking to establish itself globally. The vision and mission of a gobal leader plays a very critical role in shaping global operations while maintaing local culture and company ethos. Tough decisions of divestment and JVs/ M&As can become a make or a break one in a fast paced, dynamic global setting.

Now that the pros and cons are recognised, the buinsesses should understand that playing in the global market is imperative and the risks associated can be charted and monitored to fuel growth while staying relevant. This is and will remain the key differentiator between successful and unsucessful global (Glocal) businesses.