Growth Across Borders

© 2001 Corporate Executive Board

Corporate Strategy BoardOctober 2001

Growth Across BordersStrategic Challenges of International Expansion

S T U D Y O B J E C T I V E

Companies that seek opportunities in international markets findtheir efforts hindered by an array of social, political anddemographic factors that differ greatly among countries.Understanding the risks that come from these differences andincorporating them into decision making about internationalgrowth is essential for companies to effectively expand abroad.This study is targeted primarily at companies that have not yetattained global reach, but even some large multinationals may findit of interest. The study presents case profiles that address thefollowing challenges:

◆ Evaluating Market Desirability: Balancing Opportunity and RiskWhen Assessing Markets

◆ Choosing the Method of Market Entry: Balancing Speed of Entryand Local Effectiveness

◆ Adapting Business Practices: Balancing Corporate Best Practiceswith Variation Among Local Operations

KEY AUDIENCESCorporate StrategistsBusiness Development ExecutivesBusiness Unit Leaders

SELECTED PROFILESBellSouth CorporationCemex, S.A. de C.V.Jabil Circuit, Inc.

ii

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This document has been prepared by the Corporate Executive Board for the exclusive use of its members. It contains valuable proprietaryinformation belonging to the Corporate Executive Board, and each member should make it available only to those employees andagents who require such access in order to learn from the material provided herein, and who undertake not to disclose it to third parties.In the event that you are unwilling to assume this confidentiality obligation, please return this document and all copies in your possessionpromptly to the Corporate Executive Board.

© 2001 Corporate Executive Board Catalog no.: CSB12UM2L

iii

Table of Contents

With Sincere Appreciation • iv

Executive Summary • vi

Essay: The Challenges of International Expansion • 1

BellSouth Corporation: Balanced Market Positioning Assessment • 13

Jabil Circuit, Inc.: Market Entry Decision Rules • 23

Cemex, S.A. de C.V.: Standardization Stewards • 33

For Further Reading • 43

iv

Special Thanks

The Corporate Strategy Board would like to express its gratitude to the followingindividuals who were especially giving of their time and insight in the developmentof this study.

Homero ResendezBusiness ProcessesCemex, S.A. de C.V.

Gabriel CerveraBusiness ProcessesCemex, S.A. de C.V.

Robin MoriartyCorporate PlanningBellSouth InternationalBellSouth Corporation

Scott BrownSenior Vice PresidentStrategic PlanningJabil Circuit, Inc.

Cynthia BeaulieuDirector of Corporate DevelopmentJabil Circuit, Inc.

With Sincere Appreciation

v

Advisors to Our Work

The Corporate Strategy Board extends its sincere appreciation to the individuals listedbelow (in alphabetical order) who have so generously contributed their time and expertiseto our work.

Ms. Laura J. BussDuke Energy Corporation

Mr. Mike BradleyTelstra Corporation

Mr. Joel DavisThe Gillette Company

Mr. Daniel GagnierAlcan Inc.

Dr. Dieter GarusRWE A.G.

Sr. Alejandro HollanderCemex S.A. de C.V.

Dr. Steve HuckvaleMoog, Inc.

Roberto Huertas IstillarteEndesa S.A. de C.V.

Mr. Pim KamphuisenHeineken N.V.

Mr. Arnold KuijpersRabobank Nederland

Mr. Bob NemensDiebold, Inc.

Mr. David PittTelstra Corporation

Ms. Janet PopeVisa International

Mr. Steven R. Pusey3M Corporation

Ms. Donna RodriguezMcDonald’s Corporation

Mr. Thomas SantelAnheuser-Busch Companies, Inc.

Mr. Jay W. ScheererA.T. Kearney

Mr. Robert I. TomeiACNielsen Company

Sr. Guillermo TrigoMavesa, S.A.

Mr. Simon VaseyPowerGen Plc

Ms. Laura Wade-GeryTesco Stores Ltd.

vi

Executive Summary

Growth Across Borders:Strategic Challenges of International Expansion“Going Global”: A World of Opportunity

Most books and articles about international expansion extol the unbounded opportunities afforded bypursuing new markets abroad. Building a global enterprise promises access to growing foreign markets,efficiencies from operating and selling on a global scale, and the ability to better serve customers that areincreasingly global in scope. It is a captivating image, butit is far from the whole story.

True, globalization is accelerating as national governmentsstrip away regulations that once severely limited flows ofcapital, labor, goods and services. Indeed, somegovernments are finding themselves in “bidding wars,”creating incentives to attract foreign investment.

Seeking to benefit from these regulatory shifts, companiesfrom Calgary to Cape Town are taking advantage of moreopen markets. Production by companies’ foreign affiliatesnow accounts for fully 10 percent of global GDP, roughlytwice its level in the early 1980s. Even the companies thatare slow to pursue international markets come underpressure, as rivals use their increasingly global scope tocompete more fiercely in laggards’ own home territories.

New International Markets: Crucible of Assumptions About Growth Strategy

The pursuit of foreign markets places unfamiliar demands on decision makers. The early stages of acompany’s expansion efforts can be fraught with surprise and uncertainty. In the domestic context,political, cultural and geographic forces are well understood, as are the means of monitoring andinfluencing them. As a company enters markets with dissimilar socioeconomic conditions, the “rulesof the game” seem less obvious than before. Ventures struggle for reasons that never previously presenteddifficulty, and traditional strategy tools seem less robust. New challenges throw previously unassailableassumptions into question.

Finding the Balance: Strategic Decision Making for Varied Markets

How then to craft strategy in an international context?The key is to balance a relentless quest for growthopportunities with a balanced and rigorousunderstanding of the risks posed by operating in foreignmarkets, and the unavoidable—but notuncontrollable—costs of managing those risks.Companies must manage this delicate balance as theyevaluate the desirability of new markets, determine theirmethod of entering selected markets and adapt theirbusiness practices to local conditions.

Typical International Expansion Trajectory

Degree ofDifference

Among Markets

Progress of International Expansion

➤

➤

➤

DomesticDomestic

GlobalGlobal

Zone Zone ofAssumptionsAssumptionsFailure


Degree ofDifference

Among Markets


➤

➤

➤

Domestic

Global

Zone ofAssumptionsFailure

Foreign Direct Investment (FDI)

Billions of U.S. Dollars

1995 1996 1997 1998 1999 2000$0

$700

$1,400

$331 $385$478

$693

$1,075

$1,271

vii

Evaluating Market Desirability: Balancing Opportunity and RiskWhen Assessing Markets

Companies find it much easier to identify and evaluate economicindicators of demand in international markets than to understandsocial and political factors. However, understanding thosenonfinancial differences between markets is essential to effectivelyprioritize new markets based on a balanced assessment of bothopportunity and risk.

BellSouth Corporation has applied this comprehensive approach to itsinternational operations, leading it to establish a focused regional presence in the Latin American wirelessmarket. Equally important, BellSouth systematically reviews its country portfolio as it introduces newproducts in the region.

Choosing the Method of Market Entry: Balancing Speed of Entryand Local Effectiveness

Competitive and investor pressures drive many companies toprioritize “speed above all” when establishing operations in newcountries. In some cases, companies pursue acquisitions withoutcareful consideration of alternatives because they are seen as thefastest way to gain a presence on the ground and to obtain immediaterevenue. All too often, crucial facts about the acquired firm’scorporate culture or local circumstances are overlooked until theyhave hobbled the integration process, reducing return on investmentand slowing active engagement in the new market.

Jabil Circuit, Inc., breaks from this trend by carefully weighing the costs and benefits of both potentialacquisitions and greenfield operations in each new market. With this method, Jabil has avoided themissteps of some of its rivals whose international operations have been hindered by integration challenges.

Adapting Business Practices: Balancing Corporate Best Practices with Variation AmongLocal Operations

As companies establish new ventures in varied local contexts, assumptions about core business practicescome under increasing strain. Some methods considered integral to past successes seem to have detrimentalresults when applied to customers and operations in new markets. At the same time, variation at the locallevel can threaten to overwhelm quality control, internal coordination and efficiency. Companywideconsistency and local customization are both desirable, yet it is difficult for the approaches to coexist.For most companies, striking the right balance is one of the most enduring challenges on their path toglobal scale.

In many ways, Cemex, S.A. de C.V., has bridged the apparenttrade-off by creating an internal organization specifically chargedwith managing a universal catalog of best practices. Cemex’s“standardization stewards” document and disseminate standardizedprocesses but remain sensitive to legitimate reasons for localcustomization as part of their hands-on engagement in local businessreviews. Moreover, they are evaluated based on their efforts to identifybusiness practices among local operations and new acquisitions thatmay improve upon Cemex’s established standard.

Market EntryDecision Rules

(p. 23)

Balanced MarketPositioning Assessment

(p. 13)

StandardizationStewards

(p. 33)

1

EssayThe Challenges of International Expansion

2 Growth Across Borders

Striving for Global ReachInternational expansion, a mainstay on the agenda of corporate decision makers throughout the historyof business, is only increasing in importance as economic globalization progresses. Throughout the 1990s,companies have pursued international markets with unprecedented intensity. Foreign investment andcross-border mergers and acquisitions have reached record highs for several years running. Subsidiariesbased outside companies’ home markets account for an ever-increasing share of world production. Thecoordination of this expanding international activity is enabled by the increasing ease of moving goods,services, capital and people across borders.

Levels of cross-border investment are higher than ever…

…and international production is an increasing share of world output

Sales and Production of Foreign Affiliates, Indexed*

1982–2000

1995 1996 1997 1998 1999 2000

Value of Cross-Border M&A

1995–2000

Foreign Direct Investment (FDI)

Inflows, 1995–2000

1995 1996 1997 1998 1999 2000

Billions ofU.S. Dollars

Billions ofU.S. Dollars

$0

$600

$1200

$0

$700

$1400

Source: United Nations Conference on Trade and Development, WorldInvestment Report 2001: Promoting Linkages, p. 10; “FDI-LinkedCross-Border M&A’s Grow Unabated in 2000,” UNCTAD PressRelease (27 June 2001).

$187 $227$305

$532

$766

$1,144

$331 $385$478

$693

$1,075

$1,271

* 1982 = 100. Source: UNCTAD, World Investment Report 2000: Cross-Border Mergersand Acquisitions Development—Overview, p. 4; UNCTAD, WorldInvestment Report 2001: Promoting Linkages, p. 10.

World GDP

Global Sales of ForeignAffiliates

Global Gross Productof Foreign Affiliates

1982 20001991

650

325

0

3Essay

1995 1996 1997 1998

1996 1997 1998 1999 20000

75

150

Fewer Barriers at the BorderGovernments around the world continue to reduce barriers to entry through trade agreements, deregulationand lessened restrictions on foreign investment and on the movement of people and information. Companiesgain correspondingly greater access to previously untapped markets, not only for new customers but also forlower-cost labor and production inputs. Thus, international expansion promises economies of scale andscope that are unavailable through growth within one’s domestic market.

National economies are becoming increasingly interdependent…

World Globalization Index*, 1995–1998

Source: Adapted from “Measuring Globalization,”Foreign Policy (January–February 2001): 56-65.

…as falling regulatory barriers reduce the economic importance of borders

National Regulatory Changes, 1996–2000

Favorable to FDI

Unfavorable to FDI

Number ofRegulatoryChanges

Source: UNCTAD, World Investment Report 2001:Promoting Linkages, p. 6.

98

16

135

16

136

9

131

9

147

3

Types of Changes in FDI Regulations, 2000

More liberalentry andoperationalconditions

18%

More sectoralliberalization

16% More promotion(i.e., incentives)

2% More control

40%

More guarantees

24%

Indicators of economicintegration acrosscountries (e.g.,international trade andFDI flows as shares ofGDP, internationaltravelers per capita,number of Internet hostsper capita, convergenceof domestic prices withinternational prices)0

100

200

Goods and Services Finance Personal Contact Technology

* 1995 = 100.


Emergence of New Industry Segments

Privatization

New Technologies

Shifting Input Costs/Availability of Inputs

Deregulation

Changes in Government Regulation

New/Shifting Consumer Needs

Matching Competitors' Actions

The Double-Edged Sword of Open MarketsWhile globalization expands opportunity, it also opens the door for others in the industry to encroach uponthe domestic territory that many companies once viewed as a reliable stronghold. Companies that were onceon opposite sides of the globe now directly compete, increasing pressure at home and creating a sometimesfrantic race to seize opportunities in newly opening nations.

Competitive Pressures Drive International Expansion

Drivers of Foreign Direct Investment*

Responding to competitors’actions is a more powerfuldriver of FDI than the appealof opening markets

Source: UNCTAD, FDI Determinants and TNC Strategies: The Case of Brazil, p. 86;Govindarajan, Vijay, and Anil K. Gupta, The Quest for Global Dominance, SanFrancisco: Jossey-Bass, 2001, p. 26; Corporate Strategy Board research.

0% 40% 80%

Percentage of Companies Identifying Driveras Being of High Importance

36%

78%

75%

60%

56%

54%

48%

47%

Fighting on Two Fronts

“If your competitors start to globalize and you do not, you become vulnerable to a two-prongedattack. First, they can develop a first-mover advantage in capturing market growth, pursuing globalscale efficiencies, profiting from knowledge arbitrage, and providing a coordinated source of supplyto global customers. Second, they can use multimarket presence to cross-subsidize and wage a moreintense attack in your own home markets. Underestimating the rate at which competition canaccelerate the pace of globalization is dangerous.”

Vijay Govindarajan and Anil K. GuptaThe Quest for Global Dominance

* Survey of 57 transnational companies basedin the United States, Europe and Japan.

5Essay

Finding the Balance in International ExpansionExpansion across borders presents distinct challenges not posed by domestic growth efforts. Variationin customer needs, regulation, culture and infrastructure are often minor—or at least well-understood—considerations within a company’s home market. Such differences often seem quite manageable in the earlystages of international expansion—after all, most companies’ first steps abroad are to neighboring countrieswith similar business, political and social norms. But as expansion continues, differences become morepronounced. The importance of fully understanding the business climates of potential markets and ofmanaging increased variation among international operations similarly increases. Finding the right balancebetween pursuing efficient growth and customizing initiatives to market differences is a central problem ofinternational expansion strategy.

As companies venture into markets with unfamiliar norms and cultures…


…the need to rigorously understand and manage variationsamong markets becomes more acute

Three Challenges of International Expansion

Degree ofDifference

Among Markets


➤

➤

➤

Domestic

Global

Zone of Assumptions Failure:As companies enter marketsoutside familiar regional, culturalor linguistic boundaries, formerlysound assumptions about business,political and social norms provemisleading

Challenge #1:Evaluating Market

Desirability

Balancing Opportunity and RiskWhen Assessing Markets

In unfamiliar markets, companies find iteasier to assess economic indicators ofdemand than the less quantifiable social,political and competitive factors that mustbe understood to evaluate risk

Challenge #2:Choosing the Method

of Market Entry

Balancing Speed of Entryand Local Effectiveness

Companies that establish operationsabroad often use M&A to achieve speed,but fail to assess carefully how culturaldifferences increase the complexity ofacquisition integration, as well as theimportance of local partners

Challenge #3:Adapting Business

Practices

Balancing Standardized Practices withVariation Among Local Operations

Companies hope to gain economies ofscale and scope by standardizing systemsand processes, but market circumstancesmake it desirable to maintain appropriatevariation of business practices amonglocal operations

Source: Corporate Strategy Board research.


Balancing Opportunity and Risk When AssessingNew MarketsChallenge #1: Evaluating Market Desirability—The fundamental fact of international expansion is that marketcharacteristics—economic, cultural, physical and political—vary between countries. Understanding thesedifferences underlies decisions about which markets to enter, prioritization among current markets andpositioning against rivals within markets, yet few companies evaluate indicators of difference as systematicallyas they evaluate indicators of demand.

CulturalCharacteristics

• Language• Ethnicity• Connective social networks• Religion• Social norms

EconomicCharacteristics

• Consumer incomes• Costs and quality of:

–Natural resources–Financial resources–Human resources–Infrastructure–Intermediate inputs–Information or knowledge

GeographicCharacteristics

• Physical distance• Common border• Sea or river access• Country size• Transportation or

communication links• Climate

AdministrativeCharacteristics

• Shared monetary orpolitical association

• Colonial ties• Political culture• Regulatory policies• Institutional weakness

Well Understoodby Most Companies

Moderately Understoodby Most Companies

Poorly Understoodby Most Companies

Source: Adapted from Ghemawat, Pankaj, “Distance Still Matters,”Harvard Business Review (September 2001): 137-147.

Tunnel Vision

“The problem [with market selection] is rooted in the very analytical tools that managers rely on inmaking judgements about international investments, tools that consistently underestimate the costsof doing business internationally. The most prominent of these is country portfolio analysis (CPA)….By focusing on national GDP, levels of consumer wealth and people’s propensity to consume, CPAplaces all the emphasis on potential sales. It ignores the costs and risks of doing business in a newmarket.”

Pankaj GhemawatHarvard Business Review

Analysis of Market Characteristics Varies Widely

7Essay

Seeing the World as It IsAs companies assemble a portfolio of international markets, effective resource allocation depends on theirability to make accurate comparisons. Standard portfolio analysis compares countries based on purchasingpower and propensity to consume, but companies seldom adjust systematically for political or cultural factors.Working with such selective information can grossly distort executives’ understanding of their own operations.

Sensitivity to Sociopolitical Differences Allows Intelligent Resource Allocation

Tricon’s New World ViewTricon Restaurants International (TRI) is the international arm of Tricon, which manages thePizza Hut, Taco Bell and KFC fast-food chains. To prune its operations, TRI conducted atraditional country portfolio analysis in 1998. Dissatisfied with the result, TRI weighted itsfindings—originally based purely on financial indicators of demand—to reflect social andpolitical distinctions between its international markets and the United States. The second reviewyielded dramatically different, and more incisive, results.

Tricon Market Assessment, First Version

Based on Economic Indicators

Tricon Market Assessment, Second Version

Adjusted for Sociopolitical Differences

Source: Ghemawat, Pankaj, “Distance Still Matters,” Harvard Business Review(September 2001): 137-147; Corporate Strategy Board research.

Standard analysis based onindicators of wealth and productdemand portrays Japan as TRI’sleading market, driven by its highper capita income

Adjusting for noneconomicdifferences between markets—e.g., cultural similarities andshared language between Canadaand the U.S., versus morepronounced cultural and linguisticdifferences between Japan and theU.S.—demonstrates that Canadais in fact a much more attractivemarket than Japan for Tricon

$400

$200

$0

Per CapitaFast-Food

Consumption(U.S. Dollars)

Per Capita Income (U.S. Dollars)($5,000) $20,000 $40,000

$400

$200

$0

Per CapitaFast-Food

Consumption(U.S. Dollars)

Per Capita Income (U.S. Dollars)($5,000) $20,000 $40,000

Canada

Japan

Canada

Japan

Note: Size of bubble representsestimated revenue opportunity.


Balancing Speed of Entry and Local EffectivenessChallenge #2: Choosing the Method of Market Entry—For many companies, the imperative to move quicklyskews their market entry choices toward acquisitions rather than greenfield growth. The perceived urgency ofseizing international opportunities before competitors establish themselves and of protecting oneself againstpotential takeovers often overrides any detailed discussion of alternatives to M&A. Without properassessment of noneconomic risks, unexpected challenges from integrating cultures and business practicesmay well invalidate the benefits of speedy initial entry by delaying the acquirer’s ability to function effectivelyin the new market. Greenfields require more time to build up, but they are less likely to become mired incultural conflicts.

Imperative for speed can prematurelyend discussion of alternatives to M&A…

…despite frequent integration failuredue to cultural differences…

Surveys of Acquiring Firm Executives

…that, when fully evaluated, often argue for greenfield entry

They’d Rather BeFast Than Right

“Competitive pressures [encourage] firmsto access assets or restructure rapidly[through cross-border M&A].…As speedhas become a critical parameter, thegreenfield option is often ruled out as anentry mode at an early stage of corporatedecision making.”

UNCTADWorld Investment Report 2000

“Executives reported that they had notconsidered [cultural differences]enough and had done so too late inthe acquisition process.”

“Failure to address cultural differenceswas the number one reported cause ofacquisition failure.”

Impact of National Cultural Differences Impact of Company Cultural Differences

The need to gain local marketknowledge and contacts withgovernment, suppliers andcustomers drives companiesto choose acquisition overgreenfield

Common Perception

Greenfields established inpartnership with local firmsare often just as effective asacquisitions and allow equallyrapid growth, unless the goalis a major consolidation

Reality

A desire for quick entry canequal or overwhelm concernsabout the challenges ofintegrating companies withsignificantly different cultures,norms and business practices

Common Perception

A full accounting of integrationrisks in dissimilar marketsoften reveals a complex taskof overhauling deeplyentrenched work patterns(much more difficult thanbuilding a new business)

Reality

A

GA G A G

A

G

A = Acquisition

G = Greenfield

Source: UNCTAD, World Investment Report 2000: Cross-Border Mergers and Acquisitions and Development,p. 161; Hubbard, Nancy, Acquisition Strategy and Implementation, West Lafayette, Indiana: PurdueUniversity Press, 1999, p. 70; Govindarajan, Vijay, and Anil K. Gupta, The Quest for GlobalDominance, San Francisco: Jossey-Bass, 2001, p. 33-36; Corporate Strategy Board research.

➤ ➤

9Essay

Balancing Standardized Practices with VariationAmong Local OperationsChallenge #3: Adapting Business Practices—Particularly in the early stages of expansion, companies struggleto leverage internal business practices that have proven successful in the domestic market while also allowingfor necessary local variation. Standardization allows a company to institutionalize high-performancemethodologies, but forcing inflexible mandates upon foreign subsidiaries and acquisitions can createinefficiencies and alienate suppliers, partners and customers. At the other end of the spectrum, a holdingcompany approach allows local businesses to follow familiar practices but inhibits knowledge sharing acrossbusinesses.

Companies Struggle to Balance the Benefits of Standardization and Customization

Relationships Among Internal and External Constituencies

Highly Standardized Approach• Emphasizes seamless flow within company• Seeks efficiency and scale• Preserves companywide consistency

Highly Customized Approach• Emphasizes seamless fit with local market• Seeks return on invested capital• Preserves local autonomy

SuppliersFace

coordinatedbuying power;preference for

globalcompanies

GlobalCustomers

Servedconsistentlyat centraland local

level

➤

GovernmentArms-lengthrelationship;

consistent ethicsstandards across

company

EmployeesPotentiallyunfamiliarwork flow,

managementstyle, HRpractices

Local CustomersLimited rangeof products

available;company mayirritate localsensibilities

SuppliersCostlier

small-scalerelationships

GovernmentClose

relationship;easier toinfluence

EmployeesPractices

support localneeds and

expectations

Local CustomersFamiliarproductselection

GlobalCustomersMust work

through locallevel

Attempts to find a “happy medium” are frequently stymied by mixedmessages and implementation conflicts; such efforts often hinderinternal coordination without overcoming local dissatisfaction


Company A Company B

➤➤➤ ➤➤➤$ $$$

➤

➤

➤ ➤ ➤ ➤

Standardprocessesfacilitate flowof funds,people andideas amongunits and HQ

Localbusinessesonly obligatedto achievereturn oncorporateinvestment

11Essay

Managing the Challenges of International ExpansionIn conversations with member companies representative of many industries and regions, a recurring themeemerged—important opportunities are being missed as a consequence of failing to effectively manage thethree fundamental challenges examined in this report. Members spoke of assembling country portfolioswithout a basis in clear analysis or coherent strategy, of floundering and retrenchment before new venturesfind their footing or are discontinued, of discord between the corporate center and local subsidiaries aboutthe appropriate degree of companywide process standardization.

Three member companies—BellSouth, Jabil Circuit and Cemex—stood out for having implementedparticularly rigorous and inventive approaches to managing these challenges. All are relatively recent arrivalsto the international stage—each has launched its major push outside its home market in the past decade—making their methods more applicable to a company newly engaged in cross-border expansion than thesystematized approaches of many longtime multinationals. Furthermore, all three have outpaced theirindustry peers in shareholder return as well as in international growth.

Case Studies in International Expansion

IEvaluating

MarketDesirability

IIChoosing the

Method ofMarket Entry

IIIAdaptingBusiness

Practices

Balanced MarketPositioning Assessment

(p. 13)

Revenue opportunities areanalyzed in concert withsociopolitical risk factors

Assessment is applied to potentialmarkets and to new productdevelopment in establishedmarkets

Market EntryDecision Rules

(p. 23)

Market selection and entryguidelines promote choices thatsupport core elements of thecompany’s business model

Direct cost–benefit comparisonof acquisition and greenfieldoptions for each market

StandardizationStewards

(p. 33)

Documentation, disseminationand continuous evolution ofcompanywide best practices

Multinational teams of processspecialists ensure appropriatelocal alignment and integrateproven improvements into globalstandards


13

BellSouth CorporationBalanced Market Positioning Assessment


BellSouth Corporation

Case in Brief: Balanced Market Positioning Assessment

• BellSouth prioritizes international markets and determines its positioning against rivalsbased on thorough analysis of risks posed by country-specific variations in regulation,infrastructure, customer preferences and competition, in addition to economic indicatorsof demand for its services.

• BellSouth applies this approach consistently in evaluating potential markets and forrepositioning itself both regionally and within markets in which it is already established.

Source: Compustat data; Hoover’s Online;Corporate Strategy Board research.

Five-Year Total Return to Shareholders

Percentage Return Since 1995

BellSouth

U.S. Local Telephone Companies

S&P 500

(20%)

90%

160%

Company Profile

Atlanta-based BellSouth Corporation provides telecommunications service—includingconsumer and business voice, data and Internet service—to more than 44 million customersin the U.S., Latin America, Europe, Asia and the Middle East. It is the incumbent local phonecompany for nine southern U.S. states from Louisiana to Kentucky. In 1999, BellSouthconsolidated its U.S. wireless assets in a joint venture with SBC Communications, formingCingular Wireless, the second-largest U.S. carrier after Verizon Wireless. BellSouth managesoperations in Latin America, Europe, Asia and the Middle East through its BellSouthInternational (BSI) subsidiary.

FY2000 Revenue US$26.2 B

FY2000 Earnings US$4.2 B

Market Capitalization(October 2001) US$78.1 B

FY2000 Employees 103,900

Five-Year AverageAnnual Return toShareholders 16.3%

● ●

●

●●

●

■ ■

■

■■

■

▲

▲

▲

▲

▲

▲

1995 1996 1997 1998 1999 2000

0%

Selected Statistics

Note: All information presented in this case study is based on publicly available sources;BellSouth Corporation has reviewed this profile for factual accuracy only, and hasprovided general direction regarding market assessment processes and the creationof a business case, and a general overview of BellSouth’s Latin American services.

15BellSouth Corporation

Rapid Exposure to International Markets

International Expansion in Context

Unlike its fellow “Baby Bell” local exchange carriers which have focused on geographicexpansion within the U.S. through mergers and product expansion into the domestic long-distance market, BellSouth has pursued international expansion as a core element of itsgrowth strategy. BellSouth’s initial forays in the late 1980s targeted varied countries—typically characterized by deregulating telecom markets and unfulfilled demand for wirelessservices—throughout Europe, the Asia-Pacific region and Latin America.

BellSouth shifted its strategy in 1995 to assemble a pan-regional Latin American presence,entering 11 countries by 2001 through a mix of greenfields, acquisitions and joint ventures.At the same time, it has been divesting some of its holdings in other parts of the world.

BellSouth faces many competitors in Latin America, most of which have entered the regionvia acquisitions of local providers. However, no competitor has yet established a full-fledgedregional Latin American service.

Source: Goldstein, Tally, “BellSouth Set to Sell Stakes in Mobile Phones,” Financial Times,28 August 2001; Corporate Strategy Board research.

BellSouth International Presence

Country and Year of Entry

Argentina, 1989

Uruguay, 1991

Brazil, 1998

Chile, 1991

Peru, 1997

Ecuador, 1997

Guatemala, 2000

Nicaragua, 1997Panama, 1996

Colombia, 2000Venezuela, 1991

India, 1995(Exit 2001)

Israel, 1994(Exit Planned)

Australia, 1991(Exit 1997)

New Zealand, 1993(Exit 1998)

Denmark, 1992(Exit Planned)

Germany, 1994(Exit Planned)

Shanghai,China, 1986

Current BellSouth International Presence

Former BellSouth International Presence

Current Partial Coverage

Home Market


Analyzing Opportunities and RisksIn the early 1990s, inconsistent systems, widely varying market conditions and limited control of localdecision making made it difficult for BellSouth to fully exploit its international operations. As a result,BellSouth adopted a more balanced and comprehensive framework for analyzing each market’s potentialfor growth and the costs of adapting to local idiosyncrasies. The new approach also carefully examinesthe potential for new rivals to emerge as more national governments bring down barriers to foreigncompetition and auction additional wireless licenses.

MarketCharacteristics

CompetitiveLandscape

Company-SpecificConsiderations

Source: Mehta, Stephanie N., “BellSouth Expected to Launch Advertising Campaign in Latin America,” TheWall Street Journal, 24 May 1999; Corporate Strategy Board research.

Company Capabilities:• Engineering competencies• Distribution/logistics• Sales force management• Brand management

Resource Commitment:• Personnel• Capital• Knowledge

Opportunity Risk

Challenge

1. Duplication of Effort

Description

Each local business develops full-fledged,autonomous corporate hierarchy andadministrative functions, rendering themunable to leverage regional scale whileinhibiting cross-business coordination

Example

Each of BellSouth’s international businessesmaintains its own branding and advertisinggroups, conveying an inconsistent messageto customers and failing to capture scaleadvantages in media buying

2. Inconsistent Business Practices Local businesses maintain separate,incompatible systems and processes, makingit difficult to serve regional accounts andfrequent travelers

Marriot International receives a different billfor each of its 11 Latin American accountswith BellSouth

Balanced Market Positioning Assessment

Illustrative Criteria

International Management Challenges, 1989–1995

Demand for Offering:• Customer purchasing power• Market population• Customer product preference• Demographic trends• Unmet demand for telecom

services

Competitive Positioning:• Markets opening to competition• Unoccupied profitable niches• Local partners to ease entry

Socioeconomic Differences:• Political stability• Regulatory environment• Geography/topography• Transport and technology

infrastructure• Currency risk

Established Competitors:• Market share• Product specialization

Potential Competitors:• Barriers to entry• Cultural and linguistic affinity• Regional proximity

BellSouth looksespecially atfinancial risksposed by hard-to-quantifynonfinancialfactors


Building a Regional PresenceBased on its market analysis, BellSouth decided in 1995 to focus its international efforts on building apan-regional wireless business across Latin America. Although no competitor had yet established a full regionalpresence, BellSouth expected the window for early-mover advantage to close quickly. Thus, its plan prioritizedrapid market entry to establish market share and reputational advantage in as many countries as possible.

Assessment of Latin American markets…

Latin America Market Assessment, 1995

Key Decision Drivers

Latin AmericaPopulation (2001): 502 millionGDP per capita (2000): $4,454




Growth Prospects: Pent-up demand forlandline service indicates large potentialmarket for wireless relative to other BSIholdingsRegional One-Stop Shop: Serve businessesthat operate across the continentWireless Roaming: Seamless accessthroughout Latin American properties

Open Position: No competitors have yetestablished a truly regional presencePartners: Available local partners satisfyFDI requirements

Regional Expertise: Similar languages andpolitical and business culturesExisting Relationships: Cultural and tradeties with BellSouth home territory,including Miami and the Gulf CoastAbundant Talent: Local labor is qualifiedand affordable

Opportunity Risk

…leads to focused regional expansion strategy

Low Income: Lower ability to pay forhigh-end services with larger marginsthan in EuropeGreater Exposure to Shared Events:Political instability, economicdownturns and currency risk oftenspread regionally

Race to Regionalism: Telefonica deEspaña, Telecom Italia and Telmex’sAmerica Movil are actively pursuingLatin America strategies

Diminished Knowledge Base: Regionalfocus limits ability to leverage insightsfrom operations in more widely variedmarkets

Latin America StrategyBecome the leading pan-regional provider of wireless-based telecommunications services

Elements of Regional Strategy

Build on wireless services Enter additional markets through wireless license auctions; migratecustomers to higher-end products and services over time

Partner with Avoid alliances with incumbent monopolies tied to legacy landlinenon-incumbent infrastructurelocal companiesDifferentiate brand BellSouth operates under its own brand, capitalizing on international

brands’ connotation of better service and quality than local incumbentsIssue tracking stock Enhance visibility of Latin America operations and raise capital from

growth-oriented investors to fund further expansion

Source: Mehta, Stephanie N., “BellSouth Considers a Tracking Stock as Currency for Latin American Unit,” The Wall Street Journal,2 February 2000; Romero, Simon, “BellSouth’s Down-Home Strategy,” The New York Times, 3 September 2001; Spiegel,Peter, “The Crafty Globalizer,” Forbes (20 March 2000); Corporate Strategy Board research.


Efficiencies from a Regional PresenceAs a result of its early-mover strategy, BellSouth quickly established itself as one of the leading wirelessproviders in Latin America. With its competitive position more secure, the company began to standardizepractices and systems across markets. Improved consistency and efficiency have enabled greater delegationof responsibility by the BellSouth International center in its Georgia headquarters to local companies, whileimproving coordination across markets.

Rationalization of Latin American Activities

Selected Activities, 1997–2000

Source: “BellSouth Launches First Pan-Regional Ad-Campaign in Latin America,”PR Newswire (24 May 1999); Corporate Strategy Board research.

• Advisory support for new operations

• New market selection

• Network construction/maintenance

• R&D/product development

• Platform/operating systems

• Procurement

• Advertising

• Supply chain management

• Billing systems

• Network operating standards

• Customer-facing (brand)

• Customer sales

Holding Company Model1997

Coordinated Regional Model2000

BellSouthInternational

Profit Focus: BSI’scorporate centerfocuses on streamliningcorporate HQ anddesigning a regionalLatin American strategy

Efficiency-SeekingStandardization:Many functions arerationalized across theregion to reduce costs

Focused LocalDifferentiation: Selectfunctions have remainedlocal to accommodatelocal diversity andmarket idiosyncrasies

BellSouthInternational

LittleStandardization:Tolerance ofinconsistentbusiness practicesand systems amonglocal companieswhen they supportrapid market entry

Expansion Focus:BSI’s corporate centerstaff focuses on enteringadditional markets andassuring strong financialreturns


Balancing Country-Specific Risks and OpportunitiesBellSouth continues to add countries to its Latin American portfolio. A detailed evaluation of marketconditions in each country determines subsequent choices regarding mode and timing of market entry,customization of products and services, and definition of a specific niche within the market.

Based on evaluation of opportunities and risks…

Guatemala Market Assessment, 1999


GuatemalaPopulation (2000): 12.6 millionGDP per capita (1999): $3,900

Source: “BellSouth to Cover 18 Departments by 4Q01,” Business NewsAmerica, 24 May 2001; Corporate Strategy Board research.

Guatemala City

…BellSouth enters Guatemala market in 1999

Guatemala StrategyBuild market share by creating the first nationwide wireless network, then add profitable high-end services and local access

Elements of Regional Strategy

Greenfield start-up Purchase cellular license in October 1999, with partner from existingPanama operations fulfilling local ownership requirements

Build nationwide network Offer cellular service under BellSouth brand in Guatemala City areabeginning in October 2000; ultimately expand to entire country

Become full-service Fortify position as high-quality national provider by adding long-distancewireless provider and data/Internet services




Sizable Market: Largest in CentralAmerica by population and GDPPotential for Higher-End Services:550,000 households with incomesof more than $10,000Economic Resilience: Economy basedon increasingly diverse industries

No Nationwide Rivals: Opportunityfor BellSouth, given rapid investmentOpening in Data Services: No majorincumbents in wireless Internet access

Leverage BellSouth in Panama: Ability toshare existing HR practices, financialmanagement, IT systems and marketingtechniques

Opportunity Risk

History of Political Instability: Thirty-six-year guerrilla war not ended until 1996Lack of Transparency: Concerns aboutskewed deregulation processNatural Disasters: Volcanoes,earthquakes and hurricanes disruptservice and increase networkmaintenance cost

Well-Connected Incumbents: Threeexisting providers, two owned byregional players Telmex and TelefonicaOthers Eyeing Market: SBCCommunications, GTE and Vodafoneare potential rival bidders

Mostly Rural: Network build-out andmaintenance costs higher outsideGuatemala City



Introducing New Offerings in Established MarketsWith 11 million wireless customers in Latin America, BellSouth now views the region as a laboratory forlaunching new offerings based on wireless technology. The market positioning framework enables BellSouthto assess the readiness for more sophisticated services of specific countries that are already in its portfolio, aswell as to identify new offerings that can be disseminated profitably across multiple countries.

BellSouth applies market assessment approachto new offerings in established markets…

Introduction of Wireless Local Loop in Venezuela, 2001

Strong Presence in Market:BellSouth’s Venezuelan subsidiary, Telcel,obtains 65 percent of the wireless marketsince entry in 1991; also offers domesticlong-distance and Internet services

VenezuelaPopulation (2000): 24.2 millionGDP per capita (2000): $4,300

…and around the region

Source: Lifsher, Marc, “BellSouth Unit Wins Auction in Venezuela,” The Wall Street Journal, 7 February 2001; Guthrie, Amy,“BellSouth Investment in StarMedia a Welcome Hedge Bet,” Dow Jones Newswires (1 June 2001); U.S. Departmentof Commerce, Office of Telecommunications Technologies research; Corporate Strategy Board research.




Serve Offices and Large Facilities: WLLhelps Telcel reach new customers inlocations with concentrated occupancy

Protection from Major Incumbent:Former telecom monopoly CANTV islegally barred from participating inWLL auctions

Leverage Existing Network: Telcel’sproprietary wireless network alreadycovers 98 percent of Venezuela’spopulated regions

Opportunity Risk

Challenging Geography and Climate:Increases maintenance costs fornetwork of wireless towers

Competition from Regional Rivals:Telecom Italia and Telefonica haveboth secured WLL licenses

Pressure for New-Product-Led Growth:Telcel already has 65 percent shareof Venezuela’s wireless market

Regional Internet PortalMarket: Latin America2001 joint venture with StarMedia Network to create multiaccess portals throughoutLatin America, enabling BellSouth’s 12 million cellular customers to access personalizedinformation anywhere via their cellular phones and personal computers

New Product: Wireless Local Loop(WLL): Introduces WLL in April 2001;allows companies to provide broadbandaccess to office towers and large facilitiesusing cellular signals

Caracas


Q299 Q201

BellSouth’s Latin American Operations Achieve RapidGrowth and Increasing Profitability

BellSouth Latin America Customer Base

1997–2000

Latin America Earnings (EBITDA)

Q299–Q201

Assessment

Key Benefits

• Systematic market assessment, including in-depth examination of noneconomic factors,allows BellSouth to balance the appeal of untapped markets with a comprehensiveevaluation of risks due to differences from familiar markets.

• Consistent application of the market assessment framework to existing markets supportsastute allocation of resources and rollout of new products throughout internationaloperations.

• Attention to the likelihood of future entry of competitors informs BellSouth’s sequencingof market entry and its positioning decisions within entered markets.

Applicability

• The risk factors that require deepest analysis vary by industry, depending on sensitivity todifferences in economic, geographic, political or cultural factors.

• Careful analysis of risks from sociopolitical factors is important for all companies, but it iscritical for companies that are heavily affected by regulation or that must make long-term,asset-intensive investments that make exit difficult if circumstances change.

Implementation Consideration

• Gathering information about risk requires on-the-ground presence through company staff,local partners and consultants.

Source: Notes to BellSouth analyst meeting, http://www.bellsouth.com/investor/ir_speeches.shtml (28 August 2001); Corporate Strategy Board research.

Customers(Millions)

$0

$125

$250

Millions ofU.S. Dollars

$149

$222

1997 1998 1999 20000

6

12

1.73.5

6.2

11.1

23

Jabil Circuit, Inc.Market Entry Decision Rules


Jabil Circuit, Inc.

Case in Brief: Market Entry Decision Rules

• Jabil sets consistent guidelines for locating international operations and choosing itsmethod of market entry based on the alignment of market circumstances with the needsof Jabil’s business model.

• For each evaluated market, Jabil directly compares the costs and benefits of pursuingpotential acquisitions versus building a greenfield site, enabling the company to makebalanced decisions about the best mode of entry for each market.

Source: Compustat data; Hoover’s Online; Jabil Circuit, Inc.;Corporate Strategy Board research.

Five-Year Total Return to Shareholders


Jabil Circuit

Flextronics International

S&P 500

(100%)

1,300%

2,500%

Company Profile

Jabil Circuit is one of the United States’s leading electronic manufacturing service (EMS)providers. Its services enable communications, computing and other technology companiesto outsource product design, component procurement, assembly and order fulfillment. Jabilemphasizes deep relationships with a relatively small number of customers compared to itscompetitors; this philosophy is reflected in its “workcell” production model, which divideseach plant into semiautonomous business units dedicated to individual customers. Jabil’s topfive customers—Cisco Systems, Dell Computer, Marconi, Lucent and Hewlett-Packard—account for roughly half of all sales.


FY2001 Earnings US$119 M



Five-Year AverageAnnual Return toShareholders 78.3%

0%

Selected Statistics

●

●

●

●

●

●

■ ■ ■■

■■

▲ ▲ ▲ ▲ ▲ ▲

1995 1996 1997 1998 1999 2000

25Jabil Circuit, Inc.

Outsourcing for Multinational Customers


Jabil Circuit’s international expansion is based on increasing demand from its existingcustomers as much as the prospects for reaching new customers abroad. Over the course ofthe 1990s, the trend toward outsourcing production in the telecommunications, computingand electronics industries has coincided with aggressive expansion by many technologycompanies into international markets. Jabil and its competitors have been able to capitalizeon those trends by internationalizing their own production.

Unlike highly acquisitive competitors such as Flextronics and Solectron, Jabil grewexclusively through greenfields until the late 1990s. A private company until 1993, capitalconstraints led Jabil to hone its greenfield growth methodology. Given the importance ofaligning an acquisition with its unique workcell production model, Jabil has continued tocarefully scrutinize potential acquisitions.

Jabil’s early international expansion efforts, starting with Scotland in 1993, were all greenfieldoperations. Since its 1998 acquisition of plants in Idaho and Italy from customer Hewlett-Packard, Jabil has pursued cross-border acquisitions with equal vigor based on a market-by-market evaluation of the prospects of both entry modes.

Source: Miller, Eric, “Jabil Circuits the Globe to Find Financial Success,” The TampaTribune, 6 June 1999: 30; Jabil Circuit, Inc.; Corporate Strategy Board research.

Jabil Circuit International Presence


Brazil, 2000

Mexico, 1997

Italy, 1998

Scotland, 1993

China, 1998

Hungary, 2000

England, 2001Ireland, 2000 Belgium, 2001

Japan, 2000

Malaysia, 1995

Production Centers

Repair and Logistics Centers

Domestic Market


Source: Jabil Circuit, Inc.; Corporate Strategy Board research.

Decision Guardrails for Market EntryWhen Jabil considers opening new facilities in the United States or abroad, it evaluates its options based firstand foremost on its ability to provide customers with a standard of production and service quality identicalto that of its existing plants. This is especially important given that many customers contract with Jabil forproduction in multiple locations around the world. Jabil is equally attentive to a new site’s capacity tosupport its unique “workcell” production model that underpins its close relationships with customers.

Jabil’s Expansion Guidelines Support the Requirements of Its Distinct Business Model

Expansion Guidelines and Corresponding Business Model Characteristics

Business Model Characteristic Corresponding Guidelines for Expansion

To reduce capitalexpenditures and improvespeed to market, electronicsfirms outsourceproduction—and in somecases design—responsibilityto EMS providers

Jabil’s production flowsinto supply chains thatcross national borders;products are typicallydestined for end users inmany countries

Jabil manages productionfor at least threecustomers in each factory,each served by a dedicatedself-contained businessunit; these workcells usestandardized productionmethods to customizeservices for theirdesignated customer

Reassign customer facilities: The most effectiveacquisitions are often transfers of plant capacity from acustomer rather than a purchase of an entire electronicsmanufacturing firm, since the customer’s production staffis already familiar with the products and the facilities aredesigned to make them

OutsourcingBusiness Model

MultinationalCustomers

“Workcell”Production Model

Think regionally: Expansion decisions are based on Jabil’sability to help its customers serve their end users throughouta region (e.g., Western Europe, Southeast Asia)

Look forward in the value chain: Location decisions takeinto account customers’ cost of distributing Jabil’s productsto their end users

Ensure a “workcell-ready” workforce: Jabil chooseslocations where it can hire local staff that can learn its uniquestructure of production management

Full control trumps alliance advantages: Joint venturesinhibit Jabil’s ability to impose its workcell model; all elseequal, it is less costly to establish this model in a greenfieldthan by integrating an acquired company

1

2

3

4

5


Balancing the “Build or Buy” DecisionJabil’s decisions about market selection and market entry method are intricately linked. For every areaunder consideration, Jabil evaluates the costs and benefits of acquisition candidates and greenfield siteswith a standardized methodology. The approach facilitates an integrated examination of regional demand,economic and political infrastructure, local plant capacity and the local workforce’s skill sets.

Jabil Weighs the Value of Acquisition and Greenfield Options for Every New Market

Market Entry Method Evaluation

Illustrative Questions and Weighting


1. Is current demand in the region already fully met by existingproduction capacity? “Yes” supports acquisition.

Rationale: Building new capacity only makes sense if producingfor export to another region

2. Does a potential customer have plant capacity that it is willingto transfer to Jabil? “Yes” supports acquisition.

Rationale: Staff and facility can continue production with minimaldisruption if acquired

3. Are local personnel with technical skills readily available?“Yes” supports greenfield.

Rationale: It is easier to train new hires in Jabil’s methods thanto change the embedded habits and business culture of acquired staff

4. Are local acquisition candidates encountering severe laborproblems or underperformance? “Yes” supports greenfield.

Rationale: Jabil lacks competencies for quickly integrating turnaroundcompanies that require major business culture change and restructuring

5. Do local manufacturers possess innovative or valuable capabilities?“Yes” supports acquisition.

Rationale: Acquiring new skills is a much faster process than buildingthem in a greenfield context

6. Is the strategic premium for a potential acquisition greater thanthe savings from avoiding greenfield construction costs? “Yes”supports greenfield.

Rationale: Jabil is capable of efficiently building greenfield sites, reducingthe relative speed and cost advantages of M&A

7. Is political instability or corruption a serious and widespreadproblem? “Yes” supports acquisition.

Rationale: Jabil cannot leverage relationships with political power brokersin unfamiliar potential markets

Greenfield–Acquisition Assessment

Evaluation Questions Supports Greenfield Supports Acquisition

5 4 3 2 1 1 2 3 4 5

5 4 3 2 1 1 2 3 4 5

5 4 3 2 1 1 2 3 4 5

5 4 3 2 1 1 2 3 4 5

5 4 3 2 1 1 2 3 4 5

5 4 3 2 1 1 2 3 4 5

5 4 3 2 1 1 2 3 4 5

1 = Slightly5 = Strongly

Value of Greenfield Value of Acquisition

Jabil chooses its method of entry for each market basedon its evaluation of both greenfield and acquisition options

CustomerNeeds and

LocalCapacity

LocalTalent

LocalCompanies

PoliticalClimate


Building Where Others Have BoughtJabil has pursued different means of market entry in Eastern Europe and in East Asia, but for consistentreasons. In each case, its judgment was based on the application of uniform decision rules to specificcircumstances in the market. Jabil chose Hungary in early 2000 as its base for European customers owing toits technically skilled workforce and convenient distribution to markets in the West. Learning from theexperience of competitors, such as Flextronics, that struggled to integrate acquired Hungarian electronicsmanufacturers, Jabil opted to build greenfield operations in a lower-cost area east of Budapest, but withexcellent distribution infrastructure.

Jabil Avoids Competitors’ M&A Missteps by Choosingan Advantageous Hungarian Greenfield Location

Market Entry in Hungary

2000

Source: Clark, Peter, “Fab Contracting Boosts Hungary,” E.E. Times, 26 April 2001; Echikson, William, “TakingHungary on a High-Tech Ride,” BusinessWeek (23 October 2000); “Jabil Circuit Opens Plant inTiszauvjaros,” Hungarian News Agency, 7 April 2001; Jabil Circuit, Inc.; Corporate Strategy Board research.

Objective: Establish a central production and distribution facility for new and existing customers’ markets in Europe

1. Market Selection

Potential Production Sites:

Rationale:

Central location, buthighest costs in region

Close to Germany, butunderdeveloped infrastructure

HungaryAcceptable location, affordableskilled workers and improvinginfrastructure

Czech Republic

Poland

✓

Proximity toCustomers

Establishing businessin Hungary allows Jabil torapidly and inexpensivelyprovide contractmanufacturing services toits customers in Europe

Highly SkilledWorkforce

Hungarian workforcepossesses technologicalcapabilities developedunder Soviet-sponsoredelectronics industry

Rapidly DevelopingInfrastructure

Hungary’s maturinginfrastructure supportsthe efficient movementof goods, informationand people

II. Market Entry Method

Potential Entry Methods:

Rationale:

Previous acquisitions by Flextronicsand SCI Systems incurredprohibitively high strategic premiumand persistent integration expenses

Jabil builds new facility inTiszaujvaros, northeastern Hungary,capitalizing on low distribution andconstruction costs and ability tobuild on available technical skills

Acquisition

Greenfield✓

Low DistributionCosts

Tiszaujvaros’s locationallows Jabil to build anew facility on a newlyconstructed M3 highway,providing efficientdistribution to WesternEurope without the costsof Budapest

Excessive AcquisitionPremium

Potential targets askexcessive purchasepremiums for facilitiesthat would requiresubstantial retooling

Fresh Start withManagement

Building Jabil culture andmethods into newoperation bypasses taskof reversing establishedmanagement practices

M3 $


Acquiring to Pave the Way for Greenfield GrowthIn Asia, Jabil followed a greenfield in Malaysia with a major acquisition in China. In the near term,the purchase nets Jabil one of China’s most technically proficient electronics firms and current contractswith global companies outside of Jabil’s existing customer base. In the long term, the local managementteam’s relationships with Chinese business and political leaders and its knowledge of domestic marketdynamics will position them well to lead Jabil’s future greenfield expansion as the domestic Chinaconsumer electronics market continues to grow.

Jabil Enters the Complex China Market Through an Acquisitionand Lays the Foundation for Future Greenfields

Market Entry in China

1999

Source: Levine, Bernard, “Jabil Looks to China,” Electronic News (9 August 1999): 4;“On the Road to Asia: E.M.S. Expansion in China,” Investext Analyst Report,24 November 1999; Jabil Circuit, Inc.; Corporate Strategy Board research.

Objective: Establish facilities to serve electronics manufacturers selling to the Chinese domestic marketand exporting throughout Asia and the world

1. Market Selection

Potential Production Sites:

Rationale:

Proximity to Asia-Pacific Customers

Establishing a presencein China allows Jabil toefficiently serve itscustomers’ needs in Asia

Highly SkilledWorkforce

China boasts manycomparativelyinexpensive workerswith engineering andtechnological training

LiberalizingEconomic

EnvironmentChina’s rapidlyliberalizing economicinfrastructure creates anincreasingly manageableinvestment climate

II. Market Entry Method

Potential Entry Methods:

Rationale:

Differences between China’s politicaland business environment and those ofNorth America make entry difficultwithout the benefit of local insight andestablished business relationships

September 1999 acquisition of HongKong–based GET Manufacturing’s threeplants in southern China allows Jabil toimmediately expand its customer baseand obtain a company with talented,experienced local management

Greenfield

Acquisition✓

Acquire NewCustomers

Jabil acquires GET’scustomer base, whichincludes both newbusiness lines fromcurrent customersand several newmultinational customers

Acquire NewCapabilities

GET boasts productioncapabilities—injectionmolding, direct-dieattach technology—thatexpand Jabil’s serviceofferings

Acquire LocalRelationships

GET’s managementhelps Jabil work withChinese regulators,suppliers and partners;Jabil is better positionedfor further expansion viagreenfield growth

Jabil built a factory in 1995 to producecomputer components mostly for export;further expansion is deemed more costlythan entering China

Jabil enters China in 1999 to serve existingcustomers in Asia in the near term, as wellas to exploit future opportunities withinChina’s burgeoning domestic telecom andelectronics markets

Malaysia

China✓

FDI


1996 1997 1998 1999 2000

Driving Bottom-Line Growth with Geographic Growth

Revenue and New Markets Entered

1996–2000

Net Income

1996–2000

Assessment

Key Benefits

• Clear decision rules that are grounded in Jabil’s business model allow the company toconfidently factor in the costs of working around local circumstances that may not easilymatch the model’s requirements; the guidelines also provide agreed-upon criteria fordeclining to pursue expansion proposals that may have attractive financials but conflictwith Jabil’s way of doing business.

• Comparative evaluation of acquisition and greenfield options for all potential marketsencourages Jabil to identify profitable alternatives that would not be readily apparentupon initial examination of a potential growth market, and obligates the company tolook beyond the industry’s conventional wisdom with respect to expansion abroad.

Applicability

• Directly weighing multiple market entry methods is especially valuable for companiesthat are looking abroad because of a potentially attractive foreign takeover candidate;even M&A prospects that meet a company’s investment criteria may prove to be lessadvantageous over the long term than greenfields or alliances in the same market.


• To ensure a truly balanced evaluation of greenfield and acquisition possibilities, it isimportant to evaluate and compare them as capital investments based on financial criteria,as well as strategic decisions based on qualitative criteria.


Revenue(Billions of

U.S. Dollars)

$0

$80

$160

Net Income(Millions ofU.S. Dollars)

0

6

12

$1.1 $1.2$1.5

$2.2

$3.6

Hun

gary

Mex

ico Chi

na

Ital

y

1996 1997 1998 1999 2000

$30

$59$74

$95

$150

33

Cemex, S.A. de C.V.Standardization Stewards


Cemex, S.A. de C.V.

Case in Brief: Standardization Stewards

• Cemex establishes standardized business practices, known as “The Cemex Way,” that aresystematically mapped, cataloged and disseminated across all local businesses; moreover,The Cemex Way constantly evolves to incorporate local innovations and superior practicesfrom acquired companies.

• Best practice standardization is enabled by a network of nine “E-Groups”—multinationalteams of process specialists and experienced managers—with a global mandate to align allbusinesses with The Cemex Way and to identify and integrate potential improvements toCemex’s global standards.

Source: Compustat data; Hoover’s Online; Cemex, S.A.de C.V.; Corporate Strategy Board research.

Four-Year Total Return to Shareholders


(50%)

175%

300%

Cemex

Construction Industry

S&P 500

Company Profile

Cemex, the Monterrey, Mexico–based cement and ready-mix concrete manufacturer, is thethird-largest company in its industry behind France’s Lafarge and Switzerland’s Holcim.The company derives more than 50 percent of sales from outside Mexico. Cemex hasoperations in more than 30 countries on four continents, including Colombia, Costa Rica,the Dominican Republic, Egypt, Indonesia, Mexico, the Netherlands, Panama, thePhilippines, Singapore, Spain, the U.S. and Venezuela.

0%


FY2000 Earnings US$1.0 B



Four-Year AverageAnnual Return toShareholders 26.2%

Selected Statistics

●

●

●

●

●

■

■

■■

■

▲

▲

▲

▲▲

1996 1997 1998 1999 2000

35Cemex, S.A. de C.V.

A Global Consolidation with Emerging-Market Roots


The international cement industry is currently undergoing rapid consolidation. Industryexperts estimate that in the year 2000, the top 10 industry leaders owned 75 percent ofcement capacity in operation. As this trend continues, Cemex faces growing pressure toeither acquire or be acquired.

Cemex’s major competitors, France’s Lafarge and Switzerland’s Holcim, have pursuedacquisitions primarily in the United States and Europe. Cemex has also grown viaacquisitions, but it has focused first on markets with linguistic or economic ties—e.g., Spainand Latin America—and subsequently on markets where customer needs are familiar—e.g., developing countries such as Indonesia and Egypt, where cement is sold in bags ratherthan in bulk.

In October 2000, Cemex became a major player in the United States with the acquisitionof the country’s second-largest cement manufacturer, Southdown, for $2.8 billion. Cemex’smarket portfolio is now more diversified, with 29 percent of production capacity in stable,mature markets and 71 percent in developing markets with growing populations andinfrastructure requirements.

Cemex International Presence


Source: Fritsch, Peter, “Cemex Loves Its ‘Ants’ but Wants More: Mexican Cement Firm’sU.S. Deal Goes Beyond Do-It-Yourselfers,” The Wall Street Journal, 2 October2000: A22; Cemex, S.A. de C.V.; Corporate Strategy Board research.

United States,1994

Monterey,Mexico HQCosta Rica, 1999

Panama, 1994

Colombia, 1996

Venezuela, 1994

DominicanRepublic, 1995

Spain, 1992

Egypt, 1999

Indonesia, 1998

The Philippines, 1997

Thailand, 2001

Cemex Presence

Main Business Units

Domestic Market


…and aligns the entire organization with best practices

Elements of Business Practice Standardization

Setting Standards for an Expanding CompanyAs Cemex expanded beyond Mexico in the early 1990s, management encountered increasing difficulty withintegrating its international operations. Local managers often claimed that standard Cemex practices wouldnot be effective in Spain or South America. Hindered by expensive variation and duplication among itsbusinesses abroad, Cemex’s bid to become a global player slowed.

Noting that many of its established business practices had been adapted from acquired Mexican firms, Cemexbegan cataloging and disseminating standardized business practices worldwide in the mid-1990s, an approachthat would come to be known as The Cemex Way.

Cemex catalogs standardized business processes…

Corporate Center

Business Unit

Assessment: The identificationand assessment of businesspractices currently used at eithernewly acquired businesses orexisting business unit locations

Evolution: The development andongoing reassessment ofstandardized best practices toensure long-term effectiveness ofbusiness processes and activities

Accommodation:Customization of selectedpractices to reflect specific localconditions

Dissemination: The adoptionand implementation ofstandardized practices throughoutthe organization

1

2

“The Cemex Way”The Cemex Way is the core set of best business practices with which Cemex conducts its businessthroughout all of its locations. The approach was instituted in recognition of the need to build“one Cemex” that is more flexible in response to rapid growth and maintains a consistentcustomer focus worldwide.

CommercialCustomer-Facing

Processes andLogistics for

Cement Business

Business Practices Cataloged in The Cemex Way

FinanceCash Management,

Bank Relationsand Capital

Markets

ControllershipAccounting and

Cost Management

HumanResourcesRoles and

Responsibilities,Compensation,

Recruiting

Ready-MixConcrete

Processes Specificto Ready-Mix

Business

InformationTechnology

NetworkArchitecture,

Hardwareand Software

Standards

OperationsProduction and

Quality Assurance

PlanningAnalysis,

Budgeting andForecasting

ProcurementSourcing and

SupplierRelationships

Business Unit

4

3

Source: Cemex, S.A. de C.V.; Corporate Strategy Board research.

➤

➤


Clear Ownership for Global Best PracticesIn the late 1990s, Cemex established nine E-Groups with worldwide responsibility for improving anddisseminating The Cemex Way. Each E-Group brings together individuals with a variety of functionalexperience to assume responsibility for specific business processes, such as planning, IT, HR and financepractices.

Each set of business practices is stewarded by an “E-Group”…

E-Group Organization

Group Leader• Process expert with

proven track record• Coordinates team

activities and analysis

Business Process Experts• Individuals from a variety of

Cemex locations• Proven experience and

recognition in specific fields

IT Support• Business process design• Technology development

Human Resources• Supports design and

implementation of “The CemexWay” throughout organization

Responsibilities Nine E-Groups are responsible for assuring definition, documentation, implementation and improvementof a specific set of The Cemex Way business practices

Coordination All groups assemble at least once each week, in addition to frequent informal consultation, to supportcommon initiatives and knowledge sharing

Implementation While E-Groups are responsible for assuring companywide alignment, implementation of specific plans isconducted by country implementation teams that collaborate with the E-Groups

Improvement Each E-Group is responsible for seeking out superior business practices in the field and integrating themwith the elements of The Cemex Way under the group’s stewardship

Evaluation Group performance is evaluated by an executive sponsor against explicit objectives set at the beginningof each year; objectives include speed and effectiveness of implementation plans and the business valueof improvements in The Cemex Way

…composed of experienced managers from diverse backgrounds

Typical E-Group Composition

Executive Sponsor/Business Process Owner• Corporate vice president responsible for

strategic direction• Oversees as many as three E-Groups



Local Business Practice Review

Evaluating Local VariationsThe E-Groups conduct thorough reviews of all Cemex businesses and new acquisitions to assess compliancewith The Cemex Way. Successful analysis and implementation depend upon the involvement of countryimplementation teams—representatives of the local business who collaborate in every stage of the reviewprocess. Following the comprehensive analysis of processes, systems and structures, the E-Groups finalize aplan for compliance to be implemented by the local teams. Typically, only about 20 percent of a business’spractices are retained due to undeniably important local market and legal requirements.

1. E-Groups Collaborate with Country Implementation Teams

2. “Gap Analysis” Comparison with The Cemex Way Practices

3. Implementation Plan Developed for Alignment with The Cemex Way

To Align with Cemex WayI. Human Resources• In-house compensation processing• Biannual merit increase• Annual performance review procedureII. Finance• Annual budget setting• Internal accounting standardsIII. Legal• Electronic document storage• Ethics standards

E-Group Representatives Country Implementation Team

Local employees from newlyacquired company or subsidiary

Responsibilities:• Analysis of local practices• Final decision regarding

implementation of TheCemex Way

Responsibilities:• Advisory and support to E-Group

decision making• Granular implementation of plan

set by E-Group

1. Processes 4. Organizational Structure

2. Roles and Responsibilities 5. Tools and Templates

3. Technology Infrastructure 6. Performance Metrics

➤➤

➤➤

➤

JobDescription

To Be Retained

• Internet recruitment• Use of online training vendor

• Tax reporting

• Engaging outside counsel• Compliance with local standards

Typically, 80 percent ofprocesses are replacedwith those prescribedby The Cemex Way

Twenty percent remain,primarily in response tospecific legal, market andregulatory constraints

For each set of business practices,E-Groups work closely with localemployees who are familiar withbusiness practices and culture; together,they assess all practices and identifythose that need to be aligned withThe Cemex Way

All local practices are documentedand assessed for compliance withThe Cemex Way

Results of gap analysis are synthesizedinto actionable implementation planto be followed by local teams

Experts in HR, IT andbusiness practices

Business Process Analysis (Illustrative)


✓✓✓✓


Practice

Thorough analysis and investigation of local business practices…

Evolution of The Cemex Way

An Evolving Vision of Best PracticeGap analysis also identifies local practices that can be adapted to improve on The Cemex Way globally.In each business review, E-Groups specifically look for superior business practices that are evaluated withthe assistance of additional specialists and senior executives at the corporate center. The E-Groups areempowered with making final decisions about the adoption of new standards. Fully 70 percent of The CemexWay has been adopted from companies acquired since the 1970s. Cemex’s active adoption of superiorpractices has improved the effectiveness and consistency of its processes and has accelerated its transitioninto the realm of truly global companies.

….contribute to 70 percent of “The Cemex Way”processes being adopted from acquired businesses

Origin of Best Practices Integrated into The Cemex Way

Selected Practices and Rationale for Adoption

1. Analysis 2. Evaluation 3. Adaptation 4. Dissemination

Identification of successfuland potentially transferablebusiness practice

E-Group meets with executivesponsor to present the practiceand obtain feedback regardingits value and applicability

E-Group maps, reworksand adapts selected practicefor use across the organization

Practice is incorporatedinto The Cemex Way forstandardization throughoutall business units and newacquisitions

Practice➤ Cemex

Way


Corporate Center

Business Unit Business Unit

Spain, Early 1990sBank relationship management—More rigorous controls andbetter information for financialnegotiations

Commercial cement decision-support tools—Streamlinedmetrics and budgetingprocess

Ready-mix production processes—More efficient plant managementtechnology and tools

Mexico, 1980sCash management system—More robust cash flowforecasting and managementof payments and collection

Ready-mix dispatching system—Improved fleet managementand logistics efficiency

Commercial logisticsprocesses—Standardized,flexible IT platform fordistribution management

South America, Mid-1990s to PresentAccounting—More streamlinedand frequently updatedcontrollership, accounting andcost management systems

Customer servicemanagement system—Stronger customer careculture


1992 1993 1994 1995 1996 1997 1998 1999 20000

40

80

36 3945 47 50 51

5765

77

Process Improvement Across Five Continents

Production Capacity and Major Acquisitions

1992–2000 (Millions of Metric Tons)

EBITDA and Sales

1992–2000 (Billions of U.S. Dollars)

Assessment

Key Benefits

• Detailed mapping of local processes and comparison with The Cemex Way processes andsystems enable E-Groups to strike a reasonable balance between universal standardizationand appropriate customization at the country level.

• Active search for local business practices that can improve Cemex’s global standardprocesses supports continuous learning as the organization grows.

Applicability

• Cemex’s effort to identify practices that merit broader dissemination is especially valuablefor companies that regularly pursue acquisitions, as valuable knowledge is often lost in therush to integrate the acquired company.

• For companies contemplating the creation of a shared services structure to support amultinational organizational structure, Cemex’s approach to standardization may providea less disruptive means of improving the consistency and efficiency of certain functions; italso effectively lays the groundwork for introducing shared services at a later date.


• The full involvement of local staff—as with Cemex’s country implementation teams—is essential for enabling effective formulation and execution of standardization plans andfor identifying superior business practices that may not be readily apparent to peoplewithout experience at the local business level.

1992 1993 1994 1995 1996 1997 1998 1999 2000

$0.7 $0.9 $0.7 $0.8 $1.1 $1.2 $1.5 $1.8 $2.0$2.2

$2.9$2.1

$2.6$3.4 $3.8

$4.3$4.8

$5.6

Sales

EBITDA

$0.0

$3.0

$6.0


U.S

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Phili

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Col

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43For Further Reading

For Further ReadingInternational Expansion—General

Bartlett, Christopher A., and Sumantra Ghoshal, “Going Global: Lessons from Late Movers,” Harvard BusinessReview (March–April 2000).

Bryan, Lowell L., and Jane Fraser, “Getting to Global,” The McKinsey Quarterly 4 (1999).

Corporate Strategy Board, Developing Frameworks for International Expansion, Washington, D.C.: CorporateExecutive Board, 1997.

Corporate Strategy Board, Growth Through International Expansion at Middle Market Companies, Washington,D.C.: Corporate Executive Board, 1999.

Forteza, Jorge H., and Gary L. Nielson, “Multinationals in the Next Decade,” Strategy and Business (Q3 1999).

Govindarajan, Vijay, and Anil K. Gupta, The Quest for Global Dominance: Transforming Global Presence intoGlobal Competitive Advantage, San Francisco: Jossey-Bass, 2001.

Luo, Yadong, “Dynamic Capabilities in International Expansion,” Journal of World Business (December 2000).

International Mergers and Acquisitions

Ghemawat, Pankaj, “The Dubious Logic of Global Megamergers,” Harvard Business Review (July–August 2000).

Hubbard, Nancy, “Acquisition Strategy and Implementation,” West Lafayette, Indiana: Purdue UniversityPress, 1999.

Lajoux, Alexandra Reed, The Art of M&A Integration: A Guide to Merging Resources, Processes, andResponsibilities, New York: McGraw-Hill, 1998.

United Nations Conference on Trade and Development, World Investment Report 2000: Cross-Border Mergersand Acquisitions and Development.

Globalization

Fraser, Jane, and Jeremy Oppenheim, “What’s New About Globalization?” The McKinsey Quarterly 2 (1997).

“Measuring Globalization,” Foreign Policy (January–February 2001).

United Nations Conference on Trade and Development, World Investment Report 2001: Promoting Linkages.

International Management

Bartlett, Christopher A., and Sumantra Ghoshal, Managing Across Borders: The Transnational Solution, Boston:Harvard Business School Press, 1998.

Ghemawat, Pankaj, “Distance Still Matters: The Hard Reality of Global Expansion,” Harvard Business Review(September 2001).

Govindarajan, Vijay, and Anil K. Gupta, “Managing Global Expansion: A Conceptual Framework,” BusinessHorizons 43 (March 2000).

Growth Across Borders

Documents

Transcript of Growth Across Borders