The Journal of The DuPage County Bar Association

Back Issues > Vol. 16 (2003-04)

Global Expansion is a Matter of Construction: To take a Company Global, Build a Bridge that Connects the Company to the Right Global Opportunities
By Alexander Olsansky, Jr.

Opportunities for global expansion are endless, as they come in all shapes, sizes and permutations. It is hard to resist the allure of expanding globally – it is a strong force, driven by the quest to conquer new markets and the chance to reap untold riches. Indeed, the benefits of a successful global initiative are real and plentiful.

However, global expansion simply for the global expansion’s sake is unwise and imprudent. The company that embarks on a global expansion project, and then fails, can suffer devastating, and potentially irreversible, repercussions.

Global expansion requires a well-conceived plan that leads the company into global markets with direction and purpose. For starters, it should pursue global opportunities that conform to the company’s mission statement and will grow the business and increase shareholder value. These are the so-called high-level goals that should underscore all new company initiatives.

But success will depend on more than simply attempting to match high-level goals with global opportunities. To be successful, the company must build a bridge, step-by-step, that connects the company, and its high-level goals, to the right global expansion opportunities. Without a carefully built bridge, the chances of success in the global markets are significantly lessened.

W.W. Grainger, Inc. is a globally-minded, Fortune 500 company that has recently expanded into Mexico and Canada to source and sell its products. Grainger’s decision to go global in this manner is a function of the bridge-building process. And its progression from high-level goals to specific expansion initiatives serves as a model for doing it properly.

The Blueprint for Building a Bridge to the Right Global Opportunities

Identifying the right global expansion opportunities is a hearty challenge for a company looking to go global. The key is to establish a set of objectives and strategies that will grow the business and increase shareholder value and then search for global targets and establish global initiatives using the objectives and strategies as a blueprint. The company must progress logically and sequentially through the process, moving from goals to objectives, objectives to strategies and strategies to targets/initiatives. This is the essence of the "bridge-building" process.

Exhibit 1 is a flow chart that describes the bridge-building process to be used when selecting global expansion opportunities.


Exhibit 1. Flow chart for the "bridge-building" process for global expansion.

Gather and Analyze Performance-Related Data

A company looking to go global should begin the bridge-building process by gathering and analyzing key financial and performance-related data. The purpose is to probe for and identify its strengths, weaknesses, needs and areas of opportunity.

For most companies, an analysis of sales is a logical starting point. Sales should be reviewed and analyzed from many angles, including total sales per year, sales by country, sales by region and sales by product type. Other data will be similarly collected and compiled.

Formulate Business Development Objectives and Strategies

Next, with key data in hand, the company will formulate its mid-level business development objectives, such as increasing sales, profit margin, market share and productivity. These objectives will guide, define and drive the rest of the bridge-building process.

Then, the company will set specific business development strategies that will lead to the attainment of its high-level goals and business development objectives. Examples of business development strategies include reducing and arbitraging costs of labor and materials; establishing new markets for existing product lines; developing new product lines, including value-added products; eliminating the company’s main competitors and establishing barriers to entry for future competition.

Exhibit 2 describes the relationship between high-level goals, business development objectives and business development strategies for Global Co., which is a fictitious company seeking to increase sales by expanding its existing product lines into Latin America.


Exhibit 2. The relationship between high-level goals, business development objectives and business development strategies for Global Co.

Identify and Engage Global Expansion Opportunity

The company continues the bridge-building process by seeking global expansion opportunities that will lead to the attainment of its high-level goals and business development objectives. By formulating goals and objectives, the company can proceed with focus and direction toward the right global expansion opportunities.

Continuing with the scenario in Exhibit 2, Global Co. will search for global targets and initiatives in Latin America that will facilitate the opening of new markets for its existing product lines. Perhaps it will acquire the assets of a crane manufacturer in Chile, joint venture with a crane company in Brazil or build a new crane distribution facility in Argentina.

Conduct Post-Expansion Assessment

The final step of the bridge-building process requires that the company collect performance-related data throughout the operational phase of its expansion initiative. This is done in order to determine if, and to what extent, it is meeting its high-level goals and business development objectives. To that end, the company should ask the following questions: Is the company meeting its goals and objectives via the first global expansion initiative? Which business development strategies are leading to be attainment of its goals and objectives? Should the objectives be refined, expanded or modified? Should the business development strategies be modified, discarded or replaced?

Based on the foregoing analysis, the company may find that through a single global initiative, it is able to meet its goals and objectives. On the other hand, it may determine that a single global initiative is not enough. If the latter is true, and the first expansion initiative proves insufficient, the company will employ the bridge-building process for additional global opportunities until it has attained its goals and objectives.

Assume that Global Co. chooses to build a single distribution facility in Argentina and target a few select resellers in the area. It will ask the following questions vis-à-vis its first entrée into Latin American: Has it reached its sales targets through the construction and operation of a distribution facility in Argentina? Should higher or lower sales targets be set to effect the realities of the Argentine market? Should it seek a different business development strategy, like expanding into different product lines or targeting end-users rather than resellers? Or should it stick with the strategy and build additional distribution facilities?

Indeed, Global Co. may find that it is reaching its sales targets through its Argentine expansion initiative. Alternatively, however, it may conclude that it can achieve twice the sales by targeting end-users, like large manufacturing and industrial companies, as opposed to resellers. For Global Co., the decision to build additional distribution facilities or target large end-users will be a function of the bridge-building process. It is that process that gives Global Co.’s strategic planners the focus and direction needed to identify additional global initiatives in Argentina or elsewhere.

W.W. Grainger’s Global Expansion Plans are a Function of the Bridge-Building Process

W.W. Grainger, Inc. is a Lake Forest, Illinois-based company that sells operating, repair and maintenance products. And in bridge-building vernacular, it has (at least) two high-level goals — to be the leading supplier of industrial products in North America and to deliver a strong return on invested capital. The first goal is company specific, while the second goal is, of course, common to all companies.

Based on recent performance, few would quarrel with the notion that Grainger has been successful in attaining its high-level goals. After all, in each of the last two years, Grainger’s sales have topped $4.5 billion and return on invested capital has exceeded 20%. 2001 and 2002 sales and return on invested capital are summarized in Exhibit 3. And through the first quarter of 2003, sales have outpaced those from the same period in 2002.

2001 

2002

Sales (in US billions) $4.754 $4.643
Return on Invested Capital 20.50% 22.25%

Source: www.grainger.com

Exhibit 3. Grainger’s sales and return on invested capital for 2001 and 2002.

How does a successful company, like Grainger, hone in on, and identify, the right global expansion opportunities? The answer is found in the way Grainger moves from high-level goals to precise global expansion targets and initiatives. Essentially, it’s a matter of bridge-building.

There’s More than High-level Goals between Grainger and Its Global Expansion Initiatives

Sandwiched between Grainger’s high-level goals and specific globalization initiatives are its business development objectives and strategies. Identifying objectives and formulating strategies are vital to the bridge-building process. They are the heavy steel and workmanship that give the bridge its strength and design.

Grainger’s progression from high-level goals to business development objectives and strategies is summarized in Exhibit 4.


Exhibit 4. To attain its high-level goals, Grainger seeks increased market share and gross margin through global expansion and global sourcing.

Grainger’s Business Development Objectives and Strategies Lead to Expansion into Mexico and Canada

Grainger’s path to success has included global expansion into Mexico and Canada. In recent years, it has entered the Mexican and Canadian markets to both sell and source its products. It has done so by establishing sophisticated distribution networks throughout both countries.

In both countries, Grainger supplies customers with a wide variety of local and imported industrial products. In Mexico, Grainger operates through Grainger S.A. de C.V. and targets the industrial and commercial markets. That operation’s distribution facilities are located in five Mexican cities, including Mexico City and Monterrey. Mexico’s market for industrial products is estimated at ten billion dollars.

And in Canada, Grainger has formed a joint venture with Uni-Select, Inc. Through its Canadian operation, Grainger has established a network of 176 branches and 5 distribution centers. Canada’s market is estimated to be worth twelve billion dollars. These global initiatives are summarized in Exhibit 5.


Exhibit 5. Grainger has expanded operations into two multi-billion dollar markets, Mexico and Canada.

Both of Grainger’s global initiatives flow directly from its goals, objectives and strategies. Setting up shop in Mexico and Canada is a function of Grainger’s global expansion and sourcing strategies and allows it to increase market share and gross margin, which are its primary business development objectives. By targeting new customers in two multi-billion dollar markets, it expands its market reach throughout North America. And by purchasing inventory locally, it arbitrages labor costs, reduces delivery distances and provides customers with products tailored to the respective markets.

The Road Less Traveled

The poet Robert Frost wrote in his poem, The Road Not Taken, "[t]wo roads diverged in a wood, and I – I took the one less traveled by, and that has made all the difference."

Similarly, companies looking to expand globally will likely find many of the roads in foreign countries to be "less traveled" than the ones located closer to home. And traveling down those roads will certainly make a difference for globally-minded companies. In essence, the question facing companies seeking to make global inroads is whether "the difference," as Robert Frost puts it, will be positive or negative.

The answer will likely be found in a company’s approach to identifying global opportunities. In other words, the approach taken to identify strategically viable targets will determine whether the difference will be positive, where the business grows and shareholder value increases, or negative, with the opposite being the case.

In a nutshell, seeking global targets must be done with purpose and direction. And the "bridge-building" process facilitates both purpose, via the setting of the company’s high-level goals and business development objectives and direction, via the formulation of business development strategies that lead to the attainment of those goals and objectives.

For Grainger, the decision to enter the Mexican and Canadian markets to source and sell its many product lines is a function of the bridge-building process. So far, that decision has culminated in increased sales, larger market share and greater shareholder value.

Alexander Olsansky is in-house counsel for a one hundred and eleven year old corporation headquartered in Buffalo Grove, Illinois. Mr. Olsansky has served as project leader for many business expansion and profit maximization initiatives. Mr. Olsansky earned his Bachelor of Science degree in Investment Finance, with Honors, from the University of Illinois at Urbana-Champaign. He then earned his J.D. from Marquette University Law School and his LL.M. degree in Real Estate Law, with Honors, from The John Marshall Law School. This article is one of a series of four articles that discuss various aspects of global expansion in Latin America. Subsequent articles will address other key considerations in preparing for global expansion, including conducting country risk analysis, conducting corporate self-assessments and assessing the impact of NAFTA and FTAA on globalization efforts. Mr. Olsansky can be contacted at aolsansky@yahoo.com.


 
 
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