For a century and more, companies have ventured abroad only after establishing themselves at home. Moreover, when they have looked overseas, they haven’t ventured too far afield, initially.
Companies are being born global today, by contrast. Entrepreneurs don’t automatically buy raw materials from nearby suppliers or set up factories close to their headquarters. They hunt for the planet’s best manufacturing locations because political and economic barriers have fallen and vast quantities of information are at their fingertips. They also scout for talent across the globe, tap investors wherever they may be located and learn to manage operations from a distance — the moment they go into business.
Standing conventional theory on its head, start-ups now do business in many countries before dominating their home markets. In late 2001, Ron Zwanziger, David Scott and Jerry McAleer teamed up to launch their third medical diagnostics business, even though Zwanziger lives in the United States and Scott and McAleer live in England. They started Inverness Medical Innovations by retaining the pieces of their company that Johnson & Johnson didn’t acquire and immediately gained a presence in Belgium, Germany, Ireland, Israel, the United Kingdom and the United States. The troika didn’t skip a beat. In seven years, they wanted to grow the new venture into an enterprise valued at $7 billion and believed that being born global was the way to do it. They’re getting there: Inverness Medical’s assets were valued at $5 billion as of August 2008.
Today’s entrepreneurs cross borders for two reasons. One is defensive: To be competitive, many ventures have to globalize some aspects of their business — manufacturing, service delivery, capital sourcing or talent acquisition, for instance — the moment they start up. That may sound obvious today, but until a few years ago, it was standard practice for U.S. venture capitalists, in particular, to require that the companies they invested in focus on domestic markets.
The other reason is to take the offense. Many new ventures are discovering that a new business opportunity spans more than one country or that they can use distance to create new products or services.
Let’s look at the challenges start-ups face when they are born global and the skills entrepreneurs need to tackle them.
Global entrepreneurs face three distinct challenges.
DISTANCE. New ventures usually lack the infrastructure to cope with dispersed operations and faraway markets. Moreover, physical distances create time differences, which can be remarkably tough to navigate. Even dealing with various countries’ workweeks takes a toll on a start-up’s limited staff: In North America, Europe, China and India, corporate offices generally operate Monday through Friday. In Israel, they’re open Sunday through Thursday. In Saudi Arabia and the UAE, the workweek runs Saturday through Wednesday.
A greater challenge for global entrepreneurs is bridging what the British economist Wilfred Beckerman called “psychic distance.” This arises from such factors as culture, language, education systems, political systems, religion and economic development levels. It can heighten — or reduce — psychological barriers between regions.
CONTEXT. Nations’ political, regulatory, judicial, tax, environmental and labor systems vary. The choices entrepreneurs make about, say, where to locate their companies’ headquarters will affect shareholder returns and also their ability to raise capital.
Some global entrepreneurs must deal with several countries simultaneously, which is complex. In 1994, Gary Mueller launched Internet Securities to provide investors with data on emerging markets. Three years later, the start-up had offices in 18 countries and had to cope with the jurisdictions of Brazil, China and Russia on any given day. By learning to do so, Internet Securities became a market leader, and in 1999, Euromoney acquired 80 percent of the company’s equity for the tidy sum of $43 million.
RESOURCES. Customers expect start-ups to possess the skills and deliver the levels of quality that larger companies do. That’s a tall order for resource-stretched new ventures. Still, they have no option but to do whatever it takes to retain customers.
COMPETENCIES GLOBAL ENTREPRENEURS NEED
All entrepreneurs must be able to identify opportunities, gather resources and strike deals. To win globally, though, they must hone four additional competencies.
ARTICULATING A GLOBAL PURPOSE. Developing a crystal clear rationale for being global is critical. In 1999, for example, Robert Wessman took control of a small pharmaceuticals maker in his native Iceland. Within weeks, he concluded that the generics player had to globalize its core functions — manufacturing, research and development and marketing — to gain economies of scale, develop a large product portfolio, and be first to market with drugs as they came off patent. Wessman faced numerous hurdles, but he stuck to the strategy. Actavis now makes 650 products and has 350 more in the pipeline. In 2007, it generated revenues of $2 billion and had become one of the world’s top five generics manufacturers.
ALLIANCE BUILDING. Start-ups can quickly attain global reach by striking partnerships with large companies headquartered in other countries. However, most entrepreneurs have to enter into such deals from positions of weakness. An established company has managers who can conduct due diligence, the money to fly teams over for meetings and the power to extract favorable terms from would-be partners. A start-up has few of those resources or bargaining chips.
SUPPLY-CHAIN CREATION. Entrepreneurs must often choose suppliers on the other side of the world and monitor them without having managers nearby. Sometimes the global supply chain lies at the heart of the business opportunity. Take the case of Winery Exchange, co-founded by Peter Byck in 1999. The California-based venture manages a 22-country network of wineries and breweries. Winery Exchange works closely with retail chains, such as Kroger, Tesco and Costco, to develop premium private label products. The venture has succeeded because it links relatively small market-needy suppliers with mammoth product-hungry retailers and provides both with its product development expertise. In 2006, Winery Exchange sold 2 million cases of 330 different brands of wine, beer and spirits to retailers on four continents.
MULTINATIONAL ORGANIZATION. The competencies entrepreneurs need for coordination, control and communication in global enterprises include building trust, compensating for the lack of visual cues, respecting cultural differences and dealing with different institutional frameworks and incentives.
Start-ups cope with the challenges of managing a global organization in different ways. Internet Securities used a knowledge database to share information among its offices around the world, increasing managers’ ability to recognize and solve problems. Inverness Medical hired key executives wherever it could and organized the company around them rather than move people all over the world.
Entrepreneurs shouldn’t fear the fact that the world isn’t flat. Being global may not be a pursuit for the fainthearted, but even start-ups can thrive by using distance to gain competitive advantage.
(Daniel J. Isenberg is a senior lecturer at Harvard Business School in Boston.)