Internationalisation in reverse: restructuring global operations during a downturn
THE ACADEMY OF BUSINESS STRATEGY
BUSINESS INTERNATIONALIZATION BLOG
Internationalisation in reverse: restructuring global operations during a downturn
AUTHOR
Luis da Silva (CBS) MA BSc BA
Internationalisation and expanding a business overseas is frequently associated with a period of growth. Businesses often only consider expanding when the business environment is positive and general growth in the broader economy is evident. However, the current economic climate including a long-running recession which is likely to continue in many sectors for some years to come, has led and is leading many businesses to rethink the geographic scope of their business. Businesses are also measuring more rigorously the ratio of revenue to cost that is evident in their operations away from home. While there are undoubtedly instances where difficult times create business opportunities, for existing or established businesses, cost and the need to focus are putting ever-increasing strain on distributed business models, in particular where senior management teams (and their associated costs) are being trimmed. Add to that, some element of political pressure and a wave of protectionism which due to the financial climate, is affecting companies’ outlooks on their markets, and it is evident that for a number of reasons not limited to business questions alone, companies are naturally looking more carefully at their international presence. It is therefore likely that many more businesses will find themselves having to take steps to reduce their exposure, than those seeking to increase it. For this reason, internationalisation in current times is as much, if not more, about managing international presence as it is about expanding internationally.
There are, broadly speaking, three categories of adaptation of a geographically distributed business (other than maintaining the status quo) which tend to be relevant in times such as those through which the world is passing:
Consolidation by reducing the size of an international operation, either through the amalgamation of operations, the creation of regional hubs or the centralisation of some functions;
Greater use of outsourcing, franchising or sell-off of regional businesses, to reduce fixed and direct cost; or
Closure and adjustment of the business model and the balance of business volume.
The consolidation of an international base is often the most obvious (and to some extent easiest) option available to a business with multiple locations. This consolidation model is less dramatic if one is dealing with a service-based business, as the likelihood of needing to deal with capital investments or with plants or physical premises, which are held other than on a lease basis, is low.
Physical consolidation is often a natural evolution of the regional business, by virtue of the fact that, over time, certain regional businesses will perform better than others. It is almost always the case that, unless the business has opted for a single regional base from which it will service the markets in proximity, the company will have created multiple physical locations serving different countries in a region or different regions within a country. Consolidation in this sense is often possible because, in the first instance, cultural and/or linguistic differences will be small(er than in regions scattered across a broader area). Secondly, it is likely that regional collaboration will exist between team members, with some or many overlapping clients who themselves have a regional presence. For this reason, clients will be accustomed to being served, not always locally, but through a combination of local and regional resources or suppliers.
Local businesses (especially in emerging markets) may also have grown under the guidance of experienced senior executives from another part of the business, some or all of whom may now be in a position to return, for personal or professional reasons, or by virtue of having successfully grown local management and promoted staff to continue the work. The ‘removal’ of foreign management, and any seconded foreign staff, is an immediate way of reducing the cost base of the local business. In instances where the presence of foreign staff with allowances and costs not common to the local labour force is extensive, a phase-out and handover planning exercise needs to be completed, to ensure the transfer and/or removal of these costs from the business.
Another area of obvious cost reduction is the removal of long-term contractors in any business. There is no doubt that in current times, with assignments more scarce and the need for all costs to be carefully motivated, there is margin for negotiation. Clearly, the business has every right to question the motivation (other than financial) of a long-term contractor (typically longer than two years). If they are prepared to align their destinies with that of the business in return for continuity and some degree of security, then they should be converted to local staff at standard rates used in the business. If this is not the case, they should be phased out as quickly as possible.
The centralisation of certain tasks and functions is a further method of reducing the decentralised cost base. While in a sense it might reduce the autonomy of the regions, and reverse the process of regionalisation that often occurs when businesses grow internationally, it is also a way of quickly reducing cost through enforced standardisation and centralised control which reduces the need for long-distance and more expensive contact between two points in the business. As long as the functions selected (for example, some aspects of accounting, some aspects of legal/HR, the sub-assembly of kits, much of corporate IT excluding the user interaction/interface, and others) are appropriate, the options are broad.
Outsourcing occurs when businesses take a step beyond centralisation, allowing a specialised third-party business to run some of their non-core operations. Again, IT, accounting, component manufacture, raw material provision, distribution, and many others, are all examples of business processes which might not need to be subject to the business’s direct internal scrutiny but easily served by a service level agreement. This must surely be a logical step to take in circumstances where the critical mass or volume of business is not there, for example after a downsizing or restructuring of local activities.
Taken a step further, a business may just conclude that, rather than bundle its subsidiary or regional businesses into a single regional hub, the specificity and uniqueness of one or more regional businesses may be such that it would be worth franchising or selling. Both of these routes involve considerations which are explored elsewhere, but generally the sale of a business is almost always more likely if any value beyond a brand (physical presence, team, local client base) has been created.
Under extreme conditions, it may just be more sensible to close an international operation. Clearly to do so can have far-reaching effects not only financially but in terms of the people involved. Notwithstanding the due care which must be taken when dealing with people whose lives are affected, and due consideration for local and national legislation, the business is ultimately accountable to its stakeholders for its viability. Generally, if the business cannot see itself trading in the black within a reasonable time frame (bearing in mind the general economic context, the local market and the trend in client business) or returning to a position of relative strength in its local market, then it is reasonable to stem the flow of losses by shutting it down. In that context, maximising value from any fixed assets and from any trained personnel that might be used in other operations is fundamental.
Ultimately, the ability of the business to maintain an international presence to the same degree as before may be affected by many factors. It is important that before the closure of any business, all other alternatives are comprehensively examined. Only in doing so, will it be possible to analyse the real options and decide on the most effective strategy for dealing with international presence during difficult times.
ABOUT THE AUTHOR
Luis da Silva (CBS) MA BSc BA is an approved Certified Business Specialist (CBS) with the Academy of Business Strategy and his specialist subject is business internationalization. He has achieved an MA, and BA from UNISA and a BSc from the University of the Witwatersrand. He has been employed as a CEO and board member of a listed company with a turnover of €250 million and value of €1 billion and has experience within the Manufacturing, Electronics, Banking, Agribusiness, Travel/Airlines and real estate industries. His clients or employers have included Fractional Villas Inc, Invest CV Limited, BGR Ltd, API Undercliffe Ltd, DMS Lda, Emeritis, Quillion Ltd, Datanomic Ltd, E-business Partners, PLAUT and Andersen Consulting. He has geographical working experience in the USA, UK and Brazil. His language skills include English, Spanish and Portuguese. His service skills incorporate business management, business expansion or turnaround and people management.
To contact Luis da Silva, please contact the Academy of Business Strategy by forwarding an email, or visit Luis’s CBS Blog.
