The Impact of Globalization on Business

By Mike Myatt, Chief Strategy Officer, N2growth

Economic Isolationism is no longer prudent...I have traveled to more than 22 countries and have had the opportunity to transact business in various parts of Asia, the Middle East, Canada, Central and Latin America, Russia and former Eastern Block countries, India, and the European Community. Conducting business on a global basis has always been of great personal interest to me, and it has also been both a pleasurable and financially rewarding experience. However the days of doing business abroad are no longer a luxury. The ability to conduct business internationally is an absolute necessity if you hope to remain competitive in today’s marketplace. In today’s post I’ll look at the impact of globalization on business…

Expanding the geographic footprint of your business has always been an expensive and risky proposition – the risks have not gone away, they’ve just shifted. I believe we’re in an environment where we have a short window (3 – 5 years) before the landscape changes again. Currently, globalization is a developing and stabilizing force, but I’m fearful that the interdependencies now shoring up some of the risk, may at some point down the road turn against us in the form of financial ripple turns Tsunami.  Here’s the caution – times change and markets are fluid. Short term opportunity abroad abounds, but with that opportunity comes the potential for unforeseen future risk. That said, and with eyes wide open, if you are not taking aggressive steps to expatriate your business then you may be making a big mistake.

In today’s marketplace conducting business internationally is as much of a defensive play as an offensive play.  In examining the upside of going global, consider the sheer size of international markets as contrasted with the size of the domestic market and you will likely find that the majority of your potential customers live abroad. So if you could double, triple or quadruple your revenue why wouldn’t you aggressively pursue that goal? Now consider the downside of not going global –  if your company is not pursuing those customers your competition will be. They will not only take a first mover’s advantage of securing customer loyalty and brand recognition, but they will also tie-up key partners and distribution agreements. As consumers continue to become more demanding and the world economy continues to flatten there will soon be an expectation that you be able to serve multiple markets in a seamless fashion. Being a slow adopter in today’s world could eventually damage your business.

The phenomenon of “Globalization” is not new. In fact, it has been creeping up on us since the dawn of time; it just hasn’t been so visibly impactful until recent years. The broad macro-economic effects of globalization being experienced today arguably became most identifiable with the end of the cold war, and have only continued their rapid advancement with the development of third world countries and other emerging markets, establishment of free trade agreements, the creation of the Internet and other technology/communications improvements, the growing multi-national footprint of business, the emergence of the European Community, the stabilizing impact of the Euro on global currency markets, as well as the increased liquidity of more sophisticated and efficient capital markets.

The above referenced worldwide macroeconomic maturation, more commonly referred to today as “Globalization,” has served to stabilize business and financial markets in such a dramatic fashion that many industry pundits have yet to reach an understanding of the depth and breadth of the impact it has had on lowering political, financial, and economic volatility. Here’s the trick – markets don’t go up for ever, and when you tie your fortunes to a broader set of variables and unknowns you expose your business to the potential for a domino impact that will work against you. I mentioned a 3 -5 year window above, but like anyone who looks forward, this is just my best guess. At some point in the near to mid term, I believe we’ll see a shift in markets that unwind much of the current stability driving our current frothy capital markets and business expansion.

Let’s examine the stabilizing factor globalization has had on the world economy. Today’s trade deficit, petroleum pricing, down equity markets, housing crisis, constricted flow of funds, and overall cost of living should be challenging us more than it is. Conventional economic theory would suggest that with many of the negative economic metrics in play today, our interest rate environment should more closely resemble that of 1980 than the low interest rates we are experiencing today. The difference between today’s financial landscape as contrasted with that of 1980 is the emergence of a truly global economy which is acting as a stabilizing factor. In fact, when the US went through the Great Depression it was largely a result of having an isolated economy. If (more likely when) the US economy does falter again, the inter-dependant nature of the global economy will likely stave off a collapse. In the event of severe financial turmoil in the US, you would see foreign investment from the G7, and countries like China, Japan, and Dubai would see it as an opportunity to affordably acquire interests in US companies.

The theory espoused above, while working for us presently, can only hold true for so long…The stability we are experiencing now, could turn against us if the economic downturn continues for an extended period. You see, the interdependancy that is presently shielding the US could in fact turn into a global domino effect causing a worldwide recession if the right combination of things fall into place. I guess what I’m trying to point out here is that the current hedge could turn into an adverse accelarant in a worse case scenario…

Also keep in mind that emerging markets in Eastern Europe, India, Latin America, China and the rest of Asia present scenarios for higher growth, even on a risk adjusted basis. On an aggregate basis the statistics are impressive. For example, currently 80 percent of the world’s population accounts for 20 percent of world GDP. By 2015, 50 percent of world GDP will be accounted for by emerging markets. Consider the following:

1. Rising Economies: Over the past decade, China has routinely experienced 8 percent to 9 percent annualized growth and India has followed closely with 7 percent annualized growth.

2. Demographics: For the most part, these markets represent younger populations, growing numbers of well-educated professionals, an expanding middle class, growing consumer bases, urbanization, and rising incomes. In addition, the structure of family life for these modern middle class populations is assuming the “western” nuclear form and moving away from the more traditional extended cohabitating family unit.

3. Commercial Demand: The economic expansion, as well as the presence of global companies that bring employment oriented around intellectual capital, is creating demand for modern, western style commercial real estate infrastructure. Core assets such as office, industrial, retail, multi-family, and hospitality are all experiencing rising demand.

4. Infrastructure Improvement: While communications, utilities, and efficient transportation can still be spotty in areas, it is much improved over what one would have experienced even a decade ago. In most metropolitan areas you will have most of the creature comforts that you experience in the United States.

5. Closed market systems opening up: Most successful emerging markets have been engaged in systematic reform of basic societal values we take for granted in the developed world. These include property rights, legal process, and published regulations and statues. In addition, specific reforms such as privatization of state owned industry, relaxation of capital controls, and liberalization of rules regarding foreign direct investment are all encouraging growth and investment.

In order to meet increased consumer demand many businesses are attempting to expand their geographic footprint and extend their value chain to an international level. The impact of globalization on business is best evidenced by the huge proliferation in cross-border transactions. In order to protect yields and maintain competitiveness, businesses are continuing to diversify their footprint as it lowers the beta factor on their investments by spreading risk across a broader market.

There is nary a week that passes where I don’t speak with offshore entities looking for inbound opportunities or domestic businesses seeking outbound plays. The bottom line on globalization is that it creates an opportunity for businesses to expand revenue streams, diversify risk and increase brand equity.  My suggestion is to get a toe hold in the global market before the ship leaves the harbor and your window of opportunity has closed. I would also suggest you pick your markets well, and that you realize a few years down the road, the landscape will look differently than it does today – this could work for you or against you. Use caution.

Web Applications Gain Ground on Desktop Applications

By Mike Myatt, Chief Strategy Officer, N2growth

I usually resist the temptation to write on the topic of programming as the subject matter of writing code doesn’t usually speak directly to my audience. However every now and then an advancement progresses far enough that its impact merits coverage. Besides, I’m a closet geek and I just need a fix every now and then, but have no fear as I promise to keep this posting brief.

The advancement I want to make you aware of is called AJAX (not what you clean your kitchen sink with) which stands for Asynchronous JavaScript Technology and XML.  A little background As amazing as the Internet is, web applications have always played second fiddle when compared to desktop applications in terms of their speed and efficiency. Put simply desktop applications are smooth, seamless and fast while web applications have historically been clunky and slow.

The difference in performance has been that web applications (until AJAX) have had to rely on plug-ins and a variety of browser-specific tools to function. This dependency caused web pages to have to load or refresh to change content. With the use of AJAX web applications no longer require plug-ins and browser-specific features to load content. By using AJAX, web applications are rapidly closing the performance and usability gap with desktop applications by becoming more dynamic and interactive.

While the elements that come together to make up AJAX have been around for quite sometime it has only been since 2005 that mainstream web browsers have evolved to the point of allowing AJAX to become a current application development phenomenon. The early days of AJAX development were fraught with construct faults that required numerous workarounds, but if you think AJAX is a fad, think again A representative sampling of websites currently using AJAX to improve the customer experience include AIM, MSN, Google, Apple and Yahoo.

You are now armed with just enough information to be dangerous (also enough to impress the IT guys) but at least as you notice the usability and performance of web applications improving you’ll know why. I promise I won’t do this again for a while.

The Typical Approach to Capital Formation is often the Wrong Approach

By Mike Myatt, Chief Strategy Officer, N2growth

The architecture of your corporate capital formation strategy should be engineered by design and should not be something that evolves by default over time. However all too common is the enterprise that organizes itself improperly out of the gate by making the wrong choice of entity, issuing the wrong type, class and amount of stock or member units, seeking equity investments either from the wrong sources or at the wrong time, utilizing the wrong form of debt financing and the list goes on In today’s post I’ll examine some common capital formation mistakes to avoid.

I conducted an informal pole not too long ago with the goal being to try and understand how entrepreneurs choose to organize their companies.  The following five questions were posed to a group of bright, successful and sophisticated entrepreneurs and the answers received ranged from the sublime to the ridiculous, to the very enlightened. The answers displayed below are representative of the most common responses:

1. How did you select the your entity structure? “I asked my accountant which form of entity to use and he said that a Sub S would be the best choice for minimizing my tax burden”

2. How did you organize your capital structure?  “My attorney just told me to issue 100 shares of common stock.”

3. What was your capital formation plan? “I had a little cash saved up and I figured once I had been in business for a while and established some revenue I’d get a bank loan.”

4. What was your valuation strategy? “I didn’t really have a valuation strategy I thought it would take care of itself at the right time.”

5. What was your exit strategy? “I didn’t really have an exit plan per se, I just thought I’d survey my options when the time was right and see what produced the best return.”

The truth is I’ve seen companies make all the wrong choices in their formative stages and yet still do well. However these companies that have succeeded in spite of themselves had the luxury of having the time and the money to reengineer their business at a later date. The sad reality is that most companies don’t have the time or the capital to unwind critical mistakes in their strategic financial plans. 

My advice is simple Do not fall into the trap of working with a small “mom and pops” accountant or attorney; rather seek out the highest caliber professional advisors when developing your corporate financial plan. Time spent in the development of a sound strategic financial strategy will help your company secure capital at the best terms, rates and conditions thereby allowing your company to scale by leveraging the lowest blended cost of capital into the best valuation resulting in the highest return on equity.

About ready to promote your CFO into an operating or strategy role? You may want to think twice

By Mike Myatt, Chief Strategy Officer, N2growth

When the Chief Executive Officer is looking to fill a senior operating or strategy position it is common to consider the possibility of promoting the Chief Financial Officer into that role. After all CFO’s are senior executives who typically exhibit sound judgment and are used to being charged with great levels of corporate and fiscal responsibility.

From the CFO’s side of the equation their only potential to move up in the corporate hierarchy is to move out of finance and into operations or strategy. For those CFO’s looking to advance their career this typically means taking on the title of President, Chief Operating Officer, Chief Investment Officer or Chief Strategy Officer.

As you can see from the text above it is only natural to consider the possibility of filling vacant C-suite operating and strategy positions by advancing the CFO. The problem lies in the fact that what seems like an obvious win-win move rarely works as seamlessly as all parties would like to think. 

Case in point Most of us have observed the scenario where a CFO with little or no operating or non-financial strategy experience gets promoted to President or COO and have in turn witnessed the corresponding chaos that inevitably follows. The story usually unfolds like this:

1. The CFO in their new operating role and increased position of authority decides to reduce commitments to business development. After all, what do all those people do except travel and spend money? It certainly is an easy way to cut costs

2. MarComm; it just doesn’t seem prudent to make such heavy expenditures on marketing, communications, advertising and public relations And oh those events and trade shows that are so frivolous; I’ll reduce those commitments as well.

3. Now that some surplus funds have come back into the budget, I’ll increase commitments to IT, accounting, HR and let’s not forget legal…and so the story goes.

By the way, the changes noted above usually take place with very little communication which causes a sense of uncertainty across the enterprise and a corresponding rapid downturn in morale. What the finance savvy CFO has just done in his/her first few acts as a President or COO is disrupt the entire culture, increase cost centers and decrease profit centers, but boy is this operation lean and mean.

The reality is that the near term funnel will not likely be impacted, but when revenue starts to evaporate in forthcoming quarters because customers are not being serviced and new deals are not being added to the pipeline due to sales people leaving the company and the corporate brand losing visibility things start to get a little tense. You see there is no substitute for operating experience. The most brilliant CFO if void of operating experience will make similar mistakes to those mentioned above when taking over the executive level operating or strategy positions.

At this point in time you may be saying to yourself the author really doesn’t like CFO’s. Quite to the contrary, at one point in my career I served as a CFO and I understand better than most that CFO’s play a critical role in the success of any business. In fact one of my first recommendations to any client is hire the best CFO they can afford. One of my next recommendations is to start mentoring the CFO in the non-financial aspects of business. After all, if the Chairman or CEO appoints the CFO to an operating or strategy role without the experience necessary to pull if off, the resulting chaos isn’t really the fault of the CFO, but rather it belongs to the Chairman/CEO that set him or her up for failure.

Accountants rarely have training or experience in sales, marketing, advertising, public relations, non-financial strategy and tactics, and usually have little experience in terms market knowledge from a competitive, production or operating perspective. Accountants are trained in debits and credits, assets and liabilities, and other matters pertaining to balance sheet and profit and loss statements. They are masters of retroactive analysis as their job is to document and report on historical events.

Let it be noted that I am a strong advocate of sound financial governance and best practices in cost containment. However not when applied in a vacuum irrespective of the ripple effect across the enterprise. An enterprise can have all the cost containment in the world, but without revenue what does it matter? At the President or COO level the executive has a broader sphere of influence and will have many more points of critical contact both internally and externally than will the typical CFO. Therefore having experience across a broad range of skill sets and competencies is mission critical for a company’s executive operating and strategy talent. 

The moral of this story is simply to hire/promote the most experienced and discerning people possible into executive operating positions. This can and often does include a former CFO that has been properly trained and mentored.