New Economy: The Rising Cost of Waiting

If your company is doing business on the Internet, the pressures to globalise at Internet speed are-or soon will be-enormous.

After all, the Internet is our first real global medium-the business models that are developing on the Web tend to be globally applicable. People in Korea, for example, don't buy books or music or industrial parts much differently than people in Brazil, Germany or the United States.

Once a company has created a new Internet business model for one market, it has essentially created one for the entire world. Furthermore, Internet business models thrive on increased scale-popularly known as "Metcalfe's Law"-whereby, the value of the network rises exponentially with the number of people connected to it.

This effect is particularly evident in the rise of information portals like Yahoo Inc. and for sales intermediary portals like EBay Inc.

Given all the other issues that companies have to worry about-serving and building their home markets, for example-globalization can easily become an option rather than an imperative, but there is a price to be paid for waiting.

Delayed globalisation implies high opportunity costs in the sense that it gives local competitors around the world a chance to develop their own versions of EBay or Yahoo before those companies arrive on the scene. With established local players already in place, it will be much tougher for global companies to grab share in local markets, even with the advantages offered by the Internet.

However, our research suggests that companies should carefully consider the "cross-border scalability" of their business models before trying to go global. By this we mean the degree of additional financial and managerial resources needed to enter a new market abroad.

Companies selling pure information goods (whose products can be delivered online) generally have much less need for local infrastructure as compared with those selling physical goods (which must also establish a supply chain infrastructure that can reach customers in foreign markets).

On the other hand, the greater the need for local adaptation of the company's products, services and other elements of the marketing mix, the less scalable the model becomes in managerial and organizational terms. Certain products or services (such as telephone wireless service, for example), require very little adaptation across borders. Others (such as Amazon.com Inc.'s portfolio of books targeted to its German versus British customers) require considerable adaptation to the unique needs of the various markets.

As a portal providing Internet navigation services to its users, Yahoo's product was pure information. Thus, Yahoo did not need any warehousing or other logistics infrastructure in any market. Of course, Yahoo believed in offering localized content in local languages. Thus, before Yahoo's business model could be replicated in a new market, it required development of local content (in other words, search and classification of information about local websites) and localization of language.

Given Yahoo's strategy of being a pure navigator that helps customers access content developed by third parties other than itself, these were relatively straightforward, risk-free tasks. Thus, Yahoo's choice to move aggressively in foreign markets-before local imitators had a chance to spring up-was consistent with the very high scalability of its business model.

PSINet in Ashburn, Va., which began as an Internet service provider (ISP), had a more daunting challenge in going global. For even though its business model was essentially applicable anywhere (Internet access and hosting work the same way around the world), it needed expensive local infrastructure-namely high-capacity fiber-optic networks-to carry data in and out of foreign markets.

So PSINet pursued a voraciously acquisitive globalization strategy, buying up local ISPs around the world. After acquisition, the acquired customer base of the local ISPs could be easily plugged into PSINet's own lower-cost infrastructure backbone. PSINet could also use this backbone to bring global value-added services to the local market.

The good news for companies taking the globalization plunge is that once they are established around the world, the Internet will bring dramatic improvements to their ability to coordinate geographically dispersed operations. This will be increasingly true not just for large corporations with huge investments in information technology but also for small firms with relatively simple devices.

Consider, for example, the Lee Hung Fat Garment Factory, a Hong-Kong based clothing manufacturer. Lee Hung Fat has established production facilities also in mainland China and Bangladesh. A network of cameras on factory floors, all connected through the Internet, allows the company's operations director to transmit scanned pictures of samples or even parts of samples to his customers abroad, to track the operations at each of his factories and to hold videoconferences with his dispersed managers.

An important byproduct of dramatic improvement in ability to coordinate geographically dispersed operations will be that physical colocation of complementary activities will become less critical. As coordination across locations becomes better and cheaper, companies will face increasingly greater pressure to tap into the comparative advantage of different locations for every subactivity (whether internally performed or outsourced) in the value chain.

For the same reasons, companies will also have much greater access to a wider base of resources and suppliers worldwide.

These global Internet companies are not just science fiction, however. They already exist. Cisco Systems Inc. in San Jose, the networking equipment and services company, received 40 percent of its FY 1999 revenue of US$12.2 billion from outside the United States, with 80 percent of its orders coming over the Web self-configured by the customer.

Larry Carter, Cisco's chief financial officer, estimates that by running the company on the Web, Cisco is saving about $500 million per year (equal to one-sixth of its FY 1999 operating income of $3 billion). He added that given the scarcity of technically trained manpower and the complexity of the company's operations, Cisco simply could not have grown at a nearly 50 percent annual rate without living on the browser.

Cisco is a leading example of a "netcentric" global company that is not only finding ways to spread its business model around the world but is also providing a role model for how the global corporation of tomorrow might be organized and managed.

We are inclined to agree with John Chambers, Cisco's president and CEO, when he proposes that, in the Internet Age, the race will be won not by those who are big but by those who are fast. Of course, the interesting question then becomes: What happens when everybody is trying to be both big and fast? Over the coming decade, it should be a fun race to watch.

Do you think you need to go global now, or can you afford to wait? Let us know at neweconomy@cio.com. Vijay Govindarajan is a professor and faculty director for the Global Leadership 2020 program at Dartmouth College's Amos Tuck School.

Anil K. Gupta is professor of Strategy and International Business at the Robert H. Smith School of Business at the University of Maryland at College Park. Larry Carter, Cisco's chief financial officer, estimates that by running the company on the Web, Cisco is saving about $500 million per year.

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