What are the challenges to managing a global business?
Developing organization and human resource strategies across multiple borders should not simply be a matter of adapting a domestic model to accommodate changes in distance and global scale. Starting with a global mindset discussed earlier, you will have to develop a fresh perspective in order to take into consideration the unique challenges of doing business globally.
Human Resource Management Issues
There are certain human resource management issues that are particular for the global enterprise. The key issues involve staffing policies, such as selecting the right people with the right mixture of local versus home experience; managing the expatriate manager; and dealing with particular problems like repatriation. Others issues include understanding the challenges of living and working overseas, performance appraisals from a distance, training and management development, compensation packages, and labor relations and organized labor laws.
Finally, it is very important to remain focused on being the market leader. As Susanna Kass, a CEO who served for international operations at eBay explains, “We are not looking to be in twenty-four markets all at the same time. We are looking to have a very successful community for every market we enter. So it’s more important to us to be the leader in the market we are in versus being in every continent.”
Managing Accounting and Control Issues
We examine two key financial issues. First, we look at the accounting issues. Doing business in different countries means differences in accounting standards. But this also includes differences in relationships between business and capital providers, which can place restrictions on raising money or borrowing locally through individual investors, financing community (banks, investment banks, venture capital), and the government.
Other accounting issues include inflation-accounting, differences in multinational taxation, U.S. taxation of foreign-source income, and determining corporate income tax and indirect taxes, such as the value-added tax (VAT), withholding tax, and miscellaneous taxes on business transactions.
The second financial issue focuses on managing foreign exchange rate movement risk. Foreign exchange rate exposure is defined as the risk that future changes in a country’s exchange rate will hurt the venture’s operating income.
There are five types of exposure to foreign exchange risk. The greatest risk is from transaction exposure, the net cash flows from individual transactions. It is affected by fluctuations in foreign exchange values; ventures need to think about this before establishing an invoice policy (what currency), and pricing strategies (how much).
Other risks include translation exposure; the impact of currency exchange rates on the reported consolidated financial statements; operating exposure; long-term effect of changes in exchange rates on future prices, sales, and costs; tax exposure, which is determined by each country; and finally, interest rate exposure, which is the difference and sensitivity to the value of the London Interbank Offered Rate (LIBOR).
Managing Risks and Challenges to Going Global
Entering new country markets unprepared can often lead to disappointing results as well as detract from efforts in your domestic marketplace. One of the first challenges is how to appraise the success of any global business activity. We have all too often found that a global business quite literally “takes on a life of its own” and grows with specific strategy, management, and no specific performance metrics. Measuring the ROI is a complex activity that involves analyzing the many variables particular to global expansion.
There are additional costs in developing products to be used in global markets, and there are additional administrative costs in creating marketing and sales materials, or obtaining special export licenses. There are also longer sales cycles, longer cash conversion cycles, and the difficulty of trying to determine return on investments when there are multiple currencies involved.
All in all, it is far all too easy to fall into the trap of defining what constitutes a “success” too narrowly because each product/market situation requires that you set different objectives and establish a different performance metrics process.
For example, the complexities of shipping and logistics are overwhelming. In fact, the hardest aspects of circumnavigating the business world fall into two broad categories: how to get an order from one place on the globe to another, and how to negotiate the Byzantine bylaws of trade and customs regulations.
Other challenges include having to learn new business practices, as well as dealing with insufficient technology, local employee hiring, regulatory hurdles, international transaction costs, currency differences, and establishing local partnerships.
Monitoring “country risk” is most challenging for small ventures. Large corporations like IBM, General Motors, and Coca-Cola have huge departments for monitoring this specific challenge. Country risk is composed of a handful of challenges. For examples, there is the challenge of dealing with “political risk” which is dealing with the overall attitude of host governments, attitudes of consumers, expropriation, racial strife, religious freedoms, civil strife, corruption, nepotism, nationalism, war, and bureaucracy.
There is also the challenge of following and monitoring governmental controls, trade barriers, exchange rate policy tools, and foreign exchange systems, such as currency inconvertibility and the intervention of buying and selling of currencies in foreign markets. Finally, there is the challenge of monitoring the international flow of funds, each country’s “capital account,” or each country’s trade balances with the rest of the world.
Perhaps the greatest challenge is refreshing the global mindset. It is only through a fundamental shift in mindset that new opportunities are discovered. In fact, some suggest it should be a formal corporate process that consists of “global learning.” We stress that this formal process should be an ongoing commitment of time and energy and, perhaps more important, the ability to admit that you never know everything and to be always open to learning something new.