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July 17, 2008

Regional Competitors in a Globalizing Industry

John Shoaf '10 and Diana Stastny '10
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This post is part of a series following the “Pre-MBA World Tour,” organized by Shoaf and members of the class of 2010 with professional, cultural and social objectives. Over the course of nine weeks, the Tour will be visiting 24 major cities throughout Europe, the Middle East, Asia and South America, meeting with prominent alumni and business leaders.

Traveling through Thailand, Malaysia and Singapore this week, we had the opportunity to visit with the senior-most executives of several different types of institutions and discuss the challenges of competing in a global industry — and within the emerging markets.

After meeting with the executives of some major financial institutions, we started to reflect on the contrasting strategies of regional and global entities. For example, how must the perspectives differ between OCBC (a regional bank in Singapore) and Citi (the ubiquitous giant in global banking)?

Any successful organization requires growth in order to stay competitive, but how does a comparatively small company like OCBC continue to grow if it has a limited domestic market? The obvious answer seems to be that it must look outside its own country and consider entering new markets, and particularly emerging markets.

It may sound simple, but the problem is that entering a new market can require the company to stomach years of losses and investment — anywhere from 3 to 15 years.

This means that only companies able to subsidize these unprofitable years will be able to sustain themselves. These are typically either large companies with large domestic markets (such as Citi) or companies backed by another large institution (such as a sovereign wealth fund). A firm with a small domestic market of, say, four million people is not able to sustain such losses, and the investment may not provide value to shareholders in the short run.

But the real problem is this: if the target market is not large enough to give ample returns on this investment (in countries such as Vietnam or Cambodia, for example), there may not be sufficient returns in the long run, either. The payback period is simply too long.

So how can a regional player compete in a globalizing industry? Perhaps the best way is to specialize, catering to the local market and focusing on profitability and efficiency rather than top-line growth. This would make the company an attractive acquisition target for a global player with a larger domestic market (such as Citi) that can grow through acquisitions, rather than organic growth. This in effect shortens the learning curve and increases the company’s ROI.

This leaves two questions: First, does it make sense for a regional bank apply a similar strategy to compete in emerging markets? And second, with local expertise, can a regional bank be more effective in servicing its customers than a global bank?

The challenges of global expansion are complex and the appropriate solution will differ with each unique institution. Our trip to Singapore gave us a valuable lesson, pushing us to consider the variations in strategy among firms with different sets of resources and at times, different goals.

Next stop: Manila

Comments

by Andrew Russakoff | July 18, 2008 at 10:34 AM

Interesting case, John and Diana. Thanks for reporting back from abroad and hope you are having a blast. This is a perfect case to evaluate using Prof Greenwald's framework, i.e. regional economy of scale. In this case, it would appear OCBC is best-served focusing withing its regional footprint and strengthening its regional economy of scale. As mentioned, this translates into increased efficiency, profitability, and shareholder value. Also as mentioned, growth beyond its regional footprint would be destructive to shareholder value.

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