Cocooning, or competing only in your home markets, may make you feel secure, but it is not an option in today’s global economy. Being engaged and involved in global markets, these co-authors argue, is imperative. Nothing less than access to dynamic knowledge and innovative ideas are the main benefits to companies that travel beyond their borders.

The authors are also co-authors of From Global to Metanational: How Companies Win in the Knowledge Economy, (Harvard Business School Press, 2001), on which this article is based.

Faced with backing either Motorola or Nokia as the potential winner in the early days of the mobile telephony wars, most commentators would probably have bet on the American company. After all, cellular telephony had been invented in America-at Bell Laboratories, and Motorola was among the first to mass produce mobile telephones. It had sophisticated suppliers of everything from semiconductors to topflight advertising on its doorstep. So then, how did Nokia, a little-known upstart from the edge of the Arctic Circle leave Motorola behind and manage to become the global leader in mobile telephony? The answer, essentially by monitoring the radar for emerging phenomena in markets around the world – not just the domestic market, is a cautionary tale that every company must learn, and can profit from. In this article, we describe how companies can learn from developments in global markets and how they can leverage that newly acquired knowledge to compete and win.

The ace up Nokia’s sleeve was its ability to plug into knowledge about new technologies and emerging customer needs from every corner of the world. It was the first to see the potential of a mobile phone as a fashion accessory from its observations of trendy customers in Asia. It understood the need for customised handsets from its experience in Europe, where it first became apparent that there were different segments of users. Observing pilot users across Scandinavia, it was among the first to recognise that digital technology could dramatically improve the functionality of mobile phones. And in China, India and Africa, it saw that mobile phones could potentially become substitute for wire-line phones.

While Nokia prospected the world for nuggets of insight about promising technologies, diverse customer behaviour and new ways to use mobile phones, Motorola continued to develop its products based on its knowledge of the customers and technologies in its U.S. backyard. The result: Motorola missed the shift to digital mobile telephony and the growing strength of the European GSM standard. It didn’t see the potential to turn the phone into a fashion icon; it was slow to take on board the new ways mobiles were being used and to recognise that a broader, but more fragmented user base would spell the end of “one-size-fits-all” products. This myopic approach to competition, and the failure to engage fully with the rest of the world and capture the potential of global markets and the innovative ideas in them, would cost Motorola dearly.

In today’s global economy, where knowledge is king, this story is being repeated in more and more industries. The booming business of flat-panel displays is a prime example. American and European display makers who weren’t watching developments in Japan with an eagle eye, and who did not integrate technologies and skills from both America and Asia, have been left behind, too late to master the technologies and customer understanding required to catch the “slim-line”, flat panel wave. Only alliances between Asian and Western companies succeeded; every one of the competitors who used only the know-how available in their home country fell by the wayside.

The lessons are clear: It is increasingly dangerous to rely on technologies and market understanding drawn only from your home territory. You are likely to face critical gaps in the knowledge you need to win. You risk missing important customer trends emerging overseas. You are exposed to competitors coming out of “left field” with unfamiliar tactics that catch you on the back foot. Myopic competition, innovating using local knowledge, perfecting your product or service to meet the needs of customers in your home market, and benchmarking yourself against domestic competitors – each of these has become a high risk strategy. Today, every company, whether it aspires to be a national champion or global competitor, needs to be engaged in and with countries around the world.

Fishing for knowledge in a bigger pond

Engaging with the world is not only sound defence; it can also act as a powerful new source of innovation. In five years of researching companies who determinedly set out to improve their businesses by fishing for knowledge beyond their local ponds, we found a string of impressive successes:

• ST Microelectronics, created by the merger of two struggling semi-conductor companies in France and Italy, was able to tap into innovative technologies and customer needs bubbling up in places like San Jose, Dublin, Helsinki and Singapore. This new knowledge enabled it to develop customised, “system on a chip” products. Armed with this innovative product line it was able carve out a gap in the market between competitors like Intel and ASICS, for applications as diverse as hard disk drives, mobile phones, and car navigation systems. The fact that it now is the fourth largest semi-conductor company in the world, having created more shareholder  value than any of its competitors bar Intel itself, demonstrates the power of assembling a knowledge base that more myopic rivals simply cannot match.
• Shiseido, the Japanese cosmetics and skin care products company, found its market share and margins under threat as competitors used their exclusive perfume brands to gain loyalty from distribution. But the knowledge base supporting fragrance product development and marketing that Shiseido needed was under-developed in Japan. Success came only from a sustained effort to internalise new knowledge from France – involving everything from starting production in Gien, close to other leading fragrance makers, through buying two prestige Paris beauty salons chains, Carita and Alexandre Zouari, to observing trendsetting customers first-hand, to hiring as CEO of its newly starting perfume company in France a lady who was the marketing head of Yves Saint Laurent Parfums. Shiseido did more than revitalise the distribution for its cosmetics business; it became a leading and very profitable player in the perfume business with products like Eau d’Issey and the Jean Paul Gaultier line.
• Polygram, which became the world’s largest record company prior to its sale to Seagram (and subsequently Vivendi Universal) for $10 billion, built an organization capable of identifying future global “hit artists” by searching for local talent in the bars and clubs of cities like Sao Paolo, Reykjavik, Naples, Paris, Athens, and Hong Kong. While rivals like Sony Music, RCA, and EMI fought over budding stars in New York and London, the time-honoured sources of global music talent, Polygram fished in a much larger talent pool. The result: more distinctive products, while avoiding the head-to-head war for talent.

How to learn from the world

To learn from the world, a company needs to come up with new ways to work in the international environment. It must become a global prospector, looking for hotbeds of emerging technology or bellwether customers that foreshadow future trends. But tapping into new pockets of knowledge around the world usually requires more than just short-term visits, “study missions,” searching the Internet or a visit to the Patent Office. Complex, subtle knowledge can only be gained through:

• Partnerships with lead customers: Using its knowledge prospecting skills, for example, ST identified Seagate and Western Digital as “strategic partners” from whom it could access the knowledge about HDD systems that it needed to create dedicated chips. Through such alliances, it located knowledge it needed in various customer sites in the United States and the Far East.
• Distributors: In their drive to improve their products, for example, Japanese and Korean consumer electronics firms often relied on U.S. mass merchandisers, such as Sears and Wal-Mart, to specify features and performance standards for them. This allowed them to access knowledge that paved the way for later investments in building their own brands and distribution channels.
• Suppliers can provide access to new knowledge. The Taiwanese electronics giant Tatung, for example, used purchasing as a powerful engine to access technology and capabilities from the United States, Europe, Japan, and Korea. This role was made explicit — Tatung’s purchasing heads report jointly to the heads of global purchasing and new product development.
• Collaboration with universities and public research centres can provide access to local scientific communities. The Japanese pharmaceutical company Eisai, for instance, engaged in scientific collaboration with local research hospitals and medical schools, to prepare for the development and registration of promising, new molecules it had discovered, particularly to fight Alzheimer’s disease.
• Targeted acquisitions: When the pharmaceutical giant Glaxo Smith Kline bought Affymax, a pioneer in solid-state combinatorial chemistry, it got more than a technology for speeding up its development pipeline. As a senior executive at GW put it, “There was a more strategic aim when GW bought Affymax. It was to have a group of technologists and scientists in the San Francisco area, in the middle of the hive of innovation.”

In many multinationals, valuable knowledge also exists within existing subsidiaries. But it often remains in those subsidiaries, under-utilised by a global operation that either doesn’t know about it, or local managers who can’t see its relevance outside their local market or facility. As Lew Platt, former CEO of Hewlett Packard (HP) put it: “If HP knew what HP knows, it would be three times as profitable”.

Tapping into new pockets of knowledge is the first stage of gaining competitive advantage by engaging with the world. In getting beyond this first stage, however, many companies fall into a deadly trap: creating a global debating society.

Avoid becoming a global debating society

It is easy to assume that investing in IT and communications systems to connect these pockets of knowledge across the globe will create value. But in our experience, this strategy runs the risk of turning the company into a “global debating society,” where every manager is ready to share a new, often contradictory, insight with their colleagues without any benefit to the bottom line.

To create shareholder value, the process of fishing for knowledge in a bigger pond needs to be disciplined, purposeful and focused. Engaging with the world needs to be driven by problem solving rather than grand ideals. Sometimes a nagging problem provides a ready-made source of energy and focus to turn wider engagement into extra profit. Recall that margins and market share in Shiseido were coming under pressure because it lacked the skills to design and market prestige perfumes. That well-defined problem focused the minds of Shiseido’s managers. The break-through came after several less than fully successful new product launches, when they recognised that sustained involvement in the French fragrance industry was required to provide the solution.

In other cases, a demanding new customer gives purpose and incentive to engage with the world in a new and profitable way. When ST Microelectronics’ sales people first approached Seagate in California in the early 1980s, it quickly realised that, as an “outsider” with a doubtful pedigree of European State ownership, it would need a compelling USP to get through the door. It proposed building the “power-combo” – a couple of integrated chips that would perform the functions of an entire disk-controller circuit board. Seeing the potential for improved disk drive performance at lower cost, Seagate was intrigued. Although ST had much of the technology to perform this feat in house, it didn’t understand the architecture nor the exact technologies and capabilities required to optimise data storage systems. Their demanding new customer, and the prospect of hundreds of millions of dollars of new sales, provided a powerful magnet to bring together knowhow scattered within ST and Seagate, and to fill the remaining gaps by fishing for nuggets of specialist knowledge around the world.

Not all companies, however, have the relative luxury of an obvious problem or a demanding customer to motivate them to engage with the world in a focused, profitable way.

Launch specific projects to create value

Rather than waiting for necessity to be the mother of invention, the CEO and senior managers should launch and nurture projects that will allow their companies to create new value by engaging with the world.

When Citibank decided to launch its Asian credit card business, for example, it recognised the enormous potential of structuring the project to leverage the intelligence from its 27-million cardholder operation in the U.S., its Diners Club International acquisition, and its 11 years of branch banking across 15 nations in Asia. Instead of simply replicating and adapting Citibank’s U.S. model, senior management established a diverse, international team. This team was charged with creating a new service platform – the Asia-Pacific Consumer Card – designed as a magnet to bring together knowledge scattered around the world. This kind of “metanational” innovation, leveraging diverse sources of knowledge, was key to Citibank card’s subsequent success.

To leverage engagement with the world in this way, CEOs need to select a potential innovation, a new business area, a new product or service, where the relevant knowledge does not all lie on home turf. In implementing this kind of project, a number of guidelines can be helpful:

• Pick a pilot project of strategic importance that is largely outside the realm of existing operational experience. By choosing such a project, the need to find and access knowledge from places and areas of expertise where the company is not currently strong will become obvious to all.
• Use the project to get people involved in prospecting the world for new knowledge. A good project will create, and clearly demonstrate, the need to look outside the company and home base for new knowledge.
• Allow the others to lead. Entrusting leadership for a major project for the first time to a location away from the home base is a strong signal of the need to learn from the world.
• Err on the side of excessive interaction and communications among members of the project team. Until your company gains experience in moving and integrating knowledge from different sources, use a variety of knowledge carriers, from data to people, with frequent interaction.
• As the project’s deliverable takes shape, forge a direct link between the project team and people in day-to-day operations. The habit of looking to headquarters as the fount of innovation dies hard. When the deliverable has a “mongrel” pedigree, there are likely to be severe problems in getting the day-to-day operation to accept it. It is therefore important to forge a direct link between the project team and a part of the operations network that must leverage the results of their labours.

Visible success in a few pilot projects will be far more effective in getting a company to engage with the world as a source of knowledge and innovation, rather than incremental sales alone.

Failure to take this kind of initiative to engage with the world in new ways not only exposes a company to an attack from “left field” (as Motorola discovered), it also risks losing important opportunities. Witness the experience of Procter & Gamble in the coffee business. For several decades Procter & Gamble owned Splendid, an Italian coffee roasting company and a leading brand in the Italian take-home coffee market. Through Splendid, P&G had access to a powerful reservoir of knowledge about the production, distribution and marketing of authentic, Italian espresso coffee, and to powerful insights on the consumer experience of enjoying an espresso or a cappuccino in an Italian coffee bar. But it viewed the potential of this knowledge narrowly: as a way to adapt the famous P&G brand building and product management skills to the Italian market – a peculiar place where people drank thick, dark coffee in preference to the traditional American brew. P&G’s myopic view of competition – both in Italy and, back home, in the U.S.- and its failure to engage with the world as a source of innovation, left the way open for Starbucks, a minute coffee roasting company from Seattle.

In the mid-eighties, Starbucks’ CEO spent some time in Italy and studied the technology and consumer behaviour in the Italian coffee market – knowledge that P&G had already “in-house” at Splendid for ages. He then combined what he learnt in Italy with world-class retailing and “fast-food” management techniques perfected in the United States. To the recipe, he added his understanding of American consumers and New York financial market to craft Starbucks strategy. The results are now legendary.

What made the success of Starbucks was not an innovative coffee blend – but rather an innovative “knowledge blend.” The amazing thing is that P&G had privileged access to all the components of the recipe, though some components were in other countries (Italy, for starters) or in other industries (for example, fast-food). But myopia was surely limiting – and hurting — P&G, as it couldn’t see much beyond its existing markets across the street. Eventually, in 1992, P&G sold Splendid to Philip Morris’ Kraft General Foods. You didn’t notice that either, did you? Well, nearsightedness is present even in the most global of companies.

Shutting out the world is no longer an option

Companies like Starbucks, Nokia, STMicroelectonics, Polygram and Shiseido point the way to a new kind of advantage to be reaped by engaging with the world as a source of knowledge and innovation, to see it for more than its market potential. But in an increasingly dangerous and uncertain world, hunkering down might look more appealing. Such logic is flawed. Today, more than ever, no company or country is an island. As the transportation of goods, information and knowledge becomes more fluid, we must choose to engage with the world; otherwise, it will engage with us.

Companies that are serious about winning in today’s knowledge economy will need to expand the net they cast for new knowledge. They need to prospect for interesting new technologies and consumer trends beyond those regions and locations that they dominate today, and anticipate new hotbeds of technology and bell-whether customers. Multinationals will also have to unlock the potential of knowledge that lies underutilised in their local subsidiaries. Those who doubt this need to ask one basic question: What share of all new knowledge relevant to my company’s future am I capturing today? If you don’t like the answer, it’s time to engage with the world in a new way.