Why - and How - Companies Must Go Global (page 2 of 2)

New Line started as a small independent, producing such low-budget films as the Nightmare on Elm Street series. But as it grew, the company found that it could no longer afford to make the outsize bets it needed to in order to compete. "It's one thing to make a film for $10 million and have $5 million of marketing. It's another thing to make a film for $50 million and have $25 million of marketing," he said.

After the company suffered a "near death experience," Parsons said, New Line executives decided to change course. "They realized they needed to have good financial underpinnings in order to expand and grow their business." To do that, New Line was sold to Turner Broadcasting, which gave New Line the ability to make bigger bets in hopes of gaining bigger rewards in the highly risky film industry. Turner, in turn, faced similar issues of scale, and merged with Time Warner a few years later for the same reason. The merger gave Turner a "stable, bigger balance sheet."

Not only are Time Warner's deep pockets essential to make such big bets as New Line's $300 million gamble on the Lord of the Rings cycle, but Time Warner's access to many forms of media distribution in many countries creates multiple opportunities to decrease the risk of that bet and increase its potential rewards, Parsons said. Although Time Warner runs New Line with the "spirit of an independent, the financial risks are real because the production and distribution costs of multi-million dollar films are incurred up front. "If the film doesn't open well on a weekend, you write off the investment on Monday. You're looking at a multi-million dollar hit. If you can't make that money, you're out of business."

Such forces pushing economies of scale can be seen not only in media, according to Parsons, but in many industries, including automobiles, telecommunications, and computers. "These are the economic imperatives of competing in a global market. It is driving globalization and consolidation in all industries."

The need to increase profits is another force that is pushing Time Warner to expand outside its home market. "Basically, we're a publicly traded company. The way we get value is on the basis of our growth...I'm not sure if in the long term it's the most sensible way, but it's a fact. What the market will pay for is growth, predictable earnings growth, quote unquote," he said.

For a large company, achieving that continued growth becomes difficult. Time Warner already has a 20-25% share of most forms of U.S. media. "We're the fat kid in the boat," Parsons noted. "For me to go up a half a point or down a half a point in market share is a big swing on the domestic front."

This is especially true in the advanced economies of Europe and the U.S. where the population is not growing, Parsons said. This demographic factor is yet another reason that global companies are looking offshore for new opportunities, to countries such as India and China, where the economy is growing and new consumers are being created at a rapid rate.

But serving those markets requires more than just shipping copies of the same material, according to Parsons. Asking, "how do companies globalize?" he answered that most of them go through four stages in their development of international markets. First, they take what they already produce for their national market and export it to overseas markets where there may be an appetite for such products or services. Next, they start to tailor their offerings for the offshore market. Third, they begin using domestic infrastructure in the offshore country to create products for that market. And finally, he says, they establish a deep enough presence in the offshore market that they can use it as a sourcing base to make products that are imported back to the home country.

As a result, companies are being forced to look outward in a way that they never did before. Parsons, who joined Time Warner as its president in 1995, said that when he joined, perhaps 16 of the company's top 18 managers grew up within 100 miles of New York City - 12 of them from Brooklyn or the Bronx. Many of these people couldn't find Europe on a map, let alone Asia," he said. That geographic limitation led to a conservative, "some people would call it constipated, perspective."

Today, Parsons added, Time Warner and many other companies need people who understand and are open to other cultures. "You have to bring globalization into your organization if want to develop the ability to appreciate a new culture. You have to be a step ahead of change."