[Editor’s Note: Former Seattle-area resident Frits van Paasschen has served in roles including CEO of Starwood Hotels and Resorts, CEO of Coors Brewing Co. and president of EMEA for Nike. His new book is The Disruptors’ Feast: How to Avoid Being Devoured in Today’s Rapidly Changing Global Economy. This excerpt is reprinted with permission.]
“Progress is impossible without change, and those who cannot change their minds cannot change anything.” – George Bernard Shaw, Author, and Playwright
Prosperity and economic development is reaching almost everywhere. The trend line has been building momentum for decades, accelerating as the digital revolution becomes a catalyst for transferring knowledge, connecting markets, and distributing capital. This transformation is a once-in-a-lifetime chance for companies to grow — if they are prepared for seizing the global opportunity. Here are five lessons to help companies and other organizations thrive in a global marketplace.
Lesson #1: Get Ready for a Bumpy Ride
Worldwide growth over the past 200 years has been interrupted by wars, revolutions, epidemics, famines and disasters. During any one of these catastrophic events, it would have been tempting to throw in the towel and conclude that the economic transformation had reached its end. It would have taken some discipline to hold to the more patient, trend-line view. That discipline would have been rewarded, because, after each interruption, the migration resumed anew.
My own experience watching China echoes this same theme. China’s metamorphosis from isolated poverty to economic power has been punctuated by intermittent turmoil. The past 30 years witnessed economic sanctions in the early 1990s, the Asian Financial Crisis in 1997, inflation and slowing growth in the early 2000s, the SARS epidemic in 2003, the global financial crisis, and in 2015, concerns about debt and residential overbuilding. The road ahead will have its inevitable fits and starts as the now-huge economy shifts from central planning to innovation, from infrastructure investment to consumption, and from environmental destruction to sustainable growth. Just when (and how severe) these fits and starts will be is hard to predict, but there are ways for companies to prepare for the volatility.
To start, it helps to give investors a clear picture of the trend line view. Capital markets are quick to punish public companies for “exposure to emerging market volatility.” When I was asked about Starwood’s risks in China, my answer was always the same: it’s better to be in the game riding the ups and downs than to miss out on a huge new market. Shareholders who hold the trend line view see the downturns as a buying opportunity.
There are also practical ways to manage the ups and downs. At Starwood, we grew by entering into management contracts. This helped minimize the company’s capital at risk compared to buying or building hotels outright. When I ran Nike’s business in Latin America and Africa, we found local producers for footwear and apparel. When those markets experienced downturns, at least we did not have several months of inventory en route from Asia.
At Nike we were also able to reduce our foreign currency exposure. We took on debt in the currencies of countries where we had profitable businesses. When countries hit economic problems, their currency typically falls in value. With local-market debt, operating losses could be offset by a devalued debt burden.
Another way to manage volatility is to pool resources across countries and regions. Small, dedicated geographic teams (say, in Latin America), share administrative services across regions. This can help balance workloads and avoid the toxic cycle of cost cutting and then rehiring as fortunes change.
Above all else, the best long-term insurance is to find the right partners. Starwood’s partnership with the Al-Shaya family in Kuwait began in 1966. For decades, they consistently invested in their properties and found ways to grow. After Saddam Hussein devastated their hotel, the family rebuilt the property and continued expanding into other properties.
Lesson #2: Instill a Global Mindset
People in different regions often live with different realities. A local team might have just returned from a tough meeting with partners complaining about the lack of relevant products. Meanwhile, executives at corporate headquarters, feeling budget pressures, may see global uniformity as their only practical option. Of course, balancing local market needs and global consistency involves all kinds of judgment calls. Market insight can matter more than spreadsheets when it comes to tailoring marketing, negotiating important deals, and evaluating talent.
Getting people to speak openly around the table is not easy even when they share a common language and culture. Open dialogue among participants whose native languages and cultural references differ is even tougher. Via conference call — without the benefit of visual cues — it’s hard to know if you are getting the information you need. Spending time together on market tours can be eye opening, but there is only so much that you can absorb on a whistle-stop tour. When I was in the Netherlands managing Nike’s business in Europe, the Middle East, and Africa, we had frequent visitors from world headquarters in Oregon. For one frenetic week, we would show them all that we could of different retailers, countries, and styles. Try as we might, I often sensed that we fell short in conveying the full picture. You have to live in a place — “buy groceries” there— to get a true feel for a market.
This belief stayed with me as I observed Starwood’s growth in China. Starwood enjoyed a “first-mover” advantage, dating back to when the first global-branded hotel in China, The Sheraton Great Wall in Beijing, opened its doors in 1985. Starwood’s executives in the region had been with the company since the beginning, and their talent, understanding, and guanxi were invaluable. The Sheraton brand, tired as it was in the United States, was still coveted in China. As a result, the company opened more hotels in China than its top three US competitors combined. In 2010, Starwood in China had nearly 100 hotels open and another 100 under construction—more than one third of the company’s growth.
All the same, I thought we could do better. Starting with my first visit to China in my role as CEO of Starwood, I saw how our local team managed to succeed in spite of “help” from global headquarters. For instance, they had not been allowed to translate marketing and training materials into Chinese. Other support was also long overdue: a dedicated in-market call center, Chinese-language web-booking capability, and dedicated hotel design and construction resources. Moreover, the 2010s and 2020s looked to be a critical period in real-estate development. China was about halfway through its urban migration, and whole new cities were being built. It is much easier to build hotels in the best locations when cities are forming than to clear space or displace competitors in already mature markets.
I knew Starwood needed a global mindset to stay ahead in China and to grow around the world. It was time to do away with terms like “domestic” and “international” that are based on a geographic frame of reference. We should not be a US company, I asserted, but a global company that happens to be based, most of the time, near New York City.
In the summer of 2010, I was mulling all this over on a weekend away. My wife Laura and I were kayaking on a quiet lake, and I mentioned to her that I wished we could relocate our global leadership team to China for a year, but that it was impractical. After a pause, she suggested going for a month or two. That seemed like a great idea, although I’d never heard of any company doing such a thing.
Back at the office, I suggested the move, half-expecting someone to come up with a good reason why the idea would not work. But no one did.
For about six weeks in the summer of 2011, our temporary World Headquarters became Le Royal Méridien on Nanjing Road, overlooking the Peoples’ Park in Shanghai. The relocation differed meaningfully from the usual tightly scheduled market visits that left little time for casual observation. Instead, we lived and worked our normal jobs alongside our local team.
The goal of our relocation was not to oversee our colleagues in China, but to learn from them. And we learned a great deal. For example, we had an early read on the importance of the mobile booking channel by observing Chinese travelers making last-minute mobile reservations. Our China organization also had to contend with what we called “extreme growth.” As a result, our capabilities in China for designing hotels, not to mention getting them up and running, were the best in the world. The same could be said for the innovative ways they identified, recruited, and trained more than 20,000 new people each year.
The headquarters staff that stayed behind in New York also got a taste of what it was like to be in a regional office. Toward the end, we set up a call for eight in the morning, Shanghai time, on July 5. We had a good laugh when our New York-based colleagues dialed in and reminded us that, for them, it was the evening of the Fourth of July.
For me, the biggest surprise was the amount of press coverage that we received. American journalists saw the relocation as an angle on how companies could succeed in China. In China, the news tapped into a sentiment that was still reverberating after the 2008 Beijing Olympics. Just like for Tokyo in 1964 or Seoul in 1988, the Olympics were a “coming out” party for China, a rite of passage on the global scene.
Our last day in Shanghai was an 18-hour marathon of press interviews. As the day ended, I sat alone with Starwood’s president for China. He summed up our relocation in a parable: He had once run a hotel with two chefs, one European and the other Chinese. One day, both chefs informed him that they were delighted to get the best part of the same large fish that had been brought to the kitchen—for the European chef, it was the filet, and for the Chinese chef, the cheek!
Having a global mindset begins with a willingness to listen, to trust, and as I often say, “to assume competence and good intentions on the other end of the phone.” The best decisions emerge through open debate among team members who not only share goals and values, but who bring different vantage points and expertise. It takes effort to build a culture based on trust and frankness, especially around the table back at headquarters. There is no substitute for experience a place and its people first-hand.
Lesson #3: Tailor Resources and Strategies to Key Markets
Too many organizations make the mistake of lumping together the emerging markets. China and India are often mentioned in the same breath. The comparison is understandable, but only in the broadest sense. Both countries have long histories and are home to more than a billion people. Their new growth eras can both be traced back to dramatic turning points: Deng Xiaoping’s ascent to power in 1978 and Manmohan Singh’s reforms in 1991. Both countries are developing quickly, and they face similar challenges concerning urbanization, pollution, and corruption.
But when it comes to culture, language, history, economic structure, and government, China and India are about as different as the United States and Indonesia. The contrasts are palpable. On the most basic level, China is much more developed. From a similar level 35 years ago, its GDP is almost three times larger than India’s.
If China’s economy is advancing hand-in-hand with its omnipresent government, India is growing in the absence of oversight. Many Chinese ventures, such as hotels, are government-sponsored, either directly or through state-owned enterprises. Red tape is minimal. By contrast, for Indian developers, a hotel project might entail more than 100 different licenses, each one an opportunity for graft and delay.
China’s cities are being redeveloped with master plans. The plan I saw in Chongqing detailed immense areas for heavy industry and light manufacturing, as well as places like the Liangjing Cloud Computing zone. Old neighborhoods, like Beijing’s charming hutongs, are being torn down. By contrast, approximately 40 percent of Mumbai is covered by slums, whose ownership and control are complicated by politics and precedent. In India, entire new cities — like Whitefield, Navi Mumbai, and Gurgaon — have sprouted up haphazardly outside of older ones. Large-scale developments like Mindspace outside of Hyderabad are private, greenfield central business districts.
Building a hotel in China takes less than three years. The Wanda Group in China is famous for construction at “Wanda Speed,” about 18 months for a 300-room Le Meridien. In Mumbai, a young billionaire showed me a model of an elegant luxury tower. Later that day at the construction site, I saw a line of women in saris passing boulders, bucket-brigade style, in the blasting Marathi heat. No one was surprised that six years later, the project was nowhere near completed.
China’s economy depends too much on investment in major projects for roads, railways, and construction. For its transition to a consumer-led economy to succeed, the government will have to step back. India’s growth, by contrast, is being choked by a lack of infrastructure and absence of effective city planning. The dearth of proper roads, airports, and trains make getting around the country a nightmare.
In markets around the world, if you want to set up shop, you need a dedicated strategy and organization. However, few companies have the resources to tailor their work to 200 individual countries where growth is taking place. It makes sense to make natural groupings of countries, recognizing that any such grouping combines diverse markets.
Despite differences in wealth, one might group Africa and the Middle East. Dubai has emerged as an economic hub with great access throughout Africa. Europe is also an obvious regional grouping, even though across the continent, there are varying tastes, cultures, and business norms. Nike’s apparel business in Europe, for example, had to contend with variations in cut, color, style, and sizing.
The Latin American countries might also be grouped together. One must bear in mind, though, that the two countries that dominate the region’s economy, Mexico and Brazil, are actually quite different. In fact, the legacy of import substitution in Latin America means that each market has developed in isolation. Chilean retail is dominated by department stores, for example, which do not exist in Argentina.
As markets grow in the developing world, an ability to tailor and localize a company’s offerings can go far in establishing brands and taking part in economic growth. Getting a foothold early on is much easier than being a late arrival. Upfront investment in fine-tuning your approach to match market realities and local customer needs can go a long way.
Lesson #4: Pioneer with Internal Startups
Pioneering means going into a location well before it becomes an obvious hotspot. First-mover advantages and relationships can pay off for a long time. To succeed in new markets, set up small organizations that act like internal startups—flexible, willing to take risks, and patient with small numbers. Pioneering affords a great way for young, high-potential executives to gain experience by seeing many situations and learning from mistakes.
At Nike, I led a small team dedicated to the African market. We saw the region as a portfolio of countries in which to experiment, and we pursued small markets on a shoestring budget. It helped that Nike had a history of pioneering. In the 1960s, the company’s co-founder, Phil Knight, handed in a Stanford Business School project that laid out the original premise for his shoe company. It envisioned producing footwear at a low cost in Japan. As the years passed, the Japanese grew wealthier and wages rose. Nike shifted its manufacturing to Korea and Taiwan, and later on to Indonesia, Thailand, and China. In Vietnam in the early 2000s, we were told that production for Nike accounted for nearly 10 percent of the country’s manufactured exports.
Top management visits to pioneer markets are a great way to open doors. I have been to scores of such markets, shaking hands on a deal with the President of Madagascar; opening a dialogue with the Minister of Tourism in Sri Lanka; meeting the Mayor and Deputy Prime Minister in Juba, South Sudan; and spending an evening with prominent investors and ministers in Thimpu, Bhutan. Access to government officials and other key decision-makers can help the pioneering team find the right partners and get off to a good start.
Of course, every pioneering market is different, but my 2013 visit to the Republic of Guinea in West Africa was not unusual. I was there to sign a contract for a Sheraton hotel. I met several government officials, as well as the local developer, an Indian who had lived in Guinea for about 30 years.
Unlike South and East Africa, expatriate Indians are not common in the region. Back when our developer arrived, there was no Indian community at all in the country’s capital, Conakry. He’d been sent to Guinea “temporarily” to settle a business deal on behalf of an uncle based out of Thailand. Once in Guinea, he decided to stay and strike out on his own. Through the years, he had gotten into an array of businesses, including transportation, farming, and real estate. Slight and soft-spoken, he seemed observant and unflappable. His eyes sparkled when he described his ventures — and misadventures. Chuckling, he told me in a lilting Indian accent, “If you need to ship truckloads from here across the border into (neighboring) Niger, I am your man.”
Equanimity and a sense of humor would seem essential to endure, let alone thrive, in a place like Guinea. It ranks 179th out of 185 nations on the UN Human Development Index. Conakry is a filthy, sad place where you see families sleeping in the dirt along the side of the road. In 2014, it was one of only three countries in the world where Ebola was rampant.
The hotel construction site, however, was orderly and free of garbage. Our Indian partner had a cousin in Hong Kong who owned a construction firm. The cousin brought in Turkish workers led by an American project manager. Upon completion, the hotel would be up to global standards in terms of information systems, construction quality, energy efficiency, and design. Four hundred locals would be selected and trained for jobs at the hotel. For most, these jobs would be their first foray into the global workforce. Their wages, along with the local procurement needs of the hotel, would create other opportunities in the area. Projects like this may seem small compared to Guinea’s daunting problems, but they offer hope where prospects seem bleak. I wondered whether Sheraton Conakry might be like the White Swan Hotel in Guangzhou — the start of a transformation.
Lesson #5: Do Not Equate Economic Growth with Social Progress
Development has come so quickly to some countries that there are wide gaps between their newfound wealth and their lagging social and legal systems. These disconnects can hinder growth and trample on human rights. For global companies, they can also increase operating risk.
Each individual country differs in the strength of its legal system and social institutions. In Saudi Arabia, for example, social progress lags far behind wealth. One morning in Riyadh, I met with a minister to discuss Starwood’s plans in the Kingdom. He was cordial and sophisticated, and in perfect English, he shared his insights on the world economy and described plans for the new business center that I would visit later that day. Northwest of the city, the King Abdullah Financial District was a massive project with more than 40 towers — more than double the existing office space in the entire city of Riyadh. It would feature a stock exchange, a financial academy, seven mosques, and several hotels.
When we left the minister’s office, our driver made his way through traffic to the expressway. Passing the time, I opened a copy of the local English-language newspaper. Among the articles about local luminaries and world events, there was a small headline that I almost missed. It gave me a shiver when I read it: “Man Executed for Practicing Witchcraft.” There were few other details, but the article reported that the man “was in possession of books and talismans.” The article matter-of-factly reported that he had been found guilty — and beheaded.
The Kingdom of Saudi Arabia is home to stark contradictions. A long-time ally of the United States, 15 of the 19 perpetrators of 9/11 were Saudis. The ruling family (the Kingdom being the only country in the world named for its rulers) oversees trillions of dollars in state wealth. Drive around any city, however, and you can’t avoid signs of shocking poverty. The Kingdom has its social contradictions as well. It has glittering new shopping malls, but movie theaters are banned. Young men and women text on their mobile devices, but in public they are barred from seeing each other. Hotel restaurants have separate dining areas for men and women. I spent an evening with a real estate investor at his house near Riyadh who would not consider building a hotel outside of the Kingdom, because he wanted nothing to do with an establishment that might serve alcohol. “There will be no gray areas,” he bellowed emphatically. Over dinner, he served (illegal) wine, adding, “When I am in New York, I drink like a fish!”
Saudi Arabia is unique in many respects. In most countries, the biggest barrier to growth is old-fashioned corruption. Nigeria is Africa’s largest economy, with oil riches and a huge population, but its potential is being robbed by kleptocracy. In 2013, I traveled to Ibom. If that name doesn’t mean anything to you, maybe Biafra is more familiar. In the late 1960s, a region calling itself the Republic of Biafra tried to secede from Nigeria. The ensuing civil war left almost a million people dead.
Forty years later, Ibom is a state of about five million people, but its airport is small: a single-story dilapidated structure. When I visited there were a few planes on the tarmac, including a pristine Gulfstream 550 parked in the corner. The terminal inside was crowded with uniformed personnel. Mold covered the walls. After we arrived, men with blank expressions hurried us out of the building and into SUVs. The roadway from the airport was a continuous single-street village clogged for miles with a melee of carts, bicycles, and cars. Each side of the road was lined with shacks and open-air stalls offering everything from auto parts to dentistry to raw meat. It was teeming with people selling, carrying, and gathering. Average income was not more than $1US a day.
After about an hour, we reached a military compound encircled by walls two stories high and topped off with curls of razor wire. Standing by were soldiers with machine guns, a tank, and a few other military vehicles. We were special guests of the Governor of Ibom, the piously named Godswill Akpabio. Once inside the walls, we pulled up to a brand-new building. At the door, the Governor welcomed us in to his office. Behind him was a wall-sized photograph of himself with his friend, Nigerian President Goodluck Ebele Jonathan. Both were smiling out from under black fedoras.
As we walked to his meeting room, the Governor mentioned that he paid an extra $1 million to expedite delivery of his Gulfstream. His two American flight crews rotated two weeks at a time from Houston. He then complained with no discernible irony that his predecessor was only concerned with lining his own pockets. Governor Godswill assured us that he is a man of the people, having built 23 bridges in his state. In a manner that seemed both proud and off-hand, he announced that he also eliminated all crime. I stopped myself from asking why he lived and worked inside the armed protection of his compound. Strolling through his office, he told us that from his studio, he could supersede all other television broadcasts in Ibom. I was glad that he had shared this with us. A short while later, we found ourselves on-air with Governor Godswill telling his constituents that he had brought a global company to Ibom.
Saudi Arabia and Nigeria may be extreme examples of the disparity between wealth creation and social development. In reality, corruption and human rights violations present themselves everywhere. As the Chairman of Transparency International put it, “Corruption is a major cause of poverty, as well as a barrier to overcoming it.” Investors shy away from places with weak property rights, instability, and limited market access. Lax enforcement, underpaid state employees, and unneeded bureaucracy lead to corruption. When human rights are compromised, innovation dries up and the risk of unrest rises. Measures like the US Foreign Corrupt Practices Act and UK Bribery Act impose criminal penalties on companies influencing government officials anywhere.
The “no-risk” answer, of course, would be to avoid countries where corruption and instability are a problem, but that would mean missing out on global growth. Staying out of high-risk markets also does nothing to help reform. Innocent citizens are denied a path to better lives. Instead, companies should work hard to understand country risk, train and educate staff and partners in good practices, create open channels for whistleblowers, and invest in third-party monitoring. These measures are worth the price.
The prospects of rising wealth around the world represent a huge growth opportunity. Becoming a global company requires a sustained strategic commitment by top management. The potential gains demand nothing less.