Innocents Abroad

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Despite regulatory reform, that buying binge never occurred. Meanwhile, Merrill's local rivals, with ample name recognition and deep pockets, snapped up many of the risk takers who did materialize. "When it came to retail, everyone thought the U.S. financial-services model was a global one, and it wasn't," says a Merrill executive who asked not to be named. "Local institutions had a better image, and competing with them was difficult." After a $600 million loss on the retail side, Merrill radically scaled back the business and is now earning slim profits, though it took a $2.2 billion charge largely related to operations in Japan.

Perhaps most important, says Root, a company needs to identify its competitive advantage and expand with a commitment to exploiting it. For Microsoft, that means developing and selling unique software; for Dell, it means selling low-cost computers and other tech gear direct.

For a company such as KB Home, being successful overseas meant appreciating that all housing markets are profoundly local. Since the mid-1980s, the American home builder has earned healthy profits in France, where it forecasts that revenues will jump 13%, to $650 million, this year. The firm made marketing decisions that "were considered crazy by local gurus," CEO Bruce Karatz says. KB chose not to build homes with basements a staple of French houses and instead offered amenities such as walk-in closets, garages and kitchens replete with appliances, cabinets and fixtures. French builders, in contrast, tend to add those features at the customer's request, which yields a more customized home at greater expense.

Would the same strategies succeed in other foreign markets? Alas, no. After forays into Belgium, Canada, Germany and England, KB decided that it is finished with new foreign adventures. In England, KB concluded that entrenched home builders were too powerful to beat. In Germany, labor was too expensive, and generations-old inheritance practices resulted in a quagmire of negotiations with families and local officials over developing parcels of land.

Even where KB made some profit in Mexico, for instance the company determined that the market was simply more trouble than it was worth. According to Karatz, KB entered Mexico in the mid-'90s on the premise that a secondary-mortgage market would develop and spark a home-buying boom. That market never bloomed. Meanwhile, profit from a successful development near Mexico City shrank because of currency movement. "Our failure to hedge the peso proved costly," says Karatz.

To consultant Root, such global misadventures suggest that firms are better off not investing abroad just because it's possible or popular the build-it-and-they-will-come school but only when rigorous analysis shows a strong potential for profits. "It's so popular for CEOs to talk about globalization," he says, "you'd think it was a golden path to success." But while globalization as a macro trend may be unstoppable, the reality for most companies, he argues, is that local conditions are even more powerful.

Think back to the Texans at TXU: while they suffered from a slump in wholesale U.K. energy prices, the firm also appears to have miscalculated some of the specific risks of expanding into Britain. TXU underestimated the threat from European multinationals and couldn't compete effectively after a shift in British public policy that wound up favoring its rivals. "The market just did not materialize as we expected," concedes a frank Erle Nye. "But we learned a lot of lessons that we can apply going forward."