Redefining Global Strategy, with a New Preface

Crossing Borders in a World Where Differences Still Matter

Pankaj Ghemawat

• Publisher: Harvard Business Review Press
• Year: 2018
• Print ISBN:
  9781316615027
  9781422138649
• eBook ISBN:
  9781633696075
• Topic: Business
• Subtopic: Business General
• Index: Business

New Tools for Succeeding Globally

Why do so many global strategies fail--despite companies' powerful brands and other border-crossing advantages? Because a one-size-fits-all strategy no longer stands a chance.

When firms believe in the illusions of a "flat" world and the death of distance, they charge across borders as if the globe were one seamless marketplace. But cross-border differences are larger than we assume. Most economic activity--including trade, real and financial investment, tourism, and communication--happens locally, not internationally. In this "semiglobalized" approach, companies can cross borders more profitably by basing their strategies on the geopolitical differences that matter; they must identify the barriers their strategies will have to overcome, and they must build bridges to cross those barriers. Based on rigorous research, Pankaj Ghemawat shows how to create successful strategies and provides practical management tools so you can:

• Assess the cultural, administrative, geographic, and economic differences between regions at the industry level--and decide which ones require attention
• Track the implications of the specific border-crossing actions that will impact your company's ability to create value the most
• Generate superior performance through strategies that are optimized for the three A's: adaptation (adjusting to differences), aggregation (overcoming differences), and arbitrage (exploiting differences)

Using in-depth examples, Ghemawat reveals how companies such as Cemex, Toyota, Procter & Gamble, Tata Consultancy Services, IBM, and GE Healthcare are adroitly managing cross-border differences. He also shares examples of other well-known companies that have failed at this challenge. Crucial for any business competing across borders, Redefining Global Strategy will help you make the most of our semiglobalized world.

PART 1

Value in a World of Differences

CHAPTER 1 SUMMARIZES evidence that the current state of the world is one of semiglobalization: levels of cross-border integration are generally increasing and, in many instances, setting new records, but fall far short of complete integration and will continue to do so for decades. The chapter goes on to explain why semiglobalization is essential for cross-border strategies to have distinctive content—as well as why failing to keep it in view can be a recipe for poor performance.

Chapter 2 collects the reasons that borders still matter and classifies them in terms of the cultural, administrative, geographic, and economic (CAGE) distances between countries. This framework is usually best applied at the industry level because different types of distance vary greatly in importance from industry to industry. But in most industries, countries of origin do have important implications for destinations—a point that mostly eludes more established frameworks for country analysis.

Chapter 3 discusses why—if at all—firms should globalize in a world in which distance still matters. It presents a scorecard for tracking value creation that includes but goes beyond the familiar components of size and economies of size. It also supplies a set of analytical guidelines and a list of specific questions to ask—and answer. The aim is to foster more realism about how cross-border strategies will add value in the face of large cross-border differences. Such strategies themselves are the topic of part 2 of this book.

1

Semiglobalization and Strategy

The globalization of markets is at hand. With that, the multinational commercial world nears its end, and so does the multinational corporation . . . The multinational corporation operates in a number of countries, and adjusts its products and processes in each, at high relative cost. The global corporation operates with resolute constancy . . . it sells the same things in the same way everywhere.

—Ted Levitt, “The Globalization of Markets,” 1983

A QUARTER OF A CENTURY after Ted Levitt’s bold pronouncements, excitement about the globalization of markets has given way to excitement about the globalization of production.¹ But what has remained constant is the vision of a globalization apocalypse, sweeping all before it. And this apocalyptic vision leads to a focus on strategies for a post-apocalyptic, integrated world—strategies that inevitably have a one-size-fits-all character. That is why Levitt’s definition of global strategy as a strategy for an integrated world still reigns.²

And, with apologies to my late colleague at the Harvard Business School, that definition is still as wrongheaded. In this book, I redefine global strategy to describe a broader set of strategic possibilities. I argue that differences between countries are larger than generally acknowledged. As a result, strategies that presume complete global integration tend to place far too much emphasis on international standardization and scalar expansion. While it is, of course, important to take advantage of similarities across borders, it is also critical to address differences. In the near and medium term, effective cross-border strategies will reckon with both, that is, with the reality that I call semiglobalization. The primary goal of this book is to stretch our thinking about cross-border strategies for a semiglobalized world.

This chapter begins by establishing that semiglobalization is, in fact, the real state of the world today—and tomorrow. It does so by taking some data on board, because, as the late Daniel Patrick Moynihan observed, we are all entitled to our own opinions, but not our own facts. The chapter then starts to address the implications for company strategy, using the example of one of the great border-crossing companies, Coca-Cola. Around the time that Levitt’s article appeared, Coke embarked on a global strategy of the sort that he recommended. The problems with that strategy took a while to surface, but by the millennium, Coke was adrift in a sea of troubles. Only recently has it started to regain its bearings. Other companies can either learn from Coke’s experience or rediscover the same lessons about semiglobalization the hard way, through trial and error.

Apocalypse Now?

According to the Library of Congress catalog, we are positively awash in books on globalization. More than five thousand such books were published between 2000 and 2004, compared with fewer than five hundred in the whole of the 1990s. In fact, between the mid-1990s and 2003, the rate of increase in globalization-related titles—more than doubling every eighteen months—surpassed the celebrated Moore’s Law!

Amid all this clutter, the books on globalization that have managed to attract significant attention have done so by painting visions of a “globalization apocalypse.” These volumes tend to exhibit what scholars cite as general characteristics of apocalyptic argumentation: emotional rather than cerebral appeals, reliance on prophecy, semiotic arousal (i.e., treating everything as a sign), an emphasis on creating “new” people, and, perhaps above all, a clamor for attention.³ The Flattening of the Earth is the globalization apocalypse that occupies center stage as of this writing.⁴ Thus, during a recent TV interview, the first question I was asked—quite earnestly—was why I still thought the world was round!⁵ But other visions of the globalization apocalypse have been propounded as well: the Death of Distance, the End of History, or Levitt’s own favorite, the Convergence of Tastes. Some writers in this vein view the apocalypse as a good thing—an escape from the ancient tribal rifts that have divided humans, or an opportunity to sell the same thing to everyone on earth. Others see it as a bad thing: a process that will lead to everyone eating the same fast food. But they all tend to assume (or predict) nearly complete internationalization.

This is where I disagree strenuously, but on the basis of data rather than opinion. Most types of economic activity that can be conducted either within or across borders are still quite localized by country.

Ask yourself, for example, how large total foreign direct investment (FDI) flows are in relation to gross global fixed capital formation. (To put it another way, of all the capital being invested around the world, how much is being done by companies outside their home countries?) Maybe you’ve heard the rhetoric about “investment knowing no boundaries,” and so on. The fact is, the ratio of FDI to overall fixed capital formation has been less than 10 percent for each of the last three years for which data are available (2003–2005). In other words, FDI accounts for less than a dime out of every capital dollar invested—or significantly less if one recognizes that much of FDI involves mergers and acquisitions, that is, investment that doesn’t actually generate incremental capital expenditures. And although merger waves can push the ratio of FDI to gross fixed capital formation to higher than 10 percent, the ratio has never quite reached 20 percent.⁶

FDI isn’t an isolated, unrepresentative example. Figure 1-1 summarizes data on internationalization along ten dimensions. As you can see, the levels of internationalization along these dimensions all cluster much closer to 10 percent—which also happens to be the average across the ten categories—than to 100 percent.⁷ The biggest exception in absolute terms—the trade-to-GDP ratio shown at the bottom of the figure—probably recedes most of the way back toward 20 percent if you adjust for double-counting.⁸ So if I had to guess the internationalization level of some activity about which I had no particular information, I would guess it to be much closer to 10 percent than to 100 percent! I call this the “10 percent presumption.”

The 10 percent presumption notwithstanding, I prefer to talk of semiglobalization rather than “deciglobalization.” One reason is that 10 percent is not meant to be any kind of global constant: my best guess is that the next few decades will witness increased internationalization of many of the categories in figure 1-1, and a (slow) upward drift in their average. Second, if internationalization levels are setting new records in many respects, international activity probably warrants a share of attention that exceeds its current share of total economic activity—it is increasingly important and its surge is taking it into uncharted territory. Third, business interest in internationalization may also exceed general internationalization levels because businesses have some distinct advantages—as well as disadvantages—compared with other channels for cross-border coordination. Thus, the largest companies are significantly more internationalized than the 10 percent level: the one hundred largest nonfinancial corporations, for example, have, on average, one-half their sales, assets, and employment overseas.⁹ And many smaller companies aspire to increase their internationalization levels.

FIGURE 1-1

The 10 percent presumption

Note: The measures are defined as follows. Telephone calls: international component of total calling minutes; immigrants (to population): stock of long-term international immigrants as a percentage of global population; university students: foreign students as a percentage of total OECD university enrollment; management research: percentage of research papers with a cross-border component; private charity: international component of U.S. private giving; direct investment: foreign direct investment flows as a percentage of gross global fixed capital formation; tourist arrivals: international arrivals as percentage of total tourist arrivals; patents: patents of OECD residents involving international cooperation; stock investment: international component of U.S. investors’ stock holdings; trade (to GDP): global exports of merchandise and nonfactor services as a percentage of global gross domestic product (GDP).

Sources: Data are presented for as close to 2004 as possible and are for that year unless noted otherwise. The figure for phone calls is based on data from the International Telecommunications Union’s telecom database and is for 2001, although coverage drops off sharply, as of this writing, for more recent years. The estimate of the stock of long-term international immigrants is based on UNESCO, International Organization for Migration, World Migration 2005: Costs and Benefits of International Migration (Geneva: International Organization for Migration, June 2005). The data on foreigners among university students is from and for OECD (Organisation for Economic Co-operation and Development) countries and excludes Mexico and Luxembourg; see OECD Education Online Database (English) in OECD Statistics version 3.0. The figure for management research is drawn from Steve Werner, “Recent Developments in International Management Research: A Review of 20 Top Management Journals,” Journal of Management 28 (2002): 277–305. The (generous) estimate for the international component of private charitable giving is for the United States only and was supplied by Geneva Global. The internationalization of direct investment is measured by dividing FDI flows by gross fixed capital formation; the internationalization of trade (merchandise and nonfactor services) is calculated by dividing FDI by gross domestic product (GDP), with all data taken from the World Investment Report issued annually by the U.N. Conference on Trade and Development (UNCTAD). The estimate for tourist arrivals is based on estimates by the World Tourism and Travel Council for 2000. The patent data are drawn from OECD, Science, Technology and Industry Scoreboard 2005. Data on portfolio investment are for U.S. investors’ stockholdings, as reported and analyzed in Bong-Chan Kho, Re...

Table of contents

• Cover
• Series Page
• Title Page
• HBR Press Quantity Sales Discounts
• Copyright
• Dedication
• Contents
• Foreword
• Acknowledgments
• New Preface
• Introduction
• Part One: Value in a World of Differences
• Part Two: Strategies for Global Value Creation
• Notes
• Selected Resources
• Index
• About the Author