30 words summary
Plotting your company’s global strategy? Pankaj Ghemwat argues that borders do
matter and neither of the extremes of local customization and global standardization will
lead to a successful global strategy. He advices companies to get off the seesaw and
compete in an integrated way that neither ignores the differences across countries nor
caves into them entirely.
100 words summary
He's never been afraid to take a contrarian view. When everyone thought Wal-Mart
would succeed globally, his was the lone voice of doubt. And indeed Wal-Mart did pull
out of South Korea and Germany, though it now has plans to enter India. At the height of
the open source software debate a few years ago, he wrote a paper on the various
strategies Linux and Microsoft could use successfully against the other given that
Microsoft has too much market share and OSS offers too many benefits for users. Today
he is taking pot-shots at Thomas Friedman who famously announced that "the world is
flat" in a book of the same phrase. Meet Pankaj Ghemawat, professor of global strategy
at Barcelona's IESE Business School, where he is taking a sabbatical from the Harvard
Business School (HBS).
Keywords: Pankaj Ghemawat, global strategy, globalization, AAA Triangle, CAGE
Distance Framework
Author summary
Gita Piramal, managing editor, The Smart Manager
Chart
exhibit 01: the 10% presumption
exhibit 02: your company's beliefs about globalization: a diagnostic
exhibit 03: differences across the AAA strategies
pankaj ghemawat: redefining global strategy
by Gita Piramal
Plotting your company’s global strategy? Pankaj Ghemwat argues that borders do
matter and neither of the extremes of local customization and global standardization will
lead to a successful global strategy. He advices companies to get off the seesaw and
compete in an integrated way that neither ignores the differences across countries nor
caves into them entirely.
He's never been afraid to take a contrarian view. When everyone thought Wal-Mart
would succeed globally, his was the lone voice of doubt. And indeed Wal-Mart did pull
out of South Korea and Germany, though it now has plans to enter India. At the height of
the open source software debate a few years ago, he wrote a paper on the various
strategies Linux and Microsoft could use successfully against the other given that
Microsoft has too much market share and OSS offers too many benefits for users. Today
he is taking pot-shots at Thomas Friedman who famously announced that "the world is
flat" in a book of the same phrase. Meet Pankaj Ghemawat, professor of global strategy
at Barcelona's IESE Business School, where he is taking a sabbatical from the Harvard
Business School (HBS).
It's a long way from BITS Pilani (his parents are from Rajasthan) to Boston but
Ghemawat made the trip when he was sixteen. He earned his AB degree in Applied
Mathematics from Harvard College, where he was elected to Phi Beta Kappa, and by
age 22 he had completed his PhD in business economics from Harvard University. He
then worked as a consultant at McKinsey in London. Michael Porter, who in 1991 would
gain fame for his path breaking work, The Competitive Advantage of Nations, persuaded
Ghemawat to leave consulting for teaching, and in 1983 Ghemawat returned to Boston.
Ghemawat (the youngest faculty in the school's history to be tenured) and Porter worked
at the invitation of the Indian government to study India's competitiveness in 1993.
Influences such as these induced a major fascination for the globalization theme and
Ghemawat's work over the past decade and a half has largely been in this area though
he wrote a book on game theory and another on commitment besides publishing a
considerable body of research on competitive shock.
Early readers of The Smart Manager will remember the CAGE Distance Framework
published in our inaugural issue (Jan-Mar 2002). Here Ghemawat argued that managers
don't pay enough attention to the impact of distance on global strategy. Warning
managers that "companies routinely exaggerate the attractiveness of foreign markets,
and that can lead to expensive mistakes", Ghemawat recommended that they measure
the impact of distance on their business plans through the four dimensions of distance:
culture, administrative, geographic and economic.
Over the past five years, these ideas have not only been further refined but also further
validated through a forensic look at companies across the world and in diverse sectors.
The results appear in Ghemawat's latest book, Redefining Global Strategy.
Here Ghemawat emphasizes that no "world without borders" is on the horizon and that
companies will never succeed with a one-sizefits-all approach. Instead, borders do
matter, and companies must reckon with them. By daring to question the extent of
globalization, Ghemawat has provoked vigorous responses from everyone from Thomas
Friedman to Frances Cairncross. While other writers have warned that our world is
rapidly on its way to complete global integration ("the flattening of the earth", "the death
of distance" or "the end of history"), Ghemawat's research shows that
internationalization of most economic activities still falls closer to 10% than to 100%.
In Redefining Global Strategy, Ghemawat recounts the successes and failures of global
strategies from such companies as IBM, Zara, Procter & Gamble, Dell, L'Oreal, Yum!
Brands, Lego, Eli Lilly, Haier, Whirlpool, Star TV, Tata Consultancy Services and others.
He also explores such perplexing questions as:
 why Google has only 28% of the search market in Russia
 why Coca-Cola's wide range of aggressive global strategies in the last decades
have failed to stimulate growth
 how Philips lost its way by making the opposite mistake of being too responsive
to national differences
 how Cemex and other cement companies have come up with cross-border
strategies whose benefits outweigh their costs




how a regionalization strategy propelled Toyota toward becoming the number
one global automaker
why GE established regional headquarters in 2003 after resisting this structure
for decades while IBM has moved in the opposite direction
how KFC is aiming to become as ubiquitous in China as McDonald’s is in the US
how Starbucks managed to transform global markets while Microsoft must
reluctantly transform itself to adapt to the Chinese market
Dispelling today's myths of a global apocalypse and suggesting instead that we live
today in a world of semiglobalization, Ghemawat suggests that managers design global
strategy with an approach that is firmly grounded in reality. They should assess national
differences, and then adapt, overcome and exploit them for superior global performance.
To succeed in the global marketplace, Redefining Global Strategy offers three pieces of
advice.
First, analyze why you want to enter global markets and whether or not volume, growth,
and scale economies will actually add up to greater value creation.
Next, determine which international differences - cultural, administrative, geographic,
and economic - will most strongly influence your industry, and categorize foreign
countries into those that are close to your home base along these key dimensions
versus those that are far. Look for differences in differences.
Last, be more creative in stretching your responses to national differences beyond
tweaking your domestic business model-and also consider ways to profit from
differences, instead of treating them all as constraints on value creation.
You insist that the world isn't flat. Is Thomas Friedman wrong?
Friedman's bestseller The World is Flat is one successful example of a genre of books
that have tried to attract attention by painting visions of a globalization apocalypse. Such
books, which treat everything as a Sign, pack great rhetorical punch. The only problem
is that they don't fit the data. As the late Daniel Patrick Moynihan put it, "Everyone is
entitled to his own opinions but not his own facts."
Instead I call for very different global strategies based on the reality that national borders
still matter and will continue to do so for the near future.
What most surprised you when you researched the data on globalization?
The most common indicator of globalization is the ratio of international trade to Gross
Domestic Product (GDP), which exceeds 25% in most economies. But when I began to
research a broader range of measures including investment, phone calls, tourism, and
immigration, I found that, surprisingly, the average extent of globalization is only 10%.
The other thing that surprised me was that while some indicators of globalization
(example trade-to-GDP) have clearly reached much higher levels than ever experienced
before, others have not. The ratio of foreign direct investment (FDI) to GDP has broken
new ground, but only recently. It wasn't until the 1990s that this ratio reached the levels
experienced immediately before World War I (1914).
Other measures of globalization such as net capital inflows as a percentage of GDP or
immigration- intensity actually peaked before the Great War. And there is general
agreement that the international share of total Internet traffic is decreasing rather than
increasing.
This calls into question the other common myth that even if the world isn't quite flat
today, it will be tomorrow.
So does your redefinition of global strategy represent a compromise between the
extremes of the "one size fits all" and "think local, act local" approaches to global
strategy that most companies seem to waver between? Or is it something more?
Neither of the extremes of local customization and global standardization will lead to a
successful global strategy. Nor will compromising between these two extremes. Instead,
the imperative for companies is to get off the seesaw altogether and compete in an
integrated way that neither ignores the differences across countries nor caves into them
entirely.
The vagueness of a sensible slogan like "think global, act local" has allowed it to be
hijacked to promote extreme agendas. For example, Roberto Goizueta, the late
chairman of Coca-Cola, used it to justify extreme standardization. On the opposite end
of the spectrum, Orit Gadiesh, Chairman, Bain and Company, uses a variant to
encourage extreme localization. Since managers now apply the slogan to the full
spectrum of possibilities, from the most standardized to the most localized, it no longer
means anything in particular.
What are some of the worst global strategy blunders of the last few years?
The worst global strategy blunders that I can think of generally fall in the categories of
bigger and blander.
In the first category is the DaimlerChrysler mega merger. It was designed to help two
mid-sized players surf instead of being swamped by the waves of escalating scale
economies and increasing concentration in the auto industry. But its logic was fatally
flawed, for two reasons.
First, the belief that economies of scale would be achieved was akin to thinking that
strapping two leaky canoes together would somehow increase their buoyancy.
Second, and even more remarkably, looking at the data would have revealed that
concentration has actually declined more or less continuously in the auto industry since
World War II.
An example of blander is Wal-Mart, a company which I've studied and written about for
more than twenty years. When CEO Lee Scott was asked a few years ago about why he
thought Wal-Mart could expand successfully overseas, his response was that naysayers
had also questioned the company's ability to move successfully from its home state of
Arkansas to Alabama.
Such trivialization of international differences greases the rails for competing exactly the
same way overseas as at home. As the former head of the company's German
operations, now shut down, observed, "We didn't realize that pillowcases are a different
size in Germany." Unsurprisingly, the only foreign markets in which Wal-Mart has
achieved profitability-Canada, Mexico and the United Kingdom-are the ones culturally,
administratively and geographically closest to the United States.
The point is not that Wal-Mart shouldn't have ventured into more distant markets, but
instead, that it needed to think differently about how to compete in them - something it is
now starting to do in markets such as India.
What's an example of a company that gets global strategy right? Why?
Toyota has overtaken General Motors to become the largest automaker in the world
while making money in the process. Toyota is distinguished from most of its Western
rivals, not just DaimlerChrysler, by the fact that it treats market share as the result of
building better and cheaper cars, and not as an objective in and of itself. Its globalization
has actually been driven by a complex array of coordination mechanisms across
different regions, which chairman Fujio Cho characterizes as the fundamental building
blocks of the company's strategies.
Note that Toyota's starting point is not a grand, longer term vision of some distant global
future when autos and auto parts can flow freely from anywhere to anywhere. Rather,
the company anticipates expanded free trade agreements within the Americas, Europe,
and East Asia, but not across them. This is a more modest-but also more realistic-vision
in which neither the bridges nor the barriers between countries can be ignored.
In your book, you have added the AAA Triangle to the CAGE Distance Framework. What
do the three A's stand for?
Each stands for a distinct type of global strategy. Underlying the AAA Triangle is the
premise that companies growing their businesses outside their home market must
choose one or more of three basic strategic options: adaptation, aggregation and
arbitrage.
Adaptation seeks to boost revenues and market share by maximizing a firm's local
relevance. One extreme example is the creation of local units in each national market in
order to create a supply chain. Many companies use this strategy as they start
expanding beyond their home market.
Aggregation attempts to deliver economies of scale by creating regional or sometimes
global operations. It involves standardizing the product or service offering, and grouping
together the development and production processes.
Arbitrage is the exploitation of differences between national or regional markets, often by
locating separate parts of the supply chain in different places - for instance call centers
in India, factories in China, and retail shops in Western Europe.
Most companies will emphasize different A's at different points in their evolution as
global enterprises. Some straddle two A's such as Tata Consultancy Services. It obtains
the benefits of aggregation without losing its traditional arbitrage-based competitive
advantage through its global network delivery model. Success in AA strategies takes two
forms. In some cases, a company wins because it beats competition along both
dimensions at once. More commonly, however, a company wins because it manages the
tensions between two A's better than its competitors do. A few, such as IBM and GE
Healthcare, are able to use all three. In essence, adaptation strategies adjust to
differences across countries, aggregation strategies overcome differences, and arbitrage
ones exploit differences.
What changes should global companies be prepared for in the next decade or do you
think little change is ahead?
First of all, borders will continue to matter. Here are some broad pointers about how a
company might improve on the common expedients of sailing in one direction until
striking a sandbar, playing pinball to the headlines, or simply marking time:
First, anticipate bumps and detours, even if you do believe that the world will eventually
become much more integrated.
Second, prepare for other predictable surprises such as global warming, different kinds
of meltdowns in the Middle East, China and India, and the United States, a global
liquidity crisis, or a general sociopolitical backlash against globalization. Notions of a
global governance gap reinforce the idea that a shock of this sort might have a
persistent effect. How many such shocks is your company prepared for?
Third, focus on the risks and questions that are most likely to affect your industry.
Shocks, cycles and trends vary greatly across industries and companies in their effects.
Lastly, recognize the importance of business in shaping broad outcomes including those
related to the future of globalization. The previous points might seem to suggest that
outcomes will unfold independently of what managers decide to do. But for many key
uncertainties, that is clearly not the case. Business leaders cannot and should not stick
their heads in the sand in response to issues as fundamental as the controversies that
swirl around globalization.
In your book you mention some of the formative events which sparked your interest in
globalization. Which was the most interesting?
My first international case study was on Pepsi in the early 1990s. I visited a Pepsi plant
in the strife-torn state of Punjab. Given the political environment - a low - grade civil war
– many workers were militants who arrived at the plant each day toting their AK-47s.
Pepsi had set up a system so the guns could be checked in and then retrieved at the
end of a shift. 'Absolutely no AK-47s inside the building," the HR director explained
forcefully, highlighting for me the many differences that international business must
confront.