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'The world is only semi-globalised'

January 02, 2008 14:21 IST

Pankaj Ghemawat is dismissive of the obsession with growth and scale economies -- he calls them 'dinosaur economics.' He would be much happier if companies considered all components of economic value while assessing cross-border alternatives. But it doesn't happen often enough to satisfy the business strategy expert.

"Strategies need to be evaluated rather than adopted as a matter of faith," declares Ghemawat, who is currently on leave from Harvard Business School to teach at Barcelona's IESE Business School.

Evaluating and analysing data is something Ghemawat excels in. His latest book, Redefining Global Strategy, is the result of 10 years' research and challenges one of this decade's most compelling thoughts -- that the world is a flat, seamless marketplace.

Ghemawat's position is in direct contradiction with heavyweight thinkers like Theodore Levitt, who first came up with the idea of an integrated world 25 years ago, and Thomas Friedman, whose The World is Flat is still on bestseller lists two years after it was published.

But then, he clearly enjoys taking the contrarian view. On a personal visit to India, Ghemawat spoke extensively with Meenakshi Radhakrishnan-Swami on doing business in a round world. Excerpts:

Going against conventional wisdom, when everyone is talking about The World is Flat -- the book as well as the thinking. Was that difficult?

Actually, it was quite easy from both a realistic perspective and from a rhetorical one. As far as reality is concerned, the data are very clear on the point that borders still matter. As are academics who look at the data. What is remarkable is the disjunction between what academics see and what gets picked up in popular wisdom.

And from a rhetorical perspective, it is precisely the popular view of globalisation as an irresistible force levelling everything that stands in its way, including national differences, that makes my message important.

I might add that since there are over a 1,000 books written every year on globalisation, anything that helps my book stand out amidst this clutter is a useful marketing tool. If The World is Flat didn't exist, I would have probably had to set up a straw man. (Laughs)

What is the key takeaway from your book?

If the world were indeed flat, going overseas would be the same as expanding at home. If companies that are expanding internationally, especially inexperienced ones, buy into the rhetoric that borders do not matter, they can easily run into problems -- particularly the problem of assuming that what works at home will work well overseas.

Based on surveys that I have done, many managers are, in fact, subject to this bias, and to several others that result from believing in a flat world.

What is your globalisation forecast for 2008?

It was becoming clear through 2007 -- even before the subprime crisis -- that global turbulence and uncertainty were upon us. Concerns were being voiced over issues like protectionism, the emergence of China and the uncertainty over exchange rates. Even the World Economic Forum's report was titled 'Global Risks.'

That theme will continue to be with us. But I am sceptical about high-frequency predictions of changes in direction and speed of a process that's been in place for a 100 years.

Instead, I find semiglobalisation -- a state of the world in which neither the bridges nor the barriers between countries can be ignored -- to be a relatively stable reference point. It is a good description of where we are today, and where we will continue to be for the next few decades.

How should companies prepare for a semi-globalised world?

Get a realistic sense of what cross-country differences matter the most in your industry. In the cement sector, for instance, geographic differences matter. In satellite television -- as Star discovered -- geography is not so much an issue as cultural and political differences.

Then evaluate those differences. Harvard Business Review conducted an online survey on globalisation for me in 2007. The single most surprising response was, when asked whether companies should treat globalisation as an act of faith or as something to be analysed, 88 per cent opted for a "just do it" approach. There isn't enough analysis going on.

What kind of analysis?

When TCS was building its delivery system outside India, it knew costs were going to be higher. Now, a simple analysis of costs would have killed the initiative, but there were other considerations that trumped the cost factor.

Certain deals were explicitly contingent on Latin American and multiple geography delivery capabilities. ABN-Amro selected TCS for a €200-million worldwide outsourcing contract --the largest IT services deal won up to that point by an Indian competitor -- at least partly on the basis of its delivery centres in Latin America, an important region for the client.

Second, the Latin American delivery centres helped TCS try to position itself as the provider of "one global service standard" around the world.

While large Western competitors such as Accenture and IBM had much more extensive global delivery networks, the service quality of those networks was considered inconsistent, given their reliance on local partners.

Third, and related to the first two points, the Latin American delivery centres helped generate substantial buzz around TCS's trademarked "Global Network Delivery Model" -- including columns in the New York Times by Thomas Friedman!

Fourth, the move fit with the intent of injecting additional multiculturalism into the company. Over 90 per cent of the company's work comes from overseas, but less than 10 per cent of its workforce is non-Indian.

Finally, and perhaps most important, was the idea of trying to propagate the company's delivery capabilities internationally. Given the increasingly tight market for software developers in India, developing an ability to achieve the same high delivery standards out of other locations was potentially a game-changing move.

These positives were enough to overcome the concerns about higher costs. This example should serve as a reminder of the usefulness of the comprehensive analysis -- including qualitative as well as quantitative elements.

Is the nature of globalisation changing? Is it more about globalisation of services and production than about markets?

The single most remarkable change is the globalisation of production -- and of services delivery. Thus, foreign firms have built of the order of 100,000 manufacturing plants in China alone since 2000.

And the explosive growth of the Indian IT sector since then reflects the fact that it has become feasible, for the first time, to decouple where certain services are performed from where they are delivered: the offshore software development model.

These developments have amplified the interest in arbitrage or vertical strategies that exploit the differences between countries as a source of value creation instead of just treating them as a constraint to be adjusted to or overcome -- the focus of horizontal strategies that concentrate on exploiting the similarities between countries.

What should Indian companies be doing? Should they explore other markets or stay at home?

Global awareness is something that makes sense for most companies in most industries. The next stage of globalisation -- building a global footprint --

is something that makes more sense for companies in certain types of industries than others.

For companies from advanced countries, this has historically meant going overseas in industries with high advertising-to-sales or R&D-to-sales ratios.

The pattern worldwide is that consumer products companies first build scale at home first and then go abroad. So perhaps in their case it makes sense to say, "Get up to speed at home first." Especially when there's so much happening at home.

But most of the would-be-MNCs from India are arbitrageurs that seek to exploit differences between countries rather than similarities.

Of course, most of these companies still face the challenge of global integration -- the third phase of the globalisation process -- which involves not just integrating their domestic and foreign operations but also building the kinds of marketing skills and technological knowhow that underpin cross-border economies of scale.

You recommend companies should adapt to local needs. But aren't most companies already doing that?

Many businesses with some international experience have discovered that if you sell the same product in all markets, your profitability will be affected. But they are still to come to terms with the idea that you may have to engage in much farther-reaching changes to compete effectively in a foreign market.

Jinro is the world's top-selling brand of spirits by volume. The bulk of its sales are accounted for by its domestic market, in Korea, but Jinro has -- despite a taste compared (by Westerners) to embalming fluid -- expanded into several dozen countries, with a major focus on Japan, where it is the market leader, as well.

This has taken, in addition to more than two decades, a reduction in sugar content to one-tenth the original level; reformulation to allow the product to be drunk diluted with hot or cold water (instead of straight, as in Korea); very different and larger packaging aimed, in part, at achieving more of a resemblance to whisky; adoption of a premium pricing position (unlike the one targeted in many other export markets); and the use of Caucasian models in its TV commercials, to the point where a majority of Japanese customers do not know that Jinro is from Korea.

The point I'm trying to make is that MNCs need to recognise that simply tweaking a design or selling outdated products is not a strategy that works.

Procter & Gamble is also a case in point. It began in China with the proposition that "This is our product lineup and this is what we will sell."

But there was a very rapid segment shift in its consumer base -- second tier cities and lower income buyers became significant. What P&G did right was that it followed those consumers down. That required massive investment in R&D, in manufacturing and in distribution. It also required massive thinking about "what we should sell." And that worked in P&G's favour.

Now the company develops new products from the ground up, aiming at different local market segments. For instance, for China it markets an advanced market laundry detergent for the premium tier, but modified Tide Triple Action for the second (economy) and developed a new Tide Clean White without water softeners, perfumes and so on for the third (rural) tier.

Once it became the detergent category market leader in the main cities, P&G went after the third-tier leader Diao Pai whose market share P&G has reduced by 14 percentage points since introduction.

Is it worthwhile for companies to make those massive investments of time, effort and money?

These changes don't happen overnight. Jinro took 20 years to crack the Japanese market. Besides, it had a committed Japanese distributor who helped.

Sometimes, you can reduce the burden of adaptation by bringing in partners or even users. That's what Linux did. With the result that it is more adaptable than Microsoft. Though the folks at Redmond don't like to hear that.

Another suggestion you make is that companies should stick to markets with common languages and common borders. Spain did that with Latin America, but Spanish FDI to the region is now falling. Does that mean there is a sell-by date for that strategy?

Between 1997 and 2001, half of Spain's FDI was in Latin America. But the Argentine crisis reminded investors of the volatility of the region. For that reason and having built up expertise in the relatively "easy" markets of Latin America, more Spanish FDI has been directed, in particular, at European countries that, if not culturally close, are geographically and administratively close -- through common membership in the European Union.

Besides, the cultural connection hasn't been dropped entirely. Thus, Spanish bank BBVA may not want to expand more in Latin America. But it is using the bridge afforded by a common language to pursue Hispanic customers in North America.

Of course, I don't see it working in all sectors. Language can't really matter in cement, for instance. But in software, yes. TCS's expansion in Latin America wasn't only about building LatAm delivery capabilities, but also about serving customers in Spain and Portugal.

Redefining global strategy

Even with all these mechanisms in hand, overcoming all the barriers to strategy change may require a major organizational push. The Samsung Corporation offers a particularly dramatic example.

Despite a number of initiatives over the years, including the immersion program, Chairman Lee Kun Hee was dissatisfied with the pace of globalization efforts and, in 1993, launched his New Management Initiative by summoning 150 senior executives to a luxury hotel in Frankfurt.

He began his presentation to them at 8 p.m. and lectured them nonstop for seven hours about the need to "transform Samsung into a true world-class company" -- without once going to the bathroom, according to one participant -- culminating in a call to "change everything but your family." After he finished, he ordered the participants to stay on in Frankfurt for a week as a way of exposing them to the outside world.

He took the entire senior management on other trips as well, including to Los Angeles to "show them our actual position was much lower than what we had thought."

The symbolism of these efforts was backed up by a substantive emphasis on quality -- and innovation -- instead of quantity, which would make it more like Sony. Samsung restructured its portfolio to exit sunset businesses and tripled the percentage of production overseas to 60 percent of the total by 2000, through a program that involved regionalization as well as major acquisitions and strategic investments.

More than a decade later, this Frankfurt meeting is still recalled as having sparked a cultural transformation. Samsung, alone among the major Korean chaebol, not only survived the Asian financial crisis intact, but also achieved more than twice the market capitalization of Sony and overtook the Japanese company -- and Philips and Matsushita's Panasonic -- as the world's most valuable consumer electronics brand.

The example also reminds us that cultivating openness and literacy about diverse markets and cultures is about the heart as well as the head.

Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter

Author: Pankaj Ghemawat
Publisher: Harvard Business School Press
Price: Rs 1,272 Pages: 257
Reproduced with permission

Meenakshi Radhakrishnan-Swami