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Global Value Creation

The ADDING Value Scorecard

“I conceive that the great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things.”

—Benjamin Franklin, “The Whistle,” 1779

CHAPTER 2 DISCUSSED the similarities versus differences between countries and worked through the CAGE distance framework as a way of understanding how much they matter at the country and industry levels. This chapter discusses why—if at all—firms should globalize in a world in which distance still matters.

The chapter begins with a brief review of how global strategy often addresses—or fails to address—the question “Why globalize?” It then illustrates—using the example of Cemex, the Mexico-based cement company that has built itself into a global leader since the early 1990s—the ADDING Value scorecard, which adapts and extends the logic of value addition developed in a single-country context to a cross-border context. The chapter considers this scorecard and its elements in some detail, along with analytical guidelines to follow and specific questions to address in applying it. Finally, the chapter briefly discusses how to extend the analysis to address issues of sustainability, how to triangulate on the analysis by using judgment, and how to go beyond analyzing which strategic option is better for generating advantageous strategic options.

Why Globalize?

Writers on the globalization of business rarely examine the question of why, if at all, business should globalize. Although there are several reasons for this omission, perhaps the most important is the widespread tendency to believe in the globalization apocalypse. This naturally renders the question moot.

Second, there may have been some crowding out. Much of what has been written about globalization from a business perspective since the late 1980s has been dominated by concerns related to how, and not why: how to link far-flung units, build global networks, find and train global managers, create truly global corporate cultures.¹ Furthermore, to the extent that the literature does deal with global strategy as opposed to global organization, it focuses primarily on achieving global presence: entering the right global markets, making the right acquisitions, or choosing the right global alliance partners.² This addresses important questions related to where and who, but still doesn’t have much to say about why.

Third—and from a more practical perspective—there is a sense that global strategic moves are so complex and so subject to uncertainty that they essentially become a matter of faith. This can be seen as a metastasis of the traditional tendency in single-country strategy to do detailed cost-benefit analyses of relatively small decisions, and to simply throw up one’s hands and surrender to animal spirits in making large ones—a tendency first noted by the late C. Northcote Parkinson in one of his less famous laws.³

Whatever the precise mix of reasons, executives in global or would-be global companies, when asked their reasons for globalizing, often spout slogans rather than substance. Paul Verdin and Nick Van Heck have compiled a list of these that would be funny if it didn’t strike so frighteningly close to home (figure 3-1).

Furthermore, such slogans aren’t just siren songs for the unsophisticated or unwary. Recall the discussion in chapter 2 of the massive wave of foreign direct investment in electricity that began in the early 1990s, and that proved extremely unprofitable. Analysis of 264 foreign investment projects undertaken by 24 U.S. utilities between 1993 and 2002 indicates that:

• “High-status” firms (e.g., ones with current or former directors or top managers of Fortune 500 firms on their boards) were particularly prone to large-scale FDI.

• Stock analysts continued to pay more attention to high-FDI firms and to recommend purchase of their stocks through 2001.

• Stock-market reactions to FDI continued to be positive through 1998, and the investment wave itself crested over 1998–2001—after the negative impact of FDI on reported financial results had started to become clear.⁴

Of course, managers and the financial markets aren’t the only groups whose enthusiasm may get misplaced when it comes to cross-border moves—people who write about international business are also prone to such problems. To make this point, let me simply cite three examples. Wal-Mart was, despite the considerations discussed in chapter 2, widely acclaimed as an international retailing juggernaut because of its international size and growth—until it recently started to exit some of its less successful markets. Cemex is characterized—in a widely used textbook on international business, as well as in many business school cases—as a leader in using information technology and catering to its distributors, even though, as we shall see in this chapter, those are far from the most important reasons for its superior profitability. And Philips, whose evolution is explored in chapter 4, continued to be written about as a reasonably well-functioning example of various modish organizational models while it teetered at the edge of bankruptcy.

The common thread in all these examples is insufficient attention to the creation of economic value. What we see instead, in these and other cases, is value being ignored or analyzed superficially, survival being treated as a proxy for value creation, or a focus on trailing indicators of performance. The obvious antidote is to adapt and extend the rigorous focus on value creation that has been proven to work in single-country strategy. Although this will be accomplished with some rigor later in this chapter, it will begin by illustrating the importance of a value-focused perspective.

Cemex: Creating Value Through Cross-Border Expansion in Cement

Cement seems like a very unlikely setting for globalization. R&D-to-sales and advertising-to-sales ratios, the two leading indicators of propensity to engage in FDI, are very low. So is the product’s value-to-weight ratio, which amplifies the effects of geographic distance. Furthermore, if the product gets wet during waterborne transportation—the only cost-effective way of shipping it over long distances—it becomes unusable.

Yet, despite these apparently unpromising basic conditions, global concentration in cement has increased greatly since the 1980s, when the top five competitors controlled only about 11 percent of the world market. Thanks to cross-border acquisitions, that number is now close to 25 percent, meaning that cement has experienced one of the greatest absolute increases in global concentration of any of the major industries for which I have compiled data! The cement majors, which have continued to be profitable over this period, seem to have found ways of benefiting from cross-border expansion. Of particular interest is Cemex, which had all its capacity located in Mexico through the late 1980s and didn’t even figure in the top five then, but has since grown to be the third-largest competitor while maintaining the highest profitability levels of any of the majors. How has Cemex achieved superior performance, and in particular, what role has globalization played?

Volume

The most common rationale cited for crossing borders—adding volume and grabbing market share—certainly seems applicable to the Cemex case. Compare the company with another cement company headquartered in Latin America, Votorantim of Brazil. In 1988, Votorantim was slightly larger than Cemex and was the sixth-largest player in the world. Just fifteen years later, Cemex was the third-largest player, and Votorantim had slipped to tenth place. What happened in the interim? Simply put, Votorantim diversified horizontally, going into industries such as pulp and paper, aluminum, and other metals. By contrast, Cemex diversified geographically. To some extent, Cemex had to cross borders to grow because its home market in Mexico was small—significantly smaller than Votorantim’s home market in Brazil—and because, by 1989, Cemex already controlled two-thirds of Mexican capacity. There was little room for growth at home.

However, simply adding volume doesn’t explain how Cemex was able to sustain superior margins—or, more broadly, to create value through an expansion strategy that relied on acquisitions of existing capacity in other countries. A purely scalar strategy of acquisitions does nothing, as foreign investors in the electricity sector discovered, to address the most fundamental test of value creation in international business, the so-called better-off test: does combining and coordinating activities across multiple geographies enable the units to create and claim more value than they could as independent stand-alone operations? Unless the answer is yes, the prospects of superior value creation through acquisitions depend on value transfer: on being able to buy assets for less than they are truly worth. This is nice business if you can get it, but it is often infeasible, especially in light of takeover premiums and transaction costs.

Margins

The discussion of volume suggests that in order to apply the better-off test, we need to assess how Cemex’s margins have been affected by global expansion. A comparative picture of margins and their two components, prices and costs, is a useful starting point. And here is where many, perhaps most, analyses of Cemex go astray—by making the simple but serious mistake of expressing costs and margins as percentages of prices. This results in something like figure 3-2, which compares Cemex with its largest global competitor, Holcim, at a time when they were largely undiversified. Such analysis not only confirms that Cemex’s average margins are better than Holcim’s, but also suggests that Cemex has lower costs.

The trouble with the approach taken in figure 3-2 is that by expressing costs and margins as a percentage of revenues, it mixes up cost differences and price differences. To see how important it can be to separate them out, compare Cemex’s economics with Holcim’s on a per-ton basis (figure 3-3). The big difference: figure 3-3 makes it clear that Cemex’s advantage stems from higher average prices rather than lower average costs!

Costs

One might think that the parity between Cemex and Holcim in terms of operating costs per ton means that there is nothing interesting happening on the cost side at Cemex. But, again, not so fast. For one thing, Cemex has achieved parity despite much faster growth, which typically increases complexity and operating costs, particularly in the wake of major acquisitions. (In other words, adding volume can raise costs in the short to medium run.) Particularly remarkable in this regard is the company’s postmerger integration process, which has become quicker and more thorough over time. Thus, it took Cemex approximately twenty-four months to integrate the Spanish acquisitions in the early 1990s in terms of standardization of operations platforms; eight years later, a comparably sized acquisition in the United States took just four months.

Second, the operating costs comparisons do not include capital or financing costs, which loom very large in the capital-intensive cement business. These costs can, in turn, be decomposed into the weighted average cost of capital (WACC) times the amount invested per ton of capacity. Cemex’s investment and acquisition costs seem to have been comparable to those of its competitors. However, figure 3-4 shows a fairly steady decline in the cost of capital that Cemex paid between 1992 and early 2003.

Many factors contribute to the downward slope in figure 3-4, probably including the close relationship between Cemex and a Mexican bank privatized in the early 1990s, in which the company acquired a partial interest. But I want to focus here on the globalization-related factors, two of which appear to underlie the reductions in WACC. First, pooling across product markets has reduced the volatility of Cemex’s cash flows (discussed below, in “Risk”). In addition, as CEO Lorenzo Zambrano has observed, product market globalization was accompanied by (and at least partly enabled) capital market globalization. When it was still a local company, Cemex essentially relied on local sources of finance. But after its big Spanish acquisitions, Cemex financed new acquisitions through its Spanish operations, benefiting from the tax-deductibility of interest in Spain (but not in Mexico), Spanish investment incentives, and the collateral value of assets in a developed country exempt from “Mexico risk.” While many Mexican companies tried to tap foreign sources of capital after the country opened up throughout the 1980s, Cemex was unusual for its early reliance on European (rather than U.S.) capital, its use of real assets acquired overseas as collateral, and the apparent sophistication of its corporate finance team.

Of course, Cemex’s recourse to European sources of finance probably does not help create an advantage vis-à-vis its major rivals, all of which are headquartered in Europe. But it does help mitigate what would otherwise be a major disadvantage associated with higher capital costs. Particularly given the capital intensity of cement, even a small capital cost disadvantage might be fatal to a strategy of cross-border expansion. Thus, a rough sensitivity analysis based on assumptions set out in analysts’ reports suggested that a 0.5 percent decrease in Cemex’s WACC would increase its market value by 5 percent. By way of comparison, note that Cemex estimated that the shift to financing acquisitions in Spain reduced its WACC by 2.5 percent!

Prices and Willingness-to-Pay

The truly startling difference between Cemex and its leading global competitors is in the much higher average prices Cemex commands. The international Cemex brand that the company has begun introducing in parallel with its acquired local brands may play a role here, particularly on sales in bags to small buyers rather than in bulk to large buyers. And in selling to bulk buyers, the company’s guaranteed delivery within fifteen minutes of a stipulated time—inspired by Domino’s Pizza—has contributed to buyer value and willingness-to-pay by reducing expensive downtime.

Observers have cited these and other programs as illustrations of the power of differentiation even in an industry as commoditized as cement. But common sense suggests that they go only part of the way toward explaining prices that are, on average, 20 percent higher than Holcim’s. Advertising intensity in cement is, as noted, very low; the retention of local brands presumably further limits the power of global branding; and key programs such as the delivery guarantee were, until recently, confined to Cemex’s home base in Mexico. What does seem to be a big driver on the price side is bargaining and market power, as discussed next.

Prices and Leverage

Different prices without differences in costs or willingness-to-pay are generally thought to reflect the effects of differences in leverage or bargaining power. That certainly seems to be an important factor in the case of Cemex. Cemex is very disciplined in the way in which it conducts its acquisitions. It buys capacity in countries or regions where it can (1) reduce the number of competitors, (2) wind up with the largest market share among those competitors, and (3) own a controlling interest in its acquired companies. Figure 3-5 summarizes the results.

Note the clear correlation between Cemex’s operating profit by major market versus its share of that market. The idea that this correlation is based on bargaining power rather than on efficiency is corroborated by the fact that when Cemex “cleans up a country”—in the sense of consolidating a market—the other players there tend also to benefit. Cemex’s smaller rivals in Mexico, for example, are enormously profitable.

Such domestic consolidation wouldn’t help profitability much if imports could flood in whenever domestic prices rose above a certain level. But Cemex also controls what military strategists would call “strategic narrows” that allow it to influence the levels of imports into its key markets. Particularly important is Cemex’s network of sixty marine terminals worldwide. On the Spanish coast alone, it controls nine such terminals, effectively sheltering its market there from lowballing invaders—and implicitly threatening foreign markets. You can get the stuff out, and they can’t necessarily get it in. This control is complemented by Cemex’s role as the world’s largest cement trader—with much of that cement produced by third parties. This is not a very lucrative business in and of itself. But trading other people’s products is a good way to divert low-priced imports away from your own key markets, as well as to gain experience in other markets before you decide whether to acquire local capacity.

Ironically, it was a threat along exactly this dimension that helped spur Cemex’s globalization. Specifically, Holcim’s investments in Mexico in 1989 prompted Cemex to begin investing heavily in Spain in 1992, where Holcim already had significant investments in place. The clear implication was that if a price war erupted in Mexico, another might well erupt in Spain. As it turned out, no price wars erupted. The caveat, of course, is that such dominance and recognition of mutual dependence with, in particular, other global competitors has triggered antitrust investigations and legal challenges, some of which are ongoing.

Risk

Globalization has also helped Cemex manage risk (and thereby contributing to the reduction in its cost of capital, as described above). The construction business, which drives the cement industry, is characterized by deep local and regional cycles. Pooling across markets with different construction cycles helped reduce the standard deviation in Cemex’s quarterly cash flow margins from an average of 22 percent over the 1978–1992 period (in the run-up to its acquisitions in Spain) to 12 percent over the 1992–1997 period. It also helped the company weather Mexico’s currency crisis of the mid-1990s—the so-called tequila shock—that might otherwise have forced Cemex to sell out to a global competitor. And having globalized, Cemex, like other global competitors, now buys capacity at a fraction of its replacement cost when local competitors come under pressure from local economic cycles (e.g., in Asia in the wake of the Asian currency crisis of the late 1990s).

Knowledge

The final broad area to be discussed here concerns the impact of globalization on knowledge generation and transfer. Once you go outside Mexico to make cement and sell it to other people, you get the opportunity to learn all kinds of useful new things. Figure 3-6 summarizes the origins of some of the best practices that Cemex has implanted across its global operations in the 1990s and early 2000s. Some of this cross-border learning was serendipitous. But some resulted from a purposeful quest for information and a determination to deploy it worldwide.⁵ This determination is reflected in the company’s range of organizational mechanisms summarized under the rubric “The Cemex Way”: the adoption of a common language (English rather than Spanish) worldwide, the rotation of managers on a global basis, the use of international consultants, and sustained investments in technology, including information technology, to realize the potential unlocked by learning.

Table 3-1 summarizes the discussion in this section. The shaded cells are particularly important in explaining why globalization hasn’t, in this case, simply become an excuse for using profitable operations at home to cross-subsidize unprofitable ones abroad.

The ADDING Value Scorecard

Table 3-1 parses value addition at Cemex into six components: adding volume, decreasing costs, differentiating, improving industry attractiveness, normalizing risks, and generating and deploying knowledge (and other resources). These components form what we will call the ADDING Value scorecard. While the acronym will help you remember the components of the scorecard, the deeper point is that they add up to a way of thinking about value creation that is general rather than specific to the Cemex case. The components into which value is parsed are meant to be commensurable, and to add up to determine overall value addition—or subtraction.

To elaborate, the ADDING Value scorecard adapts and extends the rigorous focus on value creation that has been well tested—in companies, by consultants, and in the classroom—in single-country strategy. Note that value is the product of volume and margin. The two components into which margin itself has been unbundled in single-country strategy are the average attractiveness of the environment in which a business operates and the competitive advantage or disadvantage of a business relative to its average competitor within that environment.⁶ In loose terms, these quantities are linked by what might be called the fundamental equation of business strategy:

Your margin = industry margin + your competitive advantage

Michael Porter’s famous five-forces framework for the structural analysis of industries has explored the strategic determinants of industry margin or profitability, the first term on the right-hand side of the equation.⁷ And Porter and other strategists, notably Adam Brandenburger and Gus Stuart, have probed the determinants of competitive advantage, the second term on the right-hand side, and emphasized characterizing it in terms of willingness-to-pay and (opportunity) costs:⁸

Your competitive advantage = [willingness-to-pay–cost] for your company–[willingness-to-pay–cost] for your competitor = your relative willingness-to-pay–your relative cost

In other words, in single-country strategy, an appreciation of the importance of a competitive edge has evolved into an understanding of the economics of what might be called “the competitive wedge.” A firm is said to have created a competitive advantage over its rivals if it has driven a wider wedge between willingness-to-pay and costs than its competitors have done.

The ADDING Value scorecard follows single-country strategy in four of its six value components: adding volume (or, with a more dynamic frame, growth), decreasing costs, differentiating or increasing willingness-to-pay, and increasing industry attractiveness. Its other two components—normalizing risk and the generation of knowledge and other resources—reflect the large differences across countries, discussed in chapter 2. These are customary add-ons in international strategy, and their potential significance is illustrated by the case of Cemex. I prefer to take knowledge generation and broaden it to encompass other resources that might also be generated (or depleted) by globalization. This helps avoid overemphasis on learning—which, although important, has become a bit of a fetish in international strategy—by also bringing into the picture other resource stocks that affect a firm’s future opportunity set, even if they don’t show up directly and immediately in its cash flows.

That should explain the logic of the boxes in figure 3-7, which are also the ones that the scorecard in table 3-1 covers. Moreover, this logic, involving commensurability and adding up, distinguishes the ADDING Value scorecard from others widely used in business that simply list an assortment of more or less arbitrary items.

Before discussing how to analyze each of the boxes in figure 3-7, it is worth mentioning several broad analytical guidelines: the importance of thinking comprehensively about value creation, of unbundling of various sorts, of simple quantification, and of making comparisons.

Comprehensiveness

The strategic intent behind the scorecard is to look more broadly at cross-border value creation than is implied by the standard sort of size-ism: The world is a big place, with lots of volume out there or on the way, and we need to scoop up our share! And the common corollary to such size-ism: We’ll cut our costs by chasing volume across borders. Those two notions may or may not hold water, depending on circumstances. But as table 3-1 and figure 3-7 emphasize, they are only a subset of the components of the ADDING Value scorecard. You’ll come closer to maximizing your potential if you have a suitably broad conception of how crossing borders might add value.

Of course, that isn’t to say that all components are equally important in all industries or for all companies. Furthermore, different value components can become more or less important at different points in a company’s history. For example, Citibank supposedly started taking country risk seriously in making market entry decisions only after it had entered its first one hundred countries. Thus, the examples discussed in the chapters that follow won’t try to check off all the boxes in figure 3-7, just the most relevant ones. But in any real analysis, it is important to start off by being comprehensive: by at least considering all six value components, although some may warrant less attention than others.

Unbundling

This emphasis on comprehensiveness must be complemented by an appreciation of the importance of unbundling, or disaggregation. The very structure of the scorecard highlights the importance of unbundling value into its components. Other kinds of unbundling can also be very useful in analyzing value creation. Thus, it often makes sense to break firms down into discrete activities or processes and then analyze how each contributes to the components of the ADDING Value scorecard. And the components of value themselves may be worth unbundling: compare the distinction between operating costs and capital costs in the Cemex case.

Of course, you must also remember the strategic intent behind applying the scorecard: building a comprehensive picture of value-addition possibilities. As a result, any component-by-component analysis you conduct must be followed up by work to build or rebuild a vision of the whole—as depicted in table 3-1 in the case of Cemex.

Quantification

Some quantification is often essential to turbocharge the analysis. Thus, most groups with which I discuss the Cemex case register the company’s attempts to both reduce costs and raise prices. But some calculations are required to get a sense of the relative magnitudes—with big implications for such issues as future market selection. (For example, if Cemex were earning superior profits based on cost advantages, considerations of market attractiveness would not loom as large in its market selection decisions.)

Most of the value added by quantification, I should stress, comes from simple, back-of-the envelope calculations, many of them illustrated by the Cemex case analysis: figuring out the relative magnitudes of various kinds of effects; understanding where a company is making most of its money; probing the big differences between its economics and those of its competitors; and doing breakeven analyses. Thus, if I were advising a client on whether to make an acquisition, I’d probably recommend a discounted cash flow analysis at some point—but I’d be likely to spend most of my time on the kinds of analyses listed above to shed light on the cash flows that should be plugged into such an analysis.

Of course, even for simple analyses, you need to make assumptions, analyze how sensitive the conclusions are to the assumptions, and, if necessary, iterate. Also worth mentioning is the caveat that not everything of interest can be quantified. One approach is to quantify as best as you can the expected value from doing one thing as opposed to another, and then to weigh the results of that analysis against the qualitative considerations that are left out of the calculations. This process gives a rough sense of how much qualitative considerations would have to matter in order to overrule the numbers.

You can apply a somewhat similar approach to values other than economic value. Even if you would prefer to do something in spite of, rather than because of, economic value, it is useful to understand how much your preferred option is going to cost your company in economic terms before you decide whether to pursue it.

Comparisons

For the analysis to have bite, you generally have to undertake comparisons. Possible types of comparisons include the following:

• Option A versus B, C, and so forth: This kind of comparison is particularly useful for decision making. It usually makes sense to compare all the options against each other rather than examine them one by one, against the alternative of doing nothing. Part of the reason is that such joint evaluation may make it easier to take hard-to-evaluate considerations (e.g., qualitative ones, as discussed above) into account.⁹

• Position at one point in time versus another: This kind of comparison tends to be particularly helpful for monitoring and diagnostic purposes. Thus, it is useful to go beyond checking for improvement to assessing whether the rate of improvement is satisfactory (e.g., whether it exceeds some target rate or will suffice to achieve some target level of performance). Such trajectories will be discussed further later in the chapter, in the context of sustainability.

• Comparisons with competitors: This kind of comparison tends to be directly helpful for diagnostic purposes—although, of course, the asymmetries that it highlights can also help suggest remedial or reinforcing actions. The appropriate choice of benchmark competitors is critical to deriving value from such analyses.

• Comparisons with market contracting: The question here is whether combining and coordinating activities across multiple geographies enables units to create and claim more value than they could as independent, stand-alone operations—already introduced as the better-off test. This kind of comparison is particularly helpful at assessing mergers and stretching strategic thinking by forcing a company to rethink what it does in-house.

Note that the analysis of Cemex ended up embodying all these kinds of comparisons, even though it was motivated by the attempt to understand how Cemex had outperformed its competitors.

Let us turn now to a general discussion of each of the six components of the ADDING Value scorecard.

The Components of the ADDING Value Scorecard

You’ve been introduced to the six components of the ADDING Value scorecard in the specific context of Cemex. But to make the scorecard more valuable, we need to discuss each of the six value components from a more general perspective. The discussion is organized around a number of recommendations for analyzing each of the six value components, as summarized in Table 3-2.

Adding Volume, or Growth

Probably the most cited reason for globalization, as noted in chapter 1, is that a company has run out of room in its home market. But if that’s the only reason on offer, it is probably better to go on a diet. Thus, as noted in the Cemex discussion, without an increase in the size of the pie, the only way to create value through acquisitions is by buying companies for less than they are truly worth—a laudable objective, but not one that can be achieved unilaterally.

For an example of a global icon that has recently figured this out for itself, consider McDonald’s. According to CEO Jim Skinner: “We proved that we were getting bigger but not better. And we have to be better . . . We had contributed $4 billion or $5 billion to capital expenditures and building new stores over four years, and yet we didn’t have any corresponding incremental operating-income growth. So we decided to focus on our existing operations.”¹⁰

But for every company that figures out that incremental volume may not be profitable, there are probably several that do not. What might help them perform better?

Look at economic profits, that is, accounting profits minus capital recovery costs. Subtracting capital costs from accounting profits helps focus attention on true value creation—a focus that seems to be lacking given the number of countries in the portfolio of the typical large multinational that generate negative economic value over long periods (see chapter 8)! Making these negative outcomes visible encourages a discussion of whether they reflect deliberate investments or undesirable operating outcomes.

Understand the level at which economies of scale or scope really matter. Economies of scale are the most direct link between volume and the other components of the ADDING Value scorecard. But their strategic implications depend on the level, if any, at which additional scale or scope matters: global scale, national scale, plant scale, share of customer wallet, and so on. Thus, International Paint underperformed internationally for a long time because—unlike Cemex—it focused on global scale in a business in which key scale economies operated at the national level. Or to cite a positive example, Goldman Sachs seems to have done well by focusing on its share of the investment banking business of a select list of global clients. Also note that firms can try to deliberately engineer extra economies of scale through strategies of aggregation in particular (see chapter 5).

Calibrate the strength of economies of scale or scope. Obviously, the strength as well as the locus of economies of scale or scope matters a great deal. Thus, in the late 1990s, Whirlpool, the market leader in home appliances (see chapter 4), tried, and quickly abandoned, a strategy of halving the number of product platforms that it offered worldwide. Given the limited scale economies in the home appliance industry, this move was projected to reduce costs by only 2 percent of revenues—not enough to overcome the other distance-related impediments to successful implementation of Whirlpool’s strategy. In contrast, automakers (which Whirlpool was trying to emulate) have done much better with such strategies because of the greater scale sensitivity of their industry.

Assess the other effects of incremental volume. The preceding discussion focused on scale economies, particularly on the cost side. But incremental volume can have other effects—not all of them positive—on a company’s economics. Additional volume may, for instance, raise rather than lower costs if a key input is in short supply—or because of adjustment costs such as those associated with post-merger integration. And it can clearly affect the other components of the ADDING Value scorecard, which we will discuss later.

Decreasing Costs

Companies contemplating cross-border moves often do consider cost reduction when making such decisions. But here, too, there is much room for improvement, especially since managers are often dissatisfied with their ability to achieve the cost reductions targeted through cross-border expansion.¹¹

Unbundle cost effects and price effects. From the Cemex case, we saw that instead of looking at margins as a percentage of sales, it was better to separate out cost effects and price effects. Single-country strategy recognizes the importance of such unbundling for products that aren’t true commodities. But in a semiglobalized cross-border context, such unbundling can be important even for commodities such as cement.

Since separating out cost effects and price effects rules out the expression of costs as a fraction of revenues, it opens up the question of which other basis of normalization to use. The analysis of the Cemex case relied on expressing revenues, costs, and profits on a per-ton basis. In other situations, it may make sense to normalize by unit of resource input rather than by unit of output. And while capital is the most common resource in this context, other kinds of resources may make sense, depending on industry characteristics. Thus, because capital-intensity is very low in software services and skilled labor-intensity very high, the quantification of costs and revenues in per-employee terms often makes more sense, as we shall see in chapter 6.

Unbundle costs into subcategories. Once again, the Cemex case illustrated this point by highlighting the usefulness of distinguishing between operating costs and capital costs. Fixed costs and variable costs represent another key distinction, particularly for purposes such as breakeven analyses. Other essential distinctions are more specific to the cases being studied. In the home appliances industry, for example, the problem of complexity particularly affects selling, general, and administrative costs, so that this subcategory of costs is worth tracking separately.

Consider cost increases as well as decreases. This point, already made briefly, is important enough to reiterate. Consider, for example, a cross-border merger that is generally thought to have been a failure rather than a success: DaimlerChrysler. While there were many problems with this merger, one important one—especially from the perspective of shareholders in the old Daimler-Benz—concerned added costs: the 28 percent premium effectively paid to Chrysler’s shareholders; hundreds of millions of dollars in investment bankers’ fees and transaction costs; and, on an ongoing basis, hundreds of millions of dollars in extra compensation for German managers to bring their pay packages in line with those of their U.S. counterparts. These numbers loomed large in comparison with the merger’s targeted cost savings, which were mostly confined to procurement and back-end activities such as finance, control, IT, and logistics.

Look at cost drivers other than scale and scope. While the preceding discussion focused on scale and scope, strategists know that there are many other potential drivers of costs: location, which is of particular importance, in a cross-border context; capacity utilization; vertical integration; timing (e.g., early-mover advantages); functional policies; and institutional factors such as unionization and governmental regulations such as tariffs. Looking at the full range of cost drivers increases a company’s ability to reduce, or at least contain, the costs that result from cross-border expansion.

Relate the potential for absolute cost reductions to labor- or talent-intensity. The intensity of labor or talent is just one dimension of the possibilities for economic arbitrage, but has attracted special attention. You might, therefore, want to compare your businesses to cross-industry averages (for U.S. manufacturing), where personnel expenses equal to 17 percent of revenues mark off the bottom quartile, 23 percent the median, and 31 percent the top quartile. High values for your company relative to these benchmarks increase the potential for absolute cost reductions through labor arbitrage.

These are just some of the cost-related issues to consider in applying the ADDING Value scorecard. Others will be mentioned even more briefly. When opportunity costs differ greatly from actual costs (e.g., when cheap inputs are in short supply), it is important to focus explicitly on the former. And even where this isn’t a problem, many companies have grossly inadequate costing systems—this tends to be particularly true of overhead costs—that must be cleaned up before costing can be a useful input into strategic analysis. Analysts sometimes also confuse differences in firms’ costs with differences in their product mixes instead of looking at comparable products. Another set of problems that concerns cross-border volatility (e.g., fluctuations in currency exchange rates) will be discussed in the section on normalizing risks. And, finally, a focus on costs should not crowd out consideration of differentiation, or customer willingness-to-pay, as discussed next.

Differentiating or Increasing Willingness-to-Pay

If companies are often sloppy in doing their cross-border cost analyses, they are often even worse when it comes to differentiation or willingness-to-pay. They may assume that what worked at home will, with some tinkering, work as well (or better) abroad. But such an assumption is no substitute for serious analysis of this value component. Here are some helpful guidelines.

Relate the potential for differentiation to R&D-to-sales and advertising-to-sales ratios for your company or industry. Expenditures on R&D and on advertising in relation to sales are the two longest-established and most robust indicators of multinationalization, which is why product differentiation is considered the hallmark of (horizontal) multinationals.¹² R&D expenditures equal to 0.9 percent of sales revenues define the bottom quartile for U.S. manufacturing, 2.0 percent of revenues the median, and 3.5 percent the top quartile. The corresponding cutoff points for advertising-to-sales ratios are 0.8 percent, 1.7 percent, and 3.5 percent. The Cemex case supplies useful perspective. Note that cement falls within or close to the bottom decile of U.S. manufacturing industries on both advertising intensity and R&D intensity. This doesn’t mean that opportunities for differentiation are entirely absent: Cemex has devised delivery innovations for bulk buyers and displayed creativity in branding bagged cement for individual buyers, and in financing their purchases. Rather, the implication is that the room for differentiation is simply more limited in this industry than in, say, detergents, soft drinks, or pharmaceuticals, and that it is important to be realistic about that point.

Focus on willingness-to-pay rather than prices paid. There are at least two problems with using prices as proxies for the benefits for which buyers are willing to pay. First, prices mix in a number of other influences related to industry attractiveness and bargaining power, as we saw in the Cemex case. Second, a focus on willingness-to-pay encourages envisioning things as they might be rather than as they actually are. These and other kinds of game-changing strategies are discussed more systematically in the subsection, later in this chapter, on creativity.

Think through how globality affects willingness-to-pay. There is a lot of talk about cravings to belong to a global community, as well as a few possible examples, such as Zara, the Spanish fashion retailer: one can imagine fashionistas in one country caring to some extent about what their counterparts in other fashion-forward countries are wearing. However, examples of globality per se increasing willingness-to-pay are relatively rare, especially in consumer products. (For business-to-business products and services, buyers may themselves be globalizing, making such increases more likely.) Of seemingly comparable importance but often underemphasized are country-of-origin advantages—associated with specific countries or regions, rather than with globality in general—that can, to some extent, be influenced through strategy.¹³ Häagen-Dazs is a good example: the name was devised by the Bronx-based company’s U.S. founders to give a faux-Scandinavian appeal to their ice cream.

Against these kinds of possible advantages from cross-border operation, one has to weigh all the liabilities of foreignness that apply broadly to foreigners, and country-of-origin disadvantages attached to specific countries. For every Häagen-Dazs, there seems to be an Arla, the truly Danish dairy products company that was badly hurt by the Middle Eastern outcry against cartoons insulting Islam published in a Danish newspaper. Note that country-of-origin disadvantages—for example, being Danish, for Arla—need not be confined to countries that are generally prominent or widely disliked.

Analyze how cross-border (CAGE) heterogeneity in preferences affects willingness-to-pay for the products on offer. Chapter 2 covered this topic in depth, so all that will be added here is a reminder of the challenges in this regard. Even preference heterogeneity that seems relatively simple and obvious may require transformational changes if it is to be handled effectively. Thus, consider the trend selected as the most portentous for global business over the next five years, in a survey by the McKinsey Quarterly in early 2006: the growing number of consumers in emerging countries.¹⁴ The income-related differences thereby spotlighted seem rather straightforward when compared with some of the other cross-country differences discussed in chapter 2. But actually adapting business models tuned to advanced markets to compete effectively in emerging markets is likely to require massive efforts, with uncertain odds of success. Adaptation is the topic of chapter 4.

Segment the market appropriately. Segmentation obviously picks up on differences in willingness-to-pay (and, sometimes, differences in costs). Typically, the number of segments to be considered increases with diversity in customer needs and ease in customizing the firm’s products or services. Resegmentation can play a broader role as well, by shifting perspectives on a situation and thereby stretching strategic thinking. These benefits of segmentation are often more important in a cross-border context than in a single-country one because cross-border differences generally exceed within-country ones. But the benefits from better thinking across borders can also be helpful in a within-country context. As a European manager of a major U.S. consumer products multinational told me, “We’re now reeducating headquarters in segmentation.”

                              

In conclusion, it may be harder to pin down the implication of a move for willingness-to-pay than for costs, especially when preferences have a significant subjective component. But that is no reason not to improve on generally bad practice in this area. The guidelines offered here help suggest how to do so.

Improving Industry Attractiveness and Bargaining Power

Our discussions of decreasing costs and differentiating, the two Ds in the ADDING Value scorecard, focused on efficiency. As the Cemex case illustrates, it is also important to bring considerations of industry attractiveness or bargaining power to bear. Here are some specific guidelines for doing so.

Account for international differences in industry profitability. The simplest way to illustrate international differences in industry profitability is to note the very large variation in average profitability across countries; see figure 3-8 for data on more than four thousand firms from forty-two countries. Such cross-industry differences in average profitability represent one source of cross-border variation; the other one to be picked up, of course, involves variation in the profitability of the same industry across different countries. Both types of systematic variation seem to be too large to ignore.

Understand concentration dynamics in your industry. Chapter 1 pointed out that managers overwhelmingly believe that increased global integration increases global concentration—even though it doesn’t. This isn’t just a generalized misconception: managers are sometimes unaware of concentration dynamics in their own industries!

The auto industry is a case in point. The common belief, used to justify megamergers such as DaimlerChrsyler, is that this industry is getting progressively more concentrated.¹⁵ Yet, the concentration data actually indicate that the big story since World War II has been a decline in global concentration, followed by a flattening-out at levels much lower than a few decades ago (figure 3-9).¹⁶ In fact, the heyday of global concentration in the autos was eighty years ago, when Ford’s Model T accounted by itself for more than one-half of the world’s stock of cars! And the difference matters. Megamergers would make the most sense if rising economies of scale were actually raising global concentration, but the prevailing situation in autos is one of fragmentation and excess capacity. In such a fragmented situation, a megamerger takes on the flavor of paying privately for the costly good—spread across all the firms in an industry—of removing a major competitor from the scene. Nice for one’s competitors, but not necessarily for one’s shareholders.

Look broadly at (other) changes in industry structure. The point of the previous guideline was that instead of assuming that globalization is increasing industry concentration, you must look at the evidence. Along the same lines, it is also important look at whether other elements of industry structure—the factors highlighted by Michael Porter’s five-forces framework, for instance—are changing. Examples include shifts in sales or production to emerging markets and the possibility of greater exposure to holdup by global buyers and suppliers as a result of increased cross-border activity.

Think through how you can de-escalate or escalate the degree of rivalry. It is common to assume (often without offering any rationales) that competitors will behave in one of several standard ways: by imitating moves (e.g., entry into new markets), backing off in the face of threat, running as hard as possible, and so on. But figuring out competitors’ likely responses to a move is better undertaken on the basis of detailed structural and competitor analysis. Detailed analysis of this sort is needed to explain, for example, why multimarket contact appears to have raised prices in some industries, such as cement, but has led to price wars in others, such as tires.

Recognize the implications of your actions for rivals’ costs or willingness-to-pay for their products. Raising your rivals’ costs or reducing their willingness-to-pay can do as much for your company’s margins as improving its own position in absolute terms. Thus, in order to cope with low-cost competitors in software services from India, Western firms such as IBM and Accenture have built up significant operations there. The intent is to raise their Indian competitors’ labor costs and reduce their own.

Attend to regulatory, or nonmarket, restraints—and ethics. The legal status of the strategies listed under the two headings immediately above, in particular, varies across countries. This raises a broader issue related to regulatory or other nonmarket restraints on behavior, particularly behavior aimed at building up bargaining power of the sorts considered in this section. Not surprisingly, this was also the kind of behavior that raised legal and ethical questions as well as prices in the Cemex case.

I tell my MBA students several things about such cases. First, if they ever think about sitting down in a room with their rivals and agreeing to raise prices, they should probably think again: horizontal stripes look a lot worse than pinstripes. Second, I have them consider a list of behaviors like the following:

1. Recognizing that dominance or recognition of mutual dependence can help raise prices (e.g., through tacit coordination)

2. Exploiting local contacts (e.g., lobbying for protection)

3. Building market power indirectly to circumvent restrictions on concentration (e.g., through cross-holdings)

4. Renegotiating deals if opportunities present themselves (e.g., threatening to cut off service after establishing incumbency—most effective in natural monopolies)

5. Striking secret agreements with government officials (e.g., post-privatization “discovery” of valuable tax loopholes that effectively reduce privatization prices)

6. Figuring out (semi)legal ways of making payoffs to governmental officials (e.g., through intermediaries)

Only the first two elements of this list—which, to many of my students, are the least problematic—have been established in the Cemex case. But it is easy to come up with examples of the other, more problematic kinds of behavior as well. Students tend to vary greatly as to how far down the list they are willing to go. But the one caution I give them is that if none of the behavior on the list worries them, they probably have an underdeveloped sense of ethics. And that’s also what I would tell you.

Normalizing Risk

This value component is deliberately framed in terms of normalizing rather than neutralizing risk so as to recognize the potentially large divergence between risk optimization and risk minimization. In addition, while finance theory has been very precise about how to calculate the risk-adjusted discount rates that go into the denominator of discounted cashflow analysis, the strategic perspective on risk emphasizes getting a better handle on the variability of the cashflows that go into the numerator of this analysis. This is a challenging task, but some general guidelines can be offered.

Characterize the extent and key sources of risk in your business (capital intensity, other irreversibility correlates, demand volatility, etc.). From a strategic perspective, a rough and ready way of unbundling risk is to classify it into the following categories:

• Supply- and demand-side risks

• Financial risks such as foreign exchange volatility and the systematic correlation between local returns and the world portfolio

• Competitive risks, including those associated with not investing, such as allowing a competitor a profit sanctuary in its home market

• Nonmarket risks

In applying this or some other classification scheme, it is important to avoid double-counting. Also note that relevant risks vary both by strategy and by industry: a company that emphasizes cross-border supply chains in its globalization strategy faces very different risks from those faced by a company that has set up self-contained operations in different geographies. A useful way of summarizing risks is in terms of the learn-to-burn rate: a ratio that looks at how quickly information resolving key uncertainties comes in versus the rate at which money is (irreversibly) being spent. The learn-to-burn ratio looks much higher for investments in fast-food outlets, say, than in electricity.

Assess how much cross-border operations reduce risk—or increase it. Cemex provides a good example of geographic pooling that reduces operating risk. But Coke supplies a counterexample: the volatility in demand growth that it has faced since the Asian crisis was almost entirely generated by Coke’s less mature, non-U.S. operations. Broader global scope also increases the risk of multimarket contagion: Arthur Andersen’s post-Enron problems in the United States wouldn’t have affected the accounting firm in, say, France if the two had been separate entities. The importance of such counterexamples to risk-pooling is amplified by research suggesting that multinationals’ returns from the diverse markets in which they operate often tend to be much more correlated than local competitors’ returns across the same markets.

Recognize any benefits that might accrue from increasing risk. The idea of normalizing risk seems to suggest that risk is always to be minimized. Given optionality, however, risk can be valuable for the same reason that financial options are more valuable in the presence of greater (price) volatility. Cemex’s swap in the late-1990s of capacity in the low-risk, low-growth Spanish market for higher-risk, higher-growth capacity in Asia exemplifies an appreciation of optionality shared by many multinationals from mature, developed markets—thinking of emerging markets as gigantic strategic options rather than just as risk traps.

Consider multiple modes of managing exposure to risk or exploitation of optionality. There are many ways of managing risk. Thus, a company might enter a foreign market with a fully owned greenfield operation, make an acquisition, work with a joint venture partner, or simply export there—which typically have very different implications for risks (and returns). Or, given widely diversified shareholders (unlike the case of Cemex, where a significant fraction of the controlling family’s wealth was tied up in the company), it may make more sense to rely on shareholders to eliminate industry-specific risks and, on that basis, discount them in formulating company strategy. Registering a broad sense of the possibilities is likely to improve the risk-return trade-off that a company faces.

Generating Knowledge—and Other Resources and Capabilities

More than any other component of the ADDING Value scorecard, the generation of knowledge (and other resources and capabilities) addresses what can be thought of as a company’s strategic balance sheet instead of its strategic income statement. It focuses on developing and deploying resources and capabilities over time, of which knowledge is probably the most widely studied example.

Assess how location-specific versus mobile knowledge is and what to do about it. Cemex exemplified successful knowledge transfer that was greatly simplified by environmental characteristics: cement is cement is cement, so ideas generated in one part of the world can be applied relatively easily (i.e., without much translation) in other parts of the world. Multidimensional distance between countries presents more of a challenge in many other environments, requiring explicit attention to knowledge decontextualization and recontextualization if knowledge transfer is to work well. Otherwise, knowledge transfer can make matters worse rather than better.

Consider multiple modes of managing the generation and diffusion of knowledge. Research on knowledge transfer tends to focus on formal transfer within multinationals in a way that excludes other modes of knowledge development and deployment across borders: through personal interactions; working with buyers, suppliers, or consultants; open innovation; imitation; contracting for the use of knowledge; and so forth.¹⁷ And even the effectiveness of internal knowledge transfer can vary greatly, depending on how it is managed.

For example, while beauty company AmorePacific has done a good job of protecting its home base in Korea, it has had difficulties capturing and integrating knowledge from some of its non-Korean operations. Thus, while its French operation has enjoyed some success in launching new perfumes, particularly Lolita Lempicka, knowledge flowback has been limited by weak links with the parent organization. The efforts of Japanese cosmetics manufacturer Shiseido are more impressive in this regard: after its success in making and launching perfumes in France, the company has used its French facilities to start making “Shiseido lines” for Japan (where most of the concept development and final fragrance adjustment is done) and has transferred some French managerial techniques to Japan for other products.¹⁸

Think of other resources or capabilities in similar terms. Knowledge transfer still has a technical or technological tinge. Other types of information—such as management innovations, as in the case of Shiseido—can also usefully be transferred across borders (with information technology often supplying a boost). More broadly, there are many other kinds of resources and capabilities that might also be taken into account under this value component.

Relationships constitute one important example. What accounts for Cemex’s success at weathering antitrust challenges at home and at blocking attempts to import cement into Mexico, as in the case of the Mary Nour, a ship that tried unsuccessfully for six months to unload its cargo of Russian cement at various Mexican ports before giving up? Part of the answer is probably to be found in CEO Lorenzo Zambrano’s web of domestic relationships: kinship ties with other leading business families based in Monterrey, such as the Sadas and the Garzas; interlocking board memberships with their companies and other leading Mexican ones; membership in the powerful business association Consejo Mexicano de Hombres de Negocio; and close links to the political establishment.

And while this particular example is domestically focused and again raises some ethical questions, it is easy to think of cross-border relationships that do not. Thus, a time-honored reason for multinationals to partner with local firms, even when local regulation doesn’t mandate it, is to tap into their local partners’ domestic networks of relationships.

Avoid double-counting. While this is a generic problem in applying the ADDING Value scorecard, double-counting is particularly likely to arise in the context of this component of the scorecard. If you have already managed to account for the effects of generating (or depleting) a resource on costs, willingness-to-pay, and so on—which is what is generally recommended—avoid including them under this component of the scorecard as well.

Beyond the ADDING Value Scorecard

The ADDING Value scorecard provides a basis for assessing whether a particular strategic move makes sense. In addition, a full-fledged consideration of strategic alternatives should cover several auxiliary but important questions:

1. Is the selected strategic option likely to lead to sustained value creation and capture?

2. Does experience tend to confirm or contradict the results of the analysis?

3. Has enough attention been devoted to considering whether any better alternatives can be devised?

Each of these three additional considerations is something that I could write a separate chapter about—and actually have.¹⁹ But considerations of space permit just a quick review here.

Sustainability

What’s really important about a strategic option is not whether it will add value at a point in time, but whether it will continue to add value over time. And if it does succeed at adding value over time, how much of that added value will a firm get to appropriate or pocket, given competition from other players in its environment?

Recognize that superior performance is often short-lived. The first step in taking sustainability seriously is to recognize that you can’t take it for granted. At the industry level, industries that are subject to rapid real price declines—3 percent declines per year are one suggested threshold—are fast-cycle industries in which superior performance tends to be short-lived unless a firm can innovate continuously. For example, price declines in consumer electronics exceed this threshold, whereas those in cement do not. And company-level indicators of unsustainability include earnings that are highly dependent on returns from resources with short half-lives.

Think through how your environment is likely to evolve. Although summary indicators of sustainability versus unsustainability are useful sensitization devices, they are no substitute for thinking through how a specific strategic move fits with trends in your environment, broadly conceived.

Reconsider News Corporation’s acquisition of Star TV. This move was supposed to add value by letting News Corporation recycle English-language programming from its library, thereby decreasing programming costs. But at the time of the acquisition, News Corporation could have predicted that a host of changes were under way in Asian TV markets that would undercut the viability of this strategy. In particular, it was reasonable to expect that rapid growth in viewership would reduce the per-viewer importance of the country- and language-specific programming costs that News Corporation was seeking to avoid. Superimpose on these changes, in relative costs, the greater appeal of domestic programming—evident from either common sense or contemporaneous data (figure 3-10)—and you get a clear picture of the English-language strategy becoming less viable over time.

Anticipate how other players in your value system are likely to behave. In addition to thinking through broad changes in your environment, a useful test of sustainability is to put yourself in the shoes of other players with whom you interact. We have already talked about undertaking detailed analysis to figure out how direct rivals will behave. Similar analysis can be attempted for potential entrants, customers, suppliers, and companies that provide substitutes for, or complements to, your products. What could they do if they were trying to maximize value for themselves? What are they actually likely to do, given their predispositions? And what kinds of moves on your part are likely to elicit aggressive versus accommodating responses from them?

Look at the extent to which moves can be imitated (or neutralized). While the intent of detailed profiling of competitors or other players in your value system is to predict how they will behave, that quickly gets unmanageable as the number of players increases. It then makes sense to look directly at the extent to which a move that aims to create value can be imitated (or neutralized) on the grounds that if imitation is feasible, it will happen, eroding scarcity value.

Think through sequences of moves. Sustainability is often built up and, more broadly, opportunities unlocked, through sequences of moves. Given that, it is important to anticipate and account for such linkages among moves or projects before deciding whether to invest in the first one or not. While this requires a deep look into the future, which is often difficult, the basic logic should be clear enough: strategists should evaluate strategies overall, rather than individual projects or moves that are components of those strategies.

Remember that some moves are worth undertaking even if they do not afford sustainable advantages. If you do not undertake certain moves, your company will be at a sustained disadvantage. This is another way of reinforcing the point made earlier: while comparisons with competitors can be very useful, the ultimate objective is to create value for your company rather than to beat the competition per se.

Judgment

Most strategic decisions require judgment as well as analysis. Judgment involves recognizing that analysis is always potentially prone to error and that, therefore, you can improve the odds of making the right call by evaluating whether the recommendations that emerge from the analysis are reasonable.

While there are many ways of triangulating on the analysis, three kinds of judgments are considered crucial to strategic decision making:

• Distinctive competence or capability: The ratio of good opportunities to bad ones is likely to be higher inside your company’s zone of distinctive competence than outside it.

• Resource balance: In making major strategic decisions, you should pay some attention to maintaining a rough balance between the supply of and the demand for key resources, including capital.

• Structural context: It is also important to consider how the strategic options being considered were surfaced and evaluated—often achieved, in part, by paying attention to who is championing them.

Consider, for example, Santander of Spain’s 2004 acquisition of Abbey National of the United Kingdom for € 12.5 billion to create what was then the world’s tenth-largest bank by market capitalization. Santander’s assessment of Abbey covered all the components of the ADDING Value scorecard. But from talking to Santander chairman, Emilio Botín, I realized that all three bases of judgment described above also factored into his decision. First, Santander thought it was well placed to be the acquirer: the company had significant experience at restructuring retail banking acquisitions; it had enjoyed a window on the United Kingdom since 1988 because of a strategic alliance with Royal Bank of Scotland (RBS) that had also let Santander closely observe RBS’s absorption of a much larger bank, National Westminster; and bids by larger U.K. banks, including RBS, were likely to be blocked by regulators. Second, the acquisition helped boost topline growth that had begun to falter—while representing about the largest deal that Santander’s balance sheet could handle. And finally, the Abbey opportunity had been vetted by Juan Rodríguez Inciarte, a confidant who had been responsible for several other successful initiatives and who, along with Botín, served as one of Santander’s two representatives on RBS’s board.

Creativity

So far, this chapter has focused on improving the evaluation of strategic options. But creativity in improving the set of considered options is a very important and complementary element of strategy development because multiplying tests without improving alternatives is a good recipe for analysis paralysis—that is, for inaction.

Creativity can never be completely systematized, but there are some obvious ways of enriching the set of strategic options considered. While this chapter has mentioned some in passing, here are five broad, complementary approaches to consider. Most of them are generic—that is, they could also be applied to single-country strategy—but they will be elaborated along lines particularly useful for global strategy.

Vary the options considered in terms of control, mode of development, scale, timing, and other factors. International business has noted many possible modes of product market participation: exports, supply agreements, licensing and franchising, strategic alliances, joint ventures, and fully owned operations, with the choice between the last two attracting the most attention. Proponents of ownership stress its advantages in terms of security and control. On the other hand, proponents of joint ventures point to their advantages in terms of accessing local capabilities and networks and reducing adaptation challenges, as discussed in the next chapter.

While this debate is bound to continue, I would argue that from a managerial perspective, the choices between different modes of market participation tend to be so situational that generic assessments are unlikely to help. Rather, managers need an understanding of the implications for each component of ADDING Value and for the share of the added value that can be pocketed on a sustained basis. Also note that similar arguments hold for modes of participation in input markets (e.g., captive versus noncaptive offshoring) and for internal development versus acquisitions.

Broaden the scope of the scanning effort. The discussion of sustainability touched on some such suggestions, including focusing on changes as a way of uncovering what’s new; expanding the scope of external scanning efforts to include the entire value system in your industry, not just direct rivals; and putting yourself in other players’ shoes. Of course, the most obvious way to broaden the scope of the scanning effort in a global context is to look at multiple geographies. Thus, even if your company has no direct interest in India or China, it may be worth looking at the strategies being developed by competitors there. For example, every wireless services operator should at least be aware of the radical outsourcing strategy pioneered by the leader in the Indian market, Bharti Airtel, which has helped Bharti reduce calling rates to less than two cents per minute, compared with twenty-cents-plus in many developed markets. And take my own line of work: many business schools, particularly in the United States, have a strongly domestic orientation. However, they could learn from looking at examples such as ICFAI Business School in India, which has—by emphasizing scalability, distance learning, and a focus on market requirements—expanded its MBA enrollment tenfold over ten years to become one of the largest business schools in the world. Of course, given distance, literal translation of such examples to other contexts probably wouldn’t work: instead, explicit attention to knowledge decontextualization and recontextualization would seem to be required.

Shift the perspective. Looking at competitors from very different geographies is just one way of trying to achieve a radical shift in perspective. Many others have also been proposed, of which only a few can be mentioned here. Drop one assumption, a few, or even all (e.g., think about how one might solve a particular problem if starting afresh or if money were no object). Identify the unwritten rules that drive the industry and competitor behavior, and try to break them. Emphasize threats as well as opportunities as a way of increasing receptivity to change. Follow outside-in paths, from possible answers to the issues facing a business—threats and opportunities—that they might address, as well as inside-out paths, from issues to answers. Understand how to do the opposite of what you actually wish to achieve, and then do the opposite of that. Adopt a can-change attitude toward the current state of affairs by asking yourself, “Why not?” Think of other ways of flipping things around (e.g., by changing who pays whom). Use techniques developed to enhance lateral or parallel thinking. And take the idea of putting yourself in your competitors’ shoes one step farther by analyzing your company as a competitor from their perspectives.

The mechanisms mentioned above might seem both abstract and diffuse, but examples help underline how valuable such radical shifts in perspective can be. Diamond producer De Beers initially opposed restrictions on trade in conflict diamonds, but then had the mental agility to realize that such restrictions could actually help it deal with oversupply and commoditization in the diamond market. Ryanair, Europe’s low-fare airline, came up with a strategy of not only charging passengers for their flights to less popular airports, but also charging both these airports and tourist authorities a fee for bringing them many passengers. Zara, the Spanish fashion retailer, figured out that it could cut down on overstocks and enhance customer willingness-to-pay by speeding up its design-and-manufacturing cycle, thus making key items based on within-season trends instead of guessing ahead. And Lakshmi Mittal, who now controls Arcelor-Mittal, saw that much of the value of the integrated steel mills that he started to acquire in the mid-1990s in the former Eastern Bloc might reside in the associated mineral rights rather than in their steelmaking capacity per se.

Harness the creative powers of the whole organization. Yet another way to stretch thinking about strategic options involves moving beyond the “one big brain” model of strategic innovation and instead shaping organizational processes and structures to reflect what we know about creativity. Again, very briefly, recommendations include cultivating open-mindedness; fostering risk-taking and a commitment to learning; tolerating divergent thinking; developing suitable sensors; making strategic planning more discovery driven or more like an extended dialogue; emphasizing rich information flows and mastery of the details of the business; conducting data-driven analysis; countering known biases (e.g., the “not invented here” syndrome); relying on intrinsic commitment devices such as passion as well as extrinsic commitment devices such as incentives; and continuously revitalizing, challenging, and even unsettling the organization. Such organizational traits obviously affect the evaluation of new options as well as their generation.

While these mechanisms are, again, generic, harnessing the power of the whole organization across borders has a particular resonance in a semiglobalized context, as illustrated by the case of Coke. Thus, one of the changes that Neville Isdell has made since he took over as CEO of Coke is the reinstitution of internal trade fairs and other global get-togethers. There were reportedly no such gatherings under Douglas Daft, reflecting his “think local, act local” bias, and the ones that took place under Roberto Goizueta presumably had a “one big brain” bias—in other words, they simply served as a conduit for headquarters to tell the field what to do.

Read the rest of this book. A final approach to enhancing creativity in devising global strategies is the one that occupies the rest of this book. Given the conclusions drawn thus far—that we live in a semiglobalized world in which the differences across countries still matter a great deal—part 2 of this book looks at several broad strategies for dealing with differences. This systematic treatment of differences helps develop an approach to thinking about value creation that complements but is much more customized to global strategy than the other approaches to enhancing creativity discussed in this subsection.

Conclusions

The box “Global Generalizations” summarizes the specific conclusions from this chapter. More broadly, this chapter provided a comprehensive, rigorous basis for tracking value creation through cross-border moves. The intent was to provide you with a more realistic way to analyze such moves. Realism is not meant, however, to be a substitute for creativity; rather, it is blending the two that will optimize performance.

Armed with the ADDING Value scorecard, part 2 of this book will consider broad strategies for dealing with the differences across countries—while, of course, also recognizing and exploiting similarities. The Cemex case, discussed in particular detail in this chapter, was relatively simple in this regard, given that cement is cement is cement—with the caveat that geographic distance does matter a great deal even in this industry. The chapters that follow will, among other things, expand on the practicalities of applying the concepts and tools developed in part 1 to situations where differences are more multidimensional—and more salient.