8

Toward a Better Future

Getting Started

Even if you’re on the right track, you’ll get run over if you just sit there.

—variously attributed to Arthur Godfrey and Will Rogers

IN THE 1980S, the rhetoric of globalization concentrated on markets. In the 2000s, it seems much more focused on production. In addition to the substantive content of this shift, it suggests some variability over time in how enthusiasts have thought about globalization up to now. There is similar variability in beliefs about the future of globalization.

Getting caught up in one of these debates is often no help in—and sometimes an obstruction to—deciding what to do about global strategy and getting started at doing it. This chapter begins by commenting briefly on forecasts about the future of globalization. It then offers several suggestions for improving paths to the future and concludes with a five-step framework for getting started by doing a global strategy audit for your business or businesses.

Forecasts About Globalization

Forecasts about globalization have a tendency to get too caught up in the times in which they are formulated. Thus, Karl Polanyi and coauthors (1957) and Karl W. Deutsch and Alexander Eckstein (1961), writing before the full extent of the recovery of globalization after World War II became clear, emphasized that various measures of internationalization had declined significantly since the period before World War I, and asserted that this trend was unlikely to be reversed anytime soon.¹

Contrary to the predictions by those eminent thinkers, cross-border economic activity surged in the postwar period and, as it breached prewar records, inspired forked responses, with optimists stressing that international economic integration had reached new heights, and pessimists insisting that it had barely returned to levels experienced nearly a century earlier. Optimism about globalization drew strength from the fall of the Berlin Wall in the late 1980s; rapid growth in Asia, particularly China (albeit qualified by the Asian currency crisis); and, more recently, the surging globalization of production. But, perhaps since optimism tends to provoke its own opposition, we are seeing, as I write this, serious suggestions that globalization—as in the rate of increase of cross-border integration—may be slowing down.

The level of seriousness with which I take such forecasts is limited, for reasons that aren’t restricted to past performance, or nonperformance, but also include several other considerations:

• Skepticism about using blips in the business cycle and other high-frequency events as the basis for announcing changes in the direction or speed of a process with significant momentum that has unfolded over a long period

• Appreciation of the complexities of making precise predictions about organizations, let alone countries or the entire world economy, coupled with unease about how some of the forecasts that are made seem to be pulled out of thin air

• Belief that the semiglobalized state of the world, far removed from either complete localization or complete integration, is a better basis for company strategy than iffy forecasts about changes in that state or changes in the rate of change

To elaborate on that last point, think of somebody who is driving across the United States and who happens to be in the Midwest. The driver is going to be far from the coasts for quite some time, irrespective of whether he or she speeds up or slows down—or even changes direction. A similar argument applies to semiglobalization. Looking forward, levels of cross-border integration may increase, stagnate, or even suffer a sharp reversal if the experience between and during the two world wars is any indication of the possibilities. But given the parameters of the current situation, it seems unlikely that increases will anytime soon yield a state in which the differences among countries can be ignored. Or that decreases could lead to a state in which cross-border linkages can be forgotten about. So one does not have to make a precise forecast to predict that semiglobalization as a condition is sufficiently broad to persist for some time to come. Achieving similar stability in attitudes toward global operations would seem preferable to mood swings about the outlook—especially since most global strategies cannot be changed on a dime.

So to summarize, the one forecast that I am comfortable with is that semiglobalization is likely to persist for the next decade, the next two decades, and (probably) beyond—although obviously, the confidence interval fans out as one moves farther into the future. If this diagnosis plays any role in preventing bipolar attitudes toward globalization, it will have been worthwhile. But readers are probably also looking for specific advice on what might be done to improve their companies’ future global trajectories. In response, let me offer some tentative recommendations for making a path toward a better future.

Path Making

How might you improve the path that you follow from today to tomorrow and beyond if the future is shrouded in uncertainty? To be more specific, how might your company improve, in the context of globalization, on the common expedients of sailing in one direction until hitting a sandbar, or playing pinball to the headlines, or simply marking time?

1. Anticipate bumps and detours even if you do believe that the world will eventually become much more integrated. Even if you remain convinced that the apocalyptic vision of close-to-complete integration will be realized sooner or later, recognize that the road from here to there is unlikely to be either smooth or straight. There will be shocks and cycles, in all likelihood, and maybe even another period of stagnation or reversal that will endure for decades. (It’s happened before!) Volatility of this sort is particularly worth allowing for in relation to the BRIC (Brazil, Russia, Indian, and China) economies that Thomas Friedman and other writers have recently emphasized as centers of value creation in the twenty-first century. But even companies that are supposed to be sophisticated about emerging markets trip up on this point. Goldman Sachs—the leader in investment banking in most major markets, the first major Wall Street bank to commit resources to post-Soviet Russia, and one of the institutions responsible for popularizing BRIC countries as an opportunity set—ranked twenty-fourth among investment banks in Russian equity and debt underwriting in 2005.² Why so low? Because Goldman, like a number of other investment banks, exited after Russia’s 1998 financial crisis and debt default, and let several years go by before trying to reestablish its foothold there. Note that strategies such as this often entail buying in at the top of the cycle and exiting at the bottom—usually not a recipe for financial success.

2. Pay attention to other “predictable surprises” as well. Bumps are just one manifestation of “predictable surprises,” a term coined by Max Bazerman and Michael Watkins to describe situations where “leaders had all the data and insight they needed to recognize the potential, even the inevitability, of major problems, but failed to respond with effective preventative action.”³ A number of predictable or at least possible surprises are in the air as far as the general global environment is concerned: global warming; different kinds of meltdowns in the Middle East, China, and India, and the United States, among other possibilities; a global liquidity crisis; a general sociopolitical backlash against globalization; and so on.⁴ Notions of a global governance gap reinforce the idea that a shock of this sort might have a persistent effect. How many such shocks is your company prepared for? At a minimum, I suggest articulating one or more deglobalization scenarios and analyzing their implications for your company’s global strategy, as a prelude to thinking, possibly, of alternatives.

3. Add to predictive power by taking things down to the industry and company level. Shocks, cycles, and trends, even when they have crosscutting implications, vary greatly across industries and companies in their effects, in ways that greatly reduce the usefulness of trying to fit one world-historical conception to all of them. Focus on the risks and, more broadly, trends that are most likely to affect your industry or company, and how they are actually to do so. Thus, even the effects of something as potentially far-reaching as global warming depend on whether one looks at the issue from the perspective of a financial investor, a construction firm, an automaker (whose reaction would also depend on its focus on large versus small cars), or a potential supplier of cleaner energy, to cite some varied examples. And depending on the setting, other risks or trends may well be more salient and therefore worth prioritizing. For example, when I first started working with Indian software firm TCS on building useful scenarios about the future, we figured that it made the most sense to start with avian flu, given the nature of the company’s business.

4. Recognize the importance of business in shaping broad outcomes—including those related to the future of globalization. The preceding discussion might have seemed to suggest that outcomes will unfold independently of what businesses decide to do. But for many key uncertainties, that is clearly not the case. Consider the broad process of globalization itself. Some of the concerns voiced by antiglobalizers include the following:

• A declining share of wages in total national income in developed countries at a time when the share of profits is at a multidecade high in many of them

• The lack of a globalization safety net in many of those countries (the United States, for instance, is estimated to gain $1 trillion per year from trade, but to spend about $1 billion on retraining)⁵

• The creation of a two-track world. As Muhammad Yunus, the microcredit pioneer put it in his speech accepting the 2006 Nobel Peace Prize, if globalization “is a free-for-all highway, its lanes will be taken over by the giant trucks from powerful economies . . . [at the expense of] Bangladeshi rickshaws.”⁶

It is neither principled nor practical for companies to stick their heads in the sand in response to an issue as fundamental as the distribution of the globalization dividend. In terms of public discourse and action, in particular, I’d recommend the following steps for companies that favor greater integration (note that not all will do so):

• Be careful about your choice of words. Outsourcing often triggers negative vibes, as former Bush economic adviser Greg Mankiw discovered; so does globalization, which, according to U.S. pollster Frank Luntz, “frightens older workers.”⁷ (Luntz recommends talking about the free-market economy instead—although one suspects that this might work less well in continental Europe.)

• Try to be concrete rather than abstract about economywide benefits of globalization. Findings such as the McKinsey Global Institute’s calculation that for every dollar the United States sends abroad through outsourcing, it gets about $1.12 back are more useful than appeals to the process of market equilibration described in economics textbooks.⁸

• Dispel globalization bogeymen that don’t have a scientific basis, such as the myth, discussed and discredited in chapter 1 and my other work, that increased global integration necessarily leads to increased global concentration.

• Support job-retraining programs and, more broadly, social insurance. History shows that support for free trade tends to be fragile in the absence of such programs.

• Emphasize upgrading and productivity growth as the focus of public as well as business policy. These are what really matter in the long run for the wealth of nations as well as companies.

5. Don’t let a focus on the future crowd out consideration of the here and now. The future, including whether the direction of globalization creates headwinds or tailwinds for global strategies, certainly has a bearing on the success or failure of those strategies. But it should not be allowed to crowd out consideration of other factors that also matter, including those in the here and now. A refrain throughout this book is that the current state of practice of global strategy leaves significant headroom for improvement. One way of exploiting that potential is to get started. Figure 8-1 depicts a five-step process for doing so, although the sequencing should not be taken too literally. The rest of this chapter focuses on these steps.⁹

Getting Started

Suggestions about how to use the ideas developed in this book to devise better global strategies have run through the previous chapters. But it seems useful to summarize the suggestions here, in a final chapter, to help the reader start putting them to some use. The five-step process described here starts with background analysis before turning to the articulation and evaluation of strategic options. Since the background analyses are the ones that haven’t already had an entire chapter—or more—devoted to them, they are the ones that are discussed in a bit more detail below.

1. Performance review. As a backdrop to any attempt to set or reset global strategy, it is useful to review how global operations have been doing. At least one dimension on which it is useful to disaggregate performance is the geographic one (although the bases of disaggregation are as numerous as the bases of aggregation discussed in chapter 5). For a range of possible reasons—such as a belief in ultimate ubiquity, escalating commitment, and a focus on accounting profits rather than economic profits that also net out the opportunity costs of the capital employed—many companies get into but don’t get out of unsuitable geographies. Some indications of the extent of the problem are provided by data that Marakon Associates analyzed at my request. Here are Marakon’s findings:

We found that half of the companies we have looked at (8 out of 16) have significant geographic units that earn negative economic returns . . . [We] know from our clients that their profitability by geography has stayed fairly stable over time unless they have specifically targeted action at specific countries/regions.

Figure 8-2 provides a fairly typical example of this type of problem. Note that in 2005, roughly one-fifth of this company’s revenues generated negative economic returns. And if this seems bad, note that the same ratio for Toyota, a champion globalizer, was 25 percent rather than 20 percent.

The broader point is that instead of looking at international revenues, growth rates, and even accounting profits, it is critical to take a value-focused perspective. It is better still to take an even broader approach to global performance management and set up a globalization scorecard, as illustrated in figure 7-3. That is because a sense of how you have been doing generally improves discussions of what you should do next.

2. Industry and competitive analysis. Industry and competitive analysis is an essential part of the approach to global strategy development that is described in this chapter. It actually cascades through the rest of the five-step process as well and will be cited when the respective steps are discussed. What should be emphasized here is that there are some very basic questions about one’s own industry and interactions within it that it is foolhardy to start off without first answering. This is especially true since at least some generally held intuitions in this regard—about increasing global concentration or standardization, for example—turn out to be generally wrong.¹⁰

Nine basic questions of this sort—questions that you should be able to answer with data rather than intuition—are listed in the box “Basic Questions in Cross-Border Industry and Competitive Analysis.” Many of these questions are or can be elaborated further in terms of levels at a point in time versus changes over time, and also in terms of global, regional, or local levels of analysis; and other kinds of segmentation schemes. Each must be looked at from the perspective of a particular industry. And changes over long time frames—often a decade or longer—are of interest, given the slowness with which many global measures move. In addition, compiling and comparing international data may entail much more effort than doing so at the national level. All of which is to say that “just” filling out this background picture of the industry and interactions within it can involve a great deal of work.

3. Difference analysis with the CAGE distance framework. Steps 1 and 2, while basic in terms of due diligence, were also generic in the sense that they didn’t really key off the idea of semiglobalization developed in this book. Semiglobalization draws attention to differences across countries. Understanding the landscape of semiglobalization was the topic of chapter 2, which introduced a multidimensional framework (CAGE) for thinking about different degrees of difference between or among countries. The chapter emphasized distance-based measures of difference, with two objectives in mind:

• Moving the discussion beyond declarations of the existence and importance of cross-country differences by permitting some calibration

• Adding a bilateral or multilateral component to what still too often tends to be country analysis based on unilateral country characteristics uninformed by considerations of distance from home

If these points seem old hat by now, remind yourself of the state of practice, even sophisticated practice. I received a reminder recently when I found myself doing a panel on globalization with several well-known practitioners at an event in Vienna. The audience naturally craved local responsiveness, so one question we were asked was “How should Austrian firms be thinking about East Europe?” The panel generally agreed that East Europe was interesting, although of course, one had to be careful there. The CAGE distance framework goes considerably farther: it directs attention to East European countries where German is widely used, that were part of the Austro-Hungarian Empire, that are close to Austria as the crow flies, share a land border with it, are navigable along the Danube, et cetera. Moreover, the framework can also easily accommodate variation in per-capita income and other significant differences that exist across East Europe.

Chapter 2 also emphasized that much of the value of difference or distance analysis comes from taking it down to the industry level. The objective, in other words, is to look at your industry landscape from a semiglobalized perspective. It is therefore important to figure out the cross-country differences that matter the most in your particular industry and ideal to gain a more quantitative sense of distance-sensitivities. The strategy that is selected—the focus of the next two steps—should embody some coherence in how it deals with the critical dimensions of distance. Of course, this still leaves room for different approaches to dealing with distance, ranging from common proximity-first strategies to opposites such as the “difficult first, easy second” strategy espoused by Haier—although companies rarely do well by seeking out distance along all dimensions. What clearly isn’t a good idea is ignoring distance altogether.

4. Development of strategic options around the AAA strategies. The development of strategic options was discussed in chapters 4–7, which introduced the AAA strategies and discussed how to play the differences off the implied menu of strategy options. In addition, these chapters embodied a number of procedural points, some of which are worth reemphasizing here. First, having two or more options to evaluate is a lot better than having one. Second, strategic options do not emerge spontaneously: they have to be developed and documented. And third, improving the set of strategic options considered should probably command at least as much attention as improving their evaluation.

Improving the set of strategic options has been a recurrent theme of this book. One way this book has tried to help is by stretching thinking about global strategy with reminders of multidimensionality and variation of several kinds:

• The multidimensional (CAGE) differences between countries, and differences in differences

• The multiple components of value that can be affected by cross-border moves

• The variety (and subvarieties) of strategies for dealing with cross-border differences

Additional insights about how to improve strategic options were provided by the discussion of creativity in developing options (chapter 3) and of creating an open, adaptive mind-set (chapter 4; see also my Web site, www.ghemawat.org). And the discussion supplied numerous specific examples of imaginative—as well as unimaginative—development of global strategies. The bottom line? It is always worth looking for a new and improved angle.

5. Evaluation of strategic options with the ADDING Value scorecard. In evaluating strategic options, it is useful to analyze the implications for value in terms of the six components of the ADDING Value scorecard that was introduced in chapter 3. Table 3-2 provided a long list of guidelines—twenty-eight in all—for analyzing these value components. But the length and structure of that list should not obscure the fundamental point that it is important to take a value-focused perspective on globalization.

Again, if this recommendation sounds innocuous, it is worth reviewing current practice. Many companies still see globalization primarily in revenue-related terms, and of the remainder, many focus on accounting profits rather than economic profits (net of capital costs). So a value-focused perspective still seems the exception rather than the rule. And even fewer companies seem to do a good job of connecting strategic decision making about globalization to their systems for corporate financial programming.

The juxtaposition of this focus on value and the need expressed earlier for creativity seems the appropriate note on which to conclude. It should be abundantly clear from this book that semiglobalization, as distinct from the polar abstractions of complete cross-border integration and complete segmentation, enriches the space of global strategies and makes them worth thinking about creatively. But it should also be clear that semiglobalization implies significant barriers to border-crossing activities, which is what makes the focus on value particularly necessary.