Business Beware the World is Not Flat

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RESEARCH & IDEAS

Businesses Beware: The WorldIsNotFlatQ&A with: Pankaj Ghemawat

Published: October 15, 2007

Author: Martha Lagace

With apologies to Thomas Friedman,

managers who believe the hype of a flat world

do so at their own risk, says HBS professor

Pankaj Ghemawat. National borders still

matter a lot for business strategists. While

identifying similarities from one place to the

next is essential, effective cross-borderstrategies will take careful stock of differences

as well. A Q&A and book excerpt follow. Key

concepts include:

Some indicators of globalization aren't

increasing as many experts have claimed.

Toyota and Wal-Mart are examples of

companies that understand how to deal with

distance in a strategic way.

Take a broad view of differences, figure out

the ones that matter the most in your

industry, and look at them not just as

difficulties to be overcome but also as

potential sources of value creation.

ThomasFriedman, author of"The WorldIs Flat: A Brief History of the Twenty-first

Century", opines that a number of events

ranging from the fall of the Berlin Wall to the

rise of the Internet have flattened the

competitive landscape worldwide by increasing

globalization and reducing the power of states.

But the world is not flat, argues HBS

professor Pankaj Ghemawat. Think of it as

partly globalized, or "semiglobalized."

"Strategies that presume complete globalintegration tend to place far too much emphasis

on international standardization and scalar

expansion," Ghemawat argues. While

identifying similarities from one place to the

next is essential, effective cross-border

strategies will take careful stock of differences

as well.

An expert on global strategy, Ghemawat

lays out an action plan for business in his new

book, Redefining Global Strategy: Crossing

Borders in a World Where Differences Still

Matter.

As he sees it, important realities dotting the

landscape for business can be grouped into 4

basic areas: cultural, administrative/political,

geographic, and economic. Discussions of

globalization tend to overlook these factors.

And companies that wish to make headway

should consider 3 broad ways of dealing with

distance: adapt, overcome it, and exploit it.

"What is different about this book on global

strategy is its focus on the differences across

countries," he writes. "The idea is to help

businesses cross borders profitably by seeingthe world as it really is, rather than in idealized

terms."

Ghemawat explained more via e-mail with

HBS Working Knowledge.

Martha Lagace: The subtitle of your

book is "Crossing Borders in a World Where

Differences Still Matter." Amid the talk

around us about an increasingly flat world,

what differences have mattered, do matter,

and will continue to matter for companies?

Pankaj Ghemawat: The subtitle is meant

to emphasize that we continue to live in asemiglobalized world, one where differences

between countries and regions continue to

matter.

To make this point, it is useful to start with

some facts about levels of globalization

because, as the late Daniel Patrick Moynihan

observed, we are all entitled to our own

opinions, but not our own facts. The most

commonly cited figure concerns international

trade, which represents more than 25 percent of

most economies. But when I began to research a

broader range of measures including

investment, phone calls, tourism, andimmigration, I found that, surprisingly, the

average extent of globalization is only 10

percent. For example, for every dollar of capital

investment globally, only a dime is accounted

for by foreign direct investment.

The other thing that surprised me was that

some indicators of globalization aren't

increasing as many experts have claimed. There

is general agreement that the international share

of total Internet traffic is decreasing rather than

increasing. This calls into question the other

common myth that even if the world isn't quite

flat today, it will be tomorrow.

The data clearly indicate that national

borders still matter. I group the differences that

they demarcate into 4 areas: those related to

cultural (language, customs, religion,

ethnicities, etc.), administrative/political(laws,

trading blocs, colonial ties, currency, etc.),

geographic (physical distance, lack of land

border, time zones, climates, etc.), and

economic (income levels, cost of natural

resources, financial resources, human resources,

infrastructure, information, etc.). It is importantto take a broad view of such differences, to

figure out the ones that matter the most in your

industry, and to look at them not just as

difficulties to be overcome but also as potential

sources of value creation.

Q: You say Toyota is an example of a

company that understands the complexities

of global strategy. What approach to

globalization has allowed Toyota to thrive

among automakers?

A:Toyota has overtaken General Motors to

become the largest automaker in theworldwhile making money in the process.

Toyota is distinguished from most of the

Western automakers, not just DaimlerChrysler,

by the fact it treats market share as the result of

building better cars more cheaply than its

competitors, and not as an objective in and of

itself.

Its globalization has actually been driven by

a complex array of coordination mechanisms

across different regions, which Chairman Fujio

Cho characterizes as the fundamental building

blocks of the company's strategy.

"The idea is to help

businesses cross borders

profitably by seeing the

world as it really is."

Note that Toyota's starting point is not a

grand, longer-term vision of some distant

globality when autos and auto parts can flow

freely from anywhere to anywhere. Rather, the

company anticipates expanded free-trade

agreements within the Americas, Europe, and

East Asia, but not across them. This is a moremodestbut also more realisticvision of a

semiglobalized world in which neither the

bridges nor the barriers between countries can

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be ignored.

Q: You have studied and written about

Wal-Mart for more than 20 years. Wal-Mart

has certainly expanded during that time, but

not without criticism and its own

miscalculations. What do Wal-Mart's

experiences show us about crossing borders?

What is it doing differently in new markets

such as India?

A:When CEO Lee Scott was asked a few

years ago about why he thought Wal-Mart

could expand successfully overseas, his

response was that naysayers had also

questioned the company's ability to move

successfully from its home state of Arkansas to

Alabama.

Unsurprisingly, the foreign markets in

which Wal-Mart has achieved

profitabilityCanada, Mexico, and the United

Kingdomare the ones culturally,

administratively, and geographically closest to

the United States.The point is not that Wal-Mart shouldn't have

ventured into more distant markets, but rather,

that it needed to think differently about how to

compete in them. It is now starting to do so in

markets such as India, which does not allow

foreign direct investment in retailing. Wal-Mart

has therefore entered via a joint venture with an

Indian partner, Bharti, that will operate the

stores while Wal-Mart deals with the back-end

of the business.

More broadly, Wal-Mart's recent strategy

illustrates all three broad ways of dealing with

distanceadjusting to it (Adaptation),overcoming it (Aggregation), and exploiting it

(Arbitrage)the AAA strategies elaboration of

which occupies close to one-half ofRedefining

Global Strategy.

Wal-Mart International is increasingly

cognizant of the need to adapt to local

contextsas evinced not only by the India

entry strategy but by changes in

merchandising policies, clearer definition of

decision rights, and even the astonishing

job-swap between some of the top managers

running the U.S. operations and their

counterparts at International. Wal-Mart also tries to aggregate across

national boundaries with its IT platform and

regional management teams that were

created in 2004 to manage global brand

development and oversee government and

public relations. As John Menzer, who ran

International before becoming Wal-Mart's

vice chairman, put it, "We're playing 3-D

chess: global, regional, local."

And finally arbitrage through offshoring,

particularly to China, saves Wal-Mart much

more money than the operating income

generatedon a much larger investment

baseby the international store operations.

This is, in some sense, what Wal-Mart's

global strategy is primarily about.

Q: How do you see business shaping the

future of globalization? In which ways are

companies playing a big role, and in which

ways could or should they step up more to

exert a positive influence on society?

A: By recognizing the importance of

business in shaping broad outcomes-including

those related to the future of globalization.

Globalization has gone into reverse

beforebetween the two world warsand

could do so again. Some of the concerns voiced

by antiglobalizers include:

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 developed countries.

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 spend about $1

billion on job-retraining, according to The

Economist.) The creation of a 2-track world. As

microcredit pioneer Muhammad Yunus 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."

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. Yet,

as thoughtful business leaders (e.g., Coke'sNeville Isdell) have pointed out, business has

not been very active in trying to counter the

antiglobalizers. In terms of public discourse and

action, in particular, I'd recommend the

following steps for companies that favor greater

integration (of course, 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." (Luntz

recommends talking about the free-marketeconomy instead, although one suspects that

this might work less well in continental

Europe.)

Try to be concrete rather than abstract about

economy-wide benefits of globalization.

Findings such as those from the McKinsey

Global Institute 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.

Dispel globalization bogeymen that don't

have a scientific basis, such as the myth 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.

Q: Do you get exasperated by popular

viewpoints that treat globalization as a

monolithic force without any shades of gray?

What's the best way you counter views that

seem more emotional than fact-based?

A:I don't get exasperated at all because it is

precisely the popular view of globalization as

an irresistible force leveling everything that

stands in its way, including national differences,

that makes my message important. Based on

surveys that I have done, many managers do

believe this view, and suffer from strategic

biases as a result.

Emotional denials of the fact of semiglobalization are, past some point (which

may come very soon!), better countered with

stories than with additional data. I like the story

of Coke, because through to the late 1990s,

under CEO Roberto Goizueta, it bought into

and based its global strategy on the

globalization apocalypse that was popular then,

the globalization of markets (rather than

production), because customers everywhere

were supposed to increasingly want the same

products and services. As a result, Goizueta

embarked on a strategy that involved focusing

resources on Coke's megabrands, anunprecedented amount of standardization, and

the official dissolution of the boundaries

between the U.S. organization and the

international one.

10 years later, Coke's strategy under CEO

Neville Isdell looks very different. Coke is now

focused on learning from Japanwhere it

reportedly offers more than 200 products but

makes more money than in any other major

international marketfor insights into how to

pursue the broader objective of injecting more

variety into the Coke system. The strategy is no

longer always the same one: In big emergingmarkets such as China and India, Coke has

lowered price points, reduced costs by

indigenizing inputs and modernizing bottling

operations, and upgraded logistics and

distribution, especially rurally. And the official

boundaries between the U.S. and international

organizations have been restored-recognizing

the fact that Coke faces very different

challenges in the United States than it does in

most of the rest of the world since per capita

consumption is an order of magnitude higher in

the United States.

Coke is therefore a cautionary tale of a

company getting carried away with globaloney

and paying for itbut is apparently managing

to weather the storm. Other companies that

went through a similar set of wrenching

HARVARD BUSINESS SCHOOL | WORKING KNOWLEDGE | HBSWK.HBS.EDU



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changes might not have the kind of strategic

cushion associated with the world's most

valuable brand name. It is generally better for

them to ponder the lessons in my book than to

seek to experience them all: Offline learning is

a lot cheaper than online learning in this

context.

Excerpt from RedefiningGlobal Strategy

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 MakingHow might you improve the path that you

follow from today to tomorrow and beyond ifthe 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 orstraight. 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, India, 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 Sachsthe 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 setranked

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 bottomusually 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, 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 takingthings 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

affectyour 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 financialinvestor, 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 businessin shaping broad outcomesincluding 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 FrankLuntz, "frightens older workers."7 (Luntz

recommends talking about the free-market

economy insteadalthough 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 economicstextbooks.8

Dispel globalization bogeymen that don't

have a scientific basis, such as the myth 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 ofnations 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.

Excerpted with permission from Harvard

Business School Press. Copyright 2007 Harvard

Business School Publishing Corporation. All




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rights reserved. To order, call (800)-988-0886

or visitHarvard Business School Press.

See also Pankaj Ghemawat's blog,What in the

World, and his Web site,www.ghemawat.org.

2. Heather Timmons, "Goldman Sachs

Rediscovers Russia," The New York Times, 3

February 2006.

3. Max H. Bazerman and Michael Watkins,

Predictable Surpises: The Disasters You Should

Have Seen Coming and How to Prevent Them

(Boston: Harvard Business School Press, 2004).

4. For an even longer list, see the

twenty-three core global risks discussed in

World Economic Forum, Global Risks 2007

(Davos, Switzerland: World Economic Forum,

January 2007).

5. On the implications of a general liquidity

crisis, see for instance, Niall Ferguson, "Sinking

Globalization," Foreign Affairs 84 no. 2 (March

- April 2005):64-77.

6. Muhammed Yunus, Nobel lecture, Oslo,

Norway, 10 December 2006, accessed at

http://nobelprize.org/nobel_prizes/peace/laureates/2006/yunnus-lecture-en.html.

7. Frank Luntz, Words That Work: It's Not

What You Say, It's What People Hear (New

York: Hyperion, 2007).

8. McKinsey Global Institute, "Offshoring:

Is it a Win-Win Game?," (San Francisco,

August 2003),

http://hei.unige.ch/~baldwin/ComparativeAdvantage

About the authorMartha Lagaceis the senior editor ofHBS

Working Knowledge.


http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=8665http://discussionleader.hbsp.com/ghemawat/http://discussionleader.hbsp.com/ghemawat/http://www.ghemawat.org/http://nobelprize.org/nobel_prizes/peace/laureates/2006/yunnus-lecture-en.htmlhttp://hei.unige.ch/~baldwin/ComparativeAdvantageMyths/IsOffshoringWinWin_McKinsey.pdfhttp://hei.unige.ch/~baldwin/ComparativeAdvantageMyths/IsOffshoringWinWin_McKinsey.pdfhttp://nobelprize.org/nobel_prizes/peace/laureates/2006/yunnus-lecture-en.htmlhttp://www.ghemawat.org/http://discussionleader.hbsp.com/ghemawat/http://discussionleader.hbsp.com/ghemawat/http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=8665

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