The New Global Road Map: Enduring Strategies for Turbulent Times

By Pankaj Ghemawat and N. Chandrasekaran

What Globalization Now Means for Your Business

Executives can no longer base their strategies on the assumption that globalization will continue to advance steadily. But how should they respond to the growing pressures against globalization? And what can businesses do to control their destinies in these times of uncertainty?

In The New Global Road Map, Pankaj Ghemawat separates fact from fiction by giving readers a better understanding of the key trends affecting global business. He also explains how globalization levels around the world are changing, and where they are likely to go in the future. Using the most up-to-date data and analysis, Ghemawat dispels today's most dangerous myths and provides a clear view of the most critical issues facing policy makers in the years ahead.

Building on this analysis, with examples from a diverse set of companies across industries and geographies, Ghemawat provides actionable frameworks and tools to help executives revise their strategies, restructure their global footprints, realign their organizations, and rethink how they work with local governments and institutions.

In our era of rising nationalism and increased skepticism about globalization's benefits, The New Global Road Map delivers the definitive guide on how to compete profitably across borders.

• Language: English
• Publisher: Harvard Business Review Press
• Release date: May 1, 2018
• ISBN: 9781633694057

Book preview

In today’s volatile world, business leaders are well advised to analyze globalization carefully and pursue a fact-based strategy that strikes the right balance between global scale and local adaptation. This book is a helpful companion on that journey.

—FRANK APPEL, CEO, Deutsche Post DHL

Pankaj is unique in his ability to connect theoretical rigor to practical decision making on the ground. I highly recommend this book—and Pankaj’s sensible approach more generally—as a crucial voice to counter the oftentimes bombastic nature of our current dialogue on the future of globalization.

—from the foreword by N. CHANDRASEKARAN, Chairman, Tata Sons

The new book by Professor Pankaj Ghemawat could not be more timely. As a brilliant and sensible voice in the field of business strategy, his insightful analysis has long provided useful elements for companies focused on growth—not for growth’s sake but to create lasting value for customers, stakeholders, and communities worldwide. Now Professor Ghemawat connects new dots to show that the challenge is not to opt between local retrenchment or pursuing a mindless globalization but to find the right balance in leveraging the competitive advantages that allow any company or organization to create sustainable value while also contributing to the achievement of inclusive development for all—and in the process to help build a better world.

—FERNANDO A. GONZÁLEZ, CEO, CEMEX

With the speed and extent of change in many industries adding new levels of complexity to business models and decisions, Ghemawat provides an excellent and updated framework for discussing the present and future of globalization in our business.

—ENRIQUE OSTALÉ, EVP and President, Walmart Latam, UK, and Africa

"Pankaj Ghemawat’s book highlights important perennial truths about globalization that are frequently overlooked because of wild swings on sentiment around the topic. The New Global Road Map provides a useful framework to strike the right balance between where and how to compete, as well as help tackle the increasing anger towards global actors."

—CARLOS TORRES, CEO, BBVA

Pankaj delivers his views on globalization based on a wealth of facts and data. He pivots globalization on the strength of each local market, an approach that keeps at bay emotional perceptions. In this more complex world, Pankaj proposes avenues for business leaders to strategize and execute on their internationalization programs. His work helps balance better the global-local spectrums. An important read for all companies who move in the larger world!

—JEAN-PASCAL TRICOIRE, Chairman and CEO, Schneider Electric

Copyright

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Copyright 2018 Pankaj Ghemawat

All rights reserved

No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to [e-mail], or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.

First eBook Edition: May 2018

ISBN: 978-1-63369-404-0

eISBN: 978-1-63369-405-7

CONTENTS

Cover

Title Page

Copyright

Dedication

Foreword

Introduction

PART ONE

Mapping Globalization

What Is—and Isn’t—Changing

1. The State of Globalization

2. Globalization and Shocks

3. Globalization in the Long Run

PART TWO

Managing Globalization

SPANning the World

4. Strategy: How to Compete

5. Presence: Where to Compete

6. Architecture: How to Connect

7. Nonmarket Strategy: Anger and Its Management

Notes

Index

Acknowledgments

About the Author

FOREWORD

Pankaj Ghemawat has been a pathbreaking thinker and strategist throughout his career, and it is my privilege to have been a friend for many of those years. I first met Pankaj in 2001, when he shared his expertise on globalization and its context for strategy development at Tata Consultancy Services (TCS). Founded in 1968 as India’s first software company, TCS is a member of the Tata group of companies and has over 371,000 employees operating across forty-five countries across the globe.

Pankaj became an anchor of TCS’s core strategy group, and his ability to dispassionately analyze issues and to read the tea leaves on the trajectory of the global markets—often contrary to the prevalent rhetoric—has been extremely helpful to the organization’s overall growth and success. Back in early 2001, when the Asian financial crisis and its aftermath were keeping us awake at night, Pankaj maintained a steady view that the gloom and doom was overdone. Before the global financial crisis, when the world was supposedly becoming flat, Pankaj persuaded us that it was not a foregone conclusion—not even for Indian software companies. His counsel was so valuable that we soon referred to the core strategy meetings as the Pankaj Ghemawat sessions and, later, the PG sessions.

In The New Global Road Map, Pankaj continues to insightfully question betting on globalization extremes. He examines a topic that has come under scrutiny again after Brexit and the election of President Trump, interweaving his experiences as an academic and a strategy consultant to portray a more pragmatic and balanced view. As always, Pankaj sets himself apart by using robust data to bring his story to life. His work on the DHL Global Connectedness Index (he tells me, an accumulation of almost two million data points) supports his view that globalization will neither disappear nor expand at warp speed.

As a business leader, the yo-yo of localization versus globalization he speaks of has strong implications for our companies. In the first part of this book, he guides managers to take a measured view, cautioning against both a leadership cadre’s becoming too enthralled by the extent and impact of globalization and its succumbing to excessive pessimism about globalism’s prospects. Amid the overheated rhetoric and violent market swings, Pankaj manages to find stable patterns that can help business leaders steady themselves and their organizations. These are the patterns he calls the laws of globalization.

The second part of his book addresses many of the practical issues that concern even the most seasoned manager. Should firms scale globally or strengthen locally? Should organizations decentralize power to regional management, and if so, how? Pankaj outlines various ways that firms can improve organizational readiness in the face of globalization through levers such as culture, innovation, and his novel take on public affairs engagement.

Pankaj is unique in his ability to connect theoretical rigor to practical decision making on the ground. I highly recommend this book—and Pankaj’s sensible approach more generally—as a crucial voice to counter the oftentimes bombastic nature of our current dialogue on the future of globalization.

—N. CHANDRASEKARAN

Introduction

When I wrote my first book on globalization, Redefining Global Strategy, in 2007, the prevailing sense among executives was that companies could safely bet on globalization continuing to increase. As I finish this book a decade later, some business leaders, such as Alibaba founder Jack Ma, still believe that more globalization is inevitable.¹ But most of the talk about globalization has turned pessimistic.

Some of the negativity reflects, of course, recent shocks, most notably Brexit, as in the United Kingdom’s vote to exit the European Union, and the election of Donald Trump as US president. (I refer to these two events jointly as Brump.) But the mood had already soured before then. In May 2016, a month before the Brexit vote, Jeffrey Immelt, then chairman and CEO of General Electric, told the graduating New York University MBA class that it was time for a bold pivot toward localization in response to rising protectionism.² Brump continued this shift: having a global strategy seemed to swing from an absolute necessity to an outright risk. Only a week after Trump’s inauguration in January 2017, the Economist’s cover announced The Retreat of the Global Company.³

In figuring out what to make of such opinions and, more generally, the state of globalization, we need to remember that the present turbulence is not entirely new. While the process we now refer to as globalization has been going on for hundreds or perhaps even thousands of years, people’s hopes for it have tended to overshoot reality and then come crashing back down for centuries as well—what I call the globalization yo-yo effect.⁴

While yo-yos are fun to play with, the globalization yo-yo effect is dangerous for firms and economies—making it more like yo-yo dieting than harmless childhood play. As venture capitalist Peter Thiel put it back in 2008, for the past three centuries, the great rises and falls of the West track the high and low points of the hope for globalization … [as have] the peaks and valleys of the stock market. Almost every financial bubble has involved nothing more nor less than a serious miscalculation about the true probability of successful globalization.⁵ Postscript: Thiel, a major donor to Trump’s 2016 campaign, agrees that with Trump’s election, the globalization yo-yo is on a downswing: No one in their right mind would start an organization with the word ‘global’ in its title today … That’s so 2005, it feels so dated.⁶

Indeed, 2005 is a signal year in terms of the last upswing of the globalization yo-yo. That year, Thomas Friedman’s The World Is Flat was published, going on to become the best-selling book about globalization ever. Amid the flat-world hysteria in the run-up to the 2008 global financial crisis, it was easy to forget that less than a decade earlier, globalization expectations had experienced a downswing rather than an upswing. In the late 1990s, the euphoria after the fall of the Berlin Wall ran headlong into the Asian financial crisis.

Business anxiety back then was so high that a leading strategy consulting firm convened a set of thought leaders in early 2001 to examine the implications for companies. I teamed up with one of the firm’s partners to frame the discussion for a global salon. Figure I-1, which is adapted from our presentation at that salon, highlights many of the global issues that business leaders today are thinking about again in the present pessimistic environment.⁷ Should strategies switch from the pursuit of scale to local responsiveness? Should firms’ geographic presence be narrowed to reduce risk? Should organizational power be pushed out to region and country leaders? And should multinationals try to act and look like their national counterparts in their dealings with governments and societies around the world?

FIGURE I-1

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Globalization: the yo-yo effect

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Our lead example for raising these questions and the answers that were being considered in 2001 was Coca-Cola, judged at the time to possess the world’s most valuable brand as well as its broadest geographical footprint. For most of Coke’s history, its cross-border strategy and architecture, in particular, fit into the lower gray band spanning the different choices depicted in figure I-1. As James Quincey, who became CEO in 2017, put it, Coke went global before globalization … [T]he way that worked is, ‘You are now in charge of Country X. Go away. Good luck. There’s only two rules. You can’t change the formula and you can’t steal the money. Please come back once a year and tell me how it’s going.’ That was the model for 100 and something years.⁸

But after Roberto Goizueta became CEO in 1981—as globalization was gathering momentum—Coke shifted gears to an approach more aligned with the top gray band in the figure. Goizueta emphasized growth based on Coke’s megabrands, expanded its presence from 160 countries to nearly 200, and engaged in an unprecedented amount of centralization by consolidating divisions and putting consumer research, creative services, and TV commercials under Coke’s internal ad agency, with the idea of standardizing them. The stock price soared, and Fortune rated Coke as the most admired US corporation for several years running.

Douglas Ivester, who took over when Goizueta died unexpectedly in 1997, continued with this strategy—No left turns, no right turns, as he put it—but ran into the Asian crisis as well as governmental problems, particularly in Europe. Regulators in the EU resisted Coke’s attempts—directed out of its headquarters in Atlanta—to acquire Orangina from Pernod Ricard and a set of soft drink brands from Cadbury Schweppes. Delays in tackling contamination problems caused further strain. Coke’s market capitalization collapsed from a peak of $220 billion to below $120 billion as analysts marked it down for its global exposure, and Ivester was fired.

Douglas Daft took over in 2000 and yo-yoed back toward localization. With his manifesto of Think local, act local, thousands of jobs were cut at headquarters and decision-making authority was sent back out to the field. This was how far we took the Coke story at the global salon in early 2001. We ended our presentation with a question: Were these extreme swings, made in response to shifting sentiments about globalization—most recently, the swing from top to bottom in the figure—truly warranted?

With fifteen-plus years of additional history, the answer to that question from Coke’s perspective was clearly no. The problems with unprecedented localization were quick to surface: scale economies suffered, as did the quality of marketing. Country managers were simply unprepared for their expanded set of responsibilities. In 2002, Coke brought marketing oversight back to headquarters—that task itself a challenge because hiring a new team took longer than firing the old one. But growth continued to lag investor expectations, and Daft resigned in 2004.

It fell to Neville Isdell, who took over from Daft, to strike the right balance between these extremes (see chapter 1). What merits particular attention in this context, given the correspondence between Coke’s yo-yoing and some of the recommendations being urged on companies today, is how costly this back-and-forth turned out to be for Coke. Despite the company’s manifest strengths, it took the better part of a decade and probably tens of billions of dollars to get re-centered.

Coke is, of course, just one case in point, but its experience should not be discounted. Although history may not repeat itself, it sometimes does rhyme. Instead of simply succumbing to shifts in sentiment and yo-yoing between extremes as Coke did, companies should take a long, hard look at globalization before deciding how they are going to deal with it. This book attempts to help you with that task. Part one looks at where globalization has been and where it might go, and part two explores the implications for the globalization-related choices that companies must confront.

Let me expand slightly on that one-sentence book outline, part by part and chapter by chapter. Part one focuses on the challenges of mapping globalization at a time of great turbulence. It deploys a range of empirical approaches: relying on up-to-date data, peering inside the minds of people (specifically, managers) with surveys, using analytics and statistical inference, analyzing stretch scenarios in depth, learning from history, and, most importantly, identifying robust regularities that offer guidance for the future. No math is required of the reader, but I include much data and many analyses of patterns in the data. As the late Daniel Patrick Moynihan put it, while everyone is entitled to their own opinions, everyone is not entitled to their own facts. For the same reason, there are lots of endnotes and references to additional readings. Tables are kept to a minimum, though; I rely on maps, other visualizations, strikingly large (estimated) effects, mini-cases—such as Coke—and stories, plain and simple, to help bring the data to life.

The individual chapters in part one focus on different time frames. More specifically, chapter 1 looks at the data on globalization from past to present and concludes it does not (yet) indicate that we are in the grips of a globalization apocalypse. The data does support two laws: the law of semiglobalization, which posits that globalization is neither (nearly) zero nor complete, and the law of distance, which posits that the cross-border interactions that do take place are dampened significantly by distances of various types between countries. Looking at the data and juxtaposing it with estimates from surveys of managers and other groups also highlights the importance of guarding against globaloney—the pernicious tendency to overstate how globalized the world actually is. This habit turns out to be costly to business as well as society.

Chapter 2 focuses on the short-to-medium-run future and, in particular, on a way forward in a world that is, as military strategists put it, VUCA (volatile, uncertain, complex, and ambiguous)—and subject to shocks we can’t even anticipate. Analysis of historical shocks, most notably the global trade war of the 1930s, during which the value of world trade fell by two-thirds over a three-year period, confirms that the laws of globalization continued to apply. Analysis of recent shocks, most notably Brexit, illustrates how helpful they are when looking ahead. The chapter concludes with a discussion of the broad implications of a VUCA world for business decision making.

Chapter 3 focuses on the longer run—on a success scenario in which there is relatively robust growth globally. It looks at one of the indispensable elements of such a scenario: significantly faster growth in emerging economies, particularly in emerging Asia, than in advanced ones. (Because of demographics, it is hard to devise scenarios in which emerging economies don’t grow faster but there is robust global growth anyway.) This big shift, south by southeast, helps anchor a discussion of several trends likely to manifest themselves over the next decade and beyond. The chapter also paints a broad picture of the differences in business environments in emerging versus advanced economies and in their patterns of international engagement. And it starts to consider differences in where enterprises from emerging economies and advanced economies are coming from as a way of beginning to predict where these businesses might go.

Part two of this book moves from mapping globalization to managing it at the company level, with the intent of helping managers do more than bounce between the opposite extremes depicted in figure I-1. The four chapters in part two each address one of the four broad dimensions of choice depicted in that figure: strategy, presence, architecture, and nonmarket strategy (SPAN). Since this is a large body of content to cover, the focus is kept squarely on how companies can respond to the evolving challenges of competing across borders and distance. Each chapter offers recommendations that are organized, for mnemonic purposes, into acronyms, as depicted in figure I-2, and elaborated on below.⁹ The advice in these chapters extends beyond just keeping one’s balance between eternal opposites to lay out a richer palette of possible responses.

FIGURE I-2

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Effective globalization

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Chapter 4, on strategy, explains why pure adaptation to local conditions, while talked up during downswings, is likely to work out no better for most multinationals than it did for Coca-Cola under Daft. It also discusses why strategies of pure aggregation in the pursuit of scale economies, which Coke came close to embodying by the end of Goizueta’s reign, tend to be too extreme as well. And the chapter goes beyond suggesting striking the right balance between adaptation and aggregation, in two ways. First, it specifies more than two dozen levers and sublevers that can improve the trade-off between adaptation and aggregation. Second and even more broadly, it suggests thinking of three AAA strategies—adaptation and aggregation and arbitrage—rather than picking a point on the continuum between the first two. Chapter 4 also discusses how emerging-economy enterprises do relatively well at arbitrage and incumbent multinationals from advanced economies at aggregation, and the chapter then looks at the strategic implications for both types of enterprises. In particular, given the rise of insurgents from emerging economies, incumbents from advanced economies will often need to pursue a mix of the AAA strategies.

Chapter 5, on presence, tries to avoid overconfidence about global expansion during upswings and funk during downswings by looking at the basic logic of multinational presence. The law of distance as applied to foreign direct investment (FDI) packs a big punch here, and only partly because of the large effects of cultural, administrative, geographic, and economic (CAGE) distance (summarized in chapter 1). The CAGE distance framework supplies the basis for a logic of presence that makes business sense regardless of the prevailing mood about globalization. And by overlaying CAGE-based cross-border analysis with the characteristics of the countries, industries, and firms actually involved, readers can think through the implications for their own companies. Both qualitative and quantitative examples are provided.

Chapter 6, on architecture, expands on questions of how to organize. It begins by reviewing how a firm’s strategy should affect its organization: why adaptation typically requires some decentralization, why aggregation requires some centralization (as already suggested by figure I-1), and why arbitrage is often facilitated by a strong, cross-cutting functional axis. As a result, multinationals that employ all three AAA strategies tend to have complex structures. But structure is only part of what is required. They also need to rewire themselves, within and without, including forging new connections at the top. The acronym UNITED denotes a range of ways firms can boost their organizational capacity to bridge borders and distance: a unifying culture, networked innovation, initiatives and task forces, technology enablers, expatriation and mobility, and development programs.

Finally, chapter