your strategy in the new global landscape

8/3/2019 Your Strategy in the New Global Landscape

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Your Strategy inthe Ne"WGlobalLandscapeThepost-recessionorlddemandsamuchmoreflexibleapproacho globalstrategyandorganisation.Y PANKAJGHEMAWAT


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he 2008 crash hitcross-border businesshard. The value of in-ternational trade wasprojectedto decline byasmuch as 9 per cent

In2009.Foreigndirect investmenthasplungedevenmore: After drop-ping15percentin 2008, it fellbymorehan40 per cent in 2009.Thoughwemay have reached thebottom.he prospects for the mediumtermdon'tlookpromising. For muchofthenextdecade, we can reasonably

expect to see weak global growth,pressures from overcapacity. persist-ently high unemployment, volatilityin the fmancial markets, costlier cap-ital, a greatly expanded role for gov-ernments, a much larger burden ofregulation and taxation for all, andmaybe even increased protectionism.If we experience a second crash, assome experts worry, these conditionscould all worsen.

It goes without saying that globalfIrms must factor these developmentsinto their strategies in the new decade.For some, the response will be to re-trench and focus on home markets.This already seems to be happening: Ifyou look at the armual reports of theworld's 100 largest companies, you'llfmd that the percentage of flI'ms indevelopedeconomies that emphasisedinternational or global business intheir letters to shareholders declinedfrom 51 per cent in 2006 to 31 percent in 2008. (In contrast, the per-centage increased among the fewcompanies from emerging economiesin the group.) And use of the words"global" and "globalisation," while upsignillcantly. was mostly in referencesto the economic slowdown and itsimpact on company performance.

Becoming homebodies, however,may be a bad idea for flI'msbased inthe developed world. Early data for2009 indicate that China accountedfor 66 per cent of global growth inGDP(excluding countries with nega-tive growth) and India for 11 percent. Indonesia accounted for thethird-largest portion, 4 per cent.Though 2009 was an abnormalyear--developed economies willsnapback-the economic clout of bigemerging markets, particularlyChina and India, is likely to increaseover the next few decades, not justthe next few years. According to re-cent World Bank projections, by2050 China and India will togetheraccount for nearly 50 per cent ofglobal GDP-about the same as the

G7's current share, which isexpectedto decline to 25 per cent. (These GDP-fIgures are all nominal and not ad-justed for purchasing power parity.)And since per capita incomes inChina and India are projected to beonly one-half to one-third the sizeofthose in advanced economies, there'sroom for even higher growth rates inthese markets after 2050. The sameholds true in many other emergingmarkets as well.

That said, managers cannot af-ford to ignore the risks of pursuing aglobal strategy in the uncertain yearsahead. To successfully negotiate therockier path before them, they mustchange their strategic approach inseveral dimensions. My purpose inthese pages is to suggest what direc-tion they might take across this new,more rugged terrain. I'll look flI'stathow the crisis affects a company'sbasic strategic environment and thenexplore how that translates intochanges in product and market focus,organisational and supply chainstructures, talent managementchoices, and, of increasing impor-tance, the management of corporatereputation and identity. In otherwords, I'll take you through the huband spokesof a typical strategy wheel.6litIiiilili lliesreDs that IlI'msSfiOt:iIQconsider taking with each. (SeeNewStrategy Directions.)strategy and Competition~~~ Mostcompanies'global~-~ strategies have been based~ on a vision of a world that'ssteadily.even rapidly, becoming moreintegrated, where the key challenge iskeeping up with that integration. Butgiven what we've witnessed in thepast two years, it makes more sense toadopt a vision in which national dif-ferences remain pronounced (andmay become even more so), andmanaging those differences is theprimary challenge. Companies whosestrategies currently emphasise


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smoothing differences and achievingeconomies of scale across nationalboundaries may need to shift towardsadapting to local conditions.Companies whose strategies empha-sise arbitrage-taking advantage ofdifferences-may need to malce thesame shift; now is not the time to beperceived as an exploitative foreigner.

Resource allocation processes willhave to change, too.During the yearsof rising asset prices,many companiescame to think of globalstrategy as onelong asset-accumulation play that in-volved relatively little risk. The ideawas to invest abroad and, if that didn't

number of large companies haveturned on the investment spigots inChina and, to a lesser extent, India-and for other platforms for growth-while tightening the financial tapselsewhere. Other companies haveresponded to resource constraints byoffshoring, outsourcing, and forgingstrategic alliances (which seem to beon an upsurge).

Many companies from the devel-oped world also need to widen theircompetitive focus. Last year, in thespace of two weeks, I spoke with thetwo market leaders in a particularproduct category about globalisa-

MNCs have to develop productsand services that are differentfrom what they're used to selling.

work out, resell at a capital gain. Thatmay be why, according to a survey ofHEReaders, 88 per cent of managersin pre-crisis days thought of globalstrategy as an imperative, almost anarticle of faith, rather than as a set ofoptions to be carefully evaluated.

Now that the bubble has burst,many firms are being reminded thata significant portion of their globaloperations subtract, rather than add,economic value. This isn't just a re-sult of the crisis; it was true in theyears leading up to the downturn. Ofcourse, some global investments willpayoff in the long run. Nevertheless,in a post-bubble world, where the costand even the availability of capitalare issues, firms will need to be moreruthless about terminating long-standing loss makers-and more se-lective in pursuing new opportuni-ties. Some of this selectivity can beimposed by raising hurdle rates andtightening assumptions around ter-minal values. Some firms are alsotrying out other approaches, such asallocating resources according totheir articulated strategic priorities.A

tion. It was clear that the two com-panies were mostly focussed on eachother. I tried to point out that if theyconsidered China to be their majorarea for growth, it behooved them topay at least as much attention to lo-cal Chinese competitors as they didto each other, especially since theirsector was not R&D-or advertising-intensive (the two clear markers ofmultinational advantage). Let's turnnow to how these strategic shiftsplayout in the functional components ofa multinational's strategy.Markets and Products

When it comes to customersand product choices, threemain changes are likely.First, multinationals from ad-

vanced economies will have to re-think their customer targeting. Inlarge emerging markets they havetraditionally focussed on the urbanelite,who can buy premium productsin upscale retail outlets. Going for-ward, companies will need to pene-trate more geographies, channels,and income levels. Within China,

many successful multinationals havealready developed strategies at theprovincial level and are now workingat the level of clusters of cities androlling inland from the coast. India isseeing a similar pattern.

At home, multinationals shouldalso look for ways to target unders-erved segments. Wal-Mart, for exam-ple, has begun a major push into usurban markets. The top 15 metropoli-tan areas represent more than a thirdof the total usmarket, but Wal-Mart'sshare in them is only 4 per cent, com-pared with 10 per cent in the UnitedStates overall. The company's newurban strategy involves smaller storeformats and more attention to mobilis-ing local political support.

Second, most markets will experi-ence pressures on pricing. Economicwealmess and extra capacity, and pos-sibly a shift in the zeitgeist from excessto frugality, have already pushedprices downward. Expansion intopoorer markets at home and abroadwill intensify this trend. This will re-quire companies to do some reposi-tioning-even in the luxury productssector in booming markets such asChina. According to Forbes, Tiffanyhas faltered in China because itsstores are small and offer only a lim-ited range of high-end products. LouisVuitton and Gucci, in contrast, haveprospered with larger stores that offermany items at price points of"severalhundred dollars, which appeal to theluxury "entrants" and to gift buyers,who account for a large portion ofluxury purchases in China.

Finally.multinationals willhave todevelopproducts and services that arefundamentally different from whatthey're used to selling, as well as re-gional varieties of offerings, as localdifferences in, for instance, taste, pricesensitivity, and infrastructures forservice and delivery become moreimportant. This is obviously a chal-lenge: If it's hard for a company torecognise that what worked in NewYork isn't working inMumbai, it will


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be even harder for itto recognise thatwhat worked in Mumbai may notwork in Nagpur. But the savvier play-ers are already trying this approach.Nokia's l,OOO-plus-employee R&Dforce in India has engaged in extensiveproduct adaptation, some of it fo-cussed on rural and other lower-income markets. The results include abasic mobile phone that doubles as aflashlight for use during power out-ages and a phone designed to beshared bymultiple people.Operations and Innovation

On the supply side, severalinterrelated shifts are tak-ing place. The pressing

need to reduce global trade imbal-ances from record and clearly unsus-tainable levels,the rise of protection-ism, and concerns about the environ-ment are undermining the traditional"Chimerica" model, in which theUnited States imports large volumesof goods fromChina. Beforethe crisis,companies became accustomed tooffshoring, but they should at leasttake a second look at the practicenow. It's noteworthy that the us glo-bal giants that were financiallyhealthy and confident enough tomake major operations investmentsrecently have stressed that they madethose investments at home. Intel, forexample, has talked up its new ussemiconductor plants, and GEts newus wind turbine facilities. Of course,these are just two particularly vividexamples; both companies continueto invest substantially if quietlyover-seas. But that holds its own lesson:When offshoring does make sense,managing the discourse around it ismore important than ever.

Unless protectionism spikes, sig-nificant offshoring will most likelycontinue. But supply chains willneedto become shorter, simpler, and morerobust, which means they'll requiremajor reconfiguration. In the recentpast the divisionof tasks across coun-tries became ever finer and more

... changes as the viewer shifts position.complex; the manufacture of somegarments, for instance, might haveinvolved as many as 40 processingsteps in a dozen countries. Now in-creased concerns about the environ-ment and sensitivity to energy prices,not to mention the possibility of pro-tectionism, appear to be reversingthat trend. A 2009 survey of logisticsproviders revealed that nearly one-quarter of North American andEuropean clients had taken steps toshorten their supply chains duringthe previous year. In the airline indus-try. international carriers continue todebate the sustain ability of flyingempty aircraft to developing coun-tries in Asia and Central America,where costs are lower, for routinemaintenance.

Perspectives on skills and processinnovations are also changing.Traditionally, companies tended totransfer older, less-automated tech-

nology to plants in less-developedcountries. Those plants didn't con-tribute to technological advances. Butrecent reports on manufacturingfIrms-for instance, the global com-ponents survey sponsored by theAlfred P. Sloan Foundation-revealthat many Western multinationalshave actually started to import someof their less-automated processesback into plants in high-wage re-gions. Their experience in low-wagecountries has shown them that la-bour-intensive plants can be moreflexible than, yet just as reliable as,more-automated plants. It also turnsout that the gain in flexibility canmore than compensate forthe higherwage bill.The flow of knowledge andinnovation in operations has begunto reverse, with plants in places likeMexicobecoming models forplants inthe United States.

A reversal is happening in


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productinnovation. too. It's clearfromabourprojections that technicalmanpowers growing rapidly inemergingmarketsand that multina-llonalswill have to shift the locus ofRWhere.The projections forecast a\hortfalln the global supply of manyciltegoriesf engineers and otherll~hnicalersonnel,in a fieldalreadydominatedy graduates of universi-tll 'Snd technical schools in IndiaandChina.Consequently. large high-techlrmswithinterests in emergingmarketsre starting to think hardaboutbasing their R&Defforts in thosecountries.ntel, in fact, has alreadydesignedonechip almost entirely inIndia:he Xeon 7400 processor.whichit rolled out in 2008.

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OrganisationandPeopleAsoperational norms andpatterns in learning and.. innovationbegin to reflect

th~new opportunities and con-straints.o too will norms aroundorganisationaltructure and talent.Beforehe crash, many compa-

Olesweremovingtowards globallyIntegratedtructures. But the notionIhatwe live in a world where the'IInstituentparts of enterprises canIndshouldbe bound ever more:i~htlyogetherhas been challenged~.contagion.conomic volatility. and'"".ing political sentiments. Wemil\,herefore. see some organisa-:'"nalpower flow back to countrymilnagersscompanies tone downtheirttemptso eliminate or exploit,ToIl-borderifferences and insteadmUOadapttolocalconditions.Butinview of the other new pri-nlleson the agenda-bringing'Iler-endroducts tomarket sooner;"'iltingith localrivalsmore aggres-

takingout costs in design and!nufacturing;ndexpanding fasternewsegments and territories-'changes are called for. Because

" knowledgehas become critical:theneedo shorten learning andIncyclesmore urgent, companies

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NEWSTRATEGYDIRECTIONSCompanieseedto rethinkheirstrategiesnresponseo thechangedconomicandscape.hiswheeldescribesheadjustmentstheyshouldconsideroreachcomponentfstrategy.

MARKETS ANDPRODUCTSOPERATIONSAND INNOVATION

STRATEGYANDCOMPETITION

IDENTITY ANDREPUTATION

ORGANISATIONAND PEOPLE

must go beyond simply setting up lo-cal operations and start building deeplocal connections. A number of com-panies have begun moving some keyfunctions out of headquarters. IBM'Sglobal procurement office, for in-stance, is now located in Shenzhen,China. Cisco set up Cisco East as asecond headquarters in Bangalore.Perhaps the most dramatic example isprovided by the GMreorganisation.The company's Mexican andCanadian operations will continuereporting to the person overseeing theUnited States. but operations prettymuch everywhere else apart fromEurope will now report to the head ofChina. which last year overtook theUnited States as the automaker's larg-est market in terms of number of ve-

hicIes supplied. This is a basic realign-ment of the power structure within ahitherto us-centric GM:The China op-eration is now regarded by many asthe more interesting part of the com-pany. Looking forward, people aretalking of more multinationals withdual headquarters, one in the Westand one in Asia (most likelyChina).

Such organisational power shiftswill demand fundamental changes inthe diversity of management ranks.The profIle of most large us corpora-tions still reflects past patterns of op-erations, rather than intended futurepatterns. Their management is stilldominated by Americans, and fewhave really come to terms with diver-sity.ABoston Consulting Group studyof large multinationals and their as-

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pirations in 16 rapidly developing values and communication norms 77 per cent, respectively.)economies conducted before the crisis but also respect diversity are likely to Though attitudes look a littlebitfound a gross mismatch between the deal better with cultural and national more positive in emerging markets,amount of growth targeted in these differences in developing, communi- the standing of capitalism and pri.geographies (about 33 per cent then, cating, and executing strategies. vate business enterprise is being chal.and probably more now) and the Stronggloballeadership-development lengedilL-futvl~~~-~~,~P~~~~~~~~~~~J ~to~ .--" ,- ~~-~~

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your strategy in the new global landscape

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