Virginia University Global Business Environment Discussion

Discussion Post # 2,

Please read book Redefining Global for this Question: Why do so many global strategies fail–despite companies’ powerful brands and other border-crossing advantages?

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EDU F ERRER ALCOVE R
“Pankaj Ghemawat is one of those rare individuals who combines world-class scholarship
with a deep knowledge of business practice. Redefining Global Strategy tackles the crucial
balance between local and global that will often define success in an increasingly globalized
world economy.”
PANKAJ GHEMAWAT—globalization and
business strategist, professor, and speaker—
works with organizations and policy makers
around the world to help them anticipate and
prepare for economic shifts. He is Global
Professor of Management and Strategy and
Director of the Center for the Globalization of
Education and Management at the Stern School
of Business at New York University and the
Anselmo Rubiralta Professor of Global Strategy
at IESE Business School. He is the author of
numerous influential books, including The New
Global Road Map, World 3.0, and The Laws of
Globalization.
—MICHAEL PORTER, Bishop William Lawrence University Professor, Harvard Business School
“Pankaj Ghemawat’s differentiated industry- and company-specific views on globalization offer
essential insights and thought-provoking impulses for today’s decision makers. For anyone who
aims to realize the full potential of globalization, it clearly confirms: the world isn’t flat!”
—PROF. DR. ULRICH LEHNER, Chairman of the Supervisory Board, Deutsche Telekom
and Thyssenkrupp AG
“International firms have to reflect more deeply on how to coordinate their commitments around
the world. Pankaj Ghemawat’s pioneering book offers an innovative approach for how to deal
with this critical challenge.”
—JOSÉ IGNACIO GOIRIGOLZARRI, President, Bankia
“Pankaj Ghemawat’s Redefining Global Strategy has very appropriately identified the world
we live in as only ‘semiglobalized.’ He builds on this definition to present some very valuable
and innovative frameworks for developing strategies for internationalization and global value
creation. The book offers a comprehensive treatment of one of the most important issues
engaging the business community.”
—RATAN TATA, former Chairman, Tata Group
For more, visit Ghemawat.com
Follow @PankajGhemawat on Twitter
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PANKAJ
GHEMAWAT
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REDEFINING
GLOBAL
STRATEGY
—SAMUEL J. PALMISANO, former Chairman of the Board and CEO, IBM Corporation
U S$35.00
H A R VA R D B U S I N E S S R E V I E W P R E S S
“Pankaj Ghemawat has created an important strategic guidebook for leaders of the globally
integrated enterprises of the twenty-first century. His analytical framework is both visionary and
pragmatic—aware of the broad historic trajectories of globalization, but grounded in the real
kinds of decisions business leaders have to make now. His caveats about ‘semiglobalization’
provide a salutary reminder that massive change of this kind doesn’t happen overnight. By
basing his analysis on real-world case studies and a mastery of economic data, Ghemawat helps
CEOs and leaders make smart decisions on one of the most important challenges we all face.”
REDEFINING GLOBAL STRATEGY
and GE Healthcare are adroitly managing crossborder differences. He also shares examples of
other well-known companies that have failed
at this challenge. Crucial for any business
competing across borders, Redefining Global
Strategy will help you make the most of our
semiglobalized world.
MANAGEMENT
GHEMAWAT
(Continued from front flap)
CROSSING BORDERS IN A WORLD
WHERE DIFFERENCES STILL MATTER
NEW TOOLS FOR
SUCCEEDING GLOBALLY
W
hy do so many global strategies
fail—despite companies’ powerful
brands and other border-crossing
advantages? Because a one-size-fits-all strategy
no longer stands a chance.
When firms believe in the illusions of a “flat”
world and the death of distance, they charge
across borders as if the globe were one seamless
marketplace. But cross-border differences are
larger than we assume. Most economic activity—
including trade, real and financial investment,
tourism, and communication—happens locally,
not internationally. In this “semiglobalized”
approach, companies can cross borders more
profitably by basing their strategies on the
geopolitical differences that matter; they must
identify the barriers their strategies have to
overcome, and they must build bridges to cross
those barriers. Based on rigorous research,
Pankaj Ghemawat shows how to create
successful strategies and provides practical
management tools so you can:
• Assess the cultural, administrative, geographic,
and economic differences between regions at
the industry level—and decide which ones
require attention
• Track the implications of the specific bordercrossing actions that will impact your
company’s ability to create value the most
• Generate superior performance through
strategies that are optimized for the three
A’s: adaptation (adjusting to differences),
aggregation (overcoming differences), and
arbitrage (exploiting differences)
Using in-depth examples, Ghemawat reveals
how companies such as Cemex, Toyota, Procter
& Gamble, Tata Consultancy Services, IBM,
(Continued on back flap)
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“Most of us do not need much persuading that the world is still
round, but Pankaj Ghemawat redefines its circularity. He shows
how companies can benefit from what he calls semiglobalization, while not falling into the traps unwittingly set by those
who talk glibly about our ‘globalized world.’”
—Sir Howard Davies, Chairman, Royal Bank of Scotland
“An impeccably researched reassessment of the global business
world—not as an ideal but as it really is.”
—Sir Martin Sorrell, CEO, WPP Group
“Now things are clear. Nations and cultures will continue challenging the babel-like perspectives of those who see an irresistibly globalizing world. Pankaj Ghemawat’s refreshing and
thought-provoking book brings us to the real world.”
—Michel Camdessus, former Managing Director,
International Monetary Fund
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Redefining
Global
Strategy
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Redefining
Global
Strategy
Crossing Borders in a World Where
Differences Still Matter
Pankaj Ghemawat
HARVARD BUSINESS REVIEW PRESS
BOSTON, MASSACHUSETTS
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Library of Congress Cataloging-in-Publication Data
Names: Ghemawat, Pankaj, author.
Title: Redefining global strategy : crossing borders in a world where differences still
matter / by Pankaj Ghemawat.
Description: Boston, Massachusetts : Harvard Business Review Press, [2018] | “With a
new preface”—Title page. | Includes bibliographical references and index.
Identifiers: LCCN 2017051986 | ISBN 9781633696068 (hardcover : alk. paper)
Subjects: LCSH: International business enterprises—Management. | Strategic planning. |
Intercultural communication.
Classification: LCC HD62.4 .G474 2018 | DDC 658.4/012—dc23 LC record available
at https://lccn.loc.gov/2017051986
ISBN: 978-1-63369-606-8
eISBN: 978-1-63369-607-5
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To Anuradha
Who has helped me understand that globalization
does not mean forgetting where I’m from
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Contents
Foreword
Acknowledgments
New Preface
Introduction
Part One
ix
xi
xiii
1
Value in a World of Differences
1
Semiglobalization and Strategy
9
2
Differences Across Countries
33
The CAGE Distance Framework
3
Global Value Creation
65
The ADDING Value Scorecard
Part Two
4
Strategies for Global Value Creation
Adaptation
107
Adjusting to Differences
5
Aggregation
139
Overcoming Differences
6
Arbitrage
169
Exploiting Differences
7
Playing the Differences
197
The AAA Triangle
8
Toward a Better Future
219
Getting Started
Notes
Selected Resources
Index
About the Author
231
247
249
259
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Foreword
I F I R S T M E T Pankaj Ghemawat in September 1978, when I was look-
ing for a very talented undergraduate to help develop a course for the
then-nascent Harvard Negotiation Project. Ghemawat stood out on account of his international orientation as well as his intellectual gifts and
curiosity. Working with him for a year confirmed my initial sense that he
would go on to do great things.
I watched with interest as Ghemawat sped through his undergraduate
and PhD degrees at Harvard in a total of six years. I was pleased when he
decided to go consult after receiving his PhD. And I was delighted when
he was recruited by Michael Porter to join the Harvard Business School faculty at age twenty-three. He went on to become the youngest professor ever
granted tenure at Harvard Business School, on the strength of a body of
distinguished work on sustainability and competitive dynamics, particularly Commitment, which is my favorite book of his. Or was, until this one.
Redefining Global Strategy is based on a decade of immersion in the strategies of global enterprises. This research has already resulted in a stream of
articles in the Harvard Business Review, of which the two most recent are
“Regional Strategies for Global Leadership” (December 2005), which received HBR’s award for the best article published that year, and “Managing
Differences: The Central Challenge in Global Strategy,” which was published as the lead article in March 2007. But it is only in this book that
Ghemawat fully elaborates and explores the implications of his core proposition: that frontiers matter. Our age, he says, is not one of complete—or
even near-complete—globalization. Rather, the state of the world is more
appropriately characterized as “semiglobalization.”
Ghemawat’s notion of semiglobalization contradicts the current fanfare about frontiers subsiding and creating a flat world in which people
find both work and opportunity without being constrained by their location. For Thomas Friedman, the most prominent purveyor of this view,
“flatness” is forced primarily by technology. For Ted Levitt, writing more
than twenty years before Friedman, it was the result of a demand-side
force, the convergence of tastes. And then there are other variants on this
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x
Foreword
broad vision. But they all naturally lead to an emphasis on size, and on
one-size-fits-all strategies.
Ghemawat is not persuaded. I imagine him, like Galileo Galilei before
the Inquisition, unable to keep from saying, “But it does move around the
sun!” In other words, a flat world may be rhetorically appealing to some,
but extensive empirical observation and analysis suggest that cultural, political, and geographic barriers between countries still loom large—and
have a major influence on global strategy.
If Ghemawat stopped there, he would simply have reminded us that
the world is a complex place and that strategic leadership is difficult.
But he is interested in providing actionable knowledge about global strategies that actually work. So Redefining Global Strategy gives the reader
coherent, powerful frameworks for thinking about the ways in which
borders matter and for evaluating cross-border moves. And perhaps even
more importantly, it develops an array of strategies for dealing with such
differences—strategies that go well beyond one-size-fits-all.
This array of strategies is particularly appealing to me because in twenty
years as a strategy consultant, I have seen many companies fail precisely
because they forgot the distinction between size and strategy. However,
strategy, which was invented both as a word and as a discipline in the battles of Marathon and Salamis between the Persians and the Greeks, is the
art and science of overcoming the advantage of size. Strategy is meant to
allow for victory of the small over the large, and the few over the many,
at least sometimes.
Ghemawat’s concept of semiglobalization not only fits with this broad
view of strategy, it also gives us the tools to advance successful globalization. As the founder of the consulting firm Panthea, and as the senior
executive adviser on strategic leadership to Booz Allen Hamilton, I am
proud that my two firms have recognized the value of these ideas. Their
initial reception by Booz Allen clients has been enthusiastic, and we expect that they will help us better understand the world—and change it for
the better.
—Nikos Mourkogiannis
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Acknowledgments
B E H I N D T H I S B O O K is a personal journey from a small city in India,
to Indiana, back to India, then to Cambridge, Massachusetts, and recently
to Barcelona. Professionally, I began to work on the ideas in this book in
the mid-1980s, soon after I had joined the Harvard Business School faculty, when I wrote an early analytical piece on global strategy with Mike
Spence, one of my thesis advisers.
My interest in imbuing my work on strategy with a cross-border perspective was whetted further by a study on India’s competitiveness that
Mike Porter and I undertook in the mid-1990s for the Confederation of
Indian Industry. Shortly after, I was fortunate enough to take over Mike
Yoshino’s Global Strategy and Management course at HBS, which provided an opportunity to synchronize research, course development, and
writings for practitioners on this topic. I have now been focused on issues
related to globalization and global strategy more or less full time for the
better part of a decade. This phase of the journey has yielded about fifty
case studies and papers, this book, and sundry supporting materials such
as a CD on globalization, my Web site (which also lists most of my work
to date), and material for several ongoing projects.
I am particularly grateful to the Harvard Business School, which, under
Deans Kim Clark and Jay Light, has generously supported this program of
study for almost a decade. IESE Business School, under Dean Jordi Canals,
has been a wonderful place to put the finishing touches on this book. I am
also deeply indebted to the Harvard Business Review, where Tom Stewart,
David Champion, and others have helped shape and support my attempts
to communicate with practitioners. And, of course, thanks to Harvard
Business School Press for its work on this book, with particular gratitude
to Melinda Merino and Brian Surette for their counsel. Thanks also to my
agent, Helen Rees, for guiding me, and to my editor, Jeff Cruikshank, for
helping shape a jumble of complex ideas into a book.
My other, mostly content-related, debts are too numerous to acknowledge, including, as they do, learning from scores of colleagues, from the
hundreds of executives I’ve interviewed, and from the thousand-odd
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xii
Acknowledgments
students with whom I’ve worked through the concepts discussed here—as
well as from many excellent writings, not all of which can be cited here.
Still, I must specifically thank people who have generously read and provided comments on recent drafts of part or all of this book: Steve Altman,
Amar Bhide, Dick Caves, Tom Hout, Don Lessard, Anita McGahan, Nikos
Mourkogiannis, Jan Oosterveld, Richard Rawlinson, Denise Rehberg, Jordan Siegel, and Lori Spivey. My long-time assistant at Harvard, Sharilyn
Steketee, did some of the research for the chapters, read through them,
and managed the multiple incarnations of the manuscript. I am also indebted to Ken Mark and Beulah D’Souza for able research assistance. And
last but most important, thank you to my wife, Anuradha Mitra Ghemawat, for the reason explained in the dedication—and for many more.
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New Preface
A D E C A D E H A S P A S S E D since the original release of Redefining Global
Strategy, and I could not be more pleased with how the ideas contained
in this volume have stood the test of time. The material in this book is,
arguably, even more important today than when the first edition came
out. Back in 2007, the common wisdom was that globalization was racing
ahead, flattening borders and erasing the effects of distance. As I write
this new preface, in 2017, many business leaders suspect that globalization has stalled or perhaps even suffered a reversal. This has prompted
rising interest in international strategies designed for a world where borders, geographic distance, and other differences between countries still
constrain international activity—the central theme of this book.
One reason that Redefining Global Strategy has remained so relevant
is that expectations about globalization have long tended to overshoot
reality—in both directions. The flat-world euphoria that prevailed a decade ago was so much removed from reality that I have debunked it as
globaloney.1 And more recently, proclamations that globalization is dead
and multinational firms are in retreat also seem exaggerated.2 When I
wrote this book, I anticipated such oscillations and made sure that my
recommendations could withstand them. In the final chapter, I predicted:
“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.”
This book helps firms develop strategies to succeed in a world where
international opportunities and threats are key items on the strategy
agenda, but the markets in which most companies compete are still far
from completely integrated. I refer to this sort of world—which prevailed
in 2007 despite so much hype to the contrary and still prevails today—
as semiglobalized. As this book elaborates, semiglobalization opens up far
more interesting strategic opportunities for firms than would be available
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xiv
New Preface
in a world where globalization is either negligible or complete. And after
devoting substantial effort in the years since this book was first published
to tracking globalization trends in the DHL Global Connectedness Index
and elsewhere, I am even more confident that the world will remain semiglobalized long into the future. In 2016, I even wrote an academic book
about how the effects of borders and distance are so reliable that they
underpin two scientific laws: the law of semiglobalization and the law of
distance.3
Somewhat less gratifying from an academic perspective, but another
reason why this book remains so relevant, is that most business leaders
are still unaware of how globalized the world really is and what that implies for international strategy. In 2017, I conducted a survey of managers
in three advanced economies (Germany, the United Kingdom, and the
United States) and three emerging economies (Brazil, China, and India).
I asked the participants to estimate several of the globalization metrics
covered in chapter 1. The average manager thought the world was five
times more globalized than it really is! And the evidence on how much
harm such globaloney does has also mounted since the initial publication
of this book. My recent surveys show that managers who have perceptions of globalization that are more exaggerated are more likely to make
some common errors in international strategy. And at the societal level,
my surveys show that more globaloney is associated with more anxiety about globalization’s alleged harmful side effects—effects that I put
into perspective in my 2011 book, World 3.0: Global Prosperity and How to
Achieve It.
As changes in the globalization environment prompt firms to reexamine their international strategies, the material in Redefining Global Strategy
provides a powerful complement to the content of my 2018 book, The
New Global Road Map: Enduring Strategies for Turbulent Times (also from
Harvard Business Review Press). The new book builds on this one but does
not repeat the same material. Redefining Global Strategy is, as indicated by
its title, devoted entirely to strategy, and so it explains my international
strategy frameworks at much greater length. The New Global Road Map,
in contrast, examines how globalization is evolving over various time
frames, and it discusses implications that extend beyond strategy. The
new book also examines choices about where to compete, how to organize, and how to engage better with society.
Redefining Global Strategy is organized in two parts. Part one introduces
the concept of semiglobalization and two key frameworks for thinking
about value creation and value capture in a semiglobalized world. More
specifically, chapter 1 debunks globaloney-induced myths and grounds
the book in a more realistic sense of globalization. Chapter 2 articulates
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New Preface
xv
the CAGE (cultural, administrative, geographic, and economic) distance
framework, which has come to be widely used and illustrates its power
in business analysis. Chapter 3 provides a scorecard for thinking through
how international moves create or destroy value. The ADDING Value
scorecard encompasses six elements: adding volume or growth, decreasing costs, differentiating or increasing willingness to pay, improving industry attractiveness or bargaining power, normalizing or optimizing risk,
and generating knowledge and other resources and capabilities.
Part two is organized around three fundamental strategies that firms
can employ in a semiglobalized world: adaptation, aggregation, and arbitrage (AAA strategies). Chapter 4 covers adaptation strategies, suggesting a wide array of levers and sublevers that firms can use to adjust to
differences across countries. Chapter 5 discusses aggregation strategies,
which focus on overcoming some cross-country differences to achieve
more economies of scale or scope. Chapter 6 focuses on arbitrage strategies, which treat differences as a source of, rather than a constraint on,
international value creation. Chapter 7 brings these three strategy archetypes together and examines how firms should think about combinations
and trade-offs across them. Chapter 8 concludes with a short step-by-step
guide to help firms apply the key learning points from this book.
To recap, this book articulates a global strategy approach that is
grounded in a clear recognition of the persistent differences across countries and the challenges these differences pose for multinational firms.
The idea is to help businesses cross borders profitably by seeing the world
as it really is, rather than engaging in wishful thinking. To achieve this
objective, the book embodies what might be called the three Rs. First,
it is readable because of its unified point of view, its conciseness, and
its use of numerous examples. Second, the book is relevant for business
policymakers because I have written it around their needs (although it
may also interest leaders in the public sector and others seeking to understand cross-border business) and have kept the discussion grounded
in reality by focusing on value creation and capture. Also important in
this regard is the ease with which companies from different parts of the
world can customize the frameworks presented—which suggests some obvious follow-up exercises. In particular, the tools available on my website
at Ghemawat.com can help practitioners customize and apply this content. And third, the book is rigorous in the sense of drawing on research in
a variety of fields—including international economics, industrial organization, business strategy, and international business—as well as extensive
interactions with business leaders. So use it to your advantage!
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Introduction
M Y F I R S T I N T E R N A T I O N A L case-writing experience, in the early
1990s, had me visit a Pepsi plant in the strife-torn Indian state of Punjab.
Given the political environment—a low-grade civil war—many workers
were militants who arrived at the plant each day toting their AK-47s.
Pepsi had set up a system whereby these could be checked in and then
retrieved at the end of a shift. Absolutely no AK-47s inside the building, the
HR director explained forcefully—introducing me to the large differences
with which international business must contend.
This sense of differences has been sharpened by the years I have spent
since then working on globalization and global strategy. As a result, instead of focusing on market size and the illusion of a borderless world,
this book reminds managers that if their businesses want to cross borders
successfully, they need to pay serious attention to the sustained differences between countries in developing and evaluating strategies. And it
provides them with the insights and tools necessary to do so.
To illustrate this perspective on globalization—or what I call semiglobalization—I’ll use football as a metaphor.1 U.S. readers may be disappointed that the kind of football that I have in mind is what they refer
to as soccer, but that itself makes a useful point about the differences between countries. Although football is supposed to be a global phenomenon—former UN secretary general Kofi Annan noted enviously that more
countries belong to FIFA, football’s governing body, than to the United
Nations—its hold on sports fans is very uneven, and the United States
constitutes the single largest exception to its general appeal.2
That said, the game has come a long way since English villagers began
kicking around pigs’ bladders in the Middle Ages. Football began to spread
internationally during the heyday of the British Empire, but the sport’s
globalization went into reverse in the interlude between World Wars I and
II, as authorities restricted the international transfer of players.
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2
Introduction
The years after World War II saw escalating international rivalry, particularly around the World Cup. In the late 1950s and early 1960s, Real Madrid
emerged as the first great European club, with players from a number of
countries.3 But until the late 1980s, West European leagues continued to
limit the number of foreign players to between one and three per team.
East European countries, meanwhile, restricted the “export” of their players. And increasing international rivalry did not supersede intense local
competition. Thus, matches between Real Madrid and FC Barcelona reenacted the Spanish Civil War—and continue to do so to this day, as I can
testify from living in Barcelona and going to watch them play.
The barriers to labor mobility largely disappeared—for club play but
not country play—in the 1990s. Economic pressures in East Europe and
other poorer parts of the world led to the abandonment of restrictions
and the adoption of export-oriented strategies by many local clubs, as
well as by football academies established for that purpose. And on the demand side, a ruling by the European Court of Justice in 1995 lifted restrictions on the number of foreign players allowed in European club play. In
1999, Chelsea F.C. became the first club in the history of the English Premiership to start a game without a single English player on the field.4 By
2004–2005, an estimated 45 percent of the players in that league’s starting
lineups consisted of foreigners.5 Similar internationalization is evident in
other European clubs. But for World Cup play between countries, FIFA
continues to restrict players to representing their countries of origin or
citizenship.
Different degrees of cross-border labor mobility have led to very different
outcomes. More or less free cross-border movement of players at the club
level has concentrated quality and success at the national and regional levels among the richest clubs.6 In the European Champions League, for example, the number of different teams that qualified for the top eight slots
has decreased significantly in the last twenty years. And a recent report by
the accounting firm Deloitte & Touche indicates that the concentration
of revenues among the top twenty clubs—all European—is increasing as
well, as richer clubs with better players secure proportionately more valuable broadcast rights.7 Interestingly, the club with the most revenues
in 2005–2006, Real Madrid with $373 million, thrived financially not just
by building local identity but also by targeting global sales of merchandise featuring an all-star cast of galácticos, including David Beckham and
Ronaldo. (This seems, however, to have exacted a cost on the playing
field: as of this writing, Real Madrid has begun to rebuild its lineup with
younger players after a spell of embarrassingly bad performance.)
This story of ever-more-concentrated success is not mirrored, however,
at the World Cup level. With players’ skills sharpened by European club
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Introduction
3
experience, an increasing number of poorer countries have become globally competitive. Thus, the last five World Cups have each featured in
the quarterfinals, on average, two teams that had never advanced that far
before. And the arrival of these newcomers has not led to more blowouts:
the average goal differential, from quarterfinals onward, in the last five
World Cups has been one goal, versus an average differential of two goals
in the first five postwar cups. Clearly, the lack of cross-border labor mobility has led to very different outcomes from club play.
Increased parity at the country level does not, however, mean that all
international differences have been ironed out. Detailed statistical analysis of the determinants of the official FIFA rankings sheds some light on
the matter. Generally speaking, large countries with Latin cultural origins
rank highly, as do countries with temperate climates and high per-capita
incomes (up to a point).8
Cross-border movements of capital as well as labor merit consideration.
Recent years have seen several English Premiership clubs bought out by
foreign investors (e.g., Chelsea by Roman Abramovitch). But attempts at
foreign investment in Brazilian clubs, for example, have clearly not worked
well. Consider the sad tale of Dallas-based buyout firm Hicks, Muse, Tate
& Furst and its 1999 decision to invest in Brazilian football. As a company
partner put it at the time: “It’s hard to imagine a better sector in which to
invest in Brazil. If you add up all the fans of professional baseball, basketball, football and hockey in the United States, that number is lower than
the number of Brazilians who are soccer fans.”9 Based on this crude arithmetic, Hicks, Muse, assumed control of business dealings for Corinthians,
São Paulo’s leading club. And it invested more than $60 million in the team
in the first year of a ten-year contract.
Unfortunately for Hicks, Muse, the Brazilian club circuit was as politicized and corrupt as the Brazilian style of play was captivating. Corinthians
won the World Club championship in 2000, but its performance subsequently slumped, and fans began to protest bitterly against trades of key
players, changes in the colors of jerseys, and the addition of advertising.
In 2003, amid a row with its local partners, whom it accused of misappropriating funds, Hicks, Muse exited—as did two other foreign groups that
had invested in Brazilian football at roughly the same time.
What does this brief discussion of football tell us about globalization—
and about global strategy, which is the focus of this book?
• Football’s global progress mirrors that of many economic indicators of globalization: there was a peak before World War I, followed
by a reversal during and between the two world wars, and then
a revival after World War II. The revival has, along a number of
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4
Introduction
dimensions, led to new records being set. At the same time, football’s failure to gain traction in the United States, by far the world’s
largest sports market, reminds us that despite the new records,
globalization remains, in many respects, uneven and incomplete.
Chapter 1 applies these themes from football to the broader context of globalization.
• Football’s failure, so far, in the United States is just one indicator of
the continued importance of the differences across countries. Others include the roles that Latin cultures, reasonable temperatures,
and threshold levels of economic development play in explaining
various countries’ success in the FIFA rankings. And restrictions on
cross-border labor mobility in World Cup play but not club play
highlight the continuing importance of administrative and institutional factors, as does the more favorable record of foreign investment in English clubs than in Brazilian ones. These factors prefigure
a framework for thinking about cross-border differences: the CAGE
framework, developed in chapter 2, that highlights the cultural,
administrative, geographic, and economic differences between
countries.
• The story of Hicks, Muse, Tate & Furst’s investing in Brazil also
illustrates what is probably the most common bias in evaluating
cross-border strategies: an emphasis on “size-ism,” which fails to appreciate the persistence of differences between countries. Chapter 3
discusses a general structure for evaluating the crossborder effects of
strategic moves—the ADDING Value scorecard—that goes beyond a
focus on size and economies of size.
• The strategies followed by football clubs exhibit a range of approaches for dealing with the differences between locations. I refer
to these approaches as AAA (adaptation, aggregation, and arbitrage)
strategies. Many clubs have focused on forging a local identity,
that is, adapting to particular locations. But there are also clubs that
have aggregated across borders (e.g., Real Madrid’s global merchandise sales). And some clubs in poor countries feed talent to richer
counterparts; that is, the poorer clubs assist in arbitrage. Arbitrage
is also prominent in at least some cross-border investments and
in the manufacture of a specialized input, footballs: the Pakistani
city of Sialkot has been a famous production hub for close to one
hundred years and still accounts for the bulk of world production.10
The strategies of adaptation to adjust to differences, aggregation to
overcome differences, and arbitrage to exploit differences are the
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Introduction
5
topics of chapters 4, 5, and 6, respectively. Chapter 7 is integrative:
it examines the extent to which it is possible to mix and match
across these AAA strategies for dealing with differences, given their
different requirements.
• Finally, the description of football has focused on the state of play
as of the end of 2006. But changes cannot be ruled out. For example, FIFA president Sepp Blatter has railed against the dominance of
the richest European clubs and, relatedly, the free transfer of players
across clubs, comparing the latter to slavery.11 Analogously, there
are always negative portents about globalization to fuel debates
about whether it will stall or go into reverse. Chapter 8 uses the insights developed in the earlier chapters to discuss how you should
think about such debates—and what your company can do now to
build a path to a better future.
While football stars manage to make the beautiful game look easy,
anyone who has actually taken the field knows how hard it can be—
especially under the pressure of intense competition. So, even the most
talented footballers study how others play the game, break big strategies
down into tactical plays, and submit themselves to intensive training
and practice programs. The case examples, frameworks, and customizable
tools described in the chapters that follow are intended to serve roughly
analogous functions in the business context. If you finish this book with
a redefined sense of what global strategies really entail and can translate
those insights into action—and profit from them—then I’ve attained my
goal in writing it. For now, though, I pass the ball over to you. Turn the
page, and let’s begin.
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PA R T 1
Value in a World
of Differences
C H A P T E R 1 S U M M A R I Z E S evidence that the current state of the
world is one of semiglobalization: levels of cross-border integration are
generally increasing and, in many instances, setting new records, but fall
far short of complete integration and will continue to do so for decades.
The chapter goes on to explain why semiglobalization is essential for
cross-border strategies to have distinctive content—as well as why failing
to keep it in view can be a recipe for poor performance.
Chapter 2 collects the reasons that borders still matter and classifies
them in terms of the cultural, administrative, geographic, and economic
(CAGE) distances between countries. This framework is usually best applied at the industry level because different types of distance vary greatly
in importance from industry to industry. But in most industries, countries
of origin do have important implications for destinations—a point that
mostly eludes more established frameworks for country analysis.
Chapter 3 discusses why—if at all—firms should globalize in a world in
which distance still matters. It presents a scorecard for tracking value creation that includes but goes beyond the familiar components of size and
economies of size. It also supplies a set of analytical guidelines and a list
of specific questions to ask—and answer. The aim is to foster more realism
about how cross-border strategies will add value in the face of large crossborder differences. Such strategies themselves are the topic of part 2 of
this book.
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1
Semiglobalization
and Strategy
The globalization of markets is at hand. With that, the multinational
commercial world nears its end, and so does the multinational
corporation . . . The multinational corporation operates in a number
of countries, and adjusts its products and processes in each, at
high relative cost. The global corporation operates with resolute
constancy . . . it sells the same things in the same way everywhere.
—Ted Levitt, “The Globalization of Markets,” 1983
A Q U A R T E R O F A C E N T U RY after Ted Levitt’s bold pronouncements,
excitement about the globalization of markets has given way to excitement about the globalization of production.1 But what has remained constant is the vision of a globalization apocalypse, sweeping all before
it. And this apocalyptic vision leads to a focus on strategies for a postapocalyptic, integrated world—strategies that inevitably have a one-sizefits-all character. That is why Levitt’s definition of global strategy as a
strategy for an integrated world still reigns.2
And, with apologies to my late colleague at the Harvard Business School,
that definition is still as wrongheaded. In this book, I redefine global strategy to describe a broader set of strategic possibilities. I argue that differences between countries are larger than generally acknowledged. As a result,
strategies that presume complete global integration tend to place far too
much emphasis on international standardization and scalar expansion.
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VA L U E I N A W O R L D O F D I F F E R E N C E S
While it is, of course, important to take advantage of similarities across
borders, it is also critical to address differences. In the near and medium
term, effective cross-border strategies will reckon with both, that is, with
the reality that I call semiglobalization. The primary goal of this book is to
stretch our thinking about cross-border strategies for a semiglobalized
world.
This chapter begins by establishing that semiglobalization is, in fact,
the real state of the world today—and tomorrow. It does so by taking some
data on board, because, as the late Daniel Patrick Moynihan observed, we
are all entitled to our own opinions, but not our own facts. The chapter
then starts to address the implications for company strategy, using the example of one of the great border-crossing companies, Coca-Cola. Around
the time that Levitt’s article appeared, Coke embarked on a global strategy
of the sort that he recommended. The problems with that strategy took a
while to surface, but by the millennium, Coke was adrift in a sea of troubles. Only recently has it started to regain its bearings. Other companies
can either learn from Coke’s experience or rediscover the same lessons
about semiglobalization the hard way, through trial and error.
Apocalypse Now?
According to the Library of Congress catalog, we are positively awash in
books on globalization. More than five thousand such books were published between 2000 and 2004, compared with fewer than five hundred
in the whole of the 1990s. In fact, between the mid-1990s and 2003, the
rate of increase in globalization-related titles—more than doubling every
eighteen months—surpassed the celebrated Moore’s Law!
Amid all this clutter, the books on globalization that have managed to
attract significant attention have done so by painting visions of a “globalization apocalypse.” These volumes tend to exhibit what scholars cite as
general characteristics of apocalyptic argumentation: emotional rather
than cerebral appeals, reliance on prophecy, semiotic arousal (i.e., treating everything as a sign), an emphasis on creating “new” people, and,
perhaps above all, a clamor for attention.3 The Flattening of the Earth is
the globalization apocalypse that occupies center stage as of this writing.4
Thus, during a recent TV interview, the first question I was asked—quite
earnestly—was why I still thought the world was round!5 But other
visions of the globalization apocalypse have been propounded as well:
the Death of Distance, the End of History, or Levitt’s own favorite, the
Convergence of Tastes. Some writers in this vein view the apocalypse as a
good thing—an escape from the ancient tribal rifts that have divided
humans, or an opportunity to sell the same thing to everyone on earth.
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Others see it as a bad thing: a process that will lead to everyone eating the
same fast food. But they all tend to assume (or predict) nearly complete
internationalization.
This is where I disagree strenuously, but on the basis of data rather
than opinion. Most types of economic activity that can be conducted either
within or across borders are still quite localized by country.
Ask yourself, for example, how large total foreign direct investment (FDI)
flows are in relation to gross global fixed capital formation. (To put it another way, of all the capital being invested around the world, how much
is being done by companies outside their home countries?) Maybe you’ve
heard the rhetoric about “investment knowing no boundaries,” and so on.
The fact is, the ratio of FDI to overall fixed capital formation has been less
than 10 percent for each of the last three years for which data are available
(2003–2005). In other words, FDI accounts for less than a dime out of every
capital dollar invested—or significantly less if one recognizes that much
of FDI involves mergers and acquisitions, that is, investment that doesn’t
actually generate incremental capital expenditures. And although merger
waves can push the ratio of FDI to gross fixed capital formation to higher
than 10 percent, the ratio has never quite reached 20 percent.6
FDI isn’t an isolated, unrepresentative example. Figure 1-1 summarizes
data on internationalization along ten dimensions. As you can see, the
levels of internationalization along these dimensions all cluster much
closer to 10 percent—which also happens to be the average across the ten
categories—than to 100 percent.7 The biggest exception in absolute terms—
the trade-to-GDP ratio shown at the bottom of the figure—probably recedes
most of the way back toward 20 percent if you adjust for double-counting.8
So if I had to guess the internationalization level of some activity about
which I had no particular information, I would guess it to be much closer
to 10 percent than to 100 percent! I call this the “10 percent presumption.”
The 10 percent presumption notwithstanding, I prefer to talk of semiglobalization rather than “deciglobalization.” One reason is that 10 percent
is not meant to be any kind of global constant: my best guess is that the
next few decades will witness increased internationalization of many of
the categories in figure 1-1, and a (slow) upward drift in their average.
Second, if internationalization levels are setting new records in many respects, international activity probably warrants a share of attention that
exceeds its current share of total economic activity—it is increasingly important and its surge is taking it into uncharted territory. Third, business
interest in internationalization may also exceed general internationalization
levels because businesses have some distinct advantages—as well as disadvantages—compared with other channels for cross-border coordination.
Thus, the largest companies are significantly more internationalized than
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VA L U E I N A W O R L D O F D I F F E R E N C E S
F I G U R E 1-1
The 10 percent presumption
Telephone calls
Immigrants (to population)
University students
Management research
Private charity
Direct investment
Tourist arrivals
Patents
Stock investment
Trade (to GDP)
0
10%
20%
40%
60%
80%
100%
Level of internationalization
Note: The measures are defined as follows. Telephone calls: international component of total calling minutes;
immigrants (to population): stock of long-term international immigrants as a percentage of global population;
university students: foreign students as a percentage of total OECD university enrollment; management
research: percentage of research papers with a cross-border component; private charity: international
component of U.S. private giving; direct investment: foreign direct investment flows as a percentage of gross
global fixed capital formation; tourist arrivals: international arrivals as percentage of total tourist arrivals;
patents: patents of OECD residents involving international cooperation; stock investment: international
component of U.S. investors’ stock holdings; trade (to GDP): global exports of merchandise and nonfactor
services as a percentage of global gross domestic product (GDP).
Sources: Data are presented for as close to 2004 as possible and are for that year unless noted otherwise.
The figure for phone calls is based on data from the International Telecommunications Union’s telecom
database and is for 2001, although coverage drops off sharply, as of this writing, for more recent years. The
estimate of the stock of long-term international immigrants is based on UNESCO, International Organization
for Migration, World Migration 2005: Costs and Benefits of International Migration (Geneva: International
Organization for Migration, June 2005). The data on foreigners among university students is from and for OECD
(Organisation for Economic Co-operation and Development) countries and excludes Mexico and Luxembourg;
see OECD Education Online Database (English) in OECD Statistics version 3.0. The figure for management
research is drawn from Steve Werner, “Recent Developments in International Management Research: A Review
of 20 Top Management Journals,” Journal of Management 28 (2002 ): 277–305. The (generous) estimate for
the international component of private charitable giving is for the United States only and was supplied by
Geneva Global. The internationalization of direct investment is measured by dividing FDI flows by gross fixed
capital formation; the internationalization of trade (merchandise and nonfactor services) is calculated by dividing
FDI by gross domestic product (GDP), with all data taken from the World Investment Report issued annually
by the U.N. Conference on Trade and Development (UNCTAD). The estimate for tourist arrivals is based on
estimates by the World Tourism and Travel Council for 2000. The patent data are drawn from OECD, Science,
Technology and Industry Scoreboard 2005. Data on portfolio investment are for U.S. investors’ stockholdings,
as reported and analyzed in Bong-Chan Kho, René M. Stulz, and Francis E. Warnock, “Financial Globalization,
Governance, and the Evolution of the Home Bias,” working paper (June 2006). Available at SSRN:
http://ssrn.com/abstract=911595.
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Semiglobalization and Strategy
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the 10 percent level: the one hundred largest nonfinancial corporations,
for example, have, on average, one-half their sales, assets, and employment overseas.9 And many smaller companies aspire to increase their internationalization levels.
So the point of the data presented in figure 1-1—and other data on
cross-border market integration that I discuss at much greater length and
more systematically in my published academic research—is not that we
should neglect cross-border issues, but that we should see them from a
semiglobalized perspective.10 From this perspective, the most astonishing
aspect of various announcements of the globalization apocalypse is the
extent of exaggeration involved.
Apocalypse in the Near Term?
There is an obvious rejoinder available to apocalyptics: the assertion that
even if the world isn’t quite flat today, it will be tomorrow.11
To deal with such an assertion, we have to look at trends rather than at
levels of integration at one point in time. The results are interesting.
Along a few dimensions, integration reached its all-time high many years
ago. For example, rough calculations suggest that the fraction of the
world’s population accounted for by long-term international immigrants
was slightly higher in 1900—the high-water mark of an earlier era of migration—than in 2005.12
Along other dimensions, new records are being set. But this has happened only relatively recently, and only after long periods of stagnation
and reversal. For example, FDI stocks as a ratio of GDP peaked before
World War I and didn’t return to that level until the 1990s. In fact, some
economists have argued that the most remarkable development over the
last few centuries was the declining level of internationalization between
the two world wars, of which FDI is a particularly striking illustration.13
And finally, there are dimensions along which pre–World War I levels
of integration were matched and surpassed relatively soon after World
War II. International trade in relation to GDP is the leading example: it
surpassed pre–World War I records during the 1960s, reached the 20 percent level for the first time in 1979, and, over the next twenty-five years,
increased to 27 percent. Extrapolating this rate of increase would imply a
trade-to-GDP ratio of less than 35 percent by 2030. Unprecedented yes,
but hardly apocalyptic.14
It is useful to supplement such extrapolations with some consideration
of the forces behind the trends. Consider the two drivers of cross-border
integration that have been emphasized the most by apocalyptics:15
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VA L U E I N A W O R L D O F D I F F E R E N C E S
• Technological improvements, particularly in communications
technologies
• Policy changes that have engaged more countries in the world
economy
The question we have to ask is this: Do these two important forces really push us toward an integrated world in the near term?
Improving Communications Technologies
Technological improvements seem to be the most frequently cited drivers
of the alleged globalization apocalypse.16 Given their rate of improvement over the last century, transportation and, particularly, communications technologies have attracted the most attention. For example, the
cost of a three-minute telephone call from New York to London fell from
$350 in 1930 to about 40 cents in 1999 and is now approaching zero for
voice-over-Internet telephony. And the Internet itself is just one of many
newer forms of connectivity—enabled by digitalization and the convergence of communications and computing—that have progressed several
times faster than plain old telephone service. This pace of improvement
has inspired many apocalyptic announcements, including this one, from
one of the better books of this sort, Frances Cairncross’s Death of Distance:
New ideas will spread faster, leaping borders. Poor countries will have
immediate access to information that was once restricted to the industrial world and traveled only slowly, if at all, beyond it. Entire electorates will learn things that once only a few bureaucrats knew. Small
companies will offer services that previously only giants could provide.
In all these ways, the communications revolution is profoundly democratic and liberating, leveling the imbalance between large and small,
rich and poor.17
There is a kernel of plausibility to some of Cairncross’s ideas. Technologies and standards do enable connectivity and collaboration at a distance,
and that is important. It is also likely that, as Cairncross asserts, the separation of where certain services can be performed from where they are delivered will matter a great deal.
Nevertheless, it’s a gross exaggeration to jump from these kernels to
proclaiming the “death of distance” based on improving communications technologies. Reconsider the Internet itself. The internationalization of Internet traffic is impossible to measure precisely, particularly
because of problems sizing up domestic flows. But the best estimates I have
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been able to locate indicate an internationalization level a bit below 20
percent, that is, within a factor of two of 10 percent.18 In terms of changes
rather than levels, the international share and, particularly, the intercontinental share of total traffic is supposed to be decreasing rather than
increasing, for reasons ranging from surging peer-to-peer traffic to the development of alternatives to the United States, which until recently was
the hub for virtually all international switching.
Business-focused examples permit more definite statements based on
better data. Look at information technology (IT) services, which are often
cited as an illustration of technologically enabled globalization. A total of
2 percent or 11 percent of such work—depending on whether one looks
at the total potential market or only the immediately addressable part of
it—is currently offshored.19 Or for an even more net-centric example that
helps explain barriers at borders as well as exemplifying their effects, consider Google.
The company boasts of supporting more than one hundred languages
and, partly as a result, has recently been rated the top global Web site. But
Google’s reach in Russia—cofounder Sergey Brin’s country of origin—was
only 28 percent in 2006, versus 64 percent for the market leader in search
services, Yandex, and 53 percent for Rambler, two local competitors that
account for 91 percent of the Russian market for ads linked to Web
searches.20 Google’s problems reflect, in part, linguistic complexities: Russian nouns have three genders and up to six cases, verbs are very irregular,
and the meaning of words can depend on their ending or the context. In
addition, local competitors have adapted better to the local context by,
for example, developing payment mechanisms through traditional banks
to compensate for the dearth of credit cards and online payment infrastructure. And though Google has doubled its reach since 2003, this has
required setting up a physical presence in Russia and hiring engineers
there, underlining the continued importance of physical location.
Google’s highly publicized travails with Chinese censors illustrate a different set of reasons that borders continue to matter: governments have
become more adept at creating closed national networks and enforcing
local laws (aided, in part, by Internet geographic identification technologies that continue to improve). Nor is it just totalitarian governments that
flex their muscles in such ways. Many experts view the success of the
French government’s 2000 effort to restrict sales of Nazi memorabilia by
Yahoo! as the key legal precedent in this regard. And the intervention that
has probably had the biggest economic impact is the U.S. government’s
2006 ban on online gambling.
The implications of all these barriers at the borders for the Internet are
discussed at length in a book with the telling subtitle Illusions of a Borderless
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VA L U E I N A W O R L D O F D I F F E R E N C E S
World, which argues that: “What we once called a global network is becoming a collection of nation-state networks.”21 Chapter 2 looks more
generally at barriers to cross-border economic activity and collects and
classifies them in terms of the CAGE (cultural-administrative-geographiceconomic) distance framework for thinking about the differences between countries.
Policy Openings
A second notable driver of cross-border integration is a constellation of
policy changes that led many countries—particularly China, India, and
the former Soviet Union—to come in from the cold and participate more
extensively in the international economy. Economists Jeffrey Sachs and
Andrew Warner provide one of the better-researched (although still apocalyptic) descriptions of these policy changes and their implications:
The years between 1970 and 1995, and especially the last decade, have
witnessed the most remarkable institutional harmonization and economic integration among nations in world history. While economic integration was increasing throughout the 1970s and 1980s, the extent of
integration has come sharply into focus only since the collapse of communism in 1989. In 1995, one dominant global economic system is
emerging.22
Yes, such policy openings are important. But to paint them as a sea
change is inaccurate, at best. Remember that integration is still relatively
limited. Meanwhile, the policies that we changeable humans enact are
surprisingly reversible. Thus, Francis Fukuyama’s End of History, in which
liberal democracy and technologically driven capitalism were supposed to
have triumphed over other ideologies, seems quite quaint today.23 Especially in the wake of September 11, 2001, Samuel Huntington’s Clash of
Civilizations looks a bit more prescient.24
But even if you stay on the economic plane, as Sachs and Warner
mostly do, you quickly see counterevidence to the supposed irreversibility
of policy openings. The so-called Washington consensus around marketfriendly, open policies ran up against the Asian currency crisis and has
since frayed substantially—in the swing toward “neopopulism” across much
of Latin America, for example—to the point where we are starting to see
working papers with titles such as “Is the Washington Consensus Dead?”
In terms of outcomes, the number of countries—in Latin America, coastal
Africa, and the former Soviet Union—that have dropped out of the “convergence club” (defined in terms of narrowing productivity and structural
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gaps vis-à-vis the advanced industrialized countries) is at least as impressive as the number of countries that have joined the club.25 At a multilateral level, the suspension of the Doha round of trade talks in the summer
of 2006—prompting The Economist to run a cover titled “The Future of
Globalization” and depicting a beached wreck—is not a good omen.26 In
addition, the recent wave of cross-border mergers and acquisitions seems
to be encountering more protectionism in a broader range of countries
than did the previous wave in the late 1990s.
Of course, given that sentiments in this regard have shifted more than
once in recent decades, they may yet shift again in the future. Such possible inflection points are discussed further in chapter 8. The point here is
not only that it is possible to turn the clock back on globalization-friendly
policies, but also that we have a relatively recent example of that actually
happening, during the interwar period. In particular, we have to consider
the possibility that really deep international economic integration may
not mix well with national sovereignty.27
So while the technological drivers of increased cross-border integration
may be irreversible, we can’t say the same about policy drivers. Policy
drivers are, therefore, an even shakier basis for apocalyptic visions of complete cross-border integration—not to mention strategy making predicated
on such visions!
It is interesting to speculate about why people’s beliefs in globalization
overshoot the reality of semiglobalization to the extent that they do. Jean
de la Fontaine’s aphorism “Everyone believes very easily what they fear or
desire” subsumes at least some of the explanations: the paranoia of those
who fear world domination by multinationals, the smug superiority of elites
who have been variously characterized as Davos men and cosmocrats, the
terminal insecurity of those trying to be “with it,” the naive utopianism
of internationalists, and so forth. But spending more time on this issue is a
little bit like H. L. Mencken’s characterization of going to the zoo: engaging, but not especially productive. So it’s time to turn to the implications
for companies and their global strategies, which we will pursue by looking at the rather amazing story of Coke.
The Case of Coke
Even companies with substantial global experience, presence, and success
can fall prey to visions of the apocalypse—and thereby place themselves
in great peril. A particularly cautionary case is that of Coca-Cola, which
has a broader global presence than just about any other company in the
world, owns what is reckoned to be the world’s most valuable brand, and
is much more profitable overseas than at home. Until the late 1990s,
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Coke was also regarded as an exemplar of global management. But since
then, it has experienced a fall from grace, from which it is still recovering.
Consider Coke under successive CEOs.
Background
Founded in 1886, Coke made its first move outside the United States in
1902, when it entered Cuba—the same year that archrival Pepsi-Cola
started up business. By 1929, five years before Pepsi set up its first foreign
venture (in Canada), Coke was being sold in seventy-six countries around
the world. Its international presence was greatly bolstered by World War
II, when keeping U.S. troops overseas supplied with the soft drink became
government policy. Coke, exempted from wartime sugar rationing, built
sixty-three bottling plants around the world. Its global push continued
after the war, under Robert Woodruff, who ran the company from the
early 1920s to the beginning of the 1980s and was an avowed flag-planter:
“In every country in the world, [Coca-]Cola dominates. We feel that we
have to plant our flag everywhere, even before the Christians arrive. Cola’s
destiny is to inherit the earth.”28
But despite this triumphalism (which one wit referred to as “CocaColonization”), Coke’s strategy continued to be “multilocal” over this period.
Its local operations were more or less independently managed. Their primary
objective was to support a network of over one thousand bottlers, which
employed more than fifty times as many people as did the mother ship
and actually undertook most of the activities performed by the Coke system.
Roberto Goizueta: Exploiting Similarities
Roberto Goizueta, who took over as Coke’s CEO in 1981, continued Woodruff’s push into international markets but also set out to transform how
they were managed. Over the course of his tenure, Coke came to define
the aggressively globalized corporation: its strategy reflected Goizueta’s
sense that the only fundamental difference between markets in the United
States and other countries was the lower average levels of market penetration overseas. As he put it in one speech, “At this point in time in the
United States, people consume more soft drinks than any other liquid, including ordinary tap water. If we take full advantage of our opportunities,
some day, not too many years into our second century, we will see the
same wave catching on in market after market.”29
This core belief in similarities across countries underpinned a global
strategy that placed ever more emphasis on international growth, scale economies, statelessness, ubiquity, and centralization with standardization:
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• Growth fever: Although U.S. volume growth slowed in the mid1980s, Goizueta clung to historic targets and placed ever more
emphasis on the non-U.S. operations as a way of meeting them.
Given a belief in similarities across countries, the rest of the world
seemed to be a blue ocean of growth opportunities: in Goizueta’s
last year as CEO, for example, Coke sold thirty gallons of soft drinks
per capita in the United States (5 percent of the world’s population), versus an average of three and one-half gallons per capita in
the rest of the world. Room to grow!
• Economies of scale: Goizueta was also convinced of endless scale
economies that would increasingly concentrate market share in
Coke’s hands. As he explained to Coke’s bottlers in a speech shortly
before his death, “We already have the most popular brand in the
world. In fact, we have four of the top five soft drink brands . . .
As I see it, that is a giant head start. I cannot think of one business
that is in a better position to succeed than ours . . . in a time when
trade barriers are tumbling.”30 Again, this element of Goizueta’s
strategy went hand in hand with a belief in similarities across
countries.
• Statelessness: In 1996, Goizueta declared that “the labels international and domestic, which adequately described our business
structure in the past, no longer apply. Today, our company,
which just happens to be headquartered in the United States, is
truly a global company.”31 And he acted on this assertion by
officially embedding the U.S. organization in what used to be
the international organization—although in practice, the U.S.
operation continued to be an entity unto itself. The point is that
such a move would make perfect conceptual sense, given a faith
in cross-border similarities, because maintaining separate U.S.
and international organizations would then be duplicative at
best and probably dysfunctional (in the sense of creating unnecessary silos).
• Ubiquity: Goizueta inherited an enterprise that already operated in
160 countries; by the time he departed, that number had nearly
reached 200. Some of this expansion—such as into East Europe as
the Berlin Wall came down—made clear sense. But other market
penetration efforts seem to have been justified on the basis of faith
rather than market analysis. Thus, after the Soviet Union left
Afghanistan—but as turmoil there continued—Coke successfully
raced Pepsi to be the first to bring its soft drinks back to the Afghani
market, in 1991.32
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• Centralization and standardization: In pursuit of the objectives
described above, Goizueta engaged in an unprecedented amount of
centralization and standardization. Divisions were consolidated,
and regional groups headquartered in Atlanta. Consumer research,
creative services, TV commercials, and most promotions were put
under the supervision of Edge Creative, Coke’s internal ad agency,
with the idea of standardizing these marketing activities—and the
effect of further increasing the head count at headquarters. At the
same time, the company designated so-called anchor bottlers,
which would often operate in more than one country, and in which
Coke would take equity stakes ranging from 20 to 49 percent—
leading the company to become more involved internationally in
decisions that it had previously delegated to (more) independent
bottlers.
The emphasis on centralization and standardization obviously created
a bias toward a one-size-fits-all strategy. But few were inclined to argue
with it at the time. Coke had been rated the most admired U.S. corporation by Fortune in 1995 and 1996, and would be again in 1997. More objectively, its market value increased from $4 billion to $140 billion over
Goizueta’s sixteen-year tenure. Still, these impressive accomplishments
reflected Coke’s fundamental strengths and Goizueta’s assiduity in exploiting them (as well as some creative accounting toward the end of this period
in buying and selling bottlers), rather than the fundamental soundness of
the one-size-fits-all approach. In light of his successors’ travails, that approach turned out to have been grossly overrated.
Douglas Ivester: Staying the Course
When Goizueta died unexpectedly in 1997, he was succeeded by his chief
financial officer, Douglas Ivester. The CFO had masterminded the strategy
of buying bottlers and reselling them to Coke affiliates, with the gains
booked as operating income; this practice helped mask pressures on concentrate profitability. Ivester shared Goizueta’s vision of limitless international growth: his first letter to Coke’s shareholders was titled “A Business
in Its Infancy” and contained a section with the heading “Why is a billion
[daily servings of Coke] just the beginning? A look at the other 47 billion.”33 Ivester clung to the other elements of Goizueta’s global strategy as
well: when a reporter asked him if Coke would change direction, his response was, “No left turns, no right turns.”
But Ivester’s strategy of staying the course quickly ran into roadblocks,
many of them demand related. The world economy began to sag almost
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on the day he moved into the corner office, with Brazil and Japan—two of
Coke’s largest overseas markets—taking economic nosedives. The aforementioned Asian currency crisis intensified with a vengeance in 1998. By
1999, the Russian operations were limping along at 50 percent capacity.34
The same analysts who had previously assigned high values to Coke’s
stock because of its global “presence” now marked it down for its global
“exposure.”
Ivester discounted the growth shortfalls as short-run setbacks and refused to cut the 7–8 percent volume growth target that had been set—and
achieved—under Goizueta, although he did trim the earnings growth target.
But by late 1999, Coke’s stock valuation had declined by about $70 billion
from its peak as a result of these problems and others, including fraying
relationships with governments, particularly in Europe, and with bottlers.
Regulators in the European Union resisted Coke’s attempts—directed out
of its headquarters—to acquire Orangina and Cadbury Schweppes, and lags
in tackling contamination problems in France and Belgium caused further strains. Bottlers had begun to find Coke overbearing as well. They were
under profit pressures in many geographies and were particularly embittered by Coke’s attempts to stuff channels as its growth rate came under
pressure. The last straw for them was Ivester’s attempt to sustain performance by imposing a 7.6 percent concentrate price increase. They put enormous pressure on Coke’s board, to which they had always had a back
channel, to fire Ivester. It did.
Douglas Daft: Succumbing to Differences
Ivester’s successor was Douglas Daft, who had previously headed Coke’s
Middle and Far East Group. Daft’s years in the field had imbued him with
the belief that the way to win globally was to transfer strategic decision
making to local executives. As he put it in January 2000, “No one drinks
globally. Local people get thirsty and go to their retailer and buy a locally
made Coke.”35 He elaborated on this theme in a March 2000 newspaper
article titled “Think Local, Act Local”:
As the century was drawing to a close, the world had changed course,
and we had not. The world was demanding greater flexibility, responsiveness, and local sensitivity, while we were further centralizing decisionmaking and standardizing our practices, moving further away from our
traditional multi-local approach . . . If our local colleagues develop an
idea or strategy that is the right thing to do locally, and it fits within our
fundamental values, policies, and standards of integrity and quality,
then they have the authority and responsibility to make it happen.36
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This was more than just rhetorical froth for locals to feel good about.
Daft made an abrupt about-face in terms of how Coke was to be managed.
He ordered six thousand layoffs—most of them at headquarters in Atlanta—and launched a massive reorganization that, among other things,
aimed to relocate decision making closer to local markets. Perhaps the
single most surprising announcement—which sparked an exodus of top
marketing talent—was that no more global advertisements would be made.
Instead, ad budgets and creative control were placed in the hands of local
executives, who were understandably delighted—but also underprepared.
As a result, quality suffered even more than scale economies. A flood of
homegrown ads hit the airwaves, ranging from people streaking naked
across a beach (in an Italian ad) to an angry grandmother in a wheelchair
leaving a family reunion when her granddaughter couldn’t come up with
a Coke (in a U.S.-made spot). And the new umbrella themes proved shortlived as well: Enjoy lasted fifteen months, and Life Tastes Good five months
(versus Always, which ran from 1993 to 2000).
Given this significant flailing around, it should come as no surprise
that volume growth sagged. It averaged only 3.8 percent in 2000 and
2001, versus the 5.2 percent achieved in 1998 and 1999 under Ivester.
At a company that has traditionally cherished growth, this was unacceptable. In March 2002, the Wall Street Journal reported, “The ‘think local,
act local’ mantra is gone. Oversight over marketing is returning to Atlanta.”
A hundred or so marketers in Atlanta had been reconstituted as the apex of
a global marketing group that would set strategy for core brands and
agency engagement, develop marketing talent, and help local markets
share best practices. But efforts to rebuild headquarters capabilities in this
and other functions lagged because hiring and integrating people required much more time than firing them had. Meanwhile, the advertising
churn continued. As a result, Coke’s volume growth rate recovered to
only 4.7 percent over 2002–2003, well below the long-run target of 5–6
percent (to which Daft had lowered it in 2001), and its stock continued to
stagnate. In February 2004, Coke announced Daft’s retirement.
Neville Isdell: Managing Similarities and Differences
Coke looked outside as well as inside for a successor to Daft and ultimately tapped a retired Coke executive, E. Neville Isdell, who signed on in
May 2004. The story of Coke under Isdell is still being written, but his
moves in his first two years seem consistent with his publicly expressed
viewpoint that under his immediate predecessors, the “pendulum swung
too far over.” Isdell has turned his back on the extreme localization that Daft
initiated by continuing to rebuild headquarters capabilities and recentral-
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ize elements of marketing, with a particular emphasis on bigger, more
universal advertising themes. Notably, however, this rejection of localization has not been accompanied by a reversion to Goizueta’s and Ivester’s
one-size-fits-all approach with its emphasis on extreme standardization:
• Growth fever has receded as a result of Isdell’s reduction of Coke’s
long-run volume growth target to 3–4 percent. Stock analysts, who
no longer considered Daft’s 5–6 percent target credible, actually
reacted positively.
• Economies of scale and selling a few established soda brands are
no longer Coke’s primary focus: innovation, particularly in noncarbonated beverages, is.
• Statelessness is out. Early in 2006, Isdell reinstituted a position
Goizueta dissolved a decade earlier: a head of all international
operations outside North America. The intent was not just to
improve possibilities for coordination overseas, but also to be
realistic in recognizing the distinctive features and challenges of
the home region. This is a far cry from the belief that for a company as global as Coke, there is no meaningful distinction left
between home and abroad.
• Ubiquity has not been abandoned, but Isdell’s emphasis on “looking
at where we are most profitable and then expand[ing]our offerings
there” does point toward more nuanced resource-allocation decisions.
• Centralization and standardization have been moderated. The regional heads have more authority than they did under Goizueta
and Ivester, and Coke’s strategies now exhibit more variation at the
country level. In China and India, in particular, Coke has lowered
price points, reduced costs by indigenizing inputs and modernizing
bottling operations, and upgraded logistics and distribution, especially
rurally. And as noted, there is more emphasis now on variety.
The last bullet point bears further discussion. What Coke headquarters
seems to have realized, in the past few years, is that it may not make sense
to compete the same way in all markets.
To be fair, this recognition really dates back to Daft: “I’m not saying
that every market will turn into a mirror image of North America or Australia. What consumers in our most promising markets want from us may
develop differently—maybe even very differently—than they have in our
established markets.”37
Unfortunately for Coke, Daft responded by letting a thousand flowers
bloom. But such an approach naturally raises the question of why the
whole is more than the sum of its parts. If there are no benefits to be
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derived from similarities across borders, why are the different country operations part of the same company in the first place?
Under Isdell, in contrast, Coke is trying to leverage ideas that have
worked well in one market to rethink how to compete in others—in a way
that does afford room for cross-border value addition. Particularly notable
in this regard is Coke’s reliance on what it has learned in Japan (see the
box “Coke in Japan”) to figure out how to become less cola driven in
other markets. This is important in the United States, for example, because
obesity has become a major concern, and also in China, where resistance
to cola is compounded by an aversion to dark drinks. And in parallel,
there is a newfound emphasis on globalizing noncola brands instead of
simply treating them as localized add-ons.
In sum, Coke’s strategy under Isdell should be seen as an attempt to
find a new and improved way of competing across borders, instead of settling for some compromise between Goizueta’s and Ivester’s extreme centralization and standardization and Daft’s extreme decentralization and
localization—that would probably also compromise performance. How
well this new strategy will work remains to be seen, but at least Coke is no
longer seesawing between those two extremes. Instead, it is attempting to
get off the seesaw altogether and compete in a way that neither ignores
the differences across countries nor caves in to them entirely—that is, it
recognizes the reality of semiglobalization.
Beyond Coke
It is time to extrapolate from the Coke case. This section begins by discussing why other companies may be subject to some of the same gravitational pull of one-size-fits-all strategies that Coke experienced under
Goizueta and Ivester. The discussion then takes a cue from Coke’s lurch
toward localization under Daft to look at the possibility of protracted
weakness after the selection of such strategy, instead of a quick recovery
from it. It concludes by using Isdell’s strategy as a springboard to a third
way of competing across borders—a way that is more than a halfway
house between the extremes of one-size-fits-all globalization and parochial local variation.
Broad Biases
The Coke story, although particularly colorful, is far from unique. Other
examples of overstretch and retreat abound. Vodafone, in a faster-moving
environment, managed to go through a similar cycle of overstretch-and-
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Coke in Japan
Coke’s dominance of the Japanese market can be traced back to the U.S. occupation of the country after World War II and the troops who stayed on
there. As a result, Coke enjoys a crushing market-share lead in Japan, which is
its most profitable major market and generates more profits than the rest of
the countries in Asia and the Middle East combined. But this dominance is
not due to Japan’s being cola driven. Cola accounts for only a small share of
Coke’s sales there. The bulk of its Japanese sales and profits comes from selling canned coffees and two hundred other eclectic products, such as Real
Gold, a hangover cure, and Love Body, a tea that some believe increases bust
sizes.a The variety of products in the Japanese market reflects a limited appetite
for colas, the need to offer multiple products to fill up vending machines, and a
faddishness that has led Coke to introduce as many as a hundred new products there every year. Headquarters did not always welcome this level of variety;
in fact, the leading Coke product in Japan, Georgia Coffee, was reportedly developed by bottlers over objections from headquarters and given its name as
an ironic comment on how helpful headquarters had been. However, because the Japanese operations were so profitable, headquarters cut them
some slack.
As a result, Coke Japan has developed its own product development capabilities and the ability to handle many more—and individually smaller—
brands. Under Isdell, Coke has been deconstructing the “Total Beverage
Company” model that it has worked out in Japan to figure out how to become less cola driven elsewhere.
a. Information on Coke’s product offerings and introductions in Japan is based on Dean Foust,
“Queen of Pop,” BusinessWeek, 7 August 2006, 44–51.
retreat in a much shorter time span. While it built up a substantial presence in Japan and the United States as well as its home region of Europe,
differences in mobile telephone standards invalidated its attempts to
achieve interregional economies of scale. And in the tenth year of the
DaimlerChrysler merger, speculation abounds about a demerger. Whatever the eventual outcome, the intended results have clearly not been
achieved.
One way of deriving some insight into the incidence of such cases is to
consider in a more general context the biases associated with Coke’s failure,
under Goizueta and Ivester, to take the differences across countries seriously.
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• Growth fever: Even a company as internationalized as Coke averaged nearly ten times the penetration at home as it did overseas.
For most companies, the differences between domestic and foreign
penetration are even larger! A borderless frame applied to such
differences in penetration levels runs an obvious risk of inducing
growth fever about foreign markets, especially since most companies tend to cross borders after saturating their home market. To
make matters worse, such biases can be exacerbated by advisers
(e.g., investment bankers interested in doing deals).38 As I write
this, I’m looking at a slide from a major strategy consulting firm
that superimposes offerings related to its “global strategy audit” on
a stylized globe. On the North Pole is a label that summarizes the
overarching objective of such audits: Growth.
• Economies of scale: Coke didn’t pull its obsession with economies
of scale out of thin air; it was the logical consequence of failing to
take differences across countries seriously. As Bruce Kogut pointed
out long ago, in the absence of such differences, the answer to the
question of “what is different when we move from a domestic to
an international context . . . [is] simply that the world is a bigger
place, and hence all economies related to the size of operations
are, therefore, affected.”39 There does, in fact, seem to be such an
obsession with scale economies and, relatedly, increasing concentration. Thus, surveys that Fariborz Ghadar and I have conducted
indicate that more than three-quarters of managers believe that
increasing cross-border integration leads to increasing seller concentration—even though the eighteen global or globalizing industries for which we have compiled data show, on average, no such
increase.40 Incidentally, out of our sample, the soft drinks industry
does exhibit the single largest increase in concentration. This suggests that a faith in scale economies would be even more misplaced
in other contexts.
• Statelessness: Very few companies have gone as far as Coke did
under Goizueta: proclaiming that they have no home base. Many
managers do, however, seem to believe that a truly global company
should strive to achieve such a state of statelessness. They run the
risk of being severely disappointed since foreign companies don’t
seem to be able to shake their foreignness (see chapter 2 for more
on the liability of foreignness). This is obviously true for such U.S.
icons as Coke in parts of the world where the United States is
widely hated. But even companies from countries that generally
maintain lower international profiles can face problems: consider
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the boycott of Danish products in the Middle East after a Danish
paper ran cartoons of the Prophet Mohammed.
• Ubiquity: Very few companies are as ubiquitous as Coke, but many
experience great angst because they are not—and would agree that
a truly global company should compete everywhere. This logical
consequence of believing in a borderless world seems to be reinforced empirically by an exaggerated conception of the number
of countries in which the “typical” multinational operates. Thus,
managers seem surprised to learn that U.S. multinationals typically
operate in just one or two foreign countries and that for those that
operate in just one, there is a 60 percent chance that this country is
Canada.41 And again, managers can get bad advice in this regard;
thus, the “global strategy audit” of the leading strategy consulting
firm cited above frames global expansion as a question of when,
rather than where.
• Centralization and standardization: Finally, if you (as the leader of
a company) become convinced that borders don’t matter, you’re
most likely to compete internationally the same way that you do
at home, for reasons ranging from economies of scale to the sheer
difficulty of grasping how different the conditions in foreign countries
truly are. The likelihood of such an overemphasis on similarities is
reinforced by the observation that firms that are successful at home
are disproportionately likely to be the ones that venture abroad
and, presumably, to be overly enamored of their own domestic
business models. Furthermore, even if such a bias runs up against
an unfriendly reality, that may not be enough to overturn it. Coke
continued to emphasize centralization and standardization under
Goizueta and Ivester, despite pressures for market responsiveness
that had forced it to increase its number of brands from a handful
in the early 1960s to more than four hundred today, and despite the
idiosyncrasy of its most profitable major foreign market, Japan, as
described earlier.
So while Coke is clearly unusual along certain dimensions, other more
“typical” companies may experience similar biases toward adopting onesize-fits-all strategies. In some cases, they may even be under greater pressure to do so!
Calamitous Consequences
Recall that after Coke got carried away with a one-size-fits-all strategy
under Goizueta and Ivester, the pendulum swung too far in the opposite
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direction during Daft’s first two years as CEO. In other words, not only
does it take time to develop a strategy, detect problems with it, and devise
an antidote, but all too often, the antidote is an overreaction.
One explanation for this kind of overshoot is emotional. If you get
burned by an excessive faith in globalization, “globaloney”—Clare Booth
Luce’s original riposte to Wendell Wilkie’s visions of One World more
than half a century ago—is perhaps the natural, if irrational, reaction.
Another explanation is political. What happens in the wake of most
revolutions? People settle old scores. After the peasants with pitchforks
overrun headquarters—one characterization of what happened at Coke
under Daft—it is easy to imagine headquarters’ capabilities being dismantled, even if local or regional substitutes aren’t yet in place.
For these reasons and others, many companies get their fingers burned
by engaging first in misguided global standardization and then shifting
abruptly to a localization strategy. Still other companies throw up their
hands and terminate all their international operations. Why? For one reason, they don’t enjoy Coke’s huge border-crossing advantages. Some of
these have already been cited: the world’s most valuable brand, relatively
standardizable major products, and a consolidating industry. Other advantages include international operations that are more profitable than
domestic ones, a broad and balanced geographic presence—Coke is one
of only a dozen or so Fortune 500 companies that derive at least 20 percent of their sales from each of the three triad regions of North America,
Europe, and Asia-Pacific—and a powerful network of bottlers that provides some counterweight to tendencies toward standardization.
Without these safeguards or strengths, the average border-crossing
company can make even bigger mistakes—and be less able to recover
from them. To assess your company’s proneness to such mistakes, answer
the questions in the box, “Your Company’s Beliefs About Globalization:
A Diagnostic.”
Rhetoric and Remedies
The challenges of beating the biased beliefs and avoiding the calamities
just described are compounded by confused rhetoric. One vivid illustration is the slogan (mis)appropriated from the environmental movement,
“Think global, act local.” This tagline has come to mean such different
things to different people that it stands for nothing in particular. Thus,
Goizueta pressed it into service to describe the extremely standardized
and centralized strategy he adopted at Coke, particularly in regard to marketing. But in “Think Globally, Market Locally,” Orit Gadiesh, the chairman
of Bain & Company, encouraged brand managers to “localize, localize, lo-
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Semiglobalization and Strategy
Your Company’s Beliefs About
Globalization: A Diagnostic
Which of the following beliefs underlie how your company thinks about globalization and global strategy? Check the more appropriate box in each case.
Yes No
1. Globalization is leading to a world of (nearly) complete
cross-border integration.
អ
អ
2. Global expansion is an imperative rather than an option
to be evaluated.
អ
អ
3. Globalization offers virtually limitless growth opportunities.
អ
អ
4. Globalization tends to make industries become more
concentrated.
អ
អ
5. The truly global company has no home base.
អ
អ
6. The truly global company should aim to compete (nearly)
everywhere.
អ
អ
7. Global strategy is p…

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