World 3.0

by Pankaj Ghemawat

  While adaptation seems to require increased emphasis, aggregation—short of complete standardization or one-size-fits-all—is still important because most multinationals try to leverage some element of scale or scope across markets to outdo local firms. This contrasts with their use of adaptation, which is mostly aimed at minimizing disadvantages vis-à-vis local firms.

  Arbitrage remains important as well because of the large, continued differences between countries, along with broad pressures to reduce costs. But companies do need to recognize that arbitrage has become more politically sensitive in the present environment. The pressing need to reduce global trade imbalances from record and clearly unsustainable levels and the rise of protectionism and environmental concerns are raising issues around arbitrage plays, such as the “Chimerica” model, in which the United States imports large volumes of cheap goods and capital from China. As a result, companies that became accustomed to offshoring before the crisis need to take a second look at the practice now. It's noteworthy that the U.S. global giants that were financially healthy and confident enough to make major operations investments recently have stressed the extent to which those investments were located at home. Intel, for example, has talked a great deal about its new semiconductor plants in the United States, and GE about its new U.S. wind turbine facilities. Of course, these are just two particularly vivid examples: both companies continue to invest substantially if quietly overseas. But that holds its own lesson: if offshoring does make sense, managing the discourse around it is more important than ever.

  For smaller companies, rebalancing among the AAA strategies may involve somewhat different considerations. Such enterprises usually find adaptation essential. Aggregation, while perhaps a long-term goal, is generally not something they can attempt on a global scale even if they possess the minimum efficient scale required to expand overseas. And while engaging in cross-border arbitrage by employing people or sourcing inputs from lower-cost locations may work for some born-global startups, many small companies may find that out of their reach as well. Such companies can, nonetheless, at least attempt to import ideas or best practices from abroad.

  Manage Internal Distance

  In the previous chapter, we looked at how national governments have more authority to shape distances and flows within their internal boundaries than across them. The same holds true for companies. Their choices concerning supply chains, organizational structure, foreign investment and cross-border innovation represent levers for internally shaping the four main types of flows we've focused on in this book—products, people, information, and capital. In making such choices, it's useful to think in terms of both reconfiguring internal distances and adjusting the ease or difficulty with which they can be traversed.

  Start with production and supply chains. Unless protectionism spikes, significant offshoring will most likely continue. But many companies are taking action to make their supply chains shorter, simpler, and more robust, in effect reducing internal distance within the company's production network. Such moves reflect concerns about the environment and sensitivity to energy prices as well as the threat of protectionism. A 2009 survey of logistics providers revealed that nearly one-quarter of North American and European clients had taken steps to shorten their supply chains during the previous year.14

  Companies also seem to be reducing internal distance in production by adjusting the levels of automation across their different factories. Traditionally, companies have tended to automate less in plants in countries with lower wage levels. But recent reports on manufacturing firms—for instance, the global components survey sponsored by the Alfred P. Sloan Foundation—reveal that many Western multinationals have actually started to import some of their less-automated processes back into plants in high-wage regions.15 Experience in low-wage countries has shown them that less-automated plants can enhance flexibility without compromising reliability.

  Selective de-automation also says something about how innovation and knowledge flows are changing and are likely to continue to do so. It reminds us, among other things, that experience may yield innovations or insights in one context that we can transfer to others and that such innovations need not originate in a firm's largest or most advanced markets. But harnessing such possibilities is likely to require disrupting the traditional home-first model that multinational companies have historically used to organize innovation.

  Innovation for emerging markets also requires different business models, not just or even primarily whiz-bang technology. Whereas corporate R&D labs located in advanced markets excel at creating technology, firms seeking to develop new, locally relevant products and locally effective business systems will increasingly need the informed creativity that only boots on the ground in local markets can provide. Thus, Nokia has located more than a thousand R&D staff in India. Their product adaptations for rural and other lower-income markets, while effective, are decidedly low-tech and include such items as a basic mobile phone that doubles as a flashlight for use during power outages and a phone designed to be shared by multiple people.

  While enthusiasm about such learning from emerging markets has escalated, we need to remember that the country differences that impede transplantation from developed to developing markets also apply in the reverse direction. And such difficulties are exacerbated by the fact that while consumers in emerging markets still get excited about the latest technologies from California, technologies that flow the other way carry somewhat less cachet. So, we shouldn't get too carried away about a flood of new products and processes from poor countries taking the rich world by storm.

  Thinking about R&D and innovation should also be related to better alignment of people and market strategies. Technical manpower is growing rapidly in emerging markets at the same time that global supply shortfalls are forecast for many categories of engineers and other technical personnel. Thus, labor market pressures add to the case for many companies to shift R&D to emerging markets. Intel, in fact, has already designed one chip almost entirely in India: the Xeon 7400 processor, introduced in 2008.

  Such developments will require us to become much smarter about the way we manage interactions among diverse, far-flung employees. Although companies have globalized their footprints, managers still communicate across geographies mostly by traveling to and fro, holding conference calls, and, to a lesser extent, exchanging e-mail. Few companies have gotten very far at exploiting the new collaborative tools of the Web, such as chat rooms and online bulletin boards, to build a stronger sense of community. Part of the problem is that the challenges of cross-border communication can be quite subtle. Language barriers, for example, pose less of a problem for those providing information than for those receiving it. It may be easy for a Chinese manager to make a comprehensible presentation in English but harder to get people listening to it to invest in comprehension: research shows that people quickly tune out on accents they have trouble understanding.

  Indeed, companies could do much more to leverage technology to improve internal communication. But again, there are limits because technologically mediated interactions often just mirror the distance-driven patterns of real-world relationships. We still have no perfect substitutes for face-to-face interactions, management development programs, expatriation, and other initiatives designed to knit organizations together across long distances. And especially if they intend to become more adaptive, companies really do need to become more representative of the markets they are targeting. A pre-crisis study by the Boston Consulting Group of large multinationals and their aspirations in sixteen rapidly developing economies found a gross mismatch between the amount of growth targeted in these geographies (about 33 percent then, probably more now) and the percentage of top personnel from or located in them (less than 10 percent then and probably now as well).16

  Shifting production, knowledge, and human resource configurations, along with their implications for capital allocation also indicate deeper shifts with respect to corporate power str
uctures. We may even see some organizational power flow back to country managers as companies tone down their attempts to eliminate or exploit cross-border differences and instead look to adapt better to local conditions.

  The bigger development, however, will be the shifting center of gravity of large multinational firms toward major emerging markets. IBM's global procurement office, for instance, is now located in Shenzhen, and Cisco set up Cisco East as a second headquarters in Bangalore. Perhaps the most dramatic example is provided by the General Motors reorganization. The company's Mexican and Canadian operations will continue reporting to the person overseeing the United States, but operations pretty much everywhere else apart from Europe will now report to the head of China, which has overtaken the United States as the automaker's largest market in terms of number of vehicles supplied. This is a basic realignment of the power structure within a hitherto U.S.-centric GM, whose China operation is now regarded by many as the most interesting part of the company. And looking forward, people are talking of multinationals with dual headquarters, one in the West and one in Asia (most likely China).

  In summary, managers need to pay more attention to internal distance and to ensure that organizations and operations are configured in ways that support their companies' strategies. For many companies, organizations will have to become more diverse to support emerging market growth strategies, and that diversity will create more internal distance that will need to be bridged. Table 14-2 highlights practical tools companies can draw from to knit together increasingly diverse and far-flung organizations.

  Table 14-2: Managing internal organizational distance

  Hiring for adaptability

  Formal education

  Participation in cross-border business teams and projects

  Utilization of diverse locations/media for team and project interactions

  Immersion experiences in foreign cultures

  Expatriate assignments

  Cultivating geographic and cultural diversity at the top

  Dispersion of business unit headquarters or centers of excellence

  Maintaining openness to the environment

  Defining and cultivating a set of core values throughout the corporation

  Think Beyond the Market

  Given World 3.0's recognition that markets do fail, companies need to take a broader view of the implications of their actions for society at large. The crisis as well as a seemingly unending parade of corporate scandals has pushed business's reputation to an all-time low, at least in the United States. Thus, in a survey conducted in 2009 by the Pew Research Center, U.S. respondents ranked business executives at the very bottom of a list of occupations in terms of their social contributions. Only 21 percent of respondents thought business leaders contributed a great deal to society, while 23 percent thought lawyers, the second-least-favored occupation, did. (The military and teaching professions ranked the highest, with scores of 84 percent and 77 percent, respectively).17 Attitudes look more positive in emerging markets, yet the standing of capitalism and private business there is also being challenged in fundamental ways.

  Such sentiments are particularly dangerous because of the threat of protectionism that might yet move us back toward World 1.0. According to Global Trade Alert, “Since the first G20 crisis-summit in November 2008, the world's governments have together implemented 638 beggar-thy-neighbour policy measures.” According to the same report, “No four-digit product line or 2-digit UN classified economic sector has emerged unscathed by crisis-era protectionism.”18 Since studies show that protectionism flourishes when trust in economic institutions is low, the restoration of trust in business takes on increased importance given the value of fostering openness.

  Any exercise at improving reputation should first examine the reality of one's performance and then turn to communication. When markets operate efficiently, what's good for profits is also what's good for society, but when markets fail, interests diverge. Think twice about exploiting “opportunities” with such characteristics. Although it might take a while for regulators to catch up, reputational damage is a significant possibility—for your company and for business overall. Pretending you're operating in World 2.0 risks pushing us all back toward World 1.0 instead of forward to World 3.0.

  Communication also matters a great deal, of course, and affords another arena for improvement. In particular, with the role of government on the rise, firms must pursue a well-thought-out program of corporate diplomacy. Instead of placing markets on a pedestal, they need to show more sensitivity to regulatory, legal, political, social, and cultural differences. If business leaders don't get out there and credibly lobby nonmarket players in favor of more openness, rest assured, advocates of protectionism will.

  Beyond government, business also needs to address itself to the public at large. Given how poor business's image currently is, responsible corporate leaders should place a premium on responding publicly to social and environmental concerns—including those about globalization. Coca-Cola's former chairman, Neville Isdell, has emphasized that multinationals with a large stake in globalization have not tried very hard, in general, to make the case for it. Instead, they have tended to lie low and hope that their private initiatives to globalize will avoid attracting adverse attention. Unfortunately, that leaves antiglobalizers free to dominate the public debate. Whether protectionism comes to pass is not just a function of the broader social and economic landscape. Businesses need to push for openness and ensure that the public and politicians fully understand the case against protectionism.

  Beyond Business

  My own profession, business academia, shares some blame for the gap between the business world and the general public on views about globalization—and for managers' general tendency to have an insufficient appreciation of cross-country differences. Surveys indicate that less than 1 percent of business school deans and of strategy professors believe that globalization is basically bad or mixed in its results. Business students also tend to have positive views about globalization, though not quite as uniformly positive as their professors. And while I take a basically positive view as well, I worry that this near-unanimous support for globalization (rare in academic pursuits) has generally led schools to neglect the exploration of counterarguments to globalization in their classrooms. This leaves their graduates unprepared for the views they actually encounter when they have to manage people, sell products, and interact with governments in the real world.

  I find this outcome particularly distressing because my experience teaching young MBA students has convinced me that many aspire to contribute to society in broader ways than only as managers of for-profit businesses—see the next chapter for an inspiring example. While this book does not fully elaborate the implications of World 3.0 for nonprofit or nongovernmental organizations (NGOs), many of the lessons for businesses outlined in this chapter also apply to philanthropic organizations. When you're trying to help people far away or very different from yourself, be very cognizant of the baggage that you bring to such a situation. Taking account of your origin is even more important in this context than for business, because while customers may appreciate a product's country-of-origin as part of its value proposition (e.g. French wine), in charitable work, people will seek to appraise your values themselves, and given limited contextual information will often make assumptions based on where you're coming from. Really accounting for distance also implies requirements for adaptation and focus that parallel those described in the section on revamping market strategies.

  Distance sensitivity has implications for the scope of charitable work as well. Think, for example, about relief efforts after natural disasters. The science of predicting aftershocks and tsunamis following an earthquake is relatively distance insensitive, so it makes sense for the world's top experts to apply their knowledge globally. Engineering work related to rebuilding is somewhat more distance sensitive. And at the other extreme, first aid and psychological support for victims ar
e extremely sensitive to geographic distance and cultural distance, respectively. When distance sensitivity is low, it may make sense to mount relief efforts across long distances, but when it is high, it may be better to focus just on bridging economic distance by funding local relief efforts.

  Maximizing Business Potential

  If governments enact helpful policies—or just refrain from protectionism—the possibility of much greater prosperity is a real prospect. The tremendous potential for GDP growth that we studied in chapter 4 isn't just macroeconomic esoterica: it's the sum of opportunities for investment returns, employment expansion, salary raises, and so on. Pretty exciting stuff. But as with any business opportunity, these benefits will not be realized until managers go out there with smart strategies and strong execution and make things happen. That's the broader responsibility of business as the visible hand of globalization: converting potential into reality and delivering World 3.0.

  Most companies have a long way to go to get to World 3.0. With limited mental maps and World 2.0 rhetoric prompting managers to believe that they can get off a plane anywhere in the world and operate effectively, companies stumble far too often. Products and services don't quite hit the target with customers. Marketing messages fall flat. Offense is taken, charges of imperialism fly, and the cry goes out for more protectionism. World 2.0 sets us up for failure. But the right answer isn't to turn inward and retreat to World 1.0. World 3.0 calls, instead, for cosmopolitan corporations that genuinely appreciate the challenges and opportunities posed by diversity and distance.