RESEARCH & IDEAS

Businesses Beware: The World
Is Not Flat
Q&A with: Pankaj Ghemawat
Published: October 15, 2007
Author: Martha Lagace
With apologies to Thomas Friedman,
managers who believe the hype of a flat world
do so at their own risk, says HBS professor
Pankaj Ghemawat. National borders still
matter a lot for business strategists. While
identifying similarities from one place to the
next is essential, effective cross-border
strategies will take careful stock of differences
as well. A Q&A and book excerpt follow. Key
concepts include:
• Some indicators of globalization aren't
increasing as many experts have claimed.
• Toyota and Wal-Mart are examples of
companies that understand how to deal with
distance in a strategic way.
• Take a broad view of differences, figure out
the ones that matter the most in your
industry, and look at them not just as
difficulties to be overcome but also as
potential sources of value creation.
Thomas Friedman, author of "The World
Is Flat: A Brief History of the Twenty-first
Century", opines that a number of events
ranging from the fall of the Berlin Wall to the
rise of the Internet have flattened the
competitive landscape worldwide by increasing
globalization and reducing the power of states.
But the world is not flat, argues HBS
professor Pankaj Ghemawat. Think of it as
partly globalized, or "semiglobalized."
"Strategies that presume complete global
integration tend to place far too much emphasis
on international standardization and scalar
expansion," Ghemawat argues. While
identifying similarities from one place to the
next is essential, effective cross-border
strategies will take careful stock of differences
as well.
An expert on global strategy, Ghemawat
lays out an action plan for business in his new
book, Redefining Global Strategy: Crossing
Borders in a World Where Differences Still
Matter.
As he sees it, important realities dotting the
landscape for business can be grouped into 4
basic areas: cultural, administrative/political,
geographic, and economic. Discussions of
globalization tend to overlook these factors.
And companies that wish to make headway
should consider 3 broad ways of dealing with
distance: adapt, overcome it, and exploit it.
"What is different about this book on global
strategy is its focus on the differences across
countries," he writes. "The idea is to help
businesses cross borders profitably by seeing
the world as it really is, rather than in idealized
terms."
Ghemawat explained more via e-mail with
HBS Working Knowledge.
Martha Lagace: The subtitle of your
book is "Crossing Borders in a World Where
Differences Still Matter." Amid the talk
around us about an increasingly flat world,
what differences have mattered, do matter,
and will continue to matter for companies?
Pankaj Ghemawat: The subtitle is meant
to emphasize that we continue to live in a
semiglobalized world, one where differences
between countries and regions continue to
matter.
To make this point, it is useful to start with
some facts about levels of globalization
because, as the late Daniel Patrick Moynihan
observed, we are all entitled to our own
opinions, but not our own facts. The most
commonly cited figure concerns international
trade, which represents more than 25 percent of
most economies. But when I began to research a
broader range of measures including
investment, phone calls, tourism, and
immigration, I found that, surprisingly, the
average extent of globalization is only 10
percent. For example, for every dollar of capital
investment globally, only a dime is accounted
for by foreign direct investment.
The other thing that surprised me was that
some indicators of globalization aren't
increasing as many experts have claimed. There
is general agreement that the international share
of total Internet traffic is decreasing rather than
increasing. This calls into question the other
common myth that even if the world isn't quite
flat today, it will be tomorrow.
The data clearly indicate that national
borders still matter. I group the differences that
they demarcate into 4 areas: those related to
cultural (language, customs, religion,
ethnicities, etc.), administrative/political (laws,
trading blocs, colonial ties, currency, etc.),
geographic (physical distance, lack of land
border, time zones, climates, etc.), and
economic (income levels, cost of natural
resources, financial resources, human resources,
infrastructure, information, etc.). It is important
to take a broad view of such differences, to
figure out the ones that matter the most in your
industry, and to look at them not just as
difficulties to be overcome but also as potential
sources of value creation.
Q: You say Toyota is an example of a
company that understands the complexities
of global strategy. What approach to
globalization has allowed Toyota to thrive
among automakers?
A: Toyota has overtaken General Motors to
become the largest automaker in the
world—while making money in the process.
Toyota is distinguished from most of the
Western automakers, not just DaimlerChrysler,
by the fact it treats market share as the result of
building better cars more cheaply than its
competitors, and not as an objective in and of
itself.
Its globalization has actually been driven by
a complex array of coordination mechanisms
across different regions, which Chairman Fujio
Cho characterizes as the fundamental building
blocks of the company's strategy.
"The idea is to help
businesses cross borders
profitably by seeing the
world as it really is."
Note that Toyota's starting point is not a
grand, longer-term vision of some distant
globality when autos and auto parts can flow
freely from anywhere to anywhere. Rather, the
company anticipates expanded free-trade
agreements within the Americas, Europe, and
East Asia, but not across them. This is a more
modest—but also more realistic—vision of a
semiglobalized world in which neither the
bridges nor the barriers between countries can
COPYRIGHT 2007 PRESIDENT AND FELLOWS OF HARVARD COLLEGE 1
be ignored.
Q: You have studied and written about
Wal-Mart for more than 20 years. Wal-Mart
has certainly expanded during that time, but
not without criticism and its own
miscalculations. What do Wal-Mart's
experiences show us about crossing borders?
What is it doing differently in new markets
such as India?
A: When CEO Lee Scott was asked a few
years ago about why he thought Wal-Mart
could expand successfully overseas, his
response was that naysayers had also
questioned the company's ability to move
successfully from its home state of Arkansas to
Alabama.
Unsurprisingly, the foreign markets in
which Wal-Mart has achieved
profitability—Canada, Mexico, and the United
Kingdom—are the ones culturally,
administratively, and geographically closest to
the United States.
The point is not that Wal-Mart shouldn't have
ventured into more distant markets, but rather,
that it needed to think differently about how to
compete in them. It is now starting to do so in
markets such as India, which does not allow
foreign direct investment in retailing. Wal-Mart
has therefore entered via a joint venture with an
Indian partner, Bharti, that will operate the
stores while Wal-Mart deals with the back-end
of the business.
More broadly, Wal-Mart's recent strategy
illustrates all three broad ways of dealing with
distance—adjusting to it (Adaptation),
overcoming it (Aggregation), and exploiting it
(Arbitrage)—the AAA strategies elaboration of
which occupies close to one-half of Redefining
Global Strategy.
• Wal-Mart International is increasingly
cognizant of the need to adapt to local
contexts—as evinced not only by the India
entry strategy but by changes in
merchandising policies, clearer definition of
decision rights, and even the astonishing
job-swap between some of the top managers
running the U.S. operations and their
counterparts at International.
• Wal-Mart also tries to aggregate across
national boundaries with its IT platform and
regional management teams that were
created in 2004 to manage global brand
development and oversee government and
public relations. As John Menzer, who ran
International before becoming Wal-Mart's
vice chairman, put it, "We're playing 3-D
chess: global, regional, local."
• And finally arbitrage through offshoring,
particularly to China, saves Wal-Mart much
more money than the operating income
generated—on a much larger investment
base—by the international store operations.
This is, in some sense, what Wal-Mart's
global strategy is primarily about.
Q: How do you see business shaping the
future of globalization? In which ways are
companies playing a big role, and in which
ways could or should they step up more to
exert a positive influence on society?
A: By recognizing the importance of
business in shaping broad outcomes-including
those related to the future of globalization.
Globalization has gone into reverse
before—between the two world wars—and
could do so again. Some of the concerns voiced
by antiglobalizers include:
• A declining share of wages in total national
income in developed countries at a time
when the share of profits is at a multidecade
high in many developed countries.
• The lack of a globalization safety net in
many of those countries. (The United States,
for instance, is estimated to gain $1 trillion
per year from trade, but spend about $1
billion on job-retraining, according to The
Economist.)
• The creation of a 2-track world. As
microcredit pioneer Muhammad Yunus put
it in his speech accepting the 2006 Nobel
Peace Prize, if globalization "is a
free-for-all highway, its lanes will be taken
over by the giant trucks from powerful
economies … [at the expense of]
Bangladeshi rickshaws."
It is neither principled nor practical for
companies to stick their heads in the sand in
response to an issue as fundamental as the
distribution of the globalization dividend. Yet,
as thoughtful business leaders (e.g., Coke's
Neville Isdell) have pointed out, business has
not been very active in trying to counter the
antiglobalizers. In terms of public discourse and
action, in particular, I'd recommend the
following steps for companies that favor greater
integration (of course, not all will do so):
• Be careful about your choice of words.
Outsourcing often triggers negative vibes,
as former Bush economic adviser Greg
Mankiw discovered. So does globalization,
which, according to U.S. pollster Frank
Luntz, "frightens older workers." (Luntz
recommends talking about the free-market
economy instead, although one suspects that
this might work less well in continental
Europe.)
• Try to be concrete rather than abstract about
economy-wide benefits of globalization.
Findings such as those from the McKinsey
Global Institute that for every dollar the
United States sends abroad through
outsourcing, it gets about $1.12 back are
more useful than appeals to the process of
market equilibration described in economics
textbooks.
• Dispel globalization bogeymen that don't
have a scientific basis, such as the myth that
increased global integration necessarily
leads to increased global concentration.
• Support job-retraining programs and, more
broadly, social insurance. History shows
that support for free trade tends to be fragile
in the absence of such programs.
• Emphasize upgrading and productivity
growth as the focus of public as well as
business policy. These are what really
matter in the long run for the wealth of
nations as well as companies.
Q: Do you get exasperated by popular
viewpoints that treat globalization as a
monolithic force without any shades of gray?
What's the best way you counter views that
seem more emotional than fact-based?
A: I don't get exasperated at all because it is
precisely the popular view of globalization as
an irresistible force leveling everything that
stands in its way, including national differences,
that makes my message important. Based on
surveys that I have done, many managers do
believe this view, and suffer from strategic
biases as a result.
Emotional denials of the fact of
semiglobalization are, past some point (which
may come very soon!), better countered with
stories than with additional data. I like the story
of Coke, because through to the late 1990s,
under CEO Roberto Goizueta, it bought into
and based its global strategy on the
globalization apocalypse that was popular then,
the globalization of markets (rather than
production), because customers everywhere
were supposed to increasingly want the same
products and services. As a result, Goizueta
embarked on a strategy that involved focusing
resources on Coke's megabrands, an
unprecedented amount of standardization, and
the official dissolution of the boundaries
between the U.S. organization and the
international one.
10 years later, Coke's strategy under CEO
Neville Isdell looks very different. Coke is now
focused on learning from Japan—where it
reportedly offers more than 200 products but
makes more money than in any other major
international market—for insights into how to
pursue the broader objective of injecting more
variety into the Coke system. The strategy is no
longer always the same one: In big emerging
markets such as China and India, Coke has
lowered price points, reduced costs by
indigenizing inputs and modernizing bottling
operations, and upgraded logistics and
distribution, especially rurally. And the official
boundaries between the U.S. and international
organizations have been restored-recognizing
the fact that Coke faces very different
challenges in the United States than it does in
most of the rest of the world since per capita
consumption is an order of magnitude higher in
the United States.
Coke is therefore a cautionary tale of a
company getting carried away with globaloney
and paying for it—but is apparently managing
to weather the storm. Other companies that
went through a similar set of wrenching
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COPYRIGHT 2007 PRESIDENT AND FELLOWS OF HARVARD COLLEGE 2
changes might not have the kind of strategic
cushion associated with the world's most
valuable brand name. It is generally better for
them to ponder the lessons in my book than to
seek to experience them all: Offline learning is
a lot cheaper than online learning in this
context.
Excerpt from Redefining
Global Strategy
Readers are probably also looking for
specific advice on what might be done to
improve their companies' future global
trajectories. In response, let me offer some
tentative recommendations for making a path
toward a better future.
Path Making
How might you improve the path that you
follow from today to tomorrow and beyond if
the future is shrouded in uncertainty? To be
more specific, how might your company
improve, in the context of globalization, on the
common expedients of sailing in one direction
until hitting a sandbar, or playing pinball to the
headlines, or simply marking time?
1. Anticipate bumps and detours even if
you do believe that the world will eventually
become much more integrated. Even if you
remain convinced that the apocalyptic vision of
close-to-complete integration will be realized
sooner or later, recognize that the road from
here to there is unlikely to be either smooth or
straight. There will be shocks and cycles, in all
likelihood, and maybe even another period of
stagnation or reversal that will endure for
decades. (It's happened before!) Volatility of
this sort is particularly worth allowing for in
relation to the BRIC (Brazil, Russia, India, and
China) economies that Thomas Friedman and
other writers have recently emphasized as
centers of value creation in the twenty-first
century. But even companies that are supposed
to be sophisticated about emerging markets trip
up on this point. Goldman Sachs—the leader in
investment banking in most major markets, the
first major Wall Street bank to commit
resources to post-Soviet Russia, and one of the
institutions responsible for popularizing BRIC
countries as an opportunity set—ranked
twenty-fourth among investment banks in
Russian equity and debt underwriting in 2005.2
Why so low? Because Goldman, like a number
of other investment banks, exited after Russia's
1998 financial crisis and debt default, and let
several years go by before trying to reestablish
its foothold there. Note that strategies such as
this often entail buying in at the top of the cycle
and exiting at the bottom—usually not a recipe
for financial success.
2. Pay attention to other "predictable
surprises" as well. Bumps are just one
manifestation of "predictable surprises," a term
coined by Max Bazerman and Michael Watkins
to describe situations where "leaders had all the
data and insight they needed to recognize the
potential, even the inevitability, of major
problems, but failed to respond with effective
preventative action."3 A number of predictable
or at least possible surprises are in the air as far
as the general global environment is concerned:
global warming; different kinds of meltdowns
in the Middle East, China, India, and the United
States, among other possibilities; a global
liquidity crisis; a general sociopolitical backlash
against globalization; and so on.4 Notions of a
global governance gap reinforce the idea that a
shock of this sort might have a persistent effect.
How many such shocks is your company
prepared for? At a minimum, I suggest
articulating one or more deglobalization
scenarios and analyzing their implications for
your company's global strategy, as a prelude to
thinking, possibly, of alternatives.
3. Add to predictive power by taking
things down to the industry and company
level. Shocks, cycles, and trends, even when
they have crosscutting implications, vary
greatly across industries and companies in their
effects, in ways that greatly reduce the
usefulness of trying to fit one world-historical
conception to all of them. Focus on the risks
and, more broadly, trends that are most likely to
affect your industry or company, and how they
are actually to do so. Thus, even the effects of
something as potentially far-reaching as global
warming depend on whether one looks at the
issue from the perspective of a financial
investor, a construction firm, an automaker
(whose reaction would also depend on its focus
on large versus small cars), or a potential
supplier of cleaner energy, to cite some varied
examples. And depending on the setting, other
risks or trends may well be more salient and
therefore worth prioritizing. For example, when
I first started working with Indian software firm
TCS on building useful scenarios about the
future, we figured that it made the most sense to
start with avian flu, given the nature of the
company's business.
4. Recognize the importance of business
in shaping broad outcomes—including those
related to the future of globalization. The
preceding discussion might have seemed to
suggest that outcomes will unfold
independently of what businesses decide to do.
But for many key uncertainties, that is clearly
not the case. Consider the broad process of
globalization itself. Some of the concerns
voiced by antiglobalizers include the following:
• A declining share of wages in total national
income in developed countries at a time
when the share of profits is at a multidecade
high in many of them.
• The lack of a globalization safety net in
many of those countries (the United States,
for instance, is estimated to gain $1 trillion
per year from trade, but to spend about $1
billion on retraining)5.
• The creation of a two-track world. As
Muhammad Yunus, the microcredit pioneer,
put it in his speech accepting the 2006
Nobel Peace Prize, if globalization "is a
free-for-all highway, its lanes will be taken
over by the giant trucks from powerful
economies ... [at the expense of]
Bangladeshi rickshaws."6
It is neither principled nor practical for
companies to stick their heads in the sand in
response to an issue as fundamental as the
distribution of the globalization dividend. In
terms of public discourse and action, in
particular, I'd recommend the following steps
for companies that favor greater integration
(note that not all will do so):
• Be careful about your choice of words.
Outsourcing often triggers negative vibes,
as former Bush economic adviser Greg
Mankiw discovered; so does globalization,
which, according to U.S. pollster Frank
Luntz, "frightens older workers."7 (Luntz
recommends talking about the free-market
economy instead—although one suspects
that this might work less well in continental
Europe.)
• Try to be concrete rather than abstract about
economywide benefits of globalization.
Findings such as the McKinsey Global
Institute's calculation that for every dollar
the United States sends abroad through
outsourcing, it gets about $1.12 back are
more useful than appeals to the process of
market equilibration described in economics
textbooks.8
• Dispel globalization bogeymen that don't
have a scientific basis, such as the myth that
increased global integration necessarily
leads to increased global concentration.
• Support job-retraining programs and, more
broadly, social insurance. History shows
that support for free trade tends to be fragile
in the absence of such programs.
• Emphasize upgrading and productivity
growth as the focus of public as well as
business policy. These are what really
matter in the long run for the wealth of
nations as well as companies.
5. Don't let a focus on the future crowd
out consideration of the here and now. The
future, including whether the direction of
globalization creates headwinds or tailwinds for
global strategies, certainly has a bearing on the
success or failure of those strategies. But it
should not be allowed to crowd out
consideration of other factors that also matter,
including those in the here and now. A refrain
throughout this book is that the current state of
practice of global strategy leaves significant
headroom for improvement. One way of
exploiting that potential is to get started.
Excerpted with permission from Harvard
Business School Press. Copyright 2007 Harvard
Business School Publishing Corporation. All
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COPYRIGHT 2007 PRESIDENT AND FELLOWS OF HARVARD COLLEGE 3
rights reserved. To order, call (800)-988-0886
or visit Harvard Business School Press.
See also Pankaj Ghemawat's blog, What in the
World, and his Web site, www.ghemawat.org.
2. Heather Timmons, "Goldman Sachs
Rediscovers Russia," The New York Times, 3
February 2006.
3. Max H. Bazerman and Michael Watkins,
Predictable Surpises: The Disasters You Should
Have Seen Coming and How to Prevent Them
(Boston: Harvard Business School Press, 2004).
4. For an even longer list, see the
twenty-three core global risks discussed in
World Economic Forum, Global Risks 2007
(Davos, Switzerland: World Economic Forum,
January 2007).
5. On the implications of a general liquidity
crisis, see for instance, Niall Ferguson, "Sinking
Globalization," Foreign Affairs 84 no. 2 (March
- April 2005):64-77.
6. Muhammed Yunus, Nobel lecture, Oslo,
Norway, 10 December 2006, accessed at
http://nobelprize.org/nobel_prizes/peace/laureates/2006/yunnus-lecture-en.html.
7. Frank Luntz, Words That Work: It's Not
What You Say, It's What People Hear (New
York: Hyperion, 2007).
8. McKinsey Global Institute, "Offshoring:
Is it a Win-Win Game?," (San Francisco,
August 2003),
http://hei.unige.ch/~baldwin/ComparativeAdvantageMyths/IsOffshoringWinWin_McKinsey.pdf.
About the author
Martha Lagace is the senior editor of HBS
Working Knowledge.
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COPYRIGHT 2007 PRESIDENT AND FELLOWS OF HARVARD COLLEGE 4