Developing Worldly Business Strategies

by Dr. Farid A. Muna
September 2009

Not long ago the conventional wisdom of “think globally, act locally” (originally coined by the environmental group Friends of the Earth) was seen as a major paradigm shift for doing business on a global scale. Multinational business appointed managers from their talent pools at headquarters to manage overseas operations and urged them to “think globally”, but to “act locally”. These managers were often torn between the global strategies formulated in their home offices and the local needs of the country or the region to which they were assigned. They lacked flexibility and the authority to act independently of the main office. They were caught in the dilemma of “thinking globally” and the urgent and unique requirements of “acting locally”. Despite these difficult conditions, many multinational companies thrived in places where local competition was weak.

Things started to change when economic globalization efforts began to spread in earnest during the 1990s with the revival of GATT (General Agreement on Tariffs and Trade) and the WTO (World Trade Organization). We are now discovering that globalization is not happening at an even space, and it is not likely to happen for decades, according to Ghemawat (2007). He suggests that the world is in a state of “semiglobalization”, and that strategy should go beyond the delusions of globalization and the one-size-fits-all approach. Instead, business strategies should be formulated to take advantage of the differences that still exist between countries and regions. He classifies these differences in terms of the distances along four dimensions: cultural, administrative/political, geographic, and economic.

Ghemawat suggests that strategies for adding value in the face of significant cross-border differences should involve adjusting to, overcoming, and exploiting these differences. According to Ghemawat, very few multinational organizations can operate on either total local customization or a total global standardization basis across borders. The slogan “think global, act local” has lost its usefulness in this age of semiglobalization.

Let us consider two examples, cited by Ghemawat, who tackled global business in totally different ways: Coca-Cola (USA) and Cemex (Mexico). Over the past 25 years, and under the stewardship of four CEOs, Coca-Cola has seesawed between extreme centralization and standardization (a one-size-fits-all strategy), and extreme decentralization and localization. Meanwhile Coke’s growth and profitability has continued to suffer as it attempts to find a strategy that works in a semi-globalized business environment. The swings in Coke’s strategy encompassed not only drastic changes in its organizational structure and control, but were also evident in its changing approaches to marketing and advertising, as well as in diversification and localization of its beverages.

Cemex, on the other hand, was able to grow from a local player in the Mexican cement industry to become one of the largest cement and building materials company in the world with around $22 billion in revenues in fiscal 2007, serving 50 countries across five continents. Cemex relied on a combination of global and local strategies to achieve success including: geographic diversification through worldwide acquisitions; managing to keep a low cost per ton (especially its lower capital and financing costs); commanding higher prices per ton through good service, bargaining and market power (it controls many of the marine terminals, thus shielding itself from imported competition); and taking full advantage of investments in technology, knowledge transfer, rotation of its managers on a global basis, and use of international consultants.

Clearly, other companies with global reach have been working hard to localize their products and services; consider the strategic actions over the past few years of organizations such as Shell, GE, IBM, Philips, Samsung, Siemens, Toyota, and Unilever, to mention just a few. These multinationals have initiated and experimented with a variety of global strategies to take advantage of the cultural, political, geographic and economic differences that exist across nations. Additionally, these multinational companies are increasingly bringing senior foreign executives from all around the world to work with the top management team at headquarters, or have appointed foreign executives to the board of directors. For example, a French area president of an American multinational company joins the top management group thus lending it his or her experience and knowledge of the local and European cultures.

In an article about the globalization of production and of services delivery, IBM’s Chairman and CEO, Samuel Palmisano wrote:
“ The MNC (Multinational Corporation) of the late twentieth century had little in common with the international firms of a hundred years earlier, and those companies were very different from the great trading enterprises of the 1700s. The type of business organization that is now emerging—the globally integrated enterprise—marks just as big a leap.”

Palmisano goes on to say:
“The globally integrated enterprise will require fundamentally different approaches to production, distribution, and work-force deployment. This is already happening. Because new technology and business models are allowing companies to treat their different functions and operations as component pieces, firms can pull those pieces apart and put them back together again in new combinations, based on strategic judgments about which operations the company wants to excel at and which it thinks are best suited to its partners.”

Finally, he warns:
“The alternative to global integration is not appealing. Left unaddressed, discontent with globalization will only grow. People might ultimately choose to elect governments that impose strict regulations on trade or labor, perhaps of a highly protectionist sort. Worse, they might gravitate toward more extreme forms of nationalism, xenophobia, and antimodernism.” (Palmisano, 2006).

Globalization, where it has taken hold, is nonetheless proving to be a double-edged sword for some multinationals. Smart local companies are starting to use globalization to close the gap between themselves and their giant rivals from the developed world. In a recent article titled “How Local Companies Keep Multinationals at Bay”, Bhattacharya and Michael (2008) report that their research in ten developing countries found that large domestic organizations are more than holding their own in the face of global or multinational companies. The authors wrote:

“Why don’t the strategies of the biggest and brightest corporations work well in developing countries? Part of the problem is that many transnational enterprises mistakenly believe that emerging markets are years behind developed nations, and that the former’s markets will eventually look like the latter’s. Multinationals assume it’s merely a matter of time before their existing business models and value propositions start delivering results in developing markets. These misconceptions are deadly.”

The authors go on to state, “Developing economies neither are behind developed ones nor show signs of converging with them. The emerging markets are different, behind in some ways and advanced in others.”

How then are large local companies able to successfully compete with multinationals? Bhattacharya and Michael argue that among the 50 local companies represented in their study, the most successful were able to pursue several, or often all, of the following six strategies:

• The local companies are not constrained by preconceived notions about customer needs. They customize products and services to meet local needs and preferences.
• They develop business models to overcome local obstacles or roadblocks and gain competitive advantage in the process.
• Local companies turn globalization to their advantage, deploying the latest technologies and using them effectively.
• They benefit from low-cost labor and find ways to overcome shortages of talented employees.
• They go national quickly before multinationals and regional competitors can challenge them.
• Local companies invest in top management talent, some of which they find locally and some recruited from other multinational companies—talent which most global companies underestimate or underutilize.

When working with markets in less affluent countries, managers should be mindful of the unconscious reference to one's own cultural values, experiences, and knowledge as a basis for decisions (known as SRC or self-reference criterion). Both SRC and ethnocentrism impede a manager’s ability to assess a foreign market in its true light. Worldly leaders are aware that there are likely some local/national managers who are well-advanced in their fields, and thus can bring much needed worldly insight to the organization.

Undoubtedly, global strategies require a variety of creative approaches and leave no room for the one-size-fits-all approach of the past. In a recent Fortune article titled “The Pepsi Challenge” (Morris 2008), the author described the challenges facing PepsiCo and Indra Nooyi, the first woman to become Chairman and CEO of PepsiCo, who is widely considered an up-and -coming worldly leader:

“Her new motto ‘Performance With Purpose’ is both a means of ‘herding the organization’ and of presenting PepsiCo globally. Because these days, she knows, that you can’t take even an emerging market for granted. Says Zein Abdulla, president of PepsiCo Europe: ‘People still tend to think of the emerging markets as, oh, well, just do your core portfolio and then sometime in the future when they catch up with the West, you’ll do the rest’. Well guess what? They’ve already caught up. Fully half of PepsiCo’s Russian beverage business is noncarbonated drinks—juice, water, tea, energy drinks. Global brands like Pepsi don’t play the way they used to. ‘They work’ Abdulla says, ‘but they are not monolithic.’”

Finally, the ability of organizations to adapt their business model to the local context was also considered as a critical discipline by Kambil et.al (2006). “A key success factor for many Chinese ventures is business model innovation and adaptation to local constraints and opportunities.” they explain. As Duanne Kuang of Intel has remarked, “At 1,000 feet, an online bookseller looks like Amazon.com. At 500 feet, you realize you have no credit cards, and you have to adapt your business model for cash on delivery. At 100 feet, you realize that everything is different.”

References

Bhattacharya, A. and Michael, D. (2008), “How Local Companies Keep Multinationals at Bay”, Harvard Business Review, Volume 86, No. 3, March 2008, pp. 84-95.

Ghemawat, P. (2007), Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter, Harvard Business School Press.

Kambil, A., Long, V. W., and Kwan, C. (2006), The Seven Disciplines for Venturing in China”, MIT Sloan Management Review, Vol. 47, No. 2, pp-85-9.

Morris, B. (2008), “The Pepsi Challenge”, Fortune, Vol.157, No. 4, March 3, 2008, pp 54-66.

Palmisano, S. J. (2006), “The Globally Integrated Enterprise”, Foreign Affairs, Vol. 85, No. 3, May/June 2006, pp. 127-36.