Sunday, December 23, 2007

Redefining Global Strategy (or would you rather be a Jackalope?)

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

Thomas Friedman has famously argued that the world is flat -- that globalization has reduced many of the barriers to competition that once existed between and among countries. You've got to study hard -- invest in education, infrastructure and knowledge -- if you want to succeed in the flat world. Otherwise some smart guy from Bangalore is going to take your job! There's little to prevent this in the flat world of globalization today.

I suppose you can think of Pankaj Ghemawat as that smart guy from Bangalore, although he's really from the Harvard Business School and IESE Business School in Barcelona. He's studied globalization good and hard and ... guess what? ... it turns out the world isn't flat after all. Globalization isn't complete -- it is "semiglobalization" at best -- and businesses (and by extension, I suppose, nations, although he doesn't really talk about this) need to take into account the differences if they want to succeed.

The book is written in Business-schoolese, with diagrams, acronyms and lots of exclamation points (although, to be fair, it is far from the worst offender in this regard). Ghemawat uses the acronym CAGE to denote the differences among countries: Cultural, Administrative, Geographic and Economic. He does a nice job using this framework to show why India's trade with the United States has evolved along different lines from the China trade. India has Cultural advantages (more English speakers) and Geographic disadvantages (Indian ports are much farther away from the U.S. and are logistical nightmares compared to more efficient Chinese ports). This helps explain why China exports more products (where language is less important and ports are critical) while India exports more services, where language is key and electronic delivery sidesteps transportation bottlenecks. The full analysis is much more complex than this, of course, but you probably get the idea.

The CAGE differences also create regional CAGE similarities. One of the defining characteristics if semiglobalization is regionalization and it can take many forms. We are used to thinking of regionalization is Geographic terms, but there are also Cultural regions (the English speaking world, for example, or the Indian and Chinese diasporas) as well as Administrative regions (collections of countries with common legal systems and government structures due, for example, to common colonial influences) and of course common Economic regions (the
US-EU-Japan triad countries with their high incomes and large markets).

How does a business deal with CAGE differences and similarities? With AAA strategies, of course! AAA stands for Adaptation, Aggregation and Arbitrage. Some companies learn to adapt to the differences in order to succeed. Adapting can be costly, but it is often cheaper than the mistakes you make when you don't apart. Others choose their markets carefully so that they fall into one of the CAGE regions. Then they can Aggregate based upon commonalities and profit from economies of scale. Finally, businesses can Arbitrage the differences among countries, especially in production though variations on outsourcing. Luxury goods companies, which are some of the most successful global businesses, often arbitrage cultural differences, for example.

The most successful businesses will find ways to profit from two of the three As, Ghemawat suggests but he cautions against trying to employ all three strategies, comparing the resulting business a Jackalope (see drawing at right). I wonder if there are enough internal trade-offs among strategies that they form a trilemma -- pick two and the third is impossible? Ghemawat doesn't suggest a trilemma, but he is sure skeptical about the potential of a AAA play.

This is a very interesting book that deserves the attention it has received recently -- and not just because it disagrees with Thomas Friedman. When I started reading it I was fascinated by the brief case studies that Ghemawat uses to illustrate his framework, but annoyed with the framework itself with its acronyms and B-school jargon. I liked the stories but I wasn't that keen on the lectures that they came wrapped in. But, to my surprise, the frameworks became more and more useful as the complexity of the problems increased. Now I cannot wait to try to apply Ghemawat's analysis to the global wine market and so to write a new story myself.

My advice: stick with this book and you will be rewarded. Otherwise you could end up with a strategy that is as well designed as a jackalope.

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