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 / Autumn 2007 / Issue 48(originally published by Booz & Company)


The Statecraft of Business

How the frameworks of international relations can improve the debate about corporate strategy and globalization.

The fall of the Berlin Wall nearly 20 years ago brought forth a chorus of toasts to the victory of a democratic world order and “the end of history.” Those looking ahead predicted greater simplicity in international affairs, with political considerations taking a backseat to free global markets.

These forecasts couldn’t have been more wrong. Rather, the post–Cold War world has turned into a battleground between old and emerging political and economic actors and ideologies, resulting in an ever more fragmented global marketplace. For multinational corporate leaders, the farrago of political and economic ideas, social aspirations, statism, and regional biases is disquieting and challenging.

To be successful, strategies pursued by corporate leaders must take into account the possibility of sudden fissures in global politics; strategies should also be consistent with the political environments in which the organizations operate. Managing under these conditions, executives must be knowledgeable about the world’s various political systems to nimbly adapt their companies to the preferences of governments, regulators, and global policymakers.

The field of international relations offers five alternative views of the structure of the global political environment. Each is accurate in its own way; each suggests a different strategic approach to international expansion; and each fits best with a different set of companies.

New Realism: Balance of Power
In a New Realism world view, power is spread among the world’s nation-states, which are constantly threatened by their fellow states, near and abroad, and continually struggle to maintain and enhance their standing. Although New Realism, with its numerous power centers, would seem to portend global uncertainty and war, the system can be fairly stable. Most of the time, states use their strength, either individually or in alliances, to balance each other out. With the Cold War over, adherents of New Realism assume that the current and emerging global powers, such as the U.S., the E.U., China, India, Japan, and Russia, will try to improve their positions on the worldwide chessboard, and several regional players — Iran, North Korea, and Venezuela, for example — will challenge the influence of global powers in their neighborhoods.

A New Realism corporate response requires self-sufficiency of operations within the various power centers. It assumes that the bulk of commercial interactions will take place within, rather than across, regions; hence, supply chains are developed within regional commercial centers, instead of spread across the world. A New Realism management structure is decentralized. A global headquarters provides limited corporate functions, and mediates the interests of business units operating in the different world regions. This ensures diversity throughout the corporation, which should reflect the regional characteristics of the hubs in which it operates. The marketing strategies of such organizations cater to the distinct cultural appetites of different markets and eschew unified worldwide brands.

The oil industry typically operates from a New Realism world view, forced to navigate the nationalist objectives of governments around the globe and their ever-changing rules regarding access to their natural resources.

Hegemony: Dominant States
Adherents of hegemony believe that the desirable goal of international stability requires a sole powerful state to articulate and enforce the rules of interaction among the most important members of the system. The hegemonic power imposes its rules on the international system — thereby determining political order — primarily through a large, growing economy, leadership in technological or economic sectors, and military strength. At the close of the Cold War, the U.S. in many respects took on the role of a global hegemon. But hegemonies can also exist at the regional level. For example, at different times Germany and France have played a dominating role in the European integration process, South Africa is the leading political player in Southern Africa, and Israel has the strongest military position in the Middle East.

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