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 / Spring 2008 / Issue 50(originally published by Booz & Company)


Pankaj Ghemawat: The Thought Leader Interview

Second, the relevant measures of closeness depend on the industry — as in the example of satellite TV versus cement.

Third, although country-level differences are meaningful, other levels of analysis may also be relevant. Both India and China are diverse in many ways. People speak many languages within them. There are tax barriers at provincial borders, huge differences in per capita in­come, and great geographic distances. Some multinationals, like Procter & Gamble, have realized that you can have a macro strategy for a whole country like China, but the provincial level is a more fruitful scale — especially when you consider how much economic activity is localized within each province.

Also note that the economic differences between the Chinese coastal regions and the Chinese hinterland have a parallel in the differences between south India and much of north India, which is being left behind.

S+B: Is that what you mean by “semiglobalization”?
It’s one example. Levels of cross-border integration are currently increasing. They’re even setting new records in some cases. But they still account for only a fraction of economic activity. Instead of being global, most companies that succeed are highly regional: They expand only to the markets where they can navigate the distances.

I should also add that semiglobalization doesn’t just mean that we are striking a balance between ex­treme localization and extreme standardization. Even that dichotomy — local versus central — implies a single-country view of the world, in which there are two extremes: applying separate strategies country by country, or basically treating the world as one big country. It’s much better to develop a strategy for your own priorities that reflects the granularity of the real world.

S+B: What would that strategy consist of?
It would be a combination, tailored to your own industry, needs, and capabilities, of three basic ways to add value in a world where differences still matter: adaptation, aggregation, and arbitrage.

Adaptation involves adjusting your business model and product offerings to different requirements and tastes around the world. In 1994, Whirlpool’s CEO, David Whitwam, based a global expansion strategy on the belief that consumers everywhere wanted the same kinds of refrigerators and washing machines. But Whirlpool’s financial performance didn’t rise accordingly; in fact, it fell. It turns out that many factors vary from country to country, and the manufacturer must adapt to them: electrical standards, tariffs, climate differences, the growth rate of new households, typical living space, availability of running water, income levels, and cultural tastes, among others.

And product variation is just one kind of adaptation. If you’re serious about expanding internationally, and you’re very profitable at home — like, say, the Turkish home appliance manufacturer Arçelik, which controls a key dis­tribution channel at home with its 2,000 retail stores — you may have to change your metrics. Otherwise, no international opportunity will ever meet the screen that you apply to it.

Another kind of adaptation is product or business redesign to reduce the amount of complexity. For instance, Brunswick, a company that makes boats, figured out that boat engines were relatively similar and not costly to transport. So they focused on selling engines globally, rather than providing the whole end-to-end value chain.

Also of interest in this context is externalization — involving partners or customers in your globalization, so as to reduce the burden of adjustment. When entering an unfamiliar environment, you find a joint venture partner who knows that environment. Or you adopt some of the more creative approaches of YouTube, where customers provide the attractions that draw in other customers.

Innovation is yet another way of adapting, and one can distinguish several different kinds: transfer of insights from one country to another, localized innovation (like Unilever’s laundry soap bars for people who wash clothes by hand), recombination (melding elements of your business model with opportunities from the new country), and even transformation of the local country environment. When Starbucks entered Japan with stores that banned smoking, skeptics said chain-smoking Japanese businessmen would never go there. But instead they transformed the local market by drawing in a nonsmoking, largely female clientele.

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