In this context, it is also worth remembering that the benefits of arbitrage tend to vary by company as well as industry. In the information technology sector, IBM cannot beat Tata Consultancy Services or Infosys on labor costs in India — in part because of the premium IBM pays as a foreign company. Nor can IBM tell its 200,000 Western employees, “Just bide with us a moment while we shift all the jobs over to India.” And so the IBM strategy is to develop services, software, and hardware that will differentiate it.
Sam Palmisano provides a very interesting perspective on arbitrage with his explanation of why IBM expanded from 6,000 people to about 60,000 in India in three years. To be sure, some of it had to do with labor costs, but much of it was driven by talent shortages. Some skills are becoming hard to recruit in the U.S.; if you want 100 qualified voice engineers, you may have better luck finding them elsewhere. The ultimate cost of not arbitraging labor in such a situation is the opportunity cost associated with turning business away. Moreover, some Indian offshore companies, simply by virtue of having to learn to work at a distance, have operations that outpace their Western competitors in documentation and process quality. The Western companies have to learn to meet those standards.
S+B: Michael Porter calls you “one of those rare individuals who combine world-class scholarship with a deep knowledge of business practice.” In that light, what can you say about the state of business school research today?
GHEMAWAT: Actually, I think few business schools take the practice of business very seriously. In 2006, MIT Sloan School Dean Richard Schmalensee published an interesting article in Business Week [“Where’s the ‘B’ in B-Schools?” November 27] in which he said that business schools are focused on research aimed at other researchers, uninformed by practice. [See “Knowledge Review: Lessons for Business Schools,” by Andrea Gabor, s+b, Spring 2008.] I think Harvard, IESE, and a few other business schools do emphasize real-world problems, but they’re more the exception than the rule — particularly among the top B-schools in the U.S.
For instance, in the academic research that does get done on international business, there’s a fascination with firms as knowledge transfer networks. Researchers talk about information flows in network-theory terms, and so on. But when you ask the CEOs of large international companies what they would like to learn more about, knowledge flows don’t rank that high. For Sam Palmisano, the crucial challenge was shifting IBM’s geographic center of gravity. For A.G. Lafley at P&G, it was coordinating outsourcing with a customer focus — and stitching together global business units and market development organizations. At Cisco Systems, appointment of a chief globalization officer has been a key initiative. And on every one of these topics, I have trouble locating academic literature.
S+B: Much of the research for your book involved evaluating the success of corporate strategies. How do you judge whether a company has proven successful? And how long does it take to know that something’s working?
GHEMAWAT: It depends on the industry. In some industries, like financial services, given their low level of disclosure, it’s awfully hard to figure out whether one operation is propping up the rest or the company has actually created a coherent global strategy. Given the corporate-level problems that many “global” financial behemoths have experienced as a result of problems in the U.S. market for subprime mortgages, one often suspects the former to be the case.
But the more general point is the prevailing low level of analysis of global strategies that exists in the business literature. Even a little bit of diligence in looking at perfor-mance data can reveal major misinterpretations of cases of apparent success — and failure.