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Globalization + Strategy

I started work as a corporate strategist in the late 1980s. For anyone with half a brain (the left half mind you - no creativity was expected) life was a cinch. For some decades the standard business proposition had been based on an unvarying formula. Essentially this formula focused the entire enterprise on the creation of value – for customers, for shareholders, even for staff.

Profits were key as they enabled smart CEOs to invest in growing their organization’s capability to do better. Organizational purpose was usually a distracting afterthought. The role of business, most people agreed, was to make money. And this it did with remarkable alacrity and stoicism. It was as though business existed a world apart from society; servicing its needs and desires while ignoring its plight – a plight that was becoming more and more perilous as we consumed more and more of everything business had to offer.

In this context strategy didn’t take much of a brain to figure out. Design goods and services for specific markets utilizing local talent wherever possible. Factor in things like organizational capability, costs, the nature of competition. Ensure efficiency at every possible point in the value chain. Deliver on quality.

Little ingenuity or discipline was required – unless, of course, you wanted your brand to conquer the world. Virgin and The Body Shop empires were simply serendipitous flukes. They flourished because of an entrepreneurial spirit that threw caution to the wind. The success stories of companies like Sony, Toyota, Microsoft and GE, on the other hand, transpired through disciplined financial management coupled with an intense determination to dominate certain industries or markets.

These days strategy is far more complicated. So many subtle factors need to be taken into account. Traditional boundaries between makers and users are dissolving. New technologies and their rapid convergence are enabling products straight out of science fiction. Talent is scarce – and becoming scarcer. Novel niche markets are exploding with activity. Furthermore the discipline of management is in transition now that so many tasks can be undertaken more efficiently by computers and robots.

Innovation, itself the result of our insatiable desire for anything new, or that speaks directly to our sense of self; speed to market; and a deep appreciation of different cultures and value systems have become the drivers of today’s success.

The business environment, too, has changed and will continue to shift in ways that are difficult to predict. Globalization has created conditions that remain fluid and uncertain, like water in the rapids. These conditions are hazardous and erratic. Rare degrees of strategic intelligence and insight are now needed in order to navigate these volatile conditions. Even more so if an enterprise is to prosper by spotting (or consciously creating) opportunities others have missed.

Several factors will be increasingly significant for business in the coming decade. So significant in fact that, when linked together, could result in the reconfiguration of the entire material basis of our civilization.

First, most obviously, is the opening up of currently uncontested market space. The upshot is the creation of entirely new industries and markets, many of them in under-developed parts of the world. Over the past decade such expansion typically centeredaround the deployment of new communications software to change business models and shift the locus of value creation. In the future we are likely to see much more of an emphasis on addressing human-induced crises such as global warming, the cost and distribution of food, and the lack of energy.

A second, accompanying factor is the need for ecologically intelligent deep design; a deliberate configuration of industrial systems to ensure that there is no waste. There is already awareness that re-cycling is passé and that a completely different system of ‘cradle to cradle’ closed-loop manufacturing is urgently required. Using natural living systems as a model the outcome will be the dawn of a new industrial revolution where even products like ethanol for fuel will be produced from waste materials, rather than sugar cane or corn as at present.

A third, and hugely promising factor on the immediate horizon is the convergence of digital and genomic technologies, coupled with smarter manufacturing methods using molecular engineering. These will be used more and more in the production of smart materials, smart foods, smart drugs and other life enhancing products.

But another factor, one that is largely overlooked, is the repercussions from the arrival in force of emerging-market multinationals. As yet these newcomers are not a threat to the more established global giants. They do not even register on most corporate radar screens. Quite soon, however, their impact will be sweeping and unavoidable. And, rather like the adoption of digital technologies over the past twenty years or so, they are set to revolutionize the very nature of strategy. How do we know that?

For some time now foreign direct investment has been flowing across traditional borders. As wealthy nations run up massive current-account deficits they borrow from the sovereign-wealth funds of emerging economies

- most notably oil exporters with huge surpluses. By 2006 foreign direct investment from developing economies had reached US$174 billion (14 per cent of the world’s total) and five companies from emerging economies had made it into the world's top 100 multinationals - measured by overseas assets. This trend continues to accelerate. Just last week the governments of Kuwait, Singapore and South Korea provided much of the US$21 billion lifeline to Citigroup and Merrill Lynch, two banks that have lost fortunes in the US credit crisis.

Economic theory maintains this should not happen. Rather, rich countries are supposed to export capital to poorer nations, not the other way round. In fact most tariffs and anti-dumping laws have been designed by rich nations to protect their industries in ways that prevent developing countries from achieving the kind of prosperity enjoyed elsewhere!

But this shift is but the tip of an iceberg. Thousands of companies are starting to expand their sales and production internationally such that these trends already represent an unmistakable and fundamental shift in economic power. Emerging economies are spawning their own breed of multinational giants in industries ranging from consumer electronics, cement and steel to automobile and aircraft production. Even iconic brands are not safe as the likes of Tetley Tea, Jaguar, Land Rover, Daewoo, Arcelor and Corus pass into the hands of emerging-economy multinationals.

For those with eyes to see and a penchant to learn much can be discovered from their ascendancy. From China’s Lenovo, Haier and Chery to Brazil’s Vale and Embraer and from India’s Tata and Mittal to Mexico’s Cemex, there is now growing evidence as to how these companies intend changing the rules. For sure these companies have been buying Western know-how. But they have also been bringing management and entrepreneurial skills, as well as capital and reconfigured business models, into the mix. They seem to have a different 'take' on globalization and adjust their strategies accordingly.

There are at least five specific strategies underpinning the expansion of these new multinationals that merit a closer look. These are not mutually exclusive by the way:

  • World sourcing is a decentralized strategy designed to drive greater value and quality by distributing an organization’s core functions across multiple global hubs of excellence. These hubs are located wherever the best resources, talent, ideas, and efficiencies exist or can be created. Based on the assumption that whole-of-brand is more important than discrete factors (such as nationality or geographical location) the philosophy of world sourcing encourages companies to reach out across the entire globe in search of the best value in all aspects of their business - from talent and ideas to materials, logistics, infrastructure, products, and even corporate social responsibility. Thus, a multinational intent on world sourcing can create value 24 hours a day.
  • Perhaps unexpectedly, the domestic markets of these companies offer distinct advantages which are deliberately factored into growth trajectories. Costs are low. The hassles of operating in an emerging market has made managers more resilient, inventive and adaptive. There is also unimpeded access to a vast, cheap manufacturing base to which other advantages, such as stylish design and world-class R&D facilities, can be added as they take their brands from local to global. Furthermore, gradual liberalization in the home market has already exposed these companies to fierce competition and the very best of international practice – a platform out of which innovation can effortlessly blossom.
  • Low cost production coupled with advanced R&D leads to innovation and the creation of new, open, market space. Most people agree that innovation drives performance in almost all sectors of today’s global economy. In a number of emerging-economy multinationals, however, local engineering skills coupled with entrepreneurial expertise and global supply webs, have been used very effectively to embrace cross-border relationships, enabling innovation on a genuinely global scale. In addition, the fact that many of these multinationals are still family-owned, or family-controlled (even when they are public companies) means that decisions can be taken quickly.
  • Many of the new breed of multinationals are going for global leadership in highly specialized, narrow product categories catering, at the same time, to precisely formulated specifications from their customers. Typically utilizing low cost labor-intensive production systems, companies like Hong Kong’s Johnson Electric, a firm that manufactures tiny electric motors for use in powering the wing mirrors in automobiles, for example, carve out niche markets which they can dominate. In some cases, targeted and well-timed acquisitions in target markets allows these firms to get closer to customers.
  • New (or better) business models have proven to be very effective when selling into diverse global markets – and even when undertaking M&A activities. Standing conventional wisdom on its head, know-how and smart investment are now routinely used to capture markets that were previously thought to be either impractical or unprofitable – or both. In addition, highly developed ICT systems, many of which can be purchased off-the-shelf, are now being used to standardize practices and procedures. In many Western companies convention, demarcation, and an ingrained management mindset that all too readily accepts waste and re-work as inevitable, inhibit breakthroughs in the design of work. There is no such legacy in these emerging-economy multinationals.

Obviously these companies are up against a whole range of disadvantages too. For one thing they are trying to break into a world economy where globalization already favors the front runners. I have already mentioned the debilitating effect of tariffs and quotas on their economies. A great many of these firms are ignorant of the markets they are trying to crack. Their brands too, while well established at home, may be totally unknown in the West. Some still lack the necessary management talent to be successful in the global arena. Furthermore, pay structures are hard to devise when managers in rich-world subsidiaries expect to earn more than their seniors in head office.

But many of the new firms have already leapt these hurdles impressively. A heap of others are following the pioneers as I write this blog. In fact the effect is being felt today as they reverse the brain-drain by sucking non-resident (but experienced) talent back from branch offices into the centre. Ultimately these companies will prevail and become a force to be reckoned with. They will change the landscape of investment and production globally. And they will change the nature of strategy. We had better be prepared for that.

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