Blue ocean. The world is flat. These are just some of the terms used in the last couple of years to discuss globalization. So if everyone is similar why was Yahoo! struggling in China (and later sold its portal business to Alibaba) ? Why is Volkswagen the leading car company in Europe while General Motors is leading in the US ? Why did Starbucks fail to penetrate Israel and why can’t one find Carlsberg in the US?
I recently read the book “Redefining global strategy” by Pankaj Ghemawat. While other books focus on how global the world is, this book provides a new perspective and discusses why borders still matter. The author takes Walmart as an example of a company whose margins decline as they open stores far from their headquarters in Bentonville.
The book offers a new framework named CAGE. The framework tries to map the gaps between countries into 4 key segments: Culture, Administration, Geography and Economy. For example, if you are a rental company planning to expand into India, you probably want to know that most car owners in India are not really driving their cars, but rather use a driver. Similarly, if you are planning to open a subsidiary in France or Germany you should probably know that it is very hard and costly to fire an employee. The regulatory challenges that Google is currently facing in China can certainly be accounted for administrative challenges, according to Ghemawat.
The approach that Ghemawat is taking to address these challenges is maybe less innovative, or revolutionary if you will, but just to give a glance to some of the approaches suggested to address these gaps:
– Adaptation – use some level of customization to the foreign country’s characteristics, for example, through some external alliances or a common frame with minor customization (Toyota, Honda) .
– Aggregation – extrapolate economies of scale by selling a common product across geographies (IKEA).
– Arbitrage – use the differences among countries to your advantage such as IBM’s establishment of service centers in India to utilize low labor cost, Microsoft’s subsidiary in Ireland to utilize tax benefits or Chanel’s leverage of its Paris presence.
I will not go into all the details in the book, but I suggest reading the book and getting some a fresh balanced perspective on globalization.