In Conversation: Pankaj Ghemawat

When you speak to people about globalization what is the thing that really mystifies them or that they don’t understand?

Well, I think right now we’re living in an environment of tremendous ambiguity about where globalization is headed. There is just more than the usual amount of disagreement about is it up, is it down, is it going sideways? That seems like an essential precursor for any company to try to decide how it should adjust its strategy in light of what’s going on.

You research and publish the DHL Global Connectedness Index, which basically shows that the world is less globalized than we might like to think.

Yes, given the ambiguity about perceptions I prefer to focus on data or facts. The DHL Global Connectedness Index is based on roughly about two million data points. It looks both at the depth of globalization and the breadth of globalization, not just how much stuff crosses borders but how far it goes. It’s the only globalization index out there that actually picked up the global financial crisis of 2008, which gives us a little bit more confidence that it is responsive to shifts in the environment.

Basically what the 2016 edition of the Global Connectedness Index indicated is that despite the huge downturn in media sentiment about globalization, globalization has basically gone sideways over the last few years. It’s not broken bad, nor has it clearly broken a ceiling to head towards new levels, particularly when we focus on trade and FDI. So we’re in a little bit of a suspenseful period of doldrums, as it were, when depending on what happens in the political sphere you could imagine things picking up, but you could also imagine things coming down a bit.

In the past there was a feeling that globalization had a kind of energy behind it, it was an unstoppable juggernaut, but now it seems that the media and the politicians are changing the agenda, in a surprising way, because it did seem unstoppable.

Well, it seemed unstoppable to some people. So, when I wrote my 2007 book, Redefining Global Strategy, the great and the good were generally convinced that the world was either flat or soon about to become flat. If you keep a little bit of historical perspective on this you see that periods of great excitement about globalization are usually followed by disappointment, and this is not the only such instance I can think. To just focus on the 25 years that I’ve been focused on globalization. Think of what happened when the Berlin Wall came down – huge excitement. Think of how it ended – with the Asian crisis. And what’s interesting is some of the implications for companies that people were talking about back at the time of the Asian crisis and which turned out not to work very well are exactly the kinds of remedies that people are talking about in the current situation.

So, the world is not flat but unpleasantly bumpy?

Unpleasantly bumpy or grumpy or whatever you want to call it, but definitely assuming that borders don’t matter and that distance doesn’t matter are two very bad ideas.

Can you expand on that – why are they bad ideas?

Well, I think that first of all if you don’t recognise the bumps, the joint effect of the border and distance effects, you basically end up with strategies that, to quote Dr Seuss, involve figuring on biggering the enterprise without paying any attention to how you might have to change your strategy, how you might want to decide where to compete versus where not to compete, and so forth. Or another way of putting is if you ignore borders and distances your basic strategy is bigger and blander, and that doesn’t work too well – so that would be one reason.

I think the second reason why believing that borders and distances have stopped mattering is that at a public policy level it suggests to us that there’s nothing to be gained from further integration and it’s only if you recognise that there are still significant obstacles to crossing borders that you realise that there might be scope, for instance, for, say, trade facilitation arrangements that might further increase global welfare. So, both at the level of public policy and at the level of business strategy seem to be some compelling reasons why you want to be realistic about this rather than simply go with the flow and repeat whatever is being said about globalization.

Jeff Immelt at GE talks about the company’s bold pivot from globalization to localization – is that a credible, useful response, do you think?

Well, I talk a little bit about Jeff’s speech, the one that he gave at NYU at commencement in May 2016, because I was there, and I was surprised. Jeff is of course a more nuanced thinker than the bold pivot to localization would suggest so now he’s started talking about connected localization.

But the point is that, first of all, in general terms these were exactly the kinds of responses we heard last time before the global financial crisis, that things got bad during the Asian currency crisis. Coke, in particular, decided that it was over-standardized and so Douglas Daft, who had just taken over as CEO, put in a think local, act local strategy. It was a disaster in terms of what it did to Coke’s headquarter capabilities, in terms of the leeway it allowed underprepared country managers to prepare really questionable ads, a whole range of problems, and it’s only when Neville Isdell took over a couple of years later that he kind of righted the balance, neither the extreme standardization under Goizueta nor the extreme localization that Daft was talking about.

And so when I look at suggestions that localization is the answer I think, first of all, as to how well this worked the last time around. And second, the other thing I think of is that frankly, especially for a company like GE, which has chosen to be in scale sensitive businesses, how do you really localize jet engines? – not entirely clear to me.

One thing that becomes clear in your research is there are very few successful global companies who are successful in different regions. You site Honda as one of the few examples – it’s successful in Asia, North America and Europe, but it’s amazing that there are so few that you consider to be globally successful, even though we would consider them to be global organizations.

Yes, it is quite striking because the general pattern that you see when you look across many multinationals is they make money at home and lose it overseas, and it’s a little bit of a reminder that globalization is not an imperative, it’s something that you need to subject to cost-benefit analysis and something that you need to think about carefully in terms of where you’re going to compete, how you’re going to do so, and so forth.

So, this morning, I was speaking to a law firm and since that example is much on my mind, let’s just think of legal services where many people have talked about globalization. There have been a whole bunch of trans-Atlantic mergers, etc. The basic regularity that you see when you look at the data from American Lawyer, etc, is that at least for the US firms profit per equity partner is significantly negatively related to the percentage of equity partners outside the US. So clearly for most law firms the assumption that globalization was automatically going to be a profitable strategy hasn’t worked out.

In contrast, this morning I was with a company called Clyde & Co, which actually is quite successful as a multi-country law firm. They’ve been named the trans-Atlantic law firm of the year two years running, and their whole thing was they found a niche, shipping and insurance, and worked around that. That niche has proven to be quite globalizable and Clyde & Co does well, despite having most of its equity partners outside its home base in the UK.

And so I think that another problem with global-only of the sort associated with saying borders don’t matter, distance doesn’t matter, is it’s just an invitation to go out there without having done the necessary homework and without having asked yourself the hard questions of whether globalization makes sense for you given where you’re coming from and where you’re trying to compete and how.

These are fundamental business questions and so it’s a bit astonishing that CEOs aren’t asking themselves the questions.

Well, I think the CEO sometimes is stuck in a dual role that makes it complicated. A number of the CEOs I know see it as their personal responsibility to help make the organization more global, partly because they sense resistance a bit lower down within the organization, maybe not their direct reports, maybe two levels down.

So it’s a little bit hard to be the analyst and the motivator at the same time. So, in fact, when we do global-only surveys, the last one I did where we broke things out between CEOs and non-CEOs, CEOs were inclined to overstate actual levels of globalization by an even greater amount than the other people in our sample, not because presumably they have less experience but presumably because they’re a bit torn between being analytical and trying to persuade other people within their organization to actually get a move on.

Who’s doing this well do you think? You must come across organizations where you think, yes, they’ve really thought about it and are doing intelligent things.

Yes. Well, I think, again, it’s way easier to make lists of companies that aren’t doing this well than companies that are doing it well. But if I think to some of the companies that I find most interesting right now I think that in IT services you see some great examples, both from the West and from emerging economies – companies that know better than to get distracted by all this noise about the end of arbitrage, that’s the core of the Indian business model. These are companies that are pretty clear that they know what they’re going to do no matter what kinds of restrictions get put on to H-1B visas in the United States.

Similarly, IBM and Accenture are not going to stress arbitrage because arbitrage is a loaded word, but the reason that they have a hundred thousand- plus employees each in India means that they understand what the critical things are in their business and the need, even though they are differentiated players, to at least be in the cost ballpark vis-à-vis their Indian competitors.

I find companies like Cemex, which admittedly did do a very, very ill-starred acquisition of Rinker just before the financial crisis, reminding us that nobody is immune from doing dumb things. But when I think of the other things they have been doing, how selective they’ve become again about their portfolios, about the kind of emphasis that the late Lorenzo Zambrano put on really multinationalizing the top management team, etc, they’ve gone very, very far compared to many companies from advanced economies in terms of how cosmopolitan and how able to manage across differences they’ve become.

So, there are some of the traditional powerhouses that continue to do well, typically in businesses where scale matters a great deal and affords them protection from local competitors. There are also some scrappy new challengers, whether it’s the Indian IT firms, Cemex, or even Lenovo, which I think has done a very good job with a very different capital cost than IBM of taking that ThinkPad business and really figuring out how to maintain it as a global brand.

One thought that I’ll add, one of the indicators that I look for as perhaps the single most powerful indicator ahead of time as to how well a company is going to be able to actually work across borders is I look at the level of cosmopolitism of the top management team, and it turns out that the for the Fortune Global 500, because we painstakingly went and did this analysis for every Fortune Global 500 company we could get our hands on, they are less globalized along that dimension than on any other dimension that we measured them on.

So, I think that it’s a pretty good sign that if the CEO is a non-native, well, that means roughly about half the top management team will be non-native as well. That kind of company strikes me as probably better suited to deal with the challenges that globalization might throw up than a company where the CEO is native, where on average ninety per cent of the top management team, the direct reports, are natives as well. So, there are almost these two clusters of companies, the kind of run by natives, and the ones that actually do have some significant injection of talent from outside, and I think that this is actually one of the areas where we’re going to have to pay more attention if we want to improve companies’ globalization experiences.

Are you optimistic?

Over the long run I’m optimistic because when I think of how long the process of economic integration has been underway and how big the potential gains still are, without quite being teleologically minded, I can see a lot of momentum behind this process. In the short to medium run I’m in way more cautious mode, and so it’s a little bit like I can predict that in the long run the climate is probably going to be conducive to firms that follow global strategies that are well thought out – in the short run the weather is a little bit hard to predict.

This is an excerpt from Strategy@Work, a Brightline and Thinkers50 collaboration bringing together the very best thinking and insights in the field of strategy and beyond.