Business Case Studies, Executive Interviews, Pankaj Ghemawat on Global Strategy

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Executive Interviews: Interview with Pankaj Ghemawat on Global Strategy
January 2008

Pankaj Ghemawat
Anselmo Rubiralta Professor of Global Strategy at IESE Business School
the Jaime and Josefina Chua Tiampo Professor of Business Administration at the Harvard Business School.

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  • What are some of the worst global strategy blunders of the last few years? What did these companies get wrong?
    The worst global strategy blunders that I can think of generally fall, as I suggested earlier, in the categories of bigger and blander. For an example of the former, reconsider the DaimlerChrysler megamerger-which I wrote about skeptically in the Harvard Business Review shortly after it was announced. The merger was framed as designed to help two "mid-sized" players surf instead of being swamped by the waves of escalating scale economies and increasing concentration in the auto industry.

    But its logic was fatally flawed, for two reasons. First, in the absence of plans for integrating the two operations through parts commonality et cetera, the belief that economies of scale would be achieved was akin to thinking that strapping two leaky canoes together would somehow increase their buoyancy.

    Second and even more remarkably, looking at the data would have revealed that concentration has actually declined more or less continuously in the auto industry since World War II. Its big structural problem today is fragmentation and overcapacity as a result of too much entry and too little exit. And the difference matters: in a fragmented industry subject to excess capacity, a megamerger takes on the flavor of paying privately for the costly goodspread across all the firms in an industry-of removing a major competitor from the scene. Nice for one's competitors, but not necessarily for one's shareholders.

    For an example of blander, let me focus not on a company that has made particularly egregious blunders overseas, but one whose strategy overseas does present a marked contrast to the power of its domestic strategy. The company is Wal-Mart, which I've studied and written about for more than 20 years.

    When CEO Lee Scott was asked a few years ago about why he thought Wal- Mart could expand successfully overseas, his response was that naysayers had also questioned the company's ability to move successfully from its home state of Arkansas to Alabama. As I already pointed out, such trivialization of international differences greases the rails for competing exactly the same way overseas at home. Which has turned out to be a recipe for losing money in markets very different from the United States: as the former head of the company's German operations, now shut down, plaintively observed, "We didn't realize that pillowcases are a different size in Germany." Unsurprisingly, the foreign markets in which Wal-Mart has achieved profitability-Canada, Mexico and the United Kingdom-are the ones culturally, administratively and geographically closest to the United States. The point is not that Wal-Mart shouldn't have ventured into more distant markets, but rather, that it needed to think differently about how to compete in them. As it is now starting to do in markets such as India.

  • What's an example of a company that gets global strategy right? Why?
    Take the example of Toyota, which has overtaken General Motors to become the largest automaker in the world-while making money in the process. Toyota is distinguished from most of Western automakers, not just DaimlerChrysler, by the fact it treats market share as the result of building better cars more cheaply than its competitors, and not as an objective in and of itself. Its globalization has actually been driven by a complex array of coordination mechanisms across different regions, which Chairman Fujio Cho characterizes as the fundamental building blocks of the company's strategy. Note that Toyota's starting point is not a grand, longer-term vision of some distant globality when autos and auto parts can flow freely from anywhere to anywhere. Rather, the company anticipates expanded free-trade agreements within the Americas, Europe, and East Asia, but not across them. This is a more modestbut also more realistic-vision of a semiglobalized world in which neither the bridges nor the barriers between countries can be ignored.

    [Could add stuff on other examples: Cemex, Tata Consultancy Services, GE Healthcare]

1. Global Expansion Case Study
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