Gupta.ffirs 1/26/08 1:43 PM Page v The Quest for Global Dominance Transforming Global Presence into Global Competitive Advantage Second Edition Anil K. Gupta Vijay Govindarajan Haiyan Wang Foreword by Jeffrey E. Garten Gupta.ffirs 1/26/08 1:43 PM Page vi Copyright © 2008 by John Wiley & Sons, Inc. All rights reserved. Published by Jossey-Bass A Wiley Imprint 989 Market Street, San Francisco, CA 94103-1741—www.josseybass.com No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the Web at www.copyright.com. 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Includes bibliographical references and index. ISBN 978-0-470-19440-9 (cloth) 1. International business enterprises—Management. 2. Industrial management. 3. Organizational effectiveness 4. Comparative advantage (International trade) 5. Globalization—Economic aspects. 6. Competition, International. I. Govindarajan, Vijay. II. Wang, Haiyan. III. Govindarajan, Vijay. The quest for global dominance. IV. Title. HD62.4.G68 2008 658'.049—dc22 2008000872 Printed in the United States of America SECONDEDITION HB Printing 10 9 8 7 6 5 4 3 2 1 Gupta.ftoc 1/26/08 1:44 PM Page vii Contents Foreword ix Jeffrey E. Garten Preface xiii Acknowledgments xix 1. Rising Up to the Global Challenge 1 2. Building Global Presence 25 3. Lessons from the Globalization of Wal-Mart 57 4. Exploiting Global Presence 79 5. Cultivating a Global Mindset 115 6. Building a Global Knowledge Machine 153 7. Dynamics of Global Business Teams 189 8. Globalizing the Young Venture 217 9. Leveraging China and India for Global Dominance 237 Notes 267 The Authors 279 Index 281 vii Gupta.c01 1/26/08 1:32 PM Page 1 1 Rising Up to the Global Challenge The world is your oyster. Do you have the right fork? —Thomas A. Stewart1 What do we mean when we say that we live in an increasingly global world? If you are a Silicon Valley entrepreneur, it means that unless your business plan includes doing R&D in a low-cost, high-talent location, such as India, China, or Eastern Europe, you have almost no chance of being taken seriously by any venture capitalist. If you are Larry Page and Sergei Brin, the cofounders of Google, it means that you see your company as a born global player that will pursue customers everywhere almost from day one. If you are the CEO of Black & Decker, it means that you track the strategies of not only your long-established competitors such as Makita and Bosch but also new and aggressive entrepreneurial firms such as the Hong Kong–based Techtronic Industries. If you are the chairman of Nip- pon Steel, it means that you wake up every morning conscious of the possibility that your company may be an acquisition target for the global steel giant ArcelorMittal headquartered in Luxembourg but with steel operations on virtually every continent. If you are the CEO of Nokia, it means that the most important strategic question that you face may well be not how you will defend your market share in the United States and Europe, but how you will capture the attention and wallets of the next billion cell phone users in emerg- ing markets, such as China, India, Indonesia, Brazil, Mexico, and Russia. If you are the finance minister of India, it means that you re- gard the ongoing integration of the country’s economy with the rest 1 Gupta.c01 1/26/08 1:32 PM Page 2 2 THE QUEST FOR GLOBAL DOMINANCE of the world as fundamental to the realization of your homeland’s potential as an economic superpower. And, last but not least, if you are a recent MBA and a junior manager at Procter & Gamble, you vow never to forget that you do not have a prayer of making it into the top ranks of the company unless you combine superb on-the- job performance with extensive international experience. The twin forces of ideological change and technology revolu- tion are making globalization one of the most important issues fac- ing companies today. The makeover from state-dominated, isolated economies to market-driven, globally integrated economies is pro- ceeding relentlessly in all corners of the world, be it Brazil, China, France, India, Russia, or South Africa. Accelerating developments in the information and transportation technologies are making real- time coordination of far-flung activities not only more feasible but also more reliable and efficient. In addition, we can now witness a rapid rise in the emergence of born global companies, such as Skype, Joost, and Facebook. The rise of born global companies is further transforming the worldwide economic landscape. In this emerging era, every industry should be considered a global industry and every business a knowledge business. Today, globaliza- tion is no longer an option but a strategic imperative for all but the smallest corporations. This is as true of firms in such industries as cement, construction, and health care, which have traditionally been quite local, as it is of firms in such industries as semiconductors, phar- maceuticals, and automobiles, which globalized many decades ago. The only relevant question today is: Is your company a leader or a laggard in engineering and exploiting the ongoing globalization of your industry? The central premise of this book is that, no matter what the industry, only those companies that successfully lead the global revolution within their industry arenas will emerge as the win- ners in the battles for global dominance. Over the last twenty years, we have studied over two hundred global corporations through a variety of research methods: large- scale surveys, case studies, and in-depth discussions with executives. We have also served as advisers and consultants to dozens of com- Gupta.c01 1/26/08 1:32 PM Page 3 RISING UP TO THE GLOBAL CHALLENGE 3 panies in their efforts to review, redesign, and recreate their global strategies and organizations. Building on this knowledge base, we provide herein a road map for smart globalization. We identify and focus on four tasks essential for any company to emerge and stay as the globally dominant player within its industry: • People must ensure that their company leads the industry in iden- tifying market opportunities worldwide and in pursuing these opportuni- ties by establishing the necessary presence in all key markets.In some cases, these opportunities entail creating a new industry—as illus- trated by Yahoo!, which pioneered the Internet portal market in many parts of Asia and Europe. In other cases, these opportunities might manifest in the form of transforming an existing industry as illustrated by CEMEX, whose global expansion has catalyzed a re- structuring of the worldwide cement industry. • People must work relentlessly to convert global presence into global competitive advantage.Presence in the strategically important markets gives you the right to play the game. However, it says nothing about whether and how you will actually win the game—doing so requires identifying and exploiting the opportunities for value creation that global presence offers. Converting global presence into global com- petitive advantage requires managers to address several important questions. How do you convert global scale into “economies” of global scale? How do you convert global scope into “economies” of global scope? How do you engage in just the right level of local adaptation? How do you optimize the choice of locations for differ- ent activities? How do you foster knowledge sharing across loca- tions? And how do you leverage your positions in various locations around the world to compete on a globally coordinated rather than disjointed basis? • People must cultivate a global mindset.They must view cultural and geographic diversity as opportunities to exploit and must be prepared to adopt successful practices and good ideas wherever they come from. The global economic landscape is changing much faster than most people realize. The winning corporations of tomorrow Gupta.c01 1/26/08 1:32 PM Page 4 4 THE QUEST FOR GLOBAL DOMINANCE will be those that look at the world not only through American, Eu- ropean, or Japanese lenses but also through Chinese, Indian, Russ- ian, Brazilian, and Mexican ones. • In developing their global strategies, people must take full account of the rapid growth of emerging markets, in particular the rise of China and India.China and India are the only two countries in the world that simultaneously constitute four realities: mega-markets for al- most every product and service, platforms to dramatically reduce the company’s global cost structure, platforms to significantly boost the company’s global technology and innovation base, and spring- boards for the emergence of new fearsome global competitors. Given the game-changing nature of these realities, whether or not you have solid strategies for China and India will rapidly become a growing factor in determining whether or not your company is even a survivor ten years from now. We begin the journey by examining some of the fundamental questions: What is globalization? What is driving globalization? And what do these trends imply for companies and for managers?2 What Is Globalization? At one extreme, imagine a world that is a collection of economic is- lands connected, if at all, by highly unreliable and expensive bridges or ferries. At the other extreme, imagine the world as an integrated system where the fortunes of the various peoples inhabiting the planet are highly intertwined. The sneakers that you wear were manufactured in Indonesia. Your mutual fund company invests a part of your savings in companies listed on the Hong Kong Stock Exchange. The software that you just downloaded from the Web was developed in India. And the company that you work for rou- tinely exchanges technologies and management ideas with its sub- sidiary operations in Japan and Germany. If you agree that, over the last fifty years, the world around you has undergone a transforma- tion from something like the first scenario to something like the Gupta.c01 1/26/08 1:32 PM Page 5 RISING UP TO THE GLOBAL CHALLENGE 5 second one, then we would say that the worldwide economy is in- deed undergoing a process of globalization. More succinctly stated, globalization refers to growing economic interdependence among countries as reflected in increasing cross-border flows of three types of entities: goods and services, capital, and know-how. The term globalization can relate to any of several levels of aggregation: the entire world, a specific country, a specific industry, a specific company, or even a specific line of business or functional activity within the company. At a worldwide level, globalization refers to the aggregate level of economic interdependence among the various countries. Is the world truly becoming more global? Yes. As evidence, consider the following trends. In 2006, trade in goods and services stood at 31 percent of world GDP, up from 23 percent in 1999 and under 10 percent in 1970. Annual flows of foreign direct investment grew from 1.0 percent of world GDP in 1990 to 2.2 percent of world GDP by 2005. Trends in cross-border transactions in bonds and eq- uities are even more dramatic. In 1970, such transactions as a ratio of GDP stood at less than 5 percent for the United States, Ger- many, and Japan. By 2005, they had grown to over 200 percent.3 The pace of globalization continues unabated—as evidenced by the fact that the total deal value of cross-border mergers and acquisi- tions grew from $22 billion in 1990 to $58 billion in 2000 to $135 billion in 2005.4 The fact that the world economy is becoming more global does not in the least imply that all countries, all industries, or all compa- nies are becoming globally integrated at the same rate. For a variety of historical, political, sociological, and even geographic reasons, diversity is and will remain one of the defining characteristics of humanity. Thus it is important to examine what this concept means at the level of a specific country, a specific industry, or a specific company. At the level of a specific country, globalization refers to the ex- tent of the interlinkages between that particular country’s economy and the rest of the world. Historical and political reasons have caused some countries, such as Cuba, to remain quite isolated. Others, such Gupta.c01 1/26/08 1:32 PM Page 6 6 THE QUEST FOR GLOBAL DOMINANCE as China, India, Russia, Brazil, and Mexico, have made great strides toward global integration—albeit at different speeds. Some of the key outcome indicators that can be used to measure the globaliza- tion of any country’s economy are exports and imports as a ratio of GDP, inward and outward flows of both foreign direct investment and portfolio investment, and inward and outward flows of royalty payments associated with technology transfer. Table 1.1 compares the global integration of China and India along some of the indicators at three points in time: 1980, 1997, and 2005. As this table indicates, starting from a roughly similar de- gree of economic isolation in 1980, China’s economy has globalized at a much faster rate than has India’s economy. The data also indi- cate that, over the last decade, India has begun to narrow some of the gaps. At the level of a specific industry, globalization refers to the de- gree to which, within that industry, a company’s competitive posi- tion in one country is interdependent with its competitive position in another country. Alternatively stated, the more global an indus- try, the greater the competitive advantage that a player within that industry can derive from leveraging technology, manufacturing prowess, brand names, and capital across countries. The greater the degree of such interdependence, the greater will be the extent to which the industry is dominated by the same set of global players who face each other in almost every market and coordinate their strategic actions across countries. The wireless handset industry, so far dominated globally by Nokia, Samsung, Motorola, and Sony- Ericsson, and the soft drinks industry, dominated globally by Coca- Cola, Pepsi-Cola, and Cadbury-Schweppes, are two examples of highly global industries. In contrast, the construction and the hos- pital industries, populated by hundreds of domestic companies all over the world, represent two good examples of industries still in the very early stages of globalization. Some of the key outcome indicators of the globalization of an industry are the extent of cross-border trade within the industry as a ratio of total worldwide production, the extent of cross-border Gupta.c01 1/26/08 1:32 PM Page 7 RISING UP TO THE GLOBAL CHALLENGE 7 Table 1.1. Global Integration: China Versus India China India 1980 1997 2005 1980 1997 2005 Exports of goods and services as percentage of GDP 6 20 38 7 12 21 External debt as percentage of GDP 2.2 15.6a 11.2b 12.0 25.0a 15.6b Inward flows of foreign direct investment as percentage of GDP 1.7 4.9a 3.6 0.1 0.7a 0.8 aData pertain to 1996 bData pertain to 2004 Source:Abstracted from World Bank, World Development Reports 1998, 1999, and2007. investment as a ratio of total capital invested in that industry, and the proportion of industry revenue accounted for by players com- peting in all major regions of the world. For illustrative purposes, consider the ratio of cross-border trade to worldwide production. On this measure, relative to an index of 1.0 for all manufacturing industries, the mid-1990s figures for the computer industry were 2.2, for the auto industry 1.6, and for the pharmaceutical industry 0.7.5 These figures indicate that, in terms of cross-border flow of goods and services, the computer industry was more global than the auto industry, which was more global than the pharmaceutical industry. What Is a Global Company? Ask ten different executives “What is a global company?” and, more likely than not, you will get ten different answers. Some might argue that a global company is one that is pursuing customers in all major economies, in particular the Americas, Europe, and Asia. Others might argue that you are not really global unless you put down roots in every major market in the form of producing locally what you sell locally. Yet others might suggest that the real test of