Hard globalization

To succeed in the global bazaar requires a global mindset. Thats how Narayana Murthy, the chairman of Infosys, framed the challenge of being a CEO of a truly global business. We heard similar comments after talking with 150 global chief executives responsible for $1.8 trillion of revenues. They revealed the critical facts of life that most affect their businesses. Of these, most CEOs see coping with globalization as the single most important reality for the next decade. This may seem surprising, given that globalization has been talked about for years. However, the shift we are seeing is on a dramatic scale, as India and China reintegrate into the world economy. This shift is ushering in the age of hard globalization: for the rst time, everyone is competing in a truly global fashion. Philip Green, chief executive of United Utilities, believes that what is happening in China is the second industrial revolution, while for Ed Zore, chief executive of Northwestern Mutual in the US, globalization is a trend for the next 200 years. Sir Martin Sorrell, chief executive of WPP Group, says, Weve not witnessed growth on this scale for 200 years and not at this speed. I think China and India are going back to where they were in 1819, when they generated about 49 per cent of worldwide gross domestic product (GDP).

bring volatility and risks. Growth at the rates being achieved in China and India is unstable, unpredictable and prone to sudden crises. Moreover, the success of the Wests past efforts at globalization has been patchy. Furthermore, in the near future at least, the preponderance of economic power will remain in the West in real terms: the US and the EU are each expected to have real GDPs larger than either China or India in 2025. Chris Bell, chief executive of Ladbrokes, has a rule of thumb for working in developing markets. When planning a market entry in emerging markets, he says, double the projected time and halve the projected prots. An emerging pattern will form the basis of globalization developments in the coming decade. Level One: Flag-planting doesnt work Many Western companies have headed into emerging markets intent on achieving what Lord Browne, former chief executive of oil group BP, calls easy globalization. They have tried to replicate their domestic models in emerging markets and failed because they did not understand local customs and practice. Those companies that have tried to impose Western prices, products [and/or] business model have not been so successful, notes Infosys chairman Murthy. The wave one mindset is a strategy for failure. CEOs currently think of a go out strategy, says Browne. American rms are used to being top dog and thinking in terms of domestic operations versus the rest of the world. Thats not right.
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Emerging risks
Its important to keep a sense of perspective, however. There are substantial risks to operating in emerging markets. Rapidly developing economies

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Many companies aspire to be players in the global marketplace, but the challenges to succeed are now greater than ever. Steve Tappin and Andrew Cave spoke with the CEOs of strongly globalized companies to learn their secrets.

Ben Verwaayen, the former BT chief executive who is now CEO at Alcatel-Lucent, adds: When people talk about globalization and emerging markets and doing a joint venture in China in a product-type environment, thats not globalization. I think it is export-orientated internationalization. Ive got nothing against it. Its not bad. Its something else.

Unilever also changed its packet sizes to bring prices within the reach of rural consumers. Today, sachets constitute about 55 per cent of Hindustan Unilevers shampoo sales. Vindi Banga, who is the president for foods, home, and personal care products at Unilever and the former chairman of Hindustan Unilever, says: In launching Wheel, the rm moved away from a

The best Western companies operating in emerging markets understand what their customers want and know how to develop reliable distribution channels.
The best Western companies operating in emerging markets have learned to understand what their customers want and know how to develop reliable distribution channels that respond to the unique structural and geographical challenges of each market as well as build quality pipelines of local talent. Having gured out the way to nesse their business models, theyve then taken a long-term view. Alan Rosling, executive director at Tata Sons, the premier promoter company of Indian conglomerate Tata, notes, Some foreign businesses have been in India forever and know the market and are localized: some arent even seen as foreign brands now. However, many entrants post-1991 were too short term in their thinking and used a lot of expatriates. Their cost bases were therefore too high. Lots came and then left in the 1990s. But those who stayed are doing well and some of the rms who left are trying once again. Azim Premji, the founder and CEO of Indian IT services group Wipro, adds: All those who have thrived have done many things right, but one common trend has been the ability and willingness to construct solutions for India . . . rather than trying to force-t solutions developed for other countries and societies. You have to be able to develop products, services and solutions for India. Unfortunately, a large number of Western companies are still stuck in a ag-planting mentality. Level Two: True localization Level two globalization sees enlightened companies localizing their models effectively. Some have been doing this for years. In India, for example, Hindustan Unilever developed the low-cost detergent, Wheel, to graduate people from using soaps to detergents. Wheel is now the worlds largest detergent brand by number of washes per year. It touches 600 million Indians, sells about ve million packets a year and controls about 20 per cent of the Indian low-cost detergent segment (as of 2007). Hindustan
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cost-plus pricing approach to a target cost set by deducting a desired margin from a consumer price that we could get in the market for Wheel. At rst, the target cost looked impossible, but we got there in two years with a cross-functional team. Selling billions of very small sachets requires a core competence in supply chain and distribution. It is not easy to price at two cents and earn a decent margin. Emerging market titans have leapfrogged level one globalization. Having in many cases spent recent years solidifying their domestic position, these companies are now moving quickly to acquire global market positions and are hungry to boost market share while also maintaining high quality standards. Ive never seen people who work as hard, who are as ingenious, and who also want to make money so much, says David Walton, former chief executive of engineering company API Group. When we tried to work with a Chinese company in a joint venture, we found their manufacturing processes were better than ours. Three Chinese companies Sinopec, China National Petroleum and State Grid are now positioned in the Fortune Global 30 index. Hungry and huge, the largest emerging markets groups are shifting westwards to move up the value chain, beneting from Western expertise and improving their research, development and innovation capabilities. Theyre also buying positions in high-value markets with high-value customers, simultaneously diversifying their business risks and attracting new talent into their businesses. Tatas purchases of Land Rover and Corus, Lenovos acquisition of IBMs personal computer hardware division, and Mittal Steel buying pan-European steel company Arcelor are but three examples. Level Three: Hard globalization The concept of globalization as either a westward or an eastward ow is awed. Take Wipro. Premji says, We are

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Business Strategy Review Spring 2009

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building signicant customer relationships in Canada and the Middle East and tapping talent bases in Eastern Europe, Mexico and US locations outside the large metropolitan areas. Globalization for Wipro is not just about getting customers in the US and Western Europe and talent in India . . . which, in itself, is very, very important . . . but, in addition, its about many other things and places. Rahul Bajaj, chairman of Bajaj Autos, one of Indias largest conglomerates, agrees: We have no choice but to globalize, he says. It may be not only in our interest now, but it will also be a question of survival in the future. This year, 20 per cent of Bajaj Autos production will be exported. This has to be 4050 per cent in ve to ten years. True global competition has started. And as Tim Clarke, CEO of Mitchells & Butler, states: Globalization can impact any business, even if all your operations are in the UK. Verwaayen goes further: Time is disappearing and we all will live increasingly in real time. Something happens in India and bang, the share price goes down in London. The second thing we have lost is location as a buffer. New leaders will operate without the protection of location and time.

Are you ready?

We realize that many company leaders will note the statistics and observations we have cited and immediately want to jump into such an enticing marketplace. But becoming a player in the hard globalization arena requires some signicant research and, perhaps more importantly, extensive reection. The best starting point we can offer is a set of questions. Consider these questions a form of acid test to see whether your company can compete in this eld:

Do you know exactly how your business competes globally today? Are your companys purposes and values lived globally? Can you devolve more power locally? Are your products and services completely localized in all markets? Do you world-source and share best practices on all the core elements of your business model globally? Do your metrics focus on siloed regions or driving global business outperformance? Is your management team truly global and making full use of the 24-hour clock?

Steve Tappin (stappin@heidrick.com) is a Managing Partner in the CEO & Board practice area of Heidrick & Struggles. Andrew Cave, a freelance journalist, writes the weekly CEO prole in the Sunday Telegraph as well as several other regular features for the Daily Telegraph. This article was adapted from their new book, The Secrets of CEOs: 150 Global Chief Executives Lift the Lid on Business, Life and Leadership (Nicholas Brealey).

London Business School Regents Park London NW1 4SA United Kingdom Tel +44 (0)20 7000 7000 Fax +44 (0)20 7000 7001 www.london.edu A Graduate School of the University of London

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