Globality

CHAPTER 1

WHAT IS GLOBALITY?

"We are in a new economic order. Who will survive and who will go down?"

A.M. Naik, L&T

Globality is not a new and different term for globalization, it's the name for a new and different global reality in which we'll all be competing with everyone, from everywhere, for everything.

We three, management consultants turned authors, are partners in The Boston Consulting Group (BCG), and we have been studying the change in the global business environment—and working with companies involved in it—for more than twenty years. The extensive research that we and our colleagues have conducted over the past five years set us on a path that led to this book.

When we started out in our international travels, globalization was just getting under way. It was a cavalcade that traveled from West to East—big multinational companies centered in Europe, Japan, and the United States marching out from their corporate fortresses to foreign lands in search of low-cost manufacturing and low-end markets.

Today we look forward and see a new era emerging. We call it globality, a different kind of environment, in which business flows in every direction. Companies have no centers. The idea of foreignness is foreign. Commerce swirls and market dominance shifts. Western business orthodoxy entwines with eastern business philosophy and creates a whole new mind-set that embraces profit and competition as well as sustainability and collaboration.

Globality is a blockbuster new script—action, drama, suspense, and road picture all packed into one—with a sprawling cast of characters and locations in every corner of the earth. We have met, worked with, and had extensive conversations with many of the key figures in this unfolding scenario.

Ratan Tata, chairman of India's largest conglomerate, the Tata Group, is unquestionably one of the "everyone" who will be players in the world of globality. He graduated from Cornell with a degree in architecture in 1962, flew back to India, and went to work for the family firm, which was founded as a trading company in 1868 by Ratan's great-grandfather, Jamsetji Nusserwanji Tata. Ratan Tata was named chairman in 1991, when Tata Group was a jumble of local companies, and India was still essentially closed to foreign business and investment. Ratan Tata made it his mission to modernize and internationalize his company and, along the way, help India open its borders and its mind to worldwide business.

Today the Tata Group is a decentralized family of companies grouped into seven sectors, including information and communication technology, chemicals, hotels, automotive, and steel. When Ratan Tata negotiated the $13.1 billion deal to buy Corus Group, an Anglo-Dutch steelmaker, in 2007—India's biggest-ever foreign acquisition—Tata flashed onto the world's radar in a big way. Today, Tata Group has market capitalization in excess of $50 billion, and more than 50 percent of its $50 billion annual sales comes from outside India. "We no longer discuss the future of India," said Kamal Nath, the country's minister of commerce. "We say: 'The future is India.' "¹

Tata Group is a "global challenger," one of the hundreds, even thousands, of companies that have their origins outside the established world of Western commerce in the rapidly developing economies (RDEs)—Argentina, Brazil, Chile, China, the Czech Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Poland, Russia, Thailand, and Turkey—and that are bursting their way onto the big stage. They're fast growing, hungry, and have access to all the world's markets and resources. They're showing up everywhere—in each other's markets throughout the world, in markets that are less developed than their own, and, increasingly, in the developed markets of Japan, western Europe, and the United States.

A few years back, Glenn Tilton, chief executive officer of United Airlines, spoke over breakfast about the Embraer 170, a new regional jet made in Brazil that United had put into service on the Chicago–Santa Fe route, which we often fly. At the time, we weren't fans of the small, narrow-bodied jets in service to secondary cities. "Regional jet, as in no overhead bin space and knees banging up against the guy in front, right?"

Tilton smiled. "Try it," he said. "I think you'll like it." We did. He was right. The seventy-seat, twin-engine jet has all the comforts of the big planes with none of the drawbacks, especially the dreaded middle seat. In 1995, Embraer was virtually bankrupt. Today it's the world's leading manufacturer of commercial jet aircraft of up to 120 seats, surpassing the Canadian producer Bombardier in deliveries and sales volume, yet constantly vying for supremacy with its archrival. And Embraer grew up in a South American country much better known for coffee, oranges, diamonds, and steel—and supermodel Gisele Bündchen—than for the kind of engineering and high-tech manufacturing you need to build state-of-the-art aircraft.

Embraer, like all the challengers, will increasingly be competing with everyone from everywhere for everything. And by everything, we mean just that—all the world's resources and markets. Everybody will be trying to grab the same things that everybody else wants, especially the most precious and limited ones: raw materials, capital, knowledge, capabilities, and, most important, people: leaders, managers, workers, partners, collaborators, suppliers. And, of course, customers.

In 2007, attendees at the Detroit Auto Show may have been a little perplexed when they strolled by the display booth where Changfeng, a Chinese automaker, was showing off its prototype SUV, the Liebao. The company sold about 100,000 vehicles in 2006, mostly to customers in China's Hunan Province. Could Changfeng really be serious about going up against the likes of Toyota (2,542,525 light vehicles sold in the United States in 2006) and Ford (2,901,090 light vehicles sold in the United States in the same year) in the U.S. market? If so, it would have to come up with more, and better designed, models than the Liebao. But most automakers work with independent design firms, and—as every executive at the show knew—the leading European design shops, like Giugiaro in Italy, are completely sold out for years to come. (Many of them are working with other Chinese auto companies.)

But Changfeng thought they had that one covered: They had lured a former Ford engineer, Chinese-born Allen Han, to be their head of product development. Why would Han jump from a high-paying job in Detroit, Michigan, to a lower-paying one in the industrial city of Changsha, Hunan? "In Detroit, the working conditions and the pay are much better," explained Li Jianxin, chairman of Changfeng. "But the city lacks energy and passion. We have plenty of that in China."²

Companies have been battling each other for talent for years, of course. But there's no doubt in our minds that competition among everyone from everywhere for everything is going to get much more intense. We're going to see people vying with each other for everything from palm oil in Malaysia to English-speaking office staff in Shanghai, shipping containers in Shenzhen, shelf space in Monterrey, factory workers in Bratislava, pellets of iron ore in São Paulo, natural gas in Moscow, customers in Dhaka, cotton in Kampala, senior managers in Warsaw, and business-class seats on the flight from London to Beijing.

In the spring of 1976, The New Yorker ran a cover illustration called "View of the World from Ninth Avenue" by Saul Steinberg that has become famous, iconic of the parochial mind-set. Do you remember it? Manhattan looms large in the foreground, the rest of the United States occupies a greenish rectangle in the middle distance, and on the faraway horizon lurk three low-lying blobs labeled China, Russia, and Japan. India doesn't even make the cut.

That cover would never run now because China and Russia, along with India, Mexico, Brazil, Turkey, the Czech Republic, and the other rapidly developing economies, crowd into our everyday lives from every direction at every minute of every hour. We all know about the global sourcing of products and services—that our shirts are stitched in Romania, our apricots harvested in Turkey, the computer help-line staffed from India, and laptops assembled in China. But shirt labels and Indian accents are just the tip of the very large iceberg that is the challengers' presence in our everyday lives.

Have you heard of Johnson Electric? Sounds like a midsize maker of switches and junction boxes, based in, let's say, Tyler, Texas? Wrong. Johnson Electric is a major player in the world market for micromotors. When you adjust the rearview mirror on your car or attack your carpet with a vacuum cleaner equipped with a spinning brush bar, the family of Wang Seng Liang smiles another profitable smile. In 1959, Wang founded Johnson Electric in Hong Kong to churn out the tiny motors that propelled the cheap toy boats and airplanes exported by Chinese traders to the United States. (The name Johnson Electric was chosen for use outside China so the company wouldn't sound "too Chinese.") Today, Johnson Electric is number one in motion actuators, the little engines that whirr around us constantly, powering hospital beds, surveillance cameras, foot spas, toothbrushes, coffee grinders, juicers, joysticks, toilets, printers, blood pressure pumps, headlight washers, seat adjusters, and cooling fans.

Does the name Cemex ring a bell? When you drive through the Channel Tunnel on your way from London to Paris, climb the steps of Turner Stadium in Atlanta, touch down on the tarmac at Sondika Airport in Bilbao, or lounge on the patio for drinks with your friends in El Dorado, California, that gray stuff in the walls or beneath your feet is supplied by Cemex of Mexico, the world's largest ready-mix concrete player.

Unless you're in the micromotor or cement business, it's pretty easy to get used to—and, in fact, enjoy—the incredible cornucopia of goods and services available to you from around the world, but the implications of competing with everybody from everywhere for everything get more personal when you think about, for example, college admissions.

It's already tough enough competing with the best students from across the country for admission into one of the top-ranked schools in the United States, but today you're in the race with the finest students from around the world. At the twenty top business schools in the United States, international students now account for 20 to 30 percent of all enrollees. At the University of California, 23 percent of the undergrads were born outside the United States. Not many years from now, sons and daughters raised in the United States may be the ones traveling out of their home country for an MBA, obsessing about whether to attend the China Europe International Business School (CEIBS) in Shanghai (one of the top fifty business schools in the world, so they claim) or the Skolkovo School of Management, outside Moscow.

And finally, let's get down to one of the most important activities of all: baseball. In the 2007 season, the best pitcher for the New York Yankees was not the comeback kid Roger Clemens, who contracted for as much as $28 million for the season, depending on the number of games pitched, but Chien-Ming Wang, born in Taiwan. In 2005, 242 of the 829 players—29 percent—on the opening-day rosters of the thirty Major League Baseball clubs were born outside the United States, in such countries as Cuba, Mexico, and Venezuela.³

Now baseball is starting to catch on in Africa, too. During the off-season of 2007, the New York Mets took a four-day goodwill tour to Ghana, where they conducted a clinic for kids in the capital city of Accra. "Not everyone's going to play soccer, not everyone's going to play tennis," said George Ntim, president of the African Development Foundation, "so there has to be another sport for them. Why not baseball?"⁴ Will American baseball end up like tennis at Wimbledon has for the British? Will Americans desperately hope, year after year, that a U.S.-based team will make it to the World Series?

Globality will affect everyone, everywhere, everything. And that means you. One day, it may be your company that Tata Group wants to acquire, your child calling home from Shanghai, your job moving to Mexico City, and your brand-new Changfeng gleaming in the driveway.

It's just a matter of time.

THE TSUNAMI

Or is it?

Remain calm. This is hardly the first time that a set of competitors from developing economies has risen up and challenged the established players—the companies we call "incumbents"—of the developed markets. In the early 1900s, they sprang up from the United States to challenge the dominance of the stodgy European manufacturers. In the 1970s, Japanese manufacturers pounced on the U.S. market with their low-cost, high-quality products. In the 1980s, with help from NAFTA, Mexico fielded its set of challengers. In the 1990s, the contenders hailed from Korea.

You can go back even further if you like, to the wave of upstart European enterprises that, in the early 1500s, sailed out to the established societies of India and China to trade silver for spice.

However, although all those previous waves had tremendous impact on the world, this wave of global challengers from the rapidly developing economies is far bigger and much more significant, and will have a far greater effect on the world than any of the previous ones. This one is more like a tsunami—a series of low, powerful waves caused by an undersea disruption that crash against the shore and surge far inland—than the single sharp crest of a tidal wave.

Why? Three reasons:

• The unique origins of the challengers

• The unprecedented global access they have enjoyed

• Their insatiable hunger for achievement

The country origins of China and India, in particular, are very different from those of the United States, Japan, or Korea. They are massive countries with huge populations. Not only does that mean they have abundant (low-wage) workforces, it also means they have astounding potential as markets and, what's more, that they are important providers of resources as well. The combined population of India and China is about 2.6 billion people, or 37 percent of the planet's humanity. Add in 200 million Brazilians, 143 million Russians, 110 million Mexicans, and 150 million eastern Europeans, and you have a total of more than 3 billion people in the rapidly developing economies. That's three times the number of people in the combined populations of western Europe (400 million), the United States (300 million), and Japan (127 million). And that's not even considering the hundreds of millions more people in Southeast Asia, the Middle East, and Africa.

The second key factor is the unprecedented access to everyone, everywhere, and everything that the challenger companies have enjoyed—thanks to, among many other developments, worldwide communications nets and international laws and policies favorable to commerce. Information, data, talent, organizations, capital, systems—it's all available at the click of a mouse, at the other end of the cell phone connection, or within a day's plane ride. Everyone from everywhere can get access to everything.

That was far from true in the sixteenth century, when Portuguese merchants in Macao had to build their own ships on the spot and when French traders were forced to borrow silver from moneylenders in the local markets, a situation guaranteed to drive up interest rates. Nor was it true in the Japanese wave of the 1970s, well before the Internet played a major role in communications and commerce, and when the only way to scout the U.S. markets and study the habits of the natives was to send in undercover product-development teams. (That's still the best, but hardly the only, way.) Even in the 1990s, when Korea staged its challenge, the World Wide Web was not yet the force it is today, and the world had not opened so widely.

The third factor that makes this wave so remarkable is the unrelenting hunger that people in the rapidly developing economies have for learning, improvement, achievement, success, and recognition. You have to remember that Russia, India, and China were virtually out of the world economy for most of the twentieth century. With the opening of their societies, and then the growing success of their economies, people and companies are more and more driven to achieve at higher and higher levels.

People in the rapidly developing economies see the world fundamentally differently than it is viewed from the developed ones. The United States, Japan, and western Europe are slow-growth economies characterized by wealthy consumers, well-established companies, well-defined markets, and (relatively) well-functioning infrastructures. China, India, Russia, Brazil, and the others are fast-growth economies with young and poor populations, companies inexperienced in modern business, overburdened infrastructures, and markets of unknown dimension.

Everybody in the rapidly developing economies is hurrying to catch up, grab hold of opportunities, improve their fortunes, and help their countries take their deserved place in world society. That's why business books are selling like hotcakes in China, why farmers in the villages of India are working second jobs in business-process outsourcing, why retail malls are sprouting up in Ekaterinburg, Russia, and why executives and workers alike routinely put in long workdays, sometimes seven days a week.

THE SEVEN STRUGGLES

Who are these challengers?

How did they achieve their success?

How do they think?

What do they do?

Where are they going?

We know from observing their progress, visiting their companies, working with them, and talking with their leaders that the challengers are well versed in the principles and practices of Western business orthodoxy. After all, many of their senior executives were educated in the West. Anand Mahindra holds a Harvard MBA. Baba Kalyani did his postgraduate work at MIT. Patrick Wang studied electrical engineering at Purdue. Shi Zhengrong has a degree in physics from the University of New South Wales.

But these leaders did not return home and instantly apply to their companies what they had learned from the case-study method. They synthesized Western ideas with attitudes, practices, and concepts from their own and other cultures, which causes them to take actions and make statements that, to incumbents, can seem heterodox, counterintuitive, even baffling—but also enticing and provocative, and we'll provide many examples in this book.

Not only have we gotten to know dozens of challenger companies in the rapidly developing economies and talked with their leaders about what it means to compete with everyone from everywhere for everything, we have also worked closely with incumbents as they have worked to adjust their thinking and adapt their operations to the new global reality.

Based on our experience and analysis, and on a wealth of data and knowledge, we have to conclude that, in general, the challengers are learning faster about how to succeed in the age of globality than most incumbents are. This should not be surprising, given the different starting points of the challengers and the incumbents and the vast gap between their current positions. The challengers have everything to gain. The incumbents, it often seems, have a great deal to lose.

That does not mean, however, that the rapid rise of the challenger companies will lead to the certain fall of the incumbents. That is not what happened in any of the previous waves of global change. Some incumbents will lose their current positions (some already have), but some will not. Some challengers will become world leaders; others will drop off the radar completely.

To survive, compete, and succeed in the age of globality, every company will have to face and work its way through a set of challenges and difficulties that we call the seven struggles of globality.

In a world that often prefers simple answers and bullet-point solutions, we at first balked a little at the word struggles. Isn't that word kind of negative? Won't people be put off by the thought of a business activity that doesn't have a clear resolution? Maybe. But anyone who has set foot on the stage of international business knows that performing there is often complex and always dynamic.

So, we decided that the word struggles is the most descriptive and accurate one, because these issues are decidedly different from tasks or projects that can be neatly defined, handily addressed, and checked off the to-do list. They are ongoing and often complex concerns that rarely have simple, one-off answers and that need to be constantly revisited. They can be more or less under control, but never really get solved. They are:

• Minding the Cost Gap

• Growing People

• Reaching Deep into Markets

• Pinpointing

• Thinking Big, Acting Fast, Going Outside

• Innovating with Ingenuity

• Embracing Manyness

No company—challenger or incumbent—can compete in globality without engaging in one or more (and probably all) of these struggles. But do not turn back! There are many actions that companies can take as they engage in the struggles, and we discuss them in detail in the chapters that follow.

MINDING THE COST GAP

The first struggle involves cost.

Low cost is the great lever that enabled small, local companies in the rapidly developing economies to evolve into global challengers, and their access to low-cost resources—first and foremost labor, but also equipment, raw materials, and components—continues to give them a great advantage over incumbents in developed economies.

However, globality is more than a never-ending battle to achieve the lowest cost in every aspect of every business. The challengers—especially as they seek to move from commodity suppliers to full-fledged global competitors—will not have such complete control over their costs and will find that their focus on low cost will be a disadvantage in some areas, especially when competing for talent. Allen Han went for the Changfeng offer, but he was a mid- level engineer at Ford. No matter how much passion there may be in Changsha, not everybody will fall for that city's allure.

To overcome their disadvantage in cost, incumbents can build on a number of other advantages—such as innovation and brand legacy—to offset the cost difference. The issue, therefore, is not so much about achieving the absolute low cost but about keeping a vigilant eye on the cost differential. No competitor will be able to succeed if its costs are significantly higher than others in its industry—except in those rare cases when it is able to completely transform a category or process through innovation. Even then, its advantage likely will not last for long.

The struggle for incumbents—and increasingly for challengers—will be constantly minding the cost gap. The most important actions they can take are:

• Optimizing with Labor

• Clustering

• Superscaling

• Simplifying

GROWING PEOPLE

According to various analyses, there is a huge reservoir of talent available worldwide. The rapidly developing economies are supposedly flooded with educated and skilled workers and managers while, in the developed economies, the talent pool shrinks and wages rise.

That may be, but there's still a talent struggle involved in globality, and that's aligning the right talent with the work to be done—getting the optimal number of people with the right capabilities to do the required tasks in the right places at the right times. It's partly an issue of quantity. Despite the great numbers of workers, there often aren't enough qualified people available to meet demand. In India, the attrition rate in the outsourcing industry has been as high as 50 percent annually.⁵ That's why Infosys Technologies, the giant Indian outsourcing firm, is looking to hire six thousand Chinese employees over the next five years.⁶

Sometimes, the work is located in places where there aren't enough workers available to do it. That's one of the reasons why China has some 140 million migrant workers, people who leave their homes and families to do itinerant work in distant cities. The problem is acute in eastern Europe, where workers have been emigrating to the West by the millions to find higher-paying jobs, forcing some companies with facilities in Poland to increase wages, recruit from Africa and the Middle East, or shut down their operations altogether.

The struggle is mostly, however, about quality, because even people who have what seem to be the right credentials for the job (like an engineering degree or a training certificate) don't always have the actual skills needed or at the right level, or the ability to perform as required. For example, a great percentage of people in India who have college-level training in English are not truly fluent.

Companies, therefore, will find themselves struggling with the issue of alignment and, with frustrating frequency, the misalignment of the many players involved. The successful ones focus on developing their methods of recruitment, development, and deployment. They are making their own talent, rather than just fitting people into boxes, by focusing on these key actions:

• Recruiting for Rapid Growth

• Developing for Depth

• Deploying for Early Results

• Letting Leaders Build

REACHING DEEP INTO MARKETS

Much of the history of globalization within domestic markets has been about incumbents doing business with a very small percentage of the large populations in these markets, if they sold into them at all.

Now incumbents are targeting, much more aggressively than ever before, the rapidly developing economies as the enormous and valuable markets they are—attracted not only by the size of their populations but also by the increasing wealth and sophistication of both industrial customers and general-market consumers. Rather than play on the surface of these enormous markets, the challenge is to go deep and reach the hundreds of millions of potential buyers waiting there.

However, incumbents are often confounded in their efforts to reach deep by many factors, including their inadequate understanding of consumers, the many cultural differences that exist—not just in comparison to developed markets but within a single market—infrastructural lacks, brand legacies, and complex and often unfathomable distribution and retail systems.

These issues make it difficult enough to capture the "easy" segments of the markets in the rapidly developing economies, which are only the tip of the population iceberg. At least another billion people in China, India, and eastern Europe have yet to join the global consumer society—and, over the next several decades, have the potential to do so.

The struggle for incumbents (and for challengers as they expand into other rapidly developing economies) is to achieve penetration of the well-defined and easily accessible pockets of populations and then reach deep into the mass markets beyond, by executing on one or more of the following:

• Creating New Categories