Cross-Cultural Management

The Cosmopolitan Corporation by Pankaj Ghemawat

From the Magazine (May 2011)

Summary.   Reprint: R1105F Never mind what you’ve heard about the world being

flat. Today’s global landscape is marked by unbalanced growth, protectionism, and

ethnic, religious, and linguistic divides. Differences still do matter. The ideal of a

truly global, stateless…

Listen to an interview with Pankaj Ghemawat.

Unbalanced growth, pockmarked by financial distress. The threat

of protectionism brought on by persistently high unemployment,

particularly in developed countries. Tensions, in wealthy nations

as well as poor ones, around ethnic, religious, and linguistic

divides, and talk of a new age of secession or tribalism. These are

some of the developments that contradict the story we had just

gotten used to—the one about how markets were becoming

perfectly integrated across borders, technology was obliterating

distance, and national governments were now irrelevant. The

aftermath of the financial crisis of 2008 reminds us of the many

ways in which differences still matter.

more

14:07https://hbr.org/topic/cross-cultural-managementhttps://hbr.org/search?term=pankaj%20ghemawathttp://www.amazon.com/Invisible-Continent-Strategic-Imperatives-Economy/dp/0060957425

It also calls for a reassessment of what it means to be a global

manager or corporation. Much of the management writing on

globalism adopts the Enlightenment-era ideal, proposed by the

18th-century philosopher Immanuel Kant, of abandoning all

“allegiances to nation, race, and ethnos” in favor of world

citizenship. Take the strategy guru Kenichi Ohmae. In 2000 he

published his famous book, The Invisible Continent, depicting a

world in which businesses largely ignore geographic boundaries

when serving markets and building supply chains. This kind of

thinking isn’t confined to management experts with an avant-

garde view to promote: Forty-eight percent of the respondents to

an online survey that HBR conducted for me in 2007 agreed with

the proposition “The truly global company has no home base.”

And among people with more than 10 years of international

experience, 63% agreed.

Unfortunately, enticing though they may be, such beliefs don’t

bear up upon closer examination. Of course, they never did.

The Reality of Roots

The vast majority of firms are deeply rooted in their home

countries. In 2004 less than 1% of all U.S. companies had foreign

operations, and of those, the largest fraction operated in just one

foreign country. The median operated in two foreign countries,

and 95% in fewer than two dozen. Among the U.S. companies that

were in one foreign country, that country was Canada 60% of the

time and the United Kingdom 10% of the time.

Even the icons of globalization are less global than the rhetoric

suggests. Remember ABB? Back in 1990, when BusinessWeek ran

the cover story “The Stateless Corporation,” that company, with

its global nomad of a CEO, Percy Barnevik, was the lead example.

The boundaries between ABB’s Swedish predecessor ASEA and

Swiss predecessor Brown, Boveri had ostensibly been broken

down by putting the merged company’s headquarters in

Switzerland to balance the Swedish nationality of the controlling

investors, the Wallenberg family, as well as of some key managers,

particularly Barnevik. But the years after the merger were markedhttps://hbr.org/topic/cross-cultural-managementhttps://hbr.org/search?term=pankaj%20ghemawathttp://www.amazon.com/Invisible-Continent-Strategic-Imperatives-Economy/dp/0060957425

by what one insider characterized as internal warfare between the

Swedes and the Swiss. Although things seem to have calmed

down since then, it’s more accurate to think of ABB as a company

with a global presence but with particularly strong roots in

Northern Europe and runners or prop roots in other geographies

in which it has significant operations. Not as a company without

any particular roots. That much is evident from looking at ABB’s

directors and top management (although a U.S. CEO was brought

in from GE not long ago) and at its geographic distribution of

assets and shareholdings.

Or, for an example in Asia, consider Rupert Murdoch and News

Corporation’s satellite TV network, Star TV. Murdoch and News

Corporation had some elements of statelessness. They were major

players from Australia to the United Kingdom to the United

States, and Australian-born Murdoch had already become a U.S.

citizen so that he could buy a set of American TV stations. But his

experience across English-speaking countries didn’t stop him

from making some tremendous blunders in Asia.

Murdoch’s original strategy for Star was to leverage News

Corporation’s English-language programming library across Asia,

because many Asians of the target demographic spoke English.

The company paid no attention to evidence from continental

Europe that audiences strongly prefer local-language content,

even if they understand foreign languages. Star TV’s travails with

language and culture paled in comparison with its political

missteps. Shortly after acquiring Star, Murdoch pronounced

satellite TV “an unambiguous threat to totalitarian regimes

everywhere.” The Chinese government reacted by banning

satellite TV dishes. Much of Murdoch’s China strategy has since

involved digging out of this hole. The bottom line: Though News

Corporation had transcended its Australian origins, it was still

deeply rooted in a particular set of Anglo democracies that bore

little resemblance to Star TV’s target markets along some

important dimensions.https://hbr.org/topic/cross-cultural-managementhttps://hbr.org/search?term=pankaj%20ghemawathttp://www.amazon.com/Invisible-Continent-Strategic-Imperatives-Economy/dp/0060957425

If you’re skeptical about the relevance of a corporation’s

nationality or the locations of its owners, ask yourself: Why are

large export deals involving private firms often announced at

meetings between the heads of national governments? Why do

employees of foreign-owned companies often fear their career

opportunities will be limited relative to their counterparts from

the firm’s home country? Which governments do firms call to

represent them in World Trade Organization disputes (and to lead

their bailouts in a crisis)? Why do foreign-ownership restrictions

persist in industries like media (as well as various others, like

airlines)?

It’s not just firms that are deeply

rooted in their home countries; it’s

their employees and customers.

It’s not just firms and their business operations that remain

deeply rooted. More important, it’s the people who are their

customers, employees, investors, and suppliers. Ninety percent of

the world’s people, it is estimated, will never leave the country

where they were born. Two percent of all telephone calling

minutes are international. People get 95% of their news from

domestic sources, and those sources focus most of their coverage

on domestic news. Only 21% of U.S. news coverage is

international, and of that, half deals with U.S. foreign affairs. In

European countries about 38% of news is international, but

almost half relates to stories involving other countries in Europe.

Only 5% to 10% of private charitable giving crosses national

borders, and rich countries’ governmental aid to the foreign poor,

per person, has been calculated to be one thirty-thousandth the

size of aid to the domestic poor. As another 18th-century

philosopher, David Hume, pointed out, “Sympathy…[is] much

fainter than our concern for ourselves, and sympathy with

persons remote from us much fainter than that with persons near

and contiguous.”https://hbr.org/topic/cross-cultural-managementhttps://hbr.org/search?term=pankaj%20ghemawathttp://www.amazon.com/Invisible-Continent-Strategic-Imperatives-Economy/dp/0060957425

90% of the world’s people will never

leave the country where they were

born. 2% of all telephone calling

minutes are international. 95% the

news people get is from domestic

sources.

This is the reality of what I call World 3.0, a world that is neither a

set of distinct nation-states (World 1.0) nor the stateless ideal

(World 2.0) that seems implicit in the strategies of so many

companies. Home matters in such a world, but so do countries

abroad. And instead of everything being equally near or far, as

German philosopher Martin Heidegger proposed in 1950, the law

of distance continues to apply to many activities. As distances—

geographic, cultural, administrative/political, and economic—

increase, cross-border interactions tend to decrease. It’s certainly

possible to have a global strategy and a global organization in

such a world. But they must be based not on the elimination of

differences and distances among people, cultures, and places, but

on an understanding of them. The mind-set, strategy,

organization, and employees of these firms will not be oriented

toward the global citizenship model implicit in corporate rhetoric.

Instead, they’ll start with a strong grasp of one’s roots and what’s

distinctive about them, recognize relative similarities and

differences, and flag the differences particularly worth watching

out for. Because denying the existence of differences doesn’t

make them any easier to deal with.

Building a Cosmopolitan Understanding

Most executives’ opportunity assessments rank markets by size,

growth rate, and other indicators of long-term potential, such as

demographics. In this approach, distance from a firm’s home base

or current markets is always a challenge to be overcome.https://hbr.org/topic/cross-cultural-managementhttps://hbr.org/search?term=pankaj%20ghemawathttp://www.amazon.com/Invisible-Continent-Strategic-Imperatives-Economy/dp/0060957425https://hbr.org/product/redefining-global-strategy-crossing-borders-in-a-w/an/8665-HBK-ENG

One way to break out of this trap is to use what I call a rooted map

to ground your analysis. A rooted map resembles world maps that

size countries according to measures such as population and GDP,

but it focuses on measures that reflect a particular country’s

perspective. An Indian IT services company, for example, might

use rooted maps like those in the exhibit “How Important Is

Distance?” The first map takes a general Indian perspective by

sizing countries according to their share of India’s international

trade. The second takes an industry view, with each country

drawn according to the size of its IT services market. The third

map combines the two perspectives, sizing countries on the basis

of their purchases of Indian IT services.http://www.amazon.com/Invisible-Continent-Strategic-Imperatives-Economy/dp/0060957425https://hbr.org/product/redefining-global-strategy-crossing-borders-in-a-w/an/8665-HBK-ENGhttp://press.princeton.edu/titles/7806.html

How Important Is Distance?

The rooted maps below size countries according to their

share of trade with India, their share of global IT

spending, …

https://hbr.org/product/redefining-global-strategy-crossing-borders-in-a-w/an/8665-HBK-ENGhttp://press.princeton.edu/titles/7806.html

To gain insights, you need to make comparisons across maps and

think about what kinds of distance influence the patterns they

reveal. In this case, the first map shows how India’s general trade

pattern is sensitive to geographic distance, natural-resource

availability, and historical connections. Nearby countries in Asia

and along the resource-rich Persian Gulf are among its major

trading partners, and we also see the legacy of India’s historic ties

to the former British Empire. The second map shows,

unsurprisingly, that the largest IT services markets are the most

advanced economies, whose per capita incomes make them

distant economically from India.

The first two maps suggest that without a more careful analysis,

an Indian IT firm might follow India’s general trade ties to the

nearest major market—continental Europe. Indeed, one of the

first large software projects offshored to India was for a Swiss

clearinghouse. But the third map reveals that in IT services,

linguistic distance matters more than geographic distance.

Upwards of 85% of India’s IT exports go to English-speaking

countries. Though that makes continental Europe an obvious area

for potential growth, operations there are usually less profitable

than those in the major English-speaking geographies.

This example should make clear the importance of considering

multiple types of distance and conducting analyses at the

industry level. Your sensitivity to 1,000 miles of geographic

distance is obviously much greater if you manufacture heavy

goods than if you offer an online service. On the other hand it’s

less important to share a common language if you export cars

than if you provide online training.

Rooted mapping is not just a global exercise. You need to analyze

differences across regions and within countries as well. Indeed,

the bulk of economic activity still takes place within national

borders, and large gains can be achieved by carefully managing

differences between provinces, ethnic groups, or language

communities. For example, though nationalism and separatism

are prominent in Spain’s Basque Country, that region’s trade withhttps://hbr.org/product/redefining-global-strategy-crossing-borders-in-a-w/an/8665-HBK-ENGhttp://press.princeton.edu/titles/7806.html

the rest of Spain is still 50% greater than its trade with the rest of

the world. If tensions between the Basque Country and the central

government in Madrid were reduced, Basque trade with the rest

of Spain would presumably rise.

Companies and individuals vary in their ability to manage the

same external distances. Businesses and executives from small

home countries, for instance, are often more accustomed to

dealing with cross-border differences than those from large home

countries. Since Finnish norms aren’t common in most of the

markets Nokia sells to, its managers have had to learn how

customers in other countries think. Americans, by contrast, are

more likely to project their values or feel that other people need to

do the changing.

Executives also need to think about how rooted maps are

evolving. Which kinds of distances are expanding and which are

contracting? What factors are driving those changes? In the

current environment of protectionist rumblings and more-

assertive governments, administrative and political distances

seem to be increasing. And the shift in the locus of growth to large

emerging markets—especially to the smaller interior cities within

them—also adds distance along several dimensions for a typical

U.S. or European multinational, which must learn how to bridge

cultural and political differences and vast economic and

geographic divides. On the other hand, trade agreements and new

communications and transportation technologies can contract

distance (though the impact of new technologies is often

overblown). In each case, the insights you glean from a careful

analysis will inform your strategic and organizational choices.

Crafting the Cosmopolitan Strategy

In my 2007 book, Redefining Global Strategy, I described three

fundamental ways that companies can create value across

borders: the “AAA strategies” of adaptation, aggregation, and

arbitrage. Adaptation strategies try to adjust to differences

between countries and respond to local needs. Aggregation

strategies attempt to overcome differences to achieve economieshttps://hbr.org/product/redefining-global-strategy-crossing-borders-in-a-w/an/8665-HBK-ENGhttp://press.princeton.edu/titles/7806.html

of scale and scope across national borders. Arbitrage strategies

seek to exploit differences—by, say, buying low in one country

and selling high in another. I advised managers to tailor a

combination of these strategies to their company’s industry,

position, capabilities, and intent.

Though the AAA strategies remain the relevant consideration set

for cosmopolitan corporations, in the medium term it may make

sense for many companies to emphasize adaptation more than

aggregation or arbitrage, given the public’s current sentiment

toward globalization. Such medium-term adjustments, however,

must be checked against longer-term plans and expectations

about how a firm’s industry might evolve, because it can take

years for companies to execute meaningful shifts among the AAA

strategies.

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