Winning in a polycentric world. Globalization and the changing world of business

8 Februarie 2011

ERNST & YOUNG S.R.L.

 

Executive summary

A new chapter in globalization

In his 2005 book, The World is Flat, Thomas Friedman argued that globalization was “flattening” the world and creating an increasingly level playing field of global competitiveness. In many respects, he was right. Recent decades have undoubtedly seen greater integration of trade, capital, culture and labor across borders. Crossborder investment flows are broadening and deepening, and opportunities and competition are now spread more evenly between developed and emerging markets.

This convergence of market potential between East and West, along with a gradual economic recovery and growing interdependencies between sovereign states and multinationals, will ensure that globalization continues to deepen over the coming years. Our second annual Globalization Index  shows that, after a brief pause in 2009, the overall average score for the world’s 60 largest economies will increase steadily between 2010 and 2014(see Figure 1).

But in some other respects, the "flat world" theory now seems wide of the mark, especially from the vantage point of the post-crisis world. The economic fortunes of developed and developing countries are diverging, with growth rates in China and India nearing double-digit levels, while growth in the US remains tentative, and some parts of Europe are struggling to sustain a recovery. This is prompting different policy responses, from the tightening of monetary policy in some emerging markets to further stimulus and tax measures in the US.

Current account balances are heading off in different directions, with key emerging markets amassing huge surpluses while many developed countries plunge further into deficit. And, despite the emergence of the G-20 as a more inclusive "steering committee" for the global economy, the growing assertiveness of emerging economies and a gradual loss of primacy for the US could herald growing geopolitical tensions.

Business environments and customer needs also vary considerably from one market to the next. Spending power is an obvious example of this. Although the gap is narrowing, per capita incomes in the world's largest economies range from around US$3,700 in China to US$46,000 in the US. This means that products and services created for one market areunlikely to be suitable for the other.

In essence, the story of business today is one of a tension between the flattening effect of globalization and significant variation across international markets. While the former encourages companies to roll out business and operating models globally, differences between markets demand a more localized approach. The future challenge for business will be to strike the balance between these opposing forces and achieve both scale and local relevance at the same time.

Responding to a polycentric world

In our globalized economy, growth, innovation and talent can come from anywhere. Never before have opportunities, or indeed competition, been so evenly distributed around the world. Market potential between the developed and emerging world has converged. As a result, the number of markets that multinationals must consider as "strategic" has increased. But at the same time, the nature of the opportunities in those markets can be fundamentally different.

Globalization does not mean homogeneity. In the developed world, companies have well-established business models and asset bases but face weak growth prospects. In the emerging economies, this situation is often reversed.  Companies must now operate in a "polycentric world" in which there are multiple but divergent spheres of influence in both developed and developing markets.

Multinationals must essentially operate at multiple speeds in order to fit their strategies to both fast- and slowgrowth markets. Success in the former requires rapid-fire decisionmaking and the capacity to experiment, learn and scale at speed. For large multinationals, this may require a rethink of reporting lines in order to bypass bureaucracy and maximize agility. Developed markets, on the other hand, will require a different approach, which is more dependent on efficiency and incremental growth.

"In developed countries, your predominant challenge is the re-engineering of your existing asset base against slow growth," says Kal Patel, Executive Vice-President for Asia at Best Buy, a global consumer electronics retailer. "In Asia, you have a completely different set of characteristics where your main challenge will be your ability to experiment, fail and make resource allocation decisions quickly enough."

The traditional approach of treating local markets as homogenous and imposing a standardized business model on them is no longer fit for purpose. “The model of saying ‘we’re going to do it this way and roll it out to all these different countries just doesn’t work anymore,” says David Weymouth, Chief Operating Officer of RSA, a UK-listed insurance company. “It’s a question of being flexible, adaptable and understanding the market.”

The need to respond to a polycentric world is encouraging a fresh approach among leading businesses. Rather than a top-down management style with decisionmaking centered on the corporate headquarters, these companies are empowering regional managers to develop plans and business models to suit local market dynamics. This ensures that products and services are relevant to local customers and enables the company to compete against nimble, and market-savvy, local competitors.

Succeeding in a polycentric world

Succeeding in a polycentric world requires companies to focus on four priorities:

1. Redefine global and local

The need for local relevance across a growing number of key strategic markets is demanding a higher level of decentralization. But this alone is not enough. Unfettered autonomy for local managers will quickly lead to inefficiency and undermine the advantages of global scale. As a result, leading companies are adopting a more balanced approach whereby local autonomy is combined with globally consistent strategic direction, a shared corporate culture and set of values, and the ability to draw upon capabilities and resources from anywhere in the world.

2. Develop a “polycentric” approach to innovation

Rather than innovate centrally, then adapt or de-feature products to suit different price points, companies are increasingly decentralizing the innovation process, and setting up multiple innovation hubs in key strategic markets. Products, processes or components are developed primarily with local markets in mind, but reapplied when appropriate in other markets. An open approach to innovation helps to facilitate the transfer of ideas and innovations.

3. Rethink relationships with government and tax administrations

Government is playing a bigger role in business than at any time in living memory. This new dynamic requires companies to think carefully about how they engage with the public sector. On the other hand, there are new risks to be managed. Many governments are increasing taxes and stepping up tax enforcement. This requires companies to  manage and anticipate potential risks on a global basis. But partnership with government also creates opportunities, particularly in emerging markets where a more top-down approach to managing the economy may be adopted.

4. Build diverse leadership teams with strong global experience

The skills and capabilities that are required to succeed in fast-growth markets are different from those needed in more mature markets. While business success in developed markets has been more recently rooted in process and efficiency, emerging markets demand experimentation, risk-taking and entrepreneurship. The need to balance these very different capabilities will require companies to rethink the balance and diversity of leadership teams. They must also ensure that they have the right talent management processes in place to develop a new generation of diverse business leaders with this vital combination of skills.

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