Global players urged to adapt to new ‘rule of game’

By Ernst & Young

What are the main characteristics of the evolving trend of globalization and how should enterprises respond to them for a sustainable growth?

Ernst & Young, as the world’s leading professional services firm, has been making public high-profile reports at the annual World Economic Forum (WEF) in Davos, Switzerland, over the past several years along with the ``Globalization Index’’ in cooperation with the Economist Intelligence Unit (EIU).

According to this year’s report released late January, the world’s 60 largest economies including South Korea will continue to globalize steadily until 2014 ― after a brief pause in 2009 and a modest rebound in 2010 ― driven by the continued global economic recovery, technological innovation and rise of the emerging markets.

Titled ``Winning in a polycentric world,’’ the 32-page publication highlights the tension between the flattening effect of globalization and significant variations across markets. While the former encourages companies to roll out business and operating models ``globally,’’ the market differences demand a more ``localized’’ approach.

And what does it mean for business? The future challenge for business will be to strike the balance between these opposing forces of globalization and national markets and achieve both scale and local relevance.

Business opportunities are now distributed more evenly around the world than at any time in history and the convergence of market potential between the developed and emerging world means that 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,’’ says Ernst & Young Chief Operating Officer John Ferraro. ``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. It is not just opportunities that are located in these multiple centers. Competition, capabilities and resources can all now reside anywhere in the world and travel in new, sometimes unexpected directions.

So who are going to be the long-term winners? Ernst & Young suggests four priorities to focus on to win in this polycentric world ― redefine global and local; develop a polycentric approach to innovation; rethink relationships with government and tax administrations; and build leadership teams with strong global experience.

Best Buy: Redefining global and local

In March 2010, global consumer electronics retailer Best Buy reorganized itself into three divisions ― Americas, Europe and Asia ― with an Executive Vice President running each region and reporting into the Chief Executive, Brian Dunn.

The restructuring acknowledges that the needs and priorities of business in different regions around the world can vary considerably. And rather than apply a multi-speed model onto a single organizational structure, the separation into three divisions enables each region to set its own pace.

By giving equal weight to the Americas, Europe and Asia in its organizational structure, Best Buy is moving away from traditional perceptions of developed versus emerging markets.

``We try not to talk about emerging markets,’’ says Kal Patel, Executive Vice-President for Asia at Best Buy. ``Instead, we talk about having three markets ― all of which we are trying to grow. We did not want to be seen as a predominantly U.S.-based company with other regions as subsidiaries.’’

Individual regions have considerable latitude to set their own strategies and business models. In Asia, this means adopting an experimental approach so that ideas can be tested and, if successful, scaled up quickly. ``You’ve got distinctly different competitive characteristics in each region and you need to be able to respond to that,’’ says Patel. ``So in Asia, we place bets and take options and operate a bit like a Silicon Valley start-up.’’

The ability to draw in resources and capabilities from other parts of the business creates scale. But rather than transfer entire operating models or functions from one market to another, Best Buy takes a selective approach, disaggregating business processes and picking and choosing the most appropriate components.

``Our goal is to take pieces of good practice and transfer them in an incremental way,’’ Patel says. ``For example, we might like the commission base or delivery system in Canada and bring it over to parts of Asia.’’

This is very different from the traditional approach of most multinationals, where the goal is to standardize and centralize as much as possible. But while this may offer scale, Patel believes that it is not sufficiently flexible to suit the needs of very different markets.

``The more you rely on capabilities from the core business, the more they bring their orthodoxy with them,’’ he says. ``You need to get smart about building business models in these regions and finding out how you are going to compete. By all means, share some things, but the more you share, the less relevant you become.’’

Xerox: New approach to innovation

When document management company Xerox opened its India Innovation Hub in March 2010, it was a break from the past. It already had four innovation centers, but these were located in North America and Europe. By adding a fifth in the world’s fourth-largest economy, it was showing a strong commitment to Asia and recognition that emerging market problems require local solutions.

The Xerox India Innovation Hub, located in Chennai, was to bring together Xerox scientists and engineers with a range of external partners including academic institutions, research labs and industry partners. For Meera Sampath, head of the innovation hub, this ``open’’ approach was critical to its success.

``One of the key ingredients to being able to crack the emerging markets is to rely strongly on partnerships,’’ says Sampath. ``The local companies that have been around a while really understand the market and can relate to the needs of the local customer. So while we might not be able to get all the best and brightest people to work for us, at least we can get them to work with us.’’

The goal of the India Innovation Hub was to focus first and foremost on products and services tailored for emerging markets. But Sampath sees the remit as being broader than this. While products may be designed with emerging market customers in mind, components of those innovations may be re-applied in other markets around the world, including developed ones. ``This means that we are able to take ideas innovated anywhere in the world and potentially apply them somewhere else,’’ he said.

The relatively low cost of innovating in India, and an awareness that Xerox will, in many cases, be creating a new market for itself in emerging markets, highlights the importance of conducting many small-scale experiments to test ideas on the market. ``If we can successfully figure out how to roll out products and services for these highly challenged, low-cost environments, that gives us a tremendous platform to then roll them out globally as well,’’ says Sampath.

Researchers will be encouraged to move between centers in a program that the company refers to as ``crossovers.’’ ``Our vision for the India Innovation Hub is that this would be a place where we can really leverage and harness the power of global innovation networks,’’ Sampath says. ``It will become a focal point to connect researchers in India with Xerox researchers around the world and is specifically designed to enable the cross-fertilization of ideas and transfer of knowledge.’’