Mar 20, 2012

Globalization Penalty

Ford recently announced it is investing $1B for a new plant in India (U.S. automakers in race for Indian market - The Washington Post). Ford is going to change its strategy for the region and design new products designed specifically for the market:
This new focus on India has required something of a philosophical shift for America’s big auto manufacturers, a post-downturn realization that the old ways of doing business no longer guarantee success, said Michael Dunne, president of Dunne and Co., a Hong-Kong based investment advisory firm specializing in Asia’s car markets.
In the past, U.S. carmakers tended to launch products in emerging markets that were successful in Europe “and anticipate that customers will trade up to the higher price level,” Dunne said."
The article points out that the Indian market is going to grow at more than 12% per year and Ford needs to ensure a share of that market.  The effort to reduce product costs while still delivering reasonable products might even have some benefits to the core business from reverse innovation or frugal engineering.
As we have discussed recently, the drive to reduce cost might even drive innovation in general.  However, there is some penalty to globalization as pointed out by McKinsey Quarterly (Understanding your ‘globalization penalty:
The rapid growth of emerging markets is providing fresh impetus for companies to become ever more global in scope. Deep experience in other international markets means that many companies know globalization’s potential benefits—which include accessing new markets and talent pools and capturing economies of scale—as well as a number of risks: creeping complexity, culture clashes, and vigorous responses from local competitors, to name just a few.
The article analyzes data from hundreds of thousands of employees to arrive at three major risks of globalization: 1) Dilution of company vision / focus, 2) Reduced innovation and learning and 3) Ineffective collaboration and partnership between locations.

Clearly, having a larger product portfolio increases complexity, which reduces focus, dilutes vision and increases risks to overall performance.
Complicating matters further, our interviews suggested that, for most companies, about 30 to 40 percent of existing internal networks and linkages are ineffective for managing global–local trade-offs and instead just add costs and complexity. 
We have also seen that modularity can actually negatively impact innovation.  We have discussed some approaches to address global product development:

Managing culture / training across a diverse organization is clearly more difficult which might account for the lack of learning.  May be organizations need to improve global talent management? Or R&D managers can get involved to increase creativity.  The article finds that motivation for team members actually improved under globalization. This is counter to some of the work from Wharton which suggest that motivation reduces as team size increases.  May be rivalry actually improves performance?

The other problem may be with collaboration between multicultural teams:
Many companies, for example, can’t identify transferable lessons about low-income consumers in one high-growth emerging market and apply them in another. Some struggle to coalesce rapidly around market-specific responses when local entrants undermine traditional business models and disrupt previously successful strategies.
On the other hand, research shows that very little dispersion is needed before a team becomes virtual.  Since the teams are likely virtual to start with, the only major challenge would be different cultures.  We have discussed several approaches to improve multicultural team performance (here and here).

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