I’m just settling down from a trip to Davos and I’m thinking about some of the things I wrote just one month ago—and how much has changed and stayed the same since then. My last posting for 2007 ran under the title above and began with the words “I think the biggest globalization story of 2008 will be the replacement of the bland certainty that the world is quickly becoming 'one' with a somewhat greater recognition of turbulence and uncertainty.” It hasn’t taken long for the new year to validate that prediction.

Last month, as we all know, the financial markets went into a tailspin, forcing an unscheduled 75 basis points reduction in interest rates by the Fed. More recently, the Fed took the rate down another 50 basis points. These moves triggered further debate about whether the U.S. is in a recession and highlighted other macroeconomic/financial signs of weakness. But, as is customary in these matters, agreement is elusive, although rapid shifts in majority opinion have certainly been on display: “decoupling” went from being fashionable to being forgotten within the course of an eventful week.

What else might be helpful in handling an uncertain future—a topic that seems much more important than it did even one month ago? Here’s what I wrote a month ago: “The sub-prime crisis has fed this shift in sentiment, but other dangers are in the air as well: concerns about global imbalances and institutions, protectionism coupled with nationalism, the emergence of new power centers and miscellaneous geopolitical and even biological hazards.”

As one attendee at Davos put it to me last week, questions concerning 1-2% drops in GDP crowded out consideration of risks that might have a 10-20% positive impact on global GDP. But they shouldn’t—and so let’s discuss some such contingencies and their implications:

• Plan for bumps and shocks in making your strategic plans—in a way that takes things down to the industry and company level.
• Envision multiple possible futures, instead of simply trying to predict the next bump or shock.
• Recognize the value of options in an uncertain world.

Getting a grip on and dealing with an uncertain future are themes to which I will keep returning in my postings this year. How have the events of the last month reshaped your—or your company’s—global strategy?

I think the biggest globalization story of 2008 will be the replacement of the bland certainty that the world is quickly becoming “one” with a somewhat greater recognition of turbulence and uncertainty. You’re starting to see this shift now, with some of the opinions recently expressed by corporate leaders in the U.S. and Europe.

The sub-prime crisis has fed this shift in sentiment, but other dangers are in the air as well: concerns about global imbalances and institutions, protectionism coupled with nationalism, the emergence of new power centers and miscellaneous geopolitical and even biological hazards. Are all these signs of a coming breakdown in globalization?

While anything is possible, I don’t think that that particular outcome is probable. In fact, I tend to be skeptical about frequent announcements of changes in the direction or speed of a globalization process that has unfolded over longer than a century because they leave me with the feeling that sentiments seem to shift much more rapidly than structural realities. This is why my October 22 posting about a possible global downturn, “Global Strategies for Uncertain Times,” warned against overreacting to short-run changes.

But that post contains advice about what to avoid. Here’s what I think businesses can do in a year marked by changes attitudes:

Plan for bumps and shocks in making your strategic plans—in a way that takes things down to the industry and company level. Most shocks vary greatly across industries and companies in their effects, in ways that greatly reduce the usefulness of modeling them in a generic way. For instance, global warming looks very different from the perspective of a financial investor, a construction firm, an automaker (whose reaction would also depend on its focus on large vs. small cars) or a potential supplier of cleaner energy. Focus on the risks and questions that are most likely to affect your company, and how they are actually likely to do so.

Envision multiple possible futures, instead of simply trying to predict the next bump or shock. For instance, instead of trying to predict whether globalization will continue or deglobalization will occur, you might want to think through your strategy with both scenarios in mind. This stretches thinking in a way that simply trying to predict the future and then picking the strategy option most suited to that prediction does not.

Recognize the value of options in an uncertain world. Strategy options often vary greatly in their “learn-to-burn” ratios--the rate at which they generate information about which scenario will come to pass versus the rate at which they commit resources to particular scenarios. Once you take this kind of option value into account, it opens the door to additional strategic possibilities: e.g., mixed supply chains (rather than complete offshoring or onshoring), toeholds as ways of exploring new markets and, more generally, sequenced strategies.

Going back over all the comments posted in response to my “What in the World” blog, I am struck by the volume of thoughtful commentary and wanted to thank everyone who has taken the time to post comments. Things that I’ve learned or been reminded of by the exchanges include:

Continued confusions about globalization. Some commentators still think of globalization as the process of (increasing) cross-border integration and others as the state of complete cross-border integration. Commenter Tevfik Dalgic (September 28) encapsulates the difference: “Globalization is in the making-it is not in its final phase yet.” I’d generally agree with this statement because my point is that the world is not (close to) completely globalized—although I am less certain than Tevfik seems to be that that will be the final phase, or that it will be reached within any meaningful time frame.

Believing is seeing. Ultimately, even after definitions (e.g., of globalization) have been agreed, data take you only so far in settling debates. As reader Marcis Esmits elegantly puts it (November 5), “The reality presented by your research is completely irrelevant to the argument about globalization. The globaloneys KNOW that globalization is bad, is increasing, will increase the gap between rich and poor, and can be blamed for any and all ills suffered by (particularly) Third World countries.” I am more optimistic about data, and will present more, but also recognize that stories can be more engaging.

Techno trances. Continued belief in complete cross-border integration is generally underpinned by a technological determinism that overlooks the cultural and administrative (or political) barriers between countries. If you ignore cultural and political factors, it is feasible to believe that borders soon won’t matter; if you don’t, though, I think it is impossible.

Social responsibilities. It is clearly difficult to write a blog about what globalization means for business without engaging with some of the social issues, including the distributional ones, that it raises. And without making some value judgments.

I also sensed from comments an appetite for additional discussion of a number of areas, of which two stood out for me:

Connecting to “mainstream” strategy. There seemed to be some appetite for connecting the perspectives on global strategy advanced in my blog to “mainstream" or single-country strategy. Thus, more than one comment connected arbitrage strategies with low-cost strategies. I think this isn’t quite right—I can think, for instance, of cultural arbitrage as underpinning differentiation in many snobby products. But I agree with the broader sentiment that it would be useful to connect some of what we learn about global strategy back to single-country strategy.

The shape of things to come. There seems to me to be considerable interest, fuelled no doubt by turbulence in the financial markets and elsewhere, in having more discussion of what lies ahead for globalization. I dealt with one possibility, a recessionary cycle/shock, in my “Global Strategies for Uncertain Times” posting on October 22. And I’ll continue to deal with this broad area, starting with my next post, on things to look out for in 2008.

In my previous postings, I have mostly focused on the challenges that national differences pose to global strategists. The theme of this post is the long overdue point that these differences need not be just sources of constraint: selected differences can also be potent engines of value creation for arbitrage-based cross-border global strategies. In other words, strategies that take advantage of these differences (factor costs, tax rates, regulations, etc) for economic gain.

Such arbitrage strategies get less attention than they ought to, partly because arbitrage is conceived too narrowly and partly because it is often considered a low, unsustainable basis for cross-border competition.

Here are some examples of arbitrage strategies that deviate from the usual notion of low-cost manufacturers from emerging markets selling goods in developed ones. Bumrungrad Hospital in Thailand, a pioneer in medical tourism, will treat close to half a million international patients this year in its five-star facilities. A number of East European countries also attract many patients across borders in distinct specialties: the Czech Republic in cosmetic surgery; Latvia in knee surgery; Hungary in dentistry; and Slovenia in fertility treatments. Portuguese investors are contemplating building enormous retirement complexes for wealthier North Europeans. About 3,500 very wealthy individuals have become Swiss citizens to benefit from local laws that set tax payments as a multiple of housing costs, without accounting for foreign wealth and income. LanChile has outperformed the airline industry with a strategy that capitalizes on Chilean exports of perishables such as salmon, fruit and flowers: cargo accounts for 40 percent of its revenues, compared with 5 percent or less for large U.S. carriers. And importing used cars is a bigger business, in terms of number of vehicles, than the new car business in countries as diverse as Bulgaria, Jamaica, New Zealand and Nigeria.

Another misconception about arbitrage strategies is that low-price approaches are unsustainable. But there are many examples that explode this misconception as well. To cite just one, Tata Consultancy Services, the leader in Indian software services, has averaged a return on capital employed of more than 100 percent over the last five years while growing revenues at a 30-percent-plus rate. And the industry overall has created of the order of $100 billion in market value since sources such as the World Bank first started warning, more than 10 years ago, that expansion driven by arbitraging cheap Indian programmers would soon be at an end.

In fact, the importance of arbitrage seems, if anything, to be increasing. Labor-based arbitrage is fuelling much of the international growth of Chinese and Indian firms, among others—partly, as the Indian software example suggests--by extending its domain to services. The transformation of cross-border competition in services, with the possibility for the first time of separating where services are performed from where they are delivered, is one of the key changes in globalization today compared to 20 years ago. And sundry other forms of arbitrage—e.g., tax arbitrage—while longer-established, also seem to be increasing in their incidence. Systematically incorporating arbitrage along these and other dimensions—cultural, administrative and geographic as well as economic—into global strategies is one of the key challenges of our time.

How well do you think companies are actually succeeding at doing so?

Read more of Pankaj Ghemawat's posts

MORE ON GLOBAL STRATEGY:
Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter (Hardcover)
Getting Global Strategy Right (CD-ROM)
Managing Differences: The Central Challenge of Global Strategy (HBR Article)

I’ve spent the last few posts explaining why the world isn’t flat—and why that matters for business strategy. Adding to the complexity—but also to opportunities—is the fact that process of cross-border integration isn’t smooth: instead, it is punctuated by shocks, one of which we may be seeing right now. Thus, the outgoing head of the IMF, Rodrigo Rato warns of a significant worldwide slowdown in economic activity. Corporate leaders in the U.S. and Europe are less definite, but do generally agree that they face a very uncertain outlook.

One response to such economic weakness and ambiguity, of course, is to wait for economic growth to recover. But a better one, for most companies, is to try to think through what to do during the bad times. And here, history offers useful guidance—especially because there is limited memory, individually or institutionally, at many companies about how to handle economic downturns because it has been a while since they last experienced one.

History indicates that during previous business downturns, investment has tended to decline two to four times as fast as output. It is hard to rationalize such large cutbacks in investment as value-maximizing, which is why the economist John Maynard Keynes ended up invoking “animal spirits” to explain them. Herd behavior just reinforces this tendency.

Global investment in uncertain times is an enormous challenge-- even companies that are supposed to be sophisticated about investments trip up in these periods. Goldman Sachs--the leader in investment banking in most major markets, the first major Wall Street bank to commit resources to post-Soviet Russia, and one of the institutions responsible for popularizing BRIC (Brazil, Russia, India and China) as an opportunity set -- ranked 24th among investment banks in Russian equity and debt underwriting in 2005. Why so low? Because Goldman beat a hasty retreat from Russia after the 1998 financial crisis and the devaluation of the ruble, and let several years go by before trying to re-establish its foothold there.

The truth is, many companies could do better by treating downturns as times to lay the foundations of future growth—including additional globalization—rather than as times to turn off the investment spigot. Such a shift to a more countercyclical investment pattern is aided by the fact that many companies—although there are obviously exceptions in sectors particularly exposed to the property and credit crisis—are still sitting on large piles of cash. (Remember that just a year ago, what to do with these swelling cash stockpiles was treated as a key item on the corporate agenda). Also of help is the fact that so far, certain parts of the world have escaped the effects of the credit problems in some advanced economies. It is precisely such scenarios in the past that helped the global cement players, for example, to buy out local capacity cheaply (e.g., in Asia after the Asian crisis).

This is not meant, of course, as a blanket invitation to invest in globalization: there are also sectors (e.g., many natural resources) where investment spending, including cross-border acquisitions, still seem to be driven by excess liquidity rather than by careful consideration of the long-run fundamentals. But this does seem like a good time for companies to think of getting off the capital investment roller-coaster which, in the context of globalization, involves buying into markets at the top of cycles and exiting from or rationalizing within them at the bottom—a recipe for losing money over the entire cycle.

Read all of Pankaj Ghemawat's posts.

MORE ON GLOBAL STRATEGY AND MANAGING UNDER UNCERTAINTY:
Moving Upward in a Downturn (HBR Article)
Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter (Hardcover)
Five Missteps to Avoid in Volatile Times (HMU Article)
Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles (Hardcover)

I am gratified by the many responses to my blog. Thanks for taking the time. But I also realize that I could have been clearer. I agree that globalization, in the sense of cross-border integration, is important and that along some dimensions, it has been increasing. What I object to is thinking of it in terms of the never-never land of a flat world, or what I referred to as globaloney. Globaloney is quite common: the last time I looked at my blog, the advertisement flashing above it read “Win in a flat world.” But it can also be very harmful.

The Coke example in my last post was meant to illustrate this point. Through much of the 1980s and 1990s, Coke was prey to an early vision of a flat world: Ted Levitt’s. Levitt argued that consumers everywhere wanted the same thing. Coke has now spent nearly 10 years trying to get back on track. And while Coke is an unusual company in many respects, it is far from unique in its susceptibility to such delusions.

Think back to the biases that bedeviled Coke under Goizueta and ask yourself how many of them afflict your company. Or even better, ask colleagues who haven’t been reading this blog whether they basically agree or disagree with the following statements:

1. Competing the same way everywhere is the purest form of global strategy (Uniformity)
2. The truly global company has no home base (Statelessness)
3. Globalization tends to make industries become more concentrated (Consolidation)
4. Globalization offers virtually limitless growth opportunities (Endless Growth)
5. Global expansion is an imperative rather than an option to be evaluated (Act of Faith)

Give yourself—or your colleagues—1 point for each yes answer, and add them up to get to the total score. Zero implies an absence of globaloney. A score of 1 or 2, while indicating some globaloney, is still better than average. A score of 3 puts you at the average for several hundred managers who responded to an online survey—see below—but note that the average is pretty unhealthy given the number of problems it can lead to (think Coke). And a score of 4 or 5 rises beyond globaloney to the level of globalmania.

Average Responses to the Globaloney Quiz: Yes vs. No

The antidote? Take the differences across countries seriously. In other words, attend to the borders between countries as well as the bridges between them. This is the state of the world that I refer to as semiglobalization, to distinguish it from total globalization. Recognition of semiglobalization is a better recipe for success than rhetorical globaloney: it leads to reality-based global strategies, as I will discuss in later posts.

So how do you score in the globaloney quiz? If you scored poorly, what will you do to change it?

Read all of Pankaj Ghemawat's posts.

MORE ON GLOBAL STRATEGY:
Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter (Hardcover)
Managing Differences: The Central Challenge of Global Strategy (HBR Article)
Getting Global Strategy Right (CD-ROM)