In Search of Globalization

Race for the World

By Lowell Bryan, Jane Fraser, Jeremy Oppenheim, Wilhelm Rall
Harvard Business School Press, 364 pages, $47.95

The global economy has become so ubiquitous a topic in business writing, it's only a matter of time before the people who produce those yellow and black books come out with one titled "Globalization for Dummies."

Many such works are written in the tone of breathless exuberance exuded by someone that has just ordered a pizza on-line for the first time, and now believes he has seen the future. Wild sweeping generalizations are made about everything from the evolution of the nation state to human relationships.

Race for the World, written by four McKinsey & Company consultants is more modest in its ambitions. The focus is on new ways of thinking about strategy in an integrating world economy. Its scope is limited to big business.

The authors' original intent was to model the book on In Search of Excellence, a mid-eighties bestseller written by two other then-McKinsey consultants Thomas Peters and Robert Waterman.

Lead writer Lowell Bryan and his team planned to survey twenty of the firm's largest clients all with market capitalizations in excess of $15 billion and extensive international operations. They would then compile a list of best practices followed in dealing with the challenges of the transition to a global economy.

The plan's wheels fell off when the author's realized there were few, if any, best practices consistent throughout the sample group. Each company's approach was different and contingent on the industry they were operating in.

This was because organizations were defining strategies in terms of opportunities in the developing world. But much of what has been driving the new economy has been economic integration within North America and Europe. The book's focus thus turned to the evolution of value chains as companies overcame geographic and other market constraints.

In spite of all the hype, barely 20 per cent of the world's gross domestic product is produced and consumed in global markets. A market is global when a product sells for the same price everywhere, allowing for transportation and transaction costs. Global markets should account for 80 per cent of the world's GDP within 30 years. Although a mere blink in the span of history, this may represent a manager's entire career.

The culprits are national governments removing regulatory barriers to economic interaction, the emergence of global capital markets of enormous proportions and rapid advances in digital technology causing communications and computing costs to plunge.

The advantages to global markets are enormous as demonstrated by opportunities in the automotive industry. Car experts say a company using Indian labor, world-class plant design, and scale efforts could produce an Asian "world car" for less than $2,000 U.S., compared to $10,000 in developed countries. But this kind of "cross border arbitrage," may only be a temporary advantage to companies that profit from it.

The economy is undergoing such a profound restructuring that real winners will be "shapers." These are companies that can create value propositions so an entire industry rearranges itself around their unique capabilities. They do this by leveraging their mostly intangible assets to dominate "slivers" of emerging value chains.

Coca-Cola for example employs about 31,000 people but its bottlers and associates have double that amount. The company's market to book ratio was about 27 at the time Race for the World went to press. This indicates not only the market's high expectations, but also Coca-Cola's ability to exploit its intangible assets: its brands, distribution networks and management skills.

A big challenge for managers is that spending required to build intangible assets such as advertising and promotion expenses, training costs and research and development is mostly accounted for as an expense on the income statement rather than as a capital item on the balance sheet. Consequently companies with large intangible assets often have understated earnings.

CEOs, pressured by increasingly intolerant investors and the inadequacy of current accounting conventions tend to under-invest in intangibles in an effort to improve reported financial numbers.

Capital has become increasingly abundant as an aging developed world saves for the retirement of its baby boomers. Falling equity costs make it easier to justify low-return investments in familiar tangible assets, but this increases competition in these sectors and creates a cycle of decreasing returns.

The four authors have a truckload of ivy-league MBAs and other graduate degrees between them and consequently Race for the World has more characteristics of an academic work than a "how to" book.

Their contribution is a thorough understanding of the transition economy and its implications for businesses. By defining new terms they help frame the debate. Slivers for example are the same as niches, with the important distinction that they be viable on a global scale.

The book is a tough read and prone to excessive jargon: " efficient contract-based, cross-geographic arbitrage among specialists will not take place until counterparty structures evolve." But those that can hack their way through the prose will be rewarded.



Peter Diekmeyer is a financial writer living in Montreal.


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