Uncaging global tigers

Is there a roadmap companies can follow on their way to globalisation?

Does a conceptual framework exist that helps emerging globalisers "" regardless of size, scale or industry? Harvard professor Pankaj Ghemawat believes there is, and urges Indian companies to go global by focusing on the differences between markets, rather than by exploiting similarities.

In the 11th Good to Global, Manjari Raman explores the arbitrage strategies of some not-so-obvious global aspirants.

Ten months after I first began researching what it would take for a good Indian company to become a great global company, I'm struck by the one trait that sets apart the likely winners: they get it. They not only know what needs to be done to go global successfully, they also know how it must be done. It's almost as if they win the war before they set out to conquer the world.

That made me wonder: what makes these companies so confident about their globalisation strategy? Is there a conceptual framework that helps companies spot opportunities for going global, no matter what their size, scale, or industry might be?

I turned for help to Pankaj Ghemawat, a professor at Harvard Business School who specialises in strategy and the dynamics of globalisation "" and he didn't disappoint me. According to Ghemawat, when framing global strategy, most firms need to be clear on the two potentially profitable paths they might take. The first is arbitrage, which involves capitalising on differences or distance between countries. The second is replication, which entails making hay from similarities or proximity between countries.

Ghemawat's research shows that for several centuries, arbitrage dominated international economic activity. For instance, the 17th and 18th centuries saw the rise of great trading companies that essentially based their business models on the differences in the cost and availability of goods "" from spices to minerals "" between geographic locations.

Replication strategies, on the other hand, became more popular with the advent of the multinational, especially in the latter half of the 20th century. Companies like Coca-Cola and General Electric Medical Systems believed that globalisation essentially required extending a "superior" business model globally with some modifications, and thereby maximising the firm's economies of scale.

When "think global, act local" strategists began stumbling the world over, Ghemawat set out to solve the mystery of why globalisation was proving to be so tough for experienced multinationals. His prognosis, in "The Forgotten Strategy" (Harvard Business Review, November 2003): "In their rush to exploit the similarities across borders, multinationals have discounted the original global strategy: arbitrage, the strategy of difference... If they are to get their global strategies right in the long term, many companies will have to find ways to combine the two approaches, despite the very real tensions between them."

As many firms have learnt the hard way, exploiting strategies of similarities requires a different approach from pursuing strategies of differences. In the former "" aggregation "" competitive advantage comes from achieving scale and scope economies by standardising everything. The focus is on minimising the effects of distance by concentrating on foreign countries that are similar to the company's home base.

In the latter "" arbitrage "" competitive advantage is gained by trying to reap absolute economies through specialisation, and the goal is to exploit distance by operating in a more diverse set of countries. The trick to sustained success in global operations lies in striking the balance between the two.

At the outset, Ghemawat suggests that Indian companies with nascent globalisation strategies consider the full range of possibilities "" differences that make arbitrage a valuable tool as well as similarities that offer economies of scale "" to find every possible source of competitive advantage. Then, opt for the strategy that plays to your biggest strengths and minimises weaknesses.

Says Ghemawat: "India's emerging globalisers have to pull on multiple levers to maximise their potential."

Since the replication strategies followed by multinationals are often top-of-mind, Ghemawat urges Indian firms to consider global strategies based on differences. Arbitrage opportunities become obvious when firms consider the "distance" between the countries in which they want to do business.

Ghemawat measures distance on a four-dimensional "CAGE" framework (Click here for chart), which includes cultural differences, administrative differences, geographic differences, and differences in economic attributes. "Strategies associated with differences are systematically underappreciated in terms of how much potential value they can unlock," says Ghemawat. "For emerging globalisers, it's very important to think about arbitrage strategies."

It strikes me that the more successful Indian globalisers do exploit some form of arbitrage in their business models. The Indian software industry, for instance, leverages the economic arbitrage of low labour costs while Indian pharmaceutical companies sniff out administrative arbitrage opportunities by finding loopholes in the patent regime of regulated markets. What's truly exciting is that Ghemawat's framework opens up a world of opportunity for nearly every Indian company that chooses to go global.

The past 10 "Good to Global" columns focused on some of India's biggest companies; consider now the arbitrage strategies of some not-so-obvious global aspirants:

Cultural arbitrage

While differences in race, social norms, or language create distance between two countries, they can also be strong levers for building global presence. French cuisine and wines enjoy global cachet. So do American fast-food chains like McDonald's and Pizza Hut. For many Indian businesses "" from basmati to Bollywood "" cultural arbitrage is a quick ticket to globalisation.

"Products marketed to the Indian diaspora are a very obvious example of using cultural bridges across international boundaries. By selling to such a niche, firms can easily penetrate global markets," says Ghemawat.

That's certainly the tack the Vicco Group took. For years, the company marketed its Vicco Vajradanti toothpaste mostly to Indians all over the world. In the early 1980s, Chairman G K Pendharkar decided that he wanted to market Vicco toothpaste in the US to Americans. His first few attempts to sign on distributors in California backfired. Laughs Pendharkar: "Americans could not even pronounce the word 'ayurvedic', let alone understand it."

Pendharkar felt that if the Chinese could make capital from acupuncture and the Germans could make homoeopathy globally acceptable, an Indian company could take ayurveda global. He changed the brand name from Vicco Ayurvedic to Vicco Herbal Toothpaste, adapted the formulation to suit American tastes, and set up two distribution channels. That worked: a brand that once struggled to survive in California is available across the US today.

While one distributor sells the sweetened version of Vicco Ayurvedic to Indians by exclusively targeting Indian grocery stores, another sells unsweetened Vicco Herbal toothpaste through wholefoods supermarkets. Pendharkar's next goal: to put Vicco Herbal on the shelves of mainline supermarkets in all 52 US states.

Administrative arbitrage

Countries are often distant from each other because of historical or political legacies. Many also take measures "" imposing tariffs, trade quotas and regulations "" to create administrative distance. By exploiting tax differentials or finding innovative ways around the rules, companies benefit from administrative arbitrage.

Ghemawat points out that the tax exemption that the Indian software industry enjoys is a classic example of using administrative arbitrage to build a competitive edge. Though he is against protectionism, Ghemawat admits: "Companies can benefit by lobbying for preferential policy in certain kinds of businesses."

Usually, administrative arbitrage is not for the faint-hearted "" companies need to find a loophole here or bend a rule there "" but sometimes, it's a simple matter of taking advantage of differences in national policy. The Bush administration's ambivalence about stem-cell research, particularly embryonic stem-cell research, for instance, offers Indian life sciences companies a chance to conduct research on a level playing field.

The LV Prasad Eye Institute (LVPEI), a non-profit hospital based in Hyderabad, has figured that one out. Admits ophthalmologist G N Rao, who founded the hospital in 1986: "Stem cell research has given us a unique opportunity to be a global leader."

The hospital's Stem Cell Biology Laboratory has developed a process that allows it to culture adult stem cells in a lab and transplant them to the surface of the eye in order to cure corneal diseases. Clinical trials for the process have begun and Rao claims that LVPEI is pursuing a process patent. LVPEI then plans to work on embryonic stem cell research to find treatments for retinal diseases. According to Rao, the foray into stem cell research has already raised LVPEI's visibility.

The UK's National Health Services has approved LVPEI for referrals, and hospitals from as far as Paraguay, Indonesia, and China have asked to become partners. Rao is banking on stem-cell research to take his non-profit model global, and help fight blindness in developing countries. Says he: "Our research attracts bigger grants from agencies, and also helps bring in patients from other parts of the world."

Geographic arbitrage

The great trading companies of yore built global empires because of the price differentials between countries for raw materials, intermediate goods and finished goods. Ghemawat's research shows that even today industries such as electricity, natural gas, paper, live animals and sugar are sensitive to physical distance, while products like coffee, tea, cocoa, spices and gold are less sensitive to geographic distances. Add to the latter: telecommunications.

Reliance Infocomm was quick to spot a geographic arbitrage opportunity when it acquired FLAG Telecom in January 2004. FLAG's core assets were undersea cables with landing stations at key points across the globe. Right from inception, FLAG exploited geographic arbitrage opportunities across the globe.

FLAG's was the first privately-funded intercontinental cable to land in China, and tap the traffic in that rapidly growing market. In 2001, its North Asian Loop offered city-to-city linkages between the high-traffic centres of Hong Kong, Seoul, Tokyo and Taipei. And in February 2004, FLAG Telecom announced that it would set up a high-capacity loop cable system with landings throughout the Gulf region.

For FLAG's CEO Patrick T Gallagher, geographic arbitrage is as deeply embedded in his strategy as FLAG's cables are under the sea. Instead of having to construct multiple operations in multi-locations, the amalgamation enabled Reliance to use FLAG's offices and points of presence to serve specific markets.

The FLAG acquisition not only provided Reliance with access to global information highways, but also control over busy crossroads: from mature markets such as Europe and the US to emerging markets in Asia, West Asia and Africa. "Reliance knew that if it didn't have those arteries and highways, it could not exploit its core assets and core base, India," says Gallagher. "It was a master-stroke to combine the geographic spread "" the highways and arteries "" of FLAG with a very, very strong heart that is pumping away in India, at Reliance."

Economic arbitrage

Ghemawat points out that economic arbitrage strategy is possible when there are differences in the costs of labour and capital, differentials in industry-specific inputs such as knowledge and best practices, or differences in the availability of complementary products and technologies.

From Kashmiri carpets to Coimbatore cottons, Indian exporters have always sensed the opportunity for economic arbitrage, but only now are Indian companies learning to use it to build internationally-competitive businesses.

Take the Bangalore-based Biocon, whose Chairman and Managing Director Kiran Mazumdar-Shaw uses language that sounds uncannily like Ghemawat's. Biocon's global thrust, she explains, is based on "value differentials" "" think of it as economic arbitrage coupled with knowledge arbitrage.

Says Mazumdar-Shaw: "The competitive advantage that India has, which Biocon is taking full advantage of, is the cost and speed of innovation. Out-of-the-box thinking is very affordable in India, and by hiring highly qualified scientists, we can be extremely innovative. So, while one part is cost arbitrage, we also immediately derive value arbitrage because we focus on developing cutting-edge solutions."

Her math is simple. Mazumdar-Shaw reckons that, scientist to scientist, the wage differential between India and the rest of the world is between 33 per cent and 15 per cent. By projecting Biocon as a low-cost, high-quality generator of bio-pharma intellectual property, Mazumdar-Shaw says she hopes to clinch development partnerships that will allow Biocon maintain a well-primed research pipeline.

Her plan seems to be working. In October 2004, Biocon tied up with the North Carolina-based Nobex Corporation to develop oral insulin for the treatment of diabetes on a global scale. A few weeks later, Biocon announced a strategic partnership with the New York-based Vaccinex to co-develop antibody drugs for cancer, inflammation and auto-immune diseases.

While a successful product from either partnership will be huge for Biocon, what grabs my attention is Mazumdar-Shaw's tacit understanding of Biocon's relative competitive advantage while building global strategy.

"Platform companies (like Nobex and Vaccinex) have very smart science, but with risk capital drying up in the West, they don't know how to take it forward. Biocon allows them an affordable way forward. They don't just pay Biocon; it's a co-development partnership, and we share the intellectual property," she explains.

When I quiz her on the long wait to realise her global dreams, she laughs: "The numbers will come in a few years."

That's the kind of mind-set Ghemawat approves of. "The most powerful use of the CAGE framework is when a firm figures out which kinds of difference matter the most in its industry," says Ghemawat. "It seems an obvious step, but somehow, it's the one step many companies never end up taking."

It's a lesson emerging Indian globalisers should take to heart: thinking within the CAGE can lead to out-of-the-box global strategies.