You must think global in today's world
This week’s reading of Redefining Global Strategy by Pankaj Ghemawat had some very different ideas, than previous readings. Ghemawat believes that we are not heading to an era of extreme free trade or full globalism, but rather that we will experience semi-globalization. This semi-globalization will not happen in all countries of the world, but rather focus on the rather large economies that are close to home.
This week I would like to discuss Ghemawat’s idea of “ADDING” value. The concept of why we should globalize is one that doesn’t appear to be discussed much, but rather that globalization is inevitable. The idea that globalization is good and that globalization is the key to be successful, the real question that is rarely asked is why/should we globalize?”
Ghemawat’s adding value scorecard gives you a way to answer this question and if in fact help you decide whether or not you should globalize. Having never managed a global company before, I would like to take this “adding” value idea on a level that many may understand. I enjoy investing and personal finance, so let me use an example of making an investment by using the “ADDING” value scorecard that Ghemawat outlines. The first part of adding value is whether or not you are truly adding growth. Does investing more money lead to an increase in return? Or is your money tied up in a stagnate market with subpar returns? This is the first question you must answer. If you come to the conclusion that this additional investment of capital will yield little or no return then why invest it? The next part of adding value is decreasing your costs. Going back to our investment example, will addition trades help lower your commission costs or decrease any fees that may be associated with your investment? If the answer is yes than it would be in your best interest to make the investment, which would allow you to hold onto more of your money. The third objective of adding value is that does it allow you to increase the willingness-to-pay of the product or service. If you are choosing a stock you should look for one that is continuously increasing in price and highly sought after. If you cannot find one that appears to be providing any return, than you have no value added in this category. The next value Ghemawat discusses is improving your bargaining power. If additional investment allows you to position yourself to make decisions or even allow you to leverage your investment to guarantee a higher yield. The last two categories of adding value are for minimizing risk and increasing your knowledge. He discusses that globalization can be a good way to normalize risk, like his example of Cemex corporation. Taking this concept to our investment example, will making this additional capital investment lead to a more diversified portfolio and minimize some market risks? Or on the other side are you taking enough risk to gain the returns you are looking for. During this step is crucial that you look not just at limiting risk, but possibly looking at any benefits that may come with increasing risk. The final category is just a catchall for any other general knowledge you may gain with the investment or other resources that may come along with the investment.
One final thing I thought was interesting was Ghemwat’s idea of the CAGE framework. In this frame work he discusses why large economies that are close in distance and cultural differences tend to trade more than other countries. This idea got me thinking about this in my own purchasing habits. Let’s say I have just run out of milk, and I must have a glass of milk now. Even though there may be a small convenient store located very close, I chose to drive just a bit farther to Super-Wal-Mart to get this milk. Why is this? In this case Super-Wal-Mart would be a model of a large economy in which has used cultural similarities that I have seen on TV advertising to reach me (cultural distance), and since there is no law that says I cannot go to Wal-mart (administrative distance) , and since Wal-Mart is fairly close to me (geographical distance) and since I can afford to shop at Wal-Mart and they are likely to have a gallon of milk (economic distance) I chose to drive to Wal-Mart and purchase a gallon of milk. This may not be the best example, since this is a perishable good, but it gives you an understanding of possibly how this CAGE framework can be used to describe why we make the decisions we do.
