Summary: The story of business today is one of a tension between the flattening effect of globalization and significant variation across international markets. The challenge will be to balance between these opposing forces and achieve both scale and local relevance. Below we lay out four priorities for rethinking globalization in a “polycentric” world.
4 priorities for succeeding in a “polycentric” world
1. Redefine global and local
The need for local relevance is demanding greater decentralization. Leading companies are adopting a more balanced approach whereby local autonomy is combined with globally consistent strategic direction, a shared corporate culture and set of values. This allows companies to draw upon capabilities and resources from anywhere in the world.
2. Develop a “polycentric” approach to innovation
Companies are increasingly decentralizing the innovation process. Rather than innovate centrally, then adapt or de-feature products to suit different price points, now products, processes or components are developed primarily with local markets in mind, but reapplied when appropriate in other markets.
3. Rethink relationships with government and tax administrations
Government is playing a bigger role in business than at any time in living memory. This new dynamic requires companies to think carefully about how they engage with the public sector. This requires companies to manage and anticipate potential risks on a global basis.
4. Build diverse leadership teams with strong global experience
The skills and capabilities that are required to succeed in fast-growth markets are different from those needed in more mature markets. While business success in developed markets has been more recently rooted in process and efficiency, emerging markets demand experimentation, risk-taking and entrepreneurship.
Convergence and divergence of East and West market potential
The convergence of market potential between East and West, along with a gradual economic recovery and growing interdependencies between sovereign states and multinationals, will ensure that globalization continues to deepen over the coming years.
Our second annual Globalization Index1 predicts that, after a brief pause in 2009, the overall average score for the world's 60 largest economies will increase steadily between 2010 and 2014
Figure 1: Overall average scores for globalization
Source: Globalization survey 2010
But on the other hand, the economic fortunes of developed and developing countries are diverging, with growth rates in China and India nearing double-digit levels, while growth in the US remains tentative, and some parts of Europe are struggling to sustain a recovery.
This is prompting different policy responses, from the tightening of monetary policy in some emerging markets to further stimulus and tax measures in the US.
Current account balances are heading in different directions, potential geopolitical tensions
Emerging markets are amassing huge surpluses while many developed countries plunge further into deficit. And, despite the emergence of the G-20 as a more inclusive “steering committee” for the global economy, the growing assertiveness of emerging economies and a gradual loss of primacy for the US could herald growing geopolitical tensions.
Customer needs vary wildly
Business environments and customer needs also vary considerably from one market to the next.
Spending power is an obvious example of this.
Although the gap is narrowing, per capita incomes in the world's largest economies range from around US$3,700 in China to US$46,000 in the US. This means that products and services created for one market are unlikely to be suitable for the other.
While the former encourages companies to roll out business and operating models globally, differences between markets demand a more localized approach. The future challenge for business will be to strike the balance between these opposing forces and achieve both scale and local relevance at the same time.
About this report
Winning in a polycentric world draws on three sources of original research: an online survey of 1,050 global business executives conducted in November 2010 by the Economist Intelligence Unit; a program of in-depth interviews with 20 senior executives and high-level experts conducted in November and December 2010; and The Globalization Index 2010 data, which measures the 60 largest economies by GDP according to their degree of globalization.
1 The Globalization Index developed for this report measures and tracks the performance of the world's 60 largest economies, according to 20 separate indicators that capture the key aspects of the cross-border integration of business. The indicators fall into five broad categories: openness to trade; capital movements; exchange of technology and ideas; labor movements; and cultural integration. The Index measures “relative” rather than “absolute” globalization. This means that a country's trade, investment, technology, labor and cultural integration with other countries is measured relative to its GDP rather than by the absolute value of the elements being exchanged. The Index, therefore, reflects the degree to which the global integration of a country is observable or experienced from within that country.