How can companies sustain their competitiveness across business cycles in an ever more disrupted world? CKGSB Professor of Managerial Practice Stone Shi addressed this pertinent question in the context of Chinese companies’ globalization at the Harvard Business Review China Annual Conference on 26-27 October, 2023, in Beijing.
Since its inauguration in 2014, the Harvard Business Review China Annual Conference has been serving as a platform for management theories and practices from China and abroad to fuse and sparkle new management thinking. At this year’s conference, Professor Shi shared his analysis of the current globalization landscape and of Chinese companies’ strategies on market expansion.
Moderator: There are many definitions for and words related with “globalization”, such as globalization in reverse, anti-globalization and re-globalization. How do you define globalization as it is now?
Shi: When you look at globalization at the micro level, it actually means how companies conduct business across borders in a different country. From this perspective, we can define globalization from the following four dimensions.
First, the geographical distance. For example, China may have more transactions with Japan than with the United States, because of the two countries’ proximity. Second, the economic distance. Economic distance measures the gap in affluence between two countries, such as the per capita GDP levels. China’s annual per capita GDP is about USD 12,000, while that of the United States is nearly USD 80,000. Compared with the United States, China may have a narrower economic distance with Malaysia.
Also, cultural distance, which refers to the similarity of distinct cultures. A closer cultural distance between two countries might lead to more exchanges. For instance, China has a closer cultural distance with Indonesia than with the United States and, hence, this may mean there are more industrial exchanges between China with the former.
Last but not least, the institutional distance, which is actually the most important dimension. Take Spain and Argentina as examples. Spain shares a lot in common with Argentina in areas such as language, institutions and rules, as Argentina used to be its colony. In a way it makes it easier for Spain to do business with Argentina than with countries like the United States.
To summarize, geography and economy are short-term factors affecting globalization. However, culture and institutions have a more profound and far-reaching impact.
Moderator: If you could describe the current globalization in one word, what would it be?
Shi: I’m not sure if words like globalization in reverse or re-globalization are accurate. I think nowadays globalization is spiraling upward. It is like a “three steps forward, two steps back” process. The growing wealth gap worldwide may propel us toward de-globalization in the short term. But in the long run, the universal values pursued by all mankind will contribute to further globalization. These two forces—the economic gap and the underlining values—are wrestling in two different directions and will heavily shape our globalization progress.
Moderator: In the “three steps forward, two steps back” globalization process, businesses are definitely facing more complexities as well as potential opportunities. Some of them are now actively expanding overseas while others are retreating back to their home markets. Amid the fluctuations of the market, what types of companies are more suitable to expand their global footprint? What types of companies should return to their domestic market?
Shi: This is a good question. Rather than answering whether companies should go global or focus on their home turf, I would like to talk about how different companies should adjust their growth strategies.
Here I will share three points, including two adjustment directions and one development direction. The two adjustment directions are applicable to different enterprises. For smaller companies, I suggest that they shift from a globalization strategy to a regionalization strategy. Take Transsion Holdings, a Chinese smartphone manufacturer, as an example. Instead of expanding globally, it has chosen to delve into the massive market of Africa and conduct business in that regional market.
For larger enterprises, however, they can consider a “localization and nearshoring” strategy. For example, an Asian company with the United States as its main market now may need to shift part of its supply chain to Mexico, which is closer to the U.S. market. A nearshoring capacity can help it satisfy the market’s seasonality orders. In the meantime, it can choose to produce traditional and standardized orders in Asia under its localization strategy. The two strategic elements offer companies immense flexibility and resilience.
One development direction is digitalization. Companies cannot afford to not leverage the boom of the digital economy, and short videos in particular, during their market expansion.
Companies cannot afford to not leverage the boom of the digital economy, and short videos in particular, during their market expansion.
Moderator: Have Chinese companies created new competitive advantages in their overseas expansion? In today’s world, what new capabilities do companies need to equip themselves with?
Shi: Among all of the capabilities, value connection is key. I can explain this idea with three cases.
The first case comes from a manuscript I reviewed a few years ago, which was written by a professor at Harvard Business School and was about a story of an American company investing in France.
Usually a company will have a “liability of foreignness” when entering the market of another unfamiliar country, mainly due to unfamiliarity with the local culture, laws and regulations.
The common workplace practice in the United States is to emphasize that if you do a good job, you will get more money; while France has very strong labor unions and emphasizes equality for everyone. For example, a CEO cannot have a separate office, and his/her salary cannot be particularly high.
Therefore, to avoid the outside disadvantage when entering the French market, that American company implemented a localization strategy that followed the French workplace culture, which emphasized equality for everyone, and did not set up a separate office for the CEO. However, they found that this strategy did not work at all.
Through in-depth research and interviews, the professor found that the French employees believed the values of the two sides are different and the American parent company did not truly embody the French system but was simply applying the localization strategies on the surface.
The second case I wanted to share is about SHEIN, which has recently undergone significant hurdles in Europe and was even sued.
ZARA once changed the entire clothing industry, shortening the time from design to final product to about 10 days. However, after SHEIN entered the European market, it accelerated the turnover cycle to 1-2 days, which means that European consumers can buy new products on their mobile phones every day. What seems like a blessing for consumers is looked at differently by EU’s business authorities as they believe SHEIN is encouraging European consumers to change new clothes more often than necessary, which will generate more clothing waste and are consequently hurting the environment.
Both cases can boil down to conflicting values. To succeed in the global market, companies must learn to build a “value connection strategy” that allows them to truly connect with individuals and entities in a different culture.
So what is a value connection strategy?
Let’s look at the third case on Starbucks. Starbucks has been very successful in entering China. How did it sell coffee in a country with no tradition of coffee consumption?
We can find the answer in Starbucks’ corporate mission. “With every cup, with every conversation, with every community, we nurture the limitless possibilities of human connection.” The care for people and for people connection is an idea that people from various cultural backgrounds will resonate with.
For companies who want to enter the global market and build their own brands on high-value products, finding a value that customers in the target market will resonate with and buy in is going to minimize the “liability of foreignness” and ease the market entry with minimized local hostility.