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Archive for the ‘Global Strategy’ Category

The start to the world’s biggest sporting event, the FIFA World Cup 2010, is a lesson in poor risk management.

No, it’s not the political risks of South Africa: The country has managed the event spectacularly. The flop is an over-engineered ball, the Jabulani.

The ball flew over the goalie’s nest…

In every match that I have watched, the vast majority of free-kicks have sailed over the goal. Most corner kicks and other set pieces have overshot their targets. Many long passes have bounced over the heads of the recipients.

Those shots that make it to the goal are harder to predict and grasp. Many top goalies, including Italy’s Gianluigi Buffon, Spain’s Iker Casillas, Brazil’s Julio Cesar, Australia’s Mark Schwarzer, and England’s David James, have sharply criticized the ball.

As I see it, the strategies of FIFA, football’s international governing body, and Adidas, creator of the official ball, might have been overtaken by a marketing obsession that was not grounded in proper risk analysis.

The lure of reward

Adidas wanted to create a ball that’s fast. FIFA wanted to increase pace in an already fast-paced game, a game without the type of “time-out” interruptions you see in typical American sports.

Adidas claims the ball is the roundest and speediest yet. The speed and flight would translate into more goals. More goals = more viewer excitement, especially in the world’s biggest underdeveloped football market, the United States. The hope is that millions of soccer fans, fueled by goals galore in the World Cup, will shell out $150 to buy this sophisticated ball, generating a nice chunk of cash for Adidas and corresponding royalties for FIFA.

The neglected risks

1. Altitude. Adidas blames the ball’s strange movement to altitude. It’s surprising that Adidas marketers and designers did not take this adequately into account. Most places in the world, and especially South Africa, require balls that would behave predictably in different playing conditions. People play football on grass and sand and dirt and streets, and in different altitudes, not inside a lab.

2. Lab-idealism. Which brings me to the second point. Adidas claims that the ball reacts the exact same way each time a robot kicks it. But on the field, human players kick it, and the ball behaves to the unpredictable twitches and curls of each individual foot in ways that surprise the players. The ball’s “Grip N’ groove” technology makes its movement closer to “true flight.” Well, Adidas, this is a football, something you kick around, not launch into space from NASA’s Kennedy Center.

3. Strike Rate. Adidas and FIFA knew the ball would be difficult for goalkeepers to handle, especially in the air, resulting in more goals. But did they count the risk of strikers not being able to predict the ball’s movement?No wonder then, that Brazil’s main striker Fabiano called the ball “supernatural,” before adding, “it’s very bad.” The chart above  shows the reality: scoring is at a historic low.

4. Aesthetics. The aesthetics of the “beautiful game” is important. It’s not just that set plays were overshot. Some of the goals ascribed–fairly or unfairly–to the ball’s unpredictability were downright ugly to watch. Even the Slovenian striker who scored a goal against Algeria said the goal was helped by a ball “really difficult to control.”

5. Goodwill. People are questioning if Adidas is really working for the good of the game. Why fix something that already works very well? Adidas’s strategy and glitzy ads are proving a bit static against the torrent of criticism that the ball is generating. Players have called the ball “a disaster” and even “the worst ball ever.” People are talking about boycotting Adidas products. Adidas has hinted that mainly teams sponsored by rival companies are criticizing the ball. But we fans are watching the World Cup, aren’t we? And the ball’s strange movement is clear. In the days of networked consumers, bad word travels real fast.

6. Revenues. Will all these affect the bottom-line? All else equal, yes. If professional football players are unable to predict how the ball will behave, why would ordinary people buy this expensive object to replace their trusted leather footballs? However, Adidas’s Jabulani sales have been good in the US, but it’d be interesting to watch Adidas’s share price here as the competition progresses.

The need for risk analysis

This fiasco, from both a product and public relations standpoint, could have been avoided if Adidas and FIFA had properly conducted risk analysis as part of their lofty marketing plans, and gave such analysis importance. They would have known then that the risks of spoiling the quality of the world’s greatest spectator event by introducing an untested, unpredictable product is unjustifiable, even from the bottom-line perspective.

The World Cup is not the stage for these experiments. Yes, the Bundesliga and MLS used the ball, but most leagues in the world did not. As Italy’s goalkeeper Buffon said, “The World Cup brings together the best players in the world and to those players you must provide something decent. The new ball is not decent.”

Football is the world’s most popular sport partly because the game is beautifully simple. All you really need is a ball. The whole game revolves around this round thing. But Adidas and FIFA may have taken their eyes off it.

Is Adidas willing to risk a quality flop at the World Cup in order to maximize short-term revenues? Well, in a competitive market, one’s mistake is another’s opportunity. So don’t be surprised if Nike or Puma or Reebok comes up with a glitzy ad of their own that makes fun of an over-engineered ball playable only by Wall-E.

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Many analysts are putting trust in Asia to pull the West up from the slump into which it has fallen due to its profligate appetite for credit. In addition to production and trade, The Economist recently hoped that Asian consumers would become shopaholics, like their Western counterparts. Never mind that rampant credit-fueled consumerism was a major part of the problem facing the West.

But a dose of reality was injected recently by Minxin Pei, who doubted Asia’s ability to fill in for the West. Pei wrote in an article in Foreign Policy: “Even at current torrid rates of growth, it will take the average Asian 77 years to reach the income of the average American.”

The problem with most economist-driven expections of Asia’s ability to pull the world out of a slump is that such analyses ignore the crucial part that politics, and states, play in economic globalization.

But if lack of ability is one issue, so is a possible lack of willingness.

Political scientists and political risk analysts for decades have pointed out that international financial movements take place only within parameters allowed by states. Ian Bremmer of the Eurasia Group recently restated that observation, from the angle that post-financial-crisis state capitalism is now the main decision-making prism.

What this means is that competition between states will inevitably dampen Asia’s ability and willingness to clean up the mess left by the West. As I have argued in my book, India’s Open-Economy Policy, India’s political rivalry with China, whether in securing energy or in inward foreign investment, will be the first influence on its international economic policies. China’s assessment of the US and Japan will determine its foreign acquisitions. US interpretation of Chinese influence in the Middle East and Africa will also temper cooperation toward free markets.

On top, you have respective Buy American and Buy Chinese policies. These have stayed below maximum so far — but put all of these together and the expectation that Asian consumerism or dynamic growth will be West’s savior is just economic optimism, not political reality.

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I grew up with Tintin comics. The young Belgian reporter’s worldwide adventures fueled my childhood imagination, as I traveled vicariously with him and his friends from Amazonian rainforests to the arid Sahara, learning to appreciate, as I grew older, the economic and political history that often underpinned many of the stories.

So I was thrilled when I read last year that Steven Spielberg, who had bought film rights to Tintin back in 1983, was planning a Tintin trilogy with Peter Jackson. The first installment would hit the theaters in 2009.

And I was equally devastated to read last month that Universal decided to pull out of the project, citing its exorbitant cost ($130 million) and Spielberg’s astronomical fee ($80 million).

Add to that Tintin’s obscurity in the US market, the uneven track record of a 3D motion-capture film to make big bucks, and an economy battered by the thundering typhoons of a credit crunch. As Universal’s risk-averse decision began to make more sense, my heartbreaking distress began to grow.

And then… globalization comes to the rescue!  Bollywood, to be precise. With a $500 equity injection, Reliance Entertainment takes a 50% stake in a restructured Dreamworks, ensuring that Tintin will see light of day, followed by dozens of other movies produced by the studio.

Reliance can market Tintin not just across India’s enormous movie market. It will attempt to do so across the rest of the old world, where the hero remains hugely popular. Just like Tata is hoping Jaguar and Land Rover to be its vehicles for a worldwide expansion, Reliance will probably piggyback on Tintin to newer markets beyond India and the US.

Globalization’s discontents aside, I can’t think of a better win-win situation for this case: Tintin saved, risks distributed, money made, millions of fans satisfied.

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The business of a global organization is ultimately a collection of local realities. Even companies like Lenovo that pride themselves of being a HQ-less networked organization in the end needs to succeed in local markets.

Their success depends on achieving a difficult balance. The first part of this involves enticing the local populace with sharing in a global value. In the 1980s, Levis jeans was attractive to rock music listeners across the world: the brand symbolized a common bond. Apple’s iPod is a contemporary example. One’s local experience becomes part of a global community; and that gives people–though it may sound tacky–a sense of belonging. It’s basically global community created through the local marketplace.

The other part of the equation is the local experience. Call it the global tuned to the local. This is an essential trait, according to a recent Washington Post article, of companies that one “cares about,” that is, companies that create an emotional attachment in their customers. It can’t be measured in numbers, directly at least. It’s amorphous, qualitative, another manifestation of that sense of belonging.

The article identifies four US companies–Starbucks, Apple, Google, and Amazon–that have been globally successful in creating local followers. They, the SAGA, have balanced standard global services and products somehow with an intensely local customer base, and they’ve done it through transforming “some important aspect of contemporary life.” Ledbetter and Weisberg, the authors of the article, go on to note:

Each has had an appreciable impact on our daily routines, taken on a looming presence in popular culture, and often engendered an intensity of feeling more often associated with tastes in entertainment or political views. Together, they have created a new model of business innovation, culture and values.

So while McDonald’s becomes the recipient of anti-globalization political backlash, these companies blend much more easily into their environments. While each company is a giant, to the local customers they don’t seem like “monoliths imposed on other countries from abroad.”

This is the challenge, the benchmark, for global brands: can they create local stakeholders who would provide cultural, emotional, and very importantly, political, support through the turbulence of an increasingly globalized world?

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There’s a new book out by BCG consultants called Globality. The idea is that doing business is not the same anymore, because as a firm, whether you like it or not, whether you know it or not, you are “competing with everyone from everywhere for everything.”

The consulting company I founded with two other partners, Red Bridge Strategy, is based on the exact same premise, corroborated by my own academic research on globalization. Harold Sirkin, James Hemerling and Arindam Bhattacharya, authors of Globality, argue that the leanest, hungriest, and sometimes the most profitable competitors you’ll meet are usually from the emerging markets. They list 100 such “challengers.”

Hyper-competition has been real for quite some time. Challengers from emerging markets, in the shape of companies as well as national policies, have also been around for quite some time. But what’s unclear is what this means for you, the medium-sized business, and how you navigate successfully in these treacherous waters.

Large, established multinationals are used to competitive environments and have the resources to engage in elaborate strategic planning and execution processes to shape and react to complex competition. But many smaller businesses, most of whom may be focused not just on a domestic market segment, but even more narrowly, on a regional market segment, are unaware of what globality means for them.

In our work, we emphasize this as the first step: understand the extent of your competitive environment and the implications for the business. But this requires some analysis that most businesses are still unwilling to take on a regular basis.

The second challenge is that the few who are well-aware of hyper-competition often fall into a risk-exaggeration trap. That is, their analysis is driven by competitive threats and not complemented by detailed analysis of competitive opportunities. But this is where the value of analysis begins to show compellingly.

The third challenge is to then figure out a way to both manage the risks and unlock the opportunities. And here, in a hyper-competitive world, it is crucial that strategies are fully customized. In the olden days, many consulting firms used a toolset or standard methodology successfully. It worked when the number of players (markets and firms) was limited. It does not work as well under hyper-competition where uncovering opportunities require innovative thought. It is here–in understanding opportunities from ‘globality’ and acting to seize them–that a lot of value remains dormant for medium-size businesses.

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To start with, my “G” doesn’t stand for globalization, it stands for the G-8, the leaders of the industrial powers, who are now meeting for their annual summit in Hokkaido, Japan.

They’re meeting in troubled times. The distributional issues of globalization–the fact that the benefits are shared extremely unequally–have finally come to the fore, especially now that consumers of the West are feeling the pinch from rising food and energy prices.

The public is in agreement about the inequality stemming from globalization. The Christian Science Monitor reports: “The majority of the public in 27 out of 34 countries surveyed said the benefits and burdens of economic change are not being shared fairly.”

The problem is not inequality per se. The problem is the global political risk associated with it. Expect electoral turbulence around the world, expect accelerated shifts in international relations, expect the Saudis and China to get more influence as the global role of the West comes under question.

In his Washington Post column, Jim Hoagland came down particularly hard: “The world that these leaders and their predecessors have promised for the past three decades is not today’s world of energy and food-price shocks, global financial irresponsibility, menacing climate change, and terrorist networks seeking weapons of mass destruction. The G-8 leaders — most of them disdained by their publics in these hard times — have failed, and they should accept responsibility.”

No wonder, then, that the UN Secretary General cautioned on the eve of the summit: “Never in recent memory has the global economy been under such stress.”

Some argue that the G-8 needs to be expanded to a G-20 to make the group more representative and thus assure better global management. Hoagland rightly suggests more focused economic management, centered around a G-3: US, EU, and Japan. But neither will be sufficient. The first will be impossible to manage; the other is out of touch with global shifts.

A forward-looking concept of economic management should balance representation, future outlook, and focused manageability. It’s time to think of a G-4: US, EU, China, and India. Fixing energy problems or financial excesses across borders, and battling climate change or global terrorists will all fail without the active involvement of the two most populous (and increasingly assertive) countries of the world.

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I’m posting excerpts from an article of mine published recently in China Daily.

‘Going Global’ Seems Tough Journey

By Jalal Alamgir, China Daily, 19 May 2008

More and more firms from Asia are going global. According to United Nations data, between 2005 and 2006, China’s outward investment increased by 32 percent to $16 billion, one of the fastest.

State-owned companies are responsible for the bulk of China’s overseas investments. But does this mean that smaller private companies are left out? No, foreign investment in most sectors shows a pattern: large investments by a few big firms, and numerous small investments by small firms. Small and mid-size companies have also been going global.

Cross-border interactions

What does ‘going global’ mean for small and mid-sized companies? It means recognizing and structuring cross-border interactions as part of the firm’s business. These interactions can take many shapes. A firm can have customers, distributors, or suppliers in foreign countries. One can spread business functions, commonly done in services such as outsourcing. One can pursue a financial strategy, spreading assets under different jurisdictions through hedge risks. But small and mid-sized companies are more likely to follow a haphazard path; that is, [unlike large multinationals] they often do not approach globalization strategically…

Substantial risks

Can smaller firms afford to neglect globalization? … Even those midsize firms that play exclusively in the domestic Chinese market need to develop an understanding of how the external economy impacts them. And their domestic strategies need to be renewed periodically in light of this understanding. This is becoming critical for success in highly competitive markets.

The first part of this understanding relates to risk. Unlike many other governments, China has successfully cushioned the economy from external risks, a success that has earned it laurels since the Asian Financial Crisis in the late 1990s. But the global economy has evolved. Risks are increasingly intertwined; they now spread more rapidly from one region to another. Any government will find multiple risks, from oil prices to food inflation to political instability, harder to manage simultaneously.

This environment is particularly threatening to midsize firms. The first part of their globalization strategy, therefore, should be informed by a strategic risk management approach. It requires a bit of research into understanding overall risks to the firm, the industry and the economy, the level of control over these risks, strategies to mitigate them, and implementing a flag-raising mechanism that kicks in toward suggesting alternative strategies when risks increase.

Global opportunities

Beyond risk, the global economy, of course, offers manifold economic opportunities. To maximize them, a midsize firm will once again need to put on its strategic hat. It will need to juggle multiple geographies and products, and understand and manage them on a timeline from present to future.

But doing this successfully requires two fundamentals that mid-market firms in emerging economies cannot take for granted. The first is information [on how to go global] … While information sources are not available easily in the public domain, there are boutique firms that specialize on providing information on how to go global, from marketing and selling, to tax, laws, and regulations, to organizational structure and communication, to infrastructure needs, and to managing people.

The second is a strategic mindset or capability. An example will make this clear. To make use of global opportunities, many firms decide to acquire another firm abroad. But acquisition is the easy part. Most firms struggle to manage the post-acquisition reality because they have either not thought through the strategies or neglected to build the capabilities ahead of time. And so, almost 70 percent of all mergers and acquisitions fail to deliver the intended results. Here, too, specialized consulting firms that focus on capacity development in a global context can help.

Like it or not, the world economy is a reality even for domestic-focused firms, and the value of global information and strategy is something that mid-size firms can no longer afford to ignore.

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