Forming Stronger Bonds with People at Work 01-23

Connecting with others is at the heart of human nature. Recent research emphasizes that the power of connections can help us be creative, resilient, even live longer. But we can easily overlook the importance of these bonds. As popular writer and researcher Adam Grant has noted, the pressure of tight deadlines and the pace of technology mean that fewer Americans are finding friendship in the workplace. In fact, many of us are further disconnecting from the people we work with: we’re more stressed out than ever, and half of us regularly experience incivility in our jobs.

How can we create possibilities for connection in what is sometimes a hostile atmosphere? We believe there needs to be more compassion.

We define compassion as a 4-part experience of noticing someone’s distress or pain, interpreting it as relevant and important, feeling concern for that person or group, and acting to alleviate their pain. As we talk about in our book, Awakening Compassion at Work, acts of compassion can span from grand and coordinated to small and personal.

Consider Patty, who was worried about returning to work after the death of her husband. The thing she dreaded most was arriving at an empty desk on Monday mornings because for the past 15 years Patty’s husband had ordered flowers to be delivered early on Monday mornings. Every Monday, a beautiful bouquet — and a symbol of their life together — graced Patty’s desk.

Summoning up her determination, Patty walked into the office. After saying hello to a few people, she moved toward her desk and caught a glimpse of a colorful bouquet of flowers waiting there. She fought back tears as she read a note from her coworkers, who also did not want her to come back to an empty desk. They cared for her so much that they had collected funds across the entire office and made arrangements for a fresh bouquet of flowers to be delivered every Monday for a year.

Compassion, whether a coordinated gesture or an individual one, increases meaning at work — and not just for Patty, but also for her colleagues and for all the people who see this human response unfold. Being compassionate changes how we see the value of the people who are part of our work world, shifts how we see ourselves, and helps us to see our organizations as more humane.

Our research highlights four ways that people can bring more compassion to work.  

Sharpen Your Skills in Noticing Suffering

Signs of suffering at work are often subtle. Professional norms dictate that it’s not safe to express too much emotion, making it hard to see pain. Attuning ourselves emotionally to patterns in our colleagues, and making ourselves more physically and psychologically available, makes us better at picking up on what’s happening.

Alex described noticing that his coworker Ming-Jer was not enjoying the holiday party. Despite not knowing Ming-Jer well, Alex was concerned. He began by simply asking, “How are you doing, Ming-Jer?” Alex discovered that Ming-Jer was struggling with a chronic illness that was straining his finances and his relationships. Alex told us how much closer the two have become since that moment, and how meaningful the connection has made other aspects of his workplace.

Perfect Your Capacity for Inquiry

Norms about keeping personal and professional life separate can make it awkward to ask personal questions. Organizations such as Accenture and EY are now offering training programs on how to inquire in ways that fosters compassion. Asking “Are you okay?” is one example. This kind of question, asked in a genuine way with comfortable time and space, may increase a sense of safety and open space for compassion. That’s what happened with Alex and Ming-Jer.

When asking directly is too difficult, you can turn to someone who has a closer relationship to share your concerns. In one organization we studied, an employee had been a victim of domestic violence and several of her colleagues felt it wasn’t appropriate to talk with her directly about it. Instead, they shared their concerns with her friends at work who relayed the messages. These intermediaries also became coordinators, organizing a collection of donations and delivery of meals. Asking intermediaries for updates became an effective way for lots of people to participate in creating compassion at work during a difficult, sensitive situation.

Tune into Your Feelings of Concern

Sensing and understanding the distress of another person is often accompanied by a feeling that researchers call empathic concern — a warm desire for the other person to be well. This kind of emotion arises more easily when we know that we have something in common.

When we studied students who lost everything in a fire and the way their university organized a response, we found that a faculty member who had also lived through a fire became a very effective organizer. Her shared experience helped her advocate for resources such as emergency funds, new clothing, computers, and even housing.

But having the prior experience wasn’t the only route to common ground. A fellow student, who had never been involved in a fire, was able to tune into his own deep empathy and concern for his classmates. He used the motivation that flowed from this feeling to facilitate the coordination of books and class notes that allowed full replacement of each student’s customized study materials — again increasing the meaningfulness of their school program for everyone who participated in the effort to respond.

Unleash Your Creativity with Compassionate Actions

Societal norms often give us a script to follow when we encounter pain or distress: offer condolences, ask whether there is anything we can do to help, and send a card. While these scripts can be helpful, they often fall short of being meaningful to the receiver.

In one nonprofit organization we studied, an executive’s nephew was killed in a tragic accident just before an important board meeting. Instead of a scripted response, colleagues brainstormed several resourceful ways to take action, including excusing him from attending the board meeting, taking on urgent tasks so that he didn’t have to focus on them, donating their vacation days to him, collectively writing a poem to send to the family, and organizing a tribute to share at the memorial service.

Too many people think of compassion and connection with others as a nice-to-have in organizations. But if people feel like they belong and genuinely care about one another, they will be more creative, resilient, and eager to contribute at work. It’s tempting to ignore distress, and suffering and pretend like they have no place in our offices. But the human experience of pain is going to show up, whether we invite it or not, and the only way to respond is with compassion.

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How Customer Service Can Turn Angry Customers into Loyal Ones 01-18

Good customer service seems like common sense for businesses. But how valuable is it really?
Until now, this has not been rigorously quantified across different companies. Businesses are understandably reluctant to share their CRM and sales data, and most research in this field has been based on surveys. But as more Americans seek customer service online, social media offers a better platform for analyzing interactions between service reps and customers.

Using data from Twitter (where one of us works), we designed an experiment to study customer service interactions in two industries that generate a significant number of customer service complaints: airlines and wireless carriers. We found that prompt and personal customer service does indeed pay off —  customers remember good and bad customer service experiences, and they’re willing to reward companies that treat them well.

We identified more than 400,000 customer service-related tweets sent to the top five major airlines (American, Delta, JetBlue, Southwest, and United) and top four wireless carriers (AT&T, Sprint, T-Mobile, Verizon) in the U.S. from March 2015 to April 2016. Our sample of tweets was comprehensive, including complaints, questions, and comments. Since all tweets are public, we could review the entire conversation between the customer and the customer service agent (except direct messages) and code the interaction for attributes such as customer sentiment and tone (e.g., Is the interaction praise or scorn? Is the customer happy or angry?)

We then contacted these customers on Twitter, up to six months after they tweeted at the companies, and invited them to take a brief survey. Without providing a reason for the survey, we asked them to participate in a common market-research exercise called conjoint analysis to see if their customer service experiences affected how they valued the brands.

For example, for customers who had tweeted at airlines, the conjoint asked them to imagine buying a ticket for a two-hour non-stop flight. They had to choose between several combinations or “offers” that varied across dimensions such as airline, seat type, on-time arrival rate, and fare — similar to how customers would shop for fares on sites like Kayak or Expedia. We offered a similar exercise for wireless service customers.

From the conjoint exercise, we could discern what value, in dollar terms, customers attributed to their preferred airline. On Twitter, 1,877 users completed the conjoint exercises – 673 of them had received responses from companies, 375 received no response, and 829 had no customer service interaction and served as our control group for baseline willingness to pay.

We then tested our hypothesis: do customers who had a positive interaction with a brand’s customer service representative value that brand more? Or in management parlance, when a brand provides better customer service, will customers reward that brand with greater loyalty or pay a price premium?

Good Customer Service Matters on All Platforms

Customers who had interacted with a brand’s customer service representative on Twitter were significantly more likely to pay more for the brand, or choose the brand more often from a comparably-priced consideration set, compared to our control group of customers who had no such interaction. On average, across all tweets and regardless of whether the customer used a negative, neutral, or positive tone, we found customers who received any kind of response to their tweet were willing to pay almost $9 more for a ticket on that airline in the future. This extra $9 can be thought of as incremental brand value the airline has gained in the customer’s mind. In other words, all else being equal, a customer would be willing to buy a ticket from the airline even if the airline cost $9 more than its competitors.

We found similar results for wireless carriers. Customers who received any kind of response to their tweet were willing to pay $8 more, on average, for a monthly wireless plan from that carrier in the future, compared to the control group. Unlike airline tickets, wireless plans are monthly and recurring, so an $8 per month higher premium can lead to a significant revenue boost.

We also surveyed customers on their likelihood to recommend the brand to others, so we could derive a Net Promoter Score (NPS), a common measure of customer loyalty. We found that receiving a response improved NPS by 37 points for airlines and 59 points for wireless carriers, consistent with our findings from the conjoint exercise. (This bump is significant considering NPS scores range from -100 to 100.) In addition, these effects held up for at least six months after the interaction, suggesting some permanence to the positive impact of good service.

Respond to Customers, Even If They’re Upset

The connection between good customer service and brand loyalty may seem intuitive. What’s more surprising is that seeking to engage an angry or confrontational customer can also have a positive effect on brands.

Handling angry customers is a daily task for any customer service rep. While most companies do earnestly try to solve customer problems, inevitably there are some problems that cannot ever be fixed — the canceled flight that causes you to miss your sister’s wedding, or the dropped calls during your critical business negotiation. In many cases, there is little a company can do to redress a customer’s specific grievance.

But sometimes customers are just looking for a little empathy. When customers used a negative or even an angry tone in their initial tweet to a brand’s customer service team, we saw that the best approach was to respond to negative comments instead of ignoring them.

In our study, simply receiving a response — any response at all — increased the customer’s willingness to pay later, even in cases where customers were aggrieved. While successfully resolving an issue created more brand value (about $6 for our airline sample), responding without providing a resolution was still worth about $2 in added brand value for airlines.

We found even larger effects for wireless carriers. For customers who received no response, we found no statistically significant change in their willingness to pay. But, customers who got any response to their negative tweet were on average willing to pay $7 per month more for a wireless plan from that company than customers who got no response. For cases where the issue was resolved, they were willing to pay $8 more; if the agent was unable to resolve the issue, they were still willing to pay $6 more.

The lesson for managers is to reply to every customer service comment online, even the proverbial “I’ll never fly your airline again!” A mere acknowledgement of the customer’s problem can defuse initial frustration and put the customer back on the road to loyalty. Instead of the customer seeing the company as the enemy, a sympathetic response can reorient the situation so that the customer now feels that the company is on his or her side.

That being said, don’t ignore your happiest customers. We found the highest increases in willingness to pay actually came when businesses responded to customers who tweeted a positive comment at the company. Receiving a response to a positive comment generated $28 more for a future airline ticket and $12 more per month for wireless plans. Customers who say good things about your business are your advocates and your brand loyalists. You can demonstrate that you value them by acknowledging them and thanking them for their loyalty.

Good Service Happens Fast

As important as it is to respond to every customer issue, it is even more important to respond quickly. We observed that a brand can capture substantially more value by replying right away. When an airline responded to a customer’s tweet in five minutes or less, that customer was willing to pay almost $20 more for a ticket on that airline in future months. Similarly, wireless customers were willing to pay a whopping $17 more per month for a phone plan when they received a reply within five minutes.

Customer service representatives need to move fast to capitalize on these opportunities. For airlines, we found that after 20 minutes had elapsed, customers were only willing to pay $3 more, a decrease of 85% in value compared to customers who received responses in five minutes or less. After an hour, customers were only willing to pay $2 more. We found that the median time airlines took to respond to the tweets in our sample was about 20 minutes, meaning that at least half of all airlines were leaving significant money on the table.

While we were only able to measure the response time for interactions on Twitter, we believe fast responses can generate goodwill in all customer service channels. In our study, a response time of five minutes or less meant the airline ranked in the fastest 20% of response times in our data. We expect to see similar effects, regardless of channel, as long as the company is responding faster than customer expectations. (The average customer expects companies to help them within 5 minutes by phone, within 1 hour by social media, and between 1-24 hours for email.)

These patterns also held even if the customer’s complaint was unresolved, meaning that even a short acknowledgement of the customer’s issue and reassurance that the agent is looking into it can pay off. This is consistent with other psychology research showing that we dislike the uncertainty of making a request to someone and hearing nothing back.

Customers Are People, So Be Personal

Another insight from our research is the value of making a personal connection with a customer requesting support. Personalizing a message by typing a few extra characters can make a huge difference. Customers who received an unsigned response showed no detectable increase in willingness to pay compared to the general population. But, when a customer service agent added their name or initials in their first reply to a customer, we observed that their willingness to pay increased by $14 for a future flight on that airline compared to those who received an unsigned response. Similarly, in the wireless industry, customers were willing to pay $3 more for a monthly plan if the agent signed their name compared to those who received an unsigned response.

When agents sign their name in their tweets or posts, it humanizes them and helps customers feel that the company, or at least someone within the company, is on their side. Customers are also likely to feel more comfortable following up about an issue later if they have the name of the employee who helped them.

As consumers turn to a wider array of channels for help and expect faster responses, it has become more challenging to provide customer service. Bottom-line pressure restricts what companies are able to provide without breaking the bank. Our research shows that customer service that shows empathy can drive a lot of value, and there are some simple best practices to turn aggrieved customers into loyal advocates.

First, surprise customers by responding quickly, so that they feel someone is watching out for them. Even a simple acknowledgement to buy time to diagnose the customer’s issue can drive future revenue. Second, don’t shy away from responding to unhappy customers, even if you can’t immediately resolve their issue. Finally, even small gestures such as having agents sign their names or initials creates immediate value for your business.

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Globalization in the Age of Trump 01-18

Business leaders are scrambling to adjust to a world few imagined possible just a year ago. The myth of a borderless world has come crashing down. Traditional pillars of open markets—the United States and the UK—are wobbling, and China is positioning itself as globalization’s staunchest defender. In June 2016, the Brexit vote stunned the European Union, and the news coverage about globalization turned increasingly negative in the U.S. as the presidential election campaign progressed.

One week after Donald Trump’s inauguration, with fears of a trade war spiking, the Economist published a cover story, “The Retreat of the Global Company,” in which it proclaimed that “the biggest business idea of the past three decades is in deep trouble” and that “the advantages of scale and…arbitrage have worn away.” And Jeffrey Immelt, GE’s chairman and CEO, has talked about the company’s “bold pivot” from globalization to localization.

But is a mass retreat from globalization really the right approach for companies in these uncertain times? Or, short of packing up and returning home, should they focus on localization—that is, producing and even innovating where they sell—as the strategy of choice? Not according to my research. Recall that as recently as a decade ago, business leaders believed that the world was becoming “flat” and that global companies, unconstrained by country borders, would soon dominate the world economy. Those exaggerated claims were proven wrong. Today’s cries for a massive pullback from globalization in the face of new protectionist pressures are also an overreaction, in the other direction. While some of the euphoria about globalization has shifted to gloom, especially in the United States, globalization has yet to experience a serious reversal. And even if it did, it would be a mistake to talk about the end of globalization: The “rewind” button on a tape recorder shouldn’t be confused with the “off” button.

A full-scale retreat or an overreliance on localization would hamper companies’ ability to create value across borders and distance using the rich array of globalization strategies that are still effective—and will continue to work well into the future. Today’s turmoil calls for a more subtle reworking of multinationals’ strategies, organizational structures, and approaches to societal engagement. In this article, I address common misperceptions about what is—and isn’t—changing about globalization, offer guidelines to help leaders decide where and how to compete, and examine multinationals’ role in a complex world.

The Trajectory of Globalization

Doubts about the future of globalization began to surface during the 2008–2009 financial crisis. But as macroeconomic conditions improved, the gloom gave way to a murky mix of perspectives. For example, within the span of just three weeks in 2015, the Washington Post published an article by Robert J. Samuelson titled “Globalization at Warp Speed” and a piece from the editorial board called “The End of Globalization?”

In the face of such ambiguity, it is essential to look at the data. To see how globalization is actually evolving, Steven Altman and I compile the biennial DHL Global Connectedness Index, which tracks international flows of trade, capital, information, and people. The two index components of greatest business interest—merchandise trade and foreign direct investment—were hit hard during the financial crisis, but neither has suffered a similar decline since then. Trade experienced a large drop-off in 2015, but that was almost entirely a price effect, driven by plunging commodity prices and the rising value of the U.S. dollar. Updated data suggests that in 2016 foreign direct investment dipped, in part because of the U.S. crackdown on tax inversions. Complete data for 2016 is not yet available, but factoring in people and information flows will probably reinforce the conclusion that globalization has stayed flat or even increased.

What has nose-dived, however, is the tone of public discourse in the United States and other advanced economies. An analysis of media mentions for the term “globalization” across several major newspapers—the Wall Street Journal, the New York Times, and the Washington Post in the U.S. and the Times of London, the Guardian, and the Financial Times in the UK—reveals a marked souring of sentiment, with scores plummeting in 2016.

The contrast between the mixed-to-positive data on actual international flows and the sharply negative swing in the discourse about globalization may be rooted, ironically, in the tendency of even experienced executives to greatly overestimate the intensity of international business flows relative to domestic activity. In other words, they believe the world is a lot more globalized than it actually is.

Exaggerated perceptions about the depth of globalization—that is, how much activity is international versus domestic—come at a cost. In surveys I’ve conducted, respondents who overestimated the intensity of globalization were more likely to believe erroneous statements about international business strategy and public policy. When businesspeople think the world is more globalized than it really is, they tend to underestimate the need to understand and respond to differences across countries when operating abroad. In the public policy sphere, leaders tend to underestimate the potential gains from additional globalization and to overestimate its harmful consequences for society.

Surveys suggest that people also underestimate the breadth of globalization—that is, the extent to which international activity is distributed globally rather than narrowly focused. In a 2007 survey of Harvard Business Review readers, 62% of respondents agreed with the quote from Thomas Friedman’s best-selling book The World Is Flat that companies now operate on “a global, Web-enabled playing field that allows for…collaboration on research and work in real time, without regard to geography, distance or, in the near future, even language.” However, data shows that actual international activity continues to be dampened strongly by all those factors.

To counteract such “globaloney,” I offer two laws that govern, respectively, the depth and breadth of globalization:

• The law of semi-globalization: International business activity, while significant, is much less intense than domestic activity.
• The law of distance: International interactions are dampened by distance along cultural, administrative, geographic, and, often, economic dimensions.

These principles, set out in my book The Laws of Globalization, can be very helpful for strategy making—if they can be counted on to apply in the future. Given surging protectionist sentiments and possibly even a trade war, will they continue to hold? The best way of stress-testing them—at a time when the precise policies of the Trump administration and other governments are still unclear—is to look at the last time a major trade war broke out, in the 1930s, which led to the largest reversal of globalization in history. Two major lessons, corresponding to the two laws of globalization, stand out.

The first lesson is that although trade dropped precipitously in the 1930s, it did not dry up entirely. The collapse that began in 1929 was staggering, and by early 1933, trade flows had plummeted by two-thirds. That said, the drop-off in value reflected a fall more in prices than in quantities, which declined by less than 30%. Even in the wake of the collapse, trade volumes continued to be far too large for business strategists to ignore.

The second lesson is that distance of various sorts continued to dampen international business activity. For example, from 1928 to 1935, the relationship between trade flows and geographic distance barely budged. The beneficial effects of a common language and colonial ties remained powerful: Country pairs with such ties continued to trade about five times as much with each other as pairs without such ties, all else being equal. The net result was that the trading partners with whom countries (or groups of countries) did most of their business before the crash remained largely unchanged afterward.

Getting back to the future: If global trade didn’t screech to a halt in the 1930s, it’s reasonably safe to say that it won’t in the 2020s, either. In fact, analyses of what a trade war under Trump might look like suggest much smaller declines in trade than occurred in the 1930s. Moody’s Analytics estimates that if the United States were to impose proposed tariffs on China and Mexico and those two countries retaliated in kind, that and other factors would shrink U.S. exports by $85 billion in 2019. That’s only about 4% of total U.S. exports in 2015. Of course, a wider trade war would have a more significant effect, but it is very unlikely that the consequences would be as dire as in the 1930s.

Similarly, if the breadth of trade didn’t change much despite the drastic declines in depth during the Great Depression, it probably wouldn’t change much in the event of a trade war today. It is worth adding that with many more independent countries now, as well as more vertically fragmented supply chains, the estimated effects of geographic distance on merchandise trade are actually larger than they were in the 1930s.

Where to Compete

If cross-border interactions in the aggregate are unlikely to fade away, what is the rationale for individual multinationals’ pulling back? The recent Economist article on the retreat of global companies, which has stirred significant discussion, pointed to the performance problems they have experienced. But the declines over the past three to four years occurred in an environment of plunging commodity prices, dropping demand for globalization-related services, and, for U.S. companies, shifts in exchange rates—factors that clearly played outsize roles in the performance numbers. And longer-term declines over the past decade coincide with a period in which globalization actually slowed down.

To argue that poor performance problems over this period should force reconsideration of multinationalization would be like arguing that Singapore, the most deeply connected country in the world according to the DHL Global Connectedness Index, should pull back from globalization because of the growth problems it has experienced since the financial crisis. The latest report of Singapore’s official Committee on the Future Economy dismisses that notion, saying that globalization through trade, capital, and knowledge flows is still the future, as far as Singapore is concerned. And even in countries much less dependent on exports than Singapore is, a wholesale pullback from globalization would be counterproductive.

Even when economic conditions are favorable and globalization is advancing rapidly, as was the case several decades ago, multinationals can face performance issues. My 2003 HBR article, “The Forgotten Strategy,” notes that between 1990 and 2001, Fortune Global 500 companies consistently posted lower average returns on sales for their foreign operations than for their domestic ones. Given the difficulties implied by the law of distance, multinationalization has always been an option, not an imperative. Some firms—and industries—clearly overdid it, especially in the years leading up to the financial crisis.

What’s lacking in much of the debate today is the notion of contingency: a case-by-case approach in which a globalization-related move is evaluated on its own merits rather than subjected to some sweeping injunction about whether to go forth and globalize or to come back home. That said, many multinational companies do need to pay renewed attention to where they compete—in other words, to market selection.

They must also resist the idea that a truly global company must compete in all major markets. Some 64% of the respondents to the 2007 HBR survey agreed with this (non)dictum, yet an analysis of internal financial data from 16 multinationals around that time indicated that eight of them had large geographic units that destroyed value after their financing costs were taken into account. Such problems still persist. Toyota, for example, seems to be the only major competitor in the highly globalized auto industry that has managed to build up significant market share in Japan, North America, and Europe and in key emerging economies—while remaining highly profitable. By contrast, most major automakers would be better served by following the example of GM, which shed its loss-making European operation, Opel, in March 2017.

Recent data on companies ranked among the top 100 with the most assets located outside of their home countries tells a similar story. While these companies tend to operate in dozens of countries, their top four markets—including their home market—account for about 60% of their revenues and probably a larger slice of total profits. And only a single-digit percentage of the Fortune Global 500—the world’s largest firms by revenue—earn at least 20% of their revenue in each of the “triad” regions of North America, Europe, and Asia-Pacific.

In sorting out which markets to focus on, it’s important to note that the law of distance applies to foreign direct investment as well as trade. Although FDI is less sensitive to geographic distance than trade is, I estimate the effect of a common language and a colony-colonizer link to be similar and FDI to be more sensitive to differences in per capita income.

So as companies today weigh their options, they should look for opportunities where they can find cultural, administrative/political, geographic, and economic affinities. This resonates even more strongly as we recall that country relationships became even more important during the 1930s. As the political environment shifts, business leaders need to keep a careful eye on how their home countries are realigning their international ties, and engage in their own corporate diplomacy.

Remember too that staying at home is an option. Only about 0.1% of the world’s firms are multinationals, although since multinationalization is highly skewed toward larger firms, this greatly understates their overall impact. (Their foreign affiliates generate 10% of global GDP, and the multinationals themselves account for more than 50% of world trade.) For companies based in large emerging economies, focusing on the domestic market, where they enjoy home court advantage as well as rapid growth, can be a particularly attractive proposition.

Leaders must resist the idea that a global company has to compete in every market.

Of course, trade can occur without multinationalization, and this is what some tout as the wave of the future: The Economist points to “a rising cohort of small firms using e-commerce to buy and sell on a global scale.” But e-commerce is still significantly less internationalized than off-line commerce. And in light of changes brewing in the policy environment, this seems like a particularly inauspicious time to think that one can go global just by setting up a website or joining an online platform.

How to Compete

If you conclude that your company should continue to do business in a variety of markets, you still need to figure out whether to change the type or mix of strategies that you use in response to protectionist pressures. At a high level, globalization strategies have three components, as described in my 2007 book, Redefining Global Strategy.

Companies use adaptation when they want to adjust to cross-country differences in order to be locally responsive. They use aggregation to achieve economies of scale and scope that extend across national borders. And arbitrage strategies are used to exploit differences, such as low labor costs in one country or better tax incentives in another.

How companies should use these three strategies will change somewhat in a protectionist world—but perhaps less than you’d think. Take adaptation. Jeffrey Immelt isn’t alone when he talks of his company’s “bold pivot” away from aggregation and the importance of “localizing” in today’s environment. Firms should look for opportunities to amp up their adaptation efforts, because becoming more responsive to differences can help reduce the impact of protectionism.

The most obvious way for a company to adapt is to vary products, policies, market positioning, and so on to suit local markets. However, each variation increases costs and complexity. Therefore, smart adaptation typically involves limiting the amount of variation as well as finding ways to improve the effectiveness and efficiency of any changes that are introduced. For example, companies can design common platforms upon which local variants are offered. Or they can externalize some of the costs of adaptation via franchising, joint ventures, or other types of partnerships.

But while more adaptation may make sense, multinationals should not automatically put it above all else—doing so would only undercut their sources of competitive advantage relative to local competitors. Global companies—especially those from advanced economies—typically justify their cross-border strategies primarily on the basis of aggregation. In the most classic cases, they invest in intangible technological or marketing assets that they can scale across national borders. Those advantages normally have to be pretty large in order to overcome the home court advantage of local competitors. The economic rationale for aggregation won’t evaporate for multinationals that have built a healthy, profitable business in foreign markets—even if some countries make it more expensive to operate within their borders. Companies that have operations in markets where they’re only marginally successful, on the other hand, may need to retrench.

Turning to arbitrage, the opportunities for vertical multinationals to globalize on the supply side rather than on the demand side have narrowed somewhat in recent years, but they still remain large. Even with rising prosperity in large emerging markets, U.S. GDP per capita is still seven times that of China, and 33 times that of India. Differences in tax regimes across countries are not going away either, and will continue to provide arbitrage opportunities. According to the OECD, the dispersion of corporate tax rates across countries has barely changed since 2007, and progress at curbing tax havens has been slow. Furthermore, cross-country differences in safety, health, and environmental standards continue to persist as well—although exploitation of these differences raises ethical concerns.

Multinationals coming out of emerging markets tend to get their start from advantages rooted in arbitrage—competing abroad on the basis of low costs at home. This strategy continues to be the engine that drives the growth and profitability of India’s offshore IT services industry—which inspired Friedman’s The World Is Flat, kicking off a wave of interest in arbitrage strategies. More than a decade later, programmers’ salaries in India are still just a fraction of those in the United States, and cost reduction remains the top reason companies choose to outsource. The largest India-centric vendors have far outstripped their Western competitors in terms of both growth and profitability, and as of June 2016 the top four India-centric vendors enjoyed market valuations more than 50% larger than those of their top four Western competitors.

As companies from advanced and emerging countries joust for global leadership, each has to shore up its traditional weakness—for incumbents, that’s arbitrage; for insurgents, it’s aggregation. For example, developed-world incumbents in IT services, such as Accenture and IBM, have expanded their workforces in India, while Indian companies are trying to strengthen their brands and technological capabilities.

Returning to GE, Immelt’s pivot toward localization does imply a boost to its adaptation strategy. But GE—like most other multinationals—cannot give up on aggregation or arbitrage. GE’s aggregation-based advantages are what underpin its ability to compete across 170 countries. Its $5.5 billion R&D machine yields world-beating technological innovations, its $34 billion brand value opens doors everywhere, its famous management-training programs both attract and cultivate talent, and its scope across products, services, and geographies all contribute to GE’s immense cross-border aggregation potential. And while Immelt’s remarks shrewdly downplay wage arbitrage as “what GE did in the 1980s,” in contrast to its current focus on selling more abroad, arbitrage has become sufficiently ingrained at the company over the past few decades that it will probably not disappear and will continue to be part of its globalization strategy. In my view, GE’s “localization” strategy is best understood as one that retains a core strength in aggregation while toning down the company’s prior emphasis on arbitrage and becoming more adaptive.

Engaging with Society

Along with where and how to compete, questions about how to engage with society are becoming increasingly prominent on business leaders’ agendas. Except in highly regulated industries, companies have historically treated interactions with governments, media, and the public as an afterthought in setting strategy. But now, as Martin Reeves of BCG points out, “In many cases companies are seeing bigger impacts from political and macroeconomic factors than from competitive considerations.” Those factors, he says, include Brexit-driven exchange rate movements, share price fluctuations in response to policy pronouncements, and the cost of changing investment plans in light of anticipated shifts in trade policy. I would add to the list the rise of NGOs, the proliferation of social media, and increases in anti-globalization sentiment.

Companies are constrained in their responses to these developments by a range of factors. First of all, the backlash against globalization is also—in part—a backlash against big business. The general reputation of business is at an all-time low. In a recent survey, the Pew Research Center asked respondents in the U.S. how much people in 10 occupations contributed to the well-being of society. Business executives ranked next to last, ahead only of lawyers. Just 24% of respondents said they thought business leaders contributed “a lot.” The 2017 Edelman Trust Barometer also reports an all-time low for CEO credibility. And companies’ decisions about how to deploy the reputational capital that they do possess are complicated by tensions between a country’s citizens and its government—Uber CEO Travis Kalanick ran into problems with public perception when he joined Trump’s business advisory council, for example—as well as by uncertainties about how the broader environment will evolve.

In such a context, just speaking up more about social issues—as business leaders today are often instructed to do—is no panacea. While it is hard to offer simple instructions about how to cope with these complexities, the law of semi-globalization does suggest one injunction and one insight. First the injunction: Falling in line with what governments want wherever a company operates is unlikely to be a sustainable strategy. Multinational companies need to craft governmental and societal agendas that are both localized and linked across countries. Anti-globalization pressures require that multinationals deliver more local benefits—and communicate about them—in the countries where they operate. Such efforts must go well beyond compliance to include contributions in the form of jobs, technology, and so forth.

The backlash against globalization is also—in part—a backlash against big business.

Of course, there are dangers to shifting too far toward localization. Consider how IBM responded to the rise of the Nazi regime in Germany. Rather than pulling back—even as it became clear that the census IBM was supporting was being used to identify Jews for persecution—IBM sought to grow its business with the Nazi government. In 1937, then-CEO Thomas Watson was awarded—and accepted—a medal from Hitler for “service to the Reich.” One would hope that such a strategy would not even merit consideration today.

The law of semi-globalization affords an important insight as well: Addressing much of our current malaise—including but not confined to anti-globalization sentiment—requires domestic policy changes rather than the closing of borders. For example, one of the principal complaints about globalization today is the sense that it has contributed to rising income inequality and that a large swath of the population in advanced economies has been left behind. In the U.S., income inequality has recently risen to levels last seen in the 1920s, and other countries, especially developed ones, have registered similar, if less dramatic, increases. Meanwhile, corporate profits are running close to their highest historical levels.

The widespread perception that globalization is primarily to blame for this problem, however, is empirically implausible. Most research suggests that technological progress and (in the United States) the decline of unions have been bigger contributors to inequality than globalization. Corroboration is supplied by real-world examples: If the Netherlands can preserve a more reasonable income distribution despite having a trade-to-GDP ratio six times that of the United States, it seems odd to blame globalization for the much higher level of inequality in the U.S. economy. And even if one is inclined to point fingers at globalization, it is clear that protectionism is a much more expensive solution than government safety nets, increases in the minimum wage, changes in tax policy, job-training programs, and the like. Such policies are not typically favored by big business, so corporate voices advocating them make a powerful statement. Furthermore, closing borders does nothing to prepare a country to deal with the automation-related threats to jobs that dominate the debate about the future of work.

My research into the 2011 book, World 3.0: Global Prosperity and How to Achieve It, offers an in-depth evaluation of the various harms attributed to globalization. (I expected the present backlash to arrive several years before it did.) Some, such as the risks associated with international imbalances in trade and investment, are indeed real and significant. Most others, however, turn out to be overblown in relation to actual levels of international integration. For example, the contribution of international air transportation to energy-related greenhouse gas emissions is only one-tenth as large as British air travelers estimated in a survey. To deal with global warming, it would be far more effective to tackle bigger sources such as housing or driving. My research suggests that international openness should be coupled with targeted domestic policies in addressing such side effects as globalization does have.

That perspective is, of course, the opposite of President Trump’s apparent preference for domestic deregulation and international intervention, which brings me to my last point—which may seem politically partisan but is rooted in the common notion that a company’s market and nonmarket strategy should be in alignment. If your company is or may eventually be global, it’s not a good idea to actively support policies that build up barriers to trade and capital flows, make people less mobile, and delegitimize the idea that companies can contribute to the well-being of people in more than one country—even if all you care about is shareholder value. Over the long run, companies that rely heavily on sourcing from abroad (such as Walmart) and those that export far more than they import (such as GE) would benefit from joining forces to oppose protectionism.

CONCLUSION

In his classic 2006 Foreign Affairs article Samuel Palmisano, then chairman and CEO of IBM, pointed out that 150 years ago, companies that crossed borders engaged mostly in trade, but by the early 1900s, they had started to invest in localizing production. He also proclaimed the recent emergence of a new corporate form, the globally integrated enterprise, for which “state borders define less and less the boundaries of corporate thinking or practice.”

From today’s perspective, that seems too rosy by half. But there is some good news for those tasked with leading multinational companies. First, the global corporation never became nearly as integrated as Palmisano prophesied, so the amount of change required if globalization does go into reverse is less than people might think. Second, it’s still unclear whether a retreat from globalization will occur: International activity has stagnated in recent years but has not fallen off significantly. And third, even if globalization suffered a violent reversal similar to that experienced at the beginning of the 1930s, the world would still remain more globalized in terms of trade and foreign direct investment than it was in the 1920s, let alone in the 19th century. So reverting to the multinational structure of 100 years ago or the trade-based structures of 150 years ago strains plausibility. Globalization strategy and practice have advanced well beyond the prescriptions those historical models would imply, and leaders would be ill-served by going backward. 

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