Is there a globalization penalty?

Kevan Hall takes a final look at this McKinsey Quarterly article, “The past and future of global organizations” by Wouter Aghina, Aaron De Smet, and Suzanne Heywood. In it, the article proposes the existence of a “globalization penalty”.

..high-performing global companies consistently score lower than more locally focused ones on several critical dimensions of organizational health, according to a decade-long study—of hundreds of businesses—that we highlighted in a (McKinsey) 2011 Quarterly article. These critical dimensions include direction setting, coordination and control, innovation, and external orientation.

Our research and experience suggest that the existence and persistence of a “globalization penalty” isn’t just a function of today’s context, typified by rapid growth in emerging markets and technological change. It also reflects the continuation of a journey that global organizations have been on for many years. Continually remaking the organization to embrace change is a messy endeavor—and one that’s likely, at any given time, to be accompanied by growing pains.

It is an interesting way of putting it. Is this an inevitable penalty? To some extent yes, there are obviously additional costs in operating at a global level of scale and complexity – change is harder and more expensive. The costs of coordination and communication are higher. But this masks the benefits. The reason that organizations have earned the right to have these complex problems is that they were excellent at solving simpler problems. Most organizations don’t grow and survive. To become global you need to be pretty great at something.

Global operations can bring scale, synergies, access to diverse talent and learning. These are powerful counterweights to the globalization penalty. Bringing these to bear makes a compelling alternative to the greater flexibility of less complex and more nimble local competitors. Where local competitors win it may be fine to talk about a globalization penalty but, as is often the case, where the global company wins it might be better to think of it as a globalization investment.

It’s also worth revisiting what the McKinsey study identified as critical dimensions of the globalization penalty, “direction setting, coordination and control, innovation, and external orientation.” None of these are about grand strategy, complex organization structures or sophisticated systems. All of them are about how people manage and work together.

Reorganizing won’t solve these problems, they require people to develop new skills and embed change and ways of working that are capable of delivering results in this more complex environment. So to avoid the globalization penalty, invest in your people.

Global leadership and collaboration are complex and the skills are different from leading and collaborating in a less complex environment. Global leadership is not just local leadership plus cultural awareness. It’s embedding an understanding of getting things done across distance, cultures, time zones, through technology and in complex matrix or network organization structures, into our everyday management routines and habits.

Source: “The past and future of global organizations”: by Wouter Aghina, Aaron De Smet, and Suzanne Heywood, published by McKinsey Quarterly, September 2014.

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