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Ten years ago, globalization seemed unstoppable. Today, the picture looks very different. Even Coca-Cola, widely seen as a standard-bearer of global business, has had its doubts about an idea it once took for granted. Local people get thirsty and…buy a locally made Coke.

Oversight over marketing is returning to Atlanta. Since , the foreign operations of large companies have consistently posted lower average returns on sales than their domestic operations. Nor do foreign revenues work as a hedge against slumping domestic results. As the graph below clearly shows, foreign and domestic margins generally move in the same direction.

Based on data supplied by Michael Gestrin of the OECD, the graph compares the foreign and domestic operating margins for of the companies in the Fortune Global for which such data were available for at least six years.

Of course, an international presence could theoretically add value even if international operations were persistently less profitable, in accounting terms, than domestic operations. Say, for instance, that significant fixed costs incurred at home can be avoided by entering foreign markets.

But other recent studies, based on market values rather than accounting data, also tend to indicate that, on average, an international presence impairs performance instead of improving it.

Such studies are certainly subject to many caveats about data, inferences of causality, and so on. And in any case, they reflect average tendencies around which there is substantial—and predictable—variation. So one should not conclude from them that individual companies ought never expand beyond their home countries.

A more sensible lesson to draw is that companies need to think harder about how globalization can add value instead of assuming that if they are profitable at home, they will surely be profitable abroad. Why is globalization proving so hard to get right? The answer is related in part to how companies frame their globalization strategies. From this perspective, the key strategic challenge is simply to determine how much to adapt the business model—how much to standardize from country to country versus how much to localize to respond to local differences.

Recently, as at Coke, many companies have moved toward more localization and less standardization. But no matter how they balance localization and standardization, all companies that view global strategy in this way focus on similarities across countries, and the potential for the scale economies that such commonalities unlock, as their primary source of added value.

Differences from country to country, in contrast, are viewed as obstacles that need to be overcome. Correctly choosing how much to adapt a business model is certainly important for extracting value from international operations. But to focus exclusively on the tension between global scale economies and local considerations is a mistake, for it blinds companies to the very real opportunities they could gain from exploiting differences.

Indeed, in their rush to exploit the similarities across borders, multinationals have discounted the original global strategy: arbitrage, the strategy of difference. In fact, many forms of arbitrage offer relatively sustainable sources of competitive advantage, and as some opportunities for arbitrage disappear, others spring up to take their place.

I do not claim that arbitrage to exploit differences is any more a complete strategic solution than the optimal exploitation of scale economies. To the contrary: If they are to get their global strategies right in the long term, many companies will have to find ways to combine the two approaches, despite the very real tensions between them.

Arbitrage gets little respect these days as a global strategy. This partly reflects the tendency of companies to equate size with a global presence, which naturally focuses the mind on scale economies rather than on the absolute economies that underlie arbitrage. But it also reflects the fact that arbitrage has been around for so long.

Many of the industries in which arbitrage has historically been applied—farming, mining, and textiles—are regarded as low-tech and mature. There is also the sense that well-run global enterprises have already reaped what competitive advantage they can from arbitraging such generic factors of production as capital or labor, which, as one leading management guru has put it, can now be sourced efficiently with the click of a mouse.

But arbitrage is about much more than cheap capital or labor although these, as we will see, continue to be very important. Indeed, the scope for arbitrage is as wide as the differences that remain among countries, which continue to be broad and deep.

I argued that distance could be measured not only by geography but also by the extent of differences in culture, differences in the administrative and institutional context, and differences in economic attributes which all together I call the CAGE framework. Arbitrage strategies have in fact long exploited differences in culture. For example, French culture or, more specifically, its cachet abroad has long underpinned the international success of French haute couture, cuisine, wines, and perfumes.

But cultural arbitrage can also be applied to newer products and services. Consider, for example, the extraordinary international dominance of U. Nor, certainly, is this advantage reserved for rich nations; many poor countries are important platforms for cultural arbitrage. Think of Haitian compas music and dance music from the Congo, which enjoy image advantages in their respective regions.

Claims that the scope for cultural arbitrage is decreasing over time are clearly not true for all countries and product categories. The persistent association of Brazil with football, carnival, beaches, and sex—which all resonate powerfully in the marketing of youth-oriented products and services—illustrates the unexploited potential of some countries in this regard, though in this case the potential is starting to be recognized.

The lesson? Make IT management boring. Rigorously evaluate expected returns from IT investments. Separate essential investments from discretionary, unnecessary, or counterproductive ones.

Explore simpler and cheaper alternatives, and eliminate waste. Start imposing hard limits on upgrade costs—rather than buying new computers and applications every time suppliers roll out new features. Negotiate contracts ensuring long-term usefulness of your PC investments.

If vendors balk, explore cheaper solutions, including bare-bones network PCs. Delay IT investments to significantly cut costs and decrease your risk of buying flawed or soon-to-be obsolete equipment or applications. Today, smart IT users hang back from the cutting edge, buying only after standards and best practices solidify.

They let more impatient rivals shoulder the high costs of experimentation. Then they sweep past them, paying less while getting more. Many corporations are ceding control over their IT applications and networks to vendors and other third parties.

The consequences of moving from tightly controlled, proprietary systems to open, shared ones? More and more threats in the form of technical glitches, service outages, and security breaches.

Focus IT resources on preparing for such disruptions—not deploying IT in radical new ways. In , a young Intel engineer named Ted Hoff found a way to put the circuits necessary for computer processing onto a tiny piece of silicon.

His invention of the microprocessor spurred a series of technological breakthroughs—desktop computers, local and wide area networks, enterprise software, and the Internet—that have transformed the business world.

Today, no one would dispute that information technology has become the backbone of commerce. It underpins the operations of individual companies, ties together far-flung supply chains, and, increasingly, links businesses to the customers they serve. Hardly a dollar or a euro changes hands anymore without the aid of computer systems.

In , according to a study by the U. But the veneration of IT goes much deeper than dollars. It is evident as well in the shifting attitudes of top managers. Twenty years ago, most executives looked down on computers as proletarian tools—glorified typewriters and calculators—best relegated to low level employees like secretaries, analysts, and technicians.

It was the rare executive who would let his fingers touch a keyboard, much less incorporate information technology into his strategic thinking. Today, that has changed completely. Most have appointed chief information officers to their senior management teams, and many have hired strategy consulting firms to provide fresh ideas on how to leverage their IT investments for differentiation and advantage.

What makes a resource truly strategic—what gives it the capacity to be the basis for a sustained competitive advantage—is not ubiquity but scarcity. By now, the core functions of IT—data storage, data processing, and data transport—have become available and affordable to all. They are becoming costs of doing business that must be paid by all but provide distinction to none.

IT is best seen as the latest in a series of broadly adopted technologies that have reshaped industry over the past two centuries—from the steam engine and the railroad to the telegraph and the telephone to the electric generator and the internal combustion engine. For a brief period, as they were being built into the infrastructure of commerce, all these technologies opened opportunities for forward-looking companies to gain real advantages.

But as their availability increased and their cost decreased—as they became ubiquitous—they became commodity inputs. From a strategic standpoint, they became invisible; they no longer mattered.

That is exactly what is happening to information technology today, and the implications for corporate IT management are profound. Many commentators have drawn parallels between the expansion of IT, particularly the Internet, and the rollouts of earlier technologies. Little has been said about the way the technologies influence, or fail to influence, competition at the firm level. Yet it is here that history offers some of its most important lessons to managers.

A distinction needs to be made between proprietary technologies and what might be called infrastructural technologies. Proprietary technologies can be owned, actually or effectively, by a single company. A pharmaceutical firm, for example, may hold a patent on a particular compound that serves as the basis for a family of drugs. An industrial manufacturer may discover an innovative way to employ a process technology that competitors find hard to replicate.

A company that produces consumer goods may acquire exclusive rights to a new packaging material that gives its product a longer shelf life than competing brands.

As long as they remain protected, proprietary technologies can be the foundations for long-term strategic advantages, enabling companies to reap higher profits than their rivals. Infrastructural technologies, in contrast, offer far more value when shared than when used in isolation. Imagine yourself in the early nineteenth century, and suppose that one manufacturing company held the rights to all the technology required to create a railroad. If it wanted to, that company could just build proprietary lines between its suppliers, its factories, and its distributors and run its own locomotives and railcars on the tracks.

And it might well operate more efficiently as a result. But, for the broader economy, the value produced by such an arrangement would be trivial compared with the value that would be produced by building an open rail network connecting many companies and many buyers.

The characteristics and economics of infrastructural technologies, whether railroads or telegraph lines or power generators, make it inevitable that they will be broadly shared—that they will become part of the general business infrastructure. In the earliest phases of its buildout, however, an infrastructural technology can take the form of a proprietary technology. As long as access to the technology is restricted—through physical limitations, intellectual property rights, high costs, or a lack of standards—a company can use it to gain advantages over rivals.

Consider the period between the construction of the first electric power stations, around , and the wiring of the electric grid early in the twentieth century. Managers at the steelmaker lead by staying out of the way. Of course, frontline employees and managers can make good decisions only if they have access to relevant, up-to-date information. Technical discoveries and best practices are held close to the vest. The winning companies in our study spent considerable time, money, and energy on programs and technologies designed to force open the boundaries and get divisions and departments cooperating and exchanging information—and it paid off.

Winning companies are convinced that their future rests not on the brilliance of their executives but on the dedication and inventiveness of their middle managers and employees. Many people would argue that among the secondary practices of evergreen business success—talent, innovation, leadership, and mergers and partnerships—excellence in at least talent and leadership is every bit as mandatory as excellence in each of the four primary practices.

The winning companies in our study complemented their strengths in the four primary practices with superior performance in any two of the secondary practices. The best sign we could find that a company had great talent was the ease with which any executives who were lost to competitors could be replaced from within.

The winners in our study hired chief executives from the outside half as often as the losers did. So the winners that chose talent as one of their secondary practices demonstrated a distinct preference for developing and promoting their own stars and an ability to retain their top performers.

A commitment to promote from within is meaningless unless the company offers training and development that can prepare employees for new jobs in the company and creates conditions that encourage employees to enroll rather than penalize them for taking time away from their jobs.

Not long ago, the assumption was that upwardly striving employees were solely responsible for preparing themselves for higher-level positions.

No more. The first program prepares employees to become baking technicians. By providing workers with detailed knowledge about operations and equipment in its high-tech plants, the company prepares them to move off the production line and into technical roles. In the second program, Flowers sells its delivery routes to workers who have the requisite training and expertise to take them on.

The goal is to give employees an opportunity to own their own businesses. A talented employee can be just as valuable and hard to replace as a loyal customer. About half the winners in our study excelled in the talent practice, and these companies dedicated major resources—including personal attention from top executives—to building and retaining an effective workforce and management team. It is a fallacy that companies must choose between promoting from within and hiring outside talent. Winning companies do both; a talent-rich environment tends to attract able people from outside a company.

What passes for technical achievement in most companies—marginal improvements to existing products, for example—would never satisfy organizations that excel at innovation. Innovation also includes the ability to foresee and prepare for disruptive events. But the interesting thing about this practice is that despite voluminous research into which structures most effectively encourage innovation, we found no correlation between the sources the winners in our study used and the general sources of innovative business ideas.

Any one of the winners might have relied successfully on one or more of those sources, but none proved essential to the winners as a group. What the group had in common was the ambition to lead the way with major, industry-changing innovations and a willingness to cannibalize offerings, resisting the temptation to wring every last cent out of an existing product before introducing another to take its place.

Schering-Plough, for instance, is a confirmed cannibal. It actively turns its prescription-only medications into lower-priced, over-the-counter ones, automatically displacing the originals. But sales of OTC drugs typically double or triple quickly. At Home Depot, as well, cannibalization is routine. When a store becomes so popular that employees can no longer maintain a customer-friendly atmosphere, the company opens another outlet nearby.

Given the copious literature on corporate innovation, it might be expected that most of our winning companies would have excelled at innovation. In fact, a bare majority did so—which underscores how difficult this practice is. Innovation is not to be entered into lightly.

So the choice of a new chief executive is just as important as the choice of whether to stay in the same industry or enter a new one.

It made little difference whether senior managers relied on quantitative or qualitative assessments to make key decisions. Certain CEO skills and qualities do matter, however. One is the ability to build relationships with people at all levels of the organization and to inspire the rest of the management team to do the same. CEOs who present themselves as fellow employees rather than masters can foster positive attitudes that translate into improved corporate performance.

When David Johnson was chief executive at Campbell Soup, a winner in our study, he constantly sought ways to reach out to employees. He led managers on wilderness trips to build esprit de corps. Even the best-intentioned among them made little effort to reach out to the front line.

Some leaders rely on intuition. Others create special groups within the organization assigned to stay abreast of changes in everything from politics to demographics. Still others engage outside consultants or academics to watch for changes in the marketplace. Though their methods vary, effective leaders help their companies remain winners by seizing opportunities before their competitors do and tackling problems before they become troublesome nightmares.

He was quick to realize when the Internet bubble burst that Cisco would have to write off inventory and otherwise restructure itself. His willingness to react swiftly allowed Cisco to bounce back much faster than its rivals did.

No discussion of leadership would be complete without mentioning the board of directors, not least because good boards tend to choose good CEOs. And what defines a good board? Innovation is one way to drive growth. Pursuit of mergers and partnerships is another. The winners in our study appeared to make better choices: In the deals we analyzed, they created value in most of the deals they struck, generating returns in three years that exceeded the premium paid.

By contrast, the losers destroyed shareholder value in most of the deals they did. Winners and climbers shared no single motivation in their determination to buy or join with other organizations. Some were seeking cross-selling opportunities, others wanted economies of scale, while still others were simply chasing market share. Cardinal had become an industry leader in quality service, and Whitmire had a high-quality customer base. The deal allowed Cardinal to bring its services to a new set of customers, lifting the company into the upper ranks of its industry.

As an alternative to an outright acquisition, some companies enter into partnerships, which can yield growth by allowing two companies to move into new businesses using the talents of both, uniquely combined.

Partnerships provide some of the same advantages that mergers do and lack many of the disadvantages. They remain separate entities, united in the expectation that their individual talents can be combined in a new business venture that will benefit both beyond what either might have gained alone.

They invested substantial financial and human resources in developing an efficient, ongoing process for deal making—for instance, establishing dedicated teams comprised of individuals with the requisite investigative, financial, business, and negotiation skills.

Winning companies often have codified principles—lessons drawn from experience—that enable them to more consistently choose the right partners and integrate them quickly. Our research makes it clear why so few companies maintain a steady lead. Business success requires unyielding vigilance in six management practices at once and constant renewal to stay on top. Falling down is easy; climbing back up is not. Nike, for example, was a high flier at the beginning of our research period but lost sight of the business basics and became a tumbler.

In its strategy practice, for instance, Nike failed to notice and respond appropriately when the tastes of its target customers—urban teenagers—shifted from sneakers to casual wear. In an attempt to regain market share, the company pushed into brand extensions, losing focus completely. And in its utter dedication to unlimited expansion, Nike lost sight of the primary practice of execution, neglecting to ride herd on workplace efficiency and cost controls. But cautionary tales aside, we believe our study offers hope.

In the hurly-burly of business competition, managers yearn for clarity, certainty, and solid directions for success. But such questions should be tailored to the three categories of customers.

Learning how to turn a passively satisfied customer into a promoter requires a very different line of questioning from learning how to resolve the problems of a detractor.

Calculate the percentage of customers who respond with nine or ten promoters and the percentage who respond with zero through six detractors. Subtract the percentage of detractors from the percentage of promoters to arrive at your net-promoter score. Compare net-promoter scores from specific regions, branches, service or sales reps, and customer segments.

This often reveals root causes of differences as well as best practices that can be shared. What really counts, of course, is how your company compares with direct competitors. You can then determine how your company stacks up within your industry and whether your current net-promoter number is a competitive asset or a liability.

Improve your score. For companies aiming to garner world-class loyalty—and the growth that comes with it—this should be the target. For years, market leader AOL aggressively focused on new customer acquisition. Through those efforts, AOL more than offset a substantial number of defections.

But the company paid much less attention to converting these new customers into intensely loyal promoters. Today, AOL is struggling to grow. Defection rates exceeded , customers per month in Countering a damaged reputation requires a company to create tremendously appealing incentives that will persuade skeptical customers to give a product or service a try, and the incentives drive up already significant customer acquisition costs.

Furthermore, detractors—and even customers who are only passively satisfied but not enthusiastically loyal—typically take a toll on employees and increase service costs. Finally, every detractor represents a missed opportunity to add a promoter to the customer population, one more unpaid salesperson to market your product or service and generate growth.

One of the main takeaways from our research is that companies can keep customer surveys simple. The most basic surveys—employing the right questions—can allow companies to report timely data that are easy to act on. Good luck to the branch manager who tries to help an employee interpret a score resulting from a complex weighting algorithm based on feedback from anonymous customers, many of whom were surveyed before the employee had his current job. Again, consider Enterprise Rent-A-Car.

The initial effort yielded a long, unwieldy research questionnaire, one that included the pet questions of everyone involved in drafting the survey. It only captured average service quality on a regional basis—interesting, but useless, since managers needed to see scores for each individual branch to establish clear accountability.

Over time, the sample was expanded to provide this information. And the number of questions on the survey was sharply reduced; this simplified the collating of answers and allowed the company to post monthly branch-level results almost as soon as they were collected.

The company then began examining the relationships between customer responses and actual purchases and referrals. This is when Enterprise learned the value of enthusiasts. Customers who gave the highest rating to their rental experience were three times more likely to rent again than those who gave Enterprise the second-highest grade. When a customer reported a neutral or negative experience, marking him a potential detractor, the interviewer requested permission to immediately forward this information to the branch manager, who was trained how to apologize, identify the root cause of the problem, and resolve it.

In fact, a few branch managers perhaps taking a cue from car dealers attempted to manipulate the system to their benefit. Branch scores were not improving quickly enough, and a big gap continued to separate the worst- and best-performing regions.

The rigorous implementation of this simple customer feedback system had a clear impact on business. Taylor cites the linking of customer feedback to employee rewards as one of the most important reasons that Enterprise has continued to grow, even as the business became bigger and, arguably, more mature. Complex loyalty indexes, based on a dozen or more proprietary questions and weighted with a black-box scaling function, simply generate more business for survey firms.

The market research firms have an even deeper fear. With the advent of e-mail and analytical software, leading-edge companies can now bypass the research firms entirely, cutting costs and improving the quality and timeliness of feedback.

These new tools enable companies to gather customer feedback and report results in real time, funneling it directly to frontline employees and managers. This can also threaten in-house market research departments, which typically have built their power base through controlling and interpreting customer survey data.

Marketing departments understandably focus surveys on the areas they can control, such as brand image, pricing, and product features.

For a measure to be practical, operational, and reliable—that is, for it to determine the percentage of net promoters among customers and allow managers to act on it—the process and the results need to be owned and accepted by all of the business functions. And all the people in the organization must know which customers they are responsible for. Overseeing such a process is a more appropriate task for the CFO, or for the general manager of the business unit, than for the marketing department.

Indeed, it is too important and politically charged to delegate to any one function. The path to sustainable, profitable growth begins with creating more promoters and fewer detractors and making your net-promoter number transparent throughout your organization.