Contrary to popular opinion, the world is not flat. In fact, as this author writes, a company must understand that there are differences between and among countries. In this context, a manager will come to see globalization as an option to be considered rather than an imperative to be automatically taken up. The author offers the ADDING Value Scorecard, which managers can apply to assess the option.

Most managers – 88 percent in a recent online survey I conducted – think of global expansion as an imperative rather than an option to be evaluated. At one level, this can be seen as yet another outlet for expansionary energies once one starts to think of multiple markets rather than just a single one. But at another level, one can argue that expansionary excesses distinguish how most people think about global strategy – as strategy for a company operating in multiple countries – from how they think about corporate strategy for a company operating in multiple lines of business. Cross-border expansion commands wider support and is conceived as optimally proceeding farther than cross-business expansion. For example, 64 percent of the respondents in my survey agreed that “The truly global company should aim to compete in all major markets,” whereas there is no comparable presumption in terms of competing in all major lines of business (not within most advanced, open economies, at least).1

The intent of this article is to counteract such biases, not only by pointing out the problems with them (the principal focus of the next section) but also but by providing an actionable alterative, namely a framework for valuing cross-border moves (the topic of the section on the ADDING Value Scorecard).

Global expansion: An imperative or an option?

Writers on the globalization of business rarely examine the question of why, if at all, so many follow the urge to globalize. Although there are several reasons for this, perhaps the most important is the widespread tendency to believe in an apocalyptic scenario in which globalization erases borders or, in popular parlance, flattens the world. If true, this would obviate the question of “Why:” Think of a blue ocean submerging a flat world and encouraging expansion into all major markets simply because they are there. But talk of a borderless world turns out, upon examination of the data, to be so much globaloney.2

A second reason for believing that the world is flat is that, since the late 1980s, much of the literature on globalization written from a business perspective has focused on concerns related to how, and not why: how to link far-flung units, build global networks, find and train global managers, create truly global corporate cultures.3 Furthermore, to the extent that the literature does deal with global strategy as opposed to global organization, it mostly focuses on achieving global presence: entering the right markets, making the right acquisitions, or choosing the right alliance partners.4 I should add that this bias appears to apply to MBA strategy curricula as well as to research and writings for practitioners.5

The two broad biases above are probably reinforced by a third – a sense that cross-border moves are so complex and uncertain that they need to become acts of faith. This can be seen as an extension of the tendency to do detailed cost-benefit analyses of small decisions in single-country strategy but to simply throw up one’s hands and surrender to animal spirits in making large decisions. Or as Parkinson put it in his Law of Triviality, “The time spent on any item of the agenda will be in inverse proportion to the sum involved.”

Whatever the precise reasons, executives in global companies or wannabes often spout slogans rather than substance when asked for their reasons for globalizing operations. Verdin and Van Heck have compiled a confection of these that would be funny if they weren’t so familiar:6 “Our home market is too small.” “We need to be where the market is.” “Eat or be eaten.” And so on. Such dinosaurism largely died out in single-country or local strategy more than two decades ago. It is time to put them to rest by articulating criteria for evaluating global expansion rather than treating it as an imperative.

Value analysis as a mode of evaluation

There are two broad approaches to evaluating strategies: in terms of principles (e.g., fit with the strategy in place, with corporate financial balances, and with the reputations of managerial sponsors) or in terms of analyzing their implications for value. I have explained at some length elsewhere why principles may be fine for guiding routine decisions, but need to be seen, in the context of important strategic decisions (with large components of irreversibility), as ways of triangulating or complementing the analysis of value rather than acting as substitutes for it.7

While this article focuses mostly on the value analysis of specific strategic decisions, even general-purpose value analysis can shed interesting light on action implications – and non-implications. Consider, for example, one of the most widely taught case studies on global business strategy, Cemex, the Mexican cement multinational that has managed to outperform its global competitors, mostly headquartered in Europe, in a capital-intensive industry where it probably suffers a capital-cost disadvantage. Cemex is often celebrated in textbooks and elsewhere for its tight integration/standardization, which it describes as “the Cemex Way” and which an academic who has studied the company terms “[CEO] Zambrano’s bear hug.” My own value analysis of the situation shifted my attention to Cemex’s apparent ability to pick more attractive markets (or to make them more attractive) in ways that let it raise prices. And it helped prevent overgeneralization about the Cemex Way from the relative homogeneity of cement to industries exhibiting more cross-country variation. In other words, a focus on value can help with implementation as well as with analysis.

Yet another reason value analysis is important is that many companies lose money in many geographies over long periods of time. Thus, according to multiyear data on 16 companies that Marakon Associates generated at my request,

“We found that half of the companies we have looked at have significant geographic units that earn negative economic returns… [We] know from our clients that their profitability by geography has stayed fairly stable over time unless they have specifically targeted action at specific countries.”

How the ADDING Value Scorecard can help

To figure out how to analyze value ahead of time, it is useful to start out with the observation that value is the product of margins and volume (with growth rates warranting independent attention in more dynamic terms).8 In the context of expansionary biases, it was argued above that volume/growth-related considerations are already allotted too much weight in global strategy. So what merits more attention in value analysis are the implications of cross-border moves for margins.

The rigorous focus on value analysis of single-country strategy – in companies, by consultants, and in the classroom – is helpful in this regard because it unbundles margins into the average attractiveness of the environment in which a business operates and its competitive advantage or disadvantage relative to its average competitor within that environment.9 These quantities are linked by what might be called the fundamental equation of business strategy:

Your margin = industry margin + your competitive advantage

Michael Porter’s famous five forces framework for the structural analysis of industries has explored the strategic determinants of industry margin or profitability.10 And Porter and other strategists have probed the determinants of competitive advantage with more recent, rigorously value-theoretic work suggesting the usefulness of separating it into willingness-to-pay and (opportunity) costs:11

Your competitive advantage = [willingness-to-pay – cost] for your company
  [willingness-to-pay – cost] for your competitor
  = your relative willingness-to-pay – your relative cost.

In other words, in single-country strategy, the notion of a competitive edge has evolved into an understanding of the economics of what might be called ‘the competitive wedge.’ A firm is said to have created a competitive advantage over its rivals if it has driven a wider wedge between willingness-to-pay and costs than its competitors. The ADDING Value Scorecard adapts and extends this logic to multiple countries. (ADDING is an acronym that is explained below).

The Scorecard’s first component is Adding volume, and it is followed by the three levers for improving margins discussed above: Decreasing costs, Differentiating and Improving industry attractiveness. Its last two components, Normalizing risks, and Generating knowledge (and other resources), are add-ons that reflect the large discontinuities that can arise at national borders. It is worth adding that this structure, involving commensurability and adding up, distinguishes ADDING Value from other scorecards widely used in business that simply summarize an assortment of more-or-less arbitrary items.

Applications of the scorecard will be aided by a detailed application to a cross-border move that clearly failed the ADDING Value test (as I wrote about roughly at the time12), namely the merger, recently dissolved, of Daimler-Benz and Chrysler. Figure 1 summarizes the ADDING Value analysis and the rest of this section elaborates.

Figure 1: The Adding Value Scorecard and the Daimler-Chrysler (DC) Merger

Levers of Value Addition DC’s Attempts/Achievements Limitations
Adding Volume Became one of the Big 5 in terms of total scale of production
  • Performance not really driven by scale
  • Scale requirements lower in luxury : BMW overtook DC despite lower scale and scale/brand
  • DC share slippage after merger
Decreasing Costs 1-year operating cost savings of $1.4b, mostly procurement and back-end activities (finance, control, IT and logistics)
  • $1.4b only 1% of revenues (SG&A focus–only 7% of revenues, excluding advertising)
  • Some improvement even without merger: Chrysler previously saved $1.5b over 5 years with an internal ideas program
  • Some higher costs as well:
    • $00s of millions in inv. bankers’ fees etc.
    • $00s of millions (ongoing) pay increases to German top managers for parity with U.S.
    • 28% premium for Chrysler stock
    • No allowance for complexity/coordination costs of
  • Source of additional $3.0b unclear given limited segment overlap, zero cross-brand platforms, “Purity Laws”
  • Share backflow to Europe, triggering rapid ejection from S&P500; possible increase in volatility: cf. row on risk
Differentiating/ Increasing Willingness-to- Pay Transfer of superior quality, technology, image (particularly from DB to Chrysler)
  • Brand Bible mandate of strict separation
  • Perception that Mercedes’ recent quality and profitability problems reflect management focus on fixing Chrysler
Improving Industry Attractiveness/Bargaining Power Increased Big 5 share from 52% to 54% → another step in industry restructuring
  • Restructuring excess capacity weaker basis for consolidation by mid-sized players, than need for scale economies: public vs. private benefits
  • Unfavorable dynamics: intensifying competition in light commercial vehicles (Chrysler focus) in U.S.
Normalizing Risk Risk pooling across different segments or geographies
  • Limited value to pooling for public firms with access to efficient capital markets
  • Possible increase in share volatility/shareholder pressure (new investors, weakened Deutsche Bank ties)
Generating and Upgrading Resources Some joint development effortsSome attempts at cultural integration
  • Joint work in strictly demarcated (and limited) areas
  • Institutionalized “Marrying Up/Marrying Down” barriers with “Purity Laws”
  • Poor communication (Schrempf did not visit US HQ)

Adding Volume

Through its merger with Chrysler, Daimler-Benz hoped to turn itself into one of the Big 5 automakers in terms of total scale of production. But the limitation of this logic is that profitability in cars, particularly luxury cars, doesn’t really seem related to volume. GM, with the biggest scale at the time and scale/brand as well, scrapes along at the bottom of the profitability rankings, while Daimler’s archrival, BMW, which barely makes the Top 10, ranks just behind Toyota in profitability. And even if one believes, despite these data, that size does matter, note that D-C’s total volume actually dipped after the merger!

Decreasing Costs

What about decreasing costs? As Figure 1 indicates, the proposed one-year savings of $1.4 billion in operating costs were focused on SG&A, excluding advertising, which amounted to only 7 percent of revenues. This is small change. In addition, automakers generally count on substantial annual productivity gains anyway, so the target looks even punier in that light. And on the other side of the coin, there were increased expenses: investment bankers’ fees that exceeded $100 million, more than $400 million a year in recurring expenditures to bring the pay of the merged company’s German managers up to their American counterparts’, not to mention the much larger premiums (28 percent) paid for Chrysler’s stock, and the costs of increased coordination complexity.

And then there was the issue of saving an additional $3 billion through shared engineering and manufacturing know-how. Daimler and Chrysler had almost zero product-line overlap, which spelled trouble for attempts at such sharing. To aggravate matters, a so-called “Brand Bible” issued after the merger decreed that the two divisions’ marques would be kept completely separate, including their European dealerships.

Finally, in the decreasing-costs category, Daimler apparently hoped that a broader global shareholder base would lead to reduced capital costs for the merged company. In fact, the large “backflow” of shares from the U.S. to Europe in the wake of the merger triggered the company’s removal from the S&P 500, which may have led to more volatility, which may in turn have increased capital costs.

Differentiating/Increasing Willingness-to-Pay

The notion here, glanced at above, was that Mercedes’ cachet would somehow rub off on Chrysler and make the latter’s products more attractive. “Mass with class,” as one periodical put it. Two things went wrong. First, the Brand Bible (and similar barriers) prevented this kind of cross-pollination. Second, Chrysler turned out to be a far shakier company than Daimler-Benz’s due diligence had suggested. Its aging product line and significant overcapacity contributed to losses of $4.7 billion in 2001 alone. This necessitated an intensive focus on rehabbing Chrysler – distracting management’s attention – as well as compromises at Daimler to keep reported profits up. BMW ended up overtaking Mercedes as the number one luxury car brand in the world in 2004.

Improving Industry Attractiveness/Bargaining Power

What about improving industry attractiveness? Did the DaimlerChrysler merger fix the auto industry in some way that was useful to DaimlerChrysler? Unfortunately, no. The merger did increase the Big 5’s share of production from 52 to 54 percent, but that change pales against the backdrop of prior decreases in auto industry concentration, which had fallen substantially and more or less continuously since Ford’s Model T accounted for about one-half of the world’s total stock of cars in the 1920s. The global auto industry’s problem today is not one of fewer and fewer players surmounting escalating scale thresholds but, instead, of more and more fragmentation and, related to that, chronic excess capacity.

Normalizing Risk

The problem with applying this piece of the ADDING template to the DaimlerChrysler merger is that risk-pooling across different segments or geographies – one of the stated aims of the merger – doesn’t make much sense in the context of a public firm with access to efficient capital markets. On the flip side, the market-value plunge of the overall company soured the traditionally cozy relationship between Daimler and Deutsche Bank, and there was operational risk as well: D-C’s management proved unable to attend to more than one crisis at a time.

Generating knowledge/resources

While the DaimlerChrysler merger created opportunities for information exchange, it appears that few were pursued. This is not too surprising given the very limited attempts at integration. For example, CEO Jurgen Schrempf didn’t speak at Chrysler’s headquarters in Auburn Hills until 7 months after the merger had officially been finalized.


The detailed discussion of the Daimler-Chrysler merger was meant to help you apply the ADDING Value Scorecard to your own business situation. Other help is provided by the even more detailed discussion of the Cemex case in particular and conceptual material in Chapter 3 of my recent book, Redefining Global Strategy and by the ADDING Value electronic tool available from Harvard Business Online.

Another way of wrapping up this article is with the reminder that in analyzing the implications of cross-border moves for value, strategists need to ask – and address – deeper questions about the different components of the ADDING Value Scorecard. Figure 2 below provides a 30-odd list of generic questions of this sort. Addressing some or even all of these questions will not eliminate the possibility of error. But the alternative – expansion across borders driven by dinosaurism – is likely to yield results that are substantially worse.

Components of Value Questions
Adding Volume/Growth
  • What is the true economic profitability of incremental volume?
  • At what level does additional volume really boost profitability or margins: total scale, other (disaggregated) geographic scale, plant scale, share of customer wallet…?
  • Are the effects on the cost side or differentiation side?
  • How significant are the scale effects (slope, percentage of costs/revenues affected)?
  • What’s the sustainable growth rate?
  • Where will economics start to deteriorate (or capacity to pinch) first if expanding volume: procurement, production, logistics, pricing?
Decreasing Costs
  • To what extent can you use actual costs as a proxy for opportunity costs?
  • Have you unbundled price effects and cost-effects by looking at costs/unit?
  • Have you looked at cost increases (e.g., due to cross-border adaptation, complexity or size) as well as decreases, and to net them out?
  • Have you considered cost drivers other than scale?
  • Have you distinguished between ongoing costs (e.g., operating costs) and one-time costs – ultimately stacking them up against each other?
  • Are there any implications for rivals’ costs? (Raising rivals’ costs can help added value as much as one’s own, although legal/antitrust risks)
Differentiating/Increasing Willingness-to-Pay
  • Have you thought about the full range of benefits to buyers?
  • Have you segmented the market appropriately?
  • To what extent can price be used as a proxy for willingness-to-pay (otherwise, have to devise willingness-to-pay calculator)?
  • How are any benefits of volume affected by downward sloping demand?
  • How does cross-country heterogeneity reduce willingness-to-pay for the products on offer?
  • What are the R&D/sales and Advertising/sales intensities for the industry?
  • Are there any implications for rivals’ willingness-to-pay?
Improving Industry Attractiveness/Bargaining Power
  • Do you understand international differences in industry profitability?
  • Are moves significant enough to substantially affect the structural correlates of industry attractiveness (particularly concentration)?
  • Do you have to account for changes in bargaining power associated with shifts to multinational customers/suppliers?
  • Can you overcome free-rider problems: is your stake in the industry large enough to pay to improve its general attractiveness?
  • Are there regulatory/non-market restraints that are important.
Normalizing (or Optimizing) Risk
  • How significant is risk (capital-intensity and specialization of assets, volatility of demand…)?
  • How reducible is risk by pooling across geographies, products etc (inversely related to their integration/correlation)?
  • Are there other ways of diversifying or managing risk (e.g., can shareholders do it)?
  • In which ways does cross-border expansion increase risk (e.g., foreign exchange volatility)?
  • Are there any benefits to increasing risk (e.g., option value of emerging markets to multinationals in mature developed markets)?
  • How reversible is the move being considered?
Generating and Upgrading Resources
  • Is knowledge geographically-specific or portable?
  • What are the other modes of acquiring the requisite knowledge?

(Similar questions can be applied to resources other than knowledge/learning)


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  1. Highly diversified groups, particularly in small, closed markets, provide an important exception to this rule.

  2. For more extended discussions of the empirical underpinnings, or rather, lack thereof, of flat-earth beliefs, see my article “Why the World Isn’t Flat” in the March-April 2007 issue of Foreign Policy or, for a full-length academic treatment, Edward Leamer’s review of Thomas Friedman’s book, The World is Flat, in the Journal of Economic Literature in March 2007. My “What in the World” blog for HBS Online at supplies additional data, on exaggerated conceptions of flatness and evoked biases.

  3. Cf. the most prominent writers in this vein, Christopher A. Bartlett and Sumantra Ghoshal, 1989, Managing Across Borders: The Transnational Solution, Boston: Harvard Business School Press. As they put it, “For all the companies we studied, the key challenge in responding to the demands of the 1980s was not to define a strategy, but to overcome the one-dimensional organizational capabilities and management biases that stood in the way of building a new, more complex, and dynamic transnational posture.” Just in case you didn’t get it, the objectives and content of cross-border strategy – the why and the what – are supposed to be obvious, but organization – the how – is not. To me, this is placing the cart squarely before the horse given the general acknowledgment, even by organizational scholars, that organizational structure, broadly defined, has to be contingent on strategy. For more detail, see my “Reconceptualizing Research in International Strategy and Organization,” Strategic Organization, May 2008.

  4. For some survey work that makes these points, see Steven Werner, “Recent Developments in International Management Research: A Review of 20 Top Management Journals,” Journal of Management, No. 3, 2002, and Niccolò Pisani, “International Management Research: An Updated Review,” unpublished draft, IESE Business School, June 2007.

  5. Pankaj Ghemawat and Jordan Siegel, “Study of Core Strategy Curricula,” and Pankaj Ghemawat, “Study of the Core Curriculum of a Leading Business School.”

  6. Paul Verdin & Nick Van Heck, From Local Champions to Global Masters. London: Palgrave, 2001.

  7. See Pankaj Ghemawat, “Choice: Making Commitments,” Chapter 3 in Commitment: The Dynamic of Strategy, New York: Free Press, 1991, especially pp. 46-51.

  8. The implied margin-volume trade-off was first discussed systematically in Chapter 3 of my book, Commitment (op cit.).

  9. For more discussion of this logic, see Pankaj Ghemawat, Strategy and the Business Landscape, Englewood Cliffs (NJ): Prentice-Hall, 2006.

  10. Michael E. Porter, Competitive Strategy, New York: Free Press, 1980.

  11. See, in particular, see Adam. M. Brandenburger and Harborne W. Stuart, Jr., “Value-Based Business Strategy,” Journal of Economics and Management Strategy 5, No. 1 (1996).

  12. Pankaj Ghemawat and Fariborz Ghadar, “The Dubious Logic of Global Megamergers,” Harvard Business Review, July-August 2000.