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Robust Emerging Market Strategies
By our reckoning, less than one-tenth of the world's 500 largest companies have even close to a robust strategy for emerging markets. By robust strategy, we mean a strategy that is fundamentally market-driven (what do the customers in emerging markets need?) rather than product-driven (how can we sell our current products and services in these new markets?).
"According to Fortune magazine, of the world's 500 largest corporations by revenue, 93 are now headquartered in the BRIC countries, up from just 7 in 1995."
Consider the case of a Fortune 500 company with over 10 billion dollars in 2011 revenues. It derives over 75 percent of its revenues from the US and Canada. By most estimates, over 80 percent of the market for this company's products and services is outside North America. While the US market is largely mature, the market in emerging economies is growing at double digit rates. When senior executives at this company analyze the global market, the question they ask is "how large is the market for our U.S.-based products and services, especially those which provide the bulk of the company's revenues and profits?" What they overlook however is that, within their industry, much of the opportunity in emerging markets is for lower cost products and services that must be conceived, designed, and manufactured within these markets. Cloning or mere adaptation of U.S.-based products and services does little more than skim the surface in these emerging epicenters.
Contrast the above case with the approach taken by Deere & Co. A few years back, Deere's Agricultural Equipment division initiated a zero-based redesign of its strategy for India and other emerging markets. Till then, Deere had viewed India predominantly from the lens of its existing US-based products i.e., large, technologically advanced, and very expensive machines designed for large American farms. Not surprisingly, executives had concluded that the market for their products in India was very small and had assigned India a relatively peripheral role in the company's global strategy.
Our discussions with a senior-level strategy group focused on two central questions: (i) How does Deere define its business – as a supplier of "large 100+ horsepower tractors" or as a supplier of "agricultural equipment"? (ii) How large is the current and future market for agricultural equipment in India that may be smaller in size and horsepower and may not look anything like the company's machines for the US and other developed markets? Discussions around these questions revealed that the company's global strategy had been driven too much by a product-centric mindset and not enough by a market-centric mindset. These discussions also led to a decision by Deere to upgrade its engineering center in India and give the Indian subsidiary the needed autonomy and resources to design and manufacture products for India as well as other emerging markets. Since then, Deere's India-made tractors have proved to be popular with farmers in India and other emerging markets. To its surprise, Deere has discovered that these small, very basic, low horsepower, highly maneuverable, and inexpensive tractors (with a starting price of $14,400) are proving to be popular also with hobby farmers in the U.S.
Emerging markets are not just large and rapidly growing but also radically different from those in the developed countries. Selling the same or de-featured versions of existing products and services does little more than skim the surface of the market opportunities. For the winning corporation of tomorrow, what is needed instead is a robust strategy that, while staying within the bounds of the company's business domain ("beverages" for Coca-Cola, "hospitality" for Marriott, and "agricultural equipment" for Deere), is market- rather than product-driven.
"For the winning corporation of tomorrow, what is needed is a robust strategy that, while staying within the bounds of the company's business domain is market- rather than product-driven."
By frugal innovation, we mean innovation that strives to create products, services, processes, and business models that are frugal on three counts: frugal use of raw materials, frugal impact on the environment, and extremely low cost. The rapid rise of emerging markets is once again the prime mover behind the critical need for all three types of frugality.
Take global warming. Two of the biggest consumers of energy and contributors to global warming are cars and buildings. Look the impact of China and India in these two areas. In 2000, motor vehicle production in China was barely 16 percent of that in the U.S. By 2010, it was twice as large as the U.S. During 2006-2010, China added more square meters of urban floor space than all of the developed countries combined. India is behind China by about 12-15 years but following a similar path. No wonder then that the price of almost every commodity has risen sharply over the last ten years and that China and India have become two of the biggest contributors of greenhouse gases into the air.
It is unlikely that, for the sake of lifestyles in the developed world, people in emerging markets will decide to put brakes on their own growth. Instead, what we will witness is a rapid shift from products, services, and processes that are energy inefficient, raw material inefficient, and environmentally inefficient to those which are. Companies that take proactive leadership on these fronts on a worldwide basis are likely to find it easier to preserve and grow their global market shares at the expense of those who spend their time lobbying governments to ease up.
Note also that, over the next twenty years, the bulk of the absolute growth in market demand for most products and services will occur at the middle and low income levels in the big emerging markets. Winning these mega-markets will require that products and services also be ultra low-cost.
Take Bharti Airtel, the world's lowest cost provider and India's market leader in cell phone services. The ingenuity of Bharti Airtel lay in devising a new-for-the-industry business model for mobile telephony that relied heavily on outsourcing all network operations (to NSN and Ericsson) and all business support services (to IBM). However, for this business model to succeed, it was essential that companies such as NSN and Ericsson depart from their traditional practices and agree to get paid for network operations on a per minute basis rather than for selling and installing the equipment. In short, the Bharti Airtel model works because all of the players (NSN, Ericsson, IBM, and Bharti Airtel itself) are committed to frugal innovation.
Over the coming decade, companies such as GE which must help hospitals in Beijing and Kolkata provide better care at a lower cost, Otis which must provide lower cost and more energy efficient elevators and escalators for tomorrow's Mumbai, and Carrier which must keep buildings in Guangzhou and New Delhi cool in the summer will have no choice but to become ever more passionate about frugal innovation. Otherwise, the market will move to companies that are.
Multinational companies such as Unilever, Philips and General Electric have long relied on local research and development laboratories in foreign markets to adapt their products to local market needs. Today's reality, however, is very different. GE's 5000-person R&D centre in Bangalore, India, is dedicated only partly to localisation of the company's products for the Indian market. The bulk of its resources is channelled into developing the next-generation technologies for GE's businesses globally – wind turbines, aircraft engines, washing machines, hybrid locomotives and the like.
Similarly, Microsoft's R&D centre in Beijing has played a leading role in the development of speech technologies, new user interfaces, and new mobile operating systems not just for China but for the company's needs globally. Also, virtually every big pharmaceutical company in the world now finds that, if it wants to stay competitive in new drug development, it must conduct a good chunk of its drug discovery and clinical research activities in India and/or China.
In short, distributed innovation is no longer driven merely by the need for local adaptation. Rather, it's being driven by the fact that China and India now produce large numbers of highly capable, often less expensive, and easily scalable scientists and engineers. As a senior executive at Goodyear China noted to us: "The United States will probably graduate three PhDs in tire technologies this year. In China, we know of at least 50."
Along similar lines, a senior executive at GE's John F. Welch Technology Centre in Bangalore remarked: "It's not easy to find expertise in computational fluid dynamics in the US. In India, we can find dozens of specialists in this field."
As these examples illustrate, global enterprises need to become skillful at distributing and managing not just peripheral product development but also the creation of next-generation technologies and new product platforms at selected hot spots of talent and capabilities around the world.
Network of Global Hubs
Cisco Systems is one of the world's leading edge companies in trying to figure out what the global enterprise of tomorrow must look like. Here is what Wim Elfrink, Executive Vice-President and Chief Globalization Officer at Cisco, has said about the impending virtualization of the corporation: "The tradeoff between the intimate but inefficient old-world organization and the hyper-efficient but impersonal modern organization is on the verge of extinction. Today, the increasing pervasiveness of broadband networks have facilitated the slicing and dispatching of corporate functions around the globe... This translates into an extraordinary cultural shift...and possibly from the very idea of a corporate headquarters."1
We agree entirely with Elfrink. Legacy notions of corporate headquarters will undergo a transformation over the next ten years. For any company that wants to emerge or stay as one of its industry's global leaders ten years from now, it is imperative that the center of gravity of its marketing and sales efforts, its manufacturing operations, and even its R&D activities must begin to shift from the U.S., Europe, or Japan to other countries.
"For any company that wants to emerge or stay as one of its industry's global leaders ten years from now, it is imperative that its marketing and sales efforts, its manufacturing operations, and even its R&D activities must begin to shift from the U.S., Europe, or Japan to other countries."
What will replace the old-fashioned mother ship headquartered in New York, San Jose, London, or Paris? Some observers have proposed that the new global architecture will consist of regional hubs (say, North America, South America, Asia, Europe and so forth). In such an architecture, each regional hub would have all of the resources and decision-making power to manage all operations within its region. We disagree with such a viewpoint. The world economy is becoming not only increasingly multi-polar but also ever more globally integrated. IBM's procurement operations in China serve the company's global needs, not just those in Asia. Similarly, IBM's global delivery centers in India serve the needs of its clients worldwide and not just those in Asia. Microsoft's research center in Beijing is a global hub for the development of next generation user interfaces for the global market and not just China. These are only a few of countless examples that will multiply over the coming ten years. The last thing that the global enterprise of tomorrow should do is to become a federation of regional fiefdoms.
Instead, what will be needed is the creation of a small number of global – not regional – hubs, each situated in a carefully selected location. Some of the central criteria for these locations will be: (i) physical proximity to the global epicenter of that particular function or line-of-business; (ii) attractive and safe living conditions for senior executives and their families who will spend much of their time living in and working out of these global hubs; and (iii) world-class connectivity in terms of both telecommunications infrastructure as well as airports and flights so that the executives based at these hubs can stay connected with their peers as well as external partners in other locations with the least amount of wasted time and effort.
Globalizing the Corporate Mindset
The term "mindset" refers to the cognitive lenses through which people make sense of the world around them. Companies and business leaders can be said to have a global mindset when they reflect two characteristics: an openness to and awareness of diversity across cultures and markets combined with a propensity and ability to integrate across this diversity. Becoming a prisoner of diversity is just as bad as being blind to it.
Most business leaders still view foreign markets as an add-on supplement to the domestic market. The primary explanation for why most companies lack global mindsets is because leaders with the power to shape the company's future direction are far removed (psychologically, cognitively, and physically) from the new epicenters of global change. The net result is that they rely primarily on information that is not merely several months old but that also has been filtered and processed to make it palatable – in other words, information that may well be useless or even misleading. Given the vastness, complexity, dynamism, and importance of emerging markets, there can be no substitute for gut-level judgment based on direct observation and deep immersion within these societies.
What steps must a company undertake in its moves to globalize the sensing and decision-making capabilities of the corporate leadership? The starting point in cultivating a global mindset is to deepen people's knowledge of major cultures and markets other than their own home country. The key here is to build knowledge that is deep rather than superficial. Deep knowledge comes not from short visits but from on-the-ground immersion over a longer duration. It comes not from observation but from problem-solving within the new culture. This requires that the career paths of fast-track employees must mandatorily involve cross-border on-the-ground experience in at least a couple of the major economies.
"The primary explanation for why most companies lack global mindsets is because leaders with the power to shape the company's future direction are far removed from the new epicenters of global change."
Another mechanism to deepen knowledge of different cultures and markets is to rotate the locations of key meetings and, when a particular group meets in a location, to make sure that the agenda includes addressing not only the immediate task at hand but also learning via field experience, even if such field experience is only for half a day.
Deeper learning of other cultures can also be fostered via the building of inter-personal networks that cut across borders. Deployment of social media technologies within the company is making it easier by the day. Evolution has programmed human beings into social animals. As each of us knows from personal experience, people like to interact with others and they interact more openly and more helpfully with others whom they know and like. The idea here is not that the company should mandate the formation of cross-border interpersonal networks. Rather, what the company should do is to eliminate every barrier that prevents such networks from emerging spontaneously on their own.
The final and perhaps most potent mechanism for cultivating a global mindset is to globalize the company's leadership architecture. On this issue, the first question to ask is: where should the leaders come from? Having studied strategic leadership over the last twenty years, we have come to the firm conclusion that the best leaders are not those who are supposedly objective but those who are biased – with an important caveat i.e., whose biases reflect the reality of the future rather than that of the past. The best leaders are those who have a sense for where the future is headed and who are passionate about this vision. Vision and passion reflect a biased view of the world, a bias that propels the company forward rather than hold it back. Remember Steve Jobs at Apple!
Some questions to ponder are: How many of the top 300 people in your company reflect a deep knowledge of geographies that represent your future markets and sources of your future talent pool? What about the executive committee? Also, what about the board of directors?
The second major question to ask is: where should people with decision-making power sit? In far too many companies, there exists a gap of five to ten thousand miles between the location of major opportunities and the location of decision-making power. The typical outcome is that people in the field often find themselves banging their heads against a wall. Business leaders who spend most of their time in New York City, Tokyo, or Munich have a difficult time looking at the world from anything other than American, Japanese, or German eyes.
If you are keen to transform your company into a next generation global enterprise, you need to start decoding why companies such as IBM, GE, Honeywell, Cisco, and Procter & Gamble have started to relocate some of their most powerful executives to the new epicenters of the global economy. At IBM, the global chief procurement officer is now based in Shenzhen, China. At GE, vice-chairman John Rice now sits in Hong Kong. P&G has recently relocated two of its most powerful executives – the presidents of the global baby care and beauty care businesses – to Singapore. And at Honeywell, two members of the corporate executive committee – Shane Tedjerati, President-Global High Growth Regions and Krishna Mikkilineni, SVP-Engineering & Operations – are based in Shanghai and Bangalore respectively.
In conclusion, the winning global enterprise of tomorrow will be one that figures out how to take advantage of three realties: the rapid growth of emerging markets and the increasing multi-polarity of the world economy; enduring cultural, political, and economic differences across countries and regions; and the rapidly growing integration of national economies.