Giants, old and new Business Trends 2014
The field is set for a new, highly competitive game as firms from emerging markets with distinctive strengths take on longer-established corporations—which enjoy their own hard-won advantages.
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In the 1970s, American and European auto executives were shocked by the rapid appearance in their home markets of powerful Japanese competitors. In the following decade, new players from fast-growing Asian economies arrived on the global stage in several industries. And over the past 20 years, many “new global giants” have grown up in the fertile soils of emerging markets—firms such as Embraer, Tata, CEMEX, Grupo Bimbo, JBS, Bharti Airtel, Mahindra & Mahindra, Lenovo, and Haier. They have become serious, regular competitors to the Western multinationals that had long dominated their industries. This time around, the emergence of powerful new players should be no shock. In many industries, from beer brewing to automobiles to IT consulting, companies whose names were largely unfamiliar in the West just a decade ago are now firmly established in the top pack of global leaders. But it is not yet clear who will hold the advantage in the years ahead, as the newer players progressively increase their focus on winning in mature, developed-economy markets. As many Western businesses have experienced, expanding from one’s accustomed home markets to less familiar new ones is far from straightforward. Will the distinctive strengths of the new giants prove to be well-suited to the demands of the future? Or will the advantages of the longer-standing incumbents help them prevail?
The answer is likely to be “neither.” For we are seeing a trend: Market leaders from both the developed and emerging worlds are seeking to learn from each other to master a multi-dimensional game. They use certain moves as they venture into new territories, others as they compete with familiar rivals in their home markets, and still others as they defend those traditional markets against invasions by new entrants. To resort to a sports analogy, it’s as though some managers have been boxing and others wrestling, but now all are finding themselves in a mixed martial arts match. The best of them are learning fast. The least agile may go home losers.
What’s behind this trend?
The first generation of large, powerful industry leaders essentially emerged from developed economies. In the closing decades of the 20th century, these same players were also the early beneficiaries of the steady growth in globalization, having cut their teeth in demanding and sophisticated markets. Companies like Yum!, Colgate, and Unilever led the charge, pushing vigorously into emerging markets that provided them with substantial new growth opportunities—and that today account for the majority of their sales.1 Coming from similar business environments, these players had broadly comparable strategies, management methods, and theories of competition. And for a while, it appeared that the developed economies had perhaps discovered the ultimate formula for global business success. Indeed, as growth in emerging markets created opportunities for ambitious local competitors, many of these new players succeeded in part by becoming avid students of Western and Japanese management practices, often proving to be fast learners. However, these learners were also creating their own tricks, developing new and different capabilities as they served their own challenging markets. Over time, many have used these skills to become serious rivals to more established firms in markets all over the world. Take, for example, a classic strength of emerging-market giants: their ability to bring straightforward, no-frills solutions to customers who cannot afford or do not value premium offerings. Many have learned the art of “frugal innovation.”2 For example, JBS, originally based in Brazil, is the world’s biggest processor and exporter of beef, pork, poultry, and lamb.3 Its chief executive credits the company’s rigorous pursuit of efficiency for its success: JBS has developed techniques that allow it to take more “prime” meat off of the bone and leave fewer scraps (which sell for roughly one-tenth the price).4 The company has used this efficiency to gain a global advantage over better-capitalized peers based in advanced economies. According to Rajeev Batra, a marketing professor at the Ross School of Business, we can expect to see more of the JBS-style formula from other emerging giants in the future.5 Emerging-market multinationals often have a better understanding of customers in the fastest-growing parts of the world.6 Haier’s electronic appliances, including refrigerators with rodent-proof wiring and clothes washers that can also clean potatoes, have been a hit with rural and middle-class consumers in China.7 The company, China’s number-one brand for the 12th year running,8 is now driving its unique approach into developed markets. One of its breakout products in the United States has been a low-end wine cellar (essentially a small refrigerator with special racking and humidity control). By addressing an underserved market segment previously not prioritized by domestic companies, this product has captured a 60 percent market share in the United States.9 Emerging-economy giants often view the relationships between government and private enterprise as symbiotic and constructive—a consequence of the typically close links between the two sectors. Histories of partnering with governments, donors, and civil society allow emerging-market companies to envision new opportunities to pursue business and social objectives—for example, by serving underdeveloped markets. As Grupo Bimbo grew in Mexico, the company needed a credit system for smaller, less creditworthy customers shunned by other companies. It turned to Fincomun, a community bank that provides micro-lending within local communities. Bimbo placed Fincomun loan officers on Bimbo delivery trucks to set up credit arrangements for store owners. As a result, Bimbo sold more baked goods, Fincomun processed more loans, and small businesses were able to grow.10 Finally, emerging-market giants are resourceful in tough business environments—a point emphasized by Mauro Guillén, director of the Joseph H. Lauder Institute at the University of Pennsylvania. In a recent interview, he noted that the new giants are accustomed to dealing with inconsistent regulations, unpredictable supplies of raw goods, infrastructure gaps, different standards and definitions of corruption, and substantial political and economic instability.13 There are balancing factors, obviously—for example, they often have less experience in dealing with tight environmental and labor regulatory regimes—but overall, the newer players often have “thicker skins” owing to the unique uncertainty and change with which they have been forced to contend. Family-owned business might have an additional advantage: greater flexibility to deal with these challenges, as they are sometimes more able to make fast decisions, take risks, and accept longer-term returns. The skills and capabilities forged in challenging home environments often translate into powerful advantages elsewhere. CEMEX provides one well-known example. Given the notoriously unpredictable traffic of Mexico City, wet cement too often solidified in delivery vehicles before reaching construction sites. So CEMEX developed one of the first GPS-enabled real-time truck routing systems.14 The innovation worked at home and in other traffic-choked capitals across the developing world—which helped fuel CEMEX’s global growth for more than a decade.15 Bharti Airtel, the Indian telecom giant, followed a similar pattern. After notable success in India, Bharti extended its operations into dozens of other emerging markets, mostly in Africa. Its innovative business model has allowed it to offer inexpensive but high-quality wireless service to less affluent consumers.16
In Deloitte’s globalization survey, 43 percent of emerging-market executives surveyed indicated that their firms partner extensively with nonprofits and local organizations when operating in developed markets, versus 33 percent of developed-market executives.11 And emerging-market executives are far more likely than developed-market executives to identify social and political issues (for example, environmental impacts, worker rights, or local community improvement) as critical factors in company decisions.12
The new giants seem mature and prepared. They have built obvious and distinct strengths in their home markets. Many are already deploying these in other emerging markets—potentially a profound advantage given the growth in South-South trade, which between 1980 and 2011 increased from approximately 8 percent of total global trade to over 26 percent while North-North trade declined from 46 percent to less than 30 percent.17 And today, some of these players are already competing effectively in developed markets too, with many more starting to make inroads.
The die is cast . . .
The global mix of true industry leaders is far richer and more diverse than it was even a decade ago. Today, India’s three major IT consulting firms (TCS, Infosys, and Wipro)18 are among the largest in the world. The Tata Group is the United Kingdom’s largest industrial employer; Mexico’s Bimbo is the largest baker in the United States; and Lenovo has become the world’s largest PC maker.19 Brazil’s Embraer is the world’s third-largest aircraft manufacturer, drawing the majority of its revenue in 2012 from the United States and Europe.20 The list of the world’s largest and most influential companies is geographically distributed. The number of North American companies in the Fortune Global 500 fell from 215 in 2001 to 141 in 2013. The number of companies on the list based in Asia (excluding Japan) increased from 30 to 109 over the same period. And great businesses in other parts of the world, especially Latin America, are also on the rise.21 This shift is not over yet. Deloitte’s 2013 globalization survey suggests that it could continue apace: Two-thirds of executives expect competition from emerging giants to become more intense in both developed and emerging markets (figure 1).22
. . . and the game is afoot
For the first time, global competition features organizations from a range of remarkably different backgrounds, traditions, and geographies. Given the shift in the location of economic power, some argue that the advantage has now switched firmly in favor of the new giants. Certainly, the distinctive strengths they have built are impressive. But the new story of global competition is very unlikely to be a one-sided onslaught from the emerging-market leaders. Established players from advanced economies have decades of experience operating in broadly competitive markets, with a focus on delivering value to shareholders—consistently, and sometimes against the odds. Comfortable with the sophisticated needs of customers in advanced economies, they have demonstrated outstanding capacity to manage their brands successfully.23 In the Interbrand 2013 list of leading global brands, only one of the top 100—Mexico’s Corona—came from outside the developed economies.24 Developed-market companies also benefit from deep reservoirs of intellectual property and enjoy privileged access to most of the world’s leading educational institutions. Partly as a result, they have created most of the “high end” innovations that secure premium prices from the wealthiest of the global middle class. Advanced-economy companies benefit from a long history that has allowed them to build strong organizational, management, and leadership capabilities. Many have also moved faster than their new rivals to reduce hierarchical and sometimes rigid structures that can hinder agility. They have invested heavily in multicultural, globally experienced, and cosmopolitan leadership—and place high value on diverse perspectives and viewpoints across their talent systems. And they typically have deeper experience in penetrating new markets, working with multiple cultures, and adapting to different regulations. In short, they are seasoned campaigners, used to overcoming serious challenges, with a history of evolving as they find themselves in new circumstances.
Learning to win
So are the new giants outgunned? Are the most ambitious of them overshooting by attempting to grow share in their local markets, take advantage of their relative strengths in other emerging markets, and aggressively penetrate the developed world too? Not necessarily. They might have to be smart about their sequencing and priorities: Learning and competing globally simultaneously is hard. But the game today is wide open. For companies of all kinds and origins, the years ahead hold substantial opportunity and challenge. For giants both new and old, learning will be at a premium—learning about new customers, competitors, regulatory regimes, business models, management styles, and more. In fact, the winners are likely to be the fastest learners, including those who can identify and replicate the most critical capabilities of their rivals. One obvious source of learning is through collaborations, joint ventures, and partnerships. In Deloitte’s recent globalization survey, 59 percent of emerging-market executives surveyed said they often form joint ventures with local companies when operating in developed markets.25 They are not alone: Western corporations have also been nimble on this front. For example, General Motors has partnered with SAIC, China’s largest auto manufacturer, not only in China but also in other emerging markets with strong potential for growth.26 The value of such across-the-globe collaborations can extend beyond simple access to local knowledge and best practices. Smart collaborations can also create new insights and capability. For example, in 2012, the United States’ Boeing and Brazil’s Embraer forged a technology-led alliance to enhance the safety and efficiency of military aircraft. This working relationship is likely to help both parties as they look for new opportunities. Embraer is seeking to secure further US defense contracts, while Boeing hopes to increase its presence in South American markets.27 Global players from everywhere will also build essential new capabilities directly by watching and learning from their foreign competitors. Many new giants have realized that their traditional management approaches might be limiting their flexibility and speed—and addressed the challenge head-on. Haier, for example, reduced its focus on traditional hierarchy and levels of command, and redirected its orientation towards fast, effective project delivery—a move that was probably key in enabling its global expansion.28 And this isn’t a one-way process: Many of the best Western firms have also made intelligent moves based on their awareness of the growing strengths of new competitors. GE has built its own deep capabilities in innovating for less affluent customers.29 Unilever was quick to learn the critical importance of addressing social impact issues in emerging markets, and has become widely admired as a world leader in this regard.30 These companies are all faster, smarter, and more effective today than they were 10 years ago. But the requirement for continued learning, greater range, and new skills will persist and intensify. As markets become global, companies’ standards of ethics and transparency must become higher and more universally applied. Some companies have decided to move their headquarters from their traditional home base. Others, wherever they are headquartered, are already benefiting from more balanced management and leadership systems composed of both home-country and in-market talent.31 Many leaders will have to challenge their habits of mind and learn to question their assumptions. Faced with such varied competition, they might have to rethink their risk appetites, realizing that aggressive entrants focused more on opportunity and less on protecting existing share often have a different risk calculus. Crucially, many companies might also have to learn how to engage more constructively with regulators, governments, and civil society. As Professor Khanna, Jorge Paulo Lemann Professor at the Harvard Business School and director of the Harvard University South Asia Institute, observed in a recent interview, there is a growing symbiosis or “détente” between the public and the private sectors that is likely to be increasingly important.32 However, regulatory requirements, consumer product and service standards, and political expectations can be extremely challenging in unfamiliar markets. More broadly, business might also be expected to contribute on topics that have often been regarded as the primary purview of governments—either through “direct” contributions to job creation, education, and health or “indirect” contributions to broader issues, such as addressing income distribution or immigration reform. There is an additional complication: The new era of competition might also be leading governments to construct policies that advantage native players. In recent years, there has been a clear rise in “back door” protectionism— or preferentialism—using novel mechanisms seemingly outside WTO norms and regulations.33 Possibly, learning to anticipate, influence, and adapt to regulatory change will become one of the most critical competences of all.
Most emerging-market players are in the relatively early stages of learning to operate in cultures beyond their home markets. For many, success is very far from guaranteed, especially as they enter the developed markets. But their unique strengths are matched by a willingness to try many different paths to global success34 and a confident mindset. Deloitte’s 2013 globalization survey confirms the mood: The surveyed emerging-market executives were more confident than their developed-market counterparts about future success (figure 2).35 Whether this confidence is fully justified remains to be seen. But there are well-established precedents. For example, when Tata Motor Group acquired Jaguar Land Rover, these two iconic brands had been previously owned by premier Western companies and managed by well-proven leadership systems and approaches. Yet within Tata, they have flourished with remarkable speed, not only as a premium brand in emerging markets, but also back in Europe and the United States.36 In the coming years, we will no doubt see similar successes—and also examples of failure. This will be true for both new and established global players. All will likely require a new approach to competing globally, one that draws from a fuller repertoire of homegrown and learned capabilities. This “best of both” orientation will reach beyond the traditional model of adopting “best practices”; it will generate new insights and a whole suite of “next practices,” too. And who knows where that might lead? Perhaps, a few years from now, we might see a new trend in management science: the emergent field of hybrid studies, defining how best to “mash up” and repurpose winning bits and pieces of insight and technique drawn from both near and far.
By Ruzbeh Irani, chief group communications and ethics officer and member of the group executive board, Mahindra Group
The birth of the Mahindra Group predates India’s independence. Founded in 1945 as a steel trading company, we entered the automotive space in 1947 by bringing the iconic Willys Jeep onto Indian roads. Over the years, we have diversified into many new businesses in order to better meet the needs of our customers. Our driving force—the thread that unites our diversified group—is our core purpose to challenge conventional thinking and innovatively use all our resources to drive positive change in the lives of our stakeholders and communities across the world: to enable them to rise. “Rise” is also Mahindra’s brand promise, connecting us to a remarkably diverse set of global stakeholders who share the desire to seize and shape their future.
Our emerging-market roots have equipped us with many valuable capabilities. Having lived through the “license-raj” in India, a period when growth was limited by quotas and price was often controlled, Mahindra has mastered the art of frugal engineering. The ability to design and manufacture a distinctive range of mobility solutions packed with accessible technology while keeping costs to a minimum continues to energize our global expansion.
The rugged DNA of Mahindra vehicles makes them suitable for and attractive to many markets, especially those where affordable durability is considered essential. As an end-to-end mobility player, we have the potential scale to become a major competitor in international markets. Mahindra has also developed significant capabilities in the electric vehicle space, which we will bring to markets across the world.
Three lessons seem particularly important to Mahindra’s past and future success.
First, market-appropriate product portfolios are a precondition of success. Exporting products developed primarily for India is a legitimate starting point, but will not guarantee success beyond India-like markets.
Second, market success typically comes with onshore presence. This is required not only to drive and grow the business, but also to gain an in-depth understanding of consumers and to stay abreast of regulatory changes. While there is a role for expats in such operations, the need to build a strong, locally recruited management team, as is the case with Mahindra USA and Mahindra South Africa, cannot be underestimated.
Last, entrenched powerhouses—who benefit from their global platforms, scale, presence, and advanced product development capabilities—have made large investments in manufacturing and branding. Newer global players like Mahindra must find creative ways to compete.
Looking to the future, Mahindra believes that competition will remain fierce as companies from emerging markets try to capture increased market share, particularly in relative white spaces like Africa. Given the importance of scale in our industry, we expect that strategies involving collaboration and acquisition (for example, between Renault and Nissan, Geely and Volvo, Tata and Jaguar Land Rover, and Mahindra and Ssangyong) will remain critical and continue to shift competitive dynamics.
The bottom line
Many firms from the emerging world have arrived on the global stage at an impressive speed and scale. Most bring with them significant strengths that have served them well in their home markets, and that in many cases also position them for expansion into growing markets elsewhere. Some are already experiencing success in developed markets, too—but, to date, the new giants have a more limited track record in this arena. Meanwhile, more established global corporations have important, hard-won, and long-standing advantages of their own—and they have not been slow to acquire new capabilities as well. The field is set for a new, highly competitive game between giants with different legacies and advantages.
The outcome ahead is unclear. It’s impossible to say which firms will prevail. But one result of this new competitive reality is quite predictable: The winners will be increasingly impressive and effective companies. They will learn fast and create new capabilities, often by spotting and themselves creating the advantages held by those from different geographies. They will be networkers, collaborators, and partners, aligned with societies’ needs and governments’ goals. They will be diverse in their management ranks and quick to question their managerial habits of mind. They will, in short, be those who truly step up to the new reality of being global giants.