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1.2 Global Competition’s Changing Center of Gravity


The rapid emergence of a number of developing economies—notably the so-called BRIC countries (Brazil, Russia, India, and China)—is the latest development shaping the global competitive environment. The impact this development will have on global competition in the next decade is likely to be enormous; these economies are experiencing rates of growth in gross domestic product (GDP), trade, and disposable income that are unprecedented in the developed world. The sheer size of the consumer markets now opening up in emerging economies, especially in India and China, and their rapid growth rates will shift the balance of business activity far more than did the earlier rise of less populous economies such as Japan and South Korea and their handful of “new champions” that seemed to threaten the old order at the time.

This shift in the balance of business activity has redefined global opportunity. For the last 50 years, the globalization of business has primarily been interpreted as the expansion of trade from developed to emerging economies. Today’s rapid rise of emerging economies means this view is no longer tenable—business now flows in both directions and increasingly from one developing economy to another. Or, as the authors of “Globality,” consultants at the Boston Consulting Group (BCG), put it, business these days is all about “competing with everyone from everywhere for everything.” [1]

The evidence that this latest shift in the global competitive landscape will have seismic proportions is already formidable. Consider, for example, the growing number of companies from emerging markets that appear in the Fortune 500 rankings of the world’s biggest firms. It now stands at 62, mostly from the BRIC economies, up from 31 in 2003, and is set to rise rapidly. What is more, if current trends persist, emerging-market companies will account for one-third of the Fortune list within 10 years.

Look also at the recent sharp increase in the number of emerging-market companies acquiring established rich-world businesses and brands, proof that “globalization” is no longer just another word for “Americanization.” For instance, Budweiser, the maker of America’s favorite beer, was bought by a Belgian-Brazilian conglomerate. And several of America’s leading financial institutions avoided bankruptcy only by being bailed out by the sovereign-wealth funds (state-owned investment funds) of various Arab kingdoms and the Chinese government.

Another prominent example of this seismic shift in global business is provided by Lenovo, the Chinese computer maker. It became a global brand in 2005, when it paid around $1.75 billion for the personal-computer business of one of America’s best-known companies, IBM, including the ThinkPad laptop range. Lenovo had the right to use the IBM brand for 5 years, but dropped it 2 years ahead of schedule, such was its confidence in its own brand. It just squeezed into 499th place in the Fortune 500, with worldwide revenues of $16.8 billion last year and growth prospects many Western companies envy.

The conclusion is that this new phase of “globality” is creating huge opportunities—as well as threats—for developed-world multinationals and new champions from developing countries alike.


[1] Sirkin, Hemerling, and Bhattacharya (2008).

1.3 Globalization Pressures on Companies


Gupta, Govindarajan, and Wang identify five “imperatives” that drive companies to become more global: to pursue growth, efficiency, and knowledge; to better meet customer needs; and to preempt or counter competition[1]

Growth


In many industries, markets in the developed countries are maturing at a rapid rate, limiting the rate of growth. Consider household appliances: in the developed part of the world, most households have, or have access to, appliances such as stoves, ovens, washing machines, dryers, and refrigerators. Industry growth is therefore largely determined by population growth and product replacement. In developing markets, in contrast, household penetration rates for major appliances are still low compared to Western standards, thereby offering significant growth opportunities for manufacturers.

Efficiency


A global presence automatically expands a company’s scale of operations, giving it larger revenues and a larger asset base. A larger scale can help create a competitive advantage if a company undertakes the tough actions needed to convert scale into economies of scale by (a) spreading fixed costs, (b) reducing capital and operating costs, (c) pooling purchasing power, and (d) creating critical mass in a significant portion of the value chain. Whereas economies of scale primarily refer to efficiencies associated with supply-side changes, such as increasing or decreasing the scale of production, economies of scope refer to efficiencies typically associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution by entering new markets or regions or by increasing the range of products and services offered. The economic value of global scope can be substantial when serving global customers through providing coordinated services and the ability to leverage a company’s expanded market power.

Knowledge


Foreign operations can be reservoirs of knowledge. Some locally created knowledge is relevant across multiple countries, and, if leveraged effectively, can yield significant strategic benefits to a global enterprise, such as (a) faster product and process innovation, (b) lower cost of innovation, and (c) reduced risk of competitive preemption. For example, Fiat developed Palio—its global car—in Brazil; Texas Instruments uses a collaborative process between Indian and U.S. engineers to design its most advanced chips; and Procter & Gamble’s liquid Tide was developed as a joint effort by U.S. employees (who had the technology to suspend dirt in water), the Japanese subsidiary (who had the cleaning agents), and the Brussels operations (who had the agents that fight mineral salts found in hard water). Most companies tap only a fraction of the full potential in realizing the economic value inherent in transferring and leveraging knowledge across borders. Significant geographic, cultural, and linguistic distances often separate subsidiaries. The challenge is creating systematic and routine mechanisms that will uncover opportunities for knowledge transfer.
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