The rise of emerging markets is rapidly changing the structure of the global economy. Many of the emerging markets are no longer small. They now constitute eight of the world’s 24 largest economies and are growing at three times the rate of their developed counterparts (see chart, p. 34). Consider the following:
- In recent years, over 50 percent of the growth in world GDP has come from emerging markets. By the end of 2008,
is expected to surpass China to become the third largest economy in the world. Germany ‘s GDP is expected to become the world’s largest by around 2030 and China ‘s the world’s second largest by around 2045. India
- In 2007, for the first time in history, the total deal size of emerging-into developed economies was estimated to have exceeded that of developed-into emerging economies. The hunted are fast becoming the hunters, and it is no longer obvious who is the predator and who is the prey.
- In 2000, the list of the world’s 500 largest companies by market cap included only three from
and none from India . In 2007, the figure was eight from China and eight from India . By 2025, there might be well over 100 companies from emerging economies in the list of the world’s top 500. China
- For the last several years, the annual output of people getting their masters and PhDs in engineering, technology and computer science in
and China each exceeded that in the India U.S.
- Emerging economies are also becoming the font of some radical innovations, such as a $3,000 car, a $300 laptop and a $30 cell phone.
‘s leading cell phone operator, provides 2-cents-per-minute nationwide cell phone ser – vices and yet has some of the highest profit margins in the world and a market cap of over $30 billion. Bharti Airtel, India
- In 2007,
was the third largest producer of motor vehicles in the world after China and the Japan (see chart, p. 35). It is expected to be the world’s largest by 2015. During the eight years from 1999 to 2007, U.S. alone accounted for 42 percent of the worldwide growth in the production of motor vehicles. According to Goldman Sachs, the total number of cars on the roads in China and China could rise from 30 million today to 750 million by 2040. India
Given the rapid pace of transformation, the current decade will almost certainly represent a strategic inflection point in the global economic landscape. As with all turning points, not every enterprise will make it from here to there. We outline below what the features of a global enterprise must be if it is to emerge as one of the winners 10 years from now.
A Global 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 synthesize across this diversity. Becoming a prisoner of diversity is just as bad as being blind to it.
Jack Welch provides a concrete illustration of a business leader with a global mindset. In the mid-1980s, he went to
Compare Jack Welch with Jim Holden, in 2000 the president of Chrysler. Upon returning from a trip to
The presence or absence of a global mindset is what differentiates somebody like Jack Welch from somebody like the former president of Chrysler. Over the next decade, companies with global mindsets will lead the change. Those without it will wonder belatedly what happened.
By our estimates, less than one-tenth of Fortune 500 companies have even close to a robust strategy for either
- large and rapidly growing markets that are both rich and poor at the same time;
- platforms for radical cost reduction in most elements of the value chain;
- platforms to dramatically boost a company’s intellectual capabilities and innovation potential; and
- launching pads for the emergence of ambitious, highly capable, and fast-moving new competitors. True, it would be difficult to find a business leader who is not aware of the rise of
and China . However, awareness is not the same thing as having a robust strategy, one based on a deep understanding of the multifaceted opportunities and threats that these two markets represent. India
Consider the case of one Fortune 500 company with over $10 billion dollars in 2007 revenues. A leading player among U.S.-headquartered companies in its industry, it derives 75 percent of its revenues from the
The multi-faceted opportunities in
A Passion for Frugal Innovation
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.
In 1999, motor vehicle production in
It is unlikely that, for the sake of lifestyles in the developed world,
Note also that, over the next 20 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 ultra lowcost products and services. The Nano, a $2,500 car introduced by
Global Platforms, Customized Solutions
It may seem counter-intuitive, but we believe that the end-game in globalization will be extreme customization and not extreme standardization. Ask any serious observer (The World Bank, IMF or Goldman Sachs) to define globalization and the answer will be that globalization refers to integration across countries. “Integration” is a fundamentally different concept from “homogenization.” Heterogeneity within and across countries (in buying power, cultural norms, habits, language, geographic climate, you name it) will remain an enduring feature of humanity for many decades to come. Equally importantly, developments in information, communications and manufacturing technologies are rapidly reducing the cost of customization.
This is already evident in the ability of individuals to customize-at near zero cost-the PC they buy, the first Web page they see and the news they get. Over the next decade, it will also start becoming evident in other goods and services such as the medicines they take, the books they read, the clothes they wear and the cars they drive. Large emerging markets such as
A Globally Optimized Value Chain
The growing power and declining cost of communications technologies has dramatically reduced the need to physically co-locate complementary activities in the company’s value chain. A doctor in
Given the onward march of technology, the need for physical co-location of complementary activities will continue to decline. This trend will make it increasingly crucial for companies to push the envelope in terms of optimizing the choice of locations for individual activities. Also, as the economic attractiveness of different locations shifts over time, companies will need to be increasingly flexible in shifting the operational base of specific activities. William Amelio, Lenovo’s CEO, has termed this approach to running the company “world-sourcing.” Amelio is right on the mark. An ever-greater commitment to worldsourcing will indeed be one of the defining features of tomorrow’s global corporation.
A Strong, One-Company Culture
As companies become geographically more dispersed, the need for tight integration across organizational subunits will increase rather than go down. No CEO ever wants to have things go out of control and to let chaos reign. It is only when leaders are confident that the company would not fall apart that they are comfortable in pushing the envelope in creating a distributed organization with roots in many countries. GE, IBM, Cisco, P&G and McKinsey are some of the leading examples of how a global enterprise that is ready for tomorrow ought to be run. Every one of these companies has a very strong culture that defines who they are and what makes them different and superior to their competitors.
Creating a strong one-company culture does not mean a lack of diversity. P&G operates in almost every country on earth and has a large portfolio of brands, none of which are called P&G. Yet, you could go to any corner of the P&G empire and CEO Alan Lafley would hope that you get the same answer to key questions such as what is the job of a brand manager, why should we win in the marketplace, what are the two moments of truth, and so forth.
Companies that are effective at building a strong one-company culture pay particular attention to investing in corporate infrastructure-the communications and IT infrastructure, the HR infrastructure, the intellectual infrastructure and the emotional infrastructure. It is the reality of a strong infrastructure that makes it easy for a company such as P&G to appoint an Indian male as the general manager of its beauty care business in
To sum up, the successful global corporation 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. Organizationally, it will be managed as a globally integrated enterprise rather than as a federation of regional or national fiefdoms. And it will be led by business leaders who are masters at building bridges rather than motes.
Anil K. Gupta is Ralph J. Tyser Professor of Strategy & Organization at the Smith School of Business, University of Maryland at College Park. Haiyan Wang is managing partner of China India Institute in Bethesda, Md. They are the co-authors of The Quest for Global Dominance (Jossey-Bass, 2008) and The Battle for China and India (Jossey-Bass, 2009, forthcoming).