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Global Enterprise 2020

The rise of emerging markets is rapidly changing the structure of the global economy. Many of the emerging markets are …

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, China is expected to surpass Germany to become the third largest economy in the world. China‘s GDP is expected to become the world’s largest by around 2030 and India‘s the world’s second largest by around 2045.
  • 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 India and none from China. In 2007, the figure was eight from India and eight from China. By 2025, there might be well over 100 companies from emerging economies in the list of the world’s top 500.
  • For the last several years, the annual output of people getting their masters and PhDs in engineering, technology and computer science in China and India each exceeded that in the 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. Bharti Airtel, India‘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.
  • In 2007, China was the third largest producer of motor vehicles in the world after Japan and the U.S. (see chart, p. 35). It is expected to be the world’s largest by 2015. During the eight years from 1999 to 2007, China 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 India could rise from 30 million today to 750 million by 2040.

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 India to assess market opportunities for GE. He concluded that the market was not yet ready. But he saw something else-a large pool of highly educated people who were not very expensive. That is when GE started to shift software development activities to India. Along with Infosys, Wipro and Tata Consulting, GE was one of the pioneers in launching the globalization of India‘s IT services industry. Welch saw something that was not obvious. He saw the future.

Compare Jack Welch with Jim Holden, in 2000 the president of Chrysler. Upon returning from a trip to India that year, he was quoted by the media as saying: “Call me when you’ve built some roads.” Apparently, what Holden did not see was the likelihood (and today the prediction of most auto analysts) that, by 2020, India will be one of the largest car markets in the world. By then, however, it will be far too late for Chrysler to make much headway in India.

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.

Robust China and India Strategies

By our estimates, less than one-tenth of Fortune 500 companies have even close to a robust strategy for either China or India, let alone both. By “robust strategy,” we mean a strategy that addresses head-on each of the four game-changing realities that China and India represent:

  • 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 China and India. 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.

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 U.S. market. Yet, by most estimates, over 80 percent of the market for its products and services is outside the U.S. While the U.S. market is largely mature, emerging markets (especially China and India) are growing at over 20 percent a year. 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, the bulk of the market opportunity in China and India is for ultra low-cost products and services that must be invented within these markets. Cloning or mere adaptation of U.S.-based products and services does little more than skim the surface of the vast opportunities in these emerging epicenters.

The multi-faceted opportunities in China and India are open to virtually any company. Companies that are not busy implementing robust strategies for China and India leave themselves vulnerable to attack by other players, be they traditional competitors or emerging champions from within these two countries.

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 China was barely 14 percent of that in the U.S. By 2007, it had jumped to 82 percent. In 2007, China added more square meters of urban floor space than all of the developed countries combined. India is behind China by about 10 years but following a similar path. As economic development in both countries spreads to the countryside, these trends are not likely to abate anytime soon. No wonder then that the price of virtually every commodity has risen sharply over the last 10 years and that China and India have become two of the largest contributors of greenhouse gases into the air that we breathe.

It is unlikely that, for the sake of lifestyles in the developed world, China and India 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 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 India‘s Tata Motors in January 2008, is a leading edge example of such 360-degree frugal innovation.

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 China and India are not just very different from those of the U.S. and Europe; they are also vast and internally very diverse. There is no such thing as the average Chinese consumer or the average Indian consumer. Thus, the winning corporation of tomorrow will have to be a master at the art and science of fine segmentation and mass customization. Technologies and platforms are increasingly global. In a seeming paradox, it is the very globalization of technologies and platforms that will enable companies to offer extremely customized and yet low cost products, services and solutions that will vary not just across individual customers but also from today to tomorrow.

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 Boston can now order an MRI scan on a patient after midnight and, if needed, have a highly experienced radiologist based in Bangalore send back his reading of the image within minutes. An architectural firm based in New York can do the overall design for a building in Manhattan but have the engineering details of the piping, plumbing and electrical wiring drawn up by a subsidiary in Shanghai. A PC company can source hardware and software components from 20 different locations, conduct assembly operations in five entirely different locations, and sell the finished laptops in more than 200 countries.

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 China or to take a high-end facial cream, SK-II, developed by its Japanese subsidiary and to roll it out globally.

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).

About anil k. gupta and haiyan wang