My last post discussed how Samsung went from a good local competitor to a great global one. Many executives dream of following in Samsung’s footsteps by moving onto the global stage. Successful globalization, however, depends on a firm’s domestic market position, timing, and the owners’ preferences and time-horizon. Before they take the plunge, executives should consider the following questions.
1) Do you have a strong domestic base? Going global is expensive-companies must invest in brand, technology, and distribution. They often incur losses while cracking new markets. A secure home-market position can provide the funds for global expansion. Today, the average Japanese, US, or European multinational produces more than two-thirds of its output at home, generating the profits to fuel expansion abroad. Many governments favor their domestic champions. The Korean government provided low cost funds and allowed domestic concentration among leading firms like Samsung, for example, while Mexico’s government has granted Telmex a near monopoly in telecommunications, which provided the company with the funds to acquire companies outside Mexico.
2) Are you under attack at home? Fighting a two-front war–protecting a home market while expanding
The rise of emerging market champions is good news, in contrast, for the entrepreneurs and executives who lead firms in developing countries, who draw inspiration from the success of firms like Mittal or AmBev. Inspiration alone is not enough. Executives and owners of emerging market firms must also understand how they can take their firm from a good local player to a globally-competitive firm. My next few posts will introduce a framework, based on this research, describing the steps that firms such as Mittal, CEMEX, Infosys, and others followed in their rise to global leadership. I will use the case of Samsung to illustrate the framework.
From metal hut to global powerhouse
South Korea in the mid-1980s was a developing country with a per-capita gross domestic product one-sixth that of the United States. The Samsung Group, while large by Korean standards, was small in global terms. Nor was Samsung a significant player in the global electronics industry. Only a few years earlier, Samsung had entered the consumer electronics industry when it produced its first microwave oven in a corrugated metal hut. When switched on, the first prototype microwave melted, and required extensive rework before Samsung could secure a small order as a sub-contractor to a Panamanian customer.
Today, Samsung is a global leader in more than fifty electronic product categories, was number two in terms of US patents granted in 2008, with a brand among the twenty most valuable in the world (ahead of Apple, Pepsi,
In October 31, 1989 Mitsubishi Estate bought a controlling stake in the Rockefeller Group, owner of iconic buildings including Rockefeller Center and Radio Center Music Hall. The acquisition, for many, underscored the inevitable rise of Japan Inc. In the preceding decade, best-selling books like Clyde Prestowitz’ Trading Places: How we are Giving Our Future to Japan and How to Reclaim It and Ezra Vogel’s Japan as Number One confidently predicted that Japan Inc. would dominate wide swaths of the global economy by the 1990s. Instead, Japan lost a decade, and Japan Inc lost its luster.
In the past few years, firms from emerging markets have acquired high-profile firms. Mittal Steel bought Arcelor, while the Brazilian-Belgian brewer InBev acquired Anheuser Busch. Many North American and European managers reassure themselves that the rise of emerging market firms will repeat the Japan Inc story–initial success, followed by massive hype that ends in a fizzle. The analogy to Japan Inc is reassuring, but deeply flawed. This comparison ignores the underlying sources of advantage enjoyed by the best emerging
Turbulent markets create opportunities in three distinct ways: Churning markets introduce new resources into the economy, enable innovative combinations of existing resources, and stimulate novel consumer demands. New opportunities resemble the creation of a new dish in cooking, which arises from a new ingredient, a new recipe for combining familiar ingredients, or a shift in tastes.
Opportunities from new ingredients. In the sixteenth century, European explorers discovered unimagined ingredients in the New World, including the tomato. Italians initially thought tomatoes poisonous, and limited their use to decorative plants. Neapolitan chefs experimented with the new fruit, which thereafter became a staple of Italian cuisine. This new resource enabled previously inconceivable sauces, including Puttanesca, Bolognese, and Marinara.
The business analogue occurs when new resources enter the market. Resources include both hard assets (oil reserves or real estate, for example) and intangible assets
Turbulence produces threats and opportunities. Readers will nod their head in agreement with this statement in principle. Yet when thrust into a volatile situation, most people most of the time will fixate on risks and walk right past opportunities strewn along their path.
My last post described how students analyzing the steel industry in 1999 fixated on the risks of expanding into emerging markets and overlooked the opportunities. Most steel executives during the 1990s looked at the industry with the same risk-tinted glasses, viewing every change as a threat–globalization meant low-price imports while technological innovation would disrupt their established processes. A 2002 report by the consulting firm BCG concluded that “capitalism alone cannot solve [the] problem” of chronic losses in the steel industry. The report did not once mention Lakshmi Mittal, who had created a multi-billion Euro steel empire by exploiting opportunities in the world’s most volatile markets.
A focus on the downside of turbulence extends well beyond steel. In 2009, the World
It was a cool autumn evening in 1999, and Lakshmi Mittal listened as a team of MBA students painted a grim picture of the turbulence roiling the steel industry. Mittal had agreed to judge a case competition at the London Business School, where teams of finalists vied to analyze the success of his steel empire (including the private firm LNM and a public corporation Ispat International), and make recommendations to the firm’s founder and CEO.
Mittal’s success was undeniable. Since starting with a single steel mill in Indonesia in 1976, Mittal had built
2007 was a tough year for America’s microbrewers, firms such as Boston Beer Company, that brew speciality beers. The price of malting barley, used to color and sweeten beer, nearly doubled after barley farmers in the U.S. planted more fields with corn to take advantage of government subsidies for corn-based ethanol. The government introduced the subsidies to decrease American reliance on Middle Eastern oil, at a time when crude prices were rising and geopolitical forces threatened to disrupt supplies. That same year, poor weather in Europe severely limited yields of hops, which provide beer with a bitter tang, driving up the prices. Hops prices jumped just as the euro strengthened against the dollar, further jacking up the prices paid by brewers. That same year, SAB Miller and Molson Coors Brewing, the second and third largest brewers in the U.S., merged, creating a behemoth to further pressure profits of small brewers.
Microbrewing might seem like the kind of business that could escape market turbulence–the production technology hasn’t changed in centuries, demand is local, and the business is simple. Yet even in this
Everyone agrees that the global economy is flying through a patch of extreme turbulence. Recall that Lehman Brothers, which was founded in 1850, successfully weathered the American Civil War, multiple recessions, four financial panics, two world wars, depressions, oil crises, and 9/11. But the storied firm could not survive the seizure of global capital markets in 2008.
The present economic crisis has been so dramatic, that many people think it caused the volatility roiling markets. If the crisis triggered turbulence, according to this line of thinking, then the global economy should return to a period of stability once the worst of the downturn is behind us. Not so fast. Turbulence did not begin on September 9th, 2008. And it will not end when the global economy pulls out of recession. The current economic crisis is not the cause of market turbulence, it is simply the latest symptom of the volatility inherent in global markets.
In January of 2000, I stepped into “the pit” to teach my first class on entrepreneurial management at the Harvard Business School. These were heady days for aspiring entrepreneurs. Some MBA students raised tens of millions of dollars with little more than a business plan. A few recent graduates had founded Internet start-ups and measured their net worth in hundreds of millions of dollars (on paper at least). Some venture capitalists prowled the student haunts hoping to discover the founder of the next amazon or eBay.
My most vivid memory of the dot.com boom is not excitement, but surprise. I was surprised when the
Some emerging market companies excel at understanding and fulfilling local customers’ needs and aspirations, while working within their budgetary constraints. Companies like Brazil’s Natura or Mexico’s CEMEX think local when studying customers, but act global as they scour the globe for ways to meet local needs. This is more than plain-vanilla benchmarking. These managers do not copy products or business models that work in other markets, but instead identify practices or technology from around the world, and recombine them in novel ways to solve the unique problems facing their local customers.