Globalization and new strategies for growth

Succeeding in rapid-growth markets is harder than it used to be

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Role of rapid-growth markets in revenue growth

What role do you expect rapid-growth markets to play in the following aspects of your business over the next three years?

Overall average scores for globalization

Source: Globalization Index 2011

Note: Total base = 992; ratings on scale of 1 to 5 where 1 = very significant and 5 = not at all significant; scores shown = percentage of respondents rating 4 or 5 (gray) vs. 1 or 2 (yellow).

Footnote:Boston Consulting Group, 2011 BCG Global Challengers: Companies on the Move: Rising Stars from Rapidly Developing Economies Are Reshaping Global Industries

Attitudes toward rapid-growth markets

Please indicate whether you agree with the following statements.

Overall average scores for globalization

Source: Globalization Index 2011

Note:Note: Total base = 992; ratings on scale of 1 to 5 where 1 = strongly agree and 5 = strongly disagree; scores shown = percentage of respondents rating 4 or 5 (gray) vs. 1 or 2 (yellow)

Key risks of rapid-growth markets

What do you consider to be the key risks that could derail growth in fast-growth markets over the next three years?

Overall average scores for globalization

Source: Globalization Index 2011

Note:Total base = 992; multiple answers; scores shown = percentage of respondents


Among our respondents, almost three-quarters say that rapid-growth markets will make a significant contribution to boosting their revenue growth over the next three years.

Role of rapid-growth
markets in revenue growth

But there are grounds for caution.

Rapid-growth markets can be difficult environments in which to do business, as many multinationals have found. More than half of our respondents think that these investments require much longer time horizons.

Betting the future on rapid-growth markets simply because they have the right economic and demographic conditions is not enough.

Almost half think that the cost of entering these markets was much greater than they had expected. A similar proportion thinks that Western executives overestimate the long-term growth potential of investing in these economies.


Attitudes toward
rapid-growth markets

A number of factors contribute to the "squeeze" on the ability of multinationals to extract value from rapid-growth markets. Multinationals entering China, India or Brazil must compete against other global firms who all see rapid-growth markets as their future.

They also face increasingly stiff competition from local companies that are growing. Ten years ago, there were just 21 companies from rapid-growth markets on the Fortune 500. Today, that number has risen to 75.

Companies also face the prospect of slowing growth, although the pace remains well above the rates seen in the developed world. Developed-market respondents point to asset price bubbles as the risk that could derail growth in fast-growth markets over the next three years.

Companies headquartered in rapid-growth markets worry less about asset prices and more about inflation, which continues to cause problems in some markets despite tightening monetary policy.

Key risks of
rapid-growth markets

Rapid-growth markets also have to contend with rising wealth inequality, a drop in exports to developed markets and heavy capital inflows that could become destabilizing. Among our respondents, 46% expect an economic slowdown in China over the next five years.

"There's no doubt that China will get richer over the next 10 years, but I do think there is a myopic presumption that all it has to do is continue to grow along a straight line and the future is inevitable and predetermined," says George Magnus, Senior Economic Adviser at UBS.

Betting the future on rapid-growth markets simply because they have the right economic and demographic conditions is not enough.

"If you're investing in these markets just because there are lots of Chinese or Indians, that's not exactly proprietary insight," says Pankaj Ghemawat, Anselmo Rubiralta Professor of Global Strategy at IESE Business School and author of World 3.0: Global Prosperity and How to Achieve It (Harvard Business Press Books, 2011). "Yet this is still the overarching strategic rationale behind many companies' plans."

"My prescription is that companies must pay careful attention to identifying the differences between these markets and those with which they are more familiar – and figure out strategies for addressing those differences."

Response: think like a start-up

1. Shed organizational baggage.

Developed-world multinationals have spent years refining their business processes and perfecting their business model. This experience gives them strong advantages, but it can also be a burden. Processes may be rigid, business models may be tired and the organization may lack the flexibility to adapt in response to changing external stimuli.

Investing in rapid-growth markets without adapting these legacy processes is often a recipe for disaster.

"Although a lot more companies are planning to invest in emerging markets, not all of them are ready and not all are organized to do so," says NV "Tiger" Tyagarajan, President and CEO of Genpact, a business process management company. "They still run their companies the same way that they did 30 years ago, and their leaders are still people who haven't travelled globally or who don't understand those markets."

Companies should rethink their approach from the ground up and behave more like a start-up than an established multinational. This will give greater flexibility and agility, and put them on the same level with local companies. Local companies are typically much younger and less encumbered with organizational baggage.

 

2. Devise innovative strategies that will secure a quick payoff.

In the past, companies recognized that investments in rapid-growth markets would take considerable time to earn a return. This was fine, as long as they could fund the new investments using profits from their core markets.

With developed markets slowing and needing their own investment in order to maintain competitiveness, it is no longer possible to recycle capital in this way. "With no growth in developed markets, companies need to invest in those economies just to maintain their market share," says Tyagarajan.

This liberates managers to develop innovative solutions that will enable them to earn a much quicker return.

"Business leaders of multinational subsidiaries in emerging markets will have to figure out some really creative ways to get off the ground quickly and ensure growth by finding a self-sustaining model," says Navi Radjou, Independent innovation and leadership consultant and a Fellow at Judge Business School at the University of Cambridge.

 

3. Take a broader stakeholder view toward the investment.

The financial crisis has re-awakened the debate about the role of business in society. Pure shareholder value creation is falling out of favor. In its place is a recognition that companies need to take into account the needs of a broader range of stakeholders.

Nowhere is this more apparent than in rapid-growth markets. With stakeholders including government, local communities and partners, the line can blur between the state and business. Governments can play a significant role in setting industrial policy and prioritizing investment.

Companies that enter rapid-growth markets often need to build infrastructure around them, which means that they are deeply involved in the development of the country itself, not just their own investment.

"You have to get involved in building up the institutions that will allow your company to operate," says Rakesh Khurana, Marvin Bower Professor of Leadership Development at the Harvard Business School.

"A lot of the institutional gaps exist precisely where the biggest growth opportunities lie, so companies need to think holistically about how they enter these markets and work with external stakeholders. They need to have a higher purpose that goes beyond pure economic logic and they need to think institutionally."