Pankaj Ghemawat

Thomas Hout

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">The Idea in Brief</h4>
 <div class="ideainbrief-contents">
 In the largest emerging markets, established multinationals and local players are battling for dominance. Conventional wisdom says MNCs rule in high-end, knowledge-intensive businesses; local companies, in low-end segments where production and logistics matter most.
 But the game is changing, say Ghemawat and Hout. Some MNCs in low-end segments are beating local players at their own game. And some local challengers are besting their supposedly more sophisticated competitors in knowledge-intensive industries.
 Whichever type of company yours is, you can invade the other’s turf using these strategies:
 <ul>
 <li>Exploit evolving market conditions. MNC Otis Elevator beat locals in China during a high-rise construction boom by quickly building out a service network.</li>
 </ul>
 <ul>
 <li>Manage convergences in costs. As local players offer more sophisticated products, their cost advantage declines, creating openings for established MNCs.</li>
 </ul>
 <ul>
 <li>Rework value chains. For example, consider specializing in one part of the chain. Bharti Airtel outsourced everything but customer care—and became the largest mobile-services operation in India.</li>
 </ul>
 The Idea in Practice
 A closer look at the three competitive strategies suggested by Ghemawat and Hout:
 <h2>Exploit Evolving Market Conditions</h2>
 As economies develop, customers and competitors evolve. By anticipating the changes and leveraging your knowledge of customers, you can spot opportunities to bundle services and products where you have an advantage. Example:&nbsp; 
 Indian wind-turbine maker Suzlon Energy leveraged its local knowledge and networks to offer a turnkey approach to selling: It began helping customers acquire permits for wind farmland, deliver and maintain the farms, and sell the power generated. Profits from these parts of the business have sometimes been higher than from the turbines themselves. 
 <h2>Manage Convergences in Costs</h2>
 Local companies in emerging markets formerly enjoyed cost advantages in manufacturing and distribution, based on their proximity to materials and customers. But that cost advantage is eroding: Governments in emerging markets are removing barriers to outside MNCs, thus lowering their costs. And market demand is forcing local players to offer more sophisticated products that cost more to produce. Result: a more level playing field for emerging and established MNCs. Both types of companies can work around or capitalize on this convergence. Example:&nbsp; 
 India’s software services provider Tata Consultancy Services is acquiring new low-cost capacity in locations outside India, such as Latin America. It’s also investing in U.S. and European operations to defend its position with customers around the world. Example:&nbsp; 
 Telecom MNC Nokia has expanded its Chinese production facilities, neutralizing up-and-coming local competitor Ningbo Bird’s cost advantages. 
 <h2>Rework Value Chains</h2>
 Emerging and established MNCs alike can find competitive opportunities by closely examining what customer needs may not be served by existing industry value chains. Some companies succeed by specializing; for example, Taiwanese computer assembly contractors help established multinationals such as Dell fend off competition from Chinese computer companies. And instead of competing with each other, they can collaborate to piece together and manage value chains across industries and geographies. Example:&nbsp; 
 Li &amp; Fung, the world’s largest contract supply-chain-management firm, manages front-end design, marketing, sales, and corporate governance in Hong Kong and production in China. For instance, the company can source product anywhere in the world for Western retailers who simply provide the brand. Or it can go further and manage the brand for the client, as it does for Levi Strauss in Asia.
 </div>
</article-ideainbrief>Western companies’ interest in emerging markets, especially China and India, is reaching a new level of intensity. Usual suspects such as IBM and Unilever, of course, are aggressively expanding their presence there, but so are nippy newcomers like Orbea, a $100 million Spanish manufacturer of ultralight carbon fiber bikes. At the same time, developing countries are pulsating with companies that think of themselves as the next multinationals, pushing outward from their home bases to establish global presence if not dominance.

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Reprint: R0811E
Multinational corporations from developed and developing economies alike are aggressively expanding their global presence, particularly in emerging markets. Industry traits largely determine the winners&#8212;but that needn&#8217;t always be the case, say Ghemawat, of IESE Business School, and Hout, of the University of Hong Kong. Companies can break the pattern by anticipating or creating new customer segments, managing cost convergences, or reworking the value chain.
Some established MNCs are succeeding in production- and logistics-oriented businesses, where local rivals usually have an advantage. One way is by using technology and capital to accelerate segments&#8217; growth. Samsung, Sharp, and others surprised Chinese producers with vicious price competition in flat-screen TVs, which quickly collapsed the demand for conventional TVs, bottoming out Chinese profits. Another way established MNCs are beating emerging players is on costs, as home appliance companies in the United States did when Haier tried to enter the U.S. market for midsize refrigerators.
Conversely, some emerging-market challengers are outperforming established MNCs in knowledge- and brand-intensive industries. Bharti Airtel has built the largest mobile-services operation in India by specializing in a limited part of the value chain (customer care and the regulatory interface) and outsourcing the rest, which freed up capital, made Bharti&#8217;s cost structure more variable, and allowed the company to radically undercut advanced-market prices. Firms such as India&#8217;s Suzlon Energy are also spotting opportunities to bundle ancillary services and products in which they have an advantage.
The authors point to these examples and others to suggest that conditions are right for aggressive global players to move outside their industry comfort zones.

Tomorrow&rsquo;s Global Giants? Not the Usual Suspects

Reprint: R0811E Multinational corporations from developed and developing economies alike are aggressively expanding their global presence, particularly in emerging markets. Industry traits largely determine the winners—but that needn’t always be the case, say Ghemawat, of IESE Business School, and Hout, of the University of Hong Kong. Companies can break the pattern by anticipating or creating new customer segments, managing cost convergences, or reworking the value chain. Some established MNCs are succeeding in production- and logistics-oriented businesses, where local rivals usually have an advantage. One way is by using technology and capital to accelerate segments’ growth. Samsung, Sharp, and others surprised Chinese producers with vicious price competition in flat-screen TVs, which quickly collapsed the demand for conventional TVs, bottoming out Chinese profits. Another way established MNCs are beating emerging players is on costs, as home appliance companies in the United States did when Haier tried to enter the U.S. market for midsize refrigerators. Conversely, some emerging-market challengers are outperforming established MNCs in knowledge- and brand-intensive industries. Bharti Airtel has built the largest mobile-services operation in India by specializing in a limited part of the value chain (customer care and the regulatory interface) and outsourcing the rest, which freed up capital, made Bharti’s cost structure more variable, and allowed the company to radically undercut advanced-market prices. Firms such as India’s Suzlon Energy are also spotting opportunities to bundle ancillary services and products in which they have an advantage. The authors point to these examples and others to suggest that conditions are right for aggressive global players to move outside their industry comfort zones.

Tomorrow’s Global Giants? Not the Usual Suspects

Summary.

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