Building World Class Companies

Emerging Giants: Building World Class Companies From Emerging Markets

In the past 20 years, stages of liberalization have pushed away protectionist barriers in developing countries. As MNCs from North America, Western Europe, Japan, and South Korea came into the emerging markets, many local companies lost market share or sold businesses, but some stood tall. India's Mahindra&Mahindra, Haier Group from China, and various other companies in developing countries have held their battle against the competition, reformed their businesses, explored new opportunities, and built excellent companies that are today giving their global competitors a run for their money.

Tharun Khanna in the article hihglights 134 companies in ten emerging markets " Argentina, Brazil, Chile, China, India, Indonesia, Mexico, Poland, South Africa, and Turkey " and analysed data on each company, starting with its strategies to its performance in stock market.

The companies implemented the following strategies: Exploit Understanding of Product Markets Build on Familiarity with Resource Markets Treat Institutional Voids as Business Opportunities Some capitalized on their knowledge of local product markets.

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The Philippines' Jollibee Foods, for example, profitably battled McDonald's because it understood that Filipinos like burgers with a particular soy and garlic taste.Some have exploited their knowledge of local talent and capital markets, hence serving customers both at home and abroad in a low-cost manner. India's software companies recognized the possibility of providing services to customers abroad at least a decade before Western companies even considered getting Indian software professionals.And some emerging giants have exploited institutional voids to create profit-oriented businesses.

China's Emerge Logistics helps foreign companies navigate the country's weak transportation system and confusing bureaucracy, guiding them from ports to retail outlets.Many companies shy away from doing business in developing nations.

CEOs are all too aware that such countries lack the market institutions needed to do business successfully such as consumer-data experts, end-to-end logistics providers, and talent search firms. But avoid investing in developing countries, and you won't remain competitive for long.

How to proactively understand the risks? As authors Khanna, Palepu, and Sinha recommend, first analyze each country's institutional context, including political and social systems; openness to foreign investment; and quality of product, labor, and capital markets. Then decide: Should you work around your target country's institutional weaknesses? Create new market infrastructures (for example, your own in-country supply chain)? Or stay away because adapting your business model would be impractical or uneconomical? Dell Computer chose to adapt its business model to enter China. After discovering that Chinese consumers didn't buy over the Internet (a cornerstone of Dell's North American business model), Dell sold its products through Chinese distributors and systems integrators. Correctly diagnose developing countries' institutional contexts, and you make savvier foreign-investment decisions. You avoid markets you can't profitably serve”while capturing the wealth of opportunities presented by other emerging markets.The local companies keep big firms at bay by following a blend of strategies.

CREATE CUSTOMIZED OFFERINGS

Simple customization techniques, based on intimate knowledge of local consumers, have sparked major success for homegrown champions. Example: India's CavinKare packages shampoo in single-use sachets, making the product affordable for Indians who can't afford big bottles and regard shampoo as a luxury. CavinKare is the largest local player in India's $500 million shampoo industry.

DEVELOP BUSINESS MODELS TO OVERCOME OBSTACLES

Smart local companies identify key challenges posed by domestic markets, then design business models to overcome them. Example: Shanda has avoided the software piracy problem plaguing global video-game leaders in China by developing highly popular multiplayer online role-playing games. These are impossible to pirate, because they're live experiences created by many players over the Internet.

DEPLOY CUTTING-EDGE TECHNOLOGIES

Local winners use new technology to control operating costs and deliver quality offerings. Example: Brazil's Gol Linhas Aereas Inteligentes (Gol), South America's first low-cost airline, uses the latest model Boeing 737 in its single-model fleet. The young fleet requires less maintenance, so Gol manages quick turnarounds, which lowers cost per available seat. Gol's use of e-tickets and unmanned check-in kiosks has further driven down costs.

TAP LOW-COST LABOR

Local champions leverage cheap labor pools rather than relying on automation. Example: China's largest outdoor advertising firm, Focus Media, has installed LCD screens in 130,000 locations in 90 cities. Instead of linking the screens electronically through expensive technology, it uses employees who go from building to building on bicycles to replace advertisement DVDs. This decreases operating costs, enabling the company to offer advertisers immense flexibility cheaply.

BUILD SCALE QUICKLY

Successful local companies fend off multinationals and other regional players by rapidly expanding their reach. Example: Focus Media initially faced many rivals across China. To gain nationwide reach, it pursued an aggressive acquisition-led strategy. Its national coverage attracted advertisers, diminished regional rivals' competitiveness, and vaulted it past two global leaders involved in China's outdoor advertising industry.

USE MANAGEMENT TALENT TO SUSTAIN GROWTH

To avoid the problems that can come with high growth, domestic dynamos put the right management talent in place. Example: Russia's Wimm-Bill-Dann Foods, founded by five entrepreneurs with borrowed funds, changed its management structure when multinationals began encroaching on its local dairy and fruit-juice markets. The founders hired a new CEO with extensive industry experience and gave him free rein. They also brought in seasoned managers from multinational companies. WBD now has 34% of the Russian market for packaged dairy products.All these strategies have helped companies with low financial power to become successful in their countries and become a competitor to the Multinational Giants already existing in the economy.