Never fall in love with what brought you success.
Everyone has a plan till they get punched in the mouth.
—MIKE TYSON
IT’S CALLED PATH DEPENDENCY—OR MAYBE JUST BEING stubborn and conceited. Others call it hubris, the worst kind of corporate disease. The better you become at something, the less adept you are at admitting that something’s not going right, at reversing course, and responding to competitors. Just like human beings, corporations are creatures of habit. They learn how to do something very well and then forget that perhaps there are other ways and approaches that could enable them to expand or defend their market share and enhance their profitability.
Consider that ingenious nineteenth-century invention the wristwatch. Swiss manufacturers dominated the world market up until the 1950s with their supremely well-crafted mechanical watches—that is, until Timex of the United States came up with an alternative vision for the industry: a cheap, standardized watch powered by a battery. Timex was maybe the most un-Swiss watch ever made, but it sold by the tens of millions. The market was hungry for a timepiece that was affordable and easily available at drugstores and other similar outlets as opposed to jewelries. Moreover, the Swiss watches lasted forever but required periodic cleaning and other repairs, tasks that were expensively performed by the jewelers. Timex watches didn’t promise to last a lifetime, but as the company boasted in advertisements, its watches could “take a licking and keep on ticking” and didn’t require frequent repairs. What’s more, they were so inexpensive that when one went bad, you could simply dispose of it and buy a new one. The Swiss companies didn’t think they should be in the business of making cheap watches for the masses. They were too proud to do that—and too concerned about tarnishing their image—and thus they missed the boat completely.
Before the Swiss or even Timex had time to react, another American firm, Bulova, designed a watch whose time mechanism was a so-called tuning fork, a bifurcated piece of metal. When struck, it vibrates with a steady frequency that can be used to measure time. The technology had been invented in Switzerland, but again, no Swiss firm was ready to abandon the centuries-old practice of making watches with lots of tiny gears and springs—after all, they still reigned supreme in the luxury segment of the market. Bulova watches contained fewer components and were cheaper to make, lasted longer without repair, and were more accurate. They took the market by storm while the Swiss once more stood on shore, watching profits sail away.
The Swiss also invented the quartz watch, but neither they nor the American firms took advantage of the innovation. Two Japanese firms, Seiko and Citizen, made hefty profits by mass-producing quartz timepieces. Quartz is a natural crystal that vibrates when an electric current is run through it. They are even cheaper to make and more accurate than those using tuning-fork technology. True, during the 1960s, the two Japanese firms had to fight the perception in the market that quartz watches were inferior to American, let alone Swiss, watches, but the marketplace eventually adjusted and the American firms never recovered from the flood of Japanese-made quartz watch exports.
Meanwhile, back in Switzerland, massive losses and layoffs shook the national conscience. Watchmaking was as much part of the Swiss psyche as Gruyère cheese, and precisely for that reason, it took a complete outsider by the name of Nicolas Hayek to turn things around. After launching the Swatch in the early 1980s, Hayek single-handedly reclaimed the lion’s share of the global watch market for his adopted country of Switzerland. Not only was Hayek foreign born—he hailed from Lebanon—he’d gained his industry expertise in a completely different field: automobiles.
Underwhelmed by the sacred cows of watchmaking, Hayek challenged the conventional wisdom and redefined each of the detailed tasks involved in the business, from design and manufacturing to marketing and sales. His experience as a consultant to the automobile industry gave him the idea of reducing the number of components down to 51 from nearly 130, thus enhancing the possibilities for automating the manufacturing process, a crucial step to take in a high-wage country such as Switzerland.
The Swiss comeback in watchmaking is more the exception than the rule, and the match is not yet over. Just as upstart American firms once challenged the two Swiss watchmaking cartels, so now Indian and Chinese firms are starting to challenge Swatch’s global dominance. The more confident the Swiss are that their watch is unassailable, the better the chances their competitive edge will disappear in a relative heartbeat.
In fact, the list of established companies in the United States, Europe, and Japan that have fallen into the competency trap of thinking they were invincible is long and growing. Let’s use initials here to protect corporate identities: NCR, ABB, ICI, AEG, NEC, JAL, and on and on. If these names were carved on tombstones, they would make for an impressive corporate graveyard. Blind adherence to what worked in the past undid all these erstwhile corporate giants, widely regarded once upon a time as examples to emulate. Meanwhile, emerging market multinationals are thinking outside the box and charging right past established companies all across the developed world.
We have already seen many illustrations of the new rules of competition pioneered by emerging market multinationals. In bread making, Bimbo surged past Sara Lee by executing before strategizing and by focusing on executing after a workable strategy was put in place. Embraer followed the same pathway in regional jets in order to surpass Bombardier. In the fast-moving world of IT services, Infosys irrupted onto the global stage by following the same formula: execute, strategize, then execute again.
The management lesson here is not that emerging market multinationals will always win or that they are inherently superior at executing efficiently, effectively, and on time. The more important point is that superior execution can be learned and can become the basis for adapting the company’s strategy in real time or even for reinventing the company. After all, that’s exactly what IBM achieved when it got out of the computer business.
Or consider the Coca-Cola Company. It made and sold carbonated brown sugar water for decades, turning itself into a veritable machine for printing money. Shareholders and top management made fortunes—back in the early 1990s Roberto Goizueta was the first CEO to break the billion-dollar barrier in annual compensation. Everything was going according to plan, until consumers changed their mind and shifted their preferences toward water, juice, and sports drinks. The guys in Atlanta couldn’t understand what was going on. They insisted that Coca-Cola was a soft-drink company, straight and simple. The company ground up four CEOs over the course of a single decade before realizing that it was in the beverage business. Making Coca-Cola innovate required going back to the drawing board. Executives had to do market research, come up with new brands, position them in the right segment, and think through all the details about procurement, bottling, distribution, and sale—a gargantuan task for a firm long used to telling the consumer what to drink, and still it wasn’t an entirely successful undertaking. While Coca-Cola is roaring in key markets like Japan or Mexico, it still trails Pepsi in China and is badly behind in bottled water and sports drinks worldwide, although it has managed to turn the tide in juices and canned coffee.
The moral: Coca-Cola’s addiction to carbonated drinks almost brought the company down. You can’t let your star product become a sacred cow. Being highly successful and profitable with something can blind you to new trends in the market and render you unwilling to abandon strategies and products that are no longer tenable. A company locked into the self-complacency of past success sooner or later is going to the canvas, just like a boxer who is badly prepared for a fight. It’s a state of mind that needs to be avoided at all costs.
As the Coca-Cola case demonstrates, reinventing the corporation to meet new demands or circumstances is no easy task. Internal and external resistance must be overcome. Individuals and companies are subject to inertia. We tend to escalate our commitment to a course of action we believe effective and successful even after receiving disconfirming feedback. It’s a perfectly human tendency and flaw. We hope that things will turn around and that circumstances will return to a state we consider as normal, one that does not require adaptation or doing away with the sacred cows. Managers can easily fool themselves into thinking that nothing of significance is changing. Employees and suppliers, too, are likely to reinforce the feeling of calm just before the storm. They may be too averse to change for the good of the company, convinced that the old sacred ways will eventually prove as useful and effective as in the good old days.
Certainly, your competitors will do nothing to encourage you to change either, especially the emerging market multinationals. While you enjoy the fleeting profits generated by the old way of doing things, they will keep on improving their products and their operations. Acer, Samsung, and BYD were sitting by the sidelines, watching their industries evolve and preparing themselves for the big assault on the established companies. They imagined a better way of competing, and they took everyone by surprise when they catapulted themselves to leading positions in the global market.
Consider next the idea that niches can become stepping-stones into the mainstream of the market. Proud and stubborn firms like Electrolux, Whirlpool, and GE saw Haier coming into their backyard. They could see that the Chinese upstart was emphasizing small segments of the market that they did not care about, but they dismissed Haier as a marginal player from a developing country. Big mistake.
Heineken lost its prized distinction as the world’s leading import beer to Modelo’s Corona, which managed the niche with more conviction and passion. L’Oréal’s reluctance to use direct sales channels led the firm to lose important opportunities in emerging economies, paving the way for firms such as Natura to succeed and facilitating also the expansion of established firms like Avon, with more experience in direct sales. “Cater to the niches” is the twenty-first-century response to the twentieth-century obsession with the mainstream of the mass market.
To be successful, niche thinking needs to permeate the entire corporate culture. For many years, BMW seemed incapable of doing anything wrong. It reigned supreme in the segment of sporty sedans, one that no other company managed to occupy. The “machine for driving” was simply invincible—until the Bavarian firm lost its focus in an attempt to expand its presence into the mainstream of the market without a good plan. In 1994 it acquired Rover, the troubled British automaker, and couldn’t make it compete. “We set out targets,” one senior BMW executive admitted, “but left them to get on with it.”1 After a mere six years, BMW dished Rover to a group of British investors, the so-called Phoenix Consortium, who couldn’t make any good of it either. The company was later liquidated, with Chinese SAIC Motor Corporation Limited acquiring part of its assets. After admitting its mistake and rectifying, BMW is blooming again by sticking to its winning formula: German engineering for the discerning auto owner who loves to feel the road.
Apple also seemed to have lost its way in the 1990s. Observers declared the company dead in the wake of the computer-clone revolution. Instead of taking the established companies head on, Apple went back to its roots, designing computers that were easy to use, cute, and full of personality. The plan was to appeal not only to the minds but also to the hearts and senses of its buyers, turning them into unconditional fans. Apple succeeded where most other companies tend to fail, by transforming a commodity product into an object of desire. It takes conviction and resolution to swim against the stream, to reject the conventional wisdom, to choose a course opposite to the one taken by your competitors.
Today BMW and Apple are among the world’s most valuable brands, but they were in no way entitled to success. In fact, managers almost killed the brand by drifting away from their winning formula. Some products and some brands are simply made for a niche. If you want to go mainstream, then you need to come up with a different formula. That’s what Swatch did. It did not seek to reposition Omega or Longines outside the natural and logical segment for those upscale brands. Rather, it launched a new brand, mass-producing colorful watches for customers seeking a youthful style in a Swiss watch.
One of the most devastating examples of path dependency and falling prey to sacred cows is the way in which many established firms from Europe, Japan, and the United States forgot that scale can be everything, especially when it comes to shocking your competitors by preempting them. This is a prime area in which emerging market multinationals have beaten the market leaders of the past at their own game. Samsung conquered the global consumer electronics market by making bold bets on ever-larger manufacturing plants to make innovative products using the newest technologies. The likes of Sony, Panasonic, and Philips simply didn’t dare to match the South Korean firm. Kraft lost its leadership in candy for the same reason, stalling on its own caution while the bold Argentine firm, Arcor, took over top global status. In the world of wind turbines, companies such as Sinovel or Suzlon are rapidly gaining ground relative to powerhouses like GE Wind following the same principle of scaling to win.
Anheuser-Busch, even before its merger with Brazil’s InBev, understood the importance of scale in production and distribution. It chose to blanket the market with brands and ramp up volumes fast. It makes billions of dollars in profits by selling a zillion servings each year. True, thousands of boutique brewers do just fine without becoming huge. But notice that even Modelo of Mexico needed to sell large volumes of its niche-oriented Corona brand in order to turn a profit. And let’s not forget that beer is not a functional product meant to satisfy some physical need. Beer is characterized by social and sensory attributes: you don’t drink beer alone, you enjoy it with your friends after a day at the office or while watching sports. The brand almost conveys a lifestyle, a way of having fun. The bigger the scale, the bigger the party. Successful scaling frequently means worrying about how the customer will perceive the product, not just making lots of it.
Scaling is not necessarily at odds with preserving a taste for the unique and the well crafted. Brands like Swatch or Zara sell by the millions but have managed to retain a sense of exclusivity. They shape customer expectations by launching collections and creating a sense of scarcity. While it is true that watches and clothes lend themselves to this type of market positioning, not all companies get it right. In fact, most get it awfully wrong. Seiko and Casio both lost their ability to capture the imagination of watch buyers. Or think about how the Gap managed its way to decline by ignoring the simple truth that people seek style and differentiation when it comes to clothes.
A telling example of the importance of scaling that has little to do with fashion is Huawei’s rise to the top of the global telecommunications equipment industry, a business once dominated by the likes of Siemens, Cisco, and Alcatel. The firm saw an opening in the market by catering to the unique needs of rapidly growing operators such as Telefónica, América Móvil, and the large Chinese firms. Huawei did not compromise on quality, customization, or service. The company fought hard to win customers specifically so it could build rapidly up scale.
Nowhere is the increasing competitive edge enjoyed by emerging market multinationals more clearly felt than when it comes to taking advantage of one of the key characteristics of the new global economy of the twenty-first century: chaos. Acer of Taiwan did not outpace IBM, Dell, and HP because it had superior technology. It prevailed over them because of its homegrown ability to cope with uncertainty, ambiguity, and complexity. It learned how to navigate the turbulent waters of the industry and the global economy, and then deployed that expertise throughout its worldwide operations. Acer accepted risk as constant in the new competitive landscape and turned it into an advantage.
Orascom Telecom of Egypt has succeeded in the same way, expanding into some of the most inhospitable markets in the world, places like Iraq and North Korea. Bharat Forge managed to become the world’s second-largest forging company by overcoming the shortcomings of the chaotic business setting in India. The new global economy demands that companies cope with chaos not by avoiding it but by turning it into a distinct capability, by embracing it. This is another sacred cow to avoid: the idea that risk is something to be afraid of.
Look at how American banks rushed out of Latin America in the wake of the infamous debt crisis of 1982. One government after another defaulted on its bonds, throwing the entire financial sector into disarray. The likes of Citibank, Bank of Boston, and Bank of America were scathed and scared, and vowed never ever again to make the same mistake. While the region went through a decade of sluggish economic growth and hyperinflation, it eventually recovered, presenting a golden opportunity for banks that dared seize it.
Anticipating the upswing, Canadian and, especially, Spanish banks took advantage of a wide-open opportunity. They acquired Latin American banks by the dozens. They sent expats to clean up the balance sheets, establish risk assessment procedures, and set up state-of-the-art information systems. Then they moved from one country to the next, creating a truly regional banking franchise. Instead of catering to the relatively safe upper segment of the well off, they targeted the masses, encouraging them to deposit at the bank the money they hoarded under the mattress. It was a risky bet. But by embracing chaos, Santander and BBVA established themselves as the largest banks in the region by the start of the new century. Today, they are laughing all the way to the bank—their own—watching Latin American economies grow and prosper. In 2011, Santander made more than half of its $5 billion in annual profits in Latin America. Yes, $5 billion.2
Or think about the Brazilian, Indian, and Chinese mining firms that are investing in sub-Saharan Africa like there’s no tomorrow. Africa is at the high point of the so-called long arc of geopolitical instability that stretches from Latin America all the way to Southeast Asia, and includes such chronically unstable regions as the Caucasus and the Middle East as well. Market-oriented reform governments, often corrupt, dot this part of the world that is so well endowed with natural resources. Operating successfully as a mining company is not as simple as going in, paying bribes, and getting out. You won’t succeed if you follow that model—and you will place your company in legal jeopardy. You need to be smart about uncertainty, political turmoil, and chaos. In addition to the government, you have to deal with opposition groups, environmentalists, human-rights activists, community leaders, and competitors. You can’t ignore the full range of stakeholders. You must engage them.
Vale of Brazil, the world’s third-largest mining company, shows how to do it. Vale has a presence in Angola, Mozambique, the Democratic Republic of Congo, Guinea, and South Africa. Like other smart mining companies, it invests heavily not only in plant and equipment but also in relationships, nurturing ties all across the board to create a base of support for its activities. This is exactly how you embrace chaos in order to thrive on it. Research indicates that mining companies that invest relatively small amounts of resources and managerial time in cultivating stakeholder relations reap billions of dollars in increased market capitalization.
But political instability is just one dimension of chaos. There are also the difficulties of doing business under conditions of infrastructure and resource deficits. From their birth, many emerging market multinationals have had to do more with less, proving time and again that necessity is the mother of invention and sometimes launching innovations that change industry rules. Take the case of Zhongxing Medical. This Chinese company developed an X-ray device that generates direct digital images costing just 10 percent of the cost of equivalent devices made by established multinationals.
The bad news for old-line firms: companies used to operating in chaotic environments can drive you out of the industry. The good news: you can set up R&D units in those countries to innovate on the cheap. GE Healthcare has used its R&D centers in emerging economies to develop local-market products that later were adopted worldwide, like its famous handheld electrocardiogram device.
The path to global riches has frequently entailed being on the watch for corporate acquisitions. Emerging market multinationals have the cash to acquire their way to the top thanks both to the profits generated in their rapidly expanding domestic markets and to their export competitiveness. But all companies would be wise to learn from them the principle of acquiring smart, of buying what makes sense strategically and only if it brings to the company something that can be useful once integrated with existing operations. Tenaris of Argentina became the leading supplier of tubular goods to the oil industry by thinking about its business as one requiring a worldwide network of integrated facilities offering a service to its customers as seamlessly global as the products it makes. Cemex also acquired smartly and integrated cement factories and distribution systems around the world in order to gain an edge over famed competitors like Holcim. Tata Communications, a newcomer to the world of global voice telecommunications, turned its Indian origins and membership in the Tata group of companies to its advantage, succeeding where giants BellSouth and AT&T had failed. Tata’s secret: thinking big and building, piece by piece, a global presence to cater to the needs of global customers.
Smart acquisitions enabled Tenaris, Cemex, and Tata Communications to win big in ways that their competitors could not because they were hostage to the old thinking that acquisitions are trophies to be displayed as proof of their success. In fact, acquisitions are only the first step on the long way to success. For years, GM and Ford displayed their acquisitions as if they were works of art. Neither could be bothered to learn much from Saab and Volvo, the storied Swedish automobile brands that they acquired in 1990 and 1999, respectively. Sure, GM and Ford managers were thrilled because they could request a Saab or a Volvo as the company car, but they did little to make the acquisitions work and even less to see how they could enhance the competitiveness of the parent company. Rather, they treated the newcomers as silos separate from the rest of the corporation, thus foregoing any possibility of cross-fertilization.
The Detroit approach to acquisitions is a far cry from the hands-on way in which Unilever handles the process. The Anglo-Dutch food group likes to write multibillion-dollar checks. Who doesn’t? Consider ice cream, where Unilever is the largest global player, with an 18 percent market share. In order to get there, they digested Popsicle, Klondike, Mio, Breyers, Kibon, Ben & Jerry’s, and dozens of other ice-cream brands worldwide. So did Nestlé, its archrival, which acquired Clarke Foods, Dairymaid, Dreyer’s, Dairy World, Schöller, and bits and pieces of Häagen-Dazs to reach nearly 13 percent global market share. But Unilever stays ahead of the game by constantly reorganizing its portfolio of brands, looking for synergies in production and distribution, and exploiting niches in the market through savvy marketing and advertising. No emerging market multinational has yet challenged Unilever’s dominant position, in large part because when it comes to sacred cows, Unilever thinks as if it were an emerging market firm still struggling up from its roots: it never stays still, never takes anything for granted, is never complacent about its accomplishments, and never hesitates to change in response to new threats and opportunities.
Faced with the complexity, risks, and pitfalls of the global economy of the twenty-first century, many companies become paralyzed by the notion that cautious expansion into other markets is the best recipe for success. Not so the emerging market multinationals. BYD, the Chinese battery maker, has a good chance of becoming the world’s leading electric vehicle maker thanks to its daring plans for global expansion. América Móvil has succeeded where BellSouth once failed, following the same principle of expanding with abandon. Its dominance in the Latin American mobile telecommunications market is testament to the principle that it is never too early to think about foreign markets. Fact is, if you wait until you’re ready, you’ve waited too long. In pioneering the offshore lab, Ocimum Biosolutions has challenged companies in its industry and beyond by exploiting the intersection between IT and the life sciences, moving aggressively to build a global presence, and never wasting time looking back at the road traveled.
McDonald’s is a good example of an established firm that was once obsessed by being cautious but managed to become bolder over time. The fast-food chain was the most methodical and risk-averse company in the world. It had a globally recognized brand desired by billions but preferred not to venture into sketchy countries. Why bother with the risky parts of the world if you can make money comfortably in the United States and a handful of safe markets such as Japan, Britain, and France? In fact, the company didn’t enter a market one might consider politically problematic or chaotic until it turned 50 years old.
Once it had saturated safe markets with too many restaurants, however, McDonald’s had no other choice but to embrace chaos—and it did. Eastern Europe, China, Africa, the Middle East, and South Asia all became home to the Golden Arches. McDonald’s had to create supply networks from scratch, deal with governments that evicted it from prime retail locations (such as the famous one off Tiananmen Square), and train employees that had little understanding for the means and ways of its vintage smiley service. The company relied on local partners in many of these risky markets in order to learn the ropes. It trained managers to cope with the unexpected and prepared itself to deal with chaos on a grand scale.
In previous chapters we’ve learned the new rules of global competition written by the emerging market multinationals. We’ve also seen that they have no monopoly over these rules—these are principles that can be adopted and learned. Sadly, though, very few companies from the developed countries are listening and willing to change their ways. Many believe that things will turn around in some magical way. Others are trying to adapt but find themselves stuck in old thought patterns. If the competency trap were inevitable and impossible to escape, there would be little point to mentioning it here: emerging market multinationals win, old-line global behemoths lose—game over, case closed. But being able to redefine the established business model is not the sole province of the new multinationals.
In electronics, for instance, Philips took a clear-eyed look at emerging market competition and chose a different path than most of its developed-world counterparts, the likes of Sweden’s Electrolux and Japan’s Panasonic. Executives began by acknowledging that the company’s existing operations were beyond repair, then spared no sacred cows in meeting the challenge: they jettisoned plants, workers, entire divisions, and old organizational practices. Company leaders decided to outsource all production of such commodity products and components as bulbs, CRTs, monitors, speakers, chips, TVs, VCRs, and DVDs, while retaining control over brand and distribution channels. Then they poured resources into lighting systems and healthcare solutions, researching and designing new technologies that bundle hardware, software, and services to win over customers worldwide. Today, while Philips makes billions in annual profits, Panasonic and Sony are losing both market share and money.
Volkswagen provides an equally powerful illustration of how enlightened corporate leadership can meet the competitive challenge posed by the emerging market multinationals. Like Philips, Volkswagen went through years of financial underperformance and painful layoffs before realizing that meeting the new competitive dynamics of the industry meant getting rid of sacred cows. The company now makes automobiles all over the world, using German technology to be sure, but taking advantage of a globally integrated approach to product design, manufacturing, and marketing. While Hyundai, Tata Motors, and Geely may one day pose an even more formidable challenge than the Japanese did, Volkswagen has demonstrated a flexibility and versatility that will be difficult to match.
Another company that adapted to changing circumstances is chemical giant DuPont. The company grew during the twentieth century by exploiting the inventions generated by its R&D department, including nylon, neoprene, and Teflon. But in the new century, this long-successful business model of inventing, producing, and selling generic materials ran headlong into high market turbulence and increased competition. So DuPont Chairman and CEO Ellen Kullman decided to shift direction by making the company more customer oriented. Today, DuPont defines itself as a “market-driven science company” and “Global Collaboratory” more focused on its activities and engaged in collaboration projects with clients in order to provide them with the materials and solutions they need to manufacture better products.
The key takeaway: nothing has been inexorable about the rise of the emerging market multinationals. They have embraced the seven principles contained in this book, something that companies from other countries can emulate. If IBM, Philips, DuPont, and Volkswagen could do it, so can your company. The key is to revisit every sacred principle, every object of adoration that has become part of your company’s legend.
In the multipolar world of the twenty-first century, corporate leaders must pay attention to mundane details and challenge their organization to constantly revisit old ways of thinking and doing. They must follow the winding path in Figure 7 to find their company’s place under the sun of the new global economy.
FIGURE 7
A treasure map for competing in the new global economy.
Start your voyage of discovery by executing well before you come up with, and commit to, a grand strategy. And then don’t forget about sustaining execution. Identify neglected niches that offer wide avenues for success, and then scale your operations to win. Embrace chaos, acquire smart, and expand with abandon in order to surpass your competitors. A permanent revolution is what’s needed—no sacred cows! And don’t forget to learn from the new kids on the block. They came from the emerging economies, they are masters at making the most out of scarce resources, they are street smart, they’re eager to make it to the top, and they’re here to stay.