Think about some large numbers:
One billion new consumers added to the world economy in the past decade.
Two billion more joining in the coming decade.
$2 trillion (give or take a few billion) of new economic growth annually in the coming decade.
After struggling through the arid lands of parched growth for years, you stand on a dune overlooking this immense lake of opportunity. Now, are you going to approach it with a teaspoon or a bucket?
It’s not a trick question. Many businesspeople of the North have become conditioned to think small, because they’ve been fighting for incremental gains in scrubby markets. Unless they break the habit, they will bring teaspoons. Only bold and ambitious thinkers will come with buckets.
In the 1980s, 1990s, and early 2000s, though the business environment grew steadily more turbulent, mainstream companies could still survive through gradual change, honing core capabilities and creatively extending them to new markets. But pursuing incremental change in the context of the global tilt is not a reliable path to success. Human imagination and drive and the transparency of interconnectedness across the globe will help global GDP to grow 3 percent–plus a year for the next decade, even taking into account ongoing setbacks caused by the financial meltdown. At the end of ten years the total world economy will be on the order of $85 trillion.
Get yourself a bucket—and be prepared to change the way you do business. Increasingly, the life of a strategy is getting shorter and new and creative business models are emerging, sending the old ones to the trash heap. No matter what your model, at some point it will become irrelevant or obsolete or will lose value against new competitors and new opportunities. That point can arrive abruptly, without clear advance signals. Consider, for example, the reversed fortunes of Research In Motion (RIM) and Nokia, two of the leading power players in mobile phones up to 2006. As of this writing—scarcely six years after their dominance seemed assured—both are in deep trouble, beaten down by competitors with newer ideas, better technology, and closer contact with the marketplace. Heroic efforts to revive them may have come too late.
Staying ahead of the game will more and more require fresh thinking, attention to innovation—your own and others’—and expanding your horizons.
The central mental skill of leadership today is the ability to identify long-term, large-scale opportunities and then build the capabilities to turn them into reality. The problem for many leaders is that this new turn in the road leads directly away from lessons they’ve learned for much of their careers: Stick to your knitting; stay with your core competencies. And as we shall see, the lesson has also been drilled into the minds of investors, who as a result take a dim view of bold ventures that might compromise near-term financial performance.
The concept of core competencies, introduced by C. K. Prahalad and Gary Hamel in 1990 to describe an organization’s unique strengths, has helped many leaders focus their business. In particular it has helped solve the problem of investing resources in non-value-adding activities or those the company was not especially good at. The outsourcing trend of the 1990s was largely driven by this kind of thinking, whereby businesses shed activities others could do better. Along the same line, Bain & Company partner Chris Zook has documented the importance of preserving and leveraging the company’s core business. Zook’s research catalogues the many failures that result when leaders lose sight of their core and argues persuasively that companies can unlock growth potential by extending and building on core strengths that are underutilized.
The concepts developed by Prahalad and Hamel and Zook are widely used in designing and developing corporate and business unit strategies; they are reliable guides to incremental growth, but there is a flaw. They make leaders internally focused and biased toward leveraging existing capabilities. This internal orientation puts you at risk of missing serious threats to the core business, some of which might require new capabilities. The way I see it, strategy making as usual is basically an inside-out, rearview-mirror approach that too often misses the opportunity or necessity for large-scale change.
Kodak provides a classic example. In the late 1990s it expanded its film business into China, an untapped market that then-CEO George Fisher found enticing. It was virtually impossible to get nationwide access to China back then, and Fisher worked tirelessly to develop relationships with Chinese state-owned enterprises, provincial governments, city governments, ministries, commissions, and banks, and spoke of having Zhu Rongji, who became Chinese prime minster in 1998, as a tennis partner. Eventually the doors opened. In 1998 the company committed to invest $1.2 billion in two joint ventures to manufacture and distribute film, paper, and photochemical products in the country. Fisher wisely established the ventures in a way that gave local partners minority stakes in exchange for business assets, ensuring that Kodak would have operational control. Despite the political risk, it seemed that Kodak was making a breakthrough, and investors approved.
But while the Chinese deals expanded Kodak’s core business, they did nothing to solve its bigger problem: the shift to digital photography. Kodak had been pioneering digital technology since the 1970s. It had a crude prototype of a digital camera as early as 1975 and in the mid-1990s helped Apple develop its QuickTake 100 digital camera. Competing in digital technology was, however, a different game altogether and one that threatened Kodak’s core business. For one thing, the company didn’t dominate the field the way it did in film but was one of many players—599 by one count.1 The market was also less predictable, and margins were lower. Much lower. According to a former executive, gross margins on the traditional business were a whopping 75 percent.
Securities analysts liked the business as it was: highly profitable. Only in hindsight did they see the need for Kodak to move faster into digital. Longtime Kodak employees also liked the status quo and were resentful of the digital team.2 So while Fisher recognized the growing importance of digital imaging, the realities of organizational resistance and Wall Street myopia seem to have kept him from making a different, more radical strategic bet, and the old business commanded the resources and management attention for too long. Later efforts to speed the transition to digital were unable to stem Kodak’s decline, and in January 2012 this great innovation company with a pioneering legacy—a brand once revered around the world and holding more than a thousand digital-imaging patents—filed for bankruptcy.
Expect to see a lot of unhappy stories (not necessarily as poignant) as the tilt makes more competencies obsolete or less relevant. But astute leaders who have the discipline and courage to shed a core competency that is becoming obsolete or marginal can make the transition successfully and even profitably. GE’s top management foresaw that the move into plastics by the Saudi Arabian public-private partnership SABIC would ultimately alter the competitive game. Plastics was a profitable core GE business, whose distinguished alumni include former CEO Jack Welch, current CEO Jeff Immelt, and former vice chairmen John Krenicki and John Opie. But neither profits nor sentiment kept these men from looking at the business with clear eyes. They realized that one of the unit’s core competencies was no longer going to be differentiated, given the incoming competition and commoditization. Reshuffling their portfolio for the future global game, they sold the plastics division to SABIC for roughly $11 billion.
The tilt creates an imperative for all leaders, from frontline managers to the CEO, to look at the business from the outside in, that is, through the lens of a leader sitting elsewhere and looking at the global changes uncontaminated by your underlying assumptions and rules of thumb. You have to take a fresh look at the world, and in a sense, look out of the corner of your eye to see how forces that seem unrelated to your business could interact and combine to create opportunities and threats to your industry or company. No matter what your business model, at some point it will become irrelevant or obsolete against new competitors and new opportunities. At that point the value of the business may drop sharply. If you’re vigilant in looking from the outside in, you’ll see when that time is coming—soon or many years away—in time for you to make a move. You’ll know when radical steps such as cutting a product line, selling a division, or reinventing the business model are needed to prevent the decline.
“Outside in” will help you detect not only threats but also opportunities. They’re often not obvious from the macro trends and may require some second-order thinking to be discovered. For example, we know China targets certain industries it wants to dominate; you will almost surely want to avoid tackling them head-on. But can you hitch a ride? What resources—raw materials, energy, or talent—will those industries require and how will China get them? If technology is needed, will China allow more foreign companies in? What opportunities does that create for a company in the North?
This scenario is playing out right now in China’s automotive industry, which sells about eighteen million vehicles a year. The goal is to ramp production up to thirty-six million a year twenty years out. China badly needs auto parts to reach its goal, and it’s allowing parts suppliers to invest there without the usual tough demands for technology transfer. That’s a huge growth opportunity for suppliers, one they could miss by looking from the inside out. But Delphi looked from the outside in and spotted the opportunity early. Today it has sixteen wholly owned and joint-venture plants where it is the majority partner (and thus in control) and two research and development centers in China. It plans to expand production capacity in those plants and is also considering several new factories to meet growing demand.
Just as important as outside in is future back. By this I mean you must extend your time horizon as you assess the world and imagine what the competitive landscape will be some twenty years out. Then jump back to consider its implications for the present. For example, it’s likely that in twenty years there will be more cars in China than in the United States, and the segmentation of the market will have changed. Many of those vehicles will be in urban centers—as many as twenty million cars in one city, by some estimates. Would that create the impetus for battery-powered cars? Where will the key ingredients for those batteries come from? From that picture of the future, think about the size and characteristics of the markets. Where would you want to be? Then work backward to what you must do now to get there. In particular, think about the capabilities you’ll have to build to take you from where you are to where you’d like to be. And at the same time, consider what great capabilities your company has that won’t really count much in the future—for example, design expertise in materials that are no longer cutting edge. In short, future back is the exact opposite of focusing on the core capabilities you have now and seeking ways to extend them into new areas—usually adjacent markets, such as a brand that can be used in another segment of the company’s current customer base.
You cannot define your path in the tilt without thinking outside in and future back. I’m not suggesting that a company should abandon its core, but a wider lens can help you see that your company may need to change sooner and on a bigger scale. Your failure to build the necessary new capabilities and remove the ones that are obsolete will take you to oblivion given today’s speed of change. Do you have the courage to acknowledge when existing strengths and incremental change are not enough—when what’s required is a new direction, a major shift in emphasis, or a capability your company lacks? Are you willing to shed old capabilities to make room for new ones? To succeed in the tilt, you must not only think more broadly but also move more decisively. You must be prepared to make an occasional big move.
Strategic bets are big, bold moves that have the potential to shake up the company, the industry, and sometimes other industries. Their purpose is to put the company on a new growth trajectory or take it off a downward path—or both. They are game changers that entail considerable risk, and because their outcome is uncertain, they almost always stir up angst and meet resistance, most often from Wall Street. In fact, you know you’re making a strategic bet when you feel the stress that comes from staring risk in the face. Succeeding in a tilted world requires that you know when it’s the right time to make such a bet, for offensive or defensive reasons. This is where an outside-in, future-back view is an invaluable survival tool. You’ll need toughness to make the bet, and also to withstand the challenges and pushback you’ll inevitably get when you make one.
That’s what Andrew Liveris, the CEO of Dow Chemical, demonstrated when he bet the future of his business on the acquisition of Rohm and Haas in July 2008. Liveris saw changes brewing in the chemicals industry. Looking outside in and future back, he realized that sooner or later the playing field would tilt away from Dow’s long-held strengths. For decades it had been the dominant player in the commodities chemical business, processing crude oil into a range of petrochemicals sold to a multitude of industries. But new players from Asia and the Middle East were coming into the industry. At the same time, oil producers were getting interested in businesses that processed their raw materials. Liveris imagined how a direct competitor like SABIC, whose majority shareholder is the Saudi Arabian government, might combine with a Saudi Arabian oil producer’s drive for vertical integration. He concluded that advantages in access to and pricing of crude would make it all but impossible for Dow to retain its number one position in the low-margin commodities business. Because of its pricing disadvantage, Dow couldn’t win in the new game, and at some point the company’s market value would decline.
Liveris saw a brighter future for Dow in higher-margin specialty products. To win in that area, it would have to strengthen its limited capability. This would be the very essence of a big bet, requiring Dow to radically shrink its mainstay business in favor of something that was only a minor part of its business. And the bet had to be made quickly, ahead of the competition and before Dow’s market value took a nosedive.
The Rohm and Haas acquisition would shore up Dow’s capabilities in specialty chemicals, but at $18.8 billion the all-cash deal required more than Dow had. Now Liveris had to really stick his neck out, tapping out Dow’s resources and patching together financing. To fill the gap, he signed an agreement for a joint venture with Kuwait’s state-run Petrochemical Industries Company (PIC), which would infuse Dow with $9 billion to partly finance the deal. It was the first joint venture between the two parties, and Liveris’s plan to acquire Rohm and Haas hinged on its success.
Liveris had the stomach to make the strategic bet, which rested precariously on the deal with PIC. His frequent communication with the board of directors and institutional investors brought them along with him. He paved the way by putting together a meticulous plan and meeting frequently with the board to discuss financing the deal, what to divest, and whether the timing was right. Wall Street didn’t like the deal when it was announced in July 2008. Analysts thought the change in direction was too sudden, the acquisition too expensive, and the outcome too uncertain, even given Dow’s solid balance sheet and standing as the industry leader in sales. Yet Liveris and the board did not back down, because they understood what would happen to Dow if it did not make the bet. They bet that it would be only a matter of time before analysts and rating agencies caught up with them. They had the confidence and stamina to persevere even when the global financial crisis erupted that fall.
Then on December 31, 2008, two days before the joint venture with PIC was to close, the high stakes of Dow’s strategic bet became visceral: The Kuwaiti government abruptly backed out, throwing Liveris’s plan into jeopardy. Most observers expected Dow Chemical to retreat, but doing so would have put the company in a tough legal situation. The contract with Rohm and Haas was airtight and its leaders wouldn’t budge. In the wake of the financial crisis, finding a replacement for PIC’s promised investment wouldn’t be easy. Even in normal times, investors are often fearful about committing money to a strategic bet, but at that moment, as the capital markets were coping with the worst economic crisis in sixty-five years and the world financial system was teetering, their fear was compounded. Both the debt markets and the equity firms were paralyzed, and the stock market was in free fall. Dow’s own stock, which had been at thirty dollars a share when the deal was announced, plummeted to seven dollars by March 2009. Dow faced the prospect of a debt downgrade to junk status by Standard & Poor’s and Moody’s.
Shocked by PIC’s move, Liveris nonetheless had to keep the board committed to the deal, find new sources of financing, and convince the capital markets that Dow’s strategy had hit a bump, not a brick wall. In the end, he succeeded. He kept the directors on board, convinced the ratings agencies to maintain the company’s investmentgrade rating, and lined up financing from Warren Buffett and two members of the Rohm and Haas family. And the deal was in fact transformational; it set up a combined Dow–Rohm and Haas enterprise for better performance than either company might have expected alone and put the company on a growth track rather than a downward slide. Today specialty chemicals make up about two-thirds of Dow’s revenue, up from 50 percent before the merger, and Liveris says he is aiming to tilt the mix toward 80 percent.
If Liveris hadn’t been thinking outside in and future back, if he hadn’t had the courage to acknowledge that control of crude oil by foreign governments would favor Dow’s competitors, he would not have seen the need to make a sudden move, especially when he did. He positioned the company for the new game that was just beginning to take shape, not the old game Dow had already played. And while Dow’s move caused others in the industry to reconsider their positioning and competitive edge, it was far enough ahead that it didn’t have to fight its way through a bidding war.
Earnings have become less volatile since then: Dow was able to raise prices 5 percent in 2011, which more than offset increases in purchased feedstock and energy costs. Its stock price—please pay attention, short-termers—has more than rebounded from the low of $5.75 in 2009 to $33 in April 2012. In his analysis of the company in February 2012, Standard & Poor’s equity analyst Leo J. Larkin wrote: “We think long-term results for Dow will benefit from the company’s strategy of shifting the business portfolio to less cyclical specialty chemicals and plastics as well as the expansion into agricultural products.… Following its merger with Rohm and Haas in 2009, the company has been gradually reducing the balance sheet leverage. We believe this will help position the company to grow via internal investment and joint venture investments.”
There are two basic reasons that every leader must be prepared to make a strategic bet in the coming years, maybe even more than once in a decade.
First, to put a stake in the ground. Companies mark off the territory to gain a future advantage—by creating a new business or new capability, for example, or by winning control over an input that will be critical to success. Markets, capabilities, and resources are already being hotly contested. For example, some leaders make a strategic bet to secure a raw material they need to ensure they can pursue market segments they’ve targeted. That’s why Toyota acquired a large portion of a lithium mine and production facility in Argentina in January 2010. The aim was to secure access to the rare element used in lithium-ion batteries, a key technology in hybrid cars. In the early 2000s, Verizon, under the leadership of CEO Ivan Seidenberg, made a $22 billion bet when the company put fiber-optic cable in the ground against the advice of just about everybody, including shareholders. But that gutsy decision has paid off well.
Second, to shed tired assets and move on. When the business model or a major asset becomes obsolete, its market value sharply declines. The business might still be making money, but if the industry is moving toward commoditization, for example, pricing power will begin to slip. Eventually, as the financials suffer and investors take notice, the market value of the business drops. It’s a strategic bet to pull out ahead of that decline and shift resources and energy into something with more promise. One of your jobs as a leader is to pragmatically and unflinchingly evaluate the value of your assets and the robustness of your business model on a long-term basis and move before their value deteriorates.
In 1996, Allied Signal CEO Larry Bossidy made exactly that sort of move. He had transformed the company after taking over in 1991 by paying close attention to execution and leadership development. He was particularly proud of raising the profitability of the auto parts business, which accounted for 15 percent of sales. But judging that automakers were facing a significant revenue decline in the years ahead, he sold most of it in order to focus on the more attractive aerospace and chemical products. Three years later, Allied Signal was well positioned for its merger with Honeywell.
No strategy has an infinite life. You should rigorously watch ahead of time for signs that conditions are likely to change. When will value—not just earnings—begin to decline? What will cause or accelerate that decline—currency, competition, technology, consolidation, customers’ changing lifestyles? Remember that change can be your friend, and go on the offensive.
The Thomson Corporation, now Thomson Reuters, was a profitable publisher of regional newspapers and professional journals in Canada and the United States in the late 1990s. But CEO Dick Harrington saw clouds gathering beyond the industry’s horizon. Big national retailers like the Gap and Target were launching national media campaigns and putting a squeeze on regional department stores, which had to cut back on advertising. When the big chains advertised in newspapers, they used circulars, which were less profitable than the traditional display ads department stores had been placing in Thomson’s newspapers. At the same time, the Internet browser was catching on, and Harrington recognized it as a threat to the classified ads that accounted for half of Thomson’s bottom line.
Had he been wedded to the concept of core competence, Harrington would have fought to protect the newspapers, tweaking the business model, as many publishers have done since. Instead, seeing that the current trends were irreversible and would eventually make it impossible to create value, he made a strategic bet to exit newspapers altogether and expand Thomson’s information services. He saw that professional publishing was a growth area and, using Thomson’s existing specialty and professional publications as a base, set out to build a business around the electronic provision of specialized information: legal and regulatory, financial services, scientific research, health care, and education. In the next several years, the company spent some $7 billion to acquire more than two hundred businesses it had painstakingly researched for their strategic fit and financial viability. In other words, Thomson shed the business it knew best when it was at the top of its game for the sake of increasing its chances of success in the future. Thomson had a market value of around $8 billion at the time. Today, Thomson Reuters is worth some $23 billion.
It’s worth noting that making a strategic bet is not synonymous with merger and acquisition activity, although M&A may be a vehicle for a strategic bet. Many companies sell a division to gain some cash or because it’s more valuable to the acquirer, but unless it alters the fate of the company, it’s not a strategic bet.
For those who think strategic bets are too risky, consider the risk of not making one: it can marginalize the business, meaning its value will decline and its fate may fall into the hands of a hostile acquirer, a competitor, or the government.
Even companies that see growth within easy reach have to look at the business from the outside in and future back. Companies in the South, for instance, have rich opportunities in their own backyard and clear advantages over foreigners, who often have trouble understanding the local conditions. But they too need to look beyond their immediate surroundings and further out, then move at least as fast as the speed of the game. If they don’t get the essential building blocks in place now—important capabilities, market presence, or access to resources—other companies could well build scale ahead of them and outcompete them in their home markets.
The highest duty of a business leader should be to build long-term economic value. But publicly held companies in the North face a conundrum: How do you think ten or twenty years out when Wall Street thinks short term? Total shareholder return (TSR) is a key measure for companies traded on the New York Stock Exchange. One problem with TSR is that it doesn’t always reflect the real economic return of a company, since it’s also a function of the bets placed by players in the capital markets. This means that executive compensation linked to TSR does not necessarily reflect how well leaders have actually run the business. Nonetheless, it has created a kind of tyranny in decision making that tips the short-term/long-term balance heavily toward the next four quarters. Favoring the short term can permanently handicap a company and its entire ecosystem for the long run. It takes skill and courage to resist the pressure when the owners of capital are represented vociferously by middlemen such as fund managers, whose compensation rests on delivering near-term profits. (It’s yet one more dysfunctional aspect of the global financial system: The self-interest of the financial-services industry can work against the future prosperity of the company, its true owners, and the nation.)
The practical realities of institutional investing reinforce the short-term focus: Many intermediaries that have big funds to invest lack the manpower and time to evaluate the fundamentals of every publicly traded company. They rely on ratings by third parties, such as Institutional Shareholder Services, which ranks a company’s governance based in part on whether the board of directors uses TSR as a basis for CEO compensation.
With as much as 80 percent of their annual compensation at stake, business leaders vigilantly protect margins, even if it means passing up markets that would put them on a path to faster growth. Meanwhile, competitors put their stakes in those market spaces, which are open now but might be hard to enter later. Many Southern companies, especially those backed by their governments, drive for market share and scale, for which they’ll willingly accept lower price points, lower absolute margins, and in many cases lower percentage margins. They figure that whatever is not strong now—whether it’s sales, profit margins, the supply chain, or product quality—will gradually improve. Think about the telecom space in Africa, where Bharti Airtel is prepared to withstand the short-term lack of profit as it builds the customer base and increases usage per customer. Success there will allow it to build another base in another geography and lead in the chess game of global market share. Will AT&T, Sprint, Verizon, and telecom in Europe have a rude awakening later when Bharti has amassed customers across several continents and is sniffing out its next frontier? (Britain’s Vodafone is wide awake and looking outside in; it’s competed against Bharti in India for years and is competing against it in Africa.)
You have to accept that the context is different in other parts of the world. For global products, such as Apple’s, you have to wrestle with how to increase brand awareness and build global share at rock-bottom prices and margins because of differences in purchasing power, and you have to do so without cannibalizing the business in higher-price regions. In other cases, lower purchasing power demands an entirely different customer experience. Thinking outside in, you might see the need to redesign the product, the business model, or the whole value chain. While it may be necessary to accept smaller margins in critical markets, you can control other variables that affect your return on invested capital. You could, for instance, scale up faster or increase the asset turnover and thereby boost the rate of profitable growth. Remember too that you may end up trimming margins and making these moves at some later point, when your inaction has put you on the defensive.
TSR can also force companies to pass up acquisitions that would strengthen their competitive position. Consolidation and cost cutting are considered legitimate rationales for mergers and acquisitions in the North, but winning in a broader, longer-term game is not, the expansive rhetoric of many merger announcements notwithstanding. Businesses shy away from deals that are strategically uncertain and that don’t promise to boost earnings anytime soon. Yet those targets may be utterly necessary in the long term.
It may appear impossible to compete against companies with twenty-year time horizons. But it is unwise if not downright irresponsible for leaders to compromise the company’s future. Rather than surrender to short-termism, leaders need to take a stand and sharpen their thinking about Wall Street’s demands.
Clearly communicate the logic of your short-term/long-term balance and direction—to investors if you’re a CEO, to your higher-ups if you’re a middle manager. If you are in fact building a marathon company, say so—explicitly and frequently. The real issue for managers is building credibility in their efforts to balance the short term and the long term through execution. Wall Street hits companies hardest when they fail to deliver what they promise, especially if the reasons for missing were under management’s control. But if you execute well and consistently deliver (and not by borrowing from the following year), investors will tend to hold the stock longer term. CEOs and their chief financial officers can cultivate a shareholder base that thinks this way. It sometimes happens that an industry is out of favor or a company’s stock is oversold, opening a gap between its market price and its intrinsic value and making the company an attractive acquisition target. Even in those unusual situations, leaders should damn the torpedoes and build credibility through disciplined execution against realistic goals.
Investing in the future is built into the budgets at IBM, Johnson & Johnson, Amazon.com, and many other publicly traded companies. The market supports their versions of short-term/long-term balance. And it catches up with companies that invest too little in their futures. HP, for example, is coming under pressure for having spent too little on R&D in recent years; CEO Meg Whitman is now increasing R&D spending and candidly acknowledges that it will be a long haul to recover HP’s market value. In September 2012 Procter & Gamble came under fire for its lack of breakthrough products, perhaps the result of division managers being put in charge of innovation yet held responsible for short-term operating results.
Others still may remain unpersuaded, but you have to have conviction, communicate, and establish some goalposts against which to measure your progress. TSR imposes one kind of discipline. But leaders need to use their own judgment. Know where the business needs to be and what must be done to get there—and deliver both the message and the results with discipline.
Outside-in, future-back thinking is one way to break mental barriers, but other kinds of psychological blockages can prevent you from seeing a clear path forward. Every one of us has a lens, or frame of reference, deeply etched in us by experience and education, through which we see the world. Each of us has subconscious guidelines that govern our behaviors and decision making. We all make assumptions that may never be challenged. Success reinforces them and etches them more deeply. Business leaders who have climbed the ranks by improving margins through cost cutting or premium pricing, for instance, tend to look for that skill in the people they hire and promote, because to them, it’s what leadership success is made of. They themselves have been rewarded for such thinking throughout their careers.
You can’t let an outdated frame of reference stop you from seeing reality. It’s easy for leaders in the North to be complacent if they believe that the South will take a long time to catch up. That’s wishful thinking. Already some Southern companies have revenues high enough to be in the Fortune 50. In most industries, it won’t be more than five or ten years before more Southern companies’ products and services will be good enough to challenge even the strongest companies in the North—and on their home turf. China is poised to win in automobiles and aircraft and has its sights set on pharmaceuticals. Brazil is strong in regional jets. India dominates in back-office automation and business processing and will continue to move into higher-value products and services, such as data analysis, partly through companies such as Accenture, IBM, and Microsoft that have located there.
India has the momentum to win in some segments of pharmaceuticals five or ten years out and is already competitive in generics. As the number of patents filed by large pharmaceutical companies has fallen, some have acquired Indian companies for their manufacturing capability and market presence.
Remember: We’re talking here not about labor and currency arbitrage but about the growing number of businesses that outcompete the North with managerial prowess and technological sophistication. They have highly trained, entrepreneurial leaders who use outside experts to help them build fundamental business capabilities and processes. Huawei Technologies, for example, the Chinese telecommunications equipment maker that overtook Alcatel-Lucent and Nokia Siemens to become number two in the world, has hired a number of experienced executives from the North, including a Swede to head its wireless marketing unit and a German to head its handset design, and retains consultants from IBM and KPMG. In 2010 Fast Company rated Huawei the fifth most innovative company in the world.
The leadership skill behind companies in the South is a force to be reckoned with. People in the North who have never spent time in the South and get their information secondhand can easily underestimate the players and misgauge where the battlefield is going to be. Passed-on information might not capture the entrepreneurial drive and fast decision making that are common or the psychological and emotional energy of the leaders there. It can miss the pragmatism that makes some leaders willing to take on joint-venture partners with limited control for the sake of shoring up competencies they lack.
The best leaders in the South are not only as hard driving and talented as the best in the North: Their psychology is different in crucial ways. Because of the circumstances under which they’ve lived, been educated, and built their careers, their mind-set is to accept as givens the scarcity of resources for themselves and their customers. As he built the $16 billion metals business under the Birla aegis, Debu Bhattacharya, managing director of Hindalco, had to focus on the fundamentals while dealing with the vagaries of the government and with limited resources. Now in his sixties, he continues to work seven days a week overseeing management, acquisitions, operations, and innovation. An engineer by training and a former plant manager, he understands the nuts and bolts of the business. Yet he sees the bigger picture and has the business acumen to cut through the issues incisively. Risk is a given for many of these leaders. So are the idiosyncrasies of legislative and regulatory actions, which they’ve learned to tolerate. Like Bhattacharya, many business leaders have come up through engineering schools and are adept with numbers and drilling into operational details. The best of them are also great judges of people, which means they’re good at finding talent to take them where they want to go, and they’ll cut their losses quickly if the person doesn’t work out.
When one of India’s big industrial companies ventured into a road-construction project, the CEO was clear and precise about what phase one would require: the ability to pull together four different state governments, the federal government, and three to four financial backers—not an inconsequential task in India. He chose a person who had shown that he had the temperament and experience to put such deals together. Execution was not this person’s strength, nor did it have to be, at least for the first six months. After that the CEO would move him to another assignment where he could shine, replacing him with a person skilled at execution. The sharp definition of the job and the person’s talent were what mattered and what made the difference for the company.
Leaders in the North may be unsure of how to expand in the South. Perhaps they don’t know how to develop and manage people in vastly different cultures or are afraid to commit resources to areas they know little about and whose political and regulatory environments are so unpredictable. Maybe they just don’t have the stomach to deal with foreign governments and local conditions. They might be put off by reports of corruption in India, China, and Africa and justify caution on that basis.
Those blockages can cause them to miss the other side of that equation: the learning they’re missing out on by not being there, facing the skirmishes, building the networks of information and goodwill. By postponing the learning, they give competitors an edge. GE, 3M, and Yum! Brands’ KFC chain all put people on the ground early to learn the local culture and business environment. Living there is different from reading about a country or flying in for three-day visits. As CEO of Nalco, the Illinois-based water services and treatment company, Erik Fyrwald spent weeks at a time in India over several years to learn the nuances of the country. It’s what gave him confidence to successfully expand the business there.
Even industries the Chinese government targets, such as wind power, leave room for competitors who have the managerial capacity and will to compete, because those spaces are so big. Industries that are not on the government’s radar leave more elbow room. KFC earns higher margins in China than in the United States. Companies like John Deere and Caterpillar have been in China for decades and are flourishing there. Makers of luxury goods from the United States, the UK, and Europe are opening stores in many urban centers and drawing the South’s newly affluent customers.
Now the horizon is clear and your choices are overwhelming. It’s like taking flight when you’ve been driving a car. Suddenly you have three dimensions to navigate instead of two, and the options seem infinite. Which direction will you fly? There are many right answers. Shape mutually exclusive options for the future of your company without the constraints of existing capabilities or core competencies. That’s what outside in, future back is all about.
Choose a central idea you want to pursue or a direction you want to move in, then work out the details and specifics to develop a full-fledged strategy that is unique to your company. Be sure you know what capabilities you need to build, and what risks you’re taking and how you’ll manage them. Remember, it is ultimately leaders, not businesses, that compete. You’ll need clear thinking and a willingness to stick your neck out to find the right path and the right pace. Clarity of thought and the perspiration needed to achieve your ambition are worth a thousand IQ points. Then the universal business rule applies: You have to execute. No execution, no results.
Execution here means mobilizing your organization to the reality of the global tilt. It’s about equipping people for transition: changing their mind-sets, getting them to align with the new state you want to be in, and understanding the social tools you will need to do these things.
In the next two chapters I will detail the requisite leadership capabilities and organizational changes. I will start with a capability that has the jaw-breaking name of “multicontextual.” Does that sound like jargon? When you get to the meaning behind it, you’ll see that it’s very real—and a big deal.