New waves in globalization and competitiveness

St | Wed, 09/03/2008 10:48 AM | Management

For the past two decades, global companies entered emerging markets mainly to lower their costs of supplies. Today, their roles are shifting and they are key players in the development of emerging nations.

But tomorrow, global companies will have to compete with the homegrown companies and brands that are being born and bred in today's emerging nations. Emerging markets are becoming emerging powers.

Globalization and compe-titiveness thus evolve in waves. Each successive wave has its own business logic and its own mode of operation. And each wave eventually fades away to be replaced by another.

The first wave of globalization (1985-2000)

In the first wave, Western companies focused on the access to cheap supplies, such as labor, raw materials or logistics (e.g. service centers in India). Consequently, the prices of most goods produced globally declined.

In addition, cheap brainpower was available from countries like China, Russia and India who produce roughly 14 million competent and highly motivated university students a year.

The main characteristic of the first wave was thusa persistent decrease in the level of consumer prices.

The second wave of globalization (2000-2020)

The second wave is now in full swing. The priority here is to have access to the domestic markets of emerging nations. With this in mind, an important change may be the birth of a middle class in Asia, Russia, Central Europe, Latin America and the Gulf region.

Since 2000, 600 million people have reached middle-class status; they spend on average some US$4 billion per year. They are eager to buy branded products (status symbols) such as electronics, cars, etc. Consequently, the private consumption portion of the GDP is expanding rapidly. Companies could thus be well advised to focus their products and services on the needs of this new middle class.

This new class of peo-ple will be the engine of world growth during the next two decades and a source of political stability - middle classes do not care about revolutions.

Birth of an urban civilization

The middle class is also closely associated with the development of cities. During the 20th century, the po-pulation living in cities exploded from 150 million to 2.9 billion.

The world is witnessing the birth of an "urban economy", which has very specific needs, such as better transportation, communication and leisure. There is also greater concern about the environment: Congestion problems, in cities all over the world, seem to indicate that urban planning as a management technique is still in its infancy.

New products to serve new customers

Parallel to the evolving middle-class, a booming world economy is gradually eradicating absolute poverty. In 1970, 15.4 percent of the world population was living on one dollar a day.

Today, adjusted to purchasing power changes, only 5.5 percent of the world population is in this category.

Companies need to develop a new business model, which serves the poorest that are entering the world of consumption. Some products already exist: The $100 PC and micro-credit are examples.

Some consequences

Oil prices are above $100, but all raw materials are in strong demand and prices have reached record levels.

World oil consumption is expected to soar from 86 million barrels/day in 2008 to 130 million barrels/day by 2030.

The Food and Agriculture Organization's (FAO) food price index for 2007 shows an unprecedented increase of 37 percent.

Shortages of water, soil pollution through over-exploitation and pesticides, are some of the environmental problems that will emerge due to changes in food consumption patterns.

Therefore, while the first wave was characterized by "deflation," the second wave is now struggling with that old demon.

The next wave of globalization

The third wave of globalization will probably feature the emergence of new competitors in currently emerging nations that will strive to become global in their own right. After the eras of "deflation" and "inflation," the world will enter the eraand tension." However, who will dominate this era and attempt to conquer world markets?

The governments of emerging nations will enjoy an unprecedented economic power base. China currently leads the way with $1,647 billion stacked up in foreign currency reserves.

Sovereign wealth funds are managing substantial amounts of money, estimated today at around $3,300 billion.

New companies and local brands are being created at an unprecedented pace all over the world. Today, the former local partners of large global companies are becoming global competitors themselves.

Acquiring knowledge

In the early stage of the third wave, which is already underway, emerging nations will probably focus on taking minority financial participations in blue chip companies in order to obtain a seat on the board thus genera-ting enough experience and acquiring sufficient management knowledge before moving intoacquisition" mode.

Emerging nations will thus demand more influence and decision-making power in international organizations, as, in all likelihood, they will increasingly finance them. They will also step up the pressure against protectionism in order to gain more access to the domestic markets of industrialized nations.

This will be a time of increased political and economic tension, reflecting the disarray of the governments and the populations of the formerly called industrialized nations that will have to fight harder to maintain their standards of living and their influence on world affairs. We are not yet therebut the challenge is coming fast!

Professor St*phane Garelli is Director of IMD's World Competitiveness Center (www.imd.ch). He also teaches, among other programs, on the Breakthrough Program for Senior Executives (BPSE) and the Orchestrating Winning Performance (OWP).

Comments (0) | Post comment

A | A | A |