The Jakarta Post
While it seems that the established global players are tripping over themselves to expand into emerging markets, what should companies from these emerging markets do in response?
Should they stay at home and leverage their 'home court advantage' against these interlopers? Should they take the competitive battle to these large giants' home turf to keep them on their toes? Should they focus on emerging market opportunities outside their home but where they can leverage their homegrown emerging market experience against the traditional global players? Should they do all of the above?
To answer these questions, we think there is a page out of the Japanese global firm's playbook that firms from the BRICs (Brazil, Russia, India and China) and other emerging markets should not follow. Like firms in emerging markets today, firms in Japan enjoyed a cost of labor and other advantages 40 years ago. They leveraged that advantage into stunning levels of exports. Those exports not only drove revenues up, but through capturing economies of scale drove unit costs down.
In fact, the success with exports from the 1960s through 1995 left Japanese firms at the top of the Fortune Global 500 list. In 1995, six of the largest firms in the world by revenue were Japanese. Even though the Japanese economy at the time was only about one-third the size of the US economy, Japanese firms' share of revenues for the Fortune Global 500 was 35.2 percent while the share of those firms from the US on the list was 28.4 percent.
At this point, this sounds like a strategy to follow not avoid, but sadly the story doesn't end with Japanese firms at the top. Instead of staying at the top, Japanese firms dropped from 35.2 percent in 1995 to a mere 11.2 percent in 2010. While Japan's global titans' footing slipped, the share of Fortune 500 revenues held by American and European companies remained relatively stable.
So what went wrong? First, as is the case with virtually every emerging economy, over time costs rise and as your exports rise in demand, so too typically does the demand for your currency ' making your exports more expensive.
Second, as you then begin to set up shop overseas to try to penetrate deeper in international markets, you need to let go of many of the products and processes that made you successful at home and adapt and adjust to product needs, management styles, etc. that lead to success in foreign places.
Third, you need to recruit, select and develop local talent who can help you make these adjustments and not smother them with expatriates from the home office or put a glass ceiling above them that keeps them from progressing to positions in the home office.
While the first factor is almost inevitable and not really controllable, the other two are but sadly most Japanese firms have done a poor job at making the needed local adjustments and have a bad reputation for identifying, retaining and developing non-Japanese leadership talent.
If you look at many of the largest 'emerging giants' such as Vale from Brazil or Reliance from India, we see some disquieting similarities. Many of the emerging giants are a bit too focused on battling on their home turf with the traditional global players and leveraging exports. It is not that these firms should ignore these battlegrounds, but they should take the fight both to the home turf of the big boys and to other emerging markets. They should leverage the benefits of their own frugal innovation to win customers in these other market segments.
However, to do that they will need to identify, recruit, hire, develop and promote non-home country leadership talent. What makes us nervous is when you look at the senior leaders from virtually all the emerging giants, you see only home country leaders. This creates many problems.
For example, when a major Chinese petroleum company recently bought a western oil exploration company in Europe, the western executives, whose expertise it had hoped to acquire, found that they not only had difficulty understanding orders translated from Chinese, but they failed to understand the subtle cultural signals emanating from the head office. Much of the acquired company's foreign top talent soon left in frustration.
The world is a diverse and complex place. No nationality has a corner on the market for leadership talent and therefore, any company with global ambitions needs to take a passport-blind approach to the creation of its leadership talent pool. In addition, because capable local, regional and especially global leaders are not developed overnight, the process of identifying, developing, deploying and promoting these leaders must start long before they are needed.
Our research suggests that when a company does 50 percent of its business internationally, it needs roughly a quarter of its executives from the countries in which it does or plans to operate. The average among many leading American companies is a ratio of 17 percent foreign executives in a company that does roughly 40 percent of its business internationally. In Europe the average is slightly higher. IBM, which has grown into a truly international company, does about 60 percent of its business internationally and roughly 40 percent of its executives are from outside the US.
Many of the emerging giants don't yet have 30 percent of their business outside their home country. However, in today's environment with global financial resources for expansion and the fast dissemination of technology, emerging giants could find themselves more global much faster than the traditional players. But if they don't have the diversity of leadership talent, they may find themselves on the Japanese trajectory of a rocket ride up and a fast fall down.
To avoid this and accelerate the development of the needed leadership talent, there are three things emerging giants can do.
First, send promising young talent (home country or foreign) abroad at an early point in their career when they can best absorb foreign culture and language.
Second, bring a diverse set of leaders together for high impact development programs. IMD has specialized in this type of development program with a vast array of corporate partners across the globe. Third, use JVs and acquisitions to access higher levels of leaders whose global development is already well along.
While all three of these actions are challenging, just keep in mind the consequences of not developing the diversity of leadership talent that you need today and more importantly that you will need in the future.
Stewart Black is Professor of Global Leadership and Strategy at IMD (www.imd.org). He is the co-director of The Leadership Challenge program (TLC) and also co-directs the Transition to Business Leadership (TBL) program.
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