“A new breed of global competitors” by Cirilo P. Noel (November 7, 2011)

Business World (11/07/2011)

In any business, understanding the competition is a vital part of corporate strategy. This is of particular importance now, considering the tremulous state of global markets.

Recently, there have been seismic changes in the world economy. Countries that were long thought to be unassailable are experiencing unrest and severe debt-related issues. The United States, considered the bastion of Western economic might, recently had its credit rating downgraded. And many multinationals, reeling from the global recession, have been forced to withdraw significant parts of their international operations back to domestic soil. These and similar events have opened the way for fast-growth economies in Asia, Africa, the Middle East, Latin America and Eastern Europe.

Leveraging on their local markets, these sectors have become the engines of the global economy, rapidly outpacing Western countries to form almost half the global GDP in 2010. And these trends are accelerating, with projections indicating that, by 2050, these fast-growth economies will account for 65% of the global economy.

To help companies better understand the changes happening in the global market place, Ernst & Young convened the first ever Global Growth Forum in Washington, DC. The goal was to gain valuable insights from the world’s top business executives, economic experts, and government leaders, as well as the World Bank and the International Monetary Fund, on how to sustain growth in the current business climate.

One of the key realizations from the forum was that the nature of competition has changed. Gone are the days when Western multinationals who invested in fast-growth markets would find a surplus of opportunity and a shortage of local competition. Domestic companies in fast-growth or emerging markets had gained confidence, developed a global mind-set, and were now rapidly climbing the value chain. Agile and flexible, these companies are focused on innovation and new value propositions, developing or expanding sustainable products/services portfolios, increasing value offerings by improving the price-quality ratio of products and services, and entering and expanding to new and emerging markets. These companies can now vigorously compete with mainstream multinationals.

The trend can already be seen among the players in the local economy. Each year, the Entrepreneur Of The Year Philippines program of the SGV Foundation recognizes Filipino entrepreneurs who contribute greatly to nation-building. Included in the criteria for selecting the finalists and winners is an entrepreneur’s ability to expand in both local and global markets. Some of these homegrown companies — the EOY Philippines winners — include the epitome of the global Filipino brand, the Jollibee food chain established by Tony Tan Caktiong, who was the first Filipino to ever win the World Entrepreneur of the Year title in 2004. Jollibee Food’s expansion has been phenomenal. As a multinational, it has established its presence in the US, Hong Kong, Vietnam, China and other locations. And then there is Cebu Air, Inc., led by Lance Gokongwei, who was named the 2005 Entrepreneur Of The Year Philippines. Cebu Pacific has grown rapidly from a domestic into an international airline in the past years.

These are, of course, just two of the enterprising Filipino companies that are transitioning into the new cadre of multinationals, not to mention similar companies coming out of countries like China, India and Korea, among others.

The question now is whether traditional multinationals should befriend, or defend against, companies in fast-growth/emerging markets, many of whom are already making inroads into other fast-growth as well as developed markets.

Fast-growth-market companies tend to have certain characteristics as perceived by members of the Ernst & Young Global Growth Forum.

Most of these companies are supported by huge domestic markets, giving them a springboard to global expansion. As cited in The Conference Board research report — The Conference Board CEO Challenges 2011, China and India are now the largest and most dynamic economies in productivity terms (measured as output per person employed) registering 8.7% and 5.4% growth, respectively, in 2010. Brazil is another emerging economy that continued to strengthen its productivity performance (4% growth) in 2010. In terms of market, for example, China is already the world’s largest market for cars, mobile phones, luxury goods and televisions. As consumption in these areas grow, companies attain a stable platform to help them weather the ups and downs of globalization, potentially giving them an advantage over multinationals heading in the opposite direction. Some of these companies are already global at the outset, skipping over the traditional process of consolidating their domestic position before reaching out to foreign markets. These companies are usually driven by young entrepreneurs, like many of those that we have seen in the Entrepreneur Of The Year Program, who build competitive advantage around innovation and new value propositions, technology and the leveraging of global and local resources.

Fast-growth/emerging-market companies are also likely to make cross-border acquisitions, particularly in developed markets. These can come in the form of established companies or equity. For some, the desire to build an innovation-based society and build momentum on the innovation value chain will likely convince these companies to acquire small, innovative companies. This can enable powerful synergies and strategic advantages as a result of a blending of demographic and cultural values. In other cases, companies that seek access to top global resources such as raw materials, talent and technologies, without having to worry about integrating a new company into their culture, will likely go the route of equity participation, which some experts feel is a safer route to success.

What truly set these companies apart, however, is their ability to react and adapt swiftly to external changes, born of their experiences in their home markets and their relative freedom from years or decades worth of organizational baggage. Most western multinationals have spent decades building operations and business processes around the assumption that developed economies will always be their key market. This has resulted in monolithic organizational baggage that puts them at a disadvantage in today’s new economic order. Smaller and younger fast-growth/emerging-market companies, however, are used to dealing with rapid changes in their domestic markets. Not only can they move quickly to take advantage of new opportunities, they are also able to roll with the punches in volatile markets without getting bogged down in corporate bureaucracy.

The only way for traditional multinationals to truly compete with this new breed of competitors is to leverage on their core fundamentals and try new approaches while maintaining alignment with their overall business strategy. They might wish to consider reducing their dependence on developed markets and seeking out opportunities in the global market. They may also wish to begin shedding the outdated systems and hidebound processes that slow them down. Because if the definition of globalization truly has changed, then a new set of business dynamics will be needed — one where speed of response, flexibility in approach and openness in outlook will set the rules of engagement. While there is no one-size-fits-all approach to dealing with the forces driving global business today, the strategic and tactical action steps should clearly consider the economic, business and political realities of the specific business environments.

(Cirilo P. Noel is the Chairman and Managing Partner of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.