Conventional wisdom holds that companies in emerging markets face daunting obstacles when trying to expand internationally. According to this view, the same factors that make them successful at home—privileged relationships and assets, high tariff walls, and a captive market of local customers—inevitably work against them abroad. So what explains the rise of the emerging world's true global leaders, which operate diverse businesses profitably, at scale, and in a wide range of geographies? Are HSBC, Ranbaxy Laboratories, and Samsung Electronics merely the exceptions that prove the rule?
In reality, emerging markets, far from being a handicap, actually provide an invaluable springboard. The combination of demanding yet price-sensitive customers and challenging distribution environments can help determined companies develop the distinctive capabilities they need to compete successfully elsewhere.
Consider the example of Ranbaxy Laboratories, India's leading pharmaceutical company, which became a top global producer of generic drugs after cutting its teeth under a unique patent regime that encouraged Indian companies to manufacture patent-protected drugs and make them affordable to the country's vast population of poor people. Thanks to that experience, Ranbaxy has succeeded in becoming a leading generics producer in both the United States and Europe. Another global competitor, Samsung Electronics, had to please its customers in tech-savvy South Korea and thus cultivated design strengths that help it beat international competitors to market. HSBC had to cope with the relatively small deposits of its customers in Hong Kong, so it learned to operate with a cost-to-income ratio lower than that of its US and European competitors.
These companies followed similar paths to global success. Each of them first forged distinctive capabilities in the difficult circumstances of its home market and then mastered the art of transferring its business DNA: the core skills and supporting organizational culture that help it make money, reliably, in diverse markets. To pull off this trick, a company must train—and then trust—a cadre of global managers who understand its distinctive capabilities but are also independent enough to modify them to fit local needs. These leaders know how to preserve the essence of the company while morphing its business systems to suit local conditions.
Getting going
Few if any success stories from emerging markets unfold quickly. In fact, the journey to global success requires painstaking groundwork in the home market before a company can begin to compete on less familiar terrain. A robust and sustainable position at home provides both an environment for creating distinctive capabilities and a cash machine to finance what is typically an expensive globalization effort.
To mount such an effort, a company must achieve global standards of competitiveness, at least in its core activities, before looking abroad. The global leaders that McKinsey has studied all brought their key processes up to or above global benchmarks before globalizing. Ranbaxy became one of the world's most cost-effective drug manufacturers before moving beyond its national borders. The Spanish institution Banco Bilbao Vizcaya Argentaria (BBVA) learned to use its resources more effectively than most of the world's banks and only then pushed into Latin America. Before going abroad, the Indian company Asian Paints had already reduced its working-capital turns to levels below those of all but one of the world's leading paint companies, and India's ICICI Bank made more money on small transactions than did the world's best institutions.
Forging distinctive capabilities
As companies in the emerging world establish a robust position at home, they must also begin to develop distinctive capabilities. Although this path is just one of three that can provide a competitive advantage, the others—privileged local relationships and valuable assets and rights, such as mining concessions—often can't be transferred from country to country, so companies that rely solely on them rarely succeed globally. The successful approach is to rely on difficult-to-imitate sets of interlocking activities that generate unusually high cash flows and profits.
Indeed, as John Seely Brown and John Hagel III argue,1 emerging markets are seedbeds for distinctive capabilities. Companies there must meet the challenge of serving hard-to-reach, price-sensitive consumers who typically have more stringent requirements than their counterparts in the developed world. These companies develop distinctive capabilities by refining and abstracting lessons from their day-to-day activities. They then standardize and document those lessons, which can form the basis of transferable business models that help them develop, source, make, and sell products across a number of geographic and product markets.
Although such a company's distinctive capabilities originate in the home market, they can't depend solely on its characteristics. Access to a pool of low-cost local talent, for instance, gives a retail bank operating in India transaction costs that are lower than those of a bank in Madrid, but when the Indian institution opens a branch there, it will have a Spanish bank's labor costs. For a distinctive offering, it would need transferable competitive advantages—such as efficient, highly customized back-office operations to drive down its costs per transaction—that local competitors couldn't easily replicate. To give one example, ICICI Bank, India's second largest, developed the ability to earn profits from small transactions by handling money transfers for India's highly mobile middle class. When the bank began to expand globally, it first targeted markets in the Gulf States and other locations with large expatriate communities that needed these services.
Ranbaxy: Affordable pharma
Ranbaxy is a good example of how companies develop distinctive capabilities in emerging markets. Before signing on to the World Trade Organization regime, at the beginning of this year, India protected only process patents—not product patents—for drugs, hoping to make them as affordable as possible for the country's poor people. In essence, Indian companies could produce any drug in the world if the chemical synthesis of the manufacturing process differed from the one that the original manufacturer used. As a result, hundreds of Indian drug companies sprang up to make drugs as soon as they were introduced in the United States or Europe and to sell them as cheaply as possible in India.
Soon Ranbaxy distinguished itself by setting up sophisticated laboratories and hiring hundreds of world-class chemists. It also invested heavily in state-of-the-art factories that could bring the manufacture of a drug up to optimal scale quickly. The distinctive advantages of the company soon proved to be its ability to identify new processes for synthesizing patented drugs and to scale up manufacturing quickly thereafter.
By the early 1990s, Ranbaxy realized that it could exploit these strengths by quickly synthesizing drugs that were going off patent in developed markets and selling them there. To pursue this strategy, it acquired Ohm Laboratories in the United States in 1994 and entered the US generics market. In the past decade, Ranbaxy has rapidly expanded its business in the United States and other international markets and currently ranks among the world's top ten generics manufacturers. It has annual revenues of $1.2 billion—78 percent from outside India, including 36 percent from the United States. The company has globalized so successfully that more than 400 of its employees now work in the United States, and more than 18 percent of its total workforce is non-Indian.
HSBC: Operating discipline
HSBC, a financial-services firm founded in Hong Kong, is another company that has used its origins in the developing world to create capabilities that transfer well across markets. In addition to the low cost-to-income ratio the bank achieved serving customers in its home city, it developed distinctive trade finance capabilities that go back to its origins, in 1865, when it began serving the businesses plying Asia's coastal trade routes. The network it built to facilitate trade deals gave it valuable skills for handling cross-border transactions and complex networks. In the late 1980s and the 1990s, this exceptionally strong trade finance network and the operating discipline needed to run a highly efficient retail-banking operation propelled HSBC's expansion into markets such as France, India, the United Kingdom, and the United States. Today HSBC serves nearly 30 million customers in 81 countries and ranks among the world's largest financial institutions.
Samsung: Speed to market
South Korea's Samsung Electronics also used local conditions as a springboard. Despite intense competition from a national rival (LG Electronics), by the mid-1990s Samsung was the domestic market leader in its core businesses: appliances, consumer electronics, and semiconductors. Prodded by very demanding high-tech consumers in the home market, the company built up strengths in product design and operations (Exhibit 2). It also capitalized on synergies between its semiconductor and consumer businesses and had a knack for quickly turning new designs into manufactured products.
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Courtesy: http://www.mckinseyquarterly.com/article_page.aspx?ar=1590&L2=21&L3=33&srid=299&gp=0
