How Innovation Is Helping Emerging Multinationals to Race Ahead
Millions
of Americans fly on planes made by Embraer. They may even know the name of the
aircraft manufacturer. But if they had to guess what country Embraer is from,
many would probably guess wrong.
Embraer
is from Brazil. It is the largest manufacturer of regional jets in the world
and among the top five aircraft manufacturers globally. “In a high-tech area as
regional jets, the largest firm at present happens to be from Brazil. Who would
have anticipated this a few years ago?” says Mauro Guillen, a Wharton professor of international
management.
Increasingly,
companies from developing countries such as Brazil, India, China and Mexico are
becoming global leaders and eclipsing familiar brands in the developed world.
Take Alibaba, the e-commerce giant from China. It has a market value greater
than Yahoo, Netflix, eBay, Yelp, LinkedIn, Twitter and Groupon put
together. Alibaba’s cloud service Aliyun is giving Amazon Web Services a run
for its money. South Korea’s Samsung is the world’s largest consumer
electronics firm, outselling Sony, Panasonic and Philips. Bimbo of
Mexico is the largest bakery company; in 2010, Bimbo purchased Sara Lee’s North
American bakery business. And on this year’s Forbes Global
2000 list, although the U.S. still claims the maximum spots, the top four are
occupied by Chinese banking firms.
The
phenomenon of emerging multinationals (EMs) — successful companies from the
developing world — isn’t going away any time soon, according to a report from
the World Economic Forum’s Global Agenda Council on Emerging Multinationals.
The trend is being fueled by the growth of emerging markets themselves: During
2000 to 2010, developing and emerging markets accounted for 60% of the
incremental world GDP. And over the next decade, most of the world’s population
growth will be located in emerging economies, giving rise to new consumers and
larger markets.
Shaped by Limitations
How
are EMs managing to succeed on a global scale? Most experts agree that
innovation is a major factor. But what is the nature of that innovation, and
what is its source?
According
to Wharton’s Guillen, even as EMs try to become like European or American
firms, they are “forced to be different.” Says Guillen: “They were born in
environments in which it was not easy to innovate. You wouldn’t have the
engineers; you wouldn’t have the resources, the inputs needed.” Government
regulations, political instability and economic volatility pose additional
stumbling blocks. But, as a result of these limitations, Guillen notes, EMs
“see huge dividends” because “if you learn how to become competitive with few
resources, it means that you’re being innovative.” Companies that learn this
skill will benefit over the long run, he adds.
One EM
that began life with very little by way of resources — US$250 in capital, to be
exact — is Infosys, the global technology consulting company from India.
Founded by seven engineers in 1981, Infosys became the first information
technology (IT) company from India to be listed on the NASDAQ in 1999. Today,
it boasts a market capitalization of approximately US$40 billion.
S.D.
Shibulal, co-founder and former CEO of Infosys, credits his firm’s signature
innovation, the global delivery model, as a major source of its success.
“Global delivery model is a methodology by which you can disaggregate a project
and a program, get it done in different parts of world, and give it back to the
client, seamlessly,” explains Shibulal. He contrasts this model with the way IT
work was typically conducted at the time: “Let’s say you had a [project to
execute] in New York. Twenty people from all over the world [would] fly into New
York, do the work, and go back. It was all about taking the worker to the work.
The global delivery model is all about taking the work to the worker. It
fundamentally changed the industry.”
According
to Shibulal, adopting the global delivery model was a leap of faith. The
fledgling company gambled that technology would become ubiquitous, and that the
technology industry would become globalized. “[Now,] it looks like a simple
thing to do, but in 1981 … it was not an easy bet to take. We were way ahead of
the time.”
Anil Gupta, chair in strategy, globalization &
entrepreneurship at the Robert H. Smith School of Business at the University of
Maryland, notes that Indian companies like Infosys and Tata Consultancy
Services “basically came from nowhere over the last 20 or 30 years” and changed
the face of the IT industry. He points out that of the top five IT service
companies in the world today, three are Indian and two are American. “The
Indian companies have become much bigger than other IT services companies that
used to exist, like Electronic Data Systems. They have pushed them aside and
are going head to head against Accenture and IBM Global Services.”
From Mini Fridges to the
Human Genome
Describing
the approach taken by many EMs of focusing on relatively simple needs in
American markets, Guillen says: “They improved existing products; they made
them easier to use and cheap to produce.” Some EMs like Haier from China, he
notes, exploited niche markets by “appealing to a group of customers that
established companies didn’t care about.” In its early days, Haier targeted
college students and made small refrigerators for dorm rooms.
Gupta
adds that Haier also targeted a niche Chinese market — Shanghai
apartment-dwellers. The company came up with a small washing machine designed
for laundering a minimal amount of clothing frequently, designing it for the
income level, space requirements and lifestyle of this demographic rather than
following an American model. “Haier looked at the characteristics of the
customers in Shanghai and created a machine that was tailored to those unique
characteristics,” says Gupta. Today, Haier is the largest appliance brand in
the world. According to The Economist, the company’s revenues have
gone up fourfold since 2000, and it is considered one of the world’s most
innovative firms.
Gupta
divides EM innovations into two categories: market-driven and
technology-driven. According to him, the bulk of EMs’ innovations tend to be
highly market-driven. He places Haier’s innovation in this category. “It has
very little to do with technology. It’s really market responsiveness and
market-driven innovation,” says Gupta. He ranks another Chinese company, the
medical device-maker Mindray Technologies, also in the same category.
“Essentially, their competitive advantage is to develop and market lower-priced
medical devices.”
Commenting
on the success of Bharti Airtel, India’s number-one telecom operator, which
engaged in what Gupta terms “extreme outsourcing” — it outsourced its entire
network to Nokia and Ericsson and all its business processes to IBM — Gupta
notes: “Airtel found an innovative way to use the expertise and skill of [those
companies] and reduced its cost structure without sacrificing the quality of
service.”
For
technological innovation, Gupta points to Huawei Technologies, the leading
telecom equipment company in China and among the top three worldwide.
Describing the firm as a “technology powerhouse,” Gupta says that the number of
patents it has received from both the U.S. and European patent offices
indicates that Huawei is developing “next-generation technologies.”
Guillen
notes that some of Brazil’s EMs are engaging in technological innovation as
well, working on environmentally oriented projects such as how to produce
energy or plastics out of ethanol, and developing cosmetics that use natural
ingredients. There are companies in India, he adds, that are combining IT with
the human genome and becoming specialized suppliers to hospitals and doctors
who need to analyze a patient’s genetics for various conditions. Guillen
believes these companies “are just about the best in the world” at performing
this service, and at a very competitive cost.
The Recipe for Success
In the
near term, which innovative EMs will succeed and which will not? According to
Gupta, EMs would do well to shift their focus from market-driven innovation to
technological innovation. “Just look at what’s happening on the digitization
frontier — whether with smartphones, or driverless cars, or whatever. In terms
of technology-driven innovation, emerging multinationals (with two or three
exceptions like Huawei) are far behind.” He adds that technological innovation
is easier to take global, because it is more “portable” and not married to the
needs of one particular market. Another factor for success, in Gupta’s opinion,
is that EMs need to be private-sector companies which have “a much stronger
incentive to innovate and succeed” rather than state-owned enterprises.
Shibulal
agrees that market-driven innovations do not always easily transcend the
borders between the developed and developing worlds. In the Western world,
innovations are about making things “bigger, smarter, faster.” but these are
not necessarily the qualities the rest of the world is looking for. For India
and China’s growing middle class, for example, affordability and durability are
more important, and products need to be lean rather than bulky.
Adds
Guillen: “If you go to China, you won’t see GE electrical appliances; you’ll
see Haier all over. Or, if you go to India, you’ll see a lot of Tata cars. You
won’t see that many Chryslers.” Within 10 or 15 years, India and China combined
will be a larger market than the U.S. and Europe combined, so many EMs will
have the advantage. “They will be the biggest in the world and the
better-known.”
http://knowledge.wharton.upenn.edu/article/how-innovation-is-helping-emerging-multinationals-to-race-ahead/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2015-08-05
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