In an earlier research project on the challenges of making changes to a firm’s business model, “Shifts from a domestic business to a global business” was ranked as the most difficult such change, scoring higher on the difficulty scale than a substantial number of other also-challenging changes[1].  Despite that high degree of difficulty, globalization remains a priority for most industrial firms.

In last year’s Conference Board study of CEO priorities[2], growth was ranked first by manufacturing CEOs, with cost optimization in second place.  For most manufacturing firms, the best opportunities for both growth and cost optimization involve participation in emerging markets like China, Brazil, India, and numerous other less familiar country markets, a sharp departure from the focus on the markets of North America, Europe, and Japan of earlier decades.

Many readers will be thinking that there is nothing particularly new about the observations above.  Global markets have been on the radar scope for quite a few years.  How many times have we read recent earnings reports that cited significant gains in sales in China as a key factor in their improved results?  Many firms can accurately make statements like “We have factories in eleven countries” and “Over half of our revenues now come from markets outside of North America”.  To a significant extent, it’s true that the focus on globalization – and the challenges associated with it – has been around for quite some time.

In the past, globalization initiatives for western businesses have been centered on the “core” of those firms.  For many western firms, the first element of their globalization strategy involved arbitrage, taking advantage of low manufacturing and sourcing costs in countries like China and Mexico in order to improve competitiveness and profitability in their home markets.  Such initiatives spawned the eleven factories that about which many manufacturing firms now boast.  Subsequently, opportunities for aggregation entered into the picture, as elite segments of those same global markets achieved income levels sufficient to buy the products made by those firms, yielding benefits in terms of economies of scale.  These initiatives are the ones that yielded the claims about successful diversification of revenues beyond traditional developed country markets.

Such globalization initiatives, involving either arbitrage or aggregation, were centered on the core businesses of the firms involved.  Along both dimensions, the contribution of globalization was to exploit the western firm’s core strengths, either by introducing efficiencies in manufacturing and sourcing or by seizing on opportunities to serve an expanded market for the firm’s products.

What has changed is this.  In the future, the focus of globalization will shift.  At its center will be initiatives designed to bring what is done by firms from emerging markets into the portfolios, business models, and cultures of established western companies.  Examples of the importance of doing so are already visible in many industrial markets[3].  The focus will shift from exploiting the core strengths of the western firm to assimilating the core strengths of often-unfamiliar firms from emerging markets.

This focus will be critical to western firms that want to succeed in the broad middle markets of the large emerging economies – the segments which will contribute most of the growth that will occur in the coming decade.  To succeed in those markets, it will require that firms bring customers an offer of “almost as good products at a great price point”, the competency that has driven many emerging market firms like Huawei, Haier, Sany, and Mindray to positions of global prominence.

Furthermore, meeting future competitive challenges in both western markets and emerging markets will require that western firms “become them” in important ways, a challenge very different from that of previous globalization initiatives.  Western firms will have to learn and assimilate new approaches to innovation, ones that “take out unnecessary features and their costs” rather than ones that constantly “raise the bar”.  They will have to rethink the balance between product and service contributions to the value delivered to customers.  They will have to blend processes appropriate to success in emerging markets with those that have been critical to their growth in past decades in their traditional markets; in that blending, the western processes will not always be those that survive.

Globalization has always been a challenge, but it will become an even more difficult one as the focus shifts.   It was a challenge for most firms to translate what they knew well – their “core” – into new market environments.  It will be an even greater challenge to learn what unfamiliar firms are doing and bring that into their own firm’s business model and culture.  But doing so will be critical to success in the markets of the next decade.

Author: George F. Brown, Jr.