Globalization is a double-edged sword

History is on the side of emerging global champions from India and China. Over the next two to three decades, these are the only two economies that are destined to catch up with the United States and an integrated Europe. A prolonged recession in the developed economies will actually accelerate these trends. As a result, aspiring multinationals from India and China are likely to enjoy the benefits of several home-grown advantages: a large and growing domestic scale, radically low cost structures, and access to a vast pool of talented scientists and engineers.

Getting China and India Right, ambitions and potential are not the same as reality. Globalization is a double-edged sword. Aside from its well known benefits, it also exposes the firm to numerous challenges. Managers must understand, engage with and delight unfamiliar new customers. They must compete with established global players on their home turf. They must contend with a dramatic increase in diversity and complexity. And, they must accept a significant increase in the firm’s fixed cost base. Given these challenges, it is given that not every aspiring global champion from India will succeed in realizing its ambitions. We outline below six strategic guidelines essential for the realization of global leadership by any Indian multinational over the next ten years. Whether or not a company’s actions reflect these guidelines will differentiate between those who make it and those who do not.

First, become world class within India. Barring rare exceptions (such as India’s IT services sector), most companies become dominant within their home markets before venturing abroad. Core competencies are built first on one’s home turf and then leveraged to serve customers and do battle with competitors in foreign markets. If a company is not world class within India, it is hard to imagine how it could successfully challenge foreign competitors in their home markets while also taking on the added complexity of globalization. Tata Steel became one of the world’s lowest cost producers of steel before it launched an acquisition of Corus. Haier Group, China’s market leader in home appliances, became one of the world’s leaders in product innovation within China before it spread its wings over Europe, the US and, more recently, India. The importance of becoming world-class within the home market will increase with a rise in the intensity of global competition.
Never forget the economics of your industry. They determine which activities in the value chain must be localized and which can be leveraged from global delivery centers. They also determine the importance of depth and local market share within a particular country as distinct from breadth and global footprint. Discount retailing is a very localized business and depth matters far more than breadth. In contrast, the semiconductor industry is extremely global and local market shares are not very critical. Even the mighty Wal-Mart has paid the price of ignoring the importance of industry economics. Notwithstanding Wal-Mart’s global scale, its tiny market shares in Germany and South Korea proved unsustainable and the company was forced to withdraw from these markets.

Develop M&A as a core competency. Unlike Toyota, Sony, Samsung and Hyundai which became global giants primarily through organic growth, global expansion over the next twenty years will be driven heavily by mergers and acquisitions. At some point in the next 6 to 24 months, the liquidity crisis will end resulting in a dramatic pick-up in M&A activity, particularly across borders. In such an environment, skills at due diligence, strategic analysis, deal-making on the right terms, and post-merger integration will serve as a formidable advantage especially against direct competitors from China who are also eager and ambitious to become global leaders within their industries.

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