Emerging markets are key for global companies wanting to expand, but success may require a localised business model to overcome organisational and leadership challenges.
1. Changing the business model for emerging markets like Dubai
2. What happens when companies go global?
3. How companies rethink their global corporate plans
It is axiomatic that executives of major international companies see the future in the emerging markets of Asia, Africa and Latin America.
That’s why many have established offices and even headquarters outside developed markets and placed them in the mid-sized cities of the emerging economies.
But what happens to companies when they go international?
This trend of making substantial commitments is readily apparent in Dubai, where access to the consumers of Africa, South Asia and Europe is unrivalled.
A large number of Fortune 500 companies have located their head office in Dubai, and that includes, on some estimates, up to 70 per cent of the top 100 Fortune firms.
Their decision to be based in Dubai puts these companies within four hours’ flying time from markets populated by more than two billion people.
The former CEO of Starwood Hotels, Frits van Paasschen, once relocated the group’s headquarters to Dubai, one of Starwood’s most successful markets, for a month, with the objective of shifting its corporate mindset to a more global one.
“We’re here to be immersed in one of the world’s most dynamic regions, and to see our global business through a sharply focused local lens,” Mr van Paasschen wrote in the Harvard Business Review.
“While we’re here, Dubai will serve as a hub for our own travel to Saudi Arabia, Kuwait, Kazakhstan, Lebanon, Qatar and India,” he said.
“Our relocation is geared to shift our own mindset to being both a global and a “multi-local” company.”
Like Starwood, the move by many global firms to rapidly growing emerging markets such as Dubai makes good commercial sense.
The International Monetary Fund forecasts that the top ten fastest-growing economies in the world this year will be emerging ones.
And by 2025, emerging countries will represent an estimated half of the world’s consumption spending, or US$25 trillion.
For the giant oil-field services firm Halliburton, which opened a second headquarters in Dubai in 2007, the city’s location was critical for its global expansion plans.
“We used to be an American company that operated overseas. I wanted to turn Halliburton into a global organisation,” CEO David Lesar told the Wall Street Journal.
“We have to look like, act like and be culturally attuned to how you do business around the world.”
Yet according to McKinsey consultant Martin Dewhurst, who has interviewed hundreds of executives about this question, moving into emerging markets can challenge a global company’s performance.
And ultimately that could mean that local firms, with their own rival brands, will find themselves in more competitive positions than their storied global competitors.
To get around this challenge, Mr Dewhurst said the managers of global firms should pay attention to several recurring issues.
“Being global brings clear strategic benefits: the ability to access new customer markets, new suppliers and new partners,” he said. “But being global also brings strategic challenges … In particular, processes for developing strategy and allocating resources can struggle to cope with the increasing diversity of markets, customers and channels.”
What this means in practice is that local competitors, which do not face the same complex internal management issues of global firms, are often better at understanding the local market and its customers’ needs.
At the heart of a global company’s challenge in emerging markets is a fundamental tension between local and central, or what to localise and what to centralise.
This tension finds its strongest pivot in what are ideally seen as the shared functions of a global company, in HR, finance and marketing, across markets.
These are areas in which a global company could expect to benefit from economies of scale as a result of shared back office functions in different markets.
But in practice this is often not the case.
Rather than sharing existing assets and capabilities in these areas, many find they have to localise their marketing, tailor their products to local consumers and even shift their R&D programs.
For instance, making the most of a diverse global workforce, with its varied knowledge base and skill level, is difficult in the eyes of many executives.
“At the same time, many companies find deploying and developing talent in emerging markets to be a major challenge,” Mr Dewhurst said.
Barely half of the executives he interviewed at 17 global companies thought they were effective at “tailoring recruiting, retention, training and developmental processes for different geographies”.
On some estimates, only 15 per cent of Fortune 500 companies’ CEOs come from outside the base country. Moreover, many senior managers were often not based in the economies that will deliver strong sales in the future.
Companies such as Starwood seem to have anticipated many of the challenges identified by the McKinsey research.
The group is a global leader in luxury hotel and resort brands such as the W, Sheraton, the Westin and St Regis; and the promise of emerging economies is changing the way it manages its global operations.
“Globalisation is changing the way companies need to think. A new style of leadership is emerging. In a ‘flat’ world, we no longer think about being centralised or decentralised,” Mr van Paasschen said.
“Our relocations are helping to re-level our company, opening us up to more dialogue, smarter decisions, and better results.” These thoughts on globalisation were echoed by the CEO of Halliburton.
“My office will be in Dubai, and I will run our entire worldwide operations from that office,” Mr Lesar told a conference in Bahrain.
“The Eastern Hemisphere is a market that is more heavily weighted toward oil exploration and production opportunities. Growing our business here will bring more balance to Halliburton’s overall portfolio.”
Despite the flexibility and success of many individual global firms, the problems companies face as they go global remain durable.
“For more and more companies, the globalisation imperative is intensifying, and that could present additional organisational and leadership challenges that are not yet fully understood,” Mr Dewhurst said.