The Emerging Global Environment.pptx

1. Chapter 2
The Emerging
Global
Environment

2. 2
The World from 1993 to 2016
1993 2016
East Asia & Pacific 25% 30%
North America 29% 27%
European Union 30% 22%
Latin America & Caribbean 6% 7%
Middle East & North Africa 2% 4%
Sub-Saharan Africa 1% 2%
Russian Federation 2% 2%
World GDP (Billion USD, current) 25 859 75 845

3. 3
The World From 1993 to 2016
GDP
(current billion US$)
GDP per
capita
(current US$)
Population,
total (Million)
Average
yearly growth
(1993-2016)
1993(%) 2016(%) 1993 2016 1993 2016 (Per Cent)
East Asia & Pacific 6552 25% 22480 30% 3462 9788 1892 2297 4.18
North America 7458 29% 20160 27% 25822 56082 289 359 2.50
European Union 7815 30% 16487 22% 16211 17173 482 511 1.74
Latin America &
Caribbean 1565 6% 5300 7% 3332 3761 470 638 2.81
Middle East & North
Africa 608 2% 3145 4% 2224 2269 273 437 3.82
Sub-Saharan Africa 300 1% 1513 2% 540 512 556 1033 4.21
Russian Federation 435 2% 1283 2% 2929 2663 149 144 1.72
World 25859 100% 75845 100% 4667 4937 5541 7442 2.90

4. 4
0
5
10
15
20
25
30
Industrialized
economies
Emerging
markets:
Africa
Emerging
markets:
America
Emerging
markets: Asia
Emerging
markets:
Europe
Trade Growth
GDP Growth
FDI growth
Globalization growth indicators, 2000–2014

5. 5
What is an Emerging Country?
No clear definition of what is an “emerging country”.
Often describes countries that exhibit:
• High economic growth
• Increasing development of a middle class
• A high degree of infrastructure and educational investment
• A progressive shift from agriculture and services
• An economy in which market mechanisms play an increasing
role
• Opening of their market to international trade and investment.

6. 6
6
Different Types of Emerging Countries
The BRICS emerging giants - Brazil, Russia, India, China and South
Africa
The Transition Economies (Eastern Europe)
The Emerging Industrial Economies of Latin America, Asia and Africa
(such as Chile, Mexico, Turkey, Malaysia and Indonesia)
The Developing World (such as Vietnam, Nigeria, Pakistan)

7. 7
Average Yearly
Growth
Rate
(1993-2016)
GDP /Capita 2016)
Country Life Cycles
(Bubble size proportional to GDP 2016)
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
0 10000 20000 30000 40000 50000 60000 70000
North America
European Union
East Asia and the Pacific
Russian Federation
Latin America
& Caribbean
Middle East and
North Africa
Sub-Saharan
Africa

8. 8
GDP Growth : Emerging Countries vs. the World
(1990-2014) -Base 100 in 1990
Source: Data from World Development Indicators
High Economic Growth
100
150
200
250
300
350
400
1990 2000 2010 2012 2013 2014
BRICS
Developing
Economies
Emerging
Industrial
Economies
World
Transition
Economies

9. 9
132
2703
75
129
3039
1
10
100
1000
10000
Central & South
America
Asia Pacific Sub Saharian
Africa
Middle Est & N
Africa
World
Forecasted increase in Middle Class Population
in Emerging Regions from 2009 to 2030 (Million)
Increasing development of a middle class

10. 10
Middle Class Effect in Emerging Countries

11. 11
Evolution of Urban Household Income in China

12. 12
High Degree of Infrastructure Investments
Source: Data from World Bank. World Development Indicators
Average
yearly
growth
of
fixed
capital
formation
%
of
GDP
1990-2014
Average fixed capital formation
% of GDP 1990-2014
0%
2%
4%
6%
8%
10%
12%
14%
0% 5% 10% 15% 20% 25% 30% 35% 40%
BRICS
EIE
EU
World
USA
Transition
Developing

13. 13
Opening to International
Trade and Investment
Source: Data from World Bank. World Development Indicators
and UNCTAD World Investment Report , 2010)
Average
yearly
growth
of
fixed
capital
formation
%
of
GDP
1990-2014
Average fixed capital formation
% of GDP 1990-2014
0%
2%
4%
6%
8%
10%
12%
14%
0% 5% 10% 15% 20% 25% 30% 35% 40%
BRICS
EIE
EU
World
USA
Transition
Developing

14. 14
1990 2014
Brazil 23% 15%
China 53% 7%
India 60% 49%
Russian Federation 16% 7%
South Africa 15% 5%
Egypt, Arab Rep. 39% 28%
Colombia 20% 16%
Sri Lanka 41% 30%
Philippines 37% 30%
Poland 25% 11%
Czech Republic 12% 3%
Hungary 18% 11%
Indonesia 56% 34%
Mexico 26% 13%
Turkey 43% 14%
European Union 9% 4%
United States 3% 2%
World 39% 20%
A progressive shift from agriculture to services
Agriculture (as % Share of GDP)

15. 15
Market mechanisms play an increasing role
Changes to national investment policies, 2002–2016
Source: UNCTAD: World Investment Report 2017: Table III.1, Page 99

16. 16
The Washington Consensus
• Fiscal discipline: limit budget deficit
• Public expenditure directed toward high economic returns, improvement in
income distribution, healthcare, education, and infrastructure
• Tax reform: broaden the tax base and lower marginal rates; tax foreign holdings
• Interest rates market determined
• Competitive exchange rate
• Trade liberalization
• Liberalization of foreign direct investment (FDI)
• Privatization of state enterprises
• Deregulation: abolish entry barriers or restrictions on competition
• Secure property rights

17. 17
The World in 2050 according to
Goldman Sachs

18. 18
The World in 2050 according to
Goldman Sachs

19. Institutional and Business Environments
• Governance
• Market imperfection
• Ease of doing business
• Importance of business conglomerates
• A significant presence of bottom of the pyramid
market segments
19

20. 20
-1
-0.5
0
0.5
1
1.5
2
Developing
Economies
BRICS Emerging Industrial
Economies
Transition
Economies
OECD
Government Effectiveness
Scored from
-2.5
(Weakest)
to 2.5
(Strongest)
Source: Data from World Bank Indicators,2015
• Quality of public
services
• Quality of the civil
service & its degree of
independence from
political pressures
• Quality of policy
formulation and
implementation
• The credibility of the
governments
commitment to such
policies

21. 21
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Developing
Economies
BRICS Emerging
Industrial
Economies
Transition
Economies
OECD
Regulatory Quality
From -2.5 (Weak)
to 2.5 (Strong)
Ability of the government to formulate and implement sound policies and regulations that
permit and promote private sector development.
Source: Data from World Bank Indicators,2015

22. -1
-0.5
0
0.5
1
1.5
2
Developing
Economies
BRICS Emerging
Industrial
Economies
Transition
Economies
OECD
Rule of Law
From -2.5 (Weak)
to 2.5 (Strong)
Confidence in the rules of society, the quality of contract enforcement, property rights, the police,
and the courts, as well as the likelihood of crime and violence.
Source: Data from World Bank Indicators,2015
22

23. 23
-1
-0.5
0
0.5
1
1.5
2
Developing
Economies
BRICS Emerging Industrial
Economies
Transition
Economies
OECD
Control of Corruption
Reflects perceptions of the extent to which public power is exercised for private gain, including both
petty and grand forms of corruption, as well as "capture" of the state by elites and private interests.
From -2.5 (Weak)
to 2.5 (Strong)
Source: Data from World Bank Indicators,2015

24. Institutional Voids in Emerging Countries
 Access to Products Markets
 Access to Labor markets
 Access to Capital markets
 Political and social systems
 Bureaucracy
Note: Not all characteristics apply to all emerging countries, and some of those can be found in some OECD
countries.
As discussed in Khanna and Palepu (1997).
24

25.  Lack of socio-economic and market data
 Lack of information on quality of products and services
 Difficulties in accessing suppliers
 Weak logistical infrastructure
 Intricate distribution and retailing systems
 Poor product-related environmental and safety regulations
 Unsophisticated consumer credit and payment mechanisms
 Poor consumer protection
Access to Products Markets
Note: Not all characteristics apply to all emerging countries, and some of those can be found in some
OECD countries.
As discussed in Khanna and Palepu (1997).
.
25

26. Access to Labor Markets
 Weak educational system (Improving still)
 Poor mobility of personnel
 Ethnically, politically biased performance and remuneration of
employees
 Feeble protection of employees and restriction or prohibition of trade
unions
 Difficulties in fluidity of hiring and firing employees
Not all characteristics apply to all emerging countries, and some of those can be found in some OECD
countries.
As discussed in Khanna and Palepu (1997).
26

27. 27
 Low liquidity of equity market
 Limited effectiveness of banking and financial institutions
in collecting savings and channeling investments
 Lack of transparency on financial performances of corporations
 Predominance of government banking sector
 Poor protection for minority shareholders
 High predominance of diversified conglomerates
 Politically motivated allocation of licenses
 Unclear bankruptcy process
Access to Capital Markets
Not all characteristics apply to all emerging countries, and some of those can be found in some OECD
countries.
As discussed in Khanna and Palepu (1997).

28. 28
Political and Social Systems
 Uncertain stability of political cohesiveness
 Lack of clarity in the distribution of power
 Strong interference in regulating business
 Uncertain protection of property rights
 Lack of independence of judiciary system
 Ethnic, religious, family, linguistic tensions
 Control of media
 Control or prohibition of non-governmental organizations
 Corruption
Not all characteristics apply to all emerging countries, and some of those can be found in some OECD countries.
As discussed in Khanna and Palepu (1997).

29. Bureaucratic Constraints
 Investments and preferential treatment for national companies
 Bureaucratic constraints on foreign business concerning the
opening of businesses, acquisition of property, transfer of
dividends, local borrowing, imports and exports, labor and
currency
Not all characteristics apply to all emerging countries, and some of those can be found in some OECD
countries.
As discussed in Khanna and Palepu (1997).
29

30. Ease of Doing Business Indicators 2018
From low ranking score (Easy) to high (Less Easy)
Source: Data from World Bank, http://www.doingbusiness.org/rankings
145
139
128
111 112
59
72
60
55
49
24
100
125
82
78
35
48
30 27
34 31
20
7 6
0
20
40
60
80
100
120
140
160
30

31. Significant Presence of Bottom of the Pyramid Markets
Bottom of the Pyramid
Middle Class
High
Class
Below 3000 ppp $/capita
From 3000 to 20000
ppp $/capita
Above 20000 ppp $/capita
31

32. 32
Bottom of the Pyramid
Population (Million)
% of Total
Population
Bottom of the Pyramid
Income (Billion ppp)
% of Total
Income
Africa
Asia
Eastern
Europe
Latin America
&Caribbean
486 429
95% 70%
2858 83%
63%
70%
3470 41%
254
28%
458 36%
360 509
Significant Presence of Bottom of the Pyramid Markets
Source: Data from The Next Four Billion, IFC and the World Institute, 2007

33. 33
Sources: Based on concepts discussed
in Prahalad (2005) and Dawar and
Chattopadhyay (2002).
• Rural focus
• Products built to last
• Unskilled work process
• Adapt supply chains to local conditions
• Products designed for hostile environments
• Hybrid technology: combination of advanced and adaptation
• Find new price–performance relationships leading to quality at low prices
• Products, service functionalities and packaging reinvented for local conditions
• Promotion relies less on mass advertising and more on educational campaigns
using government programs and NGOs
Bottom of the Pyramid Markets - Marketing

34. 34
Emerging Countries Competitors
Haier (China – white goods)
Tata (India – multiple markets)
Ranbaxy Laboratories Ltd (India –Pharmaceuticals)
PETRONAS (Malaysia - petrochemicals)
CEMEX (Mexico – cement, building materials)
Infosys (India – IT, consulting)
SAB Miller (South Africa – Brewing/beverages)
Lenovo (China – PCs, electronics)
Huawei (China – telecoms, telephony hardware)

35. 35
The Strategic Logic of Emerging Countries Competitors
• Use their knowledge of local environment
• Use their “national” preference
• Use their low-labor cost
• Sometimes use their natural resource
On the Domestic Front On the International Front
• Dominate Bottom of the Pyramid
• Gain volume
• Progressively push their capabilities
upward
• Eventually compete head-on with
multinational players
• Export low cost products
• Buy ( copy??) technology
Globalization and local firms: The Recent View

36. 36
• Low cost manufacturing based on low labor costs and financing
• Large part of activities based on original equipment manufacturing,
• minimizing marketing costs
• Technology is acquired thru licensing or joint ventures
Time
• Brand creation and development
• Investment in R&D
• International expansion
• Proprietary Technology
• Own brand
• International marketing
Time
Sources
of
Competitive
Advantage
• Investment in advanced production technology
• Labor costs still moderate
Development of National Champions
Globalization and local firms: The Recent View
Japan 1960s 1960s 1970s and beyond
Korea 1960s 1970s 1980s 1990s and beyond
China 1980s 1990s 2000s 2005 and beyond

37. 37
Time
• Start International expansion mainly
by acquisitions
• Invest in modern manufacturing
technology
• Start to build their own brand
• Start their own R&D
• Protected Domestic markets
• Low-cost manufacturing based on low labor cost
• In some cases access to natural resources
• Technology is acquired through licensing
or joint ventures
• Large part of activities based on original
equipment manufacturing
• Compete head-on with traditional
global firms
Step 1
Domestic player
And exporter
Step 2
Internationalization
Step 3
Global Player
Development of National Champions
Globalization and local firms: The Recent View

38. 38
Products/Services
Functionality and
Performance
Time
High-End Markets
Dominated by Multinationals
Canon in Japan in the 60s (cameras)
Honda in the 60s (motorcycles)
Galanz in China in the 90s (microwaves)
TCL in China (televisions)
Samsung in Korea in the 80s (microelectronics)
Reliance in India in the 90s (pharmaceuticals)
High
Low
Low-End Markets
Dominated by Domestic Firms
National Champions: Building The Business

39. 39
Domestic players
both large and small
Multinational firms from USA, Europe,
Japan, Korea and Australasia…plus emerging
Indian and Chinese Mutinational firms …)
Technology
and marketing
Contextual and
political know-how
Low resource
costs
Competitive Approaches
Scope
Global
Local
Emerging Competitive Battlefield

40. 40
‘Dragons at Your Door’
See Ming Zeng and Peter Williamson, Dragon at Your Door:
How Chinese Cost Innovation is Disrupting Global Competition
Harvard Business School Press, 2007
Chinese companies disrupt global competition through
COST INNOVATION:
using cost advantages in radically new ways to offer customers
around the world dramatically more for less
 Start in China and overcome fragmentation
 Export by looking for loose bricks in competitors’ defense
(unexplored markets or products)
 Moving upmarket: technology at low cost ( licensing, copying)
and variety at low cost

41. 41
Earth Moving Equipment
Wheel Loaders
Global Market: 720,000 units
Chinese Market: 120,000 units
Production Capacity in China:
200,000 units
Prices (US$)
CAT, Volvo: 120,000
Komatzu: 60,000
Chinese Co 30,000
Chinese Co exported:
2,000 Units in 2004
3,500 units in 2005
Chinese Product
Caterpillar

42. 42
 By mid 1990s Whirlpool had big ambitions for Asia
 China was considered as Key Market
 Very fragmented industry with 650 appliance manufacturers
operating in China
 Customers focus was on local brands
 Some emerging Chinese leaders : KELON, HAIER
The Whirlpool Story in China - 1

43. 43
Whirlpool entered in 1994 using:
 JV in Beijing for refrigerators (Snowflake)
 JV in Shanghai for washing machines (Whirlpool Narcissus)
 JV in Shendu for microwaves (MCV)
 JV in Shenzhen for air-conditioners (Whirlpool Raybo)
Plus a greater China Headquarters in Hong Kong
and a Design Centre in Singapore
 Whirlpool exited in 1997 from its refrigerators and air-conditioning
ventures
Still produces compressors in Beijing, microwaves in Shendu and
washing machines in Shanghai
The Whirlpool Story in China - 2

44. 44
Kelon
Haier
China’s Appliances Market -Shares in 2002
Other
Xinfei
Meiling
The market is dominated by local players
The Whirlpool Story in China - 3
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%

45. 45
• Founded in 1984 in Beijing, (China Academy of Sciences), Listed in HK in 1994
as “Legend”
• Dominates the PC Market in China with around 27% Market Share
• Acquired IBM PC division in 2005
• N°1 PC maker in the world (after Dell and HP/Compaq)
• Revenues of 40 billion US$ in 2016
Personal Computers, Servers
Chinese Champions: Lenovo

46. 46
Domestic Appliances, IT
• Founded in 1984 in Qingdao
• Considers itself as 4th biggest white goods manufacturer in the world
• Revenues in 2017 : 37 billion $US
• Sells products in 160 countries and produces in 13 countries
“Guided by business philosophy of CEO Zhang Ruimin, Haier has
experienced success in the three historic periods, noted as
Brand Building, Diversification and Globalization.
At the 21st anniversary of founding of the Haier Group December 26, 2005,
Haier announced its 4th strategic development stage of Global Brand Building “
Chinese Champions: Haier

47. 47
 Established in 1999 by Jack Ma, a former English teacher from Hangzhou
 Largest e-commerce (both B-to-B and B-to-C) platform in the world; above
Amazon, Walmart
 Operates its platform in 200 Countries
 Expanded into media, entertainment, publishing, sport….
 Revenues in 2017 : 23 billion $US
E-Commerce
Chinese Champions: Alibaba Group

48. 48
Multimedia, Telecommunication
• Founded in 1981 to produce telephone handsets
• Early 1990s - branched out into audio equipment and distribution of TV sets
produced in Hong Kong
• Started production of TV sets in 1996 in Shenzen
• Became n°1 TV producer in China in 2003
• Expanded production in Vietnam, Philippines, Indonesia, Thailand, Russia
• Acquired Scheider in Germany
• In 2004 created TTE (TCL Thomson Enterprise) with Thomson Multimedia
(TCL owns 67% of the venture)
• Ranked among the top 3 worldwide producers of TV sets
• In 2005, fully acquired the mobile phone handsets business from Alcatel
• Revenues of 16 billion US$ in 2016
Chinese Champions: TCL

49. 49
Telecommunications (networks, products and solutions)
• Started in 1988: digital fixed switch
• In 1997: Launched GSM equipment.
Established joint R&D labs with Texas Instruments , Motorola, IBM, Intel,
Agere Systems, Sun Microsystems, Altera, Qualcomm, Infineon and
Microsoft. As of June 2005, Huawei Technologies has a total of 10 joint
research labs.
• In 2000, established R&D centers in Silicon Valley (California) and Dallas
in the US.
• Cisco Systems alleged in 2003 that Huawei had infringed some of
Cisco’s technology patents (resolved in 2004 with Huawei agreeing to
revise the technology in question).
• Revenues of 75billion US$ in 2016
Chinese Champions: Huawei

50. 50
Consulting and IT Services
• Established in 1981
•1987 First office in the USA
• 2016 Revenue reaches 10 billion US$.
Pharmaceuticals
• Ranbaxy founded in 1961, initially specializing in generics
• Sun Pharma started in 1983, specializing in niche therapies
• Sun and Ranbaxy merged in 2014 (Sun acquiring 100% of Ranbaxy)
• Ranked amongst the top fifty specialty generic companies worldwide
• Manufacturing operations in 40 countries
• Subsidiaries in 55 countries
• Products available in over 150 countries.
• Company Global Sales of US $5 Billion in 2017
Infosys
Indian Champions - 1
Sun Pharma/Ranbaxy

51. 51
• Created in 1961, now part of Kalyani conglomerate
• Largest exporter of auto components from India
• Leading chassis component manufacturer in the world.
• Manufacturing operations in 10 locations in 6 countries
• Global Sales of US $620 Million in 2017
• India’s oldest business conglomerate
• 100 companies operating in six continents
• Spread over seven business sectors:
Engineering, Chemicals, Materials, Energy,
Consumer Products, IT, Communication
• Sales of US$ 100 Billion in 2017
• Employs some 695 000 People
Indian Champions - 2
Tata Group
Automotive components
Bharat Forge
Conglomerate

52. 52
Multinational Corporations from:
China
India
Multinationals companies are defined as companies with sales above 1 billion US$ (as of 2004) at least 10% of which is international
Source: Data from Boston Consulting Group report The New Global Challengers (2006)

53. 53
Millions US $
Source: Data from UNCTAD “World Investment Report, 2006
Cross-Border Global Acquisitions:
Cumulative Acquisitions by the BRICS
-
2 000.0
4 000.0
6 000.0
8 000.0
10 000.0
12 000.0
China India Brazil South Africa Russian
Federation
2000
2016

54. 54
In most emerging countries the industrial, financial and trading
sectors are controlled by three groups of players:
• Government-owned enterprises
• The multinationals
• The domestic “business groups”
The domestic business groups exhibit typical characteristics:
• Highly diversified
• Personally controlled
• Most often controlled by families or ethnic groups
Business Groups in Emerging Countries - 1

55. 55
Business Groups control large sectors of their economies:
• Overseas Chinese in South East Asia
• Korean Chaebol
• Indian Family Groups
• Rejuvenated State-owned enterprises in China
• Latin American Groupos
Business Groups in Emerging Countries - 2

56. 56
Overseas Chinese In South East Asia:
Traditional Role
CREDIT
DISTRIBUTE
URBAN
AREAS
DISTRIBUTE
BUY
CREDIT
IMPORT
RURAL
AREAS
FOREIGN
COUNTRIES

57. 57
Evolution Of Overseas Chinese Groups In Southeast Asia
Banking and
Financial Services
Real Estate
Progressive Vertical
Integration in
Upstream Activities
Investment in
Industrial Activities
(Assembling, Downstream);
either Directly,
through Joint-Ventures
or Licensing
Diversified
Activities
Diversified
Activities
Diversified
Activities
Diversified
Activities
Start up
in
“Trading”

58. 58
Overseas Chinese Groups
Organization And Management

59. 59
Chaeron Pokphand
(DHANIN
CHEARAVANONT)
200 COMPANIES
REVENUE: 8 BILLION U$S
BEFORE GFC
Animal Feed
Poultry Milk
Pig Farming
Feedmill
machinery
Plantation Animal Heath
Sausage
Meat
Farming
Aqua Feed
Shrimp
Chemical
Seeds
Plant
Protection
Logistics Trading
Trucks
Motorcycles
Drills
Health
Drinks
Supermarkets Frozen Foods
Distribution
Real Estate Condominiums
Golf
PVC
Luggage
Toys Sponge
Leather
Telephony
Cable TV
Fiber
Optics
Switching
Equipment
Petroleum

60. 60
Why so Important in Emerging Countries?
 Privileged Access to Scarce Resources;
 Political power
 Information
 Financial
 Business opportunities
 Monopolies
 Reputation attracts best talent
 Benefit from Market imperfections
 Simplified “business systems”

61. 61
 In each of the businesses, limited competition (monopolies, oligopolies)
 Innovation (products, processes) is purchased (licensing, joint venture)
 Marketing is essentially a matter of sales and distribution:
Brands are sourced externally, products also....
 The key managerial task is to run logistics and production efficiently
(Reduced complexity, no search for synergies)
Innovation Logistics/
Production
Marketing
Obtained
through licensing
and joint ventures
Key operational
task
Concentrated on sales
and distribution in
oligopolistic markets.
Brands and products
sourced externally
Why So Diversified?

62. 62
Progressively Changing…
 Markets pressures: globalization, deregulation
 Increased competition - both domestic and international
 More complexity of management because of the need to develop
own R&D and marketing capabilities.
 Increasing financial stakes due to the move towards capital intensive
activities
 Overcapacities
 Higher dependencies on foreign capital

63. 63
Consequences ?
Since the early 2000s, a large number of Asian Entrepreneurial Conglomerates
have announced a series of moves under the generic name of :
RESTRUCTURING
• COST CUTTING: (wage cuts, bonus freezes, headcount reductions)
• DEBT RESTRUCTURING:( See 200% D/E ratio imposed in Korea)
• PORTFOLIO REDEFINITION: (Definition of Core Business,
concentration of similar activities in the same group, intergroup mergers )
•DIVESTMENT OF NON-CORE ACTIVITIES: (spinning off, or selling off)
•REORGANIZATION: ( flatter structures, decentralization of decision-making)
“ We’ve expanded too much. Now we need to focus only on businesses in
which we have a strong potential. It is impossible for us to maintain 100
different businesses under the current situation” - Samsung