The Mexican Stock Exchange (Source: Wikimedia Commons)
Ideas for Leaders #427

Why Companies from Emerging Markets Are Putting the Heat on Multinationals

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Key Concept

While multinational corporations typically establish their dominant competitive advantage thanks to their position in the industry and/or access to strategic resources, somehow firms from emerging markets who have neither of these advantages are beginning to dominate globally — or at least compete for domination — in their industries. The reason: while MNCs compete on position or possession, the emerging MNCs are competing on action. They have developed innovative business models, often as a direct result of conditions in their home markets, that give them the edge. 

Idea Summary

What is the basis for a company’s competitive advantage? Traditionally, this question elicits one of two answers: 1) Industry structure. Finding the product-market space within a particular industry that is optimal for your company: in this space you can establish a monopolistic or at the least an oligopolistic position through various barriers to entry. 2) Resource-based competitive advantage. In this perspective, possession rather than position is what counts, or more specifically the possession of strategic firm-specific resources.

As a rule the multinational corporations that dominate do so based on one or both of these competitive advantages: an established position in the industry and/or access to strategic resources.

Given these advantages, MNC executives are baffled by the growing competitive power of corporations from emerging markets. Companies such as Mahindra from India, Bimbo from Mexico, and the Chinese firms Haier and Hauwel are now contending for global market share and even leadership in industries once monopolized by MNCs from advanced economies. How can companies from emerging markets become leading multinational companies (emerging MNCs or EMNCs) when they have neither the position nor possession advantages of their competitors?

The answer begins with recognizing that in business, as in other domains, necessity becomes the mother of innovation. Without access to resources, or the advantage of an incumbent position in the industry, companies from emerging markets must discover other ways to compete. Such companies have little choice in where they are positioned or what they possess; but they do have complete choice in what they do — that is, in which activities they choose to be engaged.

EMNCs are building their competitive advantage based on business models, not industry structure or resources. These business models are built on action: they are built on giving the company the best chance of recognizing and pouncing on technological or environment shifts, for example, before their MNC counterparts, who are typically slow-moving, secure in the comfort of their incumbent advantage.

Ironically, these effective business models are created in response to (not in spite of) the difficulties that EMNCs face in their domestic markets. For example, the limited if non-existent institutions in their home markets require emerging market companies to become more flexible, innovative and resilient than companies working within a well-established and stable institutional structure. Thus, emerging market companies prefer to be generalists, refusing to overcommit to one particular strategy: they don’t want to specialize in certain assets or resources that could make them vulnerable to capricious institutions. They also develop skills in managing tenuous relationships with freewheeling government agencies, for example — skills that the somewhat sheltered companies from advanced economies cannot match.

Emerging market companies also deal with weak intellectual capital laws. As a result, their innovations are more process- than product-based. Given the instability in their home markets, these companies also want more control to let them better respond to market setbacks. Thus, they are more vertically integrated, and often tend to be family-owned or controlled. They are also more comfortable with risk — a natural result of constantly dealing in a risky environment.

Lack of resources forces them to use resources more efficiently. And finally, with the lack of the kind of data support found in advanced economies, these companies rely more on intuition and judgement rather than analysis and logic.

The results of all this adaptation are business models that enable flexibility, rely less on assets, and don’t run away from risks. This makes them bold and dangerous competitors at the international level, especially in contrast to established MNCs who are more likely to be in a protect and defend mode. Emerging market companies are teaching the world a lesson: It's not about what a firm has but what a firm does with what(ever) it has that makes the difference.

Business Application

Established companies can no longer rely on their position or possession advantages, as these advantages don’t protect them against bold and agile competitors who have thrived in the fire of emerging markets. Established MNCs must acquire the same entrepreneurial mindset as their new competitors. They must be ready and willing to innovate, to take risks, to be bold and aggressive, and to be proactive with marketplace opportunities.

They must be ready to thrive in uncertainty, to recognize uncertainty as a positive state that should be harnessed rather than avoided. With emerging market competitors ready to seize opportunities regardless of the resources they have under control, established MNCs must also pursue opportunities that might be beyond their resources.

When business model trumps position and resources, competitive advantage is built on customer value and execution not products and technologies. The key question is, who can best deliver the desired value proposition to the customer?

No matter how big and established you might be, customers are never hesitant to go to a new competitor who gives them what they want. The competitive rise of emerging MNCs is just beginning, and your company might be in the crosshairs next… unless you take the steps to become the agile, customer-driven company that wins in both emerging and advanced economies.

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Authors

Institutions

Source

Idea conceived

  • June 2013

Idea posted

  • August 2014

DOI number

10.13007/427

Subject

Real Time Analytics