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LOCAL MEETS GLOBAL
EMB
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Emerging market giants need to alter their worldview.
Continuing to rely solely on the country-specific advantages
that work so well for them locally is not a viable option.
management. These capabilities will
need to be fully integrated into the
corporate strategy to ensure that the
company is coherent.
Etihad Airways’ growth journey
followed these four phases. After it began
operations in 2003, the carrier started
building all the capabilities of a global
airline internally. It invested billions of
dollars in aircraft, people, technology,
real estate and brand, to rival global
industry standards. It focused particularly
on its service and hospitality capabilities,
especially for Business Class and First
Class passengers, by offering innovative
ground and in-flight services. Afterwards,
it sought partnerships with airlines in
strategic markets in the form of minority
equity investments– such as with Virgin
Australia, Alitalia, Jet Airways, and
airberlin– to acquire a combined network
of over 300 destinations operating almost
700 aircraft. It has also aligned frequent
flyer benefits across its partners and
achieved a better network offering
(flight frequency and connectivity).
HOW TO BUILD WORLD-CLASS
CAPABILITIES
As they enter the fourth phase of their
development journey, emerging market
companies must rapidly build a fully
integrated system of differentiating
capabilities to succeed globally. They can
do this using one or a combination of three
methods: (1) in-house, (2) through M&A
deals, or (3) via partnerships.
1. DEVELOPING CAPABILITIES
IN-HOUSE
Developing differentiating capabilities
in-house allows companies to tailor them
to their business needs and social context,
while continuously improving them.
This is preferable to adopting ready-made
solutions. SABIC, for example, enhanced
its capability of operating complex plants,
which has allowed it to manage 60 high-
profit operations in 40 countries. It also
EMERGING MARKETS BUSINESS
SUMMER 2017
made significant investments in employee
training to roll out these capabilities
across its organization, which reduced
its dependence on expatriate experience.
However, in-house development can
be a lengthy process and can drain money
and resources without achieving the desir-
able outcomes. This is particularly true
for companies in fast-moving markets
where there is often a shortage of reliable
suppliers, distribution networks and
qualified managerial candidates. As
a result, these companies may incur
unplanned, additional expenses or face
other difficulties such as being held back
by legacy thinking – especially for
(formerly) state-owned enterprises.
2. BUYING CAPABILITIES
Building new capabilities through M&A
is a much faster alternative to developing
them in-house and scaling them up.
However, it is not a surefire strategy.
The first consideration is the capability
fit of the acquiring company and its target.
Acquisition deals usually come in three
types: leverage deals utilize the buyer’s
capabilities to improve the situation of the
target company; enhancement deals use
an acquisition to extend the buyer’s
capabilities; and limited-fit acquisitions
neither enhance nor deploy the buyer’s
core capabilities. Evidence in the GCC also
shows that limited-fit acquisitions provide
lower returns. Capabilities-driven deals
among the 75 largest acquisitions by
GCC companies between 2009 and 2014,
outperformed limited-fit deals by 23.3
percentage points in annualized two-year
total shareholder returns (TSR) and
achieved returns that were 13.9 percent-
age points higher than the local market
index. The key to building capabilities
through deals is making M&A itself a
core capability, improving companies’
ability to standardize, and streamlining
the knowledge transfer and absorption
process after each acquisition.
There are three aspects to M&A as
a core capability. The first is stakeholder
ISSUE NO. 3
management to ensure smooth transitions
throughout the process. The second is
a sound integration management plan to
successfully absorb the technology and
knowledge from the target company. The
Mexican company, CEMEX, for example,
has developed a strong post-merger
integration capability (the CEMEX Way).
It promotes company-wide common
processes for basic activities and rapidly
inducts acquired companies into its
management system to capitalize on
synergies. The technological and
managerial processes required to drive
this integration are constantly refined to
include the best practices of acquired
companies. The third is turnaround
management, which is needed because
potential target companies are often under
financial or other types of stress.
Governments in some emerging
markets recognize the benefits of building
capabilities through M&A, and are actually
encouraging companies to increase their
acquisitions. Low interest rates in many
of these markets mean that companies
can benefit from cheap financing for M&A.
For example, the Singaporean government
has raised grant schemes for companies
venturing overseas from 50 percent to 70
percent over three years. It also increased
the tax allowance for acquisition costs
from five to 25 percent of the deal’s value
over five years, and introduced tax deduc-
tions for Singaporeans posted overseas.
Finally, it is guaranteeing loans to national
c ompanies for financing overseas
acquisitions. Governments may also
provide companies with logistic support
and market research, or create the interna-
tional framework for them to operate in, as
with China’s Belt and Road initiative intended
to build international infrastructure.
3. DEVELOPING CAPABILITIES
THROUGH PARTNERSHIPS
Strategic partnerships are good ways
for emerging giants to learn from other
companies that already possess advanced
capabilities. An advantage of taking this
course is its project-based approach,
which eliminates the need to manage or
integrate the partner’s business. Depend-
ing on the industry and market maturity,
partnerships can take the form of equity
participation, financial sponsorship, joint
ventures, joint research and development,
and co-development/marketing.
With the right fit, partnership agree-
ments can align incentives between the
two companies and create many potential
win-win opportunities in the form of
sharing or acquiring capabilities. The
recent partnership between GE and SABIC
aptly illustrates this type of arrangement.
Under the terms of their agreement, GE
and SABIC will roll out joint investments
of US$1 billion in 2017, followed by a
potential US$2 billion in the futureto
finance initiatives in oil and gas, power
and water, energy, aviation, digital and
other sectors.
To obtain the
growth they seek,
emerging market
firms need to carve
out a clear right
to win.
These initiatives will aim to enhance
and localize Saudi Arabian companies’
manufacturing capabilities, build
industrial know-how, and create jobs
for nationals. By partnering with the Saudi
Industrial Property Authority (MODON),
for example, GE will help 10 factories
achieve digitization with its Brilliant
Manufacturing Software Suite, leading
to increased efficiency and cost savings.
Additional partnerships with other
companies aim at building new facilities
or enhancing existing ones. GE will also
organize workshops and trainings for
women and youth to encourage their
participation in the labor force. In return,
GE will gain a strong supply chain in
Saudi Arabia, supported by a skilled labor
force, and will increase its products and
services exports.
ORGANIZING DIFFERENTIATING
CAPABILITIES
Once emerging market companies have
acquired these distinctive capabilities,
they need the correct organizational
framework to fully leverage these
capabilities to increase efficiency and
competitiveness. For some firms, this
means moving away from traditional
top-down management. Instead, they
should aim to develop their fully integrated
differentiated capabilities systems in
a manner that allows them to coordinate
their global operations while staying agile.
There are different organizational
options. Most multinationals currently use
a matrix structure, yet some have found
that this system can create issues related
to accountability, preventing them from
seizing opportunities in emerging
markets. Meanwhile, some emerging
market companies are experimenting
with new structures. Haier, the Chinese
manufacturer of consumer electronics
and home appliances, has globally
dispersed semi-autonomous units
heading specific projects. These teams
are held together by governance organiza-
tions that provide support services such
as marketing, supply chain management,
sales, product development and
manufacturing. These organizations
also disseminate best practices among
the different units.
ACCEPTING THE CHALLENGE
As they grow larger and more complex,
emerging market companies need to look
for new sources of competitive advantage
and sustain them over the long term to
avoid falling into growth traps. They stand
a better chance of getting there if they
build and properly organize a system of
differentiating capabilities. These
capabilities can lead to international
success, propelling them into the global
top tier while further strengthening their
domestic positions.
Looking at the larger picture, when
a local giant becomes a world-beating
company, it can create a broad and
resilient economic base in its home
market. This can create high-paying local
jobs, encourage a thriving services sector,
and develop advanced technologies that
promote national development.
John Jullens is the emerging markets
leader for the capabilities-driven strategy
platform for Strategy&, PwC’s strategy
consulting group. Based in Detroit, he is
a principal with PwC US.
Per-Ola Karlsson leads the organization,
change, and leadership practice in
Strategy& Middle East, part of the PwC
network. He is a partner based in Dubai.
Rawia Abdel Samad is the director of the
Ideation Center, the leading think tank for
Strategy& in the Middle East.
Notes:
1. John Jullens, ‘How Emerging Giants
Can Take on the World,’ Harvard
Business Review, December 2013
2. Thomas A. Stewart, ‘CEMEX’s Strategic
Mix,’ strategy+business, April 13, 201
3. Marissa Lee, ‘Tax incentives, grants to
help SMEs go international,’ The Straits
Times, Feb. 24, 2015
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