If you’re a leader in a northern-hemisphere company, you have a narrow window of time in which to make a decisive tilt in your approach to running the business. You cannot rely on traditional approaches to competitive analysis, strategy, and execution. Your leadership must start with a clear grasp of the global context. While the North is suffering from low or no growth, the southern hemisphere is on the move, even now as the global economy cools. Projections with a long enough time horizon, say ten and twenty years out, capture the steepness of the growth curve of the South and the enormity of the opportunity. Companies that miss the window may permanently lose the chance to gain footing in the South, and at the same time, they make themselves vulnerable to attack on their home turf sometime down the road.
You can’t dwell on whether the help that Southern companies are getting from their governments is “unfair.” Life is unfair. Once you drop your defensive psychology and grasp the shift in economic gravity, the lightbulb will go on: How then do we pursue these opportunities fast enough and without losing sight of our home markets, which after all are still huge in absolute terms and attractive to competitors from the South? The answer lies in fundamental changes in how you think about strategy, as well as changes in power, resource allocation, and decision making, and in your personal development as a leader.
Opportunities in the North won’t disappear, but companies that remain only in the North will struggle to find growth. Small moves into foreign markets designed to test the waters are not sufficient to meet the dynamism of South-based competitors. More and more, when the time and opportunity are right, you will face decisions about whether to make a big strategic bet or become entrepreneurial on a mega scale, as heavy hitters in the South do. In either case, you’ll need a bigger appetite for risk than many Northern CEOs and their boards are accustomed to, and you might have to consider new kinds of partnerships to scale up quickly.
The simultaneous growth of many nations’ economies is making “large scale” larger than ever, and the South is achieving it astonishingly fast. The barriers to entry that large companies of the North created are in many cases now broken. Young companies in the South, helped by American, Japanese, and German experts, are now capable of competing head-on with North-based giants. Singapore has become a financial center of Southeast Asia, Taiwan has become a dominant player in semiconductors, and Brazil is competing successfully in regional jets. Brazil’s Vale rode the wave of China’s surging demand to become the world’s largest producer of iron ore. The Chinese government has been known to push consolidation among domestic competitors precisely to achieve scale, as it is doing in autos and tried to do in rare earth minerals.
South-based competitors have all the capital they need for their fast expansion. Some have government funding in the form of low-cost loans; others are using their country’s sovereign wealth funds. Private equity firms are trolling for opportunities, and so are traditional investors, including those in the expanding stock markets of the South. A Southern company that shows it is on a growth trajectory gets rewarded with price-earnings ratios much higher than its peers in the North. Colgate, a Northern company with a strong presence in India, has a PE of 17 in the North, but its Indian division, which is listed separately on the Indian stock exchange, has a PE of 25.
Competing in the South means reckoning with the reality that the financial premiums you’ve long enjoyed may be at risk. Many upstarts there thrive on low margins, lowering profitability for the entire industry and throwing business models and financial expectations into question. Are you willing to forgo profits in the early years to win in the South? And can you convince the capital markets to live with a longer time horizon?
Explosive growth puts pressure on resources, including inputs that may be critical to your business. Some big players in the South, with the help of their governments, are making long-term deals to secure them. You might have to plan alternative suppliers of materials, alternative inputs, and alternative sources of energy, and even consider the possibility of vertical integration.
If you decide to grow aggressively in the South, you’ll need some leaders who can navigate in those very different parts of the world and others who can keep the North motivated and renew growth in so-called mature markets. Importantly, you will need leaders who see the world not just from the vantage point of New York but also from that of Beijing, Mumbai, or Buenos Aires. One mistake is the common practice of sending envoys to countries for five-day visits and assuming you understand the market-you’ll be deluding yourself. Another is to force local market intelligence through filters of a bureaucratic hierarchy that pays scant attention to the South, because it represents only a small percentage of current revenues. Decision-making has to be close to the markets, and the markets must be segmented.
You need to understand that the South has its own economic ecosystem, one that is only partly defined by its relationships with the North.
Excerpted with permission from the book Global Tilt: Mastering the Inevitable Shift of Economic Power, published today by Crown Business.
[Image: Flickr user Paul Watson]