In his best-selling book The World is Flat, Thomas Friedman had shown how globalisation had flattened the differences between developed and developing countries in terms of access to opportunity and growth.
In Globality*, authors Harold L Sirkin, James W Hemerling and Arindam K Bhattacharya from Boston Consulting Group, show how, over the past two decades, a range of corporations from the developing world have begun to disrupt traditional paradigm of development and tilted the balance of competition in their favour with their predilection for "rapid-fire innovation".
What does this mean for the future of competition? Delhi-based co-author Arindam Bhattacharya discusses these issues with Business Standard.
What is "globality"?
One of the first things we discovered when we were researching emerging markets over the past four or five years is that these markets are very different from developed markets.
Second, the positioning of these companies in the global value chain is very different from their developed country counterparts. And third, most of these companies have started taking leading positions in their industries, globally.
Now, these markets may be very narrowly defined but they're still significant. For instance, the largest manufacturers of pianos and baby strollers are Chinese, the world's largest PSF manufacturer is Reliance, the largest regional jet maker is Brazilian, the largest noodle maker is Indonesian and so on.
What we saw was a completely new industrial landscape emerging in which new global challengers were emerging from among developing economies.
But isn't this the same as globalisation? How does it differ?
Globalisation is essentially a one-way street where technology and finance flowed from West to East. Globality refers to the state of the competitive market -- it's multi-directional and it doesn't just refer to competition for markets and resources but also for talent and funding.
In short, it's a free-for-all! Also, globality is not a process but the end state of the maturing of markets.
In five years, we'll see market after market being completely different.
The point to note is that many of these challenger companies have interesting and innovative ways of competing. It's not just about competing on cost -- and even when these companies do compete on cost, it's not just about labour costs. It's about the way they set up their processes and systems.
I'll give you three examples that we've discussed in the book. One is Johnson Electric, which has become the world's largest manufacturers of micromotors. The company is based in China and makes 3 million motors a day.
Basically, Johnson has used scale to decimate the competition. Or take the case of BYD, also in China, which is now one of the largest makers of nickel-cadmium batteries. The entrepreneur who promoted this company, Wang Chuanfu, was a researcher in a Chinese institute.
In the 1970s, he considered setting up a battery manufacturing plant and travelled to Japan, which dominated the industry for precision electronics. Wang initially decided that he would simply import a battery manufacturing plant but the problem was that the plant depended heavily on robots, which was an expensive way to manufacture.
So Wang imported one robot, opened it up and basically reconstructed the way the plant was set up, replacing some functions that the robots performed with human labour.
Today, he produces batteries of the same quality at a price that is 40 per cent lower than Japanese competitors. Or take the case of the Logan, a joint venture between Mahindra and Mahindra and Renault. It is a low-cost car broadly based on the Renault Clio platform.
Engineers in Romania, were able to build this car at a cost that is 40 per cent cheaper than the Clio -- but Mahindra was able to produce it at a cost that was 15 per cent cheaper than that! So these are different ways that challengers are reacting to competition -- they're basically building layers of capabilities and that is why it is a much more sustainable model than just competing on cost.
To be sustainable, the question is whether these companies are also building intellectual property. . .
These companies are trying to do in eight to 10 years what global players tried to do in decades. They go in for rapid-fire innovation and are not afraid of failure. Take companies like Goodbaby, the world's largest maker of baby strollers.
Goodbaby designs a new product every 12 hours or so. Not every product is successful, but the point is that the learning curve is really steep. In the process, they get it right eventually.
But isn't this hit-and-miss approach expensive?
On the contrary it plays to their strengths, since India and China can develop products at significantly lower costs than the developed world. As a result, these companies are much more open to learning than global players.
Scooter-maker Bajaj, for instance, built up motorcycle-making capabilities in just eight to 10 years by partnering Kawasaki. Or look at the Tata group, which is building capabilities by acquiring and partnering around the globe.
These are important attributes because there are fundamental differences between markets 10 years ago and what they will be 10 years hence. The next billion of global consumers will be located across emerging markets and they represent new challenges in terms of buying behaviour.
How does this change the way companies should react?
Well, to start with there'll be no more offshoring. The question companies will have to ask themselves now is: how do we create a globally advantageous value chain? The challengers have shown how to do it.
What they have shown is that what matters is location as part of a network -- the question of whether I go to India or China is irrelevant. Instead, companies need to find out what kind of market or service network they need to serve their consumers. Nokia is one good example of balancing cost and customer service.
It's a question of gaining customer intimacy -- including in high-cost countries. The value chain can be deconstructed into parts that are sensitive to mobility, risk and customer intimacy.
Take the case of toys. Toy makers can lose up to 5 to 10 per cent of their gross margins if shipments are delayed. This is a chronic problem because European and US ports are congested.
So, for a company it's a question of reducing the variability -- of reconfiguring the product near the customer to get the advantage of customer intimacy and mitigating the risks of delays.
This could be done in a number of ways, such as locating assembly units closer to the markets, sourcing parts differently and so on. It's all a question of managing networks dynamically. Very few companies are doing this yet but it's a key dimension of globality.
So what are the key takeaways from globality?
There are broadly two conclusions to be drawn, which are encapsulated in the second-last chapter of the book entitled "Embracing Manyness".
First, the world of globality is not flat -- it is more open and very lumpy. Second, companies cannot work with one business model -- they need multiple business models, they cannot work with standardised processes.
(In fact, this is a challenge most multinationals face today because they tend to standardise processes as they grow.)
This, in turn, means that companies need to be more people-dependent rather than process-dependent. Many challengers of today are doing this by virtue of their starting positions in their business and because they are in a hurry.
*Business Plus, Hachette Book Group, USA, $26.99