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Friday, December 21, 2007

BCG publication: Top Companies from Emerging Markets

By Manuel Bueno

BCG Top 100 ReportJulia Tran mentioned in a previous post some Boston Consulting Group (BCG) publications related with the ?Next Billion?. Two more studies were published in November ??Decoding Next Billion Consumers? and ?A Road Map to expanding Financial Inclusion in India? (this second one looks good and I am planning to read it soon).

Recently, NextBillion posted a news item published by The Economist related to the latest BCG publication about emerging markets called ?The 2008 BCG 100 New Global Challengers?. This time, it referred to emerging countries? multinationals and their international growth strategies as a means of becoming world leaders in their markets.

The rise of emerging market multinationals is of no surprise to anyone in the business world, especially in the case of large national firms based in Brazil, Russia, India and China ?the BRIC economies.

The BCG Publication (this document is an executive report available on their webpage, I have ordered the full report, but have not received it yet) disappointed me in terms of their methodology and selection process for what they call the ?Top 100 Global Challengers?. It does, however, give an interesting overview of these firms? business models and their core strengths.

BCG selected their Top 100 from 14 countries. These 14 countries, or ?Rapidly Developing Economies? (RDEs) as they call them, have been selected on the basis of their increasing share of global trade and their total GDP. However, the authors have given themselves ample space in selecting countries that are clearly not comparable to each other. Stating that Poland (member of the EU) and Hungary (to join the EU on 2008) are as ?emerging? as Egypt (long time dictatorship and notorious human rights violator) or Indonesia (largest Muslim population in the world) seems a bit of a stretch. Likewise Chile has been included alongside Brazil and Argentina. I strongly doubt that companies from such different business environments can be compared and studied seamlessly.

Furthermore, the problem in selecting companies on the basis of their home country is that it neglects big companies which, due to their relatively small national markets, have been forced to grow their businesses in other countries. The most glaring omission was South Africa, and firms that work across boundaries, such as Celtel, were nowhere to be found. African or Middle Eastern countries were also totally absent, in spite of the growth of strategic consulting in places like Dubai or Abu Dhabi.

As a consequence of this methodology, mixing Hungary and Poland with China and India, it comes as no surprise that an overwhelming majority of the ?Top 100? are Chinese (41 firms), Indian (20 firms) and Brazilian (13 firms). Of course, if the methodology was straightened out, these countries would also be in the forefront, but it might be found that they do not represent such a big portion of the pie (74 out of 100 firms).

Moreover, the most represented industries are industrial goods (34 firms) and resource extraction (17 firms). Nonetheless, these classifications are misnomers. Although companies are labeled according to industry for easy categorization, in reality, some companies are large conglomerates with diversified holdings that extend well beyond the industries with which they are identified. This is the case of Reliance Industries, whose range of goods includes, among others, petroleum products, petrochemicals, garments and, most recently, fresh foods.

In addition, the relative weight of different industries is biased in favor of the most relevant industries in China, India and Brazil. That is, the distribution and importance of the Top 100 companies? industries will mostly be that of China, India and Brazil.

BCG then, from the selected sample, identifies the following companies? globalization business strategies:

  • Taking brands global
  • Innovating globally often in partnership with other multinationals
  • Competing globally with other multinationals
  • Merging with or acquiring firms which have access to natural resources essential for their business interests
  • Acquiring and securing access to natural resources ? a variation of the previous strategy (note that some Chinese, Indian and Russian firms are especially keen in these last two strategies, but not necessarily out of business interests only, but also due to political reasons)
  • Developing new business models in multiple markets

Yet these identified growth business strategies are biased because of the predominance of certain industries, as mentioned before. Furthermore, different growth business strategies in Consumer Industry companies and Industrial Goods companies cannot be aggregated into one list. In this study, BCG has tried to compare companies belonging to wildly different countries and is now trying to put together growth business strategies between totally different industries. This is not even like comparing apples and oranges, it is comparing apples and tuna.

Overall, this analysis fell short of my expectations, especially after reading BCG?s previous related publications on the issue. There was clear potential for more elaboration, because at some points of their study there were brief insights into how these Top 100 firms compete with different strengths against the established global leaders and how they might evolve. The strengths are based on their labor intensive approach versus their competitors? capital intensive models. As they enter new markets, they will have to improve their operational skills and re-define a big part of their cost structure.

BCG advises multinationals to respond by fighting the Top 100 Challengers in emerging markets (it does not say why, however), pointing out that the aspirants often move upmarket in their own countries as a prelude to expanding abroad ? in a classic disruptive innovation process.

I was surprised that the study didn?t even mention the challengers? strategies for selling to the Next Billion or for competing with western multinationals ? it would have made sense from a purely commercial point of view.

A recent press release from the Columbia University Program on International Investment entitled ?Brazil?s Multinationals take off? offers more detailed country-level data. Their press release essentially refines the conclusions reached by the BCG study. Its main conclusion is that the international spread of Brazilian firms has risen rapidly during the past years, primarily thanks to natural resource firms. Growth has been mostly regional, meaning that it has focused on other Latin American countries.

It further states that the most important managerial challenges that arise are related to managing the growth process and the international production networks that are the result of such a strategy.

All in all, BCG raised an important issue, that of emerging multinationals, which increasingly compete in a global marketplace. However, it remains far from proven that these emerging multinationals can be studied together agglutinating different industries and regions. In fact, it might be the case that, at least initially, a regional approach may be more fruitful.

PS. I?d like to wish all our readers a very happy Christmas and a happy New Year!

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