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Something strange seems to be happening as globalization marches forward: Increasingly, powerful local companies are winning out against multinational competitors. This is especially true in emerging markets, where multinationals are assumed to enjoy superiority and their CEOs are counting on growth. Unilever CEO Paul Polman recently pointed out that his stiffest competition comes from fast-growing local companies. “We don’t see Procter & Gamble as our toughest competitor,” he noted. “Most of our competitors in emerging markets are regional players.”1 This sentiment appears widespread: According to one survey, 73% of executives at large multinational companies considered that “local companies are more effective competitors than other multinationals” in emerging markets.2
Not long ago, many observers worried that ever-expanding multinationals, many of which had revenues exceeding the gross domestic product of smaller countries, were going to take over the world. But consider this evidence: In China’s ice cream market, Unilever and Nestlé S.A. had won market shares of only 7% and 5%, respectively, by 2013 — despite decades of investment. The market is dominated by two companies that most people outside of China have probably never heard of: China Mengniu Dairy Co. Ltd., with a 14% market share, and Inner Mongolia Yili Industrial Group Co. Ltd., with 19%. Meanwhile, in the Chinese market for laundry detergent, Procter & Gamble was the leading foreign brand, with an 11% share in 2013, but it was overshadowed by two China-based companies: Nice Group Co. Ltd., with more than 16% of the market, and Guangzhou Liby Enterprise Group Co. Ltd., with 15%. The home appliance market is similarly structured. Chinese companies dominate the market, with Haier Group at 29%, followed by Midea Group (12%) and Guangdong Galanz Group Co., Ltd. (4%). The two top multinational competitors, Germany’s Robert Bosch GmbH and Japan’s Sanyo Electric Co. Ltd., have only niche positions (each with less than 4%).
China isn’t the only market where multinationals are losing ground to local companies.
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1. S. Daneshkhu, “Stiffest Competition From Local Business, Says Unilever Chief,” Financial Times, July 30, 2014, p. 1.
2. V. Chin and D.C. Michael, “2014 BCG Local Dynamos: How Companies in Emerging Markets Are Winning at Home,” The Boston Consulting Group, July 10, 2014, p. 6.
3. C.K. Prahalad and Yves L. Doz summarized the “multinational mission” in 1987 as finding a way to combine the benefits of “global integration” (global-scale economies and a global supply chain that combined the most efficient locations) and “local responsiveness” (adapting to the peculiarities of local markets). See C.K. Prahalad and Y.L. Doz, “The Multinational Mission: Balancing Local Demands and Global Vision” (New York: The Free Press, 1987). Christopher A. Bartlett and Sumantra Ghoshal subsequently laid out a blueprint for a “transnational” company that could be both globally integrated and yet also highly adapted to local markets. See C.A. Bartlett and S. Ghoshal, “Managing Across Borders: The Transnational Solution” (Boston, Massachusetts: Harvard Business Press, 1989). More recently, Pankaj Ghemawat reminded us that the world remains “spiky” and “semi-globalized” and that companies need strategies to adapt to local differences as well as overcoming and arbitraging them. See P. Ghemawat, “Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter” (Boston, Massachusetts: Harvard Business Press, 2007).
4. IDC Asia/Pacific Quarterly Mobile Phone Tracker, February 2015, www.idc.com.
5. International Institute for the Study of Cross-Border Investment and M&A, ”XBMA Annual Review 2014,” www.XBMA.org.
6. Natura Annual Report 2013, natura.infoinvest.com/br.
7. The “triple bottom line” is a business concept coined by John Elkington. See J. Elkington, “Cannibals With Forks: The Triple Bottom Line of 21st Century Business” (Oxford, U.K.: Capstone Publishing, 1997).
8. T. Khanna and K.G. Palepu, “Winning in Emerging Markets: A Road Map for Strategy and Execution” (Boston, Massachusetts: Harvard Business Press, 2010).
9. M.F. Guillén and E. García-Canal, “The New Multinationals: Spanish Firms in a Global Context” (Cambridge, U.K.: Cambridge University Press, 2010).
10. S.J. Palmisano, “Re-Think: A Path for the Future” (New York: Center for Global Enterprise, 2014).
11. Y. Luo, “From Foreign Investors to Strategic Insiders: Shifting Parameters, Prescriptions and Paradigms for MNCs in China,” Journal of World Business 42, no. 1 (March 2007): 14-34.
12. In an extension of their seminal paper on internationalization, Jan Johanson and Jan-Erik Vahlne point out that it is exactly this difficulty of breaking into the web of already established relationships that presents the barrier to entering overseas markets rather than their “foreignness” per se. See J. Johanson and J.-E. Vahlne, “The Uppsala Internationalization Process Model Revisited: From Liability of Foreignness to Liability of Outsidership,” Journal of International Business Studies 40, no. 9 (December 2009): 1411-1431.
13. J. Santos, Y. Doz and P. Williamson, “Is Your Innovation Process Global?,” MIT Sloan Management Review 45, no. 4 (summer 2004): 31-37.
i. The market share statistics are drawn from Euromonitor International data.