The book examines how these CEOs really lead, the five facts of business life that most concern them and what the role of chief executive means for their personal relationships. It also shares a radical view of how best to lead into the future, and what it will take to become a top chief executive. Whatever your interest or involvement in business, The Secrets of the CEOs will provide a unique insight into the future. Today, in the first of a four-part series, we examine that most pressing issue – how to profit from globalisation.
"To succeed in the global bazaar requires a global mindset" – Narayana Murthy, chairman, Infosys
We discussed what it’s really like with 150 global chief executives responsible for $1,800bn of revenues. They revealed the five most important facts of life that most affect their businesses. Most of them see coping with globalisation as the single most important reality for the next decade. This may seem surprising, given that globalisation has been talked about for years. However, the shift we are seeing is on a dramatic scale as India and China reintegrate into the world economy. It is ushering in the age of ‘hard globalisation’ where for the first time everyone is competing in a truly global way.
Philip Green, chief executive of United Utilities, believes that what’s happening in China is "the second industrial revolution", while for Ed Zore, chief executive of Northwestern Mutual in the US, "globalisation is a trend for the next 200 years".
Sir Martin Sorrell, chief executive of WPP Group, says, "We’ve not witnessed growth on this scale for 200 years and not at this speed. I think China and India are going back to where they were in 1819" – when they generated about 49pc of the world’s gross domestic product (GDP).
It’s important to keep a sense of perspective, however. There are substantial risks to operating in emerging markets. Rapidly developing economies bring volatility and risks. Growth at the rates being achieved in China and India is unstable, unpredictable and prone to sudden crises. Moreover, the success of the West’s past efforts at globalisation has been patchy.
Also, in the medium term at least, the preponderance of economic power will remain in the West in real terms: the US and the European Union are each expected to have real GDPs bigger than China or India in 2025. Chris Bell, chief executive of Ladbrokes, has a rule of thumb for working in developing markets. "When planning a market entry in emerging markets, double the projected time and halve the projected profits," he says.
Here are the most important secrets to successfully negotiating globalisation.
1. Flag planting doesn’t work
Many Western companies have headed into emerging markets intent on achieving what Lord Browne, former chief executive of oil group BP, calls "easy globalisation". They tried to replicate their domestic models in emerging markets and failed because they did not grasp local customs and practice.
"Companies that have tried to impose Western prices, products, business models have not been so successful," notes Infosys chairman Narayana Murthy.
The "wave one" mindset is a strategy for failure. "CEOs currently think of a ‘go out’ strategy," says Browne. "American firms are used to being top dog and thinking in terms of domestic operations versus the rest of the world. That’s not right."
Ben Verwaayen, the former BT chief executive who is now CEO at Alcatel-Lucent, adds: "When people talk about globalisation and emerging markets and doing a joint venture in China in a product-type environment, that’s not globalisation. I think it is export-orientated internationalisation. I’ve got nothing against it. It’s not bad. It’s something else."
The best Western companies operating in emerging markets have learnt to understand what their customers want and know how to develop reliable distribution channels that respond to the unique structural and geographical challenges of each market, as well as building quality pipelines of local talent. Having figured out the way to finesse their business models, they’ve then taken a long-term view.
Alan Rosling, executive director at Tata Sons, part of the eponymous Indian conglomerate, says, "Some foreign businesses have been in India for ever and know the market and are localised: some aren’t even seen as foreign brands now.
"However, many entrants post-1991 were too short-term in their thinking and used a lot of expatriates. Their cost bases were therefore too high. Lots came and then left in the 1990s. But those who stayed are doing well and some of the firms who left are trying once again."
Azim Premji, the founder and CEO of Indian IT services group Wipro, adds: "All those who have thrived have done many things right, but one common trend has been the ability and willingness to construct solutions for India… rather than trying to force-fit solutions developed for other countries and societies."
Unfortunately, a large number of Western companies are still stuck in a flag-planting mentality.
2. True localisation
Globalisation sees enlightened companies localising their models effectively. Some have been doing this for years. In India, for example, Hindustan Unilever developed the low-cost detergent Wheel to graduate people from using soaps to detergents.
Wheel is now the world’s largest detergent brand by number of washes per year. It touches 600m Indians, sells about 5m packets a year, and in 2007 it controlled about 20pc of the Indian low-cost detergent segment.
Hindustan Unilever also changed its pack sizes to bring prices within the reach of rural consumers. Today, sachets constitute about 55pc of Hindustan Unilever’s shampoo sales.
Vindi Banga, Unilever’s president for foods, home, and personal care and former chairman of Hindustan Unilever, says: "In launching Wheel, the firm moved away from a cost-plus pricing approach to a target cost set by deducting a desired margin from a consumer price that we could get in the market for Wheel.
"At first, the target cost looked impossible – but we got there in two years with a cross-functional team. Selling billions of very small sachets requires a core competence in supply chain and distribution. It is not easy to price at 2 cents and earn a decent margin."
Emerging market titans have leapfrogged level one. Having in many cases spent recent years solidifying their domestic position, these companies are now moving quickly to acquire global market positions and are hungry and high-quality.
"I’ve never seen people who work as hard, are as ingenious, and want to make money so much," says David Walton, former chief executive of engineering company API Group. "When we tried to work with a Chinese company in a joint venture, we found their manufacturing processes were better than ours."
Three Chinese companies – Sinopec, China National Petroleum, and State Grid – now feature in the Fortune Global 30 index. Hungry and huge, the largest emerging markets groups are shifting westwards to move up the value chain, benefit from Western expertise, and improve their research and development and innovation capabilities.
They’re also buying positions in high-value markets, diversifying their business risks and attracting new talent into their businesses. Tata’s purchases of Land Rover and Corus, Lenovo’s acquisition of IBM’s personal computer hardware division, and Mittal Steel buying pan-European steel company Arcelor are just three examples.
3. Hard globalisation
The concept of globalisation as either a westward or an eastward flow is flawed. Take Wipro. Azim Premji says, "We are building significant customer relationships in Canada and the Middle East and tapping talent bases in Eastern Europe, Mexico, and US locations outside the large metropolitan areas.
"Globalisation for Wipro is not just about getting customers in the US and Western Europe and talent in India… which in itself is very, very important… it’s about many other things and places."
Rahul Bajaj, chairman of Bajaj Autos, one of India’s largest conglomerates, agrees: "We have no choice but to globalise," he says. "It may be in our interest now but it will also be a question of survival in the future. This year, 20pc of Bajaj Autos’ production will be exported. This has to be 40-50pc in five to 10 years."
True global competition has started. And as Tim Clarke, CEO of Mitchells & Butler, states: "Globalisation can impact any business, even if all your operations are in the UK." Ben Verwaayen goes further: "Time is disappearing and we all will live increasingly in real time. Something happens in India and bang, the share price goes down in London. The second thing we have lost is location as a buffer. New leaders will operate without the protection of location and time."
Steve Tappin is a managing partner in Heidrick & Struggles and has been advisor to Global500 companies for more than 20 years. Andrew Cave writes the weekly profile in The Sunday Telegraph.