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Multinational
corporations (MNCs), for good reason, are viewed
as formidable competitors. Companies like Coca-Cola,
IBM, and Citigroup control huge pools of assets,
research and development capabilities, and enormous
brand equity. It's no surprise that many OIC-based
firms would be reluctant to compete with such
MNCs, even in OIC home markets.
MNCs'
size and global presence, however, can often cause
them to develop "blind spots" - systemic tendencies
to overlook real opportunities. These "blind spots"
create opportunities for local competitors to
capture market share and profits despite their
relative lack of resources.
This
article, based on several years of consulting
to, advising and studying MNCs, identifies five
key handicaps that often prevent large firms from
effectively serving OIC markets. Local firms who
acknowledge these weaknesses can compete more
successfully in their home markets.
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OIC
Firms Can Compete Effectively by Responding
to Multinationals' "Blind Spots"
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MNC
weakness
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Local
Response
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Consider country-level opportunities
too small to warrant senior management
attention
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Aggressively serve small markets,
through differentiated products and
services
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Approach developing markets from a
cost-cutting - rather than revenue-generating
- mindset
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View developing economies as profit
centers rather than cost centers
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Overlook synergies between OIC countries
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Identify and leverage commonalities
across OIC markets
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Overestimate
"country risk"
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Assess "country risk" with greater
sophistication
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Face
difficulty customizing brands and
messages
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Embrace a local or regional brand
image and message
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Copyright
2005, Aamir Rehman
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1)
Country-level opportunities are considered too
small to warrant senior management attention.
Most
MNCs assess their business at the country level,
with country-specific managers and revenue targets.
While these country-level analyses do aggregate
to regional level (often divided by Americas,
Europe, and the rest of the world), the country-level
analysis is most rigorous.
Senior
managers at the global level, whose time is very
scarce, prioritize their attention based on the
size of market opportunity being proposed. As
firms grow larger, the threshold an opportunity
must meet gets higher. A senior management team
who needs, for example, to increase earnings by
$5 billion cannot devote attention to any opportunity
less than $500 million. Since only a handful of
OIC markets (such as Turkey) offer significant-enough
earnings opportunities, senior managers tend to
ignore OIC opportunities*.
Local
operations are, of course, handled by highly competent
country managers. A lack of global-level attention,
however, often results in under-investment in
product development, consumer research, and customized
services - all of which may require global corporate
approval.
One
global client, for example, developed a growth
strategy which prioritized its top institutional
customers (by revenue) and actively sought to
enhance its services to them. Amongst the dozens
of "top customers" identified, only a handful
were OIC entities. The implication of this strategy
is relatively little investment in growing OIC
business.
2)
Firms often approach developing markets from a
cost-cutting - rather than revenue-generating
- mindset
Without
a doubt, MNCs have significantly increased their
attention to developing countries - especially
in the past five years. This increased attention,
however, is generally from a cost-cutting perspective:
finding ways to manufacture goods more cheaply
and export them to more developed markets. Off-shoring
and outsourcing - two of the most important trends
in big business today - are driven by the pursuit
of savings by leveraging production in low-cost
countries.
A
published study by the Monitor Group, for example,
observed that pharmaceutical firm could save roughly
50% of manufacturing costs by producing drugs
in India rather than the US. Drug manufacturing
in India (and other low-cost countries) has grown
exponentially - with its principal focus on exports
rather than domestic markets.
A
cost-cutting perspective is fundamentally different
from a revenue-generating mindset, and this difference
underscores opportunities for local competitors.
As MNCs increase their activities in OIC countries,
their activities are likely to become less focused
on local markets and more focused on exports.
They are less likely to conduct local customer
research or develop products tailored for local
preferences. While this choice makes complete
sense for the MNC (who is striving to serve its
most profitable customers) it creates opportunities
for firms which develop differentiated products
with an eye towards local needs.
3)
Multinationals overlook synergies between OIC
countries
MNCs'
country-level and regional views of their business
often cause them to overlook opportunites which
span OIC markets. This mistake can be especially
detrimental in consumer goods which - deliberately
or otherwise - hold special appeal to "Muslim
lifestyle" consumers. Examples of such products
include loose-fitting apparel and Shariah-compliant
financial services.
In
our work with a major global bank, for example,
management was surprised when shown that several
of its best East Asian Muslim clients had significant
business interests in the Middle East. The bank
had not traditionally considered that Indonesian
clients may be more likely than Japanese clients
to invest in the Middle East due to some degree
of intra-OIC affinity. Recognizing this affinity
could help the bank serve these customers more
profitably.
Regional
players, with more sensitivity to the potential
for intra-OIC trade, can tailor their expansion
strategies to leverage commonalities that exist
between Muslim markets.
4)
MNCs often overestimate "country risk"
Discussions
within MNCs about expanding activities in OIC
countries often stall on the issue of "country
risk." Corporate headquarters tend to show reluctance
in investing in developing markets in which senior
managers may have no direct experience and are
fearful of political and economic instability.
Even seemingly attractive projects are discounted
heavily on the basis of country risk. Managers
often apply "country risk" broadly across a region
(the Arab world being a prime example) without
differentiating enough between less stable and
more stable economies.
Local
competitors, of course, have a much more sophisticated
view of country risk, differentiating between
genuine and exaggerated concerns. They also are
far better informed as situations change, allowing
them to be more timely and responsive. Savvy local
firms which actively manage country risk can earn
large rewards by venturing where MNCs are unwilling
to go.
5)
Multinationals often have difficulty customizing
their brands and messages
A
final - and sometimes fatal - drawback faced by
multinationals operating in OIC markets is difficulty
presenting an acceptable brand and brand message.
This challenge is particularly important in sectors
viewed as politically significant, such as media,
utilities and infrastructure.
Competition
between CNN International and regional media outlets
such as Al-Jazeera illustrate the brand challenge
well. Despite its global network and vast resources,
CNN has struggled to gain acceptance as a genuinely
local voice. The editorial and corporate requirements
put in place by CNN's headquarters and shareholders
become a barrier to developing popular local content.
Regional players, on the other hand, are able
to express a more boldly local message without
concern for shareholders abroad.
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Growth
of Multinationals Raises the Threshold
for Senior Management Attention
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Source:
Aamir Rehman, Copyright 200
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Turning
local focus into an advantage
Competing
against giants is not easy, but recognizing their
inherent weaknesses can help OIC firms craft winning
strategies.
OIC
players can benefit from MNCs' "blind spots" by:
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Aggressively
serving small markets, through differentiated
products and services |
|
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Viewing
developing economies as profit centers rather
than cost centers |
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Identifying
and leveraging synergies across OIC markets
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Assessing
"country risk" with greater sophistication
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Embracing
a local or regional brand image and message |
Firms
that embrace these strategies can expect handsome
rewards and long-term competitive strengths.
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Mr.
Rehman is a consultant with a global consuting
firm, where he advises Fortune 500 clients on
corporate strategy. He has served clients in a
range of industries, including pharmaceutical
and financial services firms. Mr. Rehman's management
research and commentary have been featured in
the New York Times, Crain's Business Daily, and
Harvard Business School's Working Knowledge. He
also serves on the advisory board of Dinar Standard.
Mr. Rehman holds an AB from Harvard College in
Social Studies, and AM from Harvard's Graduate
School of Arts and Sciences in Middle Eastern
Studies and an MBA from Harvard Business School.
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* This observation reflects dynamics
discussed at length by Clay Christensen and Michael
Raynor in The Innovator's Solution - an excellent
work on business innovation.
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