Risk Management

What U.S. CFOs Can Learn from Emerging-Market Multinationals

Emerging-market multinational companies are leapfrogging their American competitors. Can U.S. CFOs learn from their successes?
Marielle SegarraSeptember 24, 2013
What U.S. CFOs Can Learn from Emerging-Market Multinationals

Mexican bread maker Bimbo. Chinese electronics brand Haier. Taiwanese computer manufacturer Acer. A decade ago, those companies were largely dismissed by their larger, U.S. competitors. Now, they have taken over the lead in global market share in their respective industries.

These companies all have something in common. They’re emerging-market multinationals — companies from countries like Brazil or China that have assets and employees located outside their home country.

The companies are profiled in Emerging Markets Rule: Growth Strategies of the New Global Giants, a book written by Mauro Guillén, professor of management of University of Pennsylvania’s Wharton School, and Esteban Garcia-Canal, a professor at the University of Oviedo in Spain.

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In their book, Guillén and Garcia-Canal argue that EMMs, which have spent years winning business from U.S.-based behemoths like Sara Lee, GE and Whirlpool, tend to share many of the same strengths. For instance, they’re quick to execute. They exploit corners of the market. And they acquire smart.

Can U.S. companies learn from EMM’s successes? Yes and no. Part of the reason emerging-market multinationals outperform larger, U.S.-based companies is that they have looser ownership structures, and thus, the freedom to take more risks.

“Most emerging-market multinationals are not publicly listed firms with millions of shareholders,” Guillén told CFO. “Many of them tend to be family-owned or state-owned. They’re looking for the financial return, but not necessarily in the short run,” Guillén says. “They make very large bets, and a lot of financial models, like rate of return, wouldn’t justify those investments.”

These companies also focus on things like showing strong commitment to suppliers or building capacity in anticipation of demand, for instance. “It’s a problem for CFOs to the extent that they’re competing against companies that don’t have to show results on a quarterly basis,” Guillén says. “It’s very difficult for the typical publicly listed [U.S.] firm to actually react to that kind of thing.”

That said, here are three lessons U.S. CFOs can take from the experiences of emerging-market multinational companies.

Focus on execution. Execution is even more important than strategy, says Guillén. One example is Mexican company Bimbo, now the largest bread maker in the world. “They didn’t reinvent sliced bread,” he says. Instead, they focused on a distribution network and asked questions like, “‘How do you take the bread from the factory to the shelf’”? Guillén says. “They tried to think of how they could make their trucks, drivers and delivery [routes] more efficient, paying attention to the nitty-gritty details that a lot of corporate executives dismiss.”

Bimbo made it a priority to get its bread to its destination on time. “A lot of top managers don’t want to think about those details because they think it’s beneath them,” Guillén says. In 2011Bimbo bought Sara Lee’s bread business and became the number one bread maker in the world. That success no doubt stems in part from its ability to execute in markets that Sara Lee could not reach or didn’t bother to understand, say the authors.

Don’t dismiss marginal markets. “Emerging market multinationals have become big by hitting the marginal customers that the biggest firms neglected,” Guillén says.

One example is Haier, which surpassed Whirlpool as the top global refrigerator manufacturer in 2008. Whirlpool executives once said in an interview that they didn’t fear competition from Haier because it was a minor player in the electronics industry. But Haier broke into the U.S. market by catering to a small group of potential customers that Whirlpool had dismissed as insignificant: college students.

The Chinese company started making mini-refrigerators for students to keep in their dorms. With the only available mini-fridge option for students, Haier started to build customer loyalty with a new generation. And when those students graduated, many of them bought full-size Haier refrigerators from Walmart. The lesson for CFOs of U.S. multinationals: “You are letting other firms that are the underdog enter the market through the small corners that you neglect,” says Guillén. Don’t. “In sports, you have the same thing,” he says. “You have to be very careful not just about the middle of the field, but also what’s going on in the corner.”

Acquire smart. In the United States, CEOs often “start making acquisitions because otherwise people will think they’re not doing anything. So instead of running the business, they’re making acquisitions,” Guillén says.

Among EMMs, that mindset is less common. “What we’ve observed in the book is that they don’t make acquisitions ‘just because.’ They do it when they feel they’re lacking something, like market share, technology or brand. There’s more of a rational motivation on their part,” the author adds.

EMMs also “choose their targets intelligently, with the intention of advancing their international presence as opposed to making headlines or breaking the record established in a previous mega-merger,” Guillén and Garcia-Canal write in their book.

Many EMMs also excel at integration. One example: Mexican cement producer Cemex, which acquired dozens of companies in the 1990s. The company had a team of managers that would quickly “descend upon each acquired company to transfer all of Cemex’s expertise, technology, and systems, and then move on to the next acquisition,” the authors write.

Cemex shortened the process over a decade, later taking two months to integrate a group of acquisitions that once required two years. The company also saw M&A as a two-way street, picking up best practices from its acquisitions, rather than simply imposing its own systems and processes from on high. And it later created a program called the Cemex Way, which outlines what the company learned during the growth process and standardizes business processes and best practices across the company’s many acquisitions.

Some experts argue that although emerging-market companies have stolen U.S. market share, they are lacking in one respect: their ability to innovate. “I don’t believe they’re doing transformative innovation; I think they’re doing incremental innovation,” says Mark Zawacki, founder of 650 Labs, a consultancy that helps large multinationals understand how Silicon Valley firms are disrupting their industries. “They have look-alike businesses.”

Samsung is one example. “The first time I saw a [Samsung] Galaxy ad, I thought I was looking at an iPhone ad,” Zawacki says. “It’s very clear that Samsung is a fast follower. People say Samsung innovates because they have a 20 megapixel or 40 megapixel camera on a phone. That’s incrementally improving a feature; it’s not disruptive.”

Guillén agrees that EMMs have made “very few truly game-changing innovations.” But he says “the innovations they’re making are very important nonetheless,” adding that “these firms, as they grab market share and grow in size, are starting to invest in R&D. So very soon it will be more common to see more disruptive innovations. They just need the time to get there.”