Urban world: The shifting global business landscape

UrbanWorldA_150x84Here is an excerpt from an article co-authored by Richard Dobbs, Jaana Remes, Sven Smit, James Manyika, Jonathan Woetzel, and Yaw Agyenim-Boateng, featured online by McKinsey & Company. Emerging markets are changing where and how the world does business. For the last three decades, they have been a source of low-cost but increasingly skilled labor. Their fast-growing cities are filled with millions of new and increasingly prosperous consumers, who provide a new growth market for global corporations at a time when much of the developed world faces slower growth as a result of aging. But the number of large companies from the emerging world will rise, as well, according to a new report from the McKinsey Global Institute (MGI). This powerful wave of new companies could profoundly alter long-established competitive dynamics around the world.

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Our research shows that the emerging economies’ share of Fortune Global 500 companies will probably jump to more than 45 percent by 2025, up from just 5 percent in 2000 (Exhibit 1). That’s because while three-quarters of the world’s 8,000 companies with annual revenue of $1 billion or more are today based in developed economies, we forecast that an additional 7,000 could reach that size in little more than a decade—and 70 percent of them will most likely come from emerging markets.1 To put this dramatic shift in the balance of global corporate power in perspective, remember that many of the world’s largest companies have maintained their current status for generations: more than 40 percent of the 150 Western European companies in last year’s Fortune Global 500 had been founded before 1900.

In 2025, almost 230 Fortune Global 500 companies will be based in the emerging world’s cities, up from 24 in 2000.

A wake-up call for CEOs

Corporate leaders can’t afford to be complacent about a change of such magnitude. In fact, we have seen all this before. In the 1970s and 1980s, Japanese carmakers began gaining global market share and, in some cases, outcompeted their US counterparts. More recently, South Korea’s Samsung has weakened Apple’s grip on the global smartphone market. In the decade ahead, this type of story will play out on a much bigger scale, and the rate at which newcomers topple industry leaders will probably accelerate.

Such up-and-coming companies could disrupt entire industries by designing superior products at lower cost, by bringing them to market faster, and by streamlining business processes. Many of these businesses, having been nurtured in difficult operating environments, are not only more agile than their counterparts from advanced economies but also prepared to invest for the long term, even if this cuts earnings in the next few quarters. Many new players will be setting their sights on expanding into international markets. Business leaders will have to monitor trends constantly to spot new markets and competitors. They need to meet three imperatives.

o Optimize sales networks. The growth of new businesses is not only a competitive threat to older ones but also gives suppliers and service providers a significant opportunity. B2B companies will need to assess how to organize themselves so they can sell to a much more diverse and dispersed customer base. To do so, they must rethink (and perhaps redeploy) their sales networks.

o Understand how customers and competitors are evolving. New industry hotspots will be sources of both competition and demand, so companies must track up-and-coming hubs in emerging regions. Hsinchu (in northern Taiwan) and Brazil’s Santa Catarina metropolitan district, for example, may not be household names, but they are already hubs for multiple billion-dollar companies in industries such as advanced electronics.

o Reconsider the headquarters configuration and the location of other core activities. Already, many businesses find that the traditional single-headquarters model no longer meets their needs. Companies such as Caterpillar and General Electric have thus split their corporate centers into two or more locations that share decision-making, production, R&D, and service leadership. Unilever created a second headquarters, for global development, in Singapore, which now has key members of the company’s senior-leadership team.

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The rebalancing of the global business landscape will probably be even faster and more dramatic than the shift of economic growth to emerging regions. Large companies matter, and not just for their ability to create jobs and generate higher incomes; they are also forces for increased productivity, innovation, standard setting, and the dissemination of skills and technology. Their geographic shift will have profound implications for the nature of competition, including not only the race for resources and talent but also, more broadly, the emerging markets’ efforts to reach the next level of economic development and prosperity.

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To read the complete article, please click here.

Richard Dobbs, James Manyika, and Jonathan Woetzel are directors of the McKinsey Global Institute, where Jaana Remes is a principal; Sven Smit is a director in McKinsey’s Amsterdam office.

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