A Seismic Shift

Deloitte's Eamonn KellyDeloitte’s “Business Trends 2014” report focuses on the next wave of globalization

Over the last three decades, developed economies have enjoyed the benefits of first-mover advantage in globalizing their operations, which has given a major shot in the arm to the West’s bottom line. Now, developing economies are looking to catch up, and are poised to start competing with legacy players in a serious way, perhaps even flipping the script on the longstanding global business power structure. Deloitte’s recent report, Business Trends 2014: The Next Wave of Globalization , shows leaders in the developing world are brimming with confidence that sunnier days are ahead. Deloitte’s Eamonn Kelly sat down with Consulting to take a deeper dive into the seismic shift happening beneath our feet.

Consulting: What was your overall sense of the survey results?

Kelly: We surveyed 423 business executives from companies both in developed and emerging economies. Part of what we were looking for was a sense of what the business leaders in companies with different legacies and cultures and histories were feeling about the next wave of globalization. It was quite interesting that the executives working for the emerging market companies demonstrated a higher level of optimism for the future than the developed economies. They were both reasonably optimistic but there was quite a distinct difference.

Consulting: What were some of the most interesting findings?

Kelly: One thing that jumped out at me was a meaningful difference between the expectations around how important their use of social media would be in both developed and emerging economies, particularly in markets where your presence is not fully understood or known. The whole area of social impact is clearly a higher priority for executives in emerging economies; they possess a keener awareness in those areas.

There was also clear evidence that developing economy business leaders are expecting to pull a wider range of levers of innovation, they’re also more likely to be expecting to move into collaborations and partnerships with other businesses than their developed economy counterparts. The whole area of social impact is clearly a higher priority for executives in the emerging economy companies. It could be in part because developed economies are already a bit ahead in those areas and this is about emerging market players moving into pretty aggressive catch-up mode. Whether that’s the underlying reason or not, it’s still a bit of a wake up call about the advantages of incumbency.

Consulting: So what’s changed?

Kelly: I think there’s no doubt that the landscape of industry giants has changed even since the turn of the millennium. The composition of the Fortune 1000 has been changing, the growth of some formally state-owned enterprises or some family owned businesses has been changing. I think we’re getting into a very interesting period. I don’t think it’s impossible that part of the cultural legacy of having been a state-owned enterprise or a family-owned business perhaps broadens the range of priorities you pay attention to, as opposed to a corporation where for the last 20 years or so there’s been a very singular focus on the optimization and creation of shareholder value.

Part of what the survey proved is that everybody recognizes there are very challenging and unique circumstances in operating in emerging markets. If you’ve been born in that environment that’s maybe a little more hostile towards business, somewhat trickier, I suspect you have a certain kind of resilience and adaptiveness that may prove advantageous over time as the global business environment becomes increasingly complicated. That’s not to say that the developed economy players don’t have their advantages—clearly they have substantive advantages, but I think the incumbency advantages are eroding.

Consulting: How can developed economies adapt?

Kelly: I think a lot of them are already doing it, with increased diversity in the boards and leadership teams, moving managers and leaders into other markets, developing leaders in other markets, increasing the localization as well as the globalization. I think in the economy today where almost all of the new billion consumers will be living in cities, those cities have quite different characteristics: people have quite complex needs, people have less money to spend, but they’re a big part of growth and consumption, so we have to figure out how to serve them. The need for much more localized, customized solutions puts pressure on the big Western corporations to figure out how to master the dilemma between having everything centralized, standardized and up to the same global standards but at the same time have the flexibility to be adaptive in local circumstances. It’s not either-or, it’s mastering getting all the benefits of being global with the essential component of having local knowledge and understanding in how you go to market, treat customers, form alliances, navigate through local regulatory conditions, etc. It’s a both-and, not an either-or.

Consulting: It seems there’s a change underway.

Kelly: It may not be a changing of the guard, but there are new guards coming in to join the old ones. I don’t think we’re going to see a swap, but we will see a much more complex blend of industry leaders. I think the best of the developed economy corporations are already picking up on this and making the right moves, but I think any company with global aspirations is going to have to keep a close eye on who are our competitors now. As well as how do we compete with them in their home markets, and more importantly, how are we going to compete with them as they enter our home markets?

Consulting: What will the ripple effect be to the wider business world?

Kelly: Net I think it will probably be good for the global economy in terms of growth. I think there’s a lot of healthiness when you bring different powerful stands of diverse talent and capabilities together and start to hybridize them, you can get some pretty powerful outcomes from that. I think if we get this right and don’t default to protectionism, and start putting up barriers, even quasi-visible ones, against new entrants, ultimately it’s going to be a net good and will allow those billion people to come forward. We talk a great deal about the rise of inequality in the developed economies and it’s a real problem. But if you look at this on a global perspective it’s really a different situation.

We’ve made massive inroads into extreme poverty in the last 20 years. I mean really, really substantial. That’s taken a lot of people out of the absolute abject misery of extreme poverty, and now we’re in a phase where the people living in that $1.50 to $10 range who can be thought of as sort of as the base of the pyramid, they are rising. It looks pretty promising that another billion of them are going to come into the $10-plus range, bringing them into the kind of official designation of middle class. So if we get this right, we’re actually creating a more equitable world. I suspect what we’ll see in the coming decade driving the next wave of innovation will be the needs of the next billion consumers, who are far more frugal and have far less money.

That’s going to drive a whole wave of innovation to get costs down and offer real functionality, as well as addressing sustainability concerns. These are huge, consequential shifts right down to what guides innovation. I think the challenges are extreme. I’m not sure there’s ever been a more challenging time to be a business leader, but another side of the coin, there’s never been a more exciting, opportunity rich time as well.