Strategy – Multinationals Should Beware the “Local Dynamos”

The world’s largest multinationals are in a constant search for revenue and profit growth, with many targeting emerging markets as the best source of growth that will satisfy their shareholders.

In an interview with the FT today, Paul Polman (CEO Unilever) recognises the pressure that large institutional shareholders put on multinationals to undertake takeovers and mergers of other businesses in developed economies.

Investment bankers have argued that mergers and takeovers are the best way for multinationals like Unilever to transform the scale and performance of their business, rather than relying on organic growth. Of course, these bankers have a vested interest in encouraging such external growth, given the fat fees they generate from all such activity. And they tend to suggest investment targets that they know well (easier to research and value).

However Polman makes an important point in the interview. He refers to the nature of competition that Unilever is facing in emerging markets, from which he has set an objective of delivering 75% of sales.

Polman is clear about where the competition is:

“Most of our competitors in the emerging markets are regional players” he says.

“We don’t see Proctor & Gamble as our toughest competitor” he states.

No, the biggest competitive challenge comes from the kind of fast-growing local and regional-based businesses that a recent report from Boston Consulting Group (“BCG) called “local dynamos”.

BCG describe the local dynamos as “a group of 50 companies based in emerging markets that have succeeded by staying home and beating both multinationals and local, often state-owned companies”.

While many emerging-market companies have global aspirations, the local dynamos are winning by catering to the needs of customers in their home market. Many of them are also developing world-class capabilities rivalling much larger, older companies – such as Unilever and P&G!

One of the five examples of local dynamos provided by BCG in their report is well known to readers of the tutor2u business blog! Xiaomi is a great example too. Lei Jun’s fast-growing smartphone business has captured the imagination of consumers in China and increasingly further afield, taking market share from established multinationals like Apple, Samsung, Nokia and Sony.

BCG estimate that the 50 local dynamos they have identified by researching thousands of private companies in emerging markets achieved annual sales growth of 28% between 2009 and 2013 – pretty impressive stuff and certainly much stronger than most mature multinationals.

Of course you always have to be somewhat sceptical about this kind of statistic. BCG is actively looking for the fastest-growing examples and they are unlikely to include examples in their sample of 50 local dynamos that depress an annual growth statistic!

Nevertheless, the important point for business students to note is that the competition in global markets is not just between the big boys. Whilst the local dynamos may not enjoy the economies of scale and brand awareness of multinationals, they can be highly agile and take advantage of their closeness to the customer base.

This blog from the FT lists the 50 local dynamos – it’s well worth finding out a little more about some of them!