Rating Qualities

9
Analytical
Overview
Background

Global Tilt
Leading Your Business Through the Great Economic Power Shift
Ram Charan | From the book: GLOBAL TILT: Leading Your Business Through the Great
Economic Power Shift Copyright @ 2013 by Ram Charan Published by Crown Business,
an imprint of the Crown Publishing Group, a division of Penguin Random House LLC

Prolific business analyst Ram Charan makes you realize that massive sections of the world the
West once dominated economically have now leveled the playing field in market size and business
capability. As his excellent case studies show, Charan understands the world of emerging business
markets and developing world companies. He contrasts fast-growing, risk-taking, customer-share-
oriented “South” companies, from the Southern Hemisphere, with established “North” companies.
Northern competitors seem stuck in older methods that revolve around core competency, cost-
control and the powerful short-term financial system that owns most of them. Charan’s “tilt” will
take a long time to play out and portends significant disruption. getAbstract recommends his
analysis to leaders of businesses that face international competition.

Take-Aways
• Today’s business leaders have “no excuse for geoeconomic or geopolitical illiteracy.”
• In developing markets, assign high-level leaders whom you trust to make significant decisions
and handle large budgets.
• Be local: “Pinpoint” your market segment, and “don’t paint an entire hemisphere with the same
brush.”
• Two billion new consumers will join the world economy in the 2020s.
• If a Southern country’s government is active in your business sector, the normal rules
governing how efficient participants make their profits may no longer apply.
• Core competencies and cost cutting could be outmoded priorities.

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 • The high risk tolerance and low margins of companies from Southern nations can threaten
your business.
• Don’t let your corporate hierarchy filter feedback from branches in Southern countries.
• Make strategic plans based on the future, not the past. Act before others see the need.
• Your corporate culture should reward sharing, cooperating and communicating. In times of
change, build “candor and collaboration” through personal contact.

Summary

The Tilt Toward the South

Most of today’s business leaders grew up in a world where the “West” – which perhaps should
bear the more-accurate label of the “North” (the United States, Europe and Japan, plus a few
others) – dominated business and led product development. Now, clusters of countries with
various acronyms, such as the BRICs – Brazil, Russia, India and China – highlight a changing
economic landscape. Arguments about developing nations’ “cheap labor,” currency manipulation
and protectionism can distract strategists from trends that will inevitably reshape the global
economy. These include, for instance, changing population distributions as countries develop.

“Many upstarts…thrive on low margins, lowering profitability for the entire industry
and throwing business models and financial expectations into question.”

Companies in the South harness management expertise from the North. These firms have
an appetite for risk and a tolerance for low margins. Their experience, scale and momentum
challenge established businesses and business models. Changes in disruptive technology,
demographics and resource scarcity increase the challenges that international businesses face.

Companies in the South “are building scale and challenging companies of the North on all
fronts.”

Developing world firms, with their reduced need for capital and their shorter product lifecycles,
overturn “old notions about scale economies” and incumbent advantage. Two billion new
consumers will join the world economy in the 2020s. This partially accounts for approximately $2
trillion of expected annual growth. Business leaders worldwide must decide whether to dip into
this vast new pool “with a teaspoon or a bucket.”

“State Capitalism”

Established Northern businesses seeking to grow in the South must navigate the rules, barriers
and requirements of protective, ambitious Southern governments. These rules – governing mostly
“equity stakes, local content” and “certification” – are designed to nurture and protect the long-
term benefit of developing nations’ domestic businesses.

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 “The universal business rule applies: You have to execute. No execution, no results.”

China is a skillful, assertive practitioner of “state capitalism.” And it is a huge and growing market:
If you bypass it, your competitors may stand to gain. On the other hand, by collaborating with
the Chinese government, you could be creating a future competitor. Northern companies must
generate next-quarter results that please shareholders and fund managers, while patient Southern
governments own or support growing companies. They’re playing a long game toward other goals,
such as building market share, securing resources or improving tech capabilities.

China’s “State Owned Enterprises” (SOEs)

China's long game concerns its State Owned Enterprises (SOE), which represent 30% of its
industrial assets. Most Northern countries turned away from the Chinese style of extreme vertical
integration. But some are “reviving that approach as a defense mechanism” in finite resource
sectors. General Electric CEO Jack Welch reduced this approach to its basics: “Control your
destiny or someone else will.”

“The tilt creates an imperative for all leaders…to look at the business from the outside
in…through the lens of a leader sitting elsewhere.”

The North embraces an economy in which business leaders decide which areas are profitable to
enter. But, in China, government planners designate which “strategic emerging industries” to
support so they make progress. The resulting business environment in these designated sectors
is not a normal market that offers normal profits for efficient participants. For example, in the
past, China’s government prioritized solar panel production and development, pushing prices in
this market well below a profitable level. This sector illustrates the weaknesses that can develop in
China's economy due to faulty allocations of capital.

“Develop your own perspective to detect trends that cut across not just industries but also
countries, sometimes challenging the economic and business principles you’re familiar
with.”

An unprofitable Chinese SOE can be as much – if not more – of a threat to your business than
a profitable one. Research and understand the impact of government involvement in Southern
markets. “You will almost surely want to avoid tackling them head-on. But can you hitch a ride?”

Local Expertise and International Organization

If your company headquarters and business are in the North, establishing local leadership in the
developing South can be problematic. Having the right leaders and fertile working relationships
in Southern countries is a must. You cannot overcome ineffective local leadership. In developing
markets, assign the best high-level leaders you can afford and let them make the crucial decisions
while holding sway over “hefty budgets.”

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 “For most business people, the Tilt will present the biggest challenge of their careers.”

Your home-based executives must believe in the ability of your distant local leaders. Give local
leaders the autonomy they need to thrive. Don’t lump different nations or parts of nations together
with similar low-income profiles without appreciating varying local consumer and business
factors. Find sound local managers to handle these particularities, “pinpoint subsegments” and
make farsighted local decisions. For example, salaries in rapidly growing nations could be rising
fast. Allow for that; plan to manage the possible resentment those increases stir at home.

“By thinking through external trends and their implications you’ll know what you don’t
know and therefore what to track. That, in turn, will increase your confidence and
decisiveness.”

A Southern market might call for frugal innovations, such as slightly different versions of your
products. Be alert to messages from your local people. Your on-the-ground leaders need to be
free to make decisions as rapidly as their best local competitors can. Don’t “force local market
intelligence through filters of a bureaucratic hierarchy.”

“Failure to build the necessary new capabilities and remove the ones that are obsolete
will take you to oblivion given today’s speed of change.”

Because you are leading from a distance, maintain your communication channels. Make sure that
your local leaders don’t “feel buried by having to get multiple approvals.” Let them communicate
directly with your CEO. If you or other senior people are going to visit, stay for nine days, not a
long weekend.

“You know you’re making a strategic bet when you feel the stress [of] staring risk in the
face.”

To motivate and direct faraway divisions effectively, you need clear messages, defined goals and
consistent policies so you can build trust and establish a “tangible vision.”

Beyond Cost Control and Core Competencies

Leaders of large, established Northern companies rose to the top of their careers at a time when
the concepts of core competency and cost-base control paved the road to success. Given the
environment of high wages and small growth in outlying markets, these concepts encouraged the
outsourcing trend that began in the 1990s.

“If you’re not multicontextual, you’re likely to miss specific local needs and opportunities
– and the trade-offs you make or advocate will be misinformed.”

In the developing world, the new generation of leaders and their large enterprises grew by
expanding into other sectors and gambling on new markets. “An American company might think

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 4% revenue growth is acceptable; a Southern company thinks 20% is normal.” But, when the two
types of company meet head on, the new Southern companies can have an appetite for risk and
momentum stronger than that of their careful, established Northern rivals.

Northern leaders “lost the vision, drive, and boldness that had built their business. Those
qualities are more likely to be found today in companies – mostly from the South – that
American leaders never paid attention to until they themselves suddenly fell prey to
them.”

Generally, “the South is driving change. The North is afraid of it.” The hard data and market
research that prudent, established companies depend on are simply not available in the South.
Leaders there learn to rely on intuition and judgment.

“Open Innovation and Less Hierarchical Management”

The most effective Southern companies learn from Northern start-ups. They prefer open
innovation and less hierarchical management. The wider implication is that an established
company’s key performance indicators (KPIs), budgets, reviews and even recruitment processes
may be stuck on the old model of core competencies and cost cutting. This will hold you back
in fast-growing Southern markets. While your company evolved to deliver steady profits and
controlled budgets, your Southern competitors may ignore present profitability to focus on
building market share with the future intention of overtaking you – or, taking you over.

Forward Thinking

Once you’re participating in the market in a fast-moving developing country, instead of focusing
on preserving core competencies from the past think carefully about how the future may look and
where you want your company to be. As ice hockey star Wayne Gretzky said, “I skate to where the
puck is going to be, not where it has been.”

“For many leaders…this new turn in the road leads directly away from lessons
they’ve learned for much of their careers: stick to your knitting; stay with your core
competencies.”

Forward thinking may lead you to make a bold move or a “strategic bet” now, even if your present
market position is strong and even if making such a bet is difficult. You will encounter resistance
and criticism from insiders with a vested interest in the present business model and from outside
interests – such as shareholders and analysts – who don’t see the need to change a winning
formula.

“Reorienting an entire business to succeed in the tilt is akin to performing a heart

transplant: the surgeon has to keep her patient alive while cutting and slicing.”

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 Changing the direction of the business before the numbers start to suffer might turn out to be
a significant aspect of your role as a company leader. If you are certain a particular market will
be important to your organization in the future, take your company into it early – even before
it’s possible to make a profit there. Investing ahead of growth to be in the right future position
demands strong leadership. Expect to experience personal anxiety when you so willingly embrace
risk. Yet, you face a more insidious risk if you lack the courage to make strategic bets on the future
and instead rely on present business models to be static in today’s fast-tilting environment. To
survive, your company must differentiate itself continually by making rapid decisions, serving
clients, being innovative and creating relationships. Develop the “organizational and people
abilities” you need to stay ahead of your present and future competition.

Vision

In a tilting business world, leaders must try to predict and understand future “unstoppable
trends” and the countries, like China, which drive them. Today’s business leaders must build
their sophistication and knowledge about geopolitics and “geoeconomics.” To lead despite the tilt,
“develop your skill in imagining second- and third-order consequences.” Think through situations
for yourself and be aware that the specialists you’d ordinarily consult may function under their
own ideologies, which can limit their sight. Remember that a lot of economic information that
seems very precise is often false. For example, statistics from China are notoriously unreliable.

Your job as leader is not just to make the right strategic bets at the right time, but also to
communicate and justify them. If your company is expanding in developing markets, make sure
your organization is ready to face the related challenges by prioritizing such issues as sharing
knowledge and resources and communicating clearly.

“Create a tangible vision” that resonates throughout your organization. Home-country senior
people might be defensive and resent sharing with fast-developing Southern divisions. At the same
time, Southern division managers from different cultural backgrounds might be less assertive
or less vocal in fighting for their corner of the business. Reward people who share power and
encourage collaboration.

Balance

Your biggest challenge might be striking the right balance between steady, established enterprises
and more-unpredictable, Southern-country projects. Learn to function in a “multicontextual” way
that enables you to frame your business activities differently in various regions and countries.
Recognize how an area’s government operates, how its informal social networks function, what
distribution systems are available to you and how you’re faring against local competitors.

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 Working Together

To change priorities and directions within a large company, institute regular social mechanisms
such as meetings or teleconferences. To build “candor and collaboration,” help your people get
to know one another. Change the social structure of your organization – that is, the proximity in
which people work and the ease with which colleagues can talk every day. This can be as effective
as the more difficult move of changing formal reporting structures. Enable, encourage and reward
“filter free” interaction up and down the chain of command.

About the Author

Ram Charan wrote or co-wrote several acclaimed books on business, business strategy and
leadership, including High-Potential Leader, Execution, What the CEO Wants You to Know,
Boards That Deliver, Leaders at All Levels, and more.

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