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Panel: Emerging Markets and the Changing Business Landscape

Event:
19th CEEMAN Annual Conference
Georgia - Tbilisi | 2011
Embed
It is a great honor to be invited to another CEEMAN conference and I am particularly honored to be in Georgia, Tbilisi, for the first time in my life. 

We already have emerging markets and a changing business landscape. The changes are sometimes dramatic. We are in a global market which is developing very rapidly. But, as JeanPierre Lehmann pointed out, we do not have global governance. There is nobody to regulate these markets. The financial crisis was the best example. Nobody knew what to do about it and the result was a horrible cacophony. The G20 attempted to impose some regulation but a year later the financial markets are exploding again and nobody knows what to do. The global GDP is 60 billion but the amount of global financial transactions is 600 billion. Who is controlling what? 

We should not be afraid of this globalization but the question is how do we manage it at different levels? I think we should pursue two global goals: the wellbeing of people and societies and their safety. We are doing rather poorly on both. On the one side, we have rather rich countries, but on the other, we have some very poor countries. The difference between the richest, Luxembourg, and the poorest, Burundi, is 600:1. How can this be in the 21st century? Even across former Yugoslavia, the difference between Slovenia, which is the most developed, and Bosnia, the least developed, is 6:1. Across the former Soviet Union, the difference between Estonia and Tajikistan is 20:1. There is obviously something wrong with all that. Unless we find a way to manage these disparities, we can have very serious problems in the future. What needs to be done in the constantly changing business environment and in the emerging markets? 

Jean-Pierre Lehmann mentioned seismic changes over the past 20 years. I can outline three major events. One was the fall of communism. The next one was September 11, resulting in the futile war on terrorism and the erosion of the superpower status of the United States. The third one was the financial crisis four years ago. It led to the crisis in the real economy that is still producing repercussions. 

Below these visible phenomena are some important trends. Globalization is one of them. It is driven by the opening of the markets coupled with a technological revolution. Technology is now available to everybody and it is possible to leapfrog ahead. The rise of China is a good example of such technological leapfrogging. 

Another trend is the shift in political and economic power away from the United States to China and others. There are also environment issues that have not been solved. There is an increasing scarcity of resources; water may become a bone of contention in the future. We are talking about aging Europe and Japan, but not about aging Africa or even America. 

Another worrying trend is the growing global income gap. There can be big unrest in some developing countries unless something is done about it. We have seen some of that in Greece and even Spain. 

To deal with the challenges of the future, we need not only new skills, but also new aspirations and new values. The old values have been eroding. 

I fully agree that we have emerging and submerging markets. In the past, “emerging” or “developing” had a connotation of second-rate. But “developed” means “stagnant”. Those countries are not moving ahead anymore because they are developed. If you are emerging you move ahead; you are dynamic. Which one do you prefer to be? There are countries like Greece, Italy, and Spain that have reached the peak of their performance and are now submerging and their governments are desperately trying to stop this erosion. 

We have a dilemma today. We have rich but stagnating markets which still account for half of the world’s GDP. We also see fast-growing emerging markets that are catching up on all dimensions with the developed countries. Therefore, we have a new balance of power. We are talking about BRIC countries, but it is China and Brazil that are moving fastest. India is following after them. Russia, despite its enormous natural resources, is falling behind. Why is the state capitalism of China performing better than whatever kind of capitalism Russia has today? Twenty years ago, Russia was clearly ahead of China but now it is falling behind. These are questions that we need to discuss. They are particularly relevant for the area of Central and Eastern Europe and the transition countries. 

The question of emerging markets should be rethought. The World Economic Forum has come up with a new categorization: factor-driven or efficiencydriven or innovation-driven. Unfortunately, there are only about 32 countries in the latter category. These are mostly the developed countries. There are some 30 countries in the efficiency-driven league and all the rest are factordriven. Here is a question for us: how do we move these factor-driven countries into the other two categories? Innovation will be one of the elements of future growth and will ensure the wellbeing of those countries. 

As for the changing business landscape, I would just like to add a couple of things to what Jean-Pierre Lehmann said. First, I see globalization as a great opportunity if you look at it the right way and understand the rules of the game. You can find new suppliers and new customers. You run into new competitors, but you can also make new partners. Why don’t we form more partnerships on a global level? 

Globalization brings about increased volatility and insecurity. This has to be dealt with. This results in new imperatives on the political level and the business level. These two levels need to cooperate much more than they have so far. There are countries that are notable exceptions and they are performing very well. 

One of the imperatives is competitiveness. If you are not competitive today, you sink into an average position. I was recently invited to talk to the President of Slovenia about the country’s economic strategy, which we actually do not have even after 20 years of independence. I told him that I had been invited in the same room by the previous president. The topic that I was invited to talk about at that time was competitiveness and what Slovenia should do about it. At that time, Slovenia was number 31 in the world. Today we are number 57. We have obviously decided to sink into mediocrity. This is a very dangerous attitude. Let us all think how we can increase the competitiveness of our countries. Competitiveness leads to growth, profitability, and wellbeing because without a sound economy you will not have a sound society. You just will not be able to afford what you need for healthcare, education, and other social expenditures. 

Another issue is reinvestment and sustainability. A sustainable strategy is needed not only at the corporate level but also at the state level. Some states are investing more in the future than other states. The first type are also more competitive. 

Finally, we should also consider the seismic changes that are taking place in business. We have a completely new set of parameters and paradigms. We have a saturated Western world and a hungry world of developing countries. This is a difference between “I would like to have” and “I must have”. This is what drives growth. Therefore, competitiveness is becoming a very important element for many countries. 

The world economy is growing but there is a shift from West to East. If we do not get our act together in Eastern Europe, we will start falling behind. Our societies will not develop as fast as they should. We see the stagnating rich countries, like the United States, which is characterized by a jobless recovery. 

In Europe we see a split between northern Europe, which is performing reasonably well, and the southern countries - Greece, Italy, and Spain - that are increasingly under pressure. As for Japan, we have witnessed the Fukushima effect which spilled over to Germany; as a result that country abandoned its nuclear policy. But how will Germany solve its energy problem? If they manage to develop renewable sources that will be fantastic but what if they fail? They are taking a significant risk. 

We have talked about the fast-growing BRIC countries. However, although Russia is growing at 4 percent once again, it is not growing as fast as it should and is losing its competitive position with respect to the other BRIC countries. This is very unfortunate, considering the incredible human resources that Russia has. Why doesn’t Russia join the European Union? What stops it? Most Russians live in Europe, just like all Ukrainians and Byelorussians. If these countries joined the European Union, we would have an enormous bloc, not only of natural resources, but also of human resources. We could be a Eurasian region that is competitive against both, North America and China. 

There are a number of very competitive countries, like Hong Kong, Malaysia, Turkey, Vietnam, and Taiwan. These are the growing countries. They have people who are hungry and want their economies to grow. In Europe, we have a mixed picture. Some are doing reasonably well - for example Poland, the Czech Republic, and Estonia. But most of the other countries, including Russia, are lagging. They are not growing their competitiveness very fast. You may ask why some countries are faster than others. There may be very different reasons for that. It could be a lack of a coherent economic strategy, a lack of natural resources, a small population, a lack of foreign direct investment, or a lack of competitiveness. The competitiveness index that is published by the IMD and the World Economic Forum is an indicator of how countries are progressing. I was once asked what I would like to see in Slovenia. My answer is that I would like to have a combination of Singapore and Denmark: Singaporean zest for economic growth coupled with a Danish willingness for social justice. Why can’t we achieve this combination? 

If you look at the top-twenty percent countries in the competitiveness index, you will notice a clear shift to Asia and South America. A lot of countries in those parts of the world are increasing their competitiveness. Malaysia is one of them. As for the BRIC countries, China is in the best position, followed by India, Brazil, and Russia. The best performer in Central and Eastern Europe is the Czech Republic; the last one is Bosnia. There is an enormous difference across the former Soviet Union as well, especially between Estonia and Kyrgyzstan. When a country is low in the ranking, there is a potential for social unrest. I think that we should talk more about competitiveness at our business schools. CEEMAN has been focusing a lot on management development and other important topics, but so far, competitiveness has never been brought up. 

If you want to increase competitiveness, you have to work at five levels. The first is the mega level. I already mentioned the large economic areas, such as the European Union and NAFTA. The macro level is the level of individual states. There is another important level that we do not talk much about: the mezzo level. These could be sectors or regions within individual countries or clusters. If we take Germany as an example, we will notice that there is still a difference between the former West and East Germany, despite the billions of investments into the latter. 

In France, Ile de France is thriving, but other regions are struggling and are far less developed. The same goes for sectors. There are no dying sectors; there are just dying companies. The question is which of these sectors should be pushed forward so that they become engines of growth. 

Then we come to the micro level: the classic corporation. Corporations have to be competitive and sustainable; otherwise they will disappear. You do not have to be from a big country to be globally competitive. For example, Maersk is a Danish company; a world leader in maritime shipping. Novo Nordisk is a global leader in insulin production. There are also the hidden champions that are very important although we often neglect them. 

The last level is the nano level: the people. These are often the only resources that we have. But do we develop our people sufficiently and fast enough? It is the task of business schools to contribute to the development of the human relations chain: from primary education all the way to executive training. This includes education in innovativeness, entrepreneurship, and values. We need strong competitive values. 

There is no strong correlation between national wealth and competitiveness. Italy and Slovenia are rich but not competitive. The closest correlation that I have found is with social cohesiveness. The Scandinavian countries are a good example. Competitive countries are also value oriented; they have competitive value systems; for instance Singapore and Malaysia. Once a Malaysian gentleman who talked about government-owned companies actually called them government-linked companies. The progress that they have made in Malaysia is very impressive. He said that what it takes to move ahead are complete commitment on the part of the government to the progress of society and a performance culture. Nothing will ever happen without such commitment. Then, of course, businesses have to make their own contribution, and business schools must help them. 

CEEMAN has achieved enormous results in 20 years. But looking ahead, we see that even more has to be done. I think that CEEMAN can contribute a lot to the enhancement of competitiveness and the promotion of competitive values. You are educating the future generation of leaders and we need better leaders, both on business, but particularly on political level.
Event:
19th CEEMAN Annual Conference: Management Education in a Changing World: Are We Ready for the Challenge?
Categories:
Filmed:
September 2011
Published from:
October 2011
Citation:
Peter Kraljič, Panel: Emerging Markets and the Changing Business Landscape, (McKinsey & Company), http://www.mckinsey.com/
Accessed: April 23 2018,
Available at: http://video.ceeman.org/lectures/639/2011_ceemanac_tbilisi_kraljic_pemcbl

Dr. Peter Kraljič, a Director Emeritus of McKinsey & Co. Inc, joined McKinsey in 1970. He was promoted to Principal in 1977 and to Director in 1982. He was for a number of years a member of McKinsey's Shareholders, Firm Development and Personnel Development Committees and from 1993 to 1998 managed the McKinsey activities in France. Prior to joining the Firm, he worked for six years in metallurgical research with companies in Yugoslavia, Germany and Luxembourg.

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