Industry incumbents face threads from two major fronts: Emerging market companies and high-tech firms put the profits of long established firms at a danger, analyses the McKinsey Global Institute.
In their recently published report “Playing to win: The new global competition for corporate profits”, the McKinsey Global Institute (MGI) analyses the behaviour of corporate profits within a three decade time frame starting in 1980 and predicts changes in the corporate environment until 2025. The report points out that emerging market firms and high-tech firms put profits of established firms at a large risk.
Flexible and aggressive competition from emerging markets
Many companies with their roots in emerging markets are now among the world’s largest ones. Chinese firms, for example, account for about 20 of the Fortune Global 500 already, while the share of US and Western European corporations has dropped from 76 percent in 1980 to 54 percent by now. Within the past ten years, the 50 largest emerging market companies have increased their share of revenue from overseas from 19 to 40 percent, says the MGI.
Emerging markets firms seem to be more aggressive in pursuing growth and are also expanding quicker using M&A transactions. According to the report, this is one requirement to secure future growth. Those firms put revenue growth and scale ahead of maximising short-term profits and are sometimes supported by their local governments.
Most emerging market firms benefit from their ownership structure, says the report. Half of the world’s state owned firms are in China and another quarter in other emerging markets. Emerging markets do also have a major stake in family owned businesses. Those controlling shareholders can force the company to focus on building up a leading position and are able to aim for long term successes. On the other hand, North American firms are normally publicly held and aim at maximising earnings in the immediate turn due to quarterly reporting, says the report.
Besides their ownership structure, emerging market firms also benefit from their organisation. Although they are large corporations, they are have managed to stay “lean and agile”. They are able to rebalance their portfolio more often and are more focused on innovation to capture growth opportunities. With this flexibility, they are vertically and horizontally more integrated and bring different cost structures or even new business models to established industries.
Tech players disrupt business models across industries
Technology firms are another huge and even more unpredictable thread to established firms. They have already and within a short time frame reached enormous sizes in regards to revenues, asset, customer, workers and profits. Due their often network like business models, scaling up their business is a primary source of profits and competitive advantage as huge networks decrease marginal costs and give operates the ability to add new business lines to the system at rapid pace. Besides the operators of platforms itself, many small firms on those networks pose a thread to established firms.
As many tech firms are privately held by their founders or venture capitalists, they are “brutal competitors” that prioritise market share over profits and go after market-leading positions. Among NASDAQ listed firms, founder controlled firms growth 60 percent faster in terms of revenues and 40 percent lower in terms of profit margins.