Fighting Back

International business is going through a particularly interesting period, as new strategies and technologies throw conventional business models into disarray, emerging giants upset the balance of economic dominance, and low-cost competitors challenge long-established suppliers. In his new book, Counter Strategies in Global Markets, Dr Olaf Plötner explores the predicament of leading technology-based companies in global B2B markets, and explains how and why these firms must change the very characteristics that previously made them strong or else face the consequences. Gemma Carter reports.

As Dean of Executive Education at the European School of Management and Technology (ESMT) in Berlin, Dr Olaf Plötner works with technology companies and managers on a regular basis, and has garnered a profound understanding of current trends in global technology markets; not only from a Western perspective, but also, as a result of extensive business travel, from a Chinese and Indian perspective. It was upon gaining this knowledge that Dr Plötner began working on a book called Counter Strategies in Global Markets, which considers the challenges faced by global B2B companies and proposes a new model for their future development.

During our conversation about Counter Strategies, Dr Plötner points out that what is happening now in the global technology market is something that occurred several decades ago in other industries: “In the textiles industry, for example, many companies that were based in the UK or Germany 50 years ago are no longer in existence – the majority of the world’s clothing is now produced in Asia, and many European companies have disappeared,” he notes. Now, in the technology field, which has traditionally been a field in which Western companies – the likes of GE, Siemens and Alstom, for example – are strong, many of these firms are losing ground, and there are new competitors entering the market. “The Indian company Larsen & Toubro, for instance, is a very interesting company that is growing rapidly, much faster than GE or Siemens,” states Dr Plötner. “In the West, we have to assess the situation: why are these companies growing so fast, and why are they growing more than Western companies?”

New suppliers for new segments

Certainly, it is important for these traditional, Western technology companies to understand the challenge that they are up against, before they can respond to it, hence this is one of the first issues that Dr Plötner addresses in Counter Strategies. There are two key developments to consider, he tells us, the first being that not only is most market growth happening in Asia, but, more interestingly, it is taking place within customer segments that have a “low willingness to pay”, as Dr Plötner terms it. “Most of the growing segments in Asia are unable to buy premium products from the West,” he explains, “but they have some money and would like to buy some products.”

The second important point is that premium product suppliers are unable to make these new, growing customer segments happy because their products are much too expensive. As a result, these segments are served by companies that come from their home markets, like India and China. “If we look at the truck market in 1999, for example, the top six truck producing companies were all from North America and Western Europe,” Dr Plötner affirms. “Today, five of the top six firms are Indian and Chinese, with only one being from the West, and their trucks cost just 30 percent of the premium prices that Western companies charge.”

Indeed, new competitors are covering the new growth segments, which are more concerned about low prices than they are about quality, and they are earning huge profits in doing so. Then, they invest these profits in R&D and innovation to improve the quality of their products, which become better and better with each year that passes. “Just as Toyota did,” Dr Plötner remarks. “In the 1950s and ‘60s Toyota cars were very poor quality, but the company gradually improved and by the 1980s, managers from US and German automotive firms were travelling to Japan to learn about quality, because Toyota had become one of the highest quality brands in the world.”

With these improved products, the new competitors are then able to address those customers that are usually served by Western companies, and it is this very challenge that Dr Plötner tackles, from a Western perspective, in Counter Strategies, which presents two strategic options: no-frills technology (NFT) and complex service solutions (CSS).

Back to basics

As we have already heard, B2B suppliers of advanced premium goods, including Western automotive manufacturers, are generally unable to address new growth segments that are looking for rock-bottom prices. In response to this, these companies may think about potential new products and business models in order to serve those new, fast-growing customer segments. “NFT is one such strategy that is already prevalent in other types of industry,” observes Dr Plötner, “such as the airline sector. 30 years ago, European airspace was dominated by Air France, Lufthansa and British Airways, but then Ryanair and EasyJet entered the market with a new business model (and a lower standard of quality), and they were unbelievably successful.” This approach is also an option for suppliers of advanced premium goods, which can attempt to enter new markets with low-cost products. “There are many advantages, disadvantages, risks and opportunities that these companies have to take into account,” he comments, “but at least it is an option to consider. In the airline sector, British Airways took this approach when it founded the low-cost airline Go Fly (which merged with EasyJet in 2002), and so did Lufthansa when it established Germanwings.”

While there are many possible consequences of the decision to implement NFT, Dr Plötner focuses on two of the most important issues, the first of which is globalisation. Technology companies are, typically, driven by R&D and have faith in their technical competence, but if they attempt to develop NFT from their headquarters in Western Europe or North America, engineers in those regions are unlikely to be able to produce very low-cost technology. “This means that they have to go to the fast-growing countries, like India and China, and use local engineers to develop the products that they would like to sell in those markets,” clarifies Dr Plötner. This may appear logical, but it is revolutionary for those companies that have always considered R&D to be an activity for their headquarters. “Traditionally they have seen no problem with having sales and service entities in emerging markets, but R&D is the lifeblood of technology companies,” he asserts, “and the idea of taking that function to China, for example, and working with Chinese engineers, is often a monumental step and a difficult challenge for these companies.”

A second important point to note about NFT is that today, many technology companies, such as those in the elevator industry, make most of their profits from aftersales services. Dr Plötner cites the example of buying a brand new car: “If you purchase a new VW, you have to buy original, expensive spare parts from VW otherwise your warranty becomes invalid. Very often with NFT, however, the customer would simply not accept these conditions, so this business model does not work in those markets.” So, in order to operate in new markets, traditional technology companies that barely make a profit from the product, but run highly profitable aftersales services, must learn that they have to make money from their first transaction.

Raising the barriers to market entry

When it comes to CSS, a perfect example is the global management consulting firm McKinsey & Company, which provides a very complex service – having spent time working for Boston Consulting Group (BCG), Dr Plötner possesses expertise in this field. The consulting sector has not developed in the same way as the truck sector, for example, where only one of the top six companies today is from the West. On the contrary, not a great deal has changed in the consulting business, as Dr Plötner explains: “McKinsey is number one and BCG is number two, followed by the likes of A. T. Kearney and Booz & Company. There are no Chinese companies in the top six or even the top 10, and the reason for this is that the barriers to entry are so high for CSS.”

This is why some Western companies have already been successful with CSS, as Siemens has been with ‘Soarian’, a modular software solution designed to link all manner of healthcare service providers and help improve the quality and efficiency of healthcare processes. “The software product is not the key here, however,” notes Dr Plötner, “the important element of the service is the fact that Siemens goes into hospitals and consults with customers. Siemens started this business in the US – where errors in diagnosis and treatment are responsible for the deaths of over 50,000 people a year – and it cost them a lot of money, but now it is providing returns.”

Indeed, if Western companies are involved in the provision of highly complex services, the new competitors coming from emerging markets face a greater difficulty entering that market. However, there are two major consequences for Western companies to consider, Dr Plötner tells us, one of which is the fact that having a border between sales and production, which is typical of technology companies, does not work in CSS. “An employee selling trucks, for example, does not know where the individual parts are obtained […] or what method is used to apply the paint,” he writes in Counter Strategies. “With successful strategy consultants like McKinsey or BCG, on the other hand, the partners responsible for acquiring the project are also tasked with its subsequent implementation. Following this approach, the heads of CSS projects in technology companies, too, must be willing to take on responsibility for both the sale and implementation of projects.” This means change for technology companies, which is not something they find very easy.

The second major difference between advanced premium goods and CSS lies in marketing communication. “Technology companies love to talk about their products – they visit trade fairs and exhibitions, show their products and hand out brochures about the features of the products – but this does not work with CSS because there is no product to display,” argues Dr Plötner. And this is something else that has to change – people are far more important than products in CSS, but, for a traditional marketing department at a technology company, this presents a challenge.

Power players

There are certainly companies out there, like Siemens and GE, that are managing to do everything – NFT, CSS and advanced premium goods – and are still growing, albeit not as rapidly as their counterparts in emerging markets. VW is another such company that recently announced record results, perhaps on account of the fact that it is not only active in the middle segment, but it also owns high-end brands like Porsche, Lamborghini and Bugatti, as well as low-end brands like Skoda. On the other hand, those companies that do nothing are at risk of disappearing, warns Dr Plötner: “Ultimately, whether or not companies enter into NFT or CSS will not be their choice – the market will force them to make their move.

“Or, perhaps they will continue as advanced premium product manufacturers, albeit as subsidiaries of fast-growing companies from emerging markets,” he predicts. One recent example of such an occurrence was the acquisition in January this year by Sany Heavy Industry Co., a Chinese construction equipment maker, of Putzmeister, the world’s leading manufacturer of concrete pumps and, according to Dr Plötner, “a true hidden champion” in Germany. While the German firm had not expanded into NFT or CSS, Sany was growing rapidly, to the point that it had much more money than Putzmeister and was able to buy it. “Perhaps the people at Putzmeister will continue to produce premium products, but now they will be doing that as a department of a Chinese company,” Dr Plötner explains. “Many people would say that this is a bad thing for Putzmeister, but I tend to disagree – this may present a huge advantage for the company.”

From a political point of view, another issue to consider is the extent to which global companies are able to influence individual countries and governments. In Counter Strategies, Dr Plötner refers to VW’s search for a new plant in Eastern Europe in 2010, during which the company considered Slovakia, Romania and Hungary. Each nation pleaded with VW to establish the factory in their country, offering numerous inducements, which put the automaker in a very powerful position. “These companies are growing, and where this will lead I do not know,” Dr Plötner reflects, “but one thing that is clear is that a truly global company has a lot of power over individual countries – so long as that country is not as large as China or the US. The power position of those huge companies relative to countries like Belgium or Denmark, say, is fairly substantial.”

Indeed, in this era of globalisation, large countries like China, India and the US are the “power players”, observes Dr Plötner, “while Europe is still structured as many different countries that fight against each other economically.” This is perhaps one of many arguments providing reasons why Europe may need to come closer together, if only to manage big companies. Does Dr Plötner agree? “Yes; politically speaking, Europe would be in a much more powerful position in relation to big companies if it were unified. Europe either needs less integration or more integration – who knows which – but the current situation is certainly not the most favourable,” he attests.