Conventional wisdom holds that companies in emerging markets face daunting obstacles when trying to expand internationally. According to this view, the same factors that make them successful at home—privileged relationships and assets, high tariff walls, and a captive market of local customers—inevitably work against them abroad. So what explains the rise of the emerging world's true global leaders, which operate diverse businesses profitably, at scale, and in a wide range of geographies? Are HSBC, Ranbaxy Laboratories, and Samsung Electronics merely the exceptions that prove the rule?

In reality, emerging markets, far from being a handicap, actually provide an invaluable springboard. The combination of demanding yet price-sensitive customers and challenging distribution environments can help determined companies develop the distinctive capabilities they need to compete successfully elsewhere.

Consider the example of Ranbaxy Laboratories, India's leading pharmaceutical company, which became a top global producer of generic drugs after cutting its teeth under a unique patent regime that encouraged Indian companies to manufacture patent-protected drugs and make them affordable to the country's vast population of poor people. Thanks to that experience, Ranbaxy has succeeded in becoming a leading generics producer in both the United States and Europe. Another global competitor, Samsung Electronics, had to please its customers in tech-savvy South Korea and thus cultivated design strengths that help it beat international competitors to market. HSBC had to cope with the relatively small deposits of its customers in Hong Kong, so it learned to operate with a cost-to-income ratio lower than that of its US and European competitors (Exhibit 1).

These companies followed similar paths to global success. Each of them first forged distinctive capabilities in the difficult circumstances of its home market and then mastered the art of transferring its business DNA: the core skills and supporting organizational culture that help it make money, reliably, in diverse markets. To pull off this trick, a company must train—and then trust—a cadre of global managers who understand its distinctive capabilities but are also independent enough to modify them to fit local needs. These leaders know how to preserve the essence of the company while morphing its business systems to suit local conditions.

Getting going

Few if any success stories from emerging markets unfold quickly. In fact, the journey to global success requires painstaking groundwork in the home market before a company can begin to compete on less familiar terrain. A robust and sustainable position at home provides both an environment for creating distinctive capabilities and a cash machine to finance what is typically an expensive globalization effort.

To mount such an effort, a company must achieve global standards of competitiveness, at least in its core activities, before looking abroad. The global leaders that McKinsey has studied all brought their key processes up to or above global benchmarks before globalizing. Ranbaxy became one of the world's most cost-effective drug manufacturers before moving beyond its national borders. The Spanish institution Banco Bilbao Vizcaya Argentaria (BBVA) learned to use its resources more effectively than most of the world's banks and only then pushed into Latin America. Before going abroad, the Indian company Asian Paints had already reduced its working-capital turns to levels below those of all but one of the world's leading paint companies, and India's ICICI Bank made more money on small transactions than did the world's best institutions.

Forging distinctive capabilities

As companies in the emerging world establish a robust position at home, they must also begin to develop distinctive capabilities. Although this path is just one of three that can provide a competitive advantage, the others—privileged local relationships and valuable assets and rights, such as mining concessions—often can't be transferred from country to country, so companies that rely solely on them rarely succeed globally. The successful approach is to rely on difficult-to-imitate sets of interlocking activities that generate unusually high cash flows and profits.

Indeed, as John Seely Brown and John Hagel III argue,¹ emerging markets are seedbeds for distinctive capabilities. Companies there must meet the challenge of serving hard-to-reach, price-sensitive consumers who typically have more stringent requirements than their counterparts in the developed world. These companies develop distinctive capabilities by refining and abstracting lessons from their day-to-day activities. They then standardize and document those lessons, which can form the basis of transferable business models that help them develop, source, make, and sell products across a number of geographic and product markets.

Although such a company's distinctive capabilities originate in the home market, they can't depend solely on its characteristics. Access to a pool of low-cost local talent, for instance, gives a retail bank operating in India transaction costs that are lower than those of a bank in Madrid, but when the Indian institution opens a branch there, it will have a Spanish bank's labor costs. For a distinctive offering, it would need transferable competitive advantages—such as efficient, highly customized back-office operations to drive down its costs per transaction—that local competitors couldn't easily replicate. To give one example, ICICI Bank, India's second largest, developed the ability to earn profits from small transactions by handling money transfers for India's highly mobile middle class. When the bank began to expand globally, it first targeted markets in the Gulf States and other locations with large expatriate communities that needed these services.

Ranbaxy: Affordable pharma

Ranbaxy is a good example of how companies develop distinctive capabilities in emerging markets. Before signing on to the World Trade Organization regime, at the beginning of this year, India protected only process patents—not product patents—for drugs, hoping to make them as affordable as possible for the country's poor people. In essence, Indian companies could produce any drug in the world if the chemical synthesis of the manufacturing process differed from the one that the original manufacturer used. As a result, hundreds of Indian drug companies sprang up to make drugs as soon as they were introduced in the United States or Europe and to sell them as cheaply as possible in India.

Soon Ranbaxy distinguished itself by setting up sophisticated laboratories and hiring hundreds of world-class chemists. It also invested heavily in state-of-the-art factories that could bring the manufacture of a drug up to optimal scale quickly. The distinctive advantages of the company soon proved to be its ability to identify new processes for synthesizing patented drugs and to scale up manufacturing quickly thereafter.

By the early 1990s, Ranbaxy realized that it could exploit these strengths by quickly synthesizing drugs that were going off patent in developed markets and selling them there. To pursue this strategy, it acquired Ohm Laboratories in the United States in 1994 and entered the US generics market. In the past decade, Ranbaxy has rapidly expanded its business in the United States and other international markets and currently ranks among the world's top ten generics manufacturers. It has annual revenues of $1.2 billion—78 percent from outside India, including 36 percent from the United States. The company has globalized so successfully that more than 400 of its employees now work in the United States, and more than 18 percent of its total workforce is non-Indian.

HSBC: Operating discipline

HSBC, a financial-services firm founded in Hong Kong, is another company that has used its origins in the developing world to create capabilities that transfer well across markets. In addition to the low cost-to-income ratio the bank achieved serving customers in its home city, it developed distinctive trade finance capabilities that go back to its origins, in 1865, when it began serving the businesses plying Asia's coastal trade routes. The network it built to facilitate trade deals gave it valuable skills for handling cross-border transactions and complex networks. In the late 1980s and the 1990s, this exceptionally strong trade finance network and the operating discipline needed to run a highly efficient retail-banking operation propelled HSBC's expansion into markets such as France, India, the United Kingdom, and the United States. Today HSBC serves nearly 30 million customers in 81 countries and ranks among the world's largest financial institutions.

Samsung: Speed to market

South Korea's Samsung Electronics also used local conditions as a springboard. Despite intense competition from a national rival (LG Electronics), by the mid-1990s Samsung was the domestic market leader in its core businesses: appliances, consumer electronics, and semiconductors. Prodded by very demanding high-tech consumers in the home market, the company built up strengths in product design and operations (Exhibit 2). It also capitalized on synergies between its semiconductor and consumer businesses and had a knack for quickly turning new designs into manufactured products.

Samsung used these skills to build its brand in global markets and to adapt products quickly to suit local tastes. After developing products in design centers in Europe, North America, and elsewhere, the company used highly streamlined processes to launch them en masse from South Korean factories. By 2004, it had annual revenues of more than $40 billion, with international sales accounting for two-thirds of the total.

Transferring distinctive capabilities

Once a company in the emerging world has developed distinctive capabilities, it must learn to move them across markets. This effort—more art than science—should be directed by well-trained executives, not by formula. Only talented people deeply versed in the new country's business culture and in the operating practices of the company can make the trade-offs that preserve its distinctiveness while helping it adapt to local requirements. Companies must support these executives with an organizational structure that allows them to make decisions on the ground, in the new country, without unnecessary hurdles imposed by the head office.

Grooming a global cadre

When companies in the emerging world bring their distinctive capabilities—standards and practices alike—to foreign countries, they must learn which to apply without change and which should be tailored to local realities. No cookbook can guide these decisions. Too many companies assume that they should give precedence to local tastes while adding no more than a bit of their own problem-solving strengths and best practices. Yet companies that have successfully expanded out of a base in emerging markets typically approach globalization from the opposite direction: distinctive capabilities and corporate culture come first, and all subsequent adaptive efforts reflect them.

Thus, to succeed in the wider world, a company must develop a cadre of talented international executives who carry its DNA—core skills and organizational culture—and have experience in diverse markets. A methodical approach to building such a group is more important for aspiring global companies than any tangible asset, such as factories, property, or equipment. After recruiting these men and women, often from business schools around the world, leading global corporations use extensive apprenticeships and formal rotations through a wide range of functions to train them. I can't overemphasize the difficulty companies face in trying to globalize if they don't inculcate new recruits in their own culture and use its distinct values as a unifying force. The best global corporations emphasize unique practices that their executives absorb at a visceral level. One leading business services company, for instance, creates a worldwide culture around its basic values, such as professionalism and collegiality, and the rigorous processes it uses to evaluate and develop talent. It does, however, accept significant leeway in the particulars of interaction with clients in specific countries.

In addition, apprenticeships and rotations help global executives to build internal networks that not only engender mutual trust and shared understandings but also promote the efficient functioning of informal processes and the transfer of knowledge within the company. What's more, these experiences subject budding executives to the management challenges they will encounter moving from country to country. HSBC, for example, puts 400 handpicked international managers through a global-rotation program that trains them to respond quickly and effectively in troublesome situations.

Like some other companies, HSBC has also developed international programs with their own incentive and compensation systems, performance metrics, and opportunities to groom managers for global positions (Exhibit 3). Such programs, which often provide training focused on tolerance and cultural awareness, aim to produce managers who are well versed in a company's distinctive capabilities but flexible enough to deal successfully with novel situations. These managers learn to distinguish the nonnegotiable aspects of a business model from those that can be modified as necessary. Ranbaxy, whose current CEO is British, is one of the companies working to develop this kind of global cadre. Its country managers move to new locations as soon as they are ready to assume larger challenges.

Such effective global managers can give their colleagues in new markets confidence in a company's business model. Any failure to do so is costly. Despite a solid foundation, for example, one Indian consumer goods company was unsuccessful for precisely this reason when it first tried to move overseas. At home, it was highly profitable in a fast-growing business, kept its inventories below global best-practice levels in the face of a fragmented and mostly rural market, and had strong skills in managing a complex supply chain and retail network. Yet when the company tried to globalize through acquisitions, its executives feared that transferring this successful business model to other countries would make local managers revolt. Instead of expanding international business to 50 percent of total revenues, as planned, this company still gets only 20 percent of them from abroad.

Building a global organization

With the right group of executives, a company's coordination processes run smoothly because the participants have mutual trust, and dotted-line reporting relationships work because executives know each other well. They can conduct vital business informally—through social contacts—and job rotations give them a well-rounded perspective on the challenges in a variety of markets. The company avoids entrenched power structures and thus becomes stronger than any group of individuals within it.

Yet all this isn't enough: companies that are serious about globalization must also rethink their organizational structure. No amount of apprenticeship and training will help them succeed internationally unless they give local managers pricing autonomy and the ability to make decisions about reconfiguring products, retail assortments, and the like on the ground. No matter how talented those managers might be, they won't be effective if they must go back to headquarters to get approval for every pricing decision or redesigned product.

To provide that autonomy without losing the crucial glue that keeps business processes functioning efficiently, successful global companies organize their operations on a three-dimensional matrix: businesses, geographies, or functions. Such structures help companies to transfer and adapt their distinctive capabilities seamlessly, to exercise operational control throughout global networks, to capture economies of scale across functions, and to develop global-management career tracks. The first organizational model of the matrix, centering on end-to-end global business units, works best when individual businesses are distinct, share few common operations, and sell to different customers. The second, focusing on national or regional geographic units, is most appropriate if a company—say, a fast-food chain or a retail bank—requires a local supply chain and caters to local customers. The third model is a hybrid of these two; functions such as manufacturing or R&D remain centralized, while others, such as sales and marketing or customer service, are organized by geography.

These three models, when applied appropriately, help globalizing companies to disperse decision making broadly. When Ranbaxy internationalized its business, for example, it redesigned the organization using a hybrid model: it placed R&D in a global unit and other functions in several geographic units, including its home market Indian business. At least in part because of this model, Ranbaxy's managers adopted a global mind-set and began spending a substantial amount of time in their most important market—the United States, where the company has been thinking about moving its corporate headquarters. It already has a listing on the Luxembourg Stock Exchange.

Once companies have a global organizational structure in place, they must connect their units though integrative processes such as supply chain management and strategic planning; otherwise the autonomy that local managers gain can create costly disconnections among units and functions. The Israeli concern Teva Pharmaceutical Industries is an interesting example of how to establish these global links. By the late 1990s, the company faced significant problems coordinating its national units in Israel, Europe, and the United States. Management responded by creating four global-integration units to coordinate key functions—operations, R&D, strategic product planning, and business development—across national units. The senior executives responsible for ensuring global coordination worked with them to develop appropriate processes.

The path from emerging markets to global ones is arduous. Companies must use talent and organizational savvy to translate their distinctive homegrown capabilities across countries and thus to achieve the size, the competitiveness, and the broad market presence required to succeed—and endure—in increasingly turbulent global markets.