Reinvent business approaches for emerging markets
By Gary C Coleman
EMERGING ECONOMIES ACCOUNTED for more than half of total world GDP in 2005.
A recent emerging markets study by Deloitte's Global Manufacturing Group confirms that growing the top-line is the number one reason for investing in developing economies such as China, India, Southeast Asia, Latin America, and central and eastern Europe over the next five years.
Despite the size and remarkable growth of emerging markets, a surprising number of companies fall short of their goals in these countries. Indeed, less than half of the more than 440 executives surveyed by Deloitte's Global Manufacturing Group said their companies had been extremely or very successful either in meeting their operational goals or revenue goals in emerging markets.
What is preventing many companies from fulfilling their goals? Most likely, it is because business complexity continues to increase and it's a daunting task to manage emerging market operations. To drive revenue growth and increase efficiency, companies are developing innovative products that meet the needs of new and growing markets. As a result, they are moving higher-value activities such as complex production, research and development, and sales operations into emerging markets. The result is a complex global business network in which companies are designing, supplying, building, selling, and distributing everywhere around the world.
Adapting to this rapidly changing global business network requires companies to reinvent their business approaches to emerging markets. A firm cannot simply take its North American, German or Japanese business model and move it to Russia, India 'Jf China and expect it to be just as successful there. It's not a case of duplicating what works in a developed market; it's a case of building what will work in a specific emerging market. Understanding local culture and local economics in any market where you do significant business is critical for a company's long-term sustain ability and profitable growth.
To achieve success, companies should:
¬∑ Acquire an entirely new set of skills and organizational structures
¬∑ Provide autonomy at the local market level while leveraging the strengths of company headquarters
¬∑ Develop and produce products at costs that meet the unique needs of customers with much lower per capita GDP.
Notwithstanding the challenges that emerging markets pose, some companies are successful. for example, 29% of executives surveyed said their companies produced higher profit margins in emerging markets than developed markets. Customizing products appears to be one reason - two-thirds of these companies offered products in emerging markets that were different from those they sold in their home markets.
This kind of success requires an intense focus on aligning operations with the unique requirements of emerging markets. Three key operational areas are talent management, risk management, and operating models.
Talent management: Historically, companies opted to locate in emerging markets mainly to tap into a low-cost labor force. As companies shift more sophisticated activities to these markets, they are fighting over a much smaller pool of highly skilled workers to staff these operations. As a result, both labor costs and turnover among highly skilled workers are increasing rapidly, making retention ever more difficult. To win this war for talent, companies need to customize their human resources policies to local realities, while also recognizing that it may not always come down to offering the most money. In China and India, for example, training was cited as an important human resources strategy even more often than compensation. In Southeast Asia, by contrast, rewards and recognition was named most often.
Risk management: While emerging markets are brimming with opportunities, they are also fraught with risk. These risks include in many locations weak intellectual property protections, uncertain political environments, corruption, and complex legal and regulatory regimes, to name but a few. Success in emerging markets requires an eflective approach to managing these threats, including employing a variety of risk management strategies.
Yet overall, onlv half of executives surveyed by Oeloitte's Global Manufacturing Group said their companies conducted a detailed risk assessment before entering an emerging market or on an ongoing basis after the\ ha\'e established operations.
To effectively navigate these markets, it is critical that companies scrutinize all the hazarcb the\ face, integrate each of their assessments into a single, comprehensive view, and engage their employees b\ making risk management a deeply rooted part of the culture.
Operating models: Some companies seek to provide autonomy at the local level - to gain local knowledge and respond quickly to opportunities - while leveraging the strengths provided by headquarters, sllch as good governance and management expertise. There's a need to strike the appropriate balance between the efficiencv offered by a centralized structure and the nimbleness that more decentrailzed decision-making allows.
A joint venture or third-party arrangement is common when companies first enter an emerging market. As they gain experience, more form wholly owned subsidiaries, which give them greater control and allows for quicker decision-making. Deloitte's Global Manufacturing Group's research found that companies that used newly-created entities were more likelv to say they had been successful in achieving their operational goals than those that didn't use this approach.
GARY COLEMAN IS THE GLOBAL MANAGING DIRECTOH rOR THE MANUFACTURING INDUSTRY GROUP OF DELOrITE TOUCIIE TOI!MATSU. FOR A COPY OF THE "INNOVATION IN EMERGING MaRKETS 2007 ANNUAL STIJDY",