Emerging Market Success Elusive for Global Companies
Global manufacturers once regarded emerging markets primarily as low-cost locations for routine operations. Now, attracted by enormous business opportunities and often encouraged by government policies, more and more manufacturers are locating higher-value activities such as complex production, research and development, and sales/marketing operations in these rapidly growing economies. As manufacturers shift more of these more sophisticated functions into emerging markets, however, they are encountering enormous operational challenges. Indeed, a surprising number of companies fall short of achieving their goals in these markets, according to recent research from Deloitte. The 2007 study found that less than half of the executives surveyed said their companies had been ‘extremely’ or ‘very’ successful in meeting either their operational goals or their revenue goals.
What is preventing so many companies from fulfilling their goals? Most likely, it is because business complexity continues to increase and because managing emerging market operations is a daunting task. To drive revenue growth, companies are developing innovative products that meet the needs of these new and growing markets. But as they locate more sophisticated activities in emerging markets, companies will need to rethink their business approach. They need to tailor their talent management strategy to each market, and go beyond competitive compensation by placing more emphasis on training, non-monetary rewards and recognition, and career opportunities. They must manage effectively a more complex set of risks. And they must install an organizational structure that lets autonomy thrive, while still leveraging strengths from headquarters. In fact, the study found that manufacturers that take these steps are more likely to be successful.
The tremendous opportunities offered by emerging markets make solving these operational challenges worth the effort. In 2005, emerging markets accounted for more than half of world GDP measured at purchasing power parity (which takes into account differences in the relative prices of goods and services).1 Their share of world exports is now 43%, up from 20% in 1970, and they consume more than half the world’s energy.2
They are also growing rapidly. While GDP in developed economies expanded by an average 2.3% annually over the past five years, annual growth in emerging markets has been almost 7%.3The Economist magazine predicted, “China, India and other developing countries are set to give the world economy its biggest boost in the whole of history.”4
As a result, companies are now operating complex global business networks in which they are designing, supplying, building, selling, and distributing everywhere around the world. Among the executives surveyed, 59% said their companies had operations in China, while more than one-third had operations in eastern Europe, Southeast Asia, and Latin America. Not surprisingly, larger companies – those with US$1bn or more in annual revenues – were even more likely to be operating in these locations. More than three-quarters of these executives said their companies had operations in China, and roughly half or more reported having operations in each of the other markets.
Even more executives expected their companies to increase their investment in the coming years. In each of the emerging markets examined, approximately three-quarters of executives anticipated their companies would establish or expand sales/distribution operations over the next five years. And 82% of executives expected their companies would establish or expand production operations in China over the next five years, while roughly half said the same about India, Southeast Asia, Latin America, and eastern Europe (see figure 1).
The study makes clear just how much executives’ views of emerging markets have evolved. Instead of simply seeing these markets as low-cost production hubs, companies now regard them as new markets for their products and as sources of innovation. Consider that the top-rated reason for investments in emerging markets, even more so than cost reduction, was to increase revenues and market share – rated as extremely or very important by 84% of executives. Reducing time-to-market, diversifying revenues sources, and accessing talent were other factors rated highly (see figure 2).
Seizing this wider range of business opportunities requires companies to rethink their approaches to emerging markets. In many cases, they will need to acquire an entirely new set of skills, processes, and organizational structures. Just as it is critical to produce products that meet the unique preferences of customers in each market, it is equally important that companies adjust their business processes and operational approaches as well. An executive at a large US-based manufacturer notes: “You cannot simply take a North American version of a business practice, move it to China or India, and just flip the switch. It won’t work.”
Although some approaches are proving to be more successful overall, each manufacturer should craft an operational approach tailored to its specific situation. How a company addresses issues such as talent management or risk management will depend critically on its industry, specific products, and the nature of the operation or process. Clearly, it also depends on the characteristics of the individual emerging market including the labour market, risk profile, nature of sales/distribution, government regulations and incentives and culture, to name a few. These issues not only vary from country to country, they can also vary within a single market. For example, with foreign investment concentrated in a few locations, there is a wide variation in the labour markets in different locations across China and India.
The report also examined executives’ attitudes toward three key operational challenges in emerging markets areas: risk management, talent management and operating models.
Perhaps the most interesting finding is the broad lack of rigorous and ongoing risk management strategies used by global companies of their operations in emerging markets. Just 56% of all executives polled conduct a ‘very rigorous ‘ risk assessment before opening a satellite office, a research-and-development lab, or another business operation in a developing nation. Only 45% of those stated that their companies continued to perform ‘very rigorous’ risk assessments regularly, after establishing a presence in an emerging market. Given that emerging markets, while brimming with opportunity, are fraught with risks – risks to intellectual property, geopolitical risks, underdeveloped infrastructure, to name a few – this is somewhat surprising.
Indeed, the companies that did complete a risk assessment appear to have done so because of those factors. More than three-quarters of executives reported they analyzed legal and regulatory risks, 76% assessed risks to their supply chain, 72% risks to business continuity, and 64% intellectual property risks. Perhaps not surprisingly, 86% of the companies that did perform regular risk assessments reported that they are ‘very confident’ in their abilities to manage such issues.
Acquiring, retaining and developing talent is another critical issue for companies operating in emerging markets. One-fourth of the polled executives stated that attracting qualified workers is ‘very difficult’ in China, India, Latin America, and eastern Europe, and one-third stated that retaining them was ‘very difficult’, mainly because there is a great deal of competition among multinationals for a still relatively shallow pool of talent. In most markets, executives reported the greatest difficulties in attracting more highly skilled workers such as managerial, R&D and sales/marketing personnel.
As a result, both labour costs and turnover among highly skilled workers are rapidly increasing, making retention ever more difficult. To win this war for talent, companies need to customize their HR policies to local realities while also recognizing that it may not always come down to offering the most money. In fact, the report reveals that companies that use rewards and recognition and training, as well as compensation and benefits, as important human resource (HR) techniques were more likely to be successful in achieving their operational goals in emerging markets. For example, 73% of the companies that used rewards and recognition as an important HR technique said they were extremely or very successful in achieving their operational goals, compared to 51% who did not consider this an important technique.
Take AstenJohnson, a mid-sized US-based manufacturer of specialty fabrics and drainage equipment. It spreads out bonuses throughout the year in its Chinese facility instead of one lump sum at the end of the year – to keep employees from leaving.
Although companies often begin in an emerging market with a joint venture or third-party arrangement, the study reveals that, as they gain experience and become more comfortable, more are moving towards using newly created, wholly owned subsidiaries – known as ‘greenfield’ investments – as their operating structure. Companies that have adopted this operating structure appear to be finding greater success in meeting their operational goals. In addition, companies are looking to provide more autonomy at the local level – to gain local knowledge and respond quickly to opportunities – while leveraging the strengths from efficient global business processes and management expertise provided by headquarters.
Sixty-five per cent of executives at companies that deployed this strategy rated their ability to meet their operational goals as ‘extremely or very successful’. This approach appears to be particularly popular in China and Latin America – roughly two-thirds of companies surveyed preferring a newly created operation in those markets.
Clearly, just as the role of emerging markets in the global value chain is constantly changing, so too must the strategies for success in these intensely competitive markets. To achieve their goals, manufacturers will need to align their operations with the unique requirements of each location where they operate. Companies that gain a deep understanding of the local realities in each emerging market, and then strike the right balance between efficient global processes and responsive local operations, will be best positioned to prosper.
1“The New Titans,” The Economist, September 16, 2006.
2 Ibid.
3 Ibid.
4 Ibid.