Western companies operating in developing economies are in a better position to ride out the recession, as long as they take the right approach and avoid making any of the seven common errors highlighted by Sukhendu Pal.
The rationale for investing in emerging markets is simple: companies from developed countries that invest prudently in emerging markets, regardless of their problems at home, will experience growth in both revenue and profit. They will be better positioned to ride out the current recession, as well as future economic challenges, than those companies who only operate in the developed world. All facts show that emerging markets will play even a greater role, regardless of decoupling or recoupling, and therefore determine the fate of many large companies in the developed world.
However, growing businesses successfully in emerging markets requires considerably more than just tweaking a domestic market strategy. Working with CEOs of large companies in Europe and the US, Centrix Consulting has witnessed many attempt to take a shortcut to new markets either by applying their domestic formula or entering into a partnership of convenience. Typically, however, this is not the route to long-term success.
Entering emerging markets will require most CEOs to leave their comfort zone and tackle the big challenges of unfamiliarity and complexity.
Research by Centrix shows a remarkable emerging market growth story, driven primarily by the gradual opening up of markets in Brazil, Russia, India and China. Emerging markets recorded a combined annual growth rate of 5.5% over the past two decades, while the developed markets grew by 2.3%.
The combined foreign investment into emerging markets is hundreds of billions of dollars every year. According to the World Bank, India attracted $27.3bn-worth of FDI in the past year, while China is expected to pull in $130bn in 2009. Emerging markets have enjoyed a period of high productivity growth too. Even in the current recession, Chinese and Indian labour productivity is estimated to grow by 9.1% and 7.6%, respectively. The combination of a highly productive labour force with more capital flow is the reason for Centrix’s confidence in future growth within emerging markets.
The seven deadly sins
How should companies from the developed world benefit from investing in emerging markets and how can they avoid disappointment? Centrix found that most companies commit at least one or more of the following sins:
- Failing to implement a global strategy. Many CEOs find the idea of a distributed operating structure discomforting. While some CEOs understand its importance, they consistently underestimate the value creation potential of emerging countries. The assumptions persist that emerging countries do not represent viable markets because their consumers cannot afford to buy expensive products. However, household spending in Asia alone is estimated at $162bn in 2009, offsetting the plunge in spending in the US and Europe.
- Thinking emerging markets are too risky. Senior executives tend to underestimate the skill base and talent in the emerging countries on the grounds that potential employees lack the education and training to meet standards of the US and Europe. They also grossly overestimate the prevalence of corruption, quality flaws and risk in the supply chain when sourcing from these countries.
Old operating models. The model for global operations is based not on the traditional priorities of home, but on the future needs of the marketplace and on locating work wherever it can be conducted most profitably.
When it comes to crafting a global operating model, most CEOs make two flawed assumptions: first, that the main challenge is to strike the balance between economies of scale and responsiveness to local conditions, and second, the more emphasis they place on scale economies, the more global their operating models will be.
Successful companies have found significant opportunities for value creation in exploiting, rather than simply adjusting to or overcoming the differences they encounter at the borders of their various markets.
As a result, value chains of successful companies can be seen spanning multiple emerging countries, including the giants – China and India. It is easy to spot the advantages of treating China and India synergistically but only the smartest succeed in leveraging value from both.
Unable to break out of the marginal mindset. Consider a well-established pharmaceutical company, which has an annual growth rate of 26% in emerging markets and only 3% in developed markets. Already 16% of its revenues and 20% of its profits come from emerging markets and those percentages are increasing every quarter.
The company aspires to sell its medicines around the world, but its actions tell another story. Its centre of gravity remains in North America and Europe. That is where 90% of the company’s assets are located and where 99 of the top 100 senior executives grew up. These executives have lived their lives in developed markets; at work, they implant a European to head China and India when there are enough qualified local candidates; they all share a similar logic in the way they make decisions. It is no surprise that they think of developed markets and emerging markets as
distinct from one another, and they do not have a structure or a strategy to integrate them.
- Not keeping an open mind. Senior executives planning to enter or who have entered emerging markets mainly talk about labour arbitrage and increasing sales opportunities. But do these factors alone ensure their companies’ success? Hardly. In order to succeed, these senior executives must learn to learn – and that may involve some un-learning. Learning to learn is a core skill that helps a company to move up the value curve.
- Failing to manage top talent. Most companies that enter emerging markets still struggle to fill key positions, putting a considerable constraint on their potential growth. Today, top talent is not confined only to Boston, London and Stockholm; the right skill sets can also be found in Beijing, Bombay, Bangalore and Shanghai. That is why dated leadership development processes in most companies now carry a huge cost.
Not leading from the top. As we examined the journeys of 20 companies in emerging markets over the past five years, we were struck by one commonality among the successful ones: moving from a developed to an emerging market was always led from the top. In each and every case, the successful companies had leaders who drove them relentlessly up the value curve.
These CEOs shared three common traits: first, their commitment to create a truly global company was rooted in an unshakable belief that their company would succeed no matter what. Second, they never believed that entering the emerging markets would reduce their bonuses and compensations. And third, as their businesses expanded, they all showed a remarkable openness to new ideas.
Sukhendu Pal is the managing partner of Centrix Consulting, a business strategy consulting firm based in Newbury, England.
Embracing the emerging market challenges
In tough economic times, smart companies always find ways to grow and become market leaders. Entering emerging markets requires that CEOs leave their comfort zone. The biggest challenges will be unfamiliarity and complexity.
- Do not rely on just one source of advantage, such as cheap labour. Build your brand, increase your distribution channels, rekindle innovation and customise your products to unique markets.
- Recognise talents, no matter where they come from. Integrate assets, resources and diverse and talented people around the world in all your operating units.
- Start with ambitions that are far bigger than your current resources and capabilities, and create an obsession with winning at all levels.
- Being a leader requires more than ‘business as usual’. It requires investments in emerging markets, which will define your future. Failing to learn from the opportunities in the EM will not help a company to weather the recession or stay competitive for long.
- Short-term thinking got us into this financial mess and long-term investments that benefit all the stakeholders will lead us out of it.
- Be prepared to learn, even when you think you know everything you need to.