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					              Emerging markets
Best practice for business during the crisis
                and beyond

               By Nenad Pacek and Daniel Thorniley
   Authors of:“Emerging Markets: Lessons for Business Success“
           Contact: office@ceemeabusinessgroup.com

                          March 2010
                               Contents

•   The big themes of success 1-10
•   Rise of emerging markets and looking for growth 1-2
•   Competitive environment is changing and getting tighter
•   Why emerging market firms are hard to compete against?
•   As competition heats up ...
•   Some emerging market facts 1-2
•   Scale of business in emerging markets
•   Principles for outperforming competition in emerging markets 1-7
•   During tough times ... 1-4
•   Our advisory services
               The big themes of success (1)

• Developed markets are usually big volume, low growth of about 1-4% top
  line
• Emerging markets are usually low(er) volume and fast growth (although
  their volume is now interesting)
• The two points above are very straightforward but many CEOs and Boards
  draw the wrong conclusions from this simple contrast
• Companies should not use in the emerging markets the same, often
  defensive, business techniques that they employ in the West
• The trick in emerging markets is not to raise market share by 0.001% and
  then throw a corporate party as one does in the West but raise it by 3-5-
  10% !
• Companies need to be flexible, adaptable, intuitive and quick
• We do want HQ to assist in governance and ethics but we don’t require
  heavy, bureaucratic approaches to market which do not suit local needs
               The big themes of success (2)

• Do not get fixated with central office KPIs
• Spend more time getting to know customers/clients face to face
• 500 KPIs on a computer do not mean you know your customer on the
  ground
• Build relationships and nurture them in the bad times as well as good ones
• Any company can be a great company when the sun is shining
• The real test is how you behave when it’s raining outside !
• Don’t cut costs too deep that you damage relations with customers
• Don’t cut costs too deep that you damage relations with suppliers
• And don’t cut costs so deep you damage relations with your in-house
  talent
               The big themes of success (3)

• More and more executives have learned in this crisis that you have to keep
  your best HR for the future pick-up
• Do not back office sales and marketing
• Companies will create clusters in emerging markets and you can back
  office tax, legal and even the HR function but not sales and marketing
• These have to be local or/and glocal
• A major threat is when global headquarters sees that you have some glitch
  in your emerging markets operations and then they say, “Don’t worry,
  we’re going to come to help you”! When you hear those words, you may
  consider early retirement !
• Too often central, purely global marketing, IT, reporting, KPIs, structures,
  approach to market, do not work in emerging markets
              The big themes of success (4)

• Companies will want to commoditise to get products and services out to
  customers quick, fast and cheap to enhance corporate profits --- this is
  normal
• But remember the very old cliché that the “customer is king” and now
  he/she is king/queen for sure
• Increased global competition, price competition, price transparency on
  the internet all mean that the new global emerging market customer can
  pick and choose from western and local products and services
• Companies have to adapt product and price to the rising emerging market
  middle class and even more so to the lower-lower middle class or the
  aspiring working class
• The big theme of the next decade is: innovation downwards or affordable
  innovation
               The big themes of success (5)

• Western companies are very good at selling expensive products at high
  prices to rich people. That’s what they do well and they make good profits
  that way and can promote their global brands. It’s quite easy in some
  ways.
• This means all the western companies are competing at the top end of the
  market segment. They are all trapped together at the upper 1-3-10-15% of
  the market
• But the market of the future is the lower-lower middle class in the
  emerging markets. This is where corporate growth will come from in the
  next 3-5-10 years
• Many companies already have tiered offerings and especially the global
  FMCGs
• Those companies who do not, will have to go this route and those that
  already do have several different-priced brands will have to introduce
  more
               The big themes of success (6)

• This will entail a new approach to market: marketing, advertising and sales
  will have to adapt
• It does not just mean selling cheap rubbish, to cheap people at cheap
  prices in order to damage your margins.
• It entails finding the right balance between moderate quality (fewer
  inputs) and lower price so that volume sales can rise. This has to be done
  in such a way as not to ruin the premium-end of your business. It is easy to
  write about and to recommend it but challenging to get the
  implementation right.
• When you get the balance correct, the increased volume sales
  compensate for the lower prices
• As one Swedish Board chairman said, “It requires an entirely new way of
  thinking in your approach to the market and customer” and he’s right.
               The big themes of success (7)

• In normal times and during this crisis, the debate revolves around volume
  or price
• As currencies devalue and/or sales tumble, do you compensate by jacking
  up prices sharply?
• There is no clear-cut answer but usually global HQ wants to raise prices
  sharply to protect profit margins while local managers look more at
  volume. There is no black and white solution but never throw away
  market leadership just because of price.
• This debate relates also to another key factor: market share
• The key to business success in emerging markets is and will be capturing
  market share
• More and more executives talk about this theme globally and certainly
  within CEEMEA
               The big themes of success (8)

• Gaining market leadership takes so much time, effort and money that to
  cast it away to gain some quarterly results is tragic
• Market leadership also gives dominance in dictating the terms on volume
  or price, which takes us logically to the next point: relations with
  distributors and suppliers
• Another key success factor in emerging markets is developing the
  relationship with the supply chain and this crisis has actually proven an
  opportunity
• Several companies report that they supported distributors and this
  enhanced their market share when some other companies refused to help
• Remember: it’s easier to grow market share when you already have
  market leadership: you are in the driving seat
• This kind of attitude echoes our remarks about relationships: partners in
  emerging markets remember who treats them well
               The big themes of success (9)

• As one US industrial company operating in emerging markets said about
  the crisis, “We are all doing the same things: managing working capital,
  cash is king, looking for cost cuts and releasing some staff. No one does
  anything different during crises”.
• While some companies do try to “never waste a crisis” and to find benefits
  from it and while some look to acquisitions, the majority of companies do
  resort to the standard approach. There is little blue-sky thinking
• In good and bad times in emerging markets companies do need to think
  out of the box but quarterly reporting to financial markets hampers them
  and stops them listening to their “gut feelings”
• It is recognised that the best performing companies in emerging markets
  are family-owned ones. The owner/chairman can take a longer term view,
  take more risks and does not have to justify himself every 12 weeks to the
  markets
             The big themes of success (10)

• There are several key conclusions to draw from the above comments and
  we develop them in following slides but as a summary in emerging
  markets in good and bad times try to do the following:
• 1) Give as much scope and autonomy to the local team – they know the
  local environment and how to play in it
• 2) Nurture your local staff and talent and build them for the future
• 3) Work closely and seek to help as much as you can your local supply
  chain: distributors, wholesalers and retailers
• 4) Try to balance price and volume and never give away market share
• 5) Don’t cut too deep, think of what you will need in just a few months
  time
               Rise of emerging markets and
                   looking for growth (1)
• Corporate consensus is clear: sales growth will come from emerging
  regions rather than developed world in the next 5-10 years
• Emerging Asia, Latin America, MENA, parts of CEE have better economic
  fundamentals (less public debt, and more reserves than WE, USA and
  Japan) – their relative economic power vs. developed world will continue
  to rise
• Global HQ likes all emerging markets providing they are called China ! (or
  “Chindia” i.e. China and India)
• Getting other markets on the corporate radar screen is a growing
  challenge for executives in parts of Ceemea
              Rise of emerging markets and
                  looking for growth (2)
• This applies especially to the CEE region and Russia with the question
  being asked, “Should we take the letter R out of BRIC”
• But the CEE is and will be a key European growth market again
• GDP per capita is much higher in CEE than in Asia
• The same applies to sales per capita
• CEE can be very profitable relative to other markets
• If your company ahs a European strategy and it does, then CEE and Russia
  cannot be ignored or neglected
• Those companies who make the clever investments now will gain more
  market share in the coming years
     Competitive environment is changing and
                  getting tighter
• In search for growth, multinationals will be putting even more focus on
  emerging markets in the next years – they will be more systematic
• At same time, there is a growing number of companies originating from
  emerging markets that are not only strong local players, but fast becoming
  relevant regional and even global players
• In China alone, there are 700 companies with global ambitions
• Chinese activity is clear in Africa but also in several sectors of CEE markets
• Chinese companies are not only targeting FMCG markets but industrial and
  IT ones as well and going the private equity route
       Why emerging market firms are hard to
               compete against?
•   Margin objectives are often different
•   Quality is rising of products and services
•   They are good at competing in lower price segments
•   They are also eyeing higher price segments and investing more in R&D
•   Prices are competitive
•   They tend to have faster decision making and more flexibility
•   Their compliance standards are often looser
•   They often copy-cat products and marketing from incumbents
•   They can poach best staff and do not worry about global pay scales
                  As competition heats up...

• Multinationals should be aware of some of the following facts
• In the last 25 years, 60% of Fortune 500 companies have disappeared from
  the list
• Emerging market multinationals already constitute 10% (and rising) of the
  Fortune 500 list
• If history is a guide and if we add to that the new competitive dynamics, it
  is likely that only about 40% of companies on the current Fortune 500 list
  will survive on the list by 2030
• Those that disappeared from the list in the past and those that will
  disappear in the future have one thing in common – they were and are
  driven by short-term management of the bottom line
            Some emerging market facts (1)

• Some 75% of world’s foreign exchange reserves are in emerging markets
• More than 80% of world’s population live in emerging markets and
  population is growing by 6m people every month (vs. 300,000 in the
  developed world)
• Emerging markets today buy half of the world’s exports and consume half
  of world’s oil
• They export almost half of the world’s exports
• Emerging markets will grow 3x faster than developed world in the next
  decades
            Some emerging market facts (2)

• Today they account for 50% of world GDP (at purchasing power parity) --
  this will rise to 60% in 15-20 years
• Any multinational company that generates 1/3rd of its global revenue in
  emerging markets has broadly done a good job in international expansion
• Any company below that percentage has probably underinvested in
  emerging market expansion and has not captured all available sales
  opportunities (this varies by sector though)
• Any company whose CEE revenue is below 5.5% of global revenue has
  under-penetrated the CEE region
• For MENA the benchmark is 2% of global revenue and for Sub Sahara
  Africa 1%
        Scale of business in emerging markets

• The major western consumer products and food companies generate 25-
  35% of their global sales from emerging markets (2007-08)
• Philips takes 33% of sales form emerging markets and wants to raise this
  to 50% by 2015
• These companies expect these markets to account for 33-45% of global
  sales in the next 3-6 years
• Industrial companies are also heavily engaged with ABB taking 55% of
  orders from these markets, Renault 33% with a goal of 50% by 2015
  (similar to Philips targets)
• Schneider Electric and Siemens also generate a third of sales here while
  the Man Group males 25% of sales in emerging markets and Air Liquide
  15%
    Principles for outperforming competition in
                emerging markets (1)
• Forget about quarterly earnings – this false obsession has destroyed more
  companies and growth initiatives in emerging markets than any other
  (easy advice to give, but hard to get through the corporate system)
• CEOs should not say to regional directors and regional directors should not
  say to country managers the following:
  “I will give you more resources when you prove there is more business
  there”.
• Do not take market leadership for granted – systematic brand building
  supported by real money is irreplaceable
• Strong local presence is key to achieve customer intimacy – do not rely on
  distributors only
                  Principles continued... (2)

• Keep emerging market regions separate from developed regions in your
  corporate structures
• This is because someone who is running large volume, low growth
  business (developed world) has little time to focus on lower volume,
  higher growth business (emerging markets)
• Another reason for keeping developing and developed regions separate is
  avoiding cost cuts in emerging markets simply because results in the US or
  UK are bad
• Give more decision making power to country managers and make them
  accountable for results
                  Principles continued... (3)

• Make sure you have strong regional geographic leaders who lead
  expansion for multiple business units (together with global business unit
  heads)
• Try to avoid only the global heads of business units having a total say in
  how geographic expansion takes place – the regional geography head is of
  utmost importance
• Make sure your CEO and corporate officers are really committed to
  emerging markets (this entails upfront investment without expectations of
  quick returns)
• Do not test new markets for too long – you are exposing yourself to
  domestic and international competition
                  Principle continued... (4)

• Make sure your product/service portfolio matches the needs of local
  customers
• Keep innovating in a traditional upward way, but to meet the needs of
  local customers you must also innovate downwards and serve various
  market segments
• If you do not want to launch new products/brands for new market
  segments, consider acquisitions
• But make sure you do proper due diligence and understand everything you
  will have to do during restructuring
                 Principles continued... (5)

• Understand that once customer moves to cheaper product with
  acceptable quality, it is hard to move him back to premium again
• Do not underestimate the value of personal relationships and time and
  cost it takes to build them
• Do not panic and pull out during economic crisis and other market
  setbacks (unless we are talking wars) – crises come and go and you want
  to stay focused on long-term, profitable market share build up
                  Principles continued... (6)

• Make sure your senior management travels to emerging markets to
  understand opportunities but also realities and risks
• Show them Tverskaya Ulitsa in Moscow but that will make your CEO treble
  your budget, so take him/her to a local village 30 kilometers away to see
  people living in their basic wooden dachas
• Nurture and encourage creativity and different opinions of your staff on
  the ground – only such companies can be future winners
• Nurture this local management
• Build government relations everywhere you go
                  Principles continued... (7)

• Do not let distributors drive your brand building and other marketing
  activities
• Keep sharing experiences and best practices within the organization on a
  regular basis
• Avoid joint ventures – consensus is that they take more time than they are
  worth
• Make sure your product is available everywhere – do not just focus on
  major cities
• Never insist on absolute certainty when planning emerging market
  business and be aware that demand is more volatile and often hard to
  explain
                  During tough times... (1)

• Change reward systems to award managers who build market share
• History shows that companies that outspend competitors on marketing
  during the crisis come out stronger when the crisis is over
• Companies that keep innovating during the crisis also come out stronger
  when the crisis is over
• Go even closer to customers and distributors during tough times –
  understand them and support them
                  During tough times... (2)

• When cost cutting, first pay attention to accumulated fat which was
  hidden during good times (things such as processes, structures, back-
  office inefficiencies, weak performers) – trim only unnecessary fat and
  stay focused on opportunities that economic upturn will bring
• Do not cut costs in emerging markets with opportunities just because US
  or WE business might be bad
• Do not let the crisis move you away from long-term strategy
• Avoid knee-jerk reactions
• Consider acquiring distributors, land and competitors
                   During tough times... (3)

• Look at everything you do from unusual angles – encourage staff to think
  out of box to find solutions
• Get locals in emerging markets to find solutions and give them more
  responsibility – they are more used to tough times than managers from
  the developed world
• Act as a bank for a while or help distributors if he can‘t get financing to
  buy your products – he will be more loyal in the future
• Focus on retaining best staff
                   During tough times... (4)

• Be careful about cutting sales force in the crisis
• Further improve communication to the headquarters and constantly
  explain that the crisis is an opportunity
• Price increases should be gradual – during the crisis it is more important
  to preserve markets share, goodwill of customers than preserve the profit
  margin
• Explain to management that focus on margins during currency
  depreciations is counter-productive to long term strategy
• Even in crisis, countries are different so take that into account
                     Our advisory services

• If you need any assistance with your emerging market strategy and
  planning, please do not hesitate to contact us.
• We can come to you in-house to evaluate your emerging market strategy
  and assist you with best practice understanding and implementation
• We can also help you prioritize markets for your next medium term plan
• As ever, if you need any in-house presentations to your CEO or regional
  teams, please let us know
• You can contact us at office@ceemeabusinessgroup.com
                         Disclaimer, sources, copyright


•   Disclaimer: This material is provided for information purposes only and it has been
    researched to the best of author‘s and company‘s ability. It is not a recommendation or
    advice for an investment or commercial activity whatsoever. GSA Global Success Advisors
    GmbH and DT-Global Business Consulting GmbH accept no liability for any commercial losses
    incurred by any party acting on information in these materials.

•   Sources: Nenad Pacek and Daniel Thorniley from „Emerging Markets: Lessons for business
    success and the outlook for different markets“, GSA Global Success Advisors GmbH research
    and DT-Global Business Consulting GmbH research.
•   Copyright: Nenad Pacek and Daniel Thorniley (text copyright „Emerging Markets: Lessons for
    business success and the outlook for different markets“, GSA Global Success Advisors GmbH
    and DT-Global Business Consulting); 2010

				
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