To Grow In Emerging Markets, Hit The Reset Button

To Grow In Emerging Markets, Hit The Reset Button

September 2016


The world’s rapidly developing economies are so populous and have grown so fast in recent decades – the BRICs (Brazil, Russia, India, and China) in particular – that many Western companies assumed that all they had to do is show up, plant the flag and the money would just roll in. And for many companies over the course of many years, that’s what happened.

Not so much anymore, however. Having just a well-known brand is no longer enough to win, which means it’s time for Western multinationals to think more strategically, focusing on ways to improve their competitiveness in a crowded and troubled global market.

Make no mistake: Even with the Great Recession, the past three decades provided opportunity for extraordinary growth. Low-hanging fruit was everywhere.

In China, for example, the number of upper- and middle-income consumers exploded, generating hundreds of millions of ready customers for Western brands. From 2013 to 2014 alone BCG has estimated the numbers of Chinese millionaires increased by some 308,000. China also has been minting billionaires at an astounding rate.

And even with the Chinese economy growing at a fraction of its previous red-hot pace, now about 6.5% annually (three times the U.S. rate, it should be noted), most China-watchers expect the number of middle-income consumers to surpass 600 million early in the 2020s – nearly double the total U.S. population. Reduce the numbers and a similar pattern can be seen in India, Brazil and other rapidly developing economies.

Export figures confirm all this. U.S. exports to China exploded – from about $3.9 billion in 1985, according to the U.S. Census Bureau, to some $16 billion in 2000, $92 billion in 2010, and $123.6 billion in 2014. Exports to India jumped from $1.6 billion in 1985 to $21.6 billion in 2014. Exports to Brazil increased from just over $3 billion in 1985 to more than $42 billion in 2014. Sales to Nigeria skyrocketed from $676 million to just under $6 billion. And so forth.

Multinationals headquartered in Western Europe, Japan, South Korea, and elsewhere similarly cashed in.

Imports from some of these countries – China, in particular, of course – also have surged. But that’s one of the reasons for the growth of the middle class: the emergence of low-cost manufacturing hubs.

The days of such rapid growth appear to be ending, however. The global slowdown, combined with rising Chinese labor costs, the collapse of commodity prices, turbulence in the currency markets, political uncertainty, and aggressive competition from local companies, has created a new competitive dynamic. So corporations, if they hope to continue their winning ways, need to hit the reset button and prepare for the economic equivalent of hand-to-hand combat.

This is not the time for multinationals to retreat. As the authors of a new BCG report correctly observe, the opposite is more likely the case: “If anything, it may be a good opportunity for reengagement.”

But this reengagement needs to be focused not only on changes in the external market, but on internal business practices and productivity improvements – in short, on transformation, making operations in developing markets as competitive and productive as those in developed markets.

The authors identify four broad steps companies need to take if they hope to succeed in this regard: Reset strategy to focus on competitiveness; fund the effort by restructuring local organizations to make them leaner and more accountable; make performance excellence a priority; and build the right local team in every market, giving expatriate executives primary responsibility for team building, and giving local executives – many of them still untested – primary responsibility for execution and results.

“We define a transformation as a profound change in a company’s strategy, business model, organization, people and culture,” my colleagues write in Transformation in Emerging Markets. “A transformation is not an incremental change but a fundamental reboot that enables a business to achieve a sustainable quantum improvement in performance, altering the trajectory of its future.”

Growth in emerging markets will continue, they say, “but only for companies that are set up to be competitive and that make growth profitable. In the changing world of emerging markets, this will become the new definition of winning.”

The authors suggest that top corporate executives operating in emerging markets ask themselves the following questions:

1. Do we need some minor fine-tuning of activities in emerging markets or a more fundamental reset?

2. Are the current tradeoffs we make around investments, product portfolios, process excellence and people development still valid?

3. How do we want to approach the transformation of operations to ensure immediate results and a fast global rollout of the program? Making needed transformational changes won’t be easy. But it’s something companies have to do if they hope to survive if not thrive in the global arena.

This article was written by Harold Sirkin from Forbes and was legally licensed through the NewsCred publisher network.

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