Transformation in Emerging

Markets
From Growth to Competitiveness
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Transformation in Emerging
Markets
From Growth to Competitiveness

Christoph Nettesheim, Lars Fæste, Dinesh Khanna, Bernd Waltermann, and

Peter Ullrich

February 2016
AT A GLANCE

The performance of multinational corporations in emerging markets is increasingly

challenged by multiple macroeconomic, market-based, and competitive factors.
Companies now have to focus much more on enhancing their competitiveness with
rapid and constant productivity gains.

The Need for Transformation...

Shifting the focus from growth toward a combination of growth and productivity
requires changes in both strategy and execution. It also usually requires a shift in
mind-set about accountabilities, processes, and governance. Many MNCs will need
to undertake a fundamental transformation in their principal emerging markets.

...to Improve Local Operations’ Competitiveness

MNCs must rethink their targets, restructure their organizations, work on process
excellence, and strengthen the accountability of local managers.

Getting Started—One Country at a Time

Companies should start emerging-market transformations in one local market to
develop a robust methodology for subsequent rollouts. They should avoid the
temptation to centralize and standardize too much.

2 Transformation in Emerging Markets

E merging markets have driven growth for many multinational corporations
(MNCs) for years, and they will continue to do so. But these are turbulent times
as commodity prices plunge, currencies are devalued, and equity markets gyrate.
The profitability of many MNCs’ operations is already under attack, and future
performance will be challenged by slower macroeconomic growth, increasing costs,
and heightened competition from local companies, which are rapidly gaining scale,
experience, and capability. To reduce these pressures, companies will have to focus
much more on improving their competitiveness through constant productivity
gains.

Most MNCs have emphasized growth in emerging markets at the expense of other
metrics, such as operating margins. Shifting the emphasis to include profitability re-
quires implementing process discipline, leveraging scale, and instituting behaviors
that focus on constant efficiency gains. Such changes are not easily achieved. For
many MNCs, a fundamental transformation will be necessary, executed market by
market.

The Changing Nature of Growth and Competition in Emerging

Markets The performance of
For years, the BRICS (Brazil, Russia, India, China, and South Africa) were synony- MNCs will be chal-
mous with broad-based, rapid growth. Not anymore. Data for 2015 from Oxford Eco- lenged by slower
nomics shows China’s GDP growth slowing to 6.5%, South Africa eking out a per- macroeconomic
centage point or two, Brazil flat, and Russia actually contracting. Growth in other growth, increasing
emerging markets, especially those with commodity-dependent economies, has costs, and heightened
slowed as well. competition from
local companies.
The economics of emerging markets are also becoming more challenging. China is
losing its cost competitiveness in exports thanks to rising labor costs, as well as
higher energy costs than those in countries such as the U.S. and Mexico. China has
plenty of company: the cost advantages of Brazil, Russia, Poland, and other coun-
tries are also diminishing.

Despite the slowdown, this is certainly not the time for MNCs to retreat; if anything,
it may be a good opportunity for reengagement, as we have observed before. (See
“Time to Reengage with, Not Retreat from, Emerging Markets,” BCG Perspectives,
May 2014.) Some 300 million additional households will enter the consuming class
in emerging markets during this decade. The populations of less developed coun-
tries are still growing four times faster than those of their developed counterparts:

The Boston Consulting Group 3

 by 2020, 6.4 billion people (out of 7.5 billion worldwide) will be living in emerging
markets. These economies will add more than 600 million urban dwellers between
now and 2020. An increasing number of free-trade agreements will help contribute
to sustainable economic growth. Still, these markets present big challenges for
MNCs—the biggest having to do with competition, costs, and shifting relationships
with key stakeholders such as employees and governments.

Competition. Most MNCs now face a fast-rising number of agile and aggressive
Most MNCs now face local competitors that are winning share in many industries. The number of compa-
a fast-rising number nies in Asia with more than $1 billion in annual revenues jumped sixfold to 1,015
of agile and between 2003 and 2013 and doubled in Latin America, Africa, and the Middle East
aggressive local to a total of almost 700. And these are not only companies making simple low-cost
competitors that are products or commodity components; many are in sophisticated segments of the
winning share in engineering and manufacturing sectors. For example, emerging-market-based
many industries. companies now control between 30% and 80% of the global markets for rolling
stock, onshore wind-power equipment, coal power-generation equipment, wireless
telecommunications equipment, and photovoltaic equipment. Their competitive
prowess is typically rooted in three factors: a significant cost advantage owing to
small overheads, lower wages, and lower R&D costs; a deep understanding of local
markets and strong relationships with local stakeholders, including both customers
and suppliers; and a nimble and aggressive corporate culture, which enables quick
decision-making and significant risk-taking.

As the search for growth pushes many MNCs into middle markets in emerging
economies—where they seek new middle-class consumers in B2C businesses and
small-business customers in B2B—these companies run head-on into local competi-
tors. Middle markets are tough, and in our experience most MNCs have struggled to
make money in them. Prices are often only 50% to 70% of those in “high end” mar-
kets, where MNCs have traditionally focused. In mobile handsets in Asia, for exam-
ple, local (mostly Chinese) competitors have erased profits in the lower price seg-
ments. In banking, new local operating models based on digital or mobile
technologies are constantly pushing down price points. And in many infrastructure
projects in emerging markets, competition from local companies has made it much
harder for global players to bid successfully.

Costs. MNCs also face profitability pressures owing to flattening revenues and rising
factor costs. Data from the European Union Chamber of Commerce in China shows
40% of European MNCs reporting flat or declining revenues in China in 2013, 2014,
and 2015. EBIT margins have contracted over the same period, compared with the
companies’ worldwide averages. Only 28% of European MNCs are optimistic about
their profitability prospects in the next two years, compared with 36% in 2012.
Almost one-quarter of companies are actually pessimistic about profitability.

On the manufacturing side, many emerging markets, such as China and Brazil, are
no longer the labor bargains they once were, thanks primarily to rising wages. Pro-
ductivity-adjusted manufacturing wages in China almost tripled from $4.35 to
$12.87 per hour between 2004 and 2014; they are now higher than those of Asian
neighbors such as Vietnam and India—and roughly on a par with those in Mexico.
Manufacturing costs in Brazil jumped 25% over the same period. Workers with the

4 Transformation in Emerging Markets

engineering and technical skills that many MNCs need are still few in number, mak-
ing finding, hiring, training, and retaining them expensive. In addition, their produc-
tivity significantly trails the productivity of skilled workers in developed markets.

Relationships with Stakeholders. Adding to these challenges, MNCs are losing their
allure for local employees precisely at a time when they need skilled managers and
staff on whom they can place added responsibility. And once-welcoming govern-
ments are becoming less accommodating as economies mature. Governments feel
more confident in their ability to regulate and influence markets, and local compa-
nies have become more numerous, more competitive, and more deliberate in
lobbying for their benefits. Governments in many emerging markets are less
hesitant to flex their muscles, and their actions or interventions usually favor local
players. Unpredictability in the regulatory arena, including tariffs, import duties,
licenses, and local content requirements, for example, are another source of fre-
quent frustration for MNCs. Governments’ actions are often beyond MNCs’ control,
of course, but they underscore the need to improve performance.

The Transformation Imperative

The shifts taking place in emerging markets are big, structural, and long-term. As
macroeconomic growth slows and competition rises, improved productivity is a crit-
ical foundation for MNCs to continue to grow revenues and profits and gain share.
Our MNC clients today talk continually of the need to make operations in emerging
markets as productive as those in developed markets. Given such issues as smaller
scale and volatile political and economic environments, this is a tall order—and cer-
tainly not one to be underestimated. Moreover, companies in many markets should
adopt an entrepreneurial approach and find innovative ways to overcome challeng-
es related to talent, infrastructure, and the regulatory environment, rather than
wait for governments or others to solve structural problems. (See Overcoming Asia’s
Obstacles to Growth: How Leading Companies Are Reshaping Their Environment, BCG re-
port, September 2015.)

Shifting focus from growth toward a combination of growth and rapid, steady pro-
ductivity gains requires changes in both strategy and execution. It also usually re- Shifting focus from
quires a shift in thinking about goals, processes, and governance on the part of both growth toward a
global and local management. combination of
growth and rapid,
Many MNCs will have to undertake a process of transformation in emerging mar- steady productivity
kets. As we have written before, transformations are not just for troubled compa- gains requires a shift
nies; they have become necessary interventions in many, if not most, corporations. in thinking about
(See Transformation: The Imperative to Change, BCG report, November 2014; and The goals, processes, and
New CEO’s Guide to Transformation: Turning Ambition into Sustainable Results, BCG governance.
Focus, May 2015.) Less than half of BCG clients that have undergone a transforma-
tion effort over the past decade had been chronic underperformers, and nearly
one-quarter had been consistently ahead of their competitors.

We define a transformation as a profound change in a company’s strategy, business

model, organization, culture, people, and processes. A transformation is not an in-
cremental change but a fundamental reboot that enables a business to achieve a

The Boston Consulting Group 5

 sustainable quantum improvement in performance, altering the trajectory of its fu-
ture. Successful transformation normally requires rapid short-term improvements to
the bottom line to establish traction and position the company to win in the medi-
um term. At the same time, companies need to build the right organization and cul-
ture to achieve sustainable results over the long term. All these changes must hap-
pen in parallel.

Because of their comprehensive nature and the need for companies to implement
them quickly, transformations are complex endeavors. Most of them fail either to
fully capture the potential value or to embed new behaviors and processes in the
time allotted. Evidence from the experiences of non-BCG clients undergoing public-
ly announced transformations from 2003 through 2013 shows that up to 75% of
those efforts fell short of their targets in terms of implementation time, value cap-
tured, or both. Only 25% captured short- and long-term performance gains com-
pared with their sector average.

The risk of failure in transformations in emerging markets is even greater. As we ob-

served recently, only about 10% of companies believe they have the full complement
of capabilities required to win overseas. Most think they are barely mastering the ba-
sics. (See The Globalization Capability Gap: Execution, Not Strategy, Separates Leaders
from Laggards, a Focus by BCG and IMD business school, June 2015.) Moreover, while
many companies get their broad globalization strategies right, they come up short
on execution in individual markets. Issues related to execution were where our re-
search found the biggest gaps between leaders and laggards. (See Exhibit 1.)

MNCs should move quickly, but they should also advance with care. The biggest
mistake they can make is to pursue a transformation driven by headquarters that
tries to standardize and centralize processes and operating procedures for all mar-
kets. MNCs are much better advised to approach the challenge one market at a

Exhibit 1 | Many Transformations Fail Because of a Lack of Readiness and Poor Execution
GLOBAL AND BUSINESS UNIT
EXECUTIVES HAVE DIFFERENT VIEWS BUSINESS UNIT EXECUTIVES SEE A LACK OF GLOBAL SUPPORT IN MANY
OF BUSINESS UNITS’ READINESS TRANSFORMATION DIMENSIONS
Capabilities with the largest differences: the percentage-point difference between
–28.4% the score of board members and the score of local or business unit executives
80 –38.4% 30
74 73

60 53
20
45
40
27
10 20 18 18 18
20

0 0
Aspiration Readiness Open Performance Best-practice Effective Product
score score mind-set incentives distribution support from and service
head office development
Global executives based on
local needs
Business unit and local executives
Sources: BCG and IMD Global Readiness Survey, 2015; BCG analysis.

6 Transformation in Emerging Markets

time, starting with a high-profile struggling market and experimenting with what
works there.

Transforming Local Operations

Historically, rapid growth in emerging markets allowed most companies to support
behaviors such as approving investments without defined returns or time frames,
extensive customization of products, limited process discipline, and building up
teams in anticipation of future growth. A growth bias was vital to capturing share in
markets that were expanding at breakneck speeds. Disciplines such as applying
proven practices, cost containment, and investment prioritization were secondary
considerations, partly because local organizations were overwhelmed just keeping
up with their growth.

MNCs need to rethink and rebalance trade-offs in their priorities, products, systems,
and people as they seek to improve their competitiveness by moving from greater
centralization to strengthening local accountability. In our experience, this sort of re-
balancing is best achieved through a four-step transformation process. (See Exhibit 2.)

•• Resetting the strategy to focus on competitiveness

•• Funding the journey by restructuring the local organization to make it leaner

and more accountable

•• Winning in the medium term through process excellence—eliminating waste

and instilling simplification, standardization, and automation

•• Establishing the right team, platforms, and behaviors for longer-term competi-
tiveness

Exhibit 2 | An Emerging-Market Transformation Has Four Elements

Fund the journey: Win in the medium term:

create a leaner develop process excellence
Reset the strategy: organization
focus on
competitiveness

Establish the right team,

platforms, and
behaviors

Source: BCG analysis.

The Boston Consulting Group 7

 Resetting the Strategy to Focus on Competitiveness
MNCs need to shift their focus from purely maximizing growth, typically by invest-
ing in all sizable emerging markets, to determining which emerging markets offer
the best potential for establishing leading positions and achieving above-average
profitability. We have worked with many clients making such decisions. For exam-
ple, one global medical-equipment manufacturer made its emerging-market plans
on the basis of projections of the number of devices to be sold ten years out. A
global industrial-equipment manufacturer launched a massive expansion of its op-
erations in China despite profitability concerns—in order to put pressure on local
competitors in their home markets.

While the assessment of growth potential remains critical, MNC strategy also has to
focus on profitability and returns on investment. More and more companies are
asking such questions as, What is the investment risk in each of our markets?
Which customer segments can we serve competitively? Do we have product seg-
ments in which slowing growth and declining profitability mean we should ques-
tion the viability of the business?

The biggest difference between past and future assessments needs to be a more
radical examination of the actual competitiveness of the MNC’s local operation in
each market and segment. The best companies will know exactly how big the cost
differentials are between their operations and those of their strongest local compet-
itors. They will develop a systematic approach to gaining local competitive intelli-
gence, regularly analyze their competitors’ offerings (often by reverse engineering
them), and assess the strategic and operational gaps.

For example, some MNCs undertake regular market-by-market analyses of their

economics versus those of their local competitors in order to truly understand
where their own advantages—and disadvantages—lie. (See Exhibit 3.) These com-
Leading companies panies have often found that their costs of goods are at least 20% higher than those
are rethinking how of their principal local competitors because of product design and material costs.
they can adapt Their compensation costs are also higher because higher pay packages are only par-
offerings from one tially offset by higher labor productivity. The companies use these insights as the
emerging market to basis for restructuring their local activities to address competitive weaknesses.
others and thus gain
scale advantages. Another manifestation of this shift will be developing new ways to think about
portfolio management. Many companies have developed a broad portfolio of
offerings in emerging markets, often with individual products tailored only for indi-
vidual countries. These products lack the scale necessary to make a significant
contribution to global results. While this approach has been a big driver of growth,
a tougher outlook now requires a different kind of product portfolio manage-
ment.

Leading companies are now applying a much sharper definition to targeted seg-
ments in order to assess products’ cost-effectiveness. They are systematically using
target costing to further ensure competitiveness, often setting targets of 30%
to 50% less than that of the previous product. And they are rethinking how they
can adapt offerings from one emerging market to others and thus gain scale advan-
tages.

8 Transformation in Emerging Markets

 Exhibit 3 | Multinational Corporations Need a Clear Understanding of Competitive Economics
in Emerging Markets
AN ILLUSTRATIVE COMPARISON OF THE ECONOMICS OF A MULTINATIONAL COMPANY
AND THOSE OF A LOCAL COMPETITOR
Profit margin (%)
20
Price premium has already eroded Primarily due to the effects
significantly as customers have of scale, partially offset by
started to employ central bidding sales commissions paid
10

Mainly due to
royalty fees
0
MNC Local
player
Mostly difference in labor costs,
offset by efficiencies in processes
–10 and organization

The MNC pays higher compensation,

which is only partially offset
by higher labor productivity
–20

Mostly due to design

differences, which
affect material costs
–30

Profit Product Price COGS: COGS: Depreciation R&D Selling General Profit
margin mix premium materials labor expenses and margin
adminis-
trative
expenses

MNC advantage MNC disadvantage

Source: BCG analysis.
Note: COGS = cost of goods sold.

Funding the Journey with a Leaner Organization

Transformations take time, and local operations must continue contributing to re-
sults even while priorities are redirected. MNCs should take an outside-in look at
their organizations and cost structures, as if examining the company through the
eyes of a private-equity buyer. After years of chasing growth, many local organiza-
tions are neither sized nor organized optimally for a tougher market environment.

The resulting restructuring often includes delayering of the local organization to

make it leaner and faster, reducing back-office personnel, lowering the dependence
on expatriate executives, and rebuilding the leadership team to ensure that
high-performing people are in high-impact positions when more fundamental work
on process and functional excellence starts. Putting people with a strong competi-
tive and entrepreneurial mind-set into new leadership roles is vital.

Winning in the Medium Term with Process and Functional

Excellence
While many companies have systematically replicated their manufacturing process-
es in new plants in emerging markets, the establishment of process excellence in
other parts of the organization has been slow. Scores of manufacturing, quality, and

The Boston Consulting Group 9

 engineering expatriates are normally sent to a market to build new facilities accord-
ing to global blueprints and to establish strict process discipline. But in other key
functions, such as procurement, sales, and logistics, we have found either that there
are often no process definitions or that they aren’t thoroughly followed in emerging
markets. Equally often, there is good reason for this: emerging markets need adapt-
ed processes, especially in externally facing functions; it isn’t possible (or a good
idea) to simply copy global models as one copies a building design.

More and more companies have to recognize that they should establish process excel-
lence across all their functions in all emerging markets. For some processes, they
must stringently foster global standardization; for others, they should require their lo-
cal units to improve process transparency, discipline, and quality but adapt them to
local circumstances. Some companies are even starting to use emerging markets as
pilots for completely new definitions of processes, especially in the area of digitiza-
tion. Emerging markets can have distinct advantages in this regard: there are few em-
bedded legacy processes or cultures to combat, and these markets are often technolo-
gy savvy, so digitally enabled, leaner processes can be deployed with relative ease.

For example, BMW, in its joint venture in China, started working in 2013 on a signif-
icant two-year productivity-improvement program for all nonproduction processes,
with the goal of optimizing them to be as effectively run as factory processes. Al-
though most processes were already defined in some way, a number of employees
were not aware of them or not sufficiently trained to do more than “check the box-
es” in compliance. The program focused systematically on process redesign, train-
ing, new tools, and new governance mechanisms. Clear accountabilities for continu-
ous improvement were also established.

Another example is FrieslandCampina, one of the largest global dairy-products com-

panies. A few years ago, it recognized that its biggest opportunity in emerging mar-
kets lay in optimizing the go-to-market model and pushing a higher level of sales ex-
cellence. Starting in one country, the company deployed a systematic approach for
Some companies are reaching consumers more effectively through new channels and new sales-manage-
even starting to use ment processes. It put enormous effort into training and skill building for sales
emerging markets as teams. The approach was copied and moved to other markets one by one, using
pilots for completely salespeople from one market to help deploy the program in the next. The company
new definitions of institutionalized the approach in each market by developing and regularly updating
processes. a handbook that combined standardized practices with local adaptations.

Getting the balance right between standardization and local adaptation of process-
es can be tough. In our experience, a general guideline is to be more aggressive in
standardization for purely internal processes and to allow more freedom for exter-
nally facing ones. (See the sidebar “Go-to-Market Approaches Continue to Be High-
ly Localized.”)

Establishing the Right Team, Platforms, and Behaviors

Most companies will need to redirect the behaviors of their local teams. Whereas
the priority in the past was to gear up for growth by investing big in people devel-
opment and potential needs, companies now should apply a tight focus on individ-
ual performance and accountability for costs.

10 Transformation in Emerging Markets

 GO-TO-MARKET APPROACHES CONTINUE TO BE
HIGHLY LOCALIZED
While the strength of many internal typically have much less well devel-
processes can depend on some level oped distribution systems. Companies
of global standardization and central- must deal with a multistep regional,
ization, go-to-market approaches have municipal, and local system, with
to be rooted in local circumstances to players of widely varying competence
remain competitive. The commercial and capability at each step. This adds
success factors in emerging markets to cost. MNCs also have to pursue
can be very different from those in multichannel distribution models and
more developed economies. For dealer networks to extend beyond tier
example, consumer segments are 1 cities, maximize reach, and avoid
highly heterogeneous and much more coverage gaps. Distribution in such
fluid in their makeup. Different markets may involve accepting some
segments have widely varying needs level of sales cannibalization and
and financial potential, both of which dealing with distributors that also
can be moving targets. carry competitors’ products.

As growth slows and competition Retail sales are another issue. Many
increases, it becomes more important developing countries have large rural
for MNCs to understand the commer- populations or populous secondary
cial environment. MNCs face very cities. Some 636 million Chinese lived
different competitive economics than in rural areas in 2013. India has 400
their local counterparts. Product cities with populations of 100,000 or
development costs can be much more. In Brazil, consumers in interior
lower, but sales and distribution costs regions are expected to account for
are high. Companies need to adjust more than 45% of growth in the retail
their bases of comparison and adopt sector, or $60 billion in new purchas-
new or revised KPIs. Our analysis indi- es, through 2020. Such markets have
cates that while a local company and widely varying, and often undevel-
an MNC might have similar costs of oped, retail infrastructures.
goods sold, the local company’s
selling expenses are often 10% or less Internet sales (which in many
of a product’s retail price, while the markets really means mobile com-
MNC’s selling expenses can easily merce) are a big and increasingly
rise to 45%. Higher distribution costs important factor in reaching these
must be offset with aggressive cost new customers. China has more than
savings across other parts of the 730 million Internet users and more
value chain. (See the exhibit “Cost than 380 million online shoppers.
Competition in RDEs Is Often Not More than 16 million consumers from
About the Cost of Goods Sold.”) the country’s tier 3 and tier 4 cities
are using mobile Internet. (See “The
There are many reasons for the Chinese Digital Consumer in a
disparities. Emerging markets, Multichannel World,” BCG article,
especially those that are big and April 2014.) Alibaba already has more
diverse, such as China and India, sales than Amazon and eBay com-

The Boston Consulting Group 11

 GO-TO-MARKET APPROACHES CONTINUE TO BE
HIGHLY LOCALIZED (continued)
Cost Competition in RDEs Is Often Not About the Cost of Goods
Sold
AN ILLUSTRATIVE EXAMPLE OF A MULTINATIONAL COMPANY
AND A LOCAL COMPETITOR
% of market or street price
100

80 Different distribution models

• The MNC uses its own sales force with higher
selling expenses.
60 • The local competitor obtains broader reach by
engaging external distributors (with selling expenses
mostly to manage distributors).
40 Tightly controlled G&A expenses for the local competitor
versus those of most MNCs

20 R&D expenses are only 20% of MNCs’ (through greater

use of standard components and copying as much as
intellectual property rights allow)
0 Limited difference in COGS
MNC Local
competitor • The local competitor sources more from local
suppliers and uses older but proven components.
• The local competitor uses a more flexible
platform strategy.
COGS R&D expenses G&A expenses
Selling expenses Distributor markup Operating margin
Source: BCG analysis.
Note: The local competitor’s cost structure was adjusted to reflect a percentage of the market price.

bined. The next wave of growth in long way from their customers. It’s
India’s online population will add up easy to lose contact or to have to rely
to 550 million new Internet users, on second- or third-hand information
including large percentages of older, about developments in local markets.
more rural, and female consumers. Local staff or representatives make a
(See “The Changing Connected big difference, and MNCs should
Consumer in India,” BCG article, April make bigger investments in relation-
2015.) ship management and performance
monitoring of distributors and
In large developing markets, MNCs dealers, all of which entails another
may benefit from new capabilities layer of cost.
that target small geographic markets
embedded in second- or third-tier Compensation models can also be
cities. (See “Street-Level Segmenta- very different in emerging markets. In
tion in India: Winning Big by Target- Europe, for example, the variable
ing Small,” BCG article, December component of compensation is
2015.) usually less than half of the total. In
many emerging markets, compensa-
Rural markets and multistep distribu- tion is often 100% variable or incen-
tion also mean that companies are a tive based.

12 Transformation in Emerging Markets

We find operations in emerging markets beset by common problems, such as a lim-
ited sense of accountability beyond their own activities on the part of individual
managers; little collaboration and a general hesitancy to ask for help; and an ab-
sence of cost consciousness. Addressing these issues requires clarification of roles,
KPIs, and targets; explicit efforts to promote collaboration and trust building (in-
cluding through peer pressure); providing for cost transparency in management in-
formation systems, especially in middle-management levels; and making cost con-
trol a principal target in annual performance reviews.

It remains critical that local management teams retain, or be given, decision-mak-

ing ability, but MNCs must clarify the responsibilities that accompany this authori-
ty. Too often, in our experience, local managers are clear about day-to-day activities
but not about longer-term accountabilities. Companies need clarity about the main
targets that local managers are accountable for, both individually and together with
others, and about the changes they are required to promote in order to achieve con-
tinuous improvement. This doesn’t mean that local managers shouldn’t make use
of the advantages that their global platforms and capabilities give them; it’s a ques-
tion of striking the right balance between local authority and global support. (See
Exhibit 4 and the sidebar “Rethinking the Relationship Between the Center and Lo-
cal Operations.”)

Most MNCs also need to retool their recruitment and training efforts, as well as
their incentive programs, tying them all more closely to productivity improvement
goals. For example, many employees in emerging markets spend a few years in an
MNC, a significant portion of which is occupied by training programs, and then
leave. In the future, training might have to de-emphasize formal classroom-type ses-
sions in favor of on-the-job coaching.

Perhaps most important is rethinking the role of both expatriate and local execu-
tives in management. Expatriates in emerging markets should take the role of team
builders rather than line managers. This happens in many companies, but most can
go further, making expatriates accountable for developing strong local managers by

Exhibit 4 | The Shifting Balance of Global Governance

Time

Future

1980s–2010

Organization with
Pre-1980s strong business units and
strong country management
Business unit
organization The center makes the
Functional business units and local country
The center employs a hands-off management accountable
organization approach to the business units for performance
Strong central and focuses on governance
leadership and selected value creation
Complexity

Source: BCG analysis.

The Boston Consulting Group 13

 RETHINKING THE RELATIONSHIP BETWEEN THE
CENTER AND LOCAL OPERATIONS
MNCs have a big advantage over local competitors in emerging markets are
competitors—their global platforms locally staffed and sourced, more
and capabilities—but transformation nimble at adapting to changing
in emerging markets is likely to market conditions, and better
necessitate a rethinking of relation- positioned to capture larger growth
ships between the center and the opportunities. Local units of MNCs
local operation. need authority to make quick deci-
sions and act swiftly, without seeking
There are many successful gover- approval from headquarters. MNCs’
nance models on a continuum from centralized functions—such as R&D,
hands-on manager, where the center marketing, finance, and human
has full power, to hands-off owner, resources—should support, not
which leaves decision-making to the encumber, local operations.
local management team—and
several options in between. Choosing Some MNCs can do a better job of
the right one depends in part on the leveraging their scale and global
company, its goals, and the markets resources, including sharing good
involved. (See Designing the Corporate practices, while not overwhelming
Center: How to Turn Strategy into local country organizations with
Structure, BCG Focus, May 2013.) global rules and initiatives. Local
units can be linked to pooled resourc-
We would argue that two consider- es and platforms to take advantage of
ations rule in a new world where the parent company’s global foot-
competitiveness and productivity are print. There are also opportunities
critical. The first is clarity. Research for local product and process innova-
has repeatedly shown that fuzziness tions to be rolled out across other
or lack of certainty with respect to emerging markets and even to certain
roles and accountabilities between segments in developed markets.
the center and local operations Knowledge can be shared through
leads to trouble. Too often, functions multidirectional networks, such as
from headquarters get involved in global excellence centers, product
local activity without a clear mandate. councils, and information networks.

The second consideration is empow-

ering local operations. Most MNCs’

actually transferring skills and know-how rather than simply meeting short-term
KPIs. This is far from easy. Placing real responsibility in the hands of often-untested
executives is difficult for many companies. Shifting from an executive role to a
team-building or advisory role is often a tough transition for expatriate executives.
But transformation is substantially about culture; putting local managers in key
leadership positions is a big cultural shift for many companies and sends the entire
organization a strong message of accountability for results (while at the same time
leading to cost savings, thanks to fewer high-cost expatriates).

14 Transformation in Emerging Markets

Getting Started—One Country at a Time
In 2013, a BCG survey of more than 150 senior executives of MNCs revealed an
eye-opening disconnect. More than three-quarters, or 78%, of respondents said their
companies expected to gain share in emerging markets, but only 13% were confi-
dent that they could take on local competitors. Not a single company stated that it
had all the capabilities required for success. The biggest concern was not the ambi-
tion but the ability to execute locally. Our experience since then indicates that not
much has changed—except the urgency with which many MNCs must address their
emerging-market operations.

Emerging-market transformation has to start in one local market (or at most two or
three) to ensure that it addresses gaps in local competitiveness and that a robust Growth in emerging
methodology is developed for subsequent rollout throughout the company. Once markets will continue,
one market demonstrates results and positive momentum, the approach can be but only for compa-
transferred to other countries. To take advantage of lessons learned in the first nies that are set up to
country or countries, companies should use the same templates and tools. They can be competitive and
develop handbooks and lessons for fast learning and ensure some continuity by that make growth
transferring people who have experience with the approach to the transformation profitable.
management team.

Chevron, for example, launched a program in 2013 to promote efficiency and pro-
ductivity in its different upstream businesses all over the globe. It started in Nigeria
and Angola, where—in addition to achieving significant productivity gains—the
company built a toolbox that could be used by others; it included activity time-anal-
yses, steps to streamline the organization, and process optimization programs.
Chevron then rolled out the toolbox to other emerging markets in the Americas
and Asia.

For many large global companies, this is not only the right time to rethink the oper-
ational models they deploy in emerging markets; it’s the essential time. The kind of
global transformation we propose makes the company better adapted to local cir-
cumstances and strengthens its competitive capabilities worldwide. MNCs must be-
come “multilocal” players if they want to succeed.

MNCs should ask themselves the following questions:

•• Do we need some minor fine-tuning of activities in emerging markets or a more

fundamental reset?

•• Are the current trade-offs we make around investments, product portfolios,

process excellence, and people development still valid?

•• How do we want to approach the transformation of operations to ensure

immediate results and a fast global rollout of the program?

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

The Boston Consulting Group 15

About the Authors
Christoph Nettesheim is a senior partner and managing director in the Singapore office of The
Boston Consulting Group. You may contact him by e-mail at [email protected].

Lars Fæste is a senior partner and managing director in BCG’s Copenhagen office. You may
contact him by e-mail at [email protected].

Dinesh Khanna is a senior partner and managing director in the firm’s Singapore office.
You may contact him by e-mail at [email protected].

Bernd Waltermann is a senior partner and managing director in BCG’s Singapore office.
You may contact him by e-mail at [email protected].

Peter Ullrich is a principal in the firm’s Munich office. You may contact him by e-mail at
[email protected].

Acknowledgments
The authors are grateful to David Michael and Vincent Chin for their valuable contributions to this
report. They thank Belinda Gallaugher for helping to coordinate the report and David Duffy for
his assistance in writing it. They are also grateful to Katherine Andrews, Gary Callahan, Angela
DiBattista, Kim Friedman, Abby Garland, Sharon Slodki, and Sara Strassenreiter for their contribu-
tions to the report’s editing, design, and production.

For Further Contact

If you would like to discuss this report, please contact one of the authors.

16 Transformation in Emerging Markets

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© The Boston Consulting Group, Inc. 2016. All rights reserved.

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