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Transformation in Emerging Markets: From Growth To Competitiveness
Transformation in Emerging Markets: From Growth To Competitiveness
Markets
From Growth to Competitiveness
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Transformation in Emerging
Markets
From Growth to Competitiveness
February 2016
AT A GLANCE
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.
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:
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
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.
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.
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.
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.
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.)
•• Establishing the right team, platforms, and behaviors for longer-term competi-
tiveness
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.
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.
Mainly due to
royalty fees
0
MNC Local
player
Mostly difference in labor costs,
offset by efficiencies in processes
–10 and organization
Profit Product Price COGS: COGS: Depreciation R&D Selling General Profit
margin mix premium materials labor expenses and margin
adminis-
trative
expenses
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.
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.”)
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-
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.
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
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
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).
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.
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.
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.