Emerging Markets Conference

Transcription

1 Emerging Markets Conference Addressing Mid-Market Customers John, Jullens Principal, Strategy& Emerging Markets Conference November 2015, Singapore

2 The latest headlines about Asia have been unrelentingly negative is the Asian growth miracle already over? 2

3 In reality, the underlying demand drivers remain strong Demographics Asia already accounts for more than half of the world s population today Asia s population will increase from 3.8B in 2010 to 4.6B by 2040, creating an additional 27M consumers every year Wealth Asian per capita incomes are growing faster than in any other region of the world Retail spending is expected to grow by + ~10% a year over the + next five years versus a global average of ~7% Urbanization Urbanization will continue to grow rapidly, driving penetration of modern trade Of the world s 20 biggest shopping malls, 14 are already in Asia, including four each in China, Malaysia, and the Philippines More people More money Easier to serve 3 Source: EIU, Strategy& analysis

4 However, MNCs will face a much more challenging environment for many, the easy phase is mostly over 1 2 New Business Environment Shifting demographics The new business environment will present domestic firms and MNCs with both challenges and opportunities While overall population size will continue to grow, the underlying mix will change significantly i.e., Asia is aging 3 New technologies Asian consumers are rapidly adopting new technologies such as the Internet foreign MNCs are not necessarily advantaged 4 Mid-Market = Battlefield Growth will often come primarily from the rapidly developing mid-market of Good Enough products 5 Emerging giants Local competitors are improving rapidly e.g., Chinese Mid-Market Innovators and other Emerging Giants 4

5 Global purchasing power is migrating to Asia, creating a fast-growing mid-market of Good Enough products Size of world s middle class (Millions of people and global share) 5,000 4,000 Asia Pacific North America Europe Central and South America Sub-Saharan Africa Middle East and North Africa 3,000 66% 53% 2,000 1, % 18% 36% 6% 2% 10% 10% 22% 8% 5% 2% 7% 14% 6% 2% 5% Source: Brookings Institute 5

6 Industry and competitive dynamics often differ significantly between the premium and mid-market segments China - Automotive Industry Example Premium Segment Strategy Market Characteristics Slow growth rate Replacement demand Premium price point Mid-Market Segment Strategy Market Characteristics High growth rate First-time buyers Budget price point Consumer Profile High income High brand awareness Increased emphasis on non-functional product and service attributes Consumer Profile Low income Low brand awareness Primary emphasis on functional product and service attributes Strategic Imperatives Premium brand strategy and facilities Conquest sales to attract competitive make drivers Loyalty initiatives to retain existing buyers Upgrade HR and other capabilities Strategic Imperatives Value brand strategy and facilities New customer acquisition strategy Network expansion strategy Introduce basic HR and other capabilities 6

7 Few MNCs currently have the capabilities required to compete in Asia s mid-markets - Good Enough just isn t Key Mid-Market Capabilities ( Ranked by Importance ) Must-Have Capabilities Readiness Design to cost capabilities Product standardization Product localization R&D transfer Fast development process Trial and error culture Source: Strategy& Mid-Market Study 2012/2013 7

8 At the same time, local competitors are improving rapidly e.g., Chinese Mid-Market Innovators Unique Factor Conditions Chinese Mid-market innovators Journey to world-class China s immense market Explosive growth in infrastructure investment Huge supply of cheap labor at all levels Hyper-competition Relatively protected market access CMMIs Special category of EMNCs who initially don t possess any unique competitive advantages, but instead leverage a dominant position in China s mid-market to gain a global leadership position and challenges established MNCs from developed countries 1) Gain dominant position in Chinese home market 2) Leverage resulting scale and other cost advantages to become cost competitive relative to established global players 3) Focus initial innovation efforts on relentless cost improvement in every activity of the business 4) Expand internationally and move up-market through heavy R&D investments and strategic partnership/ acquisitions Source: How Emerging Giants Can Take on the World, Jullens, Harvard Business Review, Dec

9 Foreign MNCs have four potential strategic options many will have no choice but to Play to Win Four strategic options for MNCs 1 Stay at home Remain focused on premium market and leave mid-market segment to other competitors 2 Wait it out Wait for (mid-market) demand in emerging markets to catch up to (premium) demand elsewhere 3 Play to Win Develop required products, capabilities, and other resources to compete successfully in mid-market now 4 If you can t beat em Partner with one or more emerging market competitors and develop the local (and global) mid-market together Source: China s Mid-Market: Where Good Enough Just Isn t, Jullens, Strategy+Business, July

10 For MNCs, winning is often a function of making a series of difficult trade-offs along at least eight dimensions Mid-market business model Rethink business model to support unique local requirements, including product, price, branding, marketing, distribution, and operations Low-price products Develop low-priced products specifically designed for mid-market customers, as opposed to merely introducing low-cost versions of existing world-class products Value chain migration Transfer core activities to narrow cost gaps with domestic entry-level market competitors through local product development, sourcing, and manufacturing Selective partnerships Consider entering into partnerships with local suppliers to fill gaps in entry-level market product portfolio, develop optimal distribution footprint, and navigate Asia s unusually complex business and institutional environments Multi-brand strategy Consider developing a multi-brand strategy to successfully operate across premium and entry-level market price points as well as multiple product categories Multi-channel strategy Develop cost-effective ways of selling across multiple channels and price points Strong local organization Ensure that management is capable and sufficiently empowered to enable fast decision-making and sensitivity to local market requirements. Clarify decision rights and put in place a strong governance structure Global mindset A firm s success is tied to the mindset of its top managers. At a minimum, ensure that headquarters has at least a basic understanding of the local business and regulatory context 10 Source: China s Mid-Market: Where Good Enough Just Isn t, Jullens, Strategy+Business, July 2013

11 Localization really does matter, a lot Value chain migration Global Localized Local Innovation Reverse Innovation Standard products and services Innovation happens centrally in developed markets Some adjustments to meet local needs De-feature products to meet customer budget Products/services developed in-country, for country Market-back perspective Leverage global R&D base Innovation in country, for the world Sell successful local products/services worldwide Success increasingly requires migrating higher order value chain activities to Asia (e.g., R&D) MNCs who localize first and best are typically the winners As a result, traditional organizational designs are no longer up to the task Instead, firms must develop hybrid organizations based on three guiding principles Innovation regional hubs Operations globally dispersed Go-To-Market - locally embedded Source: Strategy& analysis 11

12 As a result, MNCs may have to significantly rethink their existing (global) business models Product Development Sourcing Premium Business Model World-class product with advanced technology Proprietary parts Global sourcing with reasonable localization rate to guarantee product quality Mid-Market Business Model good enough product with entry-level technology Standard parts Localized sourcing with domestic suppliers to achieve price competitiveness Manufacturing Marketing Sales After-market Rigorous manufacturing standards to ensure highest possible product quality at premium prices Target few professional customers with large fleet Emphasize brand image, superior performance, and total lifetime value High initial purchase price Commercial credit Few well-capitalized stores Complex to maintain and repair Flexible manufacturing standards and relentless focus on reducing process costs to guarantee acceptable product quality at ultra-low prices Target many individual owner-operators Emphasize low initial purchase price and fit-forpurpose design Low initial purchase price Personal credit / creative financing options Many low-capitalized stores Easy to maintain and repair 12

13 Partnerships with local players are often indispensable Good Enough opportunities Jointly develop low-end / mid-market versions of existing products for emerging markets Developing Leapfrog opportunities Good enough opportunities Latent Demand opportunities Jointly penetrate developed markets by activating latent demand for low-end / mid-market products Market Developed Break-through opportunities Sunrise Industry Latent demand opportunities Mature Leapfrog opportunities Capitalize on latecomer advantages to develop new products and technologies in greenfield emerging markets first Breakthrough opportunities Combine high-end developed market and low-cost emerging market capabilities to create truly breakthrough products Source: Sino-Finnish Paths to International Competitiveness, Jullens/Suonio/Tang, TEKES, Oct

14 In addition to the firm s operations footprint, it may be necessary to localize management as well Key Issues to Consider Organization Reporting lines, roles and responsibilities between headquarters and local offices Key people selection and the proportion of local talent versus expats Governance Decision rights between headquarters, regional, and local organizations Governance structures and practices, including local, regional, and global meeting cadence Performance metrics and tracking Other Functions Local or headquarters support; shared with partner or separate; owned or outsourced Size and structure Capabilities and compatibility with other operations Oversight responsibilities Source: Strategy& Analysis 14

15 Finally, adopting the right mindset is critical for (too) many MNCs, as misunderstandings remain all too common Misaligned Priorities b/w Headquarters and Managers in China, MNC (Difference b/w Respondents based in China and All Respondents, in % respondent) Headquarters Underestimates the Challenges 5 Headquarters Overestimates the Challenges Lack of available local talent Competition from domestic companies Lack of autonomy to make the right decisions for the China Risk of trade and economic disputes between China and other countries Lack of IP protection Lack of legal protection in general Unpredictable nature of Chinese government Competition from other foreign companies Source: 15 EIU, Strategy& analysis

16 Contact information John Jullens Principal, Strategy& Formerly Booz & Company Relevant Publications Harvard Business Review How Emerging Giants Can Take on the World -- Harvard Business Review, Dec 2013 Is China the World s Next Rust Belt? -- Harvard Business Review China, Apr 2013 CEIBS Business Review Choose Your Capability Path -- CEIBS Business Review, Mar 2014 Modern Zorro is Out - CEIBS Business Review, Feb 2014 Strategy + Business It s a Race to the Bottom in China s Auto Market Strategy + Business, Sep 2014 How Firms in Emerging Markets Can Play Catch-Up - - Strategy + Business, Jan 2014 Why Strategy Matters in Emerging Markets After All -- Strategy + Business, Dec 2013 China s Mid-Market: Where Good Enough Just Isn t -- Strategy + Business, July

17 Thank You