CFO Insights Growth strategies: What can work in emerging markets?

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1 CFO Insights Growth strategies: What can work in emerging markets? There is no denying that the growth opportunities in emerging markets, such as China, Brazil, and India, can have fundamental implications for a company s business strategy, operating model, and risk management. Moreover, given the continued sluggishness in many domestic economies, who can blame companies for banking on these emerging markets as engines of growth? But what approaches actually work in emerging markets joint ventures, licensing agreements, organic growth? More important, how can a CFO know which specific strategy is most appropriate for his or her organization? To find out, Deloitte Consulting LLP recently undertook a survey outlined in Fortresses and Footholds: Emerging Market Growth Strategies, Practices and Outlook 1 of 628 executives from companies headquartered in 34 countries. Of the respondents, 389 actually have emerging market revenues today, which translates into roughly a 60/40 split between the haves and the have-nots. 2 And the study compared and contrasted their views on revenue opportunities, the challenges respondent companies face in emerging markets, and which growth strategies have tested to be most effective. The emerging markets imperative The potential of the emerging markets continues to be compelling. In 2010, gross domestic product (GDP) in emerging economies grew by 7.3 percent, compared to growth of 3.0 percent in the United States, 1.8 percent in the Euro area, and 4.0 percent in Japan. 3 Looking forward, Deloitte 4 research projects that emerging markets will likely account for 58 percent of growth in global GDP from 2010 to 2015, compared to 32 percent for the advanced economies of the G7. 5 Still, although many companies recognize this potential and place a high priority on driving increased revenues from these emerging markets, respondent executives reported mixed success in meeting their goals. Among companies with emerging market revenues in the survey, 38 percent had exceeded their goals over the last three years, 27 percent had met them, and 35 percent had fallen short. Specifically, the study found that many respondent companies are finding emerging markets success by establishing local, market-specific production, service, distribution, research and development, and other operations to develop closer ties to customers and business communities. In this issue of CFO Insights, we summarize some of the findings and recommend ways CFOs can tailor their strategies to achieve success in emerging markets. 1

2 In assessing what worked, however, there were several common ingredients. In fact, executives pointed to four elements instrumental to their success: Go local. Companies that had company-owned operations in at least five of six major emerging markets were much more likely to have exceeded their revenue goals (60 percent) than those that did not (32 percent). The advantages of greater knowledge of customer needs and buying habits, greater brand awareness in the market, and more experience in navigating government approvals and procedures translate into overall success. Grow organically. Across companies of various sizes and industries, organic growth, cited by 61 percent of executives, was considered the most important approach for expanding in emerging markets soundly beating joint ventures with local companies (20 percent), acquisition of local companies (10 percent) and licensing agreements (6 percent). Organic growth can offer substantial benefits, including helping a company protect its intellectual property, providing insight into the needs and preferences of customers, and experience with the local business environment. Scale up. Companies with revenues of $5 billion or greater were more likely to have exceeded their sales revenue goals in emerging markets over the last three years, while small companies (less than $500 million in revenue) were the least likely to have done so. Know thy customer. Organizations that evolve their value propositions with the needs of customers and segments in particular emerging markets in mind will likely produce higher revenue impact. In fact, rather than simply exporting their existing offerings, many companies looking for larger growth design products/ services to meet the needs of emerging market customers at multiple value points. What works, what doesn t As for specific strategies, there were multiple ways for entering emerging markets and they are not all created equal. Figure 1 outlines the various approaches and executives views if they were extremely or very successful. It is clear the drive to be local remains consistent in the successful approaches. Figure 1. Success of emerging market growth strategies Percentage responding extremely/very successful Base = Respondents at companies with revenues in emerging markets Use local sales/service support centers Design products/services specifically for emerging market country or region Employ company-owned sales and/or distribution Offer different value proposition for customers/consumers Employ company-owned supply chain Use marketing/promotional efforts to increase awareness Employ local vendors to provide sales, distribution, or marketing Conduct customer/consumer research locally Conduct R&D locally Form joint ventures with local companies Offer products/services with different/fewer features Partner with government authorities within a country Offer products/services in smaller packages/bundles at lower cost Partner with NGOs and local organizations Employ non-traditional distribution channels 29% 36% 34% 40% 45% 43% 43% 52% 51% 50% 56% 62% 60% 60% 59% 0% 20% 30% 40% 50% 60% 70% 80% Source: Fortresses and Footholds: Emerging market growth strategies, practices, and outlook 2

3 Figure 2. Unsuccessful emerging market growth strategies Employ non-traditional distribution channels Offer products/services in smaller packages/bundles at lower cost Partner with NGOs and local organizations Conduct R&D locally Form joint ventures with local companies Partner with government authorities within a country Offer products/services with different/fewer features Employ local vendors to provide sales, distribution, or marketing Employ company-owned supply chain Use local sales/service support centers Conduct customer/consumer research locally Design products/services specifically for emerging market country or region For example, two of the most effective strategies were initiatives to meet the particular needs of local customers. Designing products and services specifically for customers in the local market (60 percent) and offering a different value proposition for local customers (59 percent) were among the strategies most cited as being effective. In addition, two other highly rated strategies use local sales/service support centers (62 percent) and employ company-owned sales and/or distribution (60 percent) illustrate the benefits of becoming part of the local business community and gaining greater access to customers and the regulatory environment. Percent responding not at all/not too successful Base = Respondents at companies with revenues in emerging markets (n=357) 12% 12% 11% 13% 16% 21% 20% 24% 23% 28% 28% 41% There are multiple examples of how such local companies achieve effective results. Unilever, for example, launched a program in India called the Project Shakti that uses local women as product ambassadors. These women, who live in rural areas where distribution is a challenge, basically operate a quasi-franchise distribution business often via bicycle. On the flip side, when a company launched a new cereal in India without realizing that the predominant method for eating breakfast there involves hot milk which tends to turn a cornflake-type cereal into mush it had to revamp the offering. Interestingly, some of the strategies that didn t score very high (Figure 2) included collaborating with nongovernmental organizations and philanthropic groups (28 percent), despite the recent successful public-private partnerships with such organizations as World Vision. Offering products/services in smaller packages at lower cost didn t prove successful either (28 percent). Eyes wide open One of the key takeaways from the research was that the variances underscored the heterogeneity of the markets. Such differences require growth strategies that are grounded in market dynamics and company capabilities. Still, for CFOs seeking to enter or expand in emerging markets, there are common questions that can be asked to increase the probability that a particular strategy will work. For example: Where should operations be located? Indications from the study are that companies typically feel more comfortable expanding in countries or nearby regions where they already have operations. Still, such a comfort level with regulatory and country knowledge may come at the expense of better opportunities in another geography. CFOs should weigh the tradeoffs and determine if there are clear models forecasting location costs. Employ company-owned sales and/or distribution Offer different value proposition for customers/consumers Use marketing/promotional efforts to increase awareness Source: Fortresses and Footholds: Emerging market growth strategies, practices, and outlook 0% 20% 30% 40% 50% 3

4 Are emerging market strategies replicable? Emerging markets cannot be treated as one entity, and CFOs should not assume that the same strategy that has worked in one market will work with a different product set and a different buyer in a different environment. It is essential to develop specific insights to understand unmet needs and the constraints present in each market, whether it be a populous urban area or rural village. For example, Chinese and Brazilian consumers of rising affluence have much in common, but have vastly different needs and expectations for many products and services. In response, finance will likely have to adapt its models to wide regional and country differences. What does a particular market demand? Even when companies have some success in a specific emerging market, they may not yet have the in-country R&D or strategic marketing experience to adequately assess customer needs. To gain a better understanding, they may initially rely on local players, such as distributors or other important vendors in the value chain. Then once they gain a better understanding, they can research and selectively customize products or channels. For example, powdered baby milk and cheese are fairly recent categories of mass-market products in India and China, and require investing in educating consumers on the nutritional value of the products. What capabilities should I have access to? Even large companies need to stay nimble in emerging markets. But as they mature or have greater growth in a market, companies need to assess what they need to access and what they need to own in terms of rapid product design, company facilities, contract manufacturing, etc. Separate the market tactic from the business objective. Successful companies may balance risk and investment demands by accessing the capabilities they need through local vendors or joint ventures. Over time company-retained assets may become more attractive. What metrics should I use to evaluate success? Typically, companies will run a Net Present Value (NPV) assessment when entering an emerging market. But care must be taken to adjust the cost of capital or discount rates for the significantly higher risk equity premiums in most emerging markets. Moreover, a NPV assessment alone is insufficient and requires scenarios that reasonably evaluate different market behaviors. Returns matter, but realistic scenarios that account for uncertainty will likely become more valuable to the business especially in the early periods of emerging markets expansion. What type of internal controls do emerging markets demand? Many companies have been ensnared in Foreign Corrupt Practices Act violations. Business practices vary widely and corruption is frequently not obvious or visible. In any emerging market, there needs to be an appropriate segregation of duties in terms of payment approvals, creation of vendors, the giving of gifts, and handling of entertainment, as well as regular testing of those controls and payments. As with market demand, local insight matters. You cannot audit what you do not understand. What if we make the wrong bet? In emerging markets, success requires meeting unmet needs and effectively navigating individual market constraints. However, the rate of change is so great that the most effectively laid strategies may be outdated before they launch. It is essential to consider taking a dynamic approach to strategy and execution that allows for market movements and new market learning. It is essential to remember that changing tactics is not the same as changing strategy. Fundamentally, succeeding in emerging markets involves the right strategies, local knowledge, and a focus on learning and adapting as you grow. Armed with the three, the lessons learned from the survey both successes and failures can help organizations build more effective and sustainable platforms for growth in emerging markets. 4

5 Endnotes 1 Fortresses and Footholds: Emerging Market Growth Strategies, Practices and Outlook; November 2011; the survey defined emerging markets as China, India, Southeast Asia, South Korea, Brazil, Latin America outside Brazil, Eastern Europe and Russia, Turkey, Egypt, and South Africa. 2 Fortresses and Footholds: Emerging Market Growth Strategies, Practices and Outlook; November 2011; see methodology, page World Economic Outlook Update, International Monetary Fund, September As used in this document, Deloitte means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. 5 G7 are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. Primary contacts David N. Martin Principal U.S. Leader, Corporate and Business Unit Strategy Deloitte Consulting LLP davidmartin@deloitte.com Simon McLain Senior Manger Deloitte Consulting LLP smclain@deloitte.com This Deloitte CFO Insights article was developed with the guidance of Dr. Ajit Kambil, Global Research Director, CFO Program, Deloitte LLP, and Lori Calabro, Senior Manager, CFO Education & Events, Deloitte LLP. Special thanks to Andrew Marks, Senior Writer/Senior Editor, Deloitte LLP, for his contributions to this article. Deloitte s CFO Program harnesses the breadth of our capabilities to deliver forward-thinking perspectives and fresh insights to help CFOs manage the complexities of their role, drive more value in their organization, and adapt to the changing strategic shifts in the market. For more information about Deloitte s CFO Program visit our website at This article contains general information only and Deloitte is not, by means of this article, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This article is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2012 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited 5