Companies fall short of achieving goals in emerging markets

Davos, Switzerland - 24 January 2007

Despite the size and remarkable growth of emerging markets, a surprising number of companies are falling short of achieving their business goals. In fact, just 47 percent of the more than 440 senior executives surveyed by Deloitte’s Global Manufacturing Industry Group said their companies had been extremely or very successful in meeting their revenue goals in emerging markets.

What is preventing companies from fulfilling their goals? “Most likely it’s because the complexity of their business continues to increase and it’s a daunting task to integrate and manage their emerging market operations,” suggests Mr. Gary Coleman, Global Managing Director for Manufacturing, and Partner Deloitte & Touche USA LLP.

Presenting the new research findings of the “Innovation in Emerging Markets 2007 Annual Study” at a CEO Lunch in Davos today, Mr. Coleman observes the trend that, “Companies are locating higher-value activities such as complex production, sophisticated research and development (R&D), and sales and marketing operations in emerging markets.”

“What was originally seen as low-cost locations for routine operations, companies are moving up the value chain in emerging markets,” he explains. “With this move, the challenge to provide innovative products and services that capture market share in the rapidly growing emerging markets intensifies. This intensity brings complexity, which for many companies makes it even more difficult for them to achieve their original emerging market goals.”

The Deloitte 2007 study examines what companies are doing in the areas of talent, risk and structuring their operations to be successful in emerging markets.

A fierce war for talent

“More companies are realizing the need to customize their human resource strategies to the local realities while also recognizing that – just as in developed economies – developing, deploying and connecting their people will be essential to attracting and retaining higher-skilled employees,” says Coleman.

The study reveals that companies that use rewards and recognition and training, as well as compensation and benefits, as important human resource (HR) techniques were more likely to be successful in achieving their operational goals in emerging markets. For example, 73 percent of the companies that used rewards and recognition as an important HR technique said they were extremely or very successful in achieving their operational goals, compared to 51 percent who did not consider this an important technique.

Becoming risk intelligent

Locating operations in emerging markets brings increased risks in a variety of areas such intellectual property protection, geopolitical issues, and legal/regulatory issues to name a few. However, before investing in an emerging market, only 56 percent of companies surveyed conducted a very detailed risk assessment. And even fewer (45 percent) conduct a detailed risk assessment for their existing operations in emerging markets.

“It is especially important for companies to become risk intelligent to assess all the things that could prevent them from realizing its business goals,” says Mr. Coleman. “It’s important for companies to integrate their risk assessments into a single, comprehensive view, and instill a risk management into their culture.”

Trend towards wholly-owned operations

Although companies often begin in an emerging market with a joint venture or third-party arrangement, the study reveals that as they gain experience and become more comfortable more are moving towards using newly-created wholly-owned subsidiaries as their operating structure. Companies that have adopted this operating structure appear to be finding greater success in meeting their operational goals.

In addition, companies are looking to provide more autonomy at the local level—to gain local knowledge and respond quickly to opportunities—while leveraging the strengths from efficient global business processes and management expertise provided by headquarters.

“It’s a matter of striking the right balance between the efficiency offered by a centralized structure and the responsiveness provided by more decentralized decision-making,” says Mr. Coleman.

Achieving commercial success in emerging markets will require companies to rethink their business approach to these markets. Not only must they acquire new skills and organizational structures, they must let autonomy thrive, while leveraging strengths from headquarters. And they must develop and produce products at costs that meet the needs of consumers and industrial buyers with much lower per capita GDP characteristics.

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