As outlined last week, emerging markets’ contribution to corporate revenue and margin in 2015 will be neither as stable or as pervasive as many executives have taken for granted. Persistent and pervasive global economic changes prompted by falling energy prices, a strong US dollar and changing interest rate expectations is shifting the way that multinational executives position and plan for emerging markets in their portfolios.
This week’s post will focus on how the competitive environment in emerging markets is shifting as a result of the global macroeconomic environment. In 2015, plans are even more likely than in other years to be disrupted as major cost and growth assumptions have already been overturned. To capture share and margin, companies need to be more agile to local changes.
The changing competitive environment in emerging markets
Global economic conditions have shifted since multinational corporations completed their strategic plans for 2015. Cost and growth assumptions are overturned as local currencies lose their value and political unrest triggers downward revisions to economic growth. Executives, particularly at the corporate center are not only unprepared to adapt but are often caught without a strong understanding of which strategic adjustments would be effective.
Several challenges contribute to executives’ inflexibility in emerging markets. Poor data quality and limited local strategy training can lead to plan derailment. However, FSG has found that strong internal alignment between corporate, regional and country-level teams help to build resilience against external surprises and allow timely course-correction. By taking explicit steps to document, review and identify where assumptions have been derailed, multinationals can avoid reactive course-corrections and instead be proactive by turning macroeconomic shifts into cost-saving opportunities. These steps should begin at the local level.
Actions for multinationals
While the competitive environment is changing, your business doesn’t have to be caught off guard. Instead, executives should consider priming their organizations from the bottom up to keep strategic plans on course.
FSG is advising executives who find their competitive environment shifting to focus on two activities:
- Invest in local strategic capabilities: The need for more frequent course correction and strategy adjustment means that emerging market plans cannot be managed from the corporate center; you will be out-managed by local firms and other multinational corporations with strong local teams. Cultivate strong strategic thinking capabilities at the regional and country levels, and review plan assumptions and risks frequently. Consider a contingency planning workshop to jump-start localized thinking. The result will be a more thorough yet agile understanding of local risks and opportunities.
- Localize manufacturing: As a result of currency depreciation (compared to a strong dollar) and interest rate differentials, emerging market valuations are currently cheap compared to long-term averages and will likely become cheaper as the US Federal Reserve raises interest rates later this year. In this economic environment, localized manufacturing is a significant driver of cost savings. Executives should identify markets in which local currency depreciation and inexpensive company valuations make local production options more affordable.
Each of these actions contribute to more resilient business plans that allow companies to protect their strategies against the instability of emerging markets’ growth and profitability.
This entry is the second in a series of three posts outlining how multinational corporations can course-correct strategies and improve profitability where strategic plans have already been disrupted. Stay tuned for Part III of this series which examines how businesses can course-correct to maintain profitability.
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