Frontier Strategy Group hosted an exclusive breakfast for Turkey senior executives across sectors on June 1. While the overall mood amongst clients was confident, it was clear that executives are also under pressure from high corporate expectations, despite only moderate growth in demand, continued lira volatility, and fluctuating market confidence. Below are some of the key insights from the discussion on how they plan to tackle these challenges.
Turkey looks good in regional comparison
Turkey’s outlook of around 3 – 4% GDP growth for the next two to three years looks good when compared with other large markets in EMEA, many of which are seeing significant growth underperformance. For example, Russia is expected to grow on average below 1% YOY, Saudi Arabia around or below 2%, and South Africa around 1% in the years up to 2020. In comparison, growth levels in Turkey are largely supported by strong consumption, both public and private, that can create opportunities for MNCs across a variety of sectors.
However, this actually creates a challenging environment for senior Turkey executives who face increased expectations from corporate to deliver especially strong performance that helps their organizations make up for sluggish demand in markets such as Russia, South Africa and Saudi Arabia. This only exacerbates challenges, such as high competition and price sensitivity in both the B2C and B2G sectors, that are key challenges Turkey teams need to tackle.
Meanwhile, the Turkish economy faces both external and domestic risks. Weak global growth, security concerns and tense relations with Russia weigh on the tourism and export performance. Uncertainties about the rocky path to a presidential system are also delaying strong growth in private investments. These not only limit B2B opportunities for companies, but also dampen prospects for employment creation.
MNCs are expanding their customer bases
Despite the strong headline growth outlook, political and economic uncertainties, high competition, and continued price sensitivity are weighing on business sentiment. Live polling in our event showed that Turkey executives are generally expecting slightly worse performance in both LCU revenue and profitability growth in 2016, compared to 2015. While 54% of our clients in the room experienced above 10% LCU growth in 2015, only 40% expected to see this continue in 2016.
In order to adapt to this challenging environment, Turkey executives are mostly focusing on capturing new customer segments in order to 1) expand their customer base and generate more growth and 2) to diversify their exposure to abrupt falls in demand by adding new segments to their portfolio. This necessitates the launching of new products or the re-structuring of channel for some companies.
Managing risks is key to hitting targets
Although Turkey’s growth outlook is stable and moderate, there are numerous political and economic risks that can disrupt the country’s outlook, as well as business performance. Alongside the volatility of the Turkish lira, our clients were most worried about:
- The impact of tense relations with Russia on Turkey’s economy
- The impact of heightened insecurity on the tourism sector and on the predictability of consumer demand
- The rising levels of indebtedness in the private sector and the financial position of local partners
In order to manage these risks, FSG suggests:
- Taking a strategic, rather than a tactical approach to pricing. In an environment with relatively good consumption outlook, but high lira volatility, high inflation and price sensitivity, companies must:
- Develop a flexible pricing process that allows agility on the country-level
- View pricing as part of a broader framework of their overall competitive position in the market
- Select the right pricing tactics to support that framework, rather than just react to FX moves
- Re-thinking existing customer segments. MNCs may benefit from re-segmenting their business customers according to how vulnerable they’ll be to key risks such as falling tourist arrivals, rising indebtedness or lira depreciation. Sales teams that prioritize the least vulnerable customers could see less pressure to reduce prices and increase the likelihood of on-time payments
- Re-thinking channel. Companies must also ensure their existing channel structure allows them execute on key strategic imperatives, such as improving profitability and/or capturing new customer segments. Understanding the extent of financial strain your partners are in, and determining whether you’d like to support them financially or sever relations, can also make critical differences for your market share and profitability in the next 12 months
- Planning for indirect effects of rising insecurity. Planning for insecurity not only includes protecting operations from potential security threats, but also determining the most important threats that are specific to your business, and creating contingency plans in case that threat and its potential indirect effects materialize