Emerging Market View: What Our Analysts Are Reading

EM View

After defaulting on some of its restructured debt on July 30, Argentina has petitioned the International Court of Justice to hear a lawsuit against the U.S. According to the Wall Street Journal, the South American nation claims that decisions by the U.S. courts in the legal battle between Argentina and some of its creditors have violated its sovereignty, but FSG’s senior analyst for Latin America research says it’s merely a stalling tactic.

“Argentina’s lawsuit against the U.S. is a stalling tactic intended to bolster the Argentine government’s political rhetoric. Most likely, its main result will be a further delay in negotiations with holdout creditors,” says Gabriela Mallory.

On Tuesday, South African publication The Daily Maverick asserted that “corrupt, incompetent governments and their repeated failure to protect their citizens” was more to blame for the Ebola outbreak than the disease itself. FSG’s Sub-Saharan Africa analyst Alexa Lion agrees, adding that the virus will have little affect on Western businesses involved in the region.

“Ebola is scary but is fairly isolated from Western economic interests. Its spread speaks more of government inability to contain the virus rather than high risk of contagion. MNCs must be vigilant and articulate health precautions to their partners, but also remain aware that it is business as usual in West Africa’s largest hubs,” she says.

In Indonesia, members of losing presidential candidate Prabowo Subainto’s political coalition are planning to form a special committee, or pansus, in the House of Representatives, claiming electoral fraud. Despite Prabowo’s large presence in the legislature, FSG’s Adam Jarcysk says it is unlikely the court will rule in his favor.

“The Prabowo camp’s decision to begin saber-rattling now about launching a pansus in October suggests that the Constitutional Court is likely to support Jokowi in its ruling later this month,” says Adam Jarczyk, FSG’s Asia Pacific Practice Leader.


FSG clients can stay up to date with analyst commentary on the latest emerging markets headlines on the client portal. Not a client?  Contact us for more information.

Beyond Beaches: The Caribbean’s Role in Latin America Business

The Caribbean offers a small but potentially significant and diverse set of markets for companies looking to expand and deepen their presence in Latin America. Indeed, in many cases the Caribbean presents opportunities that have been neglected by the competition. FSG has recently released a Caribbean Regional Overview to provide companies with an in-depth understanding of the region’s most significant growth drivers while assessing the comparative economic and operating environments that each of the major markets in the region offers.

CaribbeanOutlook_piechart


Caribbean_barchart

Representing only 5% of LATAM’s GDP, the Caribbean is characterized by a diverse range of economies with relatively small populations whose growth rates diverge significantly on a market-by-market basis. While some of the more commodity-based economies in the region are experiencing relatively robust growth, many markets in the region, including Jamaica and Puerto Rico, are suffering from severe fiscal strains that leave limited room for higher growth.

Multinationals tend to take an opportunistic rather than strategic approach to developing their Caribbean presence by striving to find the right distribution partner, or building on either global or regional relationships with key customers, instead of developing a specific Caribbean market entry and penetration strategy. As they expand their presence and seek to expand their market share and revenues from the region, companies tend to find managing the diverse range of political, economic, linguistic, and legal environments challenging, particularly as developing an on-the-ground presence across most of the region is generally not feasible.

This report should help align your team around the markets that provide the greatest risk-adjusted opportunity, and understand the key risks and scenarios for the Caribbean region.


For FSG clients interested in learning more about the Caribbean region, the full report is available here. Not a client? Contact us for more information.

Côte d’Ivoire: an Elephantine Opportunity

Cote d'Ivoire Elephant Crest
Côte d’Ivoire is Francophone West Africa’s largest economy.

Côte d’Ivoire is once again open for business. After a brief civil war in 2010-2011 that all but halted the economy, the country is witnessing a large stream of FDI targeted at a wide variety of sectors. The government is pushing Côte d’Ivoire, and especially its economic capital Abidjan, to become a hub for the wider French-speaking region.  Côte d’Ivoire was once Francophone West Africa’s most prosperous country, and it is poised to reclaim its title as the region’s economic powerhouse. This is due to a variety of reasons:

  • GDP Growth: Côte d’Ivoire is one of Sub-Saharan Africa’s fastest-growing economies, with GDP growth expected to reach 8.5% YOY in 2014. Its strong economic performance is driven by infrastructure developments, exploration in the mining, oil, and gas sectors, and growth in the telecom, banking, and consumer goods industries.
  • Stable macroeconomic environment: Unlike many Sub-Saharan African countries, Côte d’Ivoire displays low inflation, relatively low interest rates, and little currency volatility. The CFA Franc, also used in seven other French-speaking West African countries, is pegged to the euro and partially held in the French treasury. Companies therefore benefit from low exchange rate risk and transactions costs.
  • Business reforms: The government is aggressively promoting Côte d’Ivoire as a preferred destination for investment in West Africa. It has passed a series of reforms that increase transparency, decrease bureaucratic delays, digitize registries, and improve accessibility to relevant information. Moreover, major infrastructure projects will further open up the country to trade and promote new distribution channels as private consumption increases.

Although the country is on the right track to reconstruction, it still faces several challenges to reaching its goal of becoming an emerging economy with a robust middle class and an open market by 2030:

The 2010-2011 civil war erupted at the onset of presidential elections pitting Laurent Gbagbo against Alassane Ouattara.
The 2010-2011 civil war erupted at the onset of presidential elections pitting Laurent Gbagbo against Alassane Ouattara.
  • Political risk: Society in Côte d’Ivoire remains divided in the wake of the 2010-2011 civil war, which erupted when then-president Lauren Gbagbo refused to concede to president-elect and current incumbent Alassane Ouattara. The conflict around Gbagbo’s refusal to give power was the culmination of years of tensions between adherents to opposing political parties and the legal status of Ivoirians of foreign descent. Now that Gbagbo is indicted at the ICC and Ouattara is expected to re-run for president, uncertainty prevails over the security situation ahead of the October 2015 presidential election. The common sentiment on the ground is to avoid war at all costs, but the process of reconciliation has been slow, old wounds remain, and skirmishes are likely.
  • Wealth gap: Poverty is acute and the gap between wealthy and poor is very wide. The middle class remains small and concentrated in Abidjan. Government policies that target small and medium enterprises (SMEs), the agriculture sector, and value-added industries are vital to bridging the wealth gap and encouraging inclusive growth.

As such, Côte d’Ivoire is most attractive when taken in context. It is part of the West African Economic and Monetary Union (WAEMU), a common monetary, legal, and interbank market of eight French-speaking countries: Mali, Niger, Benin, Togo, Burkina Faso, Guinea Bissau, Senegal and Côte d’Ivoire. As the wealthiest, most developed country in this group, Côte d’Ivoire is an attractive hub for companies seeking to tap into less accessible, yet rapidly growing Francophone countries.  As more companies such as Standard Bank, Carrefour, and Accor Hotels enter Abidjan, a wider range of business infrastructure will become available and boost Abidjan’s attractiveness.

Côte d’Ivoire is a long-term game. While wealth is not widespread and politics are sensitive, Côte d’Ivoire has the macroeconomic fundamentals, business reforms, and infrastructure projects to become the first stop for companies entering Francophone West Africa.


FSG clients can access our full report, “Market Spotlight: Cote D’Ivoire,” on the client portal.  Not a client? Contact us for more information.

Default Redux: Argentina Fails to Reach Agreement with Holdout Creditors

Argentina’s thirty day grace period to pay holdout creditors in full and make a scheduled interest payment to restructured bondholders expired on Wednesday (July 30). Argentina was negotiating with holdout creditors through a court-appointed mediator, but ultimately no agreement was reached, and Judge Griesa denied Argentina’s request for a stay, which would have allowed negotiations to continue without triggering default. As a result, Standard & Poor’s downgraded Argentina’s foreign-currency credit rating to technical default at the close of the business day on Wednesday.

S&P has indicated that this rating downgrade may be reversed if and when Argentina makes its missed coupon payment—which, in accordance with the US Supreme Court’s ruling on the matter, can only happen when Argentina either pays or reaches a deal with holdout creditors.

What does this mean for Argentina and the business environment?

As we noted in our previous post on this subject, there is little risk of regional contagion, as Argentina has been locked out of international capital markets since its earlier default in 2001-2002. The most significant consequence of this default is that Argentina will remain locked out of capital markets unless and until a deal with holdout creditors is reached and they are able to resume coupon payments to restructured bond holders.

This means that domestic companies, government agencies, municipalities, and consumers will face more restrictive credit conditions and may in fact see their access to credit dry up. The default will also prevent the Argentine government from returning to capital markets to borrow abroad to bolster reserves and fund deficit spending, increasing the likelihood of either a forced shift to austerity or a reversion to expansionary monetary policy which will stoke already-high inflation. There are also negative implications for the exchange rate and increased likelihood of additional one-off devaluation(s), as Argentine reserves remain precipitously low, capital flight is likely, and the likelihood of kick-starting FDI is much lower in the wake of default.

Argentina Default Chart

Default also has financial implications for Argentina, in that cross-default clauses give other bondholders the right to demand immediate payment of the principal and all interest due. There are also cross-default provisions which would allow investors owning other series of bonds worth an estimated US$ 29 billion (roughly equal to Argentina’s total foreign exchange reserves) to make acceleration demands as well, even if they themselves were not owed a coupon payment on June 30. Most observers feel that it is unlikely this would happen over the near term, but in absence of a deal, the risk of such troubles would increase.

Key signposts to monitor include:

  • Possibility of a deal: Argentina can still emerge from default if a settlement is reached in the next few days and the missed coupon payment is issued. Given the financial liabilities entailed by the threat of acceleration, it is certainly in Argentina’s interest to reach a deal, either bilaterally or, perhaps, as yesterday’s events suggest, through a third party such as the banking association.
  • Bond prices: Much will depend on government actions; at present, prices have fallen but remain above levels seen in Argentina’s previous default; future movements will depend on likelihood of a deal being reached
  • International Swaps and Derivatives Association’s ruling: The ISDA’s ruling is expected later this week/early next week, and will formally trigger CDS payments

What can you do to help protect your business?

  • FSG has a host of resources on contingency planning and management challenges in risky markets, including Argentina and Venezuela. We encourage FSG clients to take a look at these resources on our portal, and reach out to your account manager to set up an analyst conversation for an in-depth walk through.
  • We recently released a piece on scenario planning for Argentina, which will help you set expectations regarding the implications of Argentina’s near- to medium-term outlook for your business.

The glory and pitfalls of the Nigerian entrepreneurial spirit

The streets of Nigeria’s business capital, Lagos, buzz with activity. Vendors making their way through cars stuck in traffic sell everything from newspapers to chewing gum to light bulbs. Shop owners are lovingly displaying products in front of their little stalls. In the city’s vast markets, one could walk for hours among the different sections dedicated to pharmaceutical products, cosmetics, alcoholic beverages, or fabrics. When visiting the city’s various business districts, Nigerians in sharp suits are busy closing the next deal. Everyone is selling something. Or as my driver put it, they are “chasing the money.”

Market in Lagos, Nigeria
Market in Lagos, Nigeria | Wikimedia Commons

The dynamic commercial activity is living evidence of the country’s vast consumer opportunity. It seems that for every person who is selling, there are several others buying. Rarely in any western country would one see 20 to 30 Mercedes Benz trucks, newly purchased by a local business, driving in line to reach their final destination.

At the heart of all this lies Nigerians’ desire for upward social mobility, the driving force of Nigeria’s entrepreneurial spirit.

Never Satisfied

Never Satisfied

The “Never Satisfied” docked on Victoria Island, Nigeria

From what I have learned and seen on the ground, Nigerians are tremendously positive about the future. Many strive to become the country’s next Aliko Dangote – Africa’s richest man. Dangote’s wealth is visible when passing his large yacht docking on Victoria Island. A slightly smaller, but still considerably sized, boat in close proximity is called Never Satisfied. The name, in my opinion, summarizes the Nigerian desire for success.

This eagerness for more is reflected in the priorities of Nigerian workers – be they employees or entrepreneurs. Generating as much money as possible is a top priority.

“Contrary to other African countries, employees are less motivated by non-financial incentives such as private healthcare. They will always much rather opt for a higher salary,” a local recruiter explains. “This comes down to the fact that people are used to fending for themselves. They don’t expect social services from the government. Because, even when social services are provided, they are frequently insufficient and of low quality.”

For example, most Nigerians with which I spoke agree that since the government introduced free education, the educational system has deteriorated dramatically.

Social Responsibility

The Nigerian search for money is not only about increasing individual wealth, but it also stems from a broader sense of responsibility to the wider family and community.

“I have to provide for about 30–40 people,” the CEO of one of the country’s largest investment firms points out.

When Dangote sets up a new cement plant in a small town, the company will make sure that those living there will be employed at the factory or receive training. Other companies have given ownership shares to local leaders, not only to engage the community, but also as a way to protect their investment.

Displaying Success

The fact that a few strong members of society take responsibility for others also means they are proud of their achievements and eager to share them – something that is both socially accepted and expected of them. This tendency can be observed, for example, in the offices of successful local business people. Pictures of a company’s leader shaking hands with influential politicians from around the world typically decorate waiting rooms. Magazine covers featuring the leader, whether male or female, are prominently displayed, as are entire books containing tribute after tribute to the person.

“When I first walked into the office of a local official, I was greeted by a life-sized photograph of him sporting a full uniform and a pair of very cool sunglasses,” a European diplomat told me.

The Importance of Vision

As eager as Nigerians are to succeed here and now, they also understand that their labour could take years to bear fruit as the country’s development accelerates.

“The opportunity is long term. Often western businesses don’t understand that. Yes, we have many opportunities, but they will only be materialized once we solve our problems with power supply or invest in the entire agricultural supply chain, for example. But these things will take decades to evolve,” a business owner in the industrial sector explains.

As Nigeria’s entrepreneurs build their business empires, their lack of satisfaction with the current state of the country will be a driving force for Nigeria’s development. What Nigeria needs is not merely an entrepreneurial spirit. It needs leaders with a long-term vision that reflects the country’s development requirements. And most importantly, it needs leaders who will never be satisfied with less, not just in terms of the size of their boats, but in relation to upward social mobility for their communities and their country.

In the meantime, western brands catering to the expensive tastes of Nigeria’s elite will be the main benefactors of the country’s desire for more.


Anna Rosenberg is Head of Sub-Saharan Africa Research at Frontier Strategy Group. Anna is currently on a research trip to Nigeria and Ghana, meeting representatives from local and international businesses, journalists and government officials. Follow Anna on twitter @anna_rosenberg

Emerging Market View: What Our Analysts Are Reading

EM View

On Saturday, the United States closed its embassy in Libya and evacuated its staff under military guard. The closing was a response to escalated violence in Tripoli, according to the New York Times, and FSG’s Matthew Spivack says it will have a significant impact on western businesses in the area.

“The news that the US closed its embassy and the UK is evacuating some staff in Libya means that US- and UK-based companies will have little or no on-the-ground government resources to assist on investment issues. While the ongoing instability has kept away much of Western investment, companies with a local presence should already be enacting contingency plans to protect local staff and partners,” says FSG’s Practice Leader for the Middle East & North Africa, Matthew Spivack.

In Latin America this week, Argentina approached its second default in 13 years as it failed to reach a deal with creditors. Despite hope that a last-minute agreement could be reached, the Wall Street Journal reported that talks with bondholders Wednesday sent the country’s stocks plummeting.

“As the business day comes to a close on Wednesday, Argentina has failed to reach a deal with holdout creditors, and S&P has downgraded its foreign-currency credit rating to selective default. Bond and stock prices rose throughout the day in anticipation of a deal that has yet to materialize, although Argentine banks are reportedly scrambling to come up with a plan to help prevent default,” says Christine Herlihy, FSG’s Senior Analyst for Latin America.

Meanwhile in India, the founders of Flipkart, an e-commerce company that wishes to be “the first $100 billion internet company from India,” raised an additional $1 billion in funding, according to the Economic Times. With investors including Tiger Global, Naspers, and Singapore’s GIC, Flipkart has become the largest online retailer in the country.

“The potential for E-commerce in a country with a humongous young and tech savvy population and one that suffers from perpetual traffic issues is becoming clear as its online-retail poster child goes even bigger. Having hit more than USD 1 billion in revenues recently, India’s Flipkart has now raised 1 billion in funding, indicative of investor confidence in the rise of this new channel of commerce,” says FSG’s Senior Analyst for Asia Pacific, Shishir Sinha

FSG clients can keep up to date with analyst commentary on the headlines that affect their business on the client portal.

Rising Competition from ASEAN-based Corporations

As the ASEAN region begins to mature, the power, reach and influence of its indigenous companies have begun to increase dramatically.  We’ve witnessed similar rises of local and regional companies in other parts of the world — East Asian companies in the 1980s-1990s, Multi-Latinas over the last decade and mostly recently we are seeing increasing competition from Chinese firms.

ASEAN’s resilient performance over the past decade has allowed many of its local companies to rapidly expand across the region and beyond, giving birth to numerous ASEAN-based corporations.

Asean Local Competition

Under the Radar

Companies from ASEAN often do not receive much attention from Western analysts who instead focus on China and India. However, ASEAN firms are a force to be reckoned with; keeping pace with the region’s growth, the number of ASEAN companies on Forbes’ list of Global 2000 companies has more than doubled in the past seven years. Moreover, ASEAN has more companies on the Forbes’ Global 2000 list than India, Brazil, or Russia. The region is also home to 227 companies with more than $1 billion in revenues, making it the seventh-largest host for such companies, or 3% of the global total.

ASEAN countries and companies have continued to invest within the region at a steadily growing pace, with 2012 seeing twice the amount of intra-ASEAN FDI, in dollar terms, compared to 2008 (pre-crisis). The strengthening of intra-ASEAN investment can be attributed to a number of factors, including (a) the maturity of a growing number of companies in ASEAN who are venturing abroad, (b) regional integration, which provides future opportunities to scale, (c) improved financial capacities of ASEAN companies, and (d) home-country measures that encourage overseas FDI through institutional and informational support.

Western MNCs Should Monitor the Business Climate

Hailing from a new group of countries and leveraging competitive advantages that Western firms have not seen before, emerging-market multinationals have shaken up many stagnant, mature industries in developed countries. While not mature enough to rock Western markets, the rise of ASEAN corporations is going to lead to an increased fight for resources (both natural and human), heightened competition for several fast-growing segments, and the reduction of prices alongside faster innovation in ASEAN. 

MNCs should explore all potential partnerships with regional firms; ASEAN-based companies understand the market better, tend to have deeper distribution networks, and lower-cost operations. Emerging-market multinationals are born in a new world, one that is highly globalized and integrated, where internationalization will happen much faster than experienced by MNCs, making them much more of a threat to long-established businesses.

For more information on the rising competition of ASEAN-based corporations, FSG clients can access the full report on the client portal.

Brazil’s Second M&A Wave: Best Practices for Approaching Acquisitions in Brazil

Multinationals’ interest in mergers and acquisitions (M&A) in Brazil is increasing as valuations fall and the real depreciates. Additionally, the divestment of non-core assets by other companies and the need for growth capital in the SME space is generating new strategic acquisition targets for multinationals in Brazil.

However, M&A is a very time-consuming and resource-intensive activity, and many acquisitions fail to deliver expected returns to shareholders (see chart). In Brazil, M&A failure can stem from a multitude of factors, including not having a structured process for mapping and screening potential targets; failure to assess tax, labor and environmental contingencies correctly; not including price adjustment mechanisms; failure to retain key employees; and conducting a poorly-structured post-acquisition integration process.

Chart: Brazil M&AFSG recently published a report specifically addressing ways to overcome common pitfalls in the execution of an M&A deal in Brazil. In our research we focused on best practices in the following areas:

1. How to determine whether an acquisition is the right strategy for growth in Brazil

Not all companies are suited for a strategic acquisition in Brazil, and even if they feel they are, it might not be the right moment to embark on such a time- and resource-consuming endeavor. Before you decide on an acquisition in Brazil ask yourself whether growing inorganically fits your company’s culture and strategy, and whether your company is ready for an acquisition in Brazil.

Finally, even if the answers to the questions above in “Yes”, there is a final question you should be asking yourself, which is whether an acquisition is a better alternative than growing organically. The decision between organic and inorganic growth will depend on the capabilities you need to grow in Brazil, on whether or not you will be able to find an appropriate target that has those capabilities, and ultimately on the time and cost of building up those capabilities organically versus the time and cost of acquiring them through an acquisition.

2. Tactics for tackling key challenges that arise during the execution of a strategic acquisition in Brazil: 

Conducting a strategic acquisition in Brazil can prove a long and challenging road. From the first phase of an acquisition – mapping and screening potential targets, to the final step – post-acquisition integration, multinationals should be equipped with the tools and best practices to successfully navigate the acquisition process.Just to give an example, since observing tax, labor and environmental laws is so challenging for most SMEs in Brazil, many of them choose not to be fully compliant with those laws in order to gain cost advantages and stay profitable. As such, most companies in Brazil have learned to coexist with pending litigations, however a multinational is likely to attract more attention from regulators and tax authorities, which could result in significant contingencies were the multinational to acquire a non-compliant SME. Therefore, when conducting due diligence, multinationals should be very diligent in finding all the “skeletons in the closet”, which also implies getting external help from local lawyers and tax advisors.

3. Assessing the pros and cons of partnering with a private equity fund as an overarching risk mitigation strategy: 

The rise of private equity in Brazil and entry of foreign funds present interesting alternatives to standard acquisitions. Acquiring a company from a private equity fund is the most effective way to find a target that is already compliant with multinational corporate standards in areas such as governance, accounting or systems, as well as with local tax, labor and environmental standards.

Some private equity funds have specialized in investment opportunities that they can later exit selling to multinationals via strategic acquisitions. However, buying from a private equity fund comes at a price. Therefore, multinationals will need to assess whether they can generate enough additional value from the PE fund’s asset to still achieve the desired return on investment on that acquisition. This is especially crucial in Brazil, where payback periods tend to be longer than in other emerging markets as a consequence of “custo Brasil”, or the high cost of doing business in the country.

For more on best practices when approaching mergers and acquisitions in Brazil, FSG clients can access reports on the client portal.

Four things MNC executives need to know about the latest sanctions against Russia

In what has been the harshest Western response to Russia’s involvement in the Ukraine crisis, the EU today imposed broad – so called Level 3 – sanctions against Russia. The US is likely to follow suit shortly.

European Parliament in Brussels (Image: Reuters)
European Parliament in Brussels (Image: Reuters)
Four things MNCs need to know about the implications of these sanctions:

1. Credit costs will increase considerably and lending will become more restricted.

The sanctions will restrict the ability of majority state-owned Russian banks to conduct long-term borrowing on European financial markets. Russia’s biggest banks – Sberbank and VTB – will both be affected, in addition to a host of smaller banks, including ones already targeted by US sanctions. Sberbank alone holds 29.0% of Russian banking sector assets and accounts for 50.0% of retail and 32.0% of commercial lending. Shut out of EU and (likely) US financial markets, these banks will see their funding costs increase considerably. In response, they are likely to reduce new lending to both businesses and consumers and increase interest rates. Importantly, however, these banks will be able to continue processing financial transactions in US dollars and euro.

2. Sanctions will have a considerable impact on investment.

Investment in Russia is already contracting – it decreased by close to 5.0% in Q1 2014. Faced with weaker demand, higher financing costs, and political uncertainty, businesses in Russia will be more likely to postpone investments and put long-term plans on hold until the situation stabilizes.

3. The Russian government may create operational problems for Western MNCs.

Russian government discussions about import substitution and re-orienting trade toward Asia have been going on since the annexation of Crimea earlier this year. The new sanctions give proponents of such ideas a strong argument for more aggressive measures to restrict Western MNCs from the market, particularly companies that sell to the government. MNCs should be prepared for a range of Russian government responses, from slightly more onerous inspections to the outright expropriation of foreign assets, although the latter is not highly likely.

4. Companies should have a plan in place that accounts for a deteriorating operating environment:

Most MNCs’s Russia plans built in 2013 or even early 2014 are likely no longer reflective of the reality on the ground. Companies need to reassess the regulatory, operational, and economic environment in which their business will be operating in the coming months and prepare their business accordingly. FSG clients can read suggested actions on building such a plan here.

Customer Segmentation in Emerging Markets

Who Moved My Cheese?

It’s no secret the emerging market business environment has become more challenging over the last few years.  Currently, MNC growth rates are contracting on average.  An FSG survey of 52 MNC executives revealed that while 1 in 5 had enjoyed emerging markets regional revenue growth above 20% in 2011-2012, by 2014 only 1 in 10 expected such high performance.Only 39% of MNCs surveyed are satisfied with their differentiation vis-a-vis competitors.

While capital flow reversals and other macroeconomic cyclical trends account for part of this change, much of it is due to a more permanent shift: the rise of serious local competitors and more discerning local customers.  Only 39% of MNCs surveyed are satisfied with their differentiation vis-à-vis competitors.  A more competitive landscape means that market power in emerging markets is shifting from the seller to the customer.

Opportunity is still plentiful for global MNCs, but it is not readily available by just showing up with a fancy global brand and finding a good distributor.  In the metaphor of the business classic “Who Moved My Cheese?” someone has moved the cheese in emerging markets.  The best MNCs are trying to figure out where the cheese is now, rather than sitting in their maze staring at the corner where the cheese used to be.

Redrawing the Market Map from the Customer’s Perspective

FSG research suggests that in this fluctuating environment, a management tactic that raises some MNC out-performers above the rest is a dynamic approach to customer segmentation that stays on its toes and really puts the customer’s perspective at the center of the matter.

Many companies would say they do “customer segmentation,” but what they actually do is segment their markets based on their own internal logic – their organizational geography, sales channel model (direct vs. indirect) and product lines.  And those that do engage in customer-oriented segmentation often take too superficial an approach, looking at outside descriptions of their customers, such as customer purchasing power (industry and size of the firm in B2B markets, gender and income bracket in B2C).

It may sound obvious, but the most powerful (both insightful and commercially effective) customer segmentation is customer-centric.  While there are differences in the segmentation techniques most applicable for different industries, overall there is a pattern of common principles among those that are getting this right:

  1. Focus externally, not internally: What does the market look like from the buyer’s perspective?  What do they want, and what can they currently have at what price point?  These questions can only be answered by looking at the buyer’s options, which means incorporating competitive intelligence as a core input into any segments-refresh exercise.  In our survey results, MNCs that applied this principle closed an average of 15x more deals per month than the rest.
  2. Review your segmentation annually: Markets can change significantly in twelve month, and so can customer’s preferences and options.  Make sure to review your segmentation on an annual basis to ensure your segment boundaries are still drawn in the right place.  This does not mean you launch a new segmentation approach every year – that would definitely be overkill.  Instead it is a considerate gut-check that should reveal whether or not adjustments are needed.  This is usually best done right before launching into your strategic planning season.  Companies that apply this principle enjoyed 41% better sales conversation rates.
  3. Do not put a single function in charge of segmentation: Interestingly, while it is common for B2C companies to put Marketing in charge of segmentation, and B2B companies to put Sales in charge, the most effective companies make their segment reviews a truly cross-functional exercise, bringing to the table and empowering both Sales and Marketing but also Finance, Strategy, Product, and Operations.  When everyone understands what is meant by a customer segment, this creates a common language for coordinating commercial intent.  Companies that take this approach are 58% more likely to have an emerging markets regional revenue growth rate above 10% year-over-year.
  4. Consider adjacent and new markets: Don’t just re-segment your old market space, think creatively!  Are there entire groups of potential customers we haven’t previously considered or taken seriously?  What are the barriers to entry?  Can and should we get there ahead of the competition?  Companies that persistently ask these questions enjoyed 153% higher market share growth over the past two years.

Together, these four principles ensure that an MNC regional or country-level organization is tackling the practical question of how best to delineate and name current pockets of greater and lesser opportunity.  The follow-up question is how to engage the high-opportunity pockets and find the cheese.

Going Deeper: Three Kinds of Customer Segmentation

So far we have been discussing “customer segmentation” as if it is a unified exercise, for a unified purpose – but it isn’t.  FSG’s recent study goes deeper into three kinds of segmentation that are key to above-average sales performance.  They are:

  • Market segmentation for building commercial strategy
  • Behavioral segmentation for tailoring marketing and sales pitches
  • Profitability segmentation for prioritizing sales team members’ efforts

Each of these segmentation approaches provides a low-cost, high impact strategy to allocate resources where it matters.  We will cover each of these three in more detail over the next few weeks in subsequent blog posts. You can also listen to the podcast on customer segmentation on our Emerging Markets Insights iTunes page.

For further information on how to implement effective customer segmentation for your business, FSG clients should contact their client services director, and prospective clients may send us an email at info@frontierstrategygroup.com.  To learn more about Frontier Strategy Group please visit our website at www.frontierstrategygroup.com.