Emerging Markets Insights

While Turkey is one of EMEA’s most attractive growth markets, MNCs face significant challenges in building a profitable business there. According to Frontier Strategy Group’s clients, strong local competition is one of the biggest obstacles to growth in Turkey. MNCs can improve their profitability and boost their performance in Turkey by leveraging increased scale to cut costs and create economies of scale.

FSG’s research shows that scale leads to improved profitability in Turkey at a higher rate than it does in the BRIC markets. One way in which MNCs can take advantage of this is through M&A. The M&A market in Turkey is particularly favorable due to the weak lira, the slowdown of the economy which is depressing valuations for export-oriented local players, as well as the upcoming introduction of Turkey’s new commercial code which will improve transparency and strengthen shareholders rights. As competition for the best assets from private equity funds intensifies, MNCs will have a limited opportunity to take advantage of this favorable environment and reap the benefits of improved profitability in Turkey.

Share/Bookmark

Despite the uncertainty surrounding the European debt crisis, geopolitical tensions in the Middle East, slowdowns in China and Brazil, and other external headwinds, multinational executives face aggressive 2012 emerging markets growth targets.  Frontier Strategy Group’s clients tell us that their 2012 targets are in line with 2011 performance, despite the fact that 2011 enjoyed more favorable tailwinds.

In the past, Western consumer products companies have been able to rely on higher-income consumers to drive growth.  These consumers often have tastes and preferences in line with those of Western consumers, and place a premium on the cachet of Western brands.  And, given the relatively early stage of market maturity, there was plenty of white space for first-movers to take advantage of.

Looking into the future, Western companies will face a new paradigm characterized by more competitors fighting for share of a decelerating premium market.  White space will shrink as more companies enter and expand in emerging markets in search of growth to offset the slowdown in the West.  Concurrently, growth of the premium segment in key markets such as China will plateau.  To achieve their targets in such an environment, executives will need to consider more innovative and aggressive strategies.

A new paradigm in emerging market customer dynamics

The changing dynamics of a softening and increasingly competitive premium market demand a new approach in how executives should think about emerging markets.   Aggregated across the BRICs, middle tier households (as measured by annual household income) will actually surpass lower-tier households in sheer quantity by 2014.  What this means is that the traditional market segmentation of the market pyramid will soon morph into what we like to refer to as the “Market Diamond”.  As executives are thinking about emerging markets, the Market Diamond represents the idea that the middle market will be so compelling that both local competitors and multinational companies cannot afford to ignore such a large market opportunity.

A race to the middle

The only way to fight the inevitable market squeeze (competition and lower growth at the top-end, and increased local competition from the bottom-end) is to prioritize product localization strategies and move down the diamond into this huge opportunity.  Growing into new market segments is not an easy task, and choosing the right strategies depends in part on executive tolerance for risk.

FSG has identified two key root challenges that are preventing companies and executives from implementing these eight middle market strategies: 1) corporate risk aversion, and 2) organizational misalignment.  To provide a framework for overcoming these challenges, FSG has defined eight steps that represent increasingly aggressive strategies for penetrating the middle market, and profiled the strategies and tactics leading companies have used to mitigate the risks associated with each strategy:

1. Redefine metrics of success
2. Operational efficiency
3. Adjusting price
4. Distribution strategy
5. Branding strategy
6. Adapting products
7. M&A
8. Reverse innovation

The best companies are acting now

Mounting evidence suggests that emerging market based companies will continue to develop new capabilities and increase in levels of sophistication.  Local competitors are increasingly following their current low-income customers into the middle market as those customers’ tastes and preferences evolve, and if multinationals fail to act now, they may find that they are arriving to the game too late.  As the world economy continues to globalize, sophisticated emerging market based companies are no longer anomalies, but are more frequently becoming the norm.  This trend illustrates that companies we now consider “local competitors”, might soon in the future become just “competitors”.

*Sam Osborn, Senior Analyst at Frontier  Strategy Group contributed to this piece.

Share/Bookmark

Turkey had a strong 2011, with GDP growth exceeding 8% for the year. However, we expect a noticeable slowdown in 2012 to 1.7% YoY. The main drivers of the slowdown are weakening industrial production as eurozone demand for Turkish exports slows, tightening credit conditions in the eurozone, and rising inflation in Turkey. These factors will come together to put downward pressure both on business and consumer demand and will affect multinational companies across a wide variety of sectors.

However, Turkey has consistently surprised on the upside over the past several months, and a very gradual slowdown of the economy in 2012 is becoming increasingly likely. What is more, as the Turkish lira remains relatively weak, the exchange rate will favor companies exporting from Turkey and will partly offset the declin in export demand from the eurozone. We expect Turkish growth to accelerate once again in 2013 as the effect of the eurozone crisis wears off and Turkey’s current account deficit narrows, improving market confidence in the country’s economic stability.

Meanwhile, 2012 is a year of opportunity for companies looking to invest on the Turkish market. With tighter credit conditions and low export demand putting pressure on the local companies’ financial stability, a weak currency, and lower investment from the eurozone, MNCs will have more targets to choose from for M&A this year, at a lower cost of investment, and facing weaker external competition for priority targets. With the market expected to rebound next year, companies that invest in Turkey this year will find themselves positioned for stronger growth in 2013 and beyond.

Share/Bookmark

During the final weeks of 2011, Frontier Strategy Group spent a great deal of time speaking with emerging markets executives to understand their top priorities for 2012.  The chief concern for nearly every executive we spoke with largely boils down to, “How can I maintain growth in the face of market deceleration?”  Corporate expectations are roughly in line with the performance achieved in 2011, despite increasing external headwinds, uncertainty, and volatility.

As we began to unpackage and dig a bit deeper into these concerns, we identified four very common issue sets that we will address in our quarterly global business analysis and executive forums in 2012:

Responding to Local Competitors

• What are the most successful Western MNCs doing to counter the threat of local and emerging markets-based rivals?
• What are the most successful tactics for responding to price competition while preserving margins?
• How can multinationals best leverage their strengths and mitigate their weaknesses to beat local companies in the war for talent?

Streamlining the Strategic Planning Process

• How can I accelerate processes and ensure that time spent on strategic planning yields strong returns?
• What are the best mechanisms for collecting local market insight from my team?
• How can I more effectively make my case to the corporate center?

Walking the Channel Management Tightrope: Direct vs. Indirect

• What is the right balance between direct and indirect sales?
• How have leading companies managed the transition from indirect to direct, or vice versa?
• When is the right time to terminate a distributor relationship, and how can I minimize disruption through the transition?

Managing the M&A Lifecycle

• When is inorganic growth preferable to organic growth?
• What are the best (and worst) practices for identifying and screening potential targets?
• How can I more seamlessly integrate the new team and infuse my “corporate DNA?”

What do you think will be the most important challenge facing emerging markets executives in 2012?  Give us your feedback by clicking on this link.

Share/Bookmark

The economic environment is full of uncertainties for companies operating in both developed and emerging markets. However, uncertainty can be the best environment for stimulation of long-term growth. To make the best investment decisions in this climate, managers will require reliable, up-to-date data and best practices and must learn from those who have succeeded and failed ahead of them. Companies that move first to pursue growth during this downturn will become the market leaders when the global economy inevitably recovers.

Prioritizing markets and thoroughly performing due diligence are essential pre-integration procedures that need to be carefully considered. An estimated 50-70% of acquisitions fail to deliver on their expected value. The information presented in this paper aims at significantly reducing the likelihood that your acquisition will fail to deliver on its expected value.

Frontier Strategy Group recently released an exclusive white paper titled, Opportunistic M&A – Upside Potential in a Downturn Environment.

For a copy of the complete white paper in addition to an invitation to an expert led teleconference please fill in your contact details using the form below:

Share/Bookmark

In yesterday’s Financial Times, Frontier Strategy Group Director of Global Research Matthew Lasov wrote an article entitled, Emerging Markets: Time is Ripe for Acquisitions. Lasov argues that as managers seek to meet or exceed ambitious growth targets during the next year, the pace of merger and acquisition activity (M&A) in emerging markets is likely to return to and exceed levels last seen in 2007.

The three drivers that will push managers to execute quickly on M&A opportunities are:

• The likelihood of a double-dip recession in developed economies
• Multinationals hold record-high cash reserves
• Scarcity of quality M&A targets in emerging markets

Lasov expands on his analysis in an exclusive Frontier Strategy Group white paper titled, Opportunistic M&A – Upside Potential in a Downturn Environment.

For a copy of the complete white paper in addition to an invitation to an expert led teleconference please fill in your contact details using the form below:

Share/Bookmark

From the housing bubble of 2007 to increased volatility in 2011, the graphic above breaks down the critical events that led to the current global economic instability.

Share/Bookmark

As developed economies continue to muddle through an increasingly tenuous economic recovery, the need for multinationals to find new sources of growth in emerging markets is becoming ever more important. This is a trend that Frontier Strategy Group has been tracking for some time across our client base, and one that is particularly apparent in Latin America, where renewed focus on the region has led to average growth targets in excess of 20% for 2011. In order to meet these growth targets, executives are adopting a combination of strategies that includes expansion into new geographies and consumer segments as well as implementation of aggressive M&A plans.

One country where multinationals have seen a tremendous amount of growth over the past two years is Brazil. In the first half of 2011 Frontier Strategy Group member companies averaged 27% YoY growth in Brazil despite a cooling economic environment. These types of results are capturing the attention of corporate centers; however, the stellar performance of Brazilian business units presents a serious conundrum for many heads of region.

The conundrum stems from the fact that as regional heads are seeing more and more of their top-line growth in Latin America come from Brazil, they are experiencing a narrowing of bottom-line margins. The cost of doing business in Brazil, or Custo Brasil as it is known locally, is so high that business units there contribute significantly less to overall profitability than they do in other countries. For executives tasked with maintaining current levels of profitability while achieving unprecedented growth targets, the challenge posed by Custo Brasil is particularly daunting.

For this reason, Frontier Strategy Group is undertaking an effort to help multinationals diagnose and quantify Custo Brasil. The output from this effort will give executives the tools to identify and mitigate some of the more pernicious effects of Custo Brasil in their cost structures and determine which costs are due to local conditions as opposed to organizational structure and execution. By finding ways to narrow the gap in profitability between Brazilian business units and the rest of Latin America, Frontier Strategy Group is looking to ensure the continued success of multinationals in O País do Amanhã.

If you are interested in participating in this effort, please take a moment to fill out the following survey by clicking here (go to survey) or pasting the following link into your web browser: (http://vista-survey.com/survey/v2/survey2.dsb?ID=5131690207).

Share/Bookmark

The following is a cross post from the All Roads Lead to China blog. The blog is written by Frontier Strategy Group Shanghai-based expert adviser Richard Brubaker.

Meeting government officials, and getting a picture with them in China, is one thing.  Working with them is a whole different animal, and over the course of my time in China I have had a number of experiences for both (although I am not one for pictures).

In many ways, the interactions that I have had with officials have been some of the most interesting in my time here, and with a number of my clients and my own projects involving government agencies on some level, I thought I would share a few things about what I feel makes for successful government relationships.  Or at least provides for the best chances:

1) Having a clear value proposition (product, project, or partnership) that is aligned with the objectives of the organization you are in discussions with.

This is a lesson I learned most recently with one client as we discussed a nationwide program with two agencies.  Agencies one was operationally the better partner, had more experience with the type of partnership we were discussing, but the alignment was not there as the goals of the organization (and the way they were measured by their superiors) were quite different.  which for the managers we were speaking with there was nothing but risk.  If the partnership succeeded, they would not be rewarded, but if there was a failure.. then they would be punished.

So, make sure there is alignment.

2) Understand the scope and scale of the potential partnership

Imagine being a cleantech firm with the most attractive technology, terms, or price.. but because your manufacturing is based in the EU.. and you can only supply a fraction of the need.  Why would a government who is looking for scalable solutions buy your product?  This is an issue many firms face, and really fail to realize that they face it.

The fact is that there are areas where foreign partnerships are needed, and needed in a big way, but if a firm cannot support the market for that need then it is not a solution that will rank as highly as a local firm who will risk it all to scale to the government need.

3) Have the necessary internal structures ready to manage the relationship.

Working with the government requires meetings.  a LOT of meetings, and if there is anything that adds to those meetings is it when the organization that they are working with is lacking the size, structure, and coordination that they are looking for.  If they are working with you, then there is likely a measure of risk that they are facing, and the best way to overcome their fears of instability (or failure) is to have a tight reporting structure who is geared up, anticipating the government needs, and is walking into the room with all the answers.

Walking into a meeting any other way will result in more meetings.. and more oversight… until the partner is comfortable again

4) Learn the difference between what official say, and what they (can) do

This is honestly one of the ones that  I have the hardest time with.  I am someone who (typically) acts first, and then speaks, but in a number of my interactions what I have found is that a lot of brainstorming occurs in meetings .. brainstorming that are in some ways used to place pressure on the counter party..  pressure that, if appropriately identified and deflected, can deflate through a range of responses

In the meeting, they are the master of their domain, but when it comes to actually executing, it will be their teams doing the work..  so, it is important to remember that there are things that are simply easier said than done… and things that are very difficult to speak about, but easily accomplished.

5) Be Prepared to Give

I was recently in the audience where James McGregor was speaking to a group of students and by far the best line of the speech was when he recounted the words of a leader he was speaking with…. that “If western firms want to be treated like Chinese firms, they should start acting like one”

I was once naive to think that I could ask for the moon and give nothing for it.. and many firms are no different.  Being accepted is something that can be very rare, and the opportunities once accepted can be very interesting, lucrative, etc… but there is a cost.  Perhaps it is giving up a bit of IP, or accepting the resumes of friends, or working with organizations that (while somehow aligned) you’d rather not… it is part of the game

Beyond these, and these are perhaps my top 5 for now, keeping an open mind when meeting with officials is really the only way to proceed forward. In one of my recent partnerships, what started off as a small and well defined project resulted in a partnership that is now growing in ways never imagined. It is one of those cases where the precedent was set, the partnership proved itself, and the curtain was lifted.

So, while there are certainly times where the partnerships can be tenuous and demanding, there are times where they can be rewarding.

The original post is titled Managing Government Relationships in China

Share/Bookmark