Don’t Drive at Night without Headlights: How Econometrics Can Illuminate the Economic Roadway

Headlights at night

The United States Federal Reserve (Fed) is charged with driving some of the most important monetary policies for the global marketplace, with implications spanning both developed and emerging economies.  Collectively, the Fed has some of the brightest economists, combining both academic theory and best business practices for formulating monetary policy.

I recently had the pleasure of sitting down with Dr. Jaime Marquez, a former Senior International Economist at the Fed and close advisor to Frontier Strategy Group, for a podcast on best practices deployed by the Fed for modeling the international economy, as well as how to best apply econometrics to business forecasting.  Our conversation covered ways econometrics can shed light on business planning uncertainty, and how multinationals can utilize econometrics to quantify uncertainty and assess factors important to business.  The podcast explores:

  • The definition of econometrics and how it can be used for financial modeling and forecasting
  • Best practices for selecting metadata and indicators to build robust models for business
  • The importance of monitoring and readjusting models as external events affect the economic climate

I think Jaime captured the key takeaway perfectly using an analogy of a car’s headlights: “You can drive at night without headlights, but you aren’t going to make it very far without crashing.”  Econometrics are the headlights companies can use to help them steer through the uncertainty and obstacles they face, especially in emerging markets where increased volatility and instability abound.  However, Jaime cautions that applying econometrics is certainly not a one-size-fit-all approach, but a general concept that can be adapted to each companies’ strategic goals and business models; this is where Frontier Strategy Group can help.  Jaime also shares his thoughts on trends to watch in 2014, as well as a bold prediction for the coming year at the Federal Reserve. I highly recommend you listen to our insightful 30-minute conversation.  You can download the podcast or subscribe to our Emerging Markets Insights Podcast Series.

Executive Survey Reveals Strategic Planning in Emerging Markets Often Flawed

Global Benchmarking

Multinational corporations (MNCs) in emerging markets are placing strategic decision-making power in their regional and country leaders’ hands. Despite having good access to the front lines, leaders lack the tools and data to ensure that their strategy is resilient in the face of volatility. Data deficiencies in emerging markets are a deeply felt problem for decision makers. Strategic and business plans are based on assumptions that are seldom revisited, and decision makers do not use the right toolkit to compensate for these challenges.

FSG conducted a survey of 226 senior emerging-market leaders at 120 MNCs and discovered that region and country heads tend to have responsibility for five out of six of the most important business strategy decisions in their region. These areas range from sales and marketing to pricing and product mix. Product innovation is the only category for which country and regional leaders do not control strategic decisions.

Despite the superior insight provided by their close proximity to a region or country, surveyed executives report poor data availability and reliability for six of the eight market-data categories considered important to decision making. As a result, decision-making power and overall strategy are weakened.

Plans in emerging markets are highly vulnerable to external disruptions, yet planning is performed in static fashion. Only 40% of survey respondents use scenarios to test the robustness of country plans, and few organizations revisit their plan as their operating conditions change. The survey’s results reveal the gap between what is expected of country and regional leaders and how well they are equipped to plan and execute strategy. FSG advises senior regional leaders not to recentralize strategic control but to better equip regional leaders by emphasizing scenario planning and honing targeted methods to overcome poor data.

FSG clients can review the full benchmarking report by clicking here.

Emerging Market Executive Spotlight: Disruptive Innovation with Terry Thiele

Disruptive Innovation

Frontier Strategy Group has built a vibrant and dynamic community of emerging market thought leaders ranging from our client executives to academics to former diplomats. In the case of our most recent Emerging Market Executive Spotlight Podcast all three definitions hold true. FSG’s CEO Richard Leggett recently recorded an interview with Terry Thiele, Director Sustainable Product Strategies at Lubrizol Corporation on the topics of disruptive innovation and related scenario planning. Terry’s career spans across the military, law, national security, and most recently in the private sector with Lubrizol Corporation’s strategic planning support and regulatory compliance department. You may download the podcast by clicking here, or subscribe to our Emerging Markets Podcast Series.

In this Emerging Market Executive Spotlight, Terry discusses the definitions, risks, and opportunities associated with disruptive innovation and the methods of scenario planning to prepare for its effects on global business. Innovation has and always will be disruptive, but not always in a negative manner. In fact, disruptive innovation can revolutionize a product, business, or an entire industry. Though still in the early stages of development, 3D printing is one technology that has worldwide economic implications and the potential to be extraordinarily disruptive to every aspect of the traditional value chain, especially in emerging markets. Though as Terry states, it’s not the technology that poses the problem but how companies respond to the disruptive change. 3D printing certainly has the potential to initiate the 3rd industrial revolution but is dependent on two things: cost competiveness and performance characteristics.

Listen to the podcast for further explanation of how to utilize scenario planning to properly prepare business for disruptive innovations such as 3D printing, as well as other insight on the matter from Terry Thiele.

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Terry V. Thiele has been with The Lubrizol Corporation for 13 years during which time his principal responsibilities have included strategic planning support and regulatory compliance and advocacy, with an emphasis on environmental matters. In particular, Terry has led Lubrizol’s growing involvement with environmental life cycle assessments. He represents Lubrizol on the UN Clean Fuels & Vehicles Partnership, the American Chemistry Council’s Value Chain Outreach Committee, the American Petroleum Institute’s Used Oil Taskforce and the European Chemical Industry Council’s LCA Taskforce.  Before joining Lubrizol, Terry performed environmental policy and government relations functions for AB Electrolux and the General Electric Company.  Prior to that he spent the first 11 years of his career working in the Federal government with service in the Treasury Department, the Central Intelligence Agency, The Defense Intelligence Agency and the Executive Office of the President.  He received his B.A. magna cum laude from Princeton University, his J.D. from the NYU School of Law and is a graduate of the National War College.  Terry served for over 10 years in the U.S. Army Reserve, Judge Advocate General Corps, honorably discharged with the rank of captain.

Multinationals Are Reconsidering Their Operating Models in Venezuela

Venezuela has emerged as one of the most significant downside risks to 2013 performance for multinationals operating in Latin America. A devaluation in February and prolonged dollar shortages have not only hammered the value of Venezuelan business units, but in many instances have  rendered their operating models unfeasible.

While a minority of FSG clients are considering exiting Venezuela, some are asking whether a change in their operating model could position them to capture more opportunities over the medium-to-long term, especially given Venezuela’s recent history as one of the most profitable consumer markets in Latin America. Indeed, some companies, particularly in the consumer goods and healthcare space have been considering increasing their direct presence in the market, including opening up local offices with marketing and sales teams in order to capitalize on the struggles of competitors. The benefits of establishing a local office include allowing distributors to pay multinationals in local currency,  to better capture local opportunities, through stronger direct management of distributors or through a more robust direct presence.

For companies who already have a long established presence in Venezuela, the biggest challenge is how to best shield their local revenues from additional devaluation over the next twelve months. Meanwhile, the inability to repatriate currency after the shutdown of SITME and the inoperability of SICAD has only further compounded the situation. As such, companies such as Telefonica and Kimberly-Clark have decided to increase their capital expenditures over the short term and invest in their local production facilities, thus shielding cash assets from further devaluation while putting them to productive use. Other companies have considered investing in commercial real estate or other fixed assets only marginally related to their business models.

Regardless of their current operating model, multinationals should be cautious about the timing of any change in their strategy in Venezuela. The economic and business environment in the country is as likely as not to worsen over the next six months, and the Venezuelan government has thus far failed to pursue a coherent strategy to returning the economy to a period of relative stability, let alone high growth. Prospects for political and economic destabilization remain high, and companies should continue to prioritize contingency planning over growth strategies over the coming months.

PODCAST: Strategic Planning – FSG Expert Interview Part 2 of 2

Earlier in the week we covered the topic of strategic planning with insight from Cécile Bernheim, an experienced strategy and business planning expert in Europe.  Continuing the conversation of strategic planning, Cécile reiterated the importance of collaboration as it relates to portfolio management and client segmentation.

Portfolio Management, or how resources are allocated across business lines and geography in relation to potential for growth, needs to be done in collaboration in order to be accepted. It has to be a collaborative work among the different organization levels and across departments including the operations/business units. The best results are generally derived from common tools with local data provided by the region themselves.  The data should cover both macroeconomic and industry data.  All in all, the success of portfolio management resides in good cross-functional collaboration and alignment, common tools and local data and last but a good education process on benefits to the company of the approach.

Interconnected to portfolio management is the understanding of your customers, a vital process of strategic planning.  For Client segmentation, it’s important to understand the business of the customer or client of which you’re engaged with to evaluate segmentation: Within which channel are they operating? What’s the client size and degree of internationalization?  If you take the larger companies of the world, they’re very international and well poised for partnership, whereas smaller companies might have better proficiencies with local and region specific talent to consider.  Furthermore, it’s also helpful to identify the strategic role of the client: Are they adversarial, ready to partner, or interested in driving business? These are all key questions to ask when evaluating client segmentation.

Frontier Strategy Group is pleased to welcome Cécile to our Expert Advisory Network and we look forward to many more content-rich conversation with her.  To listen to or download the podcast, click on this link to access the iTunes store.

PODCAST: Strategic Planning – FSG Expert Interview Part 1 of 2

Cécile Bernheim, a well-versed and experienced strategic business planning expert, provided some key insight to developing cross-functional strategic plans that position companies for cohesive success.  Frontier Strategy Group CEO Rich Leggett recently chatted with Cécile to gain further advice on building successful plans in FSG’s Emerging Markets Insights Podcast Series.  The conversation was so fruitful and opulent with content this will be a two-part post with the  first half concentrated on the strategic planning side of the conservation and the second half more focused on portfolio management and client segmentation for business.

As with any corporate initiative, it’s important for strategic planning to be very organized and well-disciplined in order to be successful; a notion Cécile firmly stands behind.  Any company can have a well-structured hierarchy of function and responsibility, but the critical element in any structure is communication and necessary integration among company levels.  Cécile attributes a lot of the organizational success to the cross-functionality and communication of teams.  Cécile attributed her team’s success to, “the integration of planning among all three levels of the company.  The whole organization was well-aligned on the same strategic framework and was then able to adapt their strategic framework to local specificities.” In other words, they were empowered local teams but aligned with global strategy – each region had their must-win battles but all working towards the same global goal. Cécile continued, “I tried to make sure all strategic plans were cross-functional as a holistic response to a situation and strategy that was decided.”

Because the majority of FSG’s clients operate a business portfolio over both developed and developing markets, we often hear that the strategic planning proves more difficult in developing countries due to the rapid pace of change, volatility and unexpected events.   Therefore, it’s important to note two differentiating factors: processcontent.  From a process point of view, adding long-term strategic framework and annual global plans should remain somewhat similar between developing and developed regions, at least as far as the process is concerned. The content, on the other hand, will certainly vary based on the level of adaption by country.  Strategic plans, according to Cécile, need to be flexible in order to adapt so every annual plan allows enough room to balance, or re-balance, throughout the year.  Cécile mentioned that one of her key learnings was to develop and implement adaptable tools to assist efficient portfolio management.  This allows the function of the tool to remain the same, but easily reworked to use different sets of data to providing a new output for a different region.

“Strategic planning is not just one person sitting in an office making strategy on their own. Truly good strategic planning and portfolio management is the product of cross-functional initiatives that are discussed with local and regional teams so that they can recognize the data – ensure senior management is on board and of course, explain, explain, and explain the process and the benefits. At the same time, depending on organizational limits, give the regions sufficient freedoms.” – Cécile Bernheim

Perhaps that’s a lesson all global strategy planners can use: global alignment with local autonomy – using flexible tools so that they can be used at different levels of the organization.  Look for further discussion on portfolio management and client segmentation in a subsequent blog post derived from the insightful Podcast with Cécile.

For the full discussion, click on this link to access the iTunes store.

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Frontier Strategy Group is pleased to introduce Cécile Bernheim as one of the newest members in FSG’s Expert Advisors Network.  Cécile brings over 20 years of experience from The Coca-Cola Company in Europe where she was the former Strategy and Business Planning Director, as well as other roles varying from general management, strategy and commercial.  Cécile is a senior business executive with solid blue-chip fast-moving consumer goods background and international experience in highly competitive and changing environments.  Prior to Coca-Cola, Cécile was a strategy consultant at Bain.  Cecile started her career in R&D in the Pharma industry and is also a qualified pharmacist and biologist and holds an MBA from IMD in Lausanne.

Cécile is available to FSG clients for consultation and her key areas of expertise are technical processes related to customer management, sales and marketing, strategic planning, as well as anything that’s related to B2B or B2C functions in an international setting.  Furthermore, Cécile has a great understanding of the dynamics between corporate and regional business units and fostering cross-functional collaborations to streamline business and communication.  Please contact your account manager for further information or contact us at sales@frontierstrategygroup.com.

 

 

 

 

Asia CEO Insights: Investing in the Strategic Planning Process

Over the past few weeks, I have been posting some of the key takeaways from a recent Executive Breakfast on the topic of strategic planning in emerging markets.  The event, hosted by Frontier Strategy Group in Singapore, was attended by a group of nine senior Asia-based executives.  In this third and final post (you can find part one here, and part two here), I wanted to touch on some of the highlights on the topic of investments – both in terms of financial capital as well as human capital – in the context of strategic planning.

Incentives were discussed as a possible tactic for countering short-term thinking by local teams.  Many companies have considered using “plan accuracy” as a KPI for evaluating managers’ variable compensation, but one executive from the pharmaceuticals industry felt that this led to managers being overly conservative in their planning and execution in order to ensure that targets could be consistently met, which could result in missed opportunities and lost market share.  Another executive shared that he has found success in providing highly attractive long-term incentives to instill long-term thinking, as well as to fight attrition. For example, one general manager on his team received a bonus equivalent to a full year’s salary for developing and then successfully executing an aggressive four-year strategic plan.

Beyond the question of human capital, financial capital was naturally a key topic of discussion.  For many executives running an emerging markets portfolio, operations often do not yet have the scale necessary to self-fund new initiatives, so the case must be made to corporate headquarters for additional investment.   FSG has recently profiled The Coca-Cola Company’s approach of creating a global opportunity fund (as distinct from an emergency fund), contributed to equally by each business unit, to which requests for funding could be submitted via a rigorous and competitive application process.

Another approach, used by several companies attending our discussion, is to ask managers to submit “layered” plans, consisting of baseline plan supplemented by one, two, or more layers of “what if” scenarios.  For example, local managers are asked to provide details into the specific investments that would be made, and incremental opportunities captured, if corporate were to invest $1 million above the baseline plan, $2 million above baseline, and so forth.  The downside risk discussed to this approach is whether such a methodology encourages managers to submit overly optimistic plans as they make the case for additional resources.  Here again, the group came to consensus on the need for a high degree of discipline to checking progress against plan milestones on a frequent and structured basis.

Although having the right capabilities in place is necessary to achieve success, capabilities alone are not sufficient.  The right incentives and adherence to processes are also key to ensuring that time spent planning is time well spent.

Strategic Planning: Enfranchising Your Local Managers

I would venture a guess that it’s not exactly common for multinational executives to make an analogy between their local managers and schoolyard recess.  Clearly one group is comprised of precocious adults, while the other group, well, is not.  However in the strategic planning process, Frontier Strategy Group has identified a surprising amount of similarities in behavior.  Often times when local managers engage in the planning process, they are tempted to act as what we have playfully called either victims or bullies.

The “victims” play defense, focusing on keeping expectations on the low end so they can make sure to meet or exceed them.  This can manifest in managers consistently providing overly pessimistic forecasts, and constantly communicating upwards regarding current and anticipated market constraints.

The “bullies,” on the other hand, tend to be concerned with expanding their own little fiefdoms, regardless of whether that is the right answer for the organization as a whole.  “Bullies,” tend to show up a little less frequently than “victims,” but they may still be a concern in certain pockets of your organization.  Bullies are found arguing for expanded operating budgets and are often overly optimistic regardless of whether targets are met in the short-term.

What you want, of course, is for each of your key team leaders to be in a healthy place in the middle of this pendulum.  You want them to serve as trusted partners in the planning process with the freedom to speak their minds, the energy to propose some creative and courageous proposals, and the best interests of the health of your overall organization as their guiding concern while planning.

To achieve that end, Frontier Strategy Group has identified a number of strategies that are built on the foundation of:

1. Capturing the wisdom on the front lines

2. Ensuring plan morale stays high

One unique strategy for ensuring that plan morale stays high is the result of an insight that many companies overlook – employees can simultaneously be highly engaged, demonstrating high enthusiasm, and yet be poorly aligned to the strategic direction is trying to work towards.  In this case, one Frontier Strategy Group client refers to these types of employees as “Loose Cannons”.  Loose Cannons are people you really want to keep in your organization, but they need to be reoriented so that their energy and ability is helpful than potentially damaging or just wasted.

In my next post, we’ll discuss more about how companies are equipping their team leaders to spot and correct Loose Cannons, as well as other strategies for improving overall local team buy-in to the strategic plan.

 

Asia CEO Insights: Incorporate Local Market Dynamics into the Strategic Plan

CEO Takeaways

“Knowledge of local markets should not reside only in local markets.  Institutionalizing knowledge is critical in light of the high attrition of local talent in Asia.” –Head of Asia, Food & Beverage Company

Last week, I shared the first post in a small series on key takeaways from the recent Executive Breakfast hosted by Frontier Strategy Group in Singapore.  I had the opportunity to join nine senior APAC executives for a robust discussion on managing the strategic planning process despite the volatility and distance from HQ that characterize doing business in emerging markets.

One of the most important capabilities for multinational companies to possess is an effective and efficient process for capturing the insights and wisdom of front-line managers when formulating strategic plans.  In Asia, the fact that highly capable local managers are so difficult to retain for more than a few years before they leave for a big pay increase being offered by a competitive firm, or that many managers have relatively little multinational work experience, adds an extra layer of complexity to an already thorny challenge.

Furthermore, we discussed the fact that constantly churning local teams may lack a sense of ownership of plans developed by predecessors.  And, that when employees expect to have short tenure with the organization, it can be hard to incentivize them to invest in developing and implementing long-term plans that may not maximize short-term personal benefits.

A leading packaged food company in attendance of our discussion has responded by attempting to institutionalize local market knowledge at the regional and corporate headquarters (where employee tenure tends to be longer and strategic capabilities tend to be more consistent) by developing a strategic planning Center of Excellence within each business unit to own the process of long-term planning, and gives local teams ownership (and accountability for) short-term planning and execution.

Another executive, from the fashion/retail space, chimed in to mention that his company has used a similar Center of Excellence strategy, with the added tactic of segmenting focus by channel as well as business unit.  Some of the executives in attendance questioned the obvious drawback of not involving local teams directly in long-term planning, but acknowledged that this approach may be a realistic compromise in markets suffering from particularly high attrition.

An executive from the medical devices industry has shrunk the planning horizon for country teams to just two months; longer-term planning is done at the regional level.  In his view, the key to executing in this type of bifurcated planning environment is a highly structured discipline of communication between regional and country teams, and strict accountability to meeting mutually agreed upon strategic milestones.

Another important consideration when it comes to managing the human element of planning is of course incentives.  I’ll touch on some of the highlights of our discussion on that front in my next post.

 

Can strategic plans survive in emerging markets?

“One of our senior corporate strategic planners just took on a general management role in India.  Now he gets it!” –Head of Asia, Healthcare Company

In the late 19th century, Prussian military officer Helmuth von Multke famously remarked that, “no plan survives first contact with the enemy.”  Many managers in emerging markets might agree with Multke.  Strategic planning is often a frustrating and time consuming process, which is complicated in emerging markets by heightened volatility, scarcity of data, and front-line communication hindered by distance and time zones.  These three challenges often converge and result in strategic plans that do not last for more than a few quarters before being scrapped or forgotten.

Multke, however, was actually a meticulous planner.  He developed a planning process that considered a wide range of variables and potential outcomes in order to provide front-line officers with a framework to guide battlefield decisions, despite rapidly changing and unpredictable front-line developments.  As a general manager in emerging markets, your mandate is similar: to implement a planning process that results in plans that 1) guide day-to-day decisionmaking of employees, 2) are robust enough to withstand volatility, and 3) are reflective of local market dynamics despite the scarcity of granular data and the fog of distance.

Last week, I met with a group of nine senior Asia executives from a range of industries over breakfast at the Fullerton Bay Hotel in Singapore to discuss their best practices for strategic planning in emerging markets.  Much of the conversation centered on recognizing and responding to the capabilities and constraints of local teams relative to corporate teams.  We spoke a bit about incentives.  And, we touched on the question of how to best make the case for investment and additional “plus plan” funding.

I’d like to take a few blog posts to share some of the key takeaways of our discussion in the coming weeks.  Watch this space.