As Western multinationals shift their focus to emerging markets, they must adjust their structures, processes, and decision-making speed to compete successfully. This article explores the challenges presented by emerging markets and offers several approaches to successfully survive within them.
Many leading Western multinational corporations expect that their future success will depend on their ability to win in emerging markets. They project that the share of their business based in emerging markets will increase from some 20 per cent to 50 per cent or more over the next decade. While their intentions are clear, results thus far have been mixed, even for those Western multinationals that have operated in emerging markets for several decades.
Our experience and research suggests that companies are still learning how to organise for success in these markets. They are looking for better ways to allocate financial and human resources to match their aspirations. They are trying to attract and retain senior talent with the skills to align stakeholders in a global network and the entrepreneurialism to drive initiatives on the ground. They are working to innovate so they can be relevant in a local market at the prevailing price point, all while maintaining global quality standards. They are exploring how to improve risk management to accelerate the “metabolic rate” of decision making in a complex matrix organised by products, segments, countries, and functions. And they are working out when they should get into emerging markets and how they will sustain long-term commitments once they do so.[ms-protect-content id=”9932″]
Some leading globalisers are coming up with solutions that work in emerging markets; in the face of new challenges, a few are even throwing out the playbooks that worked so well at home. Companies are finding ways to entice local talent, customise their innovation processes, and develop new kinds of partnerships. Those moves allow them to follow through on bold and public commitments to emerging markets, entrusting more power to their local organisations and simultaneously unifying the global organisation with a set of core values.
Our research indicates that Western multinationals routinely confront five main challenges in emerging markets.
Challenge 1: Mismatched resources
Leaders often do not allocate the right resources to emerging markets—for example, one analysis showed that while leaders of large global companies saw a potential for 34 per cent of their sales to come from emerging markets in Asia, they currently have only 2 per cent of their top 200 employees in those countries, just 3 per cent of their R&D budget is spent there, and 5 per cent of assets are located there.1
Leaders may need some convincing to change this resource allocation; the emerging-markets business heads we have talked with say that global headquarters sometimes see more risk than reward in many emerging markets, where returns can be volatile or uncertain. One business leader said, “Emerging markets will soon be 50 per cent of our revenue, but all our developed-market executives want to talk about is the risk.” And plenty of global executives, he added, are reluctant to change their own responsibilities to place more organisational emphasis on emerging markets. Even when leaders agree with the need to rebalance in principle, making it happen has been difficult for both business reasons (for instance, it is difficult to find enough local talent) and psychological ones (for example, headquarters staff may be reluctant to change the way they work).
Challenge 2: Talent
Western multinationals face a number of challenges getting the right people in the right places: a shortage of senior global leaders with sufficient breadth of experience and mind-sets, a huge shortfall of local leaders with the skills (including English language skills) needed to work both locally and globally, and strong competition for talent at all levels from local as well as global competitors. Most executive talent pools in emerging markets are small. There are simply not enough people who know the local market thoroughly, understand what it takes to execute strategies, and are credible with the country’s senior stakeholders.
Although finding such people is a challenge, a bigger one is retaining them: good executives in emerging markets no longer want to work for a “branch” of a global company, and today they have plenty of other options as local companies become increasingly global themselves. Whether people leave because of what an executive at one global bank referred to as a “local glass ceiling,” meaning they see no chance to move up in the global organisation or do not want to move overseas in order to do so, or because they are poached by local competitors offering more money and greater responsibilities, the result for a global company is the same: a shortage at the top. A further challenge is that many local executives can be daunted by the matrix structures that global firms commonly use; they do not have the usual networks of mentors and advisers needed to navigate a complex global organisation.
Challenge 3: Innovation
International products and prices do not always translate into profits in emerging markets, particularly for consumer industries. Significant differences in income, language, literacy, social diversity, and urbanisation can make it difficult for companies to offer a standard global (or even regional) product. And yet expectations are high; emerging-market customers frequently demand products with most of the same features as their developed-market counterparts, but at a fraction of the price. A one-minute mobile phone call in the US can cost 10 to 50 cents. In India, that same call can be made for less than a penny, due in large part to innovations like Airtel’s “minutes factory” approach, in which much of the capital-intensive business of network deployment is outsourced to other companies, allowing the operator to adjust its costs to match demand. Most global companies are simply not organised to support this degree of innovation; when they do try, they are often slower than local competitors. To be fully effective, however, will require radical innovation.
There is a second dimension of the innovation challenge for many global companies as, when innovations succeed in one local market, it may be highly valuable to export the concept to other markets. Although some organisations are becoming proficient at leveraging this so-called “reverse innovation,” most do not believe they are capturing the full global potential of innovations originating from emerging markets.
Challenge 4: Risk and stakeholder management
No matter how successful a global organisation is at managing risk at home, the task is larger for emerging markets: companies must manage multiple regulatory regimes, which may be less stable than in developed markets, as well as a diverse range of business practices. And operating in an ever-expanding number of regions and countries exposes the organisation, naturally, to more varied risks. These could include political complexities (which can, for example, delay decision making between the national and state or local levels), geopolitical risks (such as nationalisation of assets), a high level of government influence on the market (for example, in China, the government can influence more than 50 per cent of the relevant market for some global organisations), governance issues such as corruption, and social tensions.
Some emerging-market risks can be difficult to assess—and easy to overestimate—given a lack of local knowledge, distance from corporate expertise, or poor connections with local stakeholders. This challenge is compounded by technology, as social media, blogs, and other new formats require increased attention and rapid responses. Indeed, the chairman of a global organisation in India said, “Anywhere between 25 and 50 per cent of our CEO’s time is spent on regulatory management.”
Challenge 5: Early and long-term commitment
Western companies’ operations in emerging markets can become stuck in what we have come to call a “midway profitability trap”: these businesses see some success but suffer from a lack of commitment to increase investments and build operations or management systems specific to a given market. Executives have told us that some senior leaders are gun-shy from previous crises, which accounts for the half-hearted commitment. Yet emerging-market policy makers and entrepreneurs have long memories, and “state visits” by the global CEO or chairman are not sufficient to maintain good relationships if a company’s commercial dedication is seen to have faltered.
How to win
Some multinational companies in emerging markets have already seen incredible success; for example, Telefónica transformed itself from a state-owned Spanish telecommunications company to a broad-based player with a deep footprint across Latin America. Throughout those emerging markets, it has close to 30 per cent market share and is either the number one or number two player. Many global companies—such as GE, Citigroup, Unilever, and P&G—also have rich histories in emerging markets with decades of experience in building large businesses and global talent pools. From our research, including conversations with executives at these companies and many others, we have begun to identify some crosscutting organisational solutions to overcome the challenges described above. Even the most advanced of these players would not claim to have solved all the issues. However, for companies that possess a strong emerging-market footprint as well as for those who aspire to, the following approaches are worth considering.
Approach 1: Manage talent with a local eye
Companies need to ensure that there are multiple paths to success for local leaders, even if they start their careers in low-profit or “less core” markets. One approach involves shifting regional or global responsibilities to emerging markets. Similarly, companies can place functional or geographical hubs in emerging markets, as GE, Honeywell, Dell, and Cisco have done. For example, Cisco’s Globalization Center East in Bangalore was established to develop local leaders in functional areas who will, in short order, account for 20 per cent of the company’s senior leadership team.
Efforts such as these can also help local executives develop deeper functional expertise, thus opening another path to success.
In addition, companies must make sure their core value proposition to talent is appropriate to emerging markets. At one company, emerging-market businesses grew by double digits in one year and also had strong operating margins, while the global business unit grew by only 2 per cent. If the company had adhered to its policy of aligning incentives to global performance, the emerging markets would have received low pay-outs, undermining their accomplishment and demotivating their future performance. The company therefore reallocated its global bonus pool to raise pay-outs in the emerging markets. Unsurprisingly, questions of equity arose as the company debated the relative contributions of global support and local execution. One tactic to manage those concerns is to establish a separate bonus pool for high performers in emerging markets.
It is also important to recognise cultural differences in the kinds of incentives people value. Many young Russians who are starting their careers in sales, for example, value higher salaries, prestigious titles, and other visible signs of success more than long-term compensation such as stock options or pensions.
Skill development at all levels is crucial. McDonald’s, for example, dealt with a lack of local skills by opening a Hamburger University in China in 2010. By 2014, it will train more than 4,000 employees, from operators to restaurant managers. At a more senior level, such investments can become a source of supply for global executive talent pools: in 2010, Unilever’s India unit relocated more than 200 managers to the global organisation to run operations in other markets. The company has also brought quite a few of these leaders back to India after their global rotations, finding that the combination of global expertise and local knowledge provides the best platform for success.
Approach 2: Bring new approaches to innovation
Though some products like airplanes or pharmaceuticals do not require significant customisation to succeed in emerging markets, most others do. The challenge is to balance the best of the “global” assets (the brand, opportunities to develop capabilities, and others) with the need to tailor locally—particularly given the rapid pace at which companies want to develop progressive and distinctive value propositions in their product portfolio. For example, well-intentioned innovation systems can be counter-productive if too much emphasis is placed on global standardisation. Instead it is critical to ensure that innovation captures local insights and responds to them at pace and scale—a challenge that frequently involves radically altering the company’s historical innovation process. Leading brewer SABMiller faced this issue in Africa. The company determined that through product innovation it could reach additional consumers at the “bottom of the pyramid.” In a couple of African markets, it changed from cereal crop inputs such as barley and maize to cassava, a local root crop that is taxed at a lower rate but which yields a beverage that consumers like. The early results are promising; the company expects with this low-priced beer it can attract additional consumers who until now have not been able to afford aspirational, but expensive, “conventional” malt-based beer.
Another African brewer was equally creative. In Kenya, Diageo realised that it had to compete with the local homebrews popular with many consumers. The company wanted to ensure consumers had access to safe and affordable beer, and so it had to change the way it typically brought new products to market. In this case, that meant involving an external stakeholder early in the process. The company successfully sought a temporary tax waiver (for itself and other brewers) from the government, which was also interested in reducing consumption of the sometimes contaminated and unhealthy homebrews.2 In four years, Diageo has earned revenue of $250 million from its new Kenyan beers.
It is not just brewers who are innovative. In Colombia, Telefónica partnered with Banco de Bogotá and the National Federation of Coffee Growers to develop the Intelligent Coffee Identification Card, a card that identifies the 300,000 member growers. The card gives them secure access to mobile-banking services, a new business model developed by this pioneering three-way partnership. Within a month of the service’s launch in 4 municipalities, more than 1,300 transactions were recorded.
Some companies are now also recognizing the huge potential for revenue innovation that brings insight from emerging markets to the rest of the global business, particularly for accessing new pools of consumers. John Deere, for example, developed a no-frills tractor at its R&D centre in Pune, India, at a fraction of its normal cost. With some minor tweaks, the company now also sells these tractors to hobbyist farmers in the US who do not require advanced features. This in turn opened a new market for John Deere, which now exports half the tractors built in India.
Approach 3: Build broad and deep partnerships and collaborations
Success in emerging markets requires companies to focus externally as they need to establish extensive networks and look beyond traditional types of partnerships. Given the extensive influence of the state and its agencies in emerging markets, there may be far more opportunities for public-private partnerships like Diageo’s.
Another model is the joint venture, which has a mixed track record. Certainly those joint ventures based on well-defined roles, a long-term commitment, a shared vision of the goals, and strong and open communication to ensure all parties are aligned have greater chances of success. For example, joint ventures such as Tata Cummins and Bajaj Allianz in India have flourished because each partner brought complementary skills and assets (like deep distribution networks, customer insights, and high brand recognition) as well as long-term commitment.
Approach 4: Create “glue” with values
Working across cultures can be difficult. But executives we have talked with agree that values can be meaningfully translated across cultures and that creating a system of shared values does help hold a global company together—improving employee attraction and retention and, often, allowing for faster decision making, even on tough issues like risk management.
Johnson & Johnson applies this idea with its annual “Credo” survey, which asks the same core questions of all employees globally, with only minor adjustments for cultural differences. The survey, which every Johnson & Johnson employee is required to participate in, consists of 130 questions (90 common questions and approximately 40 country-specific questions, as in the case of Japan). An executive at another company described its approach as asking expatriate managers to “carry the strategy and values” while “creating space to understand the local environment.” One well-publicized approach was IBM’s “values jam,” which recently allowed over 319,000 IBM employees across the globe to contribute to the process of defining their company’s values.
Approach 5: Empower local organisations
Creating the appropriate “freedom to operate” so that multinationals can compete at the same pace and with the same flexibility as their local peers is a critical element of success. As one senior Indian executive at a global company put it, “We need empowerment—we can then utilise the global pool of contacts, knowledge, and resources we have.” Another global conglomerate recently consolidated all its business units in one important emerging market under a single country head, who now has direct profit-and-loss responsibilities. He makes all major decisions, including those related to headcount, pricing, and customisation, and all business unit heads in the country report to him rather than to global business unit leaders. This has helped concentrate resources and decision making to better serve local customer needs and ultimately achieve faster growth. An empowered country head can also help build strong relationships with the government and regulators.
Empowerment also means ensuring local leaders have a clearer line of sight to global leaders. In some cases, India and China CEOs now report directly to the global CEO. Other companies are grouping their businesses by growth opportunity rather than geography, putting typically high-growth emerging-market businesses together into one or more units so that their different economics, innovation needs, and risk management requirements can be recognised. For example GE and IBM have recently created very senior roles to oversee their “growth markets.” Structure, of course, is not the only approach. It is equally critical that governance and processes create the right level of involvement and empowerment. In one instance, a leading global telecommunications company established a Latin America operating committee with strong decision-making authority on the issues that affect that region’s business.
Approach 6: Make your commitment visible and senior
Companies need to maintain their focus in emerging markets: investments, especially strategic investments, should not fall victim to short-term financial concerns. This involves the CEO and top management making a commitment to emerging markets and maintaining it, investing in local leadership and R&D, and building sustainable and healthy communities through corporate social responsibility. Novartis, for example, announced a $500 million investment in Russia in manufacturing and local R&D to demonstrate its commitment toward the market. Similarly, Wal-Mart Stores recently announced a training and education program in collaboration with nongovernmental organisations aimed at teaching critical life skills that will benefit about 60,000 women working in its suppliers’ factories in India, Bangladesh, and China. Listing shares on local exchanges, especially in bigger markets, where allowed (as Unilever and Diageo have done), can attract local investors and provide the additional benefit of demonstrating strong commitment. Companies like AstraZeneca stage “analyst days” that focus on emerging markets to highlight their operations and signal their commitment to those countries.
There are many exciting opportunities for Western multinationals as they mobilise their global capabilities, people, and technology to expand in emerging markets. Many of these companies have already made important progress. But it will not be a rising tide for all; the leaders will be the ones to make significant changes to their ambitions, capabilities, and talent management—and sustain them—to capture the full potential.
Local managers must also ensure that global leaders really understand the opportunities—and challenges—of each local market. Cisco’s Globalization Center East in Bangalore, which is primarily a leadership development centre, also acts as a closely connected extension of corporate headquarters. Holding board meetings in important emerging markets is another tactic some companies are starting to use. Leaders at Starwood Hotels have committed to spending time in the company’s most significant markets: they spend a month in China one year and in India the next. Companies can also benefit from appointing directors and creating senior advisory boards with deep, insider knowledge of these markets, which can act as a source of key intelligence and guidance.
Many companies are starting to establish big R&D centres in emerging markets to tap talent and cost advantages and to increase their ability to tailor products for local markets. Indeed, there are now 1,200 multinational R&D centres in China representing a $12.8 billion investment; 4 of IBM’s 11 research centres are in emerging markets. One heavy-manufacturing conglomerate tends to establish its global training centres in emerging markets (it recently added one in Thailand). That helps the company to both develop skills among local workers and signal a long-term commitment.
It is also important to contribute to the local community by fulfilling corporate social responsibility commitments. In China, for example, Siemens has worked closely with regional governments on energy efficiency, donated to healthcare programs, and provided advanced medical equipment to rural areas.
Finally, Western multinationals can also learn from Asian companies like LG, which is now a top three player in most consumer durables categories in India. The company’s initial entry was not particularly smooth, and it included some failed joint ventures. But it remained committed, maintained its investment, supported the local organisation, and over time attained great success.
About the Authors
Vimal Choudhary is a consultant in McKinsey’s New Delhi office, Martin Dewhurst is a director in McKinsey’s London office, and Alok Kshirsagar is a director in McKinsey’s Mumbai office.
1. “Multinationals in Asia: All mouth no trousers,” The Economist, March 29, 2007.
2. “Easier said than done,” The Economist, April 15, 2010.