The shifts taking place in emerging markets are big, structural, and long-term. As macroeconomic growth slows and competition rises, improved productivity is a critical foundation for MNCs to continue to grow revenues and profits and gain share. Our MNC clients today talk continually of the need to make operations in emerging markets as productive as those in developed markets. Given such issues as smaller scale and volatile political and economic environments, this is a tall order—and certainly not one to be underestimated. Moreover, companies in many markets should adopt an entrepreneurial approach and find innovative ways to overcome challenges related to talent, infrastructure, and the regulatory environment, rather than wait for governments or others to solve structural problems. (See Overcoming Asia’s Obstacles to Growth: How Leading Companies Are Reshaping Their Environment, BCG report, September 2015.)
Shifting focus from growth toward a combination of growth and rapid, steady productivity gains requires changes in both strategy and execution. It also usually requires a shift in thinking about goals, processes, and governance on the part of both global and local management.
Many MNCs will have to undertake a process of transformation in emerging markets. As we have written before, transformations are not just for troubled companies; they have become necessary interventions in many, if not most, corporations. (See Transformation: The Imperative to Change, BCG report, November 2014; and The New CEO’s Guide to Transformation: Turning Ambition into Sustainable Results, BCG Focus, May 2015.) Less than half of BCG clients that have undergone a transformation effort over the past decade had been chronic underperformers, and nearly one-quarter had been consistently ahead of their competitors.
We define a transformation as a profound change in a company’s strategy, business model, organization, culture, people, and processes. A transformation is not an incremental change but a fundamental reboot that enables a business to achieve a sustainable quantum improvement in performance, altering the trajectory of its future. Successful transformation normally requires rapid short-term improvements to the bottom line to establish traction and position the company to win in the medium term. At the same time, companies need to build the right organization and culture to achieve sustainable results over the long term. All these changes must happen in parallel.
Because of their comprehensive nature and the need for companies to implement them quickly, transformations are complex endeavors. Most of them fail either to fully capture the potential value or to embed new behaviors and processes in the time allotted. Evidence from the experiences of non-BCG clients undergoing publicly announced transformations from 2003 through 2013 shows that up to 75% of those efforts fell short of their targets in terms of implementation time, value captured, or both. Only 25% captured short- and long-term performance gains compared with their sector average.
The risk of failure in transformations in emerging markets is even greater. As we observed recently, only about 10% of companies believe they have the full complement of capabilities required to win overseas. Most think they are barely mastering the basics. (See The Globalization Capability Gap: Execution, Not Strategy, Separates Leaders from Laggards, a Focus by BCG and IMD business school, June 2015.) Moreover, while many companies get their broad globalization strategies right, they come up short on execution in individual markets. Issues related to execution were where our research found the biggest gaps between leaders and laggards. (See Exhibit 1.)
MNCs should move quickly, but they should also advance with care. The biggest mistake they can make is to pursue a transformation driven by headquarters that tries to standardize and centralize processes and operating procedures for all markets. MNCs are much better advised to approach the challenge one market at a time, starting with a high-profile struggling market and experimenting with what works there.