Transformation in Emerging Markets: From Growth to Competitiveness

Transformation in Emerging Markets: From Growth to Competitiveness

Title image

Transformation in Emerging Markets: From Growth to Competitiveness

  • Add To Interests
  • PDF

  • Transforming Local Operations

    Historically, rapid growth in emerging markets allowed most companies to support behaviors such as approving investments without defined returns or time frames, extensive customization of products, limited process discipline, and building up teams in anticipation of future growth. A growth bias was vital to capturing share in markets that were expanding at breakneck speeds. Disciplines such as applying proven practices, cost containment, and investment prioritization were secondary considerations, partly because local organizations were overwhelmed just keeping up with their growth.

    MNCs need to rethink and rebalance trade-offs in their priorities, products, systems, and people as they seek to improve their competitiveness by moving from greater centralization to strengthening local accountability. In our experience, this sort of rebalancing is best achieved through a four-step transformation process. (See Exhibit 2.)

    • Resetting the strategy to focus on competitiveness
    • Funding the journey by restructuring the local organization to make it leaner and more accountable
    • Winning in the medium term through process excellence—eliminating waste and instilling simplification, standardization, and automation
    • Establishing the right team, platforms, and behaviors for longer-term competitiveness
    Resetting the Strategy to Focus on Competitiveness

    MNCs need to shift their focus from purely maximizing growth, typically by investing in all sizable emerging markets, to determining which emerging markets offer the best potential for establishing leading positions and achieving above-average profitability. We have worked with many clients making such decisions. For example, one global medical-equipment manufacturer made its emerging-market plans on the basis of projections of the number of devices to be sold ten years out. A global industrial-equipment manufacturer launched a massive expansion of its operations in China despite profitability concerns—in order to put pressure on local competitors in their home markets.

    While the assessment of growth potential remains critical, MNC strategy also has to focus on profitability and returns on investment. More and more companies are asking such questions as, What is the investment risk in each of our markets? Which customer segments can we serve competitively? Do we have product segments in which slowing growth and declining profitability mean we should question the viability of the business?

    The biggest difference between past and future assessments needs to be a more radical examination of the actual competitiveness of the MNC’s local operation in each market and segment. The best companies will know exactly how big the cost differentials are between their operations and those of their strongest local competitors. They will develop a systematic approach to gaining local competitive intelligence, regularly analyze their competitors’ offerings (often by reverse engineering them), and assess the strategic and operational gaps.

    For example, some MNCs undertake regular market-by-market analyses of their economics versus those of their local competitors in order to truly understand where their own advantages—and disadvantages—lie. (See Exhibit 3.) These companies have often found that their costs of goods are at least 20% higher than those of their principal local competitors because of product design and material costs. Their compensation costs are also higher because higher pay packages are only partially offset by higher labor productivity. The companies use these insights as the basis for restructuring their local activities to address competitive weaknesses.


    Another manifestation of this shift will be developing new ways to think about portfolio management. Many companies have developed a broad portfolio of offerings in emerging markets, often with individual products tailored only for individual countries. These products lack the scale necessary to make a significant contribution to global results. While this approach has been a big driver of growth, a tougher outlook now requires a different kind of product portfolio management.

    Leading companies are now applying a much sharper definition to targeted segments in order to assess products’ cost-effectiveness. They are systematically using target costing to further ensure competitiveness, often setting targets of 30%
    to 50% less than that of the previous product. And they are rethinking how they can adapt offerings from one emerging market to others and thus gain scale advantages.

    Funding the Journey with a Leaner Organization

    Transformations take time, and local operations must continue contributing to results even while priorities are redirected. MNCs should take an outside-in look at their organizations and cost structures, as if examining the company through the eyes of a private-equity buyer. After years of chasing growth, many local organizations are neither sized nor organized optimally for a tougher market environment.

    The resulting restructuring often includes delayering of the local organization to make it leaner and faster, reducing back-office personnel, lowering the dependence on expatriate executives, and rebuilding the leadership team to ensure that high-performing people are in high-impact positions when more fundamental work on process and functional excellence starts. Putting people with a strong competitive and entrepreneurial mind-set into new leadership roles is vital.

    Winning in the Medium Term with Process and Functional Excellence

    While many companies have systematically replicated their manufacturing processes in new plants in emerging markets, the establishment of process excellence in other parts of the organization has been slow. Scores of manufacturing, quality, and engineering expatriates are normally sent to a market to build new facilities according to global blueprints and to establish strict process discipline. But in other key functions, such as procurement, sales, and logistics, we have found either that there are often no process definitions or that they aren’t thoroughly followed in emerging markets. Equally often, there is good reason for this: emerging markets need adapted processes, especially in externally facing functions; it isn’t possible (or a good idea) to simply copy global models as one copies a building design.

    More and more companies have to recognize that they should establish process excellence across all their functions in all emerging markets. For some processes, they must stringently foster global standardization; for others, they should require their local units to improve process transparency, discipline, and quality but adapt them to local circumstances. Some companies are even starting to use emerging markets as pilots for completely new definitions of processes, especially in the area of digitization. Emerging markets can have distinct advantages in this regard: there are few embedded legacy processes or cultures to combat, and these markets are often technology savvy, so digitally enabled, leaner processes can be deployed with relative ease.

    For example, BMW, in its joint venture in China, started working in 2013 on a significant two-year productivity-improvement program for all nonproduction processes, with the goal of optimizing them to be as effectively run as factory processes. Although most processes were already defined in some way, a number of employees were not aware of them or not sufficiently trained to do more than “check the boxes” in compliance. The program focused systematically on process redesign, training, new tools, and new governance mechanisms. Clear accountabilities for continuous improvement were also established.

    Another example is FrieslandCampina, one of the largest global dairy-products companies. A few years ago, it recognized that its biggest opportunity in emerging markets lay in optimizing the go-to-market model and pushing a higher level of sales excellence. Starting in one country, the company deployed a systematic approach for reaching consumers more effectively through new channels and new sales-management processes. It put enormous effort into training and skill building for sales teams. The approach was copied and moved to other markets one by one, using salespeople from one market to help deploy the program in the next. The company institutionalized the approach in each market by developing and regularly updating a handbook that combined standardized practices with local adaptations.

    Getting the balance right between standardization and local adaptation of processes can be tough. In our experience, a general guideline is to be more aggressive in standardization for purely internal processes and to allow more freedom for externally facing ones. (See “Go-to-Market Approaches Continue to Be Highly Localized.”)


    While the strength of many internal processes can depend on some level of global standardization and centralization, go-to-market approaches have to be rooted in local circumstances to remain competitive. The commercial success factors in emerging markets can be very different from those in more developed economies. For example, consumer segments are highly heterogeneous and much more fluid in their makeup. Different segments have widely varying needs and financial potential, both of which can be moving targets.

    As growth slows and competition increases, it becomes more important for MNCs to understand the commercial environment. MNCs face very different competitive economics than their local counterparts. Product development costs can be much lower, but sales and distribution costs are high. Companies need to adjust their bases of comparison and adopt new or revised KPIs. Our analysis indicates that while a local company and an MNC might have similar costs of goods sold, the local company’s selling expenses are often 10% or less of a product’s retail price, while the MNC’s selling expenses can easily rise to 45%. Higher distribution costs must be offset with aggressive cost savings across other parts of the value chain. (See the exhibit “Cost Competition in RDEs Is Often Not About the Cost of Goods Sold.”)


    There are many reasons for the disparities. Emerging markets, especially those that are big and diverse, such as China and India, typically have much less well developed distribution systems. Companies must deal with a multistep regional, municipal, and local system, with players of widely varying competence and capability at each step. This adds to cost. MNCs also have to pursue multichannel distribution models and dealer networks to extend beyond tier 1 cities, maximize reach, and avoid coverage gaps. Distribution in such markets may involve accepting some level of sales cannibalization and dealing with distributors that also carry competitors’ products.

    Retail sales are another issue. Many developing countries have large rural populations or populous secondary cities. Some 636 million Chinese lived in rural areas in 2013. India has 400 cities with populations of 100,000 or more. In Brazil, consumers in interior regions are expected to account for more than 45% of growth in the retail sector, or $60 billion in new purchases, through 2020. Such markets have widely varying, and often undeveloped, retail infrastructures.

    Internet sales (which in many markets really means mobile commerce) are a big and increasingly important factor in reaching these new customers. China has more than 730 million Internet users and more than 380 million online shoppers. More than 16 million consumers from the country’s tier 3 and tier 4 cities are using mobile Internet. (See “The Chinese Digital Consumer in a Multichannel World,” BCG article, April 2014.) Alibaba already has more sales than Amazon and eBay combined. The next wave of growth in India’s online population will add up to 550 million new Internet users, including large percentages of older, more rural, and female consumers. (See “The Changing Connected Consumer in India,” BCG article, April 2015.)

    In large developing markets, MNCs may benefit from new capabilities that target small geographic markets embedded in second- or third-tier cities. (See “Street-Level Segmentation in India: Winning Big by Targeting Small,” BCG article, December 2015.)

    Rural markets and multistep distribution also mean that companies are a long way from their customers. It’s easy to lose contact or to have to rely on second- or third-hand information about developments in local markets. Local staff or representatives make a big difference, and MNCs should make bigger investments in relationship management and performance monitoring of distributors and dealers, all of which entails another layer of cost.

    Compensation models can also be very different in emerging markets. In Europe, for example, the variable component of compensation is usually less than half of the total. In many emerging markets, compensation is often 100% variable or incentive based.

    Establishing the Right Team, Platforms, and Behaviors

    Most companies will need to redirect the behaviors of their local teams. Whereas the priority in the past was to gear up for growth by investing big in people development and potential needs, companies now should apply a tight focus on individual performance and accountability for costs.

    We find operations in emerging markets beset by common problems, such as a limited sense of accountability beyond their own activities on the part of individual managers; little collaboration and a general hesitancy to ask for help; and an absence of cost consciousness. Addressing these issues requires clarification of roles, KPIs, and targets; explicit efforts to promote collaboration and trust building (including through peer pressure); providing for cost transparency in management information systems, especially in middle-management levels; and making cost control a principal target in annual performance reviews.

    It remains critical that local management teams retain, or be given, decision-making ability, but MNCs must clarify the responsibilities that accompany this authority. Too often, in our experience, local managers are clear about day-to-day activities but not about longer-term accountabilities. Companies need clarity about the main targets that local managers are accountable for, both individually and together with others, and about the changes they are required to promote in order to achieve continuous improvement. This doesn’t mean that local managers shouldn’t make use of the advantages that their global platforms and capabilities give them; it’s a question of striking the right balance between local authority and global support. (See Exhibit 4 and the sidebar “Rethinking the Relationship Between the Center and Local Operations.”)



    MNCs have a big advantage over local competitors—their global platforms and capabilities—but transformation in emerging markets is likely to necessitate a rethinking of relationships between the center and the local operation. 

    There are many successful governance models on a continuum from hands-on manager, where the center has full power, to hands-off owner, which leaves decision-making to the local management team—and several options in between. Choosing the right one depends in part on the company, its goals, and the markets involved. (See Designing the Corporate Center: How to Turn Strategy into Structure, BCG Focus, May 2013.)

    We would argue that two considerations rule in a new world where competitiveness and productivity are critical. The first is clarity. Research has repeatedly shown that fuzziness or lack of certainty with respect to roles and accountabilities between the center and local operations leads to trouble. Too often, functions from headquarters get involved in local activity without a clear mandate.

    The second consideration is empowering local operations. Most MNCs’ competitors in emerging markets are locally staffed and sourced, more nimble at adapting to changing market conditions, and better positioned to capture larger growth opportunities. Local units of MNCs need authority to make quick decisions and act swiftly, without seeking approval from headquarters. MNCs’ centralized functions—such as R&D, marketing, finance, and human resources—should support, not encumber, local operations.

    Some MNCs can do a better job of leveraging their scale and global resources, including sharing good practices, while not overwhelming local country organizations with global rules and initiatives. Local units can be linked to pooled resources and platforms to take advantage of the parent company’s global footprint. There are also opportunities for local product and process innovations to be rolled out across other emerging markets and even to certain segments in developed markets. Knowledge can be shared through multidirectional networks, such as global excellence centers, product councils, and information networks.

    Most MNCs also need to retool their recruitment and training efforts, as well as their incentive programs, tying them all more closely to productivity improvement goals. For example, many employees in emerging markets spend a few years in an MNC, a significant portion of which is occupied by training programs, and then leave. In the future, training might have to de-emphasize formal classroom-type sessions in favor of on-the-job coaching.

    Perhaps most important is rethinking the role of both expatriate and local executives in management. Expatriates in emerging markets should take the role of team builders rather than line managers. This happens in many companies, but most can go further, making expatriates accountable for developing strong local managers by actually transferring skills and know-how rather than simply meeting short-term KPIs. This is far from easy. Placing real responsibility in the hands of often-untested executives is difficult for many companies. Shifting from an executive role to a team-building or advisory role is often a tough transition for expatriate executives. But transformation is substantially about culture; putting local managers in key leadership positions is a big cultural shift for many companies and sends the entire organization a strong message of accountability for results (while at the same time leading to cost savings, thanks to fewer high-cost expatriates).