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Globalization: Are You Ready?

May 02, 2012 by Hans-Paul Bürkner
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  • May 02, 2012

    As the recovery in developed markets proceeds unevenly, executives are looking to emerging markets for growth. In fact, based on its recent survey of executives of global companies headquartered in developed markets, The Boston Consulting Group reports that 73 percent said that emerging markets were a top priority. But only 13 percent said that their companies were well prepared to win in these markets.

    For many companies—even those that have been operating overseas for decades—expansion into emerging markets puts them outside their comfort zone. Their traditional strengths of brand, scale, and channel management may not carry the same weight in these markets.

    Even early success in emerging markets may not be sustainable. Many companies that entered these markets at the high end with Western products and services have struggled to move into the middle, where consumer tastes and income levels require a fundamentally different approach. Other companies have celebrated early success but then experienced rapid erosion of market share as more nimble and, especially, local competitors started to move in.

    While chief executives recognize that the world is changing swiftly, many are struggling to orient their organizations around new opportunities. Through our work with clients and our analysis of emerging markets over the past decade, BCG has developed a Globalization Readiness Index to help clients understand where they stand.

    The index measures a company’s capabilities against five traits of successful global businesses. Companies that want to get serious about globalization need to assess their organizations against these traits.

    Leadership commitment to emerging markets is clearly evident. The senior leadership team has a global mindset, has articulated and directed resources to an emerging-market strategy, and actively manages the tradeoff between global coordination and local autonomy. H.J. Heinz Company, for example, has a clearly articulated goal, constantly echoed by CEO William Johnson, of doubling annual sales from emerging markets—to make up 30 percent of overall revenues—by 2016.

    The product portfolio has an emerging-market focus. Products and brands have a clear value to customers in these markets. Managers at an LG Electronics subsidiary in India have the authority to modify television sets by addressing performance issues related to power fluctuations and adding local languages to setup menus, and they can use subcontractors for basic assembly to lower costs. Yum! Brands’ KFC, the leading restaurant chain in China, has customized its menu and restaurant layouts for the Chinese market.

    The go-to-market functions both develop meaningful consumer insights within these markets and have developed sales-channel and distribution networks suited to them. Hindustan Unilever’s Shakti Entrepreneurial Programme has taken a page from the playbook of Avon Products and Tupperware Brands and introduced direct sales into India, sending representatives into homes.

    Key people and organizational functions are customized for emerging markets, especially talent and leadership programs, risk and regulatory systems, and business development. Nestlé rotates talented executives from these markets into headquarters and vice versa. The senior leadership team has experience in and understands the specific challenges of emerging markets.

    The company has scale and cost advantages in emerging markets in several important areas. Key global R&D centers are based in emerging markets to better source talent and customize products. Manufacturing and sourcing decisions are made on the basis of capability, quality control, and an overall strategic orientation, not just cost. Many of the large pharmaceutical companies have made large R&D investments in both China and India. Merck has an explicit emerging-market R&D strategy focused on developing products that meet unique country needs.

    Globalization is not a license to let 1,000 local flowers bloom and hope for the best. Scale and consistency still matter, but, in today’s two-speed world, companies cannot simply export tried-and-true practices from developed markets. They need to be smart about when customization trumps consistency and vice versa.

    In order to win in these markets, companies first need to assess their readiness across the five critical dimensions. Next, they need to identify and fill gaps in their organization, product portfolios, and capabilities. And, finally, they need to act quickly.

    Emerging markets are expected to grow by 6 percent annually over the next five years, four times as fast as developed markets. By 2020, 35 percent of all consumer spending, or about $20 trillion, will emanate from emerging markets, up from 25 percent today.

    This is an opportunity that is too big to leave to chance.

    Hans-Paul Bürkner is president and chief executive officer of The Boston Consulting Group.

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