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How Leading Indicators Keep You Ahead of the Curve in Emerging Markets

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How Leading Indicators Keep You Ahead of the Curve in Emerging Markets. This episode of the IntelCollab webinar series aired on June 8, 2016.

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How Leading Indicators Keep You Ahead of the Curve in Emerging Markets

  1. 1. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by How Leading Indicators Keep You Ahead of the Curve in Emerging Markets A Complimentary Webinar from Aurora WDC 12:00 Noon Eastern /// Wednesday 8 June 2016 ~ featuring ~ Joel Whitaker Derek Johnson
  2. 2. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Joel Whitaker Joel Whitaker is Senior Vice President and Global Head of Research for Frontier Strategy Group. He is responsible for research strategy, product innovation, thought leadership, and advising FSG’s most senior client executives. FSG researchers counsel multinational executives on doing business in emerging markets around the world, providing economic forecasts, scenarios, and management best practices for Latin America, Asia, Eastern Europe, the Middle East and Africa. Joel’s analysis has been featured in The Wall Street Journal, The Financial Times, CNBC, Al Jazeera, and Harvard Business Review. Throughout his career, Joel has provided research-driven guidance to senior decision-makers with international responsibility. Prior to joining FSG, Joel was Head of Asia-Pacific Research for Corporate Executive Board (CEB), based in Singapore. In that role, he advised C-level executives across Asia on talent management, compliance, and salesforce effectiveness practices. Previously, Joel led CEB’s global research programs for leaders in information technology, R&D, strategic planning, and corporate development. Outside the private sector, Joel launched the Center of Innovation for Science, Technology and Peacebuilding at the US Institute of Peace, a Washington, DC-based think tank focused on international conflict management. He serves on the advisory board of TechChange, a startup that trains leaders to leverage technology for social change. Joel holds a BA in Economics and Politics from Oberlin College, where he serves on the President’s Advisory Council. Email: jwhitaker@frontierstrategygroup.com The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC, our clients, partners and other friends and dedicated to exploring how to apply intelligence methods to solve real-world business problems. Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora WDC at http://AuroraWDC.com.
  3. 3. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by α Use the Questions pane on your GoToWebinar control panel and all questions will be answered in the second half of the hour. α You are welcome to tweet any comments on Twitter where we are monitoring the hashtag #IntelCollab or eavesdrop via http://tweetchat.com/room/IntelCollab α Slides will be available after the webinar for embedding and sharing via http://slideshare.net/IntelCollab α To view the recording and download the PPT file, please register for a trial membership at http://IntelCollab.com Questions, Commentary & Content
  4. 4. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by How Leading Indicators Keep You Ahead of the Curve in Emerging Markets Joel Whitaker, Global Head of Research
  5. 5. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Learning Objectives 1. Learn how to select and track leading indicators of the drivers of your business 2. Understand which leading indicators are expected to rise, fall, and experience volatility in the coming year 3. Adapt a short list of industry-relevant leading indicators from agile companies in the consumer products, industrial, and health-care sectors 5
  6. 6. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by FSG’s research approach Global Business Environment MNC Executive Workflows • Emerging markets expertise • On-the-ground insight • Economic linkage analysis • Proprietary data forecasts • Implications for action • Executive and expert network • Global/local best practices • Business outcomes
  7. 7. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by A world of (downside) surprises Growth forecasts have been steadily GDP growth, % YOY (Solid bars indicate current forecasts (February 2016); white bars indicate forecasts as of November 2014) -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% Developing APAC SSA MENA US WEUR Developed APAC CEE LATAM 2015e 2016f
  8. 8. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Currency impacts on earnings are increasing Translation loss by US and European MNCs USD millions $20 $57 $87 $938 $3,004 $20,274 $22,732 $4,186 $3,671 $4,099 $4,184 $5,830 $7,450 $3,913 $8,000 $20,180 $31,680 $19,490 $24,010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
  9. 9. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by How quickly has your company adapted to the slowdown in emerging economies? A. We have adapted quickly to the changing external environment B. We were slow to make necessary changes, but we have caught up C. We have largely failed to adapt D. We have not needed to adapt, as our business has not been very affected E. Other
  10. 10. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by High performance during execution phase requires sustained market monitoring efforts Unreliable Data Untested assumptions2 1 Organizational Inertia3 Flawed market monitoring can damage performance Greatest causes of failed market monitoring Difficult to make the linkages between changing market conditions and company performance Plan assumptions based on stable commodity prices, rising Chinese demand, and successful adjustment Failure to move quickly enough to react to a weaker Brazil, liberalizing Cuba, and a reforming Argentina
  11. 11. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Adaptability is key to success during volatile times Prime your organization to keep strategic plans on course Strong planning Strong execution Growth in revenue, profitability, market share Two bridging qualities held by sustainable performers 1 High internal alignment Corporate Country Region Resilience against external surprises Plan Market shifts Regional organizations with high alignment and resilience are more likely to exceed expectations for profitability and market share, with a 99% confidence level* 2  Scenario Design  Contingency Planning  Ownership
  12. 12. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by What kind of indicators in your key markets provide the earliest, most predictive signal for your ability to hit annual targets? A. Macroeconomic data B. Industry-level data C. Channel data D. Internal data E. Other
  13. 13. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by The data you want isn’t always the most reliable in emerging markets 0% 10% 20% 30% 40% 50% 60% 70% 80% 0% 20% 40% 60% 80% 100% High quality data Addressable market size Market share Competitive intelligence Macroeconomic data Customer satisfaction Customer preferences Distribution/channel partner financials Regulatory information Survey of FSG clients on quality and importance of data sources in emerging markets Highimportancedata Market data considered highly important by MNC regional executives is usually of low quality
  14. 14. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Economic drivers point to slower growth in 2017-18 Strong dollar Abundant capital flows Lower energy prices Slowing emerging markets economic growth
  15. 15. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by The Fed will continue to increase interest rates as growth in the US cements The US Fed will move forward with additional rate hikes as the job market reaches full employment and inflation starts to accelerate -4 -2 0 2 4 6 8 10 12 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015e Real GDP Growth, %YOY Fed funds rate, average Unemployment rate, average Inflation rate 0.3 0.5 0.9 1.9 3.0 3.3 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 2014 2015 2016 2017 2018 Long Term FED funds rate, end-of-year median forecast Dec '15 FOMC Meeting Mar '16 FOMC Meeting
  16. 16. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Energy fundamentals point to low prices • Slowing global growth • Strong dollar • OPEC politics • Fracking technology • Low interest rates Political supply disruptions Supply heavily outweighs demand 2016f 2017f 2018f FSG oil price projections (Brent) US$ 30-35 US$ 40 US$ 55-60 20 30 40 50 60 70 80 90 100 110 120 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Oil prices per barrel Brent WTI
  17. 17. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Oil prices lead in different directions International oil prices have dropped dramatically over the last 18 months … … and this shift has played out differently across APAC Positive Impact Mixed Impact Negative Impact
  18. 18. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Economic drivers will persist Strong dollar Abundant capital flows Lower energy prices Slowing emerging markets economic growth Government spending Monetary policy normalization
  19. 19. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Include leading indicator analysis into your tracking process Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Leading Indicator Business Performance 3 month leading relationship 1.0% increase in leading indicator 3.0% increase in sales When the leading indicator changes course…. …. You can make adjustments to inventory, production, and execution to keep your business ahead of the game Verify the leading indicators for your business to get a head start on how your business will track against targets and assumptions
  20. 20. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Healthcare leading indicators for China: Market opportunity driven by social safety net Market potential will continue to improve as China becomes a pivotal market for healthcare companies Relaxed FDI restrictions Aging demographics Health insurance expansion (urban/rural) 1 2 3 Healthcare performance drivers 0 2 4 6 8 10 12 14 16 18 2011 2012 2013 2014e 2015e 2016f 2017f 2018f Real healthcare spending, % YOY
  21. 21. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Healthcare leading indicators for Russia: Market conditions driven by forex and oil prices Healthcare spending will be slow to reverse decline, while companies must manage currency and regulatory pressures Government pressure to localize production Currency impacting pricing and partners Government spending cuts, esp. in regions 1 2 3 Healthcare performance drivers -8 -6 -4 -2 0 2 4 6 8 10 2011 2012 2013 2014e 2015e 2016f 2017f 2018f Real healthcare expenditure, % YOY
  22. 22. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Connect leading indicators analysis to key business drivers PC HARDWARE SALES, % YOY KEY LEADING INDICATORS OF PC HARDWARE SALES LEADING INDICATOR FORECASTS INDUSTRY IMPACT 2013-2015 average 2016f 2017-2020f 2013-2015 average 2016f 2017f H2 2016f H1 2017f 12% 5% 4% Private consumption, %YOY 3.9% -1% 1.5% LCU:USD, Real %YOY 2.3% 20% 5% Industry-level data sets are often available with a long lag, making them significantly less useful for market monitoring purposes The increased dependence on more high-level indicators in emerging market does put greater focus on ensuring that these indicators are, in fact, leading indicators for performance Leading indicators must be easier to track, and offer enough lead times for executives to track monthly and quarterly changes
  23. 23. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Case: leading indicators for tractor sales One geography, two product lines Actuals Predicted Values 95% confidence interval LARGE TRACTOR MARKET SIZING We found that 1 year lagged values of loans for agricultural production and the price of wheat together are good predictors of over-100hp tractor production SMALL TRACTOR MARKET SIZING We found that 1 year lagged values of corn yield, government expenditure on agriculture, and tractor exports together are good predictors of under-100hp tractor production
  24. 24. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Incorporate leading indicators into your management dashboards TIME PERIOD Internal Targets Leading Indicator Analysis Target Expected Actual Misalignment Leading indicator Expected Actual Misalignment Revenue growth, % YOY 7.5% 7.1% Somewhat below target Personal disposable income, % YOY 3.4% -0,2% Consumer spending has declined significantly as government is pushing through unexpected austerity measures, including tax increases Market share, % total 12% 13.7% On track Margin performance, % total 5% 2% Well-below target, must discuss Inflation,% YOY 2% 1.8% Official inflation figures have remained low, though input costs have increased with higher than expected inflation LCU/USD, % YOY 10% 12.3% FX depreciation has come in higher than projected Grow sales of new product lines, % of total sales 4% 6% Performing much better than expected Import demand by industry, %YOY 5% 6% Industrial imports, a strong leading indicator for new product sales performance, is performing above track Hire new sales members for corporate sales 5 2 Well below target, may need to revise H2 targets Unemployment rate, % of total 5.6% 5.2% Labor market conditions are somewhat tighter than expected, may need to increase salary offers by more Consistent tracking of leading external metrics are essential to effectively monitoring your key markets and ensuring alignment
  25. 25. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Best dashboards highlight changes in leading indicators
  26. 26. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by How often does your executive team pull up to evaluate external economic conditions? A. Weekly B. Monthly C. Quarterly D. Twice a year E. Annual
  27. 27. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Cadence matters: Best-in-class business reviews test assumptions and track risks Incorporate periodic assumptions and risk reviews into your traditional business reviews Q1 Q2 Q3 Q4
  28. 28. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Economic indicators: China linkages cause global ripples Two of the country’s major growth engines have slowed GDP by expenditure (trillions of RMB in 2000 terms) -20 -10 0 10 20 30 40 50 60 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Government spending Consumer spending Gross domestic investment Exports of goods and services Imports of goods and services Further trade expansion limited due to slowdown in international markets Investment activity cannot sustain long term growth due to diminishing returns Domestic consumption will only increase once major reforms take hold
  29. 29. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by The impact of a sharp slowdown in China would vary significantly across Asia’s regions South Asia: India and the countries surrounding it are shielded Southeast Asia: ASEAN’s heavy reliance on trade leaves it exposed to a sharp slowdown in China ANZ: Australia’s heavy dependence on commodity exports to China leaves it exposed East Asia: S Korea and Japan both depend heavily on Chinese exports, though the former is more exposed because of its greater reliance on exports generally
  30. 30. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Political indicators: How does political risk affect business? Threat of social unrest Disruption of social contract Political change Regulatory change Economic change Security change
  31. 31. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Angola Benin Botswana Burkina Faso Burundi [CELLR ANGE][CELLRA… [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRAN… [CELLRAN… [CELLRANGE] [CELL… [CELLRANGE] [CELL… [CELLRANGE] [CELL… [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CEL… [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLR… [CELLRA… [CELLR ANGE][CELLRA… [CELLRA… [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] -3% -1% 1% 3% 5% 7% 9% 30 35 40 45 50 55 60 65 70 75 80 Focus on resilient and fast-growing markets FSG’s resilience to external shock index Three-yearaverageGDPgrowth2016–2018 Resilience to external shocks High growth, low resilience Low growth, low resilience Low growth, high resilience High growth, high resilience Bubble size = 2018 nominal GDP, US$ billions
  32. 32. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Some markets are better prepared to weather the storm – the case of Africa Factors that favor some markets over others  Political stability  Quality of governance  Economic diversification  Currency volatility  Exposure to commodity prices  Export dependency  Population size  Education FSG’s Resilience to External Shocks Index Green and higher index numbers indicate greater resilience; red and lower numbers indicate lower resilience Mauritius 83.95 Gabon 58.70 Cape Verde 77.21 Togo 58.32 Botswana 74.17 Malawi 58.24 Nigeria 70.08 Mali 55.49 South Africa 69.92 Zambia 54.65 Namibia 69.88 Zimbabwe 54.52 Senegal 69.82 Madagascar 52.68 São Tomé & Príncipe 69.64 Guinea-Bissau 52.08 Seychelles 68.86 Liberia 51.58 Kenya 68.32 Sierra Leone 51.08 Uganda 66.87 Burundi 49.55 Ethiopia 64.77 Niger 48.08 Tanzania 64.57 Congo (DRC) 47.73 Lesotho 64.46 Congo 46.52 Eritrea 63.98 Mozambique 46.46 Benin 63.57 Burkina Faso 45.39 Swaziland 62.53 Equatorial Guinea 43.46 Gambia 61.48 Guinea 43.17 Côte d’Ivoire 60.92 Angola 41.84 Rwanda 59.66 Mauritania 41.51 Cameroon 59.07 Chad 40.81 Ghana 58.84 Central African Republic 30.66 Comoros 58.81
  33. 33. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Scenario analysis makes sense of a risky world Multitude of risks too vast to track Upside Scenario Base Case Scenario Downside Scenario A few scenarios/ specific signposts to track Assess the risks that your business may confront and incorporate them into your planning and monitoring processes
  34. 34. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by FSG’s 2016 Events to Watch Property market collapse in China Schengen border disruption China rallies around the flag Abrupt protectionism in Russia Wave of subsidy cuts in MENA Eurozone austerity backlash Pegs under pressure Corruption crackdown in Latin America Cuba achieves monetary unification Financial crisis in Turkey State policy paralysis in India Velocity LikelihoodBubble size represents relative business impact
  35. 35. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by How do you use scenarios in planning? A. We use scenarios during our periodic business reviews B. We use scenarios to test strategic planning assumptions but not on any cadence C. We only use scenarios for long- term strategic planning D. We don’t use scenarios E. Other
  36. 36. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by From recognition to action Establish urgency Form a powerful guiding coalition Create a Vision Communicate a vision Empower others Create an action plan with quick wins Consolidate improvements and institutionalize change Change Management Steps  Establish urgency  Form a powerful guiding coalition  Create a vision for change  Communicate that vision to all necessary stakeholders  Empower and delegate necessary changes  Create an action plan that incorporates quick wins to establish momentum  Consolidate improvements and institutionalize changes into the market monitoring and risk tracking processes Change doesn’t just happen because you have made a decision and communicated to key stakeholders Change Management
  37. 37. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by L O N D O N 25 Southamptons Buildings London WC2A 1AL Tel: +44 (0) 203 709 9385 S I N G A P O R E 9 Battery Road 11/F Straits Trading Building Singapore 049910 Tel: +65 6422 7920 W A S H I N G T O N D C 1150 18th St, NW Suite 350 Washington, DC 20036 USA Tel: +1 202 741 1333 F S G A R O U N D T H E W O R L D www.frontierstrategygroup.com @FrontierStrtGrp L O N D O N 25 Southampton Buildings London WC2A 1AL Tel: +44 (0) 203 709 9385 S I N G A P O R E 9 Battery Road 11/F Straits Trading Building Singapore 049910 Tel: +65 6422 7920 W A S H I N G T O N D C 1150 18th St, NW Suite 350 Washington, DC 20036 USA Tel: +1 202 741 1333 F S G A R O U N D T H E W O R L D www.frontierstrategygroup.com @FrontierStrtGrp F S G A R O U N D T H E W O R L D www.frontierstrategygroup.com @FrontierStrtGrp
  38. 38. The Intelligence Collaborative http://IntelCollab.com #IntelCollab Powered by Thank you! Now how about a little Q&A? Email: jwhitaker@frontierstrategygroup.com Web: www.frontierstrategygroup.com Twitter: @FrontierStrtGrp The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC, our clients, partners and other friends and dedicated to exploring how to apply intelligence methods to solve real-world business problems. Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora WDC at http://AuroraWDC.com. See you next time!

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