The world is bumpy - globalization and new strategies for growth


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The world is not flat; it's bumpy and you can't see what's ahead. As new markets expand and globalization increases, opportunities are becoming harder to find.
Our Growing Beyond program explores opportunities across expanding into new markets, finding new ways to innovate & implementing new approaches to talent.

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The world is bumpy - globalization and new strategies for growth

  1. 1. The world is bumpyGlobalization and new strategies for growthMarch 2012
  2. 2. Introduction
  3. 3. About this reportThe world is bumpy: globalization and new strategies for growth is thethird annual report from Ernst & Young exploring trends in globalizationand their impact on multinational companies. The report is based on thefollowing original research:► A globalization index, that measures and tracks the performance of the world’s 60 largest economies across five dimensions: ► Openness to trade ► Capital movements ► Exchange of technology and ideas ► Labor movements ► Cultural integration► A survey of 1,000 senior executives from around the world► A series of interviews with CEOs, leading academics and other globalization expertsPage 3 The world is bumpy
  4. 4. Globalization continues to deepen ► After a brief pause in 2009, the overall average globalization score for the world’s largest economies is estimated to have increased in 2011 and is expected to continue increasing through 2015. Average globalization score 4.35 4.3Globalization indicator score 4.25 Predicted scores 4.2 Actual scores 4.15 4.1 4.05 4 2008 2009 2010 2011 2012 2013 2014 2015 Source: EY Globalization Index 2011 Page 4 The world is bumpy
  5. 5. The Globalization Index► The Globalization Index was created to measure the extent to which the 60 largest countries (by GDP) are connecting to the rest of the world.► This table provides a breakdown by country (or, where applicable, territory) for each of the five key categories most relevant to business for the top 10 countries in the index. Change in Change inRank Country 2011 Score score score Trade Capital Labor Technology Culture since 2010 since 19951 Hong Kong 7.42 -0.24 -1.91 9.8 7.4 4.6 6.0 9.32 Ireland 7.24 0.13 -2.50 6.7 7.8 6.0 9.5 5.83 Singapore 6.88 -0.14 -1.13 10.0 6.2 4.4 6.5 6.94 Belgium 5.81 -0.07 -1.40 6.4 6.8 5.2 6.1 4.05 Sweden 5.72 -0.11 -1.83 5.4 6.0 4.4 8.4 4.06 Denmark 5.70 0.21 -1.64 5.3 6.2 4.4 8.3 4.07 Netherlands 5.58 0.09 -1.15 6.3 5.8 4.9 6.5 4.08 Switzerland 5.46 -0.19 -1.70 4.9 5.4 6.3 5.9 4.89 Finland 5.39 -0.09 -1.72 5.0 5.6 4.0 8.1 3.810 Hungary 5.19 0.06 -1.07 6.4 5.1 4.5 5.7 3.8Page 5 The world is bumpy
  6. 6. The focus of this programCompanies face a challenging and uncertain economic environment anda highly competitive global marketplace, in which:► Mature markets face sluggish growth prospects and high levels of indebtedness.► Rapid-growth markets, although expanding more quickly than developed markets, are slowing.► Competition is increasing as companies chase more elusive growth prospects and as rapid-growth market companies grow in sophistication.► Policy is becoming more complex and uncertain.► Operations are increasing in complexity and risk.► Talent is becoming more scarce everywhere.Page 6 The world is bumpy
  7. 7. Key findings
  8. 8. Companies face four key challenges1. Succeeding in rapid-growth markets is harder than it used to be. Costs are rising, competition is becoming more intense and growth, while still rapid, is slowing. Betting the future on rapid-growth markets just because they have the right economic and demographic conditions is not enough.2. One size does not fit all markets. As companies diversify into new markets, they face increasing operational complexity. These include additional risks, such as supply chain disruption, poor visibility into performance and lack of flexibility.3. Policy has become more important and less predictable. An uncertain and dynamic policy environment — especially rising protectionism — is causing concern. Business leaders are also worried about rising in tax risk.4. Good people are hard to find. Companies find it increasingly difficult to match suitable candidates with available positions. Senior managers with local knowledge are particularly scarce. In rapid-growth markets, increased competition for talent from local players compounds the problem.Page 8 The world is bumpy
  9. 9. 1. Succeeding in rapid-growth markets is harder than it used to be
  10. 10. The challenge► Companies are increasingly looking to rapid-growth markets as their best opportunity for growth. Almost three-quarters say that these markets will make a significant difference to their revenue growth. Role of rapid growth markets in revenue growth What role do you expect rapid-growth markets to play in the following aspects of your business over the next three years? Not a significant role Significant role Overall contribution to boosting revenue growth 10 72 International expansion plans 14 62 Contribution to boosting market share 15 54 Cost effectiveness (e.g., through outsourcing or access to low cost skills) 23 51 Source of new innovations 31 39 Source of high-quality operational talent 30 35 Source of high-quality managerial talent 38 29Source: Globalization Survey 2011.Please rate 1 to 5 where 1 is very significant and 5 is not at all significant. Shown: Percentage 4 or 5 vs. percentage 1 or 2 score. Base: Total (994).Page 10 The world is bumpy
  11. 11. The challenge► More than half of respondents think that these markets require longer time horizons, and almost half believe that the cost of entering is greater than expected. ► Companies face a squeeze on growth prospects in rapid-growth markets: ► Increased competition from other multinationals and increasingly sophisticated local players ► Slowing growth – respondents see asset price bubble as the most likely risk to derail growth ► Potential bubblesPage 11 The world is bumpy
  12. 12. Response: think like a start-upShed organizational baggage.► Developed world multinationals have spent years refining their business processes, but this can be a burden.► Processes may be too rigid, business models tired and the organization may lack flexibility.► In order to succeed, they must: ► Shed their legacy processes and capabilities ► Rethink their approach from the ground up, and behave more like a start-up ► Reinvent their business model to suit the local marketThis will give them greater flexibility and capacity to respond quickly toemerging opportunities and risks.Page 12 The world is bumpy
  13. 13. Response: think like a start-upDevise innovative strategies that will secure a quick pay-off.► In the past, companies recognized that investments in rapid-growth markets were long term.► This worked as long as they could fund the new investments using profits from their core markets.► But with developed markets slowing, recycling this capital is no longer an option.► Instead, companies must: ► Develop innovative business models and solutions that will enable them to earn a much quicker return ► Ensure that growth can be achieved in rapid-growth markets via self-sustaining models, rather than though investment from profits from developed marketsPage 13 The world is bumpy
  14. 14. Response: think like a start-upTake a broader stakeholder view toward the investment.► The financial crisis has reawakened the debate about the role of business in society.► Pure shareholder value creation is falling out of favor.► Instead, companies need to take into account the needs of a broader range of stakeholders, especially in rapid-growth markets.► To succeed, companies must: ► Work closely with a wide range of stakeholders, including government, local communities and their partners ► Understand the role of government in the private sector and where the boundaries lie ► Become involved in the development of the country itself rather than solely the investment, for example, through infrastructure ► Have a higher purpose that goes beyond pure economic logic to think more holisticallyPage 14 The world is bumpy
  15. 15. 2. One size does not fit all markets
  16. 16. The challenge► As companies adopt a more global approach, they inevitably encounter greater complexity.► Two-thirds say that they will increase the number of their external partners over the next three years, and more than half say that their supply chain will become more complex. 65 Number of external partners with whom your company works 62 69 54 Complexity of the supply chain 54 54 49 Exposure of the supply chain to risk of disruption 49 49 45 Proportion of operational functions that you outsource to external Total 42 providers Developed markets 51 Emerging marketsQ: Over the next three years, what change do you expect to see to the following aspects of your company’s operations? Please select increase, no change or decreasefor each item. Shown: Percentage increase. Base of companies with international supply chains: Total (551), developed markets (359), emerging markets (192).Page 16 The world is bumpy
  17. 17. Response: adapt your approach to newoperational complexitiesIntegrate networks according to logically grouped markets.► The need to strike a balance between global and local is a major challenge for companies seeking to be relevant to local customers while still deriving benefit from economies of scale.► To address this challenge, companies must: ► Strike a careful balance between standardization and the need to remain relevant and close to end-customers ► Develop hubs that can provide shared services or resources at a regional level, yet still be close enough to the end-customers to understand their specific needs and challenges ► Consider how groupings of adjoining markets can be created to follow patterns of trade, which still take place largely within geographic regions, as well as regional trade agreementsPage 17 The world is bumpy
  18. 18. Response: adapt your approach to newoperational complexitiesRethink approaches to outsourcing.► A changing, uncertain world requires companies to be adaptable and able to respond quickly to new opportunities and risks.► Resources are fixed and tough to move, so will cause problems for companies in need of flexibility.► Instead, companies must: ► Shift their cost structure to one that is variable rather than fixed ► Use outsourcing to increase organizational flexibility and help companies deal with a high degree of complexity ► Learn from the experiences of some rapid-growth market firms that have adopted a simplified operating model from the outset ► But ensure that outsourcing does not lead to a loss of controlPage 18 The world is bumpy
  19. 19. Response: adapt your approach to newoperational complexitiesInvestigate the benefits of near-sourcing.► In the past few decades, it has become accepted wisdom that companies should offshore non-core functions, such as manufacturing, to low-cost destinations such as China.► But rising labor costs in these markets and volatile commodity markets are causing some companies to question this.► Instead they are: ► Assessing the fragility of their supply chains and determining whether a new approach is appropriate ► Considering shifting their supply chain from a sea-based one to a land-based one ► In some cases, bringing manufacturing back to developed markets, like the US, to ensure security of supply and take advantage of high labor capacity and lower prices for manufacturing assetsPage 19 The world is bumpy
  20. 20. 3. Policy has become more important and unpredictable
  21. 21. The challenge► More than half of our survey respondents say that an increase in protectionism in the markets in which they operate could have a negative impact on their growth prospects. 51 Overall growth prospects 52 49 36 Willingness to invest internationally 37 34 34 Plans for international expansion 35 33 33 International competitiveness 32 35 32 Supply chain and procurement costs 29 36 17 Time to market 16 19 16 Total Ability to access appropriate skills and talent 15 Developed markets 16 Emerging marketsQ: Should there be a rise in protectionism in the overseas markets in which you operate, which of the following areas of your business would benegatively affected? Base: Total (994), Developed markets (635), Emerging markets (359).Page 21 The world is bumpy
  22. 22. The challenge► There are concerns that governments could resort to protectionism to bolster flagging economies. More than half of respondents think that a deteriorating economic environment will cause a dramatic increase in tit-for-tat protectionism. New global financial crisis triggered by European sovereign 62 62 debt defaults 61 A deteriorating economic environment causes a dramatic 58 57 increase in tit-for-tat protectionism 59 58 Further round of quantitative easing in the US 59 57 Further capital controls in emerging markets to prevent 55 52 speculative flows of capital 60 53 Global economy falls into recession 55 49 An intensification of competitive currency devaluations by 49 47 policy-makers 51 36 Total Significant upward revaluation of the Chinese currency 35 Developed markets 37 Emerging marketsQ: How likely do you think it is that the following scenarios will occur in the next 12 months? Please rate 1 to 5 where 1 is very likely and 5 isnot at all likely. Shown: Percentage of 1 or 2 scores. Base: Total (994), developed markets (635), emerging markets (359).Page 22 The world is bumpy
  23. 23. Response: build a strategy for connectingwith governmentsEngage with policy-makers to make the right decisions.► Faced with a potential uptick in protectionism, many business leaders may conclude that the issue is out of their hands.► Only 15% of companies say they are fully prepared for an increase in protectionism and have factored it into their strategic plans.► But companies can take concrete steps: ► Engage with governments and trade departments to prevent counterproductive measures ► Ensure that governments understand the economic benefits of increased trade ► Consider shifting their supply chain from sea-based to land-based ► Correct misinformation among consumers about the impact of globalizationPage 23 The world is bumpy
  24. 24. Response: build a strategy for connectingwith governmentsCombine local knowledge with global co-ordination.► The global tax environment has never been so fast-moving or dynamic.► 78% of the world’s largest companies say they are already experiencing greater risk or uncertainty around legislation.► To deal with this, companies can: ► Put in place a mix of local, on-the-ground knowledge – often gained through outsourcing arrangements – with the ability to coordinate at a global level ► Ensure that decisions that involve tax are taken in the context of the company’s broader context and strategic goalsPage 24 The world is bumpy
  25. 25. Response: build a strategy for connectingwith governmentsBuild stronger relationships with tax administrations.► Companies are encountering a high degree of tax risk, particularly with cross-border investments.► To deal with this challenge, companies should: ► Build transparent relationships with authorities so that issues can be addressed early rather than waiting for an audit or controversy ► Where possible, explore the potential of forming enhanced relationships and alternative dispute resolution mechanisms with tax administrations ► Ensure a robust approach to maintaining adequate, easily accessible documentation that can be provided when challengedPage 25 The world is bumpy
  26. 26. 4. Good people are hard to find
  27. 27. The challenge► Although the economic prospects of developed and emerging markets are diverging, there is a common thread running across all markets: companies everywhere find it increasingly difficult to match skilled professionals with available positions. Developed markets Equally challenging Fast-growth markets Recruiting senior managers with local knowledge and 14 31 56 understanding Retaining employees 16 36 48Ensuring that salaries and benefit packages keep track with 18 37 45 local competition Recruiting employees with appropriate experience 21 35 44 Addressing weaknesses in current talent pool 16 47 37 Forecasting talent requirements 13 50 36 Succession planning for top management talent 18 49 33 Measuring performance of employees 14 57 28 Q: Compared to this time 12 months ago, in which markets are you currently experiencing most difficulty in the following dimensions of talent management? Base: Total (994).Page 27 The world is bumpy
  28. 28. Response: embrace bold approaches totalent managementPut the best talent in the most promising markets.► Many companies have been slow to send their top talent to rapid- growth markets, sending people who are ―good enough‖ rather than those who are best in class.► Instead, companies should: ► Send the best talent available on the basis that these markets are changing rapidly and are highly competitive ► Future-proof their talent by putting in place managers who will have the skills and authority to lead the larger markets of tomorrow, not just the smaller markets of todayPage 28 The world is bumpy
  29. 29. Response: embrace bold approaches totalent managementPromote managers in line with the pace of the market.► In rapid-growth markets, where employee churn can be 20%, and where salaries are rising at a similar rate, companies need to consider what will make them stand out as an attractive employer.► This means that companies should: ► Invest heavily in training to prepare managers for future challenges ► Promote internally to show employees that they have significant opportunities if they stay with the company ► Promote people sooner than you would in a more mature market, even if this means giving them a level of responsibility that is greater than their experiencePage 29 The world is bumpy
  30. 30. Response: embrace bold approaches totalent managementRevamp the expatriate model.► Traditional approaches to expatriate managers are becoming tired and are rarely successful.► Just 29% of respondents say that their company is effective at relocating employees with minimum disruption.► Instead, companies should: ► Work hard to ensure that expatriate postings are not only attractive but also benefit from access to top management ► Give managers from rapid-growth markets exposure to more developed markets through a ―reverse expat‖ experiencePage 30 The world is bumpy
  31. 31. Closing remarks
  32. 32. What’s next?► Global businesses face an ever-tightening squeeze of slowing growth, increasing competition and increased volatility.► Globalization continues its inexorable march, but the challenges of becoming truly global are harder and the responses less clear-cut.► Managing across divergent economic environments demands new management capabilities and the ability to lead diverse teams across multiple time zones and geographies► To succeed in this environment, companies may need to give more decision- making weight to the markets with the best growth potential, relocate key executives to fast-growth markets and shift their focus to a model that takes into account a broader range of stakeholders.Page 32 The world is bumpy
  33. 33. Appendix: Measuring globalization► The Globalization Index measures the performance of the world’s 60 largest economies according to 20 separate indicators.► The indicators fall into five broad categories: openness to trade, capital movements, exchange of technology and ideas, labor movements, and cultural integration. These factors have been weighted based on the significance placed upon each factor by 992 surveyed senior company executives doing international business. Subsidiary indicators are also given sub-weightings within each category.► The indicators chosen include both quantitative data and qualitative scores from a range of trusted sources. The performance of countries is measured over time, so that progress toward greater or lesser globalization since 1995 can be observed, with a forecast of likely performance until 2015.► Our Globalization Index measures ―relative‖ rather than ―absolute‖ globalization. This means that an economy’s trade, investment, technology, labor and cultural integration with other economies is measured relative to its GDP rather than by the absolute value of these elements being exchanged. The Index, therefore, reflects the degree to which the global integration of an economy is observable or experienced from within that economy.Page 33 The world is bumpy
  34. 34. Appendix: Globalization Index indicators► The Globalization Index was created by identifying the key indicators of globalization most relevant to business. The table below shows, for each of the headline categories, the individual indicators used and their source. The categories were then weighted according to the views captured in a survey of 992 business leaders. Category and indicators Source Movement of goods and services Total trade (exports + imports) as %GDP National accounts Trade openness (5=very high) Scored on 1-5 scale by EIU analysts Tariff and non-tariff barriers (5=very low) Scored on 1-5 scale by EIU analysts Ease of trading (cross-border) (5=very easy) Scored on 1-5 scale by EIU analysts Current-account restrictions (5=very low) Scored on 1-5 scale by EIU analysts Movement of capital and finance FDI flows (in and out, % of GDP) IMF International Financial Statistics Portfolio capital flows (in and out, %GDP) Scored on 1-5 scale by EIU analysts Government policy towards foreign investment (5=very encouraging) Scored on 1-5 scale by EIU analysts Expropriation risk (5=non-existent) Scored on 1-5 scale by EIU analysts Investment protection schemes (5=very good) Scored on 1-5 scale by EIU analysts Domestic favouritism by government (5=No favouritism; level playing) Scored on 1-5 scale by EIU analysts Movement of labour Net migration rate (per 1,000 population) United Nations Current transfers (in and out, as %GDP) IMF International Financial Statistics Hiring of foreign nationals (5=very easy) Scored on 1-5 scale by EIU analysts Exchange of technology and ideas R&D trade (in and out, as %GDP ) IMF Balance of Payment Statistics; EIU estimates Broadband penetration International Telecommunications Union Internet users International Telecommunications Union Cultural integration Tourism (in and out, per 1000 population) World Tourism Organization International outgoing fixed telephone traffic (minutes) per capita International Telecommunications Union Openness of national culture to foreign influence (5=very open) Scored on 1-5 scale by EIU analystsPage 34 The world is bumpy
  35. 35. Thank you
  36. 36. Ernst & Young Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and Growing Beyond an unwavering commitment to quality. We make a Global growth is the business issue of today. difference by helping our people, our clients and our wider communities achieve their potential. In Growing Beyond, we’re exploring how companies can grow faster — by expanding Ernst & Young refers to the global organization of into new markets, finding new ways to member firms of Ernst & Young Global Limited, each of innovate and taking new approaches to which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not talent. It’s an ongoing program to help you provide services to clients. For more information about grow beyond your expectations. Join the our organization, please visit discussion at Imagery expiry date: January 2013 © 2012 EYGM Limited. All Rights Reserved. EYG No. EX0088 This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.Page 36 The world is bumpy