Competing for growth


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Competing for growth

  1. 1. Competingfor growthHow business is growingbeyond boundaries
  2. 2. In this reportExecutive summary — how business is growing beyond boundaries 2New markets — how high-performing companies are approaching 4rapid-growth marketsNew products and services — how high performers are innovating 16for successNew talents and skills — how high performers are capturing and 26retaining the talent they needAbout this report 36The benchmark findings for this report are drawn from two studies conducted betweenJanuary and February 2011 in parallel for Ernst & Young by the Economist IntelligenceUnit. To explore what companies were doing as they entered new markets and innovated,we interviewed some 400 C-suite and marketing professionals. To explore how companieswere addressing talent management, we interviewed 400 C-suite and HR directors. Aswith our earlier study, we have factored out the impact of sector and distinguishedbetween the top third highest performers — in both revenue and EBITDA growth — and thelowest third to see if we can identify distinctive patterns of action that might explain thesuperior performance.
  3. 3. The new economy is more competitive than the old.Greater variation in market performance, sharpermarket volatility, ceaseless pressure on marginsand demanding stakeholders have made for anincreasingly interconnected — and interdependent —global economy.In our first Competing for growth report, we interviewed some 1,400 companiesfrom around the world to see how they were responding. Our study showed thatsuccessful players — the top quartile in both revenue and EBITDA growth – havefocused on executing four drivers of competitive success:• Customer reach — to optimize their potential market• Operational agility — to maximize their effective response• Cost competitiveness — to optimize their profitability• Stakeholder confidence — to secure both talent and support for achieving their goalsThis report seeks to test and build on these findings, by exploring how the drivers ofcompetitive success are being applied to the three fundamental sources of organicgrowth: entering new markets, creating new products or services and developingthe new skills required to deliver enhanced, or cheaper, offerings.By digging deeper into what successful companies are doing, we can draw insightand offer guidance on how they are achieving their success. Broaden product/ Prioritize service offer markets Focus on Reinforce key segments brand Customer reach Accelerate Inform speed of response pricing process Create flexible work/delivery High Sustain cost reduction platforms Operational performers Cost agility competitiveness do better Master Pass on innovation on … cost pressure Improve Optimize collaboration capital Stakeholder confidence Identify and Re-engage with explain risks internal talent Enhance Anticipate reporting regulatory complianceFor each of the four drivers — customer reach, operational agility, costcompetitiveness and stakeholder confidence — higher performers have adopteda distinctive set of actions, or have made further progress, in implementing eachprogram. Competing for growth How business is growing beyond boundaries 1
  4. 4. Executive summaryHow business is growing beyond boundariesThe Competing for growth model is an effective framework to help management understand its comparativeposition in responding to the new economic reality. The challenge is great, but competitive success is morelikely for those companies that achieve the optimal balance between their customer reach, operationalagility, cost competitiveness and stakeholder confidence.Our most recent research has reinforced our belief in the value of resonates in the market and with both internal and externalthe framework. Its application can be seen to drive high stakeholders. For positioning, like market leadership, is a toolperformance in achieving profitable and organic growth from the rather than just a goal. It is the result of management action andthree core sources: can be changed. By studying the actions of others, management can be better placed to improve their own position.In new markets For the purposes of our research, we have treated the threeHigh performers approach new markets through a deep sources of organic growth as separate, but in reality, they overlapunderstanding of their target customers. They have broadened the into a suite of connected opportunities and challenges. To growrange of their products and developed them close to their markets successfully, companies need to look beyond these boundariesto better meet their needs. They move pricing as close to the — indeed way beyond their own current boundaries — to identifymarket as possible and as much under their control as possible. their future path.And they take their stakeholders with them — through clear andspecific communication about both markets and challenges. Going forward, Ernst & Young plans a number of future studies to drill down further into the global growth agenda.In product and service innovation marketsHigh performers approach new product and service development Newfaster and closer to the market so that they can get further up thevalue curve and secure better prices for their efforts. They achievethis performance through more inclusive innovation approaches Customer reachthat extend beyond product development. And they take theirstakeholders with them by sharing more detail on the potential oftheir innovation — and the progress they are making with it.In talent management Operational Cost agility Growth competitivenessHigh performers approach their talent resources with the same New printensity that they approach their customers. Successfullyaccessing wider groups allows them to build the diversity that they tsneed. Recognizing that their talent is an asset to protect, they odu lenselect carefully and pay more to retain — while recognizing that payis only part of the implied contract that such talent demands. Stakeholder ct ta confidence s ewThe actions within these three areas may differ, but they all result Nfrom a company having an integrated view of its distinctive growthopportunity and executing it effectively across their organization.This, in turn, stems from having a powerful positioning that2 Competing for growth How business is growing beyond boundaries
  5. 5. How successful companies are driving their growth New markets New products New talents Choosing markets carefully Being driven by current Building the right team to • Preferring India and China demand activate quickly — these countries dominate • Increasing product ranges • Paying greater attention to globally, but there are clear significantly — some 30% of high technical and operational roles regional approaches, performers have increased their in setting up new operations particularly with regard to the product range by more than • Going outside the organization next generation of rapid-growth 20% in the past two years Customer and traditional sources for markets reach • Focusing on current customers management and skills • Going beyond the figures to and employees as primary develop a deeper understanding sources of innovation of the real nature of their target market • Being clearer as to their target segment within each market Being flexible, but cautious Moving quickly from idea to Being more selective, but • Achieving sales more quickly market faster to develop and deploy — using sales agents for quick • Following a formal process for • Investing significant time and entry, but seeking management innovation, but with greater effort to recruit senior control of longer-term clarity on “go/no go” criteria management, while moving operations and process oversight by quickly for rapid-growth Operational • Being flexible as to their business management opportunities agility approach to market entry, but • Adopting a structured “from • Putting greater focus on fast seeking to learn from thought to finish” process with routes of staff development experience launch and review built into the • Moving resource into markets, plan from the start but with an explicit knowledge transition expected Seeking control of price and Acting to capture more value Engaging in a battle for talent profit • Structuring cost base to • Experiencing higher staff • Moving pricing closer to the capture value — increasing turnover and challenges in target market to capture more marketing spend to capture getting the talent they need Cost opportunities margin • Being willing — and able — to competitiveness • Achieving greater control of • Locating innovation closer to pay for talent but recognizing cost bases target markets — increasingly in this is only part of the equation rapid-growth markets • Moving production closer to the target market Being more transparent Taking their stakeholders with Being more engaged with through detail them on the journey engagement • Finding market entry more • Providing more detail to • Starting from a better position costly than expected in terms of external stakeholders on to grow — handled the Stakeholder cash and time opportunity and risk challenges of the recession confidence better • Sharing more detail about their • Identifying and rewarding new market strategy innovative talent • Focusing on engagement through commercial effectiveness Competing for growth How business is growing beyond boundaries 3
  6. 6. New markets: what we learnt last time The first Competing for growth study showed there is caution around entering new markets. Respondents were clearly aware of the length of time it takes to break even in a new market, i.e., 60% believed it would take over a year, with little variation between high and low performers. The warning from Competing for growth was that while entering new markets may be the right thing to do, rapid-growth markets are only part of the reason for today’s success. High performers seem to be focusing on initiatives that have a more short-term, if not an immediate return with current customers in current markets before addressing new market entry. What the current research shows, however, is that when high performers are satisfied that the time is right to address new market entry, they do so with clarity of focus, speed of execution and transparency of communication.4 Competing for growth How business is growing beyond boundaries
  7. 7. New marketsWhat high performers are getting rightHigh performers have a focus on their current customers that runslike a thread through their operations. It determines the markets New markets: new frontiers inwhere they wish to sell and produce and how they enter andoperate. Consequently, one of our key findings in our initial consumer productsCompeting for growth study was the continued importance ofdeveloped markets to these companies. While we found growing As globalization continues to expand horizons,interest in rapid–growth markets, they were perceived to be companies in the consumer products (CP) sector areespecially competitive and not by themselves, the whole story for actively searching for new markets, and newhigh performers. opportunities. CP companies need to utilize a tailored approach toIt is clear, however, that rapid–growth markets will be an increasing overcome the inherent challenges of market entry infactor going forward. To address this, we focused our research on developing economies.whether differences exist between high and low performers in theirapproach to these markets. It is clear that high performers are not A move into rapid-growth markets typically involvesalone in their pursuit of cross-border opportunities, nor do they operating in less certain political and regulatoryappear to be pioneering ahead into new territories. Rather, it is landscapes, as well as transacting in a more volatiletheir execution of these opportunities — focused in purpose, fast to currency. Already, they are faced with the competitivedeliver, and thoroughly explained to their stakeholders — that presence of local CP companies — not yet global in scope,seems to explain their success. but powerful in ambition and entrepreneurial in nature. Agile and not averse to taking risks, these localHigh performers are doing better on: companies understand their local consumers and benefitCustomer reach — choosing markets carefully from a low-cost business model.• Preferring India and China — these countries dominate globally, CP companies are relying on projections of future data to but there are clear regional approaches, particularly with regard underpin their move into such markets. They need to be to the next generation of rapid-growth markets aware that premiums are high for talent and distribution• Going beyond the figures to develop a deeper understanding of in emerging economies, principally because they are the real nature of their target market such competitive markets. It may therefore take longer• Being clearer as to their target segment within each market for their investment to turn into desired return, and it will be longer before their business starts performing toOperational agility — being flexible, but cautious the normal expectations of more mature markets. It will• Achieving sales more quickly — using sales agents for quick be longer still before they know whether their entry, but seeking management control of longer-term demographic projections are accurate and whether the operations political and regulatory terrain will become more certain.• Being flexible as to their approach to market entry, but seeking And yet, despite these challenges, it is no exaggeration to learn from experience to say that a paradigm shift is under way; within fiveCost competitiveness — seeking control of price years, more than 60% of the revenue of larger CPand profit companies is set to come from the the rapid-growth• Moving pricing closer to the target market to maximize the markets. With low-volume growth forecast in opportunity North America and Western Europe, it is increasingly• Achieving greater control of their cost base clear that, for CP companies both large and small, the rapidly developing economies hold the key to a• Moving production closer to the target markets prosperous future.Stakeholder confidence — being more transparent through detail• Finding market entry more costly than expected in terms of cash and time• Sharing more detail about their new market strategy Competing for growth How business is growing beyond boundaries 5
  8. 8. New marketsCustomer reachChoosing markets carefullyGiven the increased variation in geographical market growth, the choice of which market to compete in has acritical impact on company performance. This seems a statement of the obvious, but given the huge variationthat exists throughout both markets and company operations, its implications are immense. The world isnot flat, our starting points are not the same, but with global mobility of capital, the consequence of thisvariation affects all players.Preferring India and China Asia-Pacific and fallen out of the top 10 for companies based in North America. The term “BRIC” has been superseded.From a global perspective, we found that India (34%) and China(33%) dominated the sales focus of all our respondents — with But it is not clear that a new global acronym can be developed.Brazil (19%), Russia (14%) and Singapore (11%) some way behind. Looking toward the next generation of rapid-growth countriesHigh performers, however, had a much greater focus on India — the post-BRIC group — no simple category of countries exists.(47%), followed closely by China (44%) and, to lesser degree, Brazil Countries such as Poland, Mexico and Argentina increase their(26%). Lower performers had a lower and broader sales focus, with importance, but it is apparent that there is a difference in focus forthe same three countries to the fore, but a similar level of interest sales between the high performers and the low performers andin Poland, Mexico and Singapore. that this varies by region.The importance of India and China remain the same regardless of • High performers from Western Europe have a greater focus onwhere companies are headquartered, although other key Middle East, Eastern Europe, Turkey and the Ukraine. Otherdestinations in the top five are more regionally distinct: Singapore than Indonesia and Mexico, they appear to have less focus onand Indonesia for Asia-Pacific, Middle East and Russia for Asia-Pacific and Latin America.Western Europe, and South Korea and Mexico for North America. • High performers from North America seem to be focused onLooking more broadly, the top 10 sales markets have a clearer Latin America. Other than South Korea and the Philippines orregional tone to them. Poland in Europe, the focus is strongly regional.It appears that the combination of high volume and rapid growth in • Asia-Pacific companies have more of an Asia-Pacific focus,the India and China markets lifts them outside the normal more regardless of whether they are high or low performers.regional focus. Brazil can be seen to continue to emerge, whileRussia’s relative importance has declined. While it retains fifthposition for European companies’ sales, it has declined forMost important markets for sales based on location* Asia-Pacific Western Europe North America High Low High Low High Low 1 India 71 70 India 45 20 China 46 47 2 China 55 75 China 44 24 India 36 41 3 Brazil 25 35 Middle East 36 18 South Korea 32 6 4 Singapore 25 5 Brazil 26 16 Brazil 23 25 5 Indonesia 18 20 Russia 19 25 Mexico 18 19 6 Bangladesh 11 5 Poland 15 14 Poland 14 22 7 Middle East 11 0 Romania 11 10 Chile 14 9 8 Russia 9 10 Turkey 11 7 Argentina 9 22 9 Malaysia 9 5 Mexico 8 13 Columbia 9 9 10 Vietnam 7 5 Ukraine 8 4 Philippines 9 6 * Post–BRIC group highlighted6 Competing for growth How business is growing beyond boundaries
  9. 9. Going beyond the figures to develop a deeper High performers, however, regardless of sector, placed lessunderstanding of the real nature of the target market emphasis on simple quantitative demographics and income-per- head factors. Indeed, high performers focused on political stabilityAll respondents generally rated economic and demographic factors more than other players — a key driver of market stability inhighly in determining the markets that they would prioritize for addition to inflation risks. Furthermore, although lower on their listinvestment, with inflation and purchasing power parity of priorities, high performers also placed greater emphasis onassessments also important. The number of people multiplied by gaining a deeper understanding of social factors affectinghigh GDP growth seems as reasonable a starting point for market purchasing behavior and understanding the reputational risk ofassessment as any, although the accuracy of both measures may transacting in particular markets. The performance challenge isbe much less certain than expected. Given the degree of economic not simply entering the market, but competing successfully againstreforecasting and correction within the developed world, complete domestic incumbents. This requires getting beyond the numbers toaccuracy in rapid–growth markets would be unrealistic. But, while it understand the critical local characteristics of the market. To win incould be argued that such corrections in these markets have India and China requires that you understand the market as well astended to be on the upside, even excessive demand can unbalance local companies and can leverage an unmatched advantagea lean supply chain. against them.Other factors are also important. Regulatory structures, forexample, are crucial — especially from a sector perspective. For the Factors affecting entrance into rapid-growth marketspower and utilities sector, for example, the regulatory environmentdictates a company’s investment model. If such companies were tomove into deregulated markets, they would almost invariably have GDP growth forecasts 48 49to be the lowest price in order to win market share from incumbent Demographic profile and 40competitors. Financial services companies are also heavily projections 43 Political stability 38impacted by regulatory changes. Here, different levels of 32regulation are being implemented on a global, regional and Inflation and macroeconomic 34country-by-country basis. The challenge for companies operating stability 42 Purchasing power parity 32in this sector is not to treat regulatory systems in an isolated, 37localized way, but to take a step back and consider how such Income per head 26 29regulation can be turned into an opportunity, rather than an Gap between wealthy and poor 18obligation. 19 Social factors 15 affecting purchasing power 10 12 Credit growth 14 Reputational risk 9 4 Size of the grey/black market 6 6 High performers Low performers Competing for growth How business is growing beyond boundaries 7
  10. 10. New marketsCustomer reachChoosing markets carefullyBeing clearer as to their target segment within each We asked all our respondents which customer segments they weremarket focusing on — and in which markets. There were companies focused across the different segments for each market, but there wereRapid-growth markets are complex. Much depends on the distinctive patterns in the response. Of the 23 major emergingever-changing demographics as the group is far from homogenous. markets, there was significant variation by country:Some segments comprise small numbers of individuals with highlevels of wealth, offering potential for high price points. There is a • “Premium customers” were the most highly targeted segmentlong history of these groups being targeted by international in only three locations: Russia, the Middle East and China. Eachcompanies. Other segments offer greater numbers of customers areas where there are distinct groups with immense personal— and hence larger volumes — though lower pricing. The Indian wealthmiddle class, a popular target with an average income of • The “middle-market/aspirational” segment was the most highlyUS$4,000, may not be very rich compared with their Western targeted segment in 10 countries: India, South Africa, Turkey,counterparts, but numbering over 400 million, they represent a Argentina, Singapore, Indonesia, Philippines, Malaysia, Southhuge opportunity. It is this latter “volume” segment that is driving Korea and Taiwanfundamental change in business models, because the challenge of • “Cost-conscious or value” segment customers were the mainserving them profitably is so different for companies from targets in Eastern Europe and Latin Americadeveloped markets. • Only in Thailand did a majority of our respondents target the “commodity” segment There was, however, much greater variation in focus when company performance was considered. The majority of high performers target: • “Premium” customers in the Middle East, Russia, China and Latin America • “Mid-market” customers in Africa, Brazil and the rest of the Asia • “Cost-conscious” customers in Eastern Europe • A mixture of segments in India8 Competing for growth How business is growing beyond boundaries
  11. 11. In contrast, low performers almost always highlighted that they also suggest that, regardless of the scale of future potential, thewere targeting the broad “middle market.” This suggests that a intense competition for the “middle market” — and the scale ofmore focused approach — whether low-volume high-value, or operational challenge it presents — is currently impacting overallcheaper mass market — is driving enhanced performance. It might performance for some players.Market segment of greatest focus for sales — majority responses High performers Low performers Greatest area of focus % Greatest area of focus %Africa Mid–market 35 Mid–market 43Brazil Mid–market 33 Mid–market 31China Premium 31 Mid–market 30India Mid–market 30 Mixture 26Middle East and North Africa Premium 38 Mid–market 43Russia Premium 35 Mid–market 46Other Eastern Europe Cost–conscious 28 Mid–market 36 Mid–market 33Other Far East Mid–market 32 Cost–conscious 33Other Latin America Premium 26 Cost–conscious 36 Competing for growth How business is growing beyond boundaries 9
  12. 12. New marketsOperational agilityBeing flexible, but cautiousAgility implies both speed and flexibility. In terms of new market opportunities, it requires both an ability torespond to an opportunity quickly but, equally, to preserve the control necessary to move out of a marketas painlessly as possible, should the situation deteriorate. In a volatile market, windows of opportunity bothopen and close with increasing speed.Speed to enter, but able to exit Once the opportunity had shown merit, all respondents felt that establishing a joint venture partnership was the most effectiveCompanies have quite different perspectives on what are either the route to take advantage. Indeed, in many rapid-growth markets itquickest or the most effective ways of entering a market, but high may be required. High performers, however, if given the choice,performers appear to adopt a more cautious approach. Working were more likely to place importance on making an acquisition orwith a local distributor was recognized by all respondents as being establishing a green field investment rather than working with athe fastest way of entering a market. High performers, however, local partner. It seems that control is recognized as a precursor toare both significantly more likely to focus on working with a sales speed and flexibility. Minimizing contractual obligations to partnersagent and less likely to establish a joint venture partnership or maximizes the ability to respond and, if necessary, to exit.make an acquisition than low performers. In such a way, they arespeeding the access to the market but with the least capital or Operational implications clearly vary based on whether a companycontractual exposure. simply has a sales operation in a market or has a production facility in that market as well. Governments will see the production facilityFastest rapid–growth market entry strategies as offering the attractive potential of future employment. They may put in regulations to require this over time. 47 Working with local distributors 56 This cautious approach is reflective of a different perspective that Working with a sales agent 42 high performers seem to share about the obstacles that present 35 24 the greatest challenges in rapid growth markets. All respondents Acquiring local private company 32 listed lack of bureaucratic clarity as the biggest obstacle. But whileEstablishing a joint venture partnership 21 low performers listed slow customs, punitive taxes or arbitrary 30 Winning a privatization tender 14 courts — all major potential downside risks — high performers had 9 much more macro–level concerns about more widespread and Establishing a greenfield investment 5 4 likely political and macro-economic risk. If your main challenges are expected in the course of business, building nimbleness into your High performers Low performers operation is essential.Most effective rapid–growth market entry strategiesEstablishing a joint venture partnership 41 49 Acquiring local private company 37 30 Working with local distributors 34 37 Establishing a greenfield investment 20 16 Working with a sales agent 16 16 Winning a privatization tender 7 15 High performers Low performers10 Competing for growth How business is growing beyond boundaries
  13. 13. Being flexible as to their approach to market entry, A number of factors could explain this difference, but it is probablybut seeking to learn from experience most likely explained by the longer experience of market entry that many companies in Western Europe will have had — not leastWhile recognizing market variation, high performers are more into other European markets. The more consistency developed,polarized in their approach to market entry than low performers. the greater the opportunity for organizational learning.A significant number plan market entry based on the needs of their Consistency of approach to market entrytarget clients and past experience. High performers weresignificantly more likely to say that they had a consistent approach High performersthat they leveraged for speed and effectiveness. But, equally, high Our approach varies We approach new marketsperformers made up a majority of the larger group that responded significantly by market Our approach varies in aapproach new markets We consistent waythat their approach varied significantly by market to optimize significantly by market in a consistent way 27flexibility. 34 27 34This polarization is also driven by both sector and market choice.Market entry options are not always fully under the control of 39management. The governments of certain rapid-growth markets 39 Our approach variesimpose the route of entry in some, if not all, sectors. There is, slightly by market Our approach varieshowever, some variation in the market entry strategy adopted by slightly by marketour respondents depending on their regional location. While thereis a mixture of response from all regions, there is a difference inwhere the majority focused: Low performers• 43% of Asia-Pacifics high performing companies reported that We approach new markets Our approach varies in aapproach new markets they varied their approach considerably based on the market We consistent way significantly by market Our approach varies in a consistent way significantly by market 22• 55% of North Americas high performing companies reported 30 22 that their approach varied slightly by market 30• 38% of Western Europes high performing companies reported that they had a consistent approach to market entry 48 48 Our approach varies slightly by market Our approach varies slightly by market Competing for growth How business is growing beyond boundaries 11
  14. 14. New marketsCost competitivenessSeeking control of price and profitIn our original Competing for growth research, we found that high performers were much more in controlof their pricing than low performers. Some 28% had introduced new pricing strategies in the past two yearsand they were significantly ahead in seeking to support better pricing through better systems and improvedanalytics. Consequently, a larger number were able to push through price rises — even in a difficult time. Theysaw price as the starting point for their consideration of cost, rather than the other way around.Moving pricing closer to the target market Achieving greater control of their supply chainOur most recent research shows that pricing remains one of the We sought to explore how respondents were addressing theirmost complex and strategic decisions that a business takes in its supply chain in support of their wider market footprint. While thereoperations. During the recession, many companies acted to take is a great deal of variation between sectors and markets, therethese decisions to the centre in the interest of both speed and does seem to be a difference in the focus of high performers.perceived control. High performers share this concern, but theyare just as likely to have pushed pricing to the regional level rather High performers were more likely to seek and achieve greaterthan the center. Thirty-three percent of high performers made control of the factors that impact their pricing and their costs.pricing decisions at the regional level, compared with 29% of low This is supported by examining responses on the factors that haveperformers. In contrast, 37% of low performers made decisions at a the greatest impact on pricing to serve key customers in rapid-global level, compared with only 33% of high performers. growth markets. In almost all cases, low performers felt that factors such as import costs, distribution, transport, and, indeed,This confirms the findings from our earlier report Winning in a relative negotiating strength with third parties, had a bigger impactpolycentric world. These findings showed that the convergence of on their pricing than high performers potential between the developed and rapidly developingworld means that the number of markets that multinationals must We also asked respondents what were the key factors impactingconsider as “strategic” has increased. But, at the same time, the cost in serving their customers in rapidly developing markets.nature of the opportunities in those markets can be fundamentally Distance from production to market was the major factor for bothdifferent. In the developed world, companies have well-established groups, but significant differences between high performers andbusiness models and asset bases, but face weak growth prospects. low performers were reported:In the rapidly developing economies, this situation is oftenreversed. The reality of the global economy may be more variation • Labor costs play a more significant role in determining highin operations rather than less. performer cost base than for low performers • Import and customs costs are a far more significant element inLocation of decisions on pricing of goods and services low performers’ costs both in proportion and priority • Transport infrastructure costs are also more significant for low 33 performers, suggesting that the distances are greater At global headquarters 37 At regional level 33 This analysis of cost suggests that high performers have moved to 29 locate a larger proportion of production close to — and often inIn the rapid-growth market itself 17 16 — the markets they aim to serve. In turn, this supports the view By third-party agents, 2 that economies of scale — certainly above a certain level — are no distributors or partners 2 longer the dominant factor in competitive success. A combination of any 14 16 High performers Low performers12 Competing for growth How business is growing beyond boundaries
  15. 15. Moving production closer to the target market • For Asia-Pacific based companies, almost two-thirds of higher performers are focusing on India compared with just over half ofThe top markets for production for all respondents are China lower performers. This suggests that a focus on India in certain(30%), India (28%), Brazil (12%) and Mexico (12%). High markets contributes to growth.performers, however, have a much greater focus on India (43%) • The picture in North America is, however, rather different. Chinaand China (41%), which almost exactly mirrors their sales focus. is the leading destination for investment in production, with 41% of leading businesses focusing on this market, compared withBut when we look at the location of respondents, some strong 31% of lower performers.regional differences emerge between high and low performers intheir attitude to location: While large differences clearly exist between high and low performers in their first choice of destination, the variance• 40% of leading Western Europe businesses have identified India between their second choice of production location is no more than as their primary destination for investment, whereas only 21% 2%. It is worth noting that, while 50% of Asia-Pacific production of lower performers have the same focus. focus is within their own region, this falls to only 20% for companies based in North America.The most important growth markets for productionFor North America based companies For Asia-Pacific based companies For Western Europe based companies China 41 66 India 40 31 India 21 55 India 27 59 China 32 28 China 30 60Middle East 18 18 Brazil 16 25 Brazil 6 20South Korea 18 Singapore 18 Poland 15 6 5 11 Singapore 18 Middle East 14 Russia 13 3 0 10 Poland 18 Malaysia 11 Ukraine 13 3 5 3 Russia 14 Vietnam 9 Romania 8 6 20 9South Africa 14 Indonesia 9 Bangladesh 8 0 10 3 Argentina 9 Bangladesh 7 Mexico 7 19 0 11 Brazil 9 Mexico 5 Turkey 7 13 0 7 Malaysia 9 Russia 2 Colombia 7 6 5 6 Colombia 9 Thailand 2 Pakistan 7 6 5 1 Romania 9 Pakistan 2 Philippines 7 3 0 0 Mexico 5 Taiwan 2 Middle East 6 31 0 20 Vietnam 5 Romania 2 Singapore 5 13 0 16 Philippines 5 Ukraine 2 Chile 5 9 0 9 Chile 5 South Africa 2 Malaysia 5 9 0 3Bangladesh 5 Nigeria 2 Indonesia 3 6 0 11 Indonesia 5 Philippines 0 Thailand 3 3 15 6 High performers Low performers Competing for growth How business is growing beyond boundaries 13
  16. 16. New marketsStakeholder confidenceBeing more transparent through choiceWe continue to observe that high performers are reporting more extensively than low performers. Thisis particularly evident in the extent of the information they provide to external stakeholders on the newmarkets they are entering. The market determines risk and the regulatory regime – and hence the amountthat you need to report to your market. Some markets are more of a challenge than others and need moreattention. And companies have a lot to explain.Finding market entry more costly than expected in terms Sharing more detail about their new market strategyof cash and management time It is not simply a question of volume of information that mightIn a forthcoming report — CFO: mastering the costs of entry — we explain the communication success of high performers.ask some 900 CFOs to comment on their experience of investing in Regardless of performance, companies report their perspectiverapid-growth economies. In almost a third of cases, the costs, time of the business prospects in the markets in which they operatespent or risk was higher than expected. While there was consistent and this includes a discussion of risk. Indeed, high performersdifficulty reported on finding reliable business partners, valuing place less importance on the historical performance of thepotential acquisitions and budgeting for the short– to medium–term different business units.costs of entry, high performers typically spent more time on Nor is it an issue simply of the quality of material — there isstrategy development, but especially on valuing the wider market much less emphasis placed on the quality of forecasting than weopportunity and undertaking due diligence. Both sets of problems would have expected, although this could be explained by thehave a similar source in the ongoing challenge in accessing high ongoing nature of the high performers dialogue with theirquality and reliable data upon which to base both market stakeholders.assessment and entry route. High performers, however, are clearlylooking both more widely and more carefully at the opportunity for There is also a variation in type and detail of information. Ratherthem. than talking about regions or geographical clusters, high performers talk about specifics. In addition, they seek to provideMost difficult market entry issues both broader and more granular data with more coverage of non-financial KPIs. And they are more likely to discuss the 48 impact of regulatory change and potential environmental risks. Identifying reliable business partners 46 Valuing potential acquisitions 46 They are also more specific about operational efficiency 45 measures — and their impact on the wider business — as well asShort- to medium-term costs of entry 42 the tax exposure they face. 44 Strategy development 36 33 Information provided to external stakeholders on entering Valuation of market opportunities 35 rapid-growth markets 26 Identifying M&A targets 25 55 22 Countries involved 36 Due diligence 25 Business prospects in market 50 17 49 Risk assessments 44 42 High performers Cash and liquidity positions 36 Low performers 47 Latest performance 34 47 Accuracy of growth forecasts 29 40 Operational efficiency measures 25 16 Tax exposure 22 11 Impact of regulatory change 18 12 Environmental risks 16 12 High performers Low performers14 Competing for growth How business is growing beyond boundaries
  17. 17. Key questions for management• Have you chosen the right markets for your business?• What is your position with regard to India and China?• How deeply do you understand your target customers?• What is different about your competitors and better about you?• How much of your pricing do you control?• How much of the opportunity do you communicate to your stakeholders? Competing for growth How business is growing beyond boundaries 15
  18. 18. New products and services: what we learnt last time The first Competing for growth study highlighted innovation as a critical area for competitive success. It also showed that a top priority for high performers is the introduction of a broader range of products and services to improve return from existing customers. Sixty-two percent of high performers used new products and services as a means to increase sales, compared with only 44% of low performers. The research showed that, while low performers are more focused on cost competition, high performers are driving into new markets and product areas where price competition is less intense. Our most recent research drills down into how high performers are succeeding in this drive for new products and services. Closeness to the market, self belief, the right talent and stronger processes are all part of the competitive mix.16 Competing for growth How business is growing beyond boundaries
  19. 19. New products and servicesWhat high performers are getting rightInnovation in products or services was cited as being mostimportant in winning the competitive battle by 71% of respondents Innovation: cleaning up in cleantechto our original Competing for growth study. Two quite distinctapproaches emerged. Intense competition around incremental Few sectors have grown as fast, or as widely, as cleaninnovation to better meet the needs of current customers and technology (cleantech) in recent years. Helping deliveroften equally intense collaboration with third parties in tackling the economic growth, jobs, energy security and carbontransformational innovation that creates new markets. reduction, cleantech’s rapid expansion has been underpinned by the success of innovative andThe centrality of effective new product development is reinforced entrepreneurial industry leaders in utilizing theby our latest research. But the low price that is demanded in many renewable resources that exist around the world.emerging markets may require the convergence of the twoapproaches, through the adoption of more transformational A diverse sector, with a number of different technologiesinnovation techniques to existing products. So, for example, the within its orbit, the industrys development has been oneUS$2,000 car is not creating anything new, but its challenging of the key economic success stories of recent years.price requires a radically transformed approach to production. Indeed, its very diversity has been a large factor in its success; solar, wind and biomass are just some of the technologies that have been driving the sector forward.High performers are doing better on: And yet, with a number of new technologies emerging, itCustomer reach — being driven by current demand is clear that this is one industry which exists in a state of• Increasing product ranges significantly — some 30% of high permanent innovation. One area that is attracting much performers have increased their product range by more than attention from investors is “efficiency technologies.” 20% in the past two years While these aren’t necessarily new, they can be used in• Focusing on current customers and employees as primary innovative ways to deliver large savings in costs and sources of innovation energy. An example is light-emitting diodes (LEDs), which use a fraction of the energy needed for more traditionalOperational agility — moving quickly from idea to market lighting. Lasting for a lifetime, they can provide• Following a formal process for innovation, but with greater consumers with savings for many decades and, as an clarity on “go/no go” and oversight by business management easy and cost-effective means of saving energy, their• Adopting a structured “from thought to finish” process with potential is enormous. launch and review built into the plan In addition, second generation biofuels are beingCost competitiveness — acting to capture more value aggressively researched, as are tidal, offshore wind and a• Choosing to invest to increase control — increasing marketing whole host of other technologies. There are some in this spend to capture margin sector who are comfortable with new innovations failing• Locating innovation closer to target markets — increasingly in as long as those that succeed deliver real and radically rapid-growth markets successful new products. Others, however, believe that all the technologies that are necessary to combat climateStakeholder confidence — taking their stakeholders with change exist already.them on the journey• Providing more detail on opportunity and risk to external While only time will tell whether existing technologies at stakeholders massive scale or really radical undiscovered technologies• Identifying and rewarding innovative talent dominate the next generation of cleantech companies, this sector’s success story is far from over. In fact, it’s only just beginning. Competing for growth How business is growing beyond boundaries 17
  20. 20. New products and servicesCustomer reachBeing driven by current demandEffective account management is perceived by high performers as being the greatest source of growth forthe next two years. This has a fundamental impact on the product development process. Part of the processof maximizing the return on existing accounts is introducing a broader range of products and services tothose accounts — both across the range of product value and the product life cycle. This is the top priority forhigh performers.High-performing companies aim to “lead in their segment” when itcomes to product innovation as such leadership helps shape a Customer segmentation andmarket-leading brand and avoids having to compete on price.Forty-four percent of low performers, by contrast, see themselves understanding your customersas “fast-followers.” Some 48% of high performers describe Segmentation is becoming more precise andthemselves as being “pioneers” in product development, compared sophisticated as companies strive to target the mostwith only 25% of low performers, and almost twice as many have profitable customers. IT should be championing theradically rethought their approach to innovation in order to meet systematic collection, analysis and presentation ofdemand. customer and market data to identify where the higher- margin opportunities lie.Consequently, high performers’ product portfolios and salespipelines include a significantly higher percentage of new products Existing clients should naturally be a rich source of— 46% of their sales came from new products developed in the past future business and many companies are looking tothree years which they support through extensive marketing. In broaden the range of products and services offered,contrast, new products account for only 24% of low performers’ support account management and develop the customersales. And this has not happened by chance. life cycle concept. Customer knowledge is likely to be at the heart of such efforts.Increasing product ranges significantly Analysis allows for differential investmentThe focus of high performers on better understanding the needs ofthe customer has resulted in an explosion of product development. By taking a more selective path, some companies maySome 87% of all survey respondents have grown their portfolios of resist the temptation to expand into certain emergingproducts over the past three years to exploit their market potential markets. Others may even choose to take the tough andbetter. This seems remarkable at a time when competition is controversial decision to contract, exiting existingintense and cost management paramount, but reflects the fact that segments and axing renowned brands where margins areincremental innovation has become a main competitive tool. It also low or negative. Once more, IT can support such difficultsuggests that business on a broad scale has mastered the ability to choices, providing profitability analyses to help challengeproduce variety without compromising on cost. They are replacing long-held assumptions.the economies of scale with the more complex economies of Moving into new markets brings a number of logisticallearning and sales. challenges, not least providing service to different time zones, and IT can help ensure that customer care isBut the scale of increase for high performers has been much more geared up to support these changes.extensive: 54% have increased by over 11% in the past three yearsand 30% by more than 20%. The equivalent figures for low Customer knowledgeperformers are only 17% and 6%. Indeed, for low performers, 48%have only increased by between 1% and 45%, and 21% stayed the Understanding the customer is the key to effectivesame or declined. marketing, and IT can be at the center of a continuous feedback culture that encourages sales and service staff to provide information on existing and potential clients. Innovation for growth IT’s role in the new global economy, Ernst & Young, April 2011.18 Competing for growth How business is growing beyond boundaries
  21. 21. Increase in range of products Putting Tata Motors employees at Increased by greater than 20% 6 30 the heart of innovation Increased by between 11% and 20% 24 11 Leading companies in emerging markets often produce 16 Increased by between 6% and 10% 16 innovative designs that reduce manufacturing costs and Increased by between 1% and 5% 19 sometimes disrupt entire industries. For example, in 48 India, Tata Motors’ US$2,900 Nano vehicle is priced at Stayed the same 10 16 less than half the cost of any other car on the market Decreased 1 worldwide, and a version is set to go on sale in Europe 5 High performers this year. Low performers Prakash Telang, Managing Director of Tata Motors India, says it is crucial to create an environment and corporateFocusing on current customers and employees as culture that nurtures innovation and encouragessources of innovation continuous improvement. Within Tata, the corporate culture is not only geared toward driving innovation andThis explosion in product development, however, is focused on product improvement, but is also aimed at engagingtoday’s demand. Most of the ideas come from current employees every employee to contribute to this process, from theor customers. Indeed, innovating with a focus on potential, rather shop floor to the boardroom.than current, customers seems to have a detrimental impact oncurrent performance in that it is an approach favored by low Tata Motors expects and encourages their people toperformers. Our earlier work found that high performers have bring to work what they call a simple “three H formula”:developed better customer analytics systems to understand the hands, head and heart. Someone who is just doing theirneeds of their current customers and this seems reflected in their job for eight hours a day is using their hands. Aiming toimproved performance in product development. solve a problem involves the head. And if they are doing all of that with passion, they are probably bringing theirBut it also suggests that most of the effort is focused on heart.incremental development. Indeed, fewer high performers arelooking across their supply chain or to academic institutions, which For Tata Motors, it is critically important to engage theirsuggests less focus on transformational initiatives with both their people on all three Hs and to create an environmentincreased costs and longer time-frames. where everybody feels an integral part of the company, passionate about contributing and developing it forward.Most effective sources of innovation As Prakash puts it: “If we can all see how Tata Motors can grow and everybody contributes, big things can Our employees 72 46 probably happen.” Existing customers 64 66 Prakash Telang, Managing Director, interviewed by Potential customers 41 54 Ernst & Young, Planning for growth study, July 2010 R&D facilities 28 13 Suppliers, retailers, wholesalers 26 44 Educational institutes 16 25Other rapid-growth market experience 12 12 High performers Low performers Competing for growth How business is growing beyond boundaries 19