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PRAGUE, 12 February 2007 — Consider: in 2005, the combined output of emerging economies accounted for more than half of total world GDP. And in the last decade, GDP per capita has nearly tripled in China. This growth will almost certainly continue. And yet despite their size and remarkable growth, a surprising number of companies fall short of their goals in emerging markets. Indeed, less than half of the more than 440 executives surveyed by Deloitte’s Global Manufacturing Group in its Innovation in Emerging Markets: 2007 Annual Study of the challenges in emerging markets said their companies had been extremely or very successful either in meeting their operational goals or in meeting their revenue goals in emerging markets.

“81 percent of executives said their companies are likely to establish or expand sales and distribution operations in Eastern Europe over the next five years.”

Failed expectations

What is preventing many companies from fulfilling their goals? Most likely, it is because business complexity continues to increase and it's a daunting task to manage emerging market operations. To drive revenue growth and increase efficiency, companies are developing innovative products that meet the needs of new and growing markets. As a result, they are moving higher-value activities such as complex production, research and development, and sales operations into emerging markets.

For example, in our 2006 study, 53 percent of executives at companies headquartered in developed markets said they had R&D facilities in emerging markets. In this year's survey, 81 percent of executives said their companies are likely to establish or expand sales and distribution operations in Eastern Europe over the next five years, and 80 percent said the same for Latin America, while 73 percent said the same for India. The result is a complex global business network in which companies are designing, supplying, building, selling, and distributing everywhere around the world. Adapting to this rapidly changing global business network requires companies to rethink their business approaches for emerging markets.

Notwithstanding the challenges that emerging markets pose, some companies are successful. For example, 29 percent of executives surveyed said their companies produced higher profit margins in emerging markets than they did in developed markets. Customizing products appears to be one reason — two-thirds of these companies offered products in emerging markets that were different from those they sold in their home markets.

This kind of success requires an intense focus on aligning operations with the unique requirements of emerging markets. Our 2007 study examines the challenges in three key operational areas: talent management, risk management, and operating models.

Talent Management

Historically, companies opted to locate in emerging markets mainly to tap into a low-cost labor force. As companies shift more sophisticated activities to these markets, they are fighting over a much smaller pool of highly-skilled workers to staff these operations. As a result, both labor costs and turnover among highly-skilled workers are increasing rapidly, making retention ever more difficult.

To win this war for talent, companies need to customize their human resources policies to local realities, while also recognizing that it may not always come down to offering the most money. In China and India, for example, training was cited as an important human resources strategy even more often than compensation. In Southeast Asia, by contrast, rewards and recognition was named most often. Tailoring human resources policies, therefore, requires creativity and a sophisticated understanding of each market.

Risk Management

While emerging markets are brimming with opportunities, they are also fraught with risk. These risks include in many locations weak intellectual property protections, uncertain political environments, corruption, and complex legal and regulatory regimes, to name but a few. Success in emerging markets requires an effective approach to managing these threats, including employing a variety of risk management strategies.

Operating Models

Some companies seek to provide autonomy at the local level — to gain local knowledge and respond quickly to opportunities — while leveraging the strengths provided by headquarters, such as good governance and management expertise. There's a need to strike the appropriate balance between the efficiency offered by a centralized structure and the nimbleness that more decentralized decision-making allows.

A joint venture or third-party arrangement is common when companies first enter an emerging market. As they gain experience, more form wholly-owned subsidiaries, which gives them greater control and allows for quicker decision-making. Deloitte's Global Manufacturing Group's research found that companies that used newly-created entities were more likely to say they had been successful in achieving their operational goals than those that didn't use this approach.

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. Deloitte Touche Tohmatsu is an organization of member firms around the world devoted to excellence in providing professional services and advice, focused on client service through a global strategy executed locally in nearly 140 countries. With access to the deep intellectual capital of 135,000 people worldwide, Deloitte delivers services in four professional areas — audit, tax, consulting, and financial advisory services — and serves more than 80 percent of the world’s largest companies, as well as large national enterprises, public institutions, locally important clients, and successful, fast-growing global growth companies. Services are not provided by the Deloitte Touche Tohmatsu Verein, and, for regulatory and other reasons, certain member firms do not provide services in all four professional areas. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other’s acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names “Deloitte”, “Deloitte & Touche”, “Deloitte Touche Tohmatsu”, or other related names.

Deloitte Central Europe is a regional organisation of entities organised under the umbrella of Deloitte Central Europe Holdings Limited, the member firm of Deloitte Touche Tohmatsu in Central Europe. Services are provided by the subsidiaries and affiliates of Deloitte Central Europe Holdings Limited which are separate and independent legal entities. The subsidiaries and affiliates of Deloitte Central Europe Holdings Limited are among the region’s leading professional services firms, providing services through nearly 3,400 people in more than 30 offices in 17 countries.

In the Czech Republic, the services are provided by Deloitte Advisory s.r.o., Deloitte Audit s.r.o. and Deloitte BPO G&I a.s. (jointly referred to as “Deloitte Czech Republic”), which are affiliates of Deloitte Central Europe Holdings Limited. Deloitte Czech Republic is one of the leading professional services organizations in the country providing services in four professional areas — audit, tax, consulting, and financial advisory services — through over 625 national and expatriate professionals.