Innovative Strategies Key to Profitable Growth in Emerging Markets

Contact: Jo, Ki Hoon
Deloitte

Seoul, 1st June, 2006 -- Emerging markets are becoming the catalysts for new product and service innovation. Long-term success, however, will take far more than simply making minor adjustments to existing products, lowering prices, and developing new sales channels, according to a new executive summary report, “Laboratories of Innovation:  Leveraging Emerging Markets for Commercial Success” by the Member Firms of Deloitte Touche Tohmatsu (“Deloitte”). 

Travelling from New York to Seoul, Mr. Gary Coleman, Global Managing Director of Manufacturing Industries with Deloitte, will present the key findings of the global report today to CEOs and other senior executives attending a Deloitte hosted manufacturing industry lunch today.
 
“The most profitable companies are looking beyond traditional strategies to meet the needs of emerging markets with significantly lower per capita GDP,” says Mr. Coleman. “These companies are acquiring a new set of competencies and organisational structures to generate a continual stream of innovative products tailored to the needs of consumers and industrial buyers in emerging markets.”

Mr. Coleman adds that, “The most successful companies allow for local autonomy and also take advantage of their parent company’s governance, business processes, and management expertise to offer products at dramatically lower prices that match the lower purchasing power of most buyers in emerging markets.”
The report identifies five innovative strategies to grow profitably in emerging markets.  Successful companies:

• Develop tailored product offerings for the local market at cost structures, price points and business models that match GDP per capita economics.
• Build local R&D capabilities in emerging markets and connect with local commercial managers.
• Leverage global value chain competencies to maintain margins and effectively manage costs.
• Acquire deeper customer knowledge and localise marketing strategies to reach customers and capture market share.
• Win the war for talent by tailoring strategies that effectively deploy, develop and connect people.

Senior executives around the world are bullish about the growth outlook in emerging markets over the next three years.  In fact, Deloitte’s survey found that 56% of executives expected that their company’s revenues in emerging markets will grow substantially, compared to just 23% who were as optimistic about their prospects in developed markets.  Of the international companies surveyed that currently sell products in South Korea, 63% expect sales revenues to somewhat or substantially increase over the next three years.

“South Korean executives are just as optimistic about the growth prospects for their business in other emerging markets,” says Mr. Jae Sool Lee, Seoul-based partner and regional manufacturing industry leader for Deloitte in Asia Pacific. “More South Korean manufacturers are looking for growth beyond the local market to emerging economies such as China, India, Russia and Eastern Europe.”

“There’s no doubt that emerging markets around the world offer significant growth potential,” adds Mr. Coleman “But, the most successful and profitable companies will be those that really understand their customers and take a different approach.”

Other key findings from the report include:

• Many companies do not tailor their products for emerging markets.  Half or more of the executives surveyed said their products were very similar to those sold in their home market.
• The most profitable companies varied product offerings for emerging markets.  Among executives headquartered in developed markets, over 42% had lower gross margins in emerging markets, 34% had roughly equal margins and only 24% enjoyed higher margins. Of the companies who did capture higher margins, nearly three-quarters provided product offerings (e.g., features, models and pricing) that were either very different or somewhat different than their home markets.
• Companies are more likely to vary their pricing strategy for emerging markets.  For companies who did varying product offerings, they were more likely to vary pricing and discounts rather than offering fundamentally different product models or features.
• Localising R&D in emerging markets to better understand the local customer is a growing trend. Some 40% of the companies selling new products in emerging markets said R&D was done locally, citing “need to understand local market”, “faster time to market” and “lower R&D costs” as the top three reasons for investing in local R&D facilities.

Some key findings related to South Korea:

• Many of the companies in our survey sell their products in South Korea. 42% of companies participating in Deloitte's survey indicated that they currently sell their products in South Korea.
• Companies expect to expand sales revenues in South Korea. Of these companies, 63% expect sales revenues to somewhat or substantially increase over the next three years (see chart below).
• Many companies do not tailor their products for South Korea. In fact, 54% of companies said that they sell very similar products in South Korea as they do in their home market. That is, many offered similar product features, model types, pricing strategies, discounts/rebates, or after-sales services. Only 10% sold somewhat or very different products in the local market as compared to their home market.
• Very few companies are localising R&D operations in South Korea. The overall level of investment in local R&D is relatively low with 80% of respondents indicating that they do not have nor have immediate plans to invest in R&D in South Korea. In the Asia-Pacific region, China and India attract a higher share of R&D investment compared with South Korea and this trend is expected to continue over the next three years. For the few companies that do vary their product offerings for the South Korean market, half of the respondents indicated that these were designed in the local market.
• Some companies are able to achieve higher gross margins in South Korea than in their home market.  Of the companies that sell products in South Korea, 24% said that they had higher gross margins in South Korea than they had in their home market.