Headquarters or Regions: Who Leads Growth in Emerging Markets? Deloitte Debates DOWNLOAD

Emerging markets present major growth opportunities – but only with the right strategic model.

With the relative slowdown in mature markets’ growth, multinationals are looking to emerging markets to meet their targets. Yet many are discovering that entering and defending positions in these fast-growing economies is harder than anticipated. To succeed, corporate and regional leaders must work together. But who should lead?

Here’s the debate.

My Take

David N. Martin, U.S. Emerging Market Growth Strategies Leader, Principal, Deloitte Consulting LLP

Many corporate leaders have long treated emerging markets as just another distribution and sales channel for their existing market-centric products. In fact, this approach is the first of four growth strategies that companies can pursue. Entrants sell existing products or services “as is” to penetrate emerging markets; participants tailor existing offerings to be more competitive in local markets; creators develop innovations that break constraints restricting possible market size and assimilators identify local innovations that can be leveraged in other existing and developed markets.

Progressing from one approach to the next increases the addressable market size, but also increases risk and requires much more sophisticated capabilities. Identifying the correct strategy to employ is a critical component of finding success in emerging markets. Being an entrant might be less risky from an operational setting, but this strategy can backfire financially. For example, a leading cereal manufacturer was surprised to find its boxes did not fit Indian grocery store shelves, which forced them to adapt their box size to the local environment. Even then, their cold cereal, which is popular in U.S. markets, was initially unsuccessful because the Indian culture favors hot breakfasts. On the other hand, customizing and/or creating offerings for each market may not be practical.

There is a strategic balance. Some of the leading emerging market strategies combine corporate oversight with local flexibility. For example, one of my clients who leads a diversified medical products company wanted to build market demand in the BRIC (Brazil, Russia, India and China) markets plus Mexico. Their products had earned regulatory approval, so market customization was not a near-term option. Corporate asked us to help create a business model for penetrating these markets with their existing product lines. Analysis of the five countries revealed several commonalities, which allowed the client to create a unified approach for building doctor and patient awareness. But distributor and physician income structures differed among these countries, so we helped develop customized strategies for patient access in each market. Twelve months after rollout, the CEO told me that their BRIC plus Mexico markets are on track to reach the growth targets established in the strategy.

There is no right-or-wrong answer when it comes to who should lead the way into emerging markets. I’ve found the best strategies are developed when corporate and regional leaders work together to reach a common strategic goal.

Perspective from Brazil

Milton Da Vila, Partner, Strategy & Operations Practice Leader, Deloitte Touche Tomatsu Brazil

Every week, I talk to at least one U.S. or European executive who wants to enter the Brazilian market. It’s easy to understand why. Like other BRIC countries, we have a large population and a fast-growing, stable economy. But Brazil has other advantages, too. As a Western country, we have a culture and government similar to those of developed countries, including a strong respect for contracts and open markets. And our time zone makes conducting business with London or New York equally convenient.

However, these similarities can be deceiving. Companies entering Brazil must carefully evaluate the market dynamics before they build or buy operations here. Product localization, competition, distribution, tax implications and other dimensions of the market are determinants of success.

Even then, offering localized products at the right price is not enough. Established companies fiercely defend their market and use their larger experience to prevent competitors from gaining a foothold.

I believe it’s almost impossible for an executive sitting in Chicago or Berlin to understand the complexities of our market. There’s no substitute for local intelligence and talent.

Perspective from China

Po Hou, Partner, Deloitte Touche Tomatsu China

The diversity among Asian countries is vast, with different languages, cultures, religions, politics and buying power. While some major business-to-business companies can drive growth from global headquarters based on relationships with government and corporate leaders, decisions about how to penetrate competitive consumer markets must cascade down to the country – or even provincial – level.

During my years as a management consultant in China, I’ve seen many multinational companies struggle to develop the right organization and leadership structure here. Some companies are now moving from a single office in Shanghai or Beijing to multiple offices across China. A few of the early entrants, such as technology manufacturers, are moving some core operations inland to lower costs because the first wave of “land-grabbing” is over and now is time to deepen market penetration. For example, foremost on the marketing agenda for a global telecom company’s Asia operations is how to penetrate tier-3 and tier-4 cities in China.

It would be difficult, perhaps impossible, for a regional leader based in Hong Kong, Singapore or Taiwan to fully grasp the Chinese market. I believe that the direct route to broad market penetration is to locate regional offices within China – and staff them with local talent who have the authority and guidance they need to make smart growth decisions. A given level of control and balance from headquarters is certainly required, but you have to bake the cake before thinking about how to split it. What’s the point of talking about risk if you’re not even in the game?

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