28 Aug, 2012

McKinsey Report: Winning the US$30 trillion Decathlon

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Ten disciplines, one goal

CEOs recognize that winning in emerging markets is the key to long-term growth.

Winning the $30 Trillion Decathlon

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Introduction (PDF–629 KB

Full report (PDF–5.9 MB)

Yet the largest companies headquartered in developed economies derive only 17 percent of their revenues from emerging markets, even though these markets represent 36 percent of global GDP. Despite advantages in scale, technology, and access to capital, multinationals often lose out to local competitors.

No single formula or capability can guarantee success in emerging markets. We believe global companies must master ten disciplines to compete effectively. As with a decathlon, winning depends on all-around excellence. Sitting out an event is not an option.

1. Target urban growth clusters

Most multinationals make decisions at the country rather than city level in emerging markets. Given the diversity of consumer preferences, purchasing power, and market conditions in emerging societies, a failure to acknowledge the importance of cities can be a fundamental strategic error. Strategies based on clusters of fast-growing “middleweight” cities are more effective than attempts to achieve blanket coverage of an entire country or region or to chase growth in scattered individual cities.

2. Anticipate moments of explosive growth

In emerging markets, timing matters as much as geography. Demand for a particular product typically follows an S-curve: there is a “warm-up zone” as growth gathers steam and consumer incomes begin to increase, a “hot zone” where consumers have enough money to buy the product, and a “chill-out zone” in which demand eases. Per capita income is the critical variable, but the takeoff point and shape of the S-curve vary greatly between products.

3. Devise segmentation strategies for local relevance and global scale

Too often, multinationals classify emerging-market consumers into two groups: at one extreme, the nouveau riche, eager to flaunt their wealth; at the other, the poor, for whom the overriding purchase criterion is getting the lowest price. With the number of mainstream consumers on the rise in emerging markets—more than half of all Chinese urban households, for example, will be solidly middle class by 2020, up from 6 percent in 2010—companies must craft nuanced product strategies balancing scale and local relevance.

4. Radically redeploy resources for the long term

Companies based in emerging markets redeploy investments across business units at much higher rates than companies domiciled in developed markets. Developed-country companies find it hard to match the agility of their emerging-market rivals for many reasons. But to compete effectively in emerging markets, multinationals must be willing to place big bets and ride them for the long term.

5. Innovate to deliver value across the price spectrum

Emerging markets offer greenfield opportunities to design and build products and services with innovative twists on their best-in-class equivalents in established markets. Whether a company sells basic products or services to challenge low-cost local players or seeks to entice consumers to adopt new products and services comparable to global offerings, competing effectively often requires innovating and localizing, while redesigning product lines, service operations, and supply chains.

6. Build brands that resonate and inspire trust

Emerging consumers are embracing new ideas and ways of living. They are highly receptive to effective branding efforts, but also quick to dump one brand for the next new thing. They also wrestle with new product choices in a cluttered marketing environment and a fragmented retail landscape. This has significant implications for brand and marketing strategies. Among them: in emerging markets, multinationals must work harder to ensure that their products are included in consumers’ initial consideration sets—the short list of brands consumers might purchase. This in turn favors brands with high visibility and an aura of trust.

7. Control the route to market

Our research underscores the importance in emerging markets of managing how consumers encounter products at the point of sale. In China, 45 percent of consumers make purchasing decisions inside shops, compared with just 24 percent in the United States. Yet managing the consumer’s in-store experience is an enormous challenge, especially in middleweight cities, where the biggest growth opportunities lie. Multinationals should be prepared to build much larger in-house sales operations in these countries and to devote far more time and energy than they do in their home markets to categorizing and segmenting sales outlets and to monitoring the quality of the in-store experience.

8. Organize today for the markets of tomorrow

In theory, global companies should enjoy substantial advantages over local rivals, including shared infrastructure and protection against individual country and currency risks. As global companies grow bigger and more diverse, however, the costs of coping with geographic and product complexity rise sharply. Large multinationals can reduce this “globalization penalty” by rethinking organizational structures and processes—for example, focusing on a few key management processes for which global consistency is advantageous, while allowing variability and local tailoring in others, and clarifying the role of the corporate center.

9. Turbocharge the drive for emerging-market talent

Unskilled workers may be plentiful in emerging societies, but skilled managers are scarce and hard to retain. Increasingly, local stars prefer working for local employers that can offer more senior roles. Beefing up salaries is, at best, a partial solution. Global firms must develop clear talent value propositions—employer brands—to differentiate themselves from local competitors. We believe many multinationals should aspire to multiply the number of leaders in emerging markets tenfold, and to do so in one-tenth of the time they would take back home.

10. Lock in the support of key stakeholders

Successful businesses need the support of stakeholders in government, civil society, and the media (increasingly shaped by online commentators). Managing these relationships effectively can have a huge impact on a company’s market access, ability to engage in merger or acquisition activity, and broader reputation. Global companies must devote far more time and effort to building such support in emerging markets than they would in developed ones. Senior executives should make a systematic effort to identify key regulators, community leaders, and business partners and to understand their needs. They also must ensure that public-affairs and external-relations teams are as well staffed in emerging markets as in markets back home.