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Eleven risks for consumer products companies - 8. Emerging market strategy and execution - EY - Global

Eleven risks for consumer products companies

8. Emerging market strategy and execution

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Market attractiveness considerations

  • Political stability: what is the likely economic and political stability of the markets we are targeting? What is the level of ongoing civil unrest and is there much evidence of government revisions of contracts with private entities?
  • Infrastructure status: what are the quality, connectivity and reliability of roads, trains and ports? How reliable are power and water supplies?
  • Quality and reliability of local manufacturing: is there a local supply and manufacturing base of sufficient quality that we can leverage?
  • Legislative and regulatory environment: what are the legal constraints in terms of import versus local manufacture and buy versus build?
  • Consumer understanding: do we have sufficient insight into local consumers across all target segments of the population? Do we understand more than where they live and how much they earn? Do we know how they like to live and how they spend?
  • Variety and complexity of routes to market: do we know or understand how to get goods to market? Can we leverage an existing distribution network or will we need to innovate and build our own?
  • Local talent: are there local staff available with appropriate experience and language skills? To what extent will we need to deploy local staff at from day one in order to comply with local requirements?
  • Regulatory, tax and legislative change: are we plugged in to the regulators so we understand the timing and scope of changes to local accounting and tax issues?
  • Corporate social responsibility considerations: can we work effectively with local partners and communities for mutual benefit?

"If consumer products companies build everything for growth, costs will spiral. The focus has to be on doing the basics consistently."Richard Taylor, Consumer Products Advisory, Ernst & Young LLP

Consumer products companies have been expanding their presence in emerging markets to counteract weak growth in developed markets. But did they do it with the right market strategy?

Track record in emerging markets is not always good

There are no guarantees of success in developing countries. In a recent Economist Intelligence Unit (EIU) survey1 into emerging markets:

  • 48% of companies interviewed believed they had invested more resources in emerging markets than was required
  • 24% entered a market without fully assessing the ability of the supply chain to support the expansion
  • 20% entered with the wrong pricing model and an inappropriate operating model

We believe companies must understand the risks they face across three categories.

  1. Strategic
  2. Operational
  3. Financial and compliance

Strategic assessments are key

Companies are frequently exposed to increasing levels of cost and risk once they've established themselves in a developed market. Many are starting to recognize that after 5 to 10 years of operation they need to transform their overall operating model to even out capabilities across the territory and achieve more consistent execution.

Companies focus on their finance and supply chains to consider:

  • Which activities need to be in market
  • Which can be placed above market in a regional hub
  • Which could be performed in-house or outsourced

Benefits: There is strong evidence that, as companies build up the insight to refine their model, so they also start to address key emerging market risks including control, talent and cost more effectively.

Risks: The risks for companies that fail to move to the right operating model can be severe: profit leakage, lack of visibility and control resulting in poor management information and poor decision-making, and direct exposure to new risks that affect the global company.

Financial and compliance risks are more challenging in developing economies

How can companies avoid value leakage and damaging their reputation?

By understanding that the levels of control and compliance in emerging markets are not the ones mature markets need.

To strike the right balance between local control and global oversight, companies need to invest in increased control and awareness, and reinforce these lessons through performance management.

Market attractiveness

Agility is a critical success factor for businesses in emerging markets

Emerging markets are volatile by nature. This makes for an uncertain operating environment.

You can combat this by integrating effective risk and crisis management into the business. Companies need to build in the flexibility and agility to respond extremely quickly to external factors. In the supply chain, for example, holding excess inventory is often the first line of defense. Other strategies may be to change ports for receiving goods or using airfreight in emergency situations, despite the extra costs.

Given the nature of operating in these markets, a risk framework that combines "on the ground" knowledge with global oversight of strategic, operational and financial and compliance risks is essential.

1Emerging markets expansion and the supply chain, Economist Intelligence Unit survey conducted on behalf of EY, September 2010. 

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