Beyond Asia: strategies to support the quest for growth
Challenge 2: the nuances of local markets are difficult to understand or control
Half of regional companies consider themselves effective understanding the local political environment.
Spanning multiple markets creates powerful growth opportunities, but it also means managing across different regulatory environments, political systems and customer preferences. Dealing with this complexity can quickly erode the benefits of scale if companies do not manage it effectively.
The further from home they travel, the more likely Asian companies are to encounter difficulties with understanding the nuances of the local market. Among our respondents, the globally focused companies consider themselves far less effective at dealing with aspects of running an international business than their regional peers.
Tailoring strategy to specific markets
“Sometimes there is an assumption that if you’ve got a great product it will fit all markets,” says Koh Boon Hwe, Chairman of Yeo Hiap Seng, a Singaporean food and beverage company. “But it doesn’t work that way. The way people respond to our products differs across Asia, and we have to tweak the formulation for each country.”
Understanding the political environment
Almost half of regional companies consider themselves very effective at this aspect of running an international business, but among the globally focused companies, this proportion falls to 27%. Many Asian companies express a need for familiarity with the political environment before being willing to invest.
Sudden political change can be very disconcerting for executives from a market like mainland China, where there has been continuity of power since the late 1940s. Mike Elliott, Global Mining & Metals Leader at EY says companies must “learn how to create a sustainable model for dealing with all the potential power players in the market.”
Dealing with unexpected regulatory change
An abrupt shift in regulations can quickly undermine the viability of an overseas investment. To manage the associated risks, companies must make sure they have an effective risk management framework in place to implement the changes. They will also need to maintain a “risk radar” that looks ahead to spot the early warning signs.
Conducting due diligence and valuation
Building a rationale for investment also becomes more difficult when Asian companies move beyond the region. Among the regionally focused companies, 31% say that they are very effective at this, compared with 20% among the regionally focused firms. Choosing the right assets is essential to success, but is an area when some Asian companies have struggled in the past.
This highlights the importance of conducting rigorous financial, legal and integrity due diligence when planning deals. Loletta Chow, Global Leader of the China Overseas Investment Network at EY explains: “In some cases, companies have overpaid for assets or not structured deals properly. We are certainly seeing that clients are putting more focus on valuation of the assets and realize the importance of conducting relevant financial and legal due diligence.”
Instituting greater autonomy
When companies expand overseas, they often need to rethink their organizational structures. With operations in multiple markets, it may no longer make sense for the headquarters to make all decisions. Companies may decide to decentralize some degree of decision-making authority to local markets, or put in place a regional structure so that country managers report into a regional, rather than global, headquarters.
The transition from regional to global seems to be a trigger point at which greater decentralization gets under way. Among the regional companies, under half say that their head office tightly controls international operations in East and Southeast Asia. Among the globally focused companies, this proportion falls to 29% and is the same for operations in developed markets.
Also important is the need to consider which functions and activities require local autonomy, and which can benefit from scale advantages. For example, companies may decide that marketing and talent are functions that require local execution, with centrally managed finance and IT – either at headquarters or through shared service centers.