The Master CFO Series:
A tale of two markets
Balancing investments across divergent markets
CFOs have to manage contradictory forces.
Please indicate whether you agree with the following statements
(percentage of 759 CFOs surveyed)
High performing organizations are better at managing the trade offs in resource allocation.
How would you rate the effectiveness of your company at managing the following aspects of its investment strategy? (percentage)
- High performers (HP): respondents from organizations in the top quartile of EBITDA growth over the last three years.
- Low performers (LP): respondents from organizations in the bottom quartile of EBITDA growth over the last three years.
In today’s economy, striking the right balance of investments across developed and rapid-growth markets will decide the winners from the losers.
“The challenge in emerging markets is that you don’t want to just throw money at everything. You also have to invest appropriately in developed markets to support the strategy and to drive the scale benefits.”
— Deirdre Mahlan, CFO, Diageo
With their unique vantage point over the business, and financial discipline, the CFO plays a central role in maintaining the right equilibrium across these investments. And yet determining the optimal balance of resource across such divergent markets presents them with a real challenge.
New growth opportunities needed
Three years after the financial crisis first hit, companies have largely reached the limits of growth that can be achieved through bottom-line cost savings and are looking for opportunities elsewhere.
“Companies have probably taken as much cost as they can out of the organization without actually destroying value,” says Allister Wilson, an audit partner at Ernst & Young LLP. “They’re now looking to grow the top line and that will typically involve entering or expanding into new markets.”
In an environment where developed markets are unlikely to grow significantly over the next few years, a shifting allocation of resources to rapid-growth markets is becoming a strategic necessity.
In fact, 87% of CFOs surveyed believe it is difficult to build a rationale for increasing the allocation of resources to developed markets when other markets are growing more quickly.
But despite their positive outlook, rapid-growth markets are by no means a panacea for sluggish performance elsewhere.
Although time horizons will vary depending on the sector, rapid-growth market investments require patience. The upfront investment can be considerable – and is rising even further as wage increases and high rates of inflation push up costs.
Investment in developed markets is still critical to growth
Equally, slow-growing developed markets cannot be neglected.
For most companies, regions such as Europe and North America still account for the largest share of their revenues and profits. Indeed, the average S&P 500 company earns just 10% of its revenues from rapid-growth markets.1
Countries such as China and India may be growing quickly, but they are unlikely to replace developed markets as the cash cow of the business any time soon.
“The challenge in emerging markets is that you don’t want to just throw money at everything,” says Deirdre Mahlan, CFO at Diageo, a consumer drinks company headquartered in the UK. “You also have to invest appropriately in developed markets to support the strategy and to drive the scale benefits.”
Companies struggle to find the optimal balance of investments
Determining the optimal balance of investments across markets with such divergent growth prospects is far from straight forward. The majority of those CFOs surveyed do not believe that their organization is effective at managing the trade-offs in resource allocation between developed and rapid-growth markets.
But interestingly, there are stark differences between high- and low-performing company respondents, with high performers reported to be much more effective at managing across two very different speeds of growth, and making trade-offs in resource allocation across markets.