What makes a successful company in an emerging market?

Tianjin and London 15 September 2010 ― A report released today by Ernst & Young to coincide with Davos Asia highlights how leading companies from the emerging markets around the world have prospered over the last three years while their peers in developed markets have stagnated or declined.

Emerging Heroes draws on recent research conducted on behalf of Ernst & Young by the Economist Intelligence Unit who studied 547 large companies based in 47 emerging markets. All had turnover in excess of US$500m. Executives of these businesses were asked what strategies they had adopted to drive growth, how they had managed their capital agenda in support of this and which tactics had been the most successful in developing the business.
The results for a substantial proportion were impressive: over one third – 34% delivered both revenue and profit growth of over 20% in a three year period. This compares to an average of 2% revenue growth and 20% profit drop of US-based Standard & Poors’ 100 companies and an average 8% revenue fall and 25% profit drop of FTSE Euro-100 European based companies over the same period.

Alexis Karklins, EMEIA Capital Transformation Leader at Ernst & Young comments, “These emerging market ‘hero’ businesses have delivered impressive results when you compare to the recent results of companies in mature economies. The tide has now fully turned. Rather than Western companies exporting their management theologies to developing markets it should now be corporates in developed markets who start to appreciate how and why these ‘companies have grown successfully despite the uniquely challenging global economic environment.”

What is behind the success stories?

Over 90% of emerging heroes focused on growth through one of two strategies: aggressive or incremental.

Nearly half of the fast growing ‘emerging hero’ companies surveyed said that their key focus in the last  three years had been aggressive growth whether it be via new markets, new products or by making acquisitions. The most successful companies were not necessarily those who practiced rapid international expansion. Often they prioritized efficiency and market share at home first before developing new markets elsewhere.

A further 41% said they had relied on incremental growth through product refinements or marketing enhancements.

Only 5% had focused instead on optimizing their existing business by cutting costs or outsourcing key parts of their business.

As Karklins explains, having a robust strategy is not enough. Clarity around communication was equally important. “Over three quarters of the hero companies surveyed said this was the most critical internal factor in achieving growth targets.”

And so does strong central strategic leadership. 65% of fast growing companies cited centralized strategic decision making as their chosen route. By contrast only 9% took strategic decisions at a local level.

Regional variations

The research clearly showed some differences in strategies employed by companies in the emerging markets. As Karklins explains “Among the BRICS, successful companies in Brazil and India are more likely to be pursuing an aggressive growth strategy while companies in China are more evenly balanced between aggressive and incremental growth, and companies in Russia have a higher incidence of focus on optimizing operations.”

Lessons from rapid growth economies

As well as having a clear strategy focused on growth, Emerging Heroes also highlights four other observations on how these companies have prospered over the last three years despite the recession that hit much of the global economy:

1. Aligned capital agenda to growth. The most successful companies indentified in the research primarily ensured cash flow and cash reserves were maximized to fund growth. Over 90% of the quickest growing firms funded expansion through retained earnings. They additionally tapped the financial markets to minimize cost of capital.
   
   
2. Prioritized go to market push. Successful companies focus on market activities above all others. They look for innovative ways to access and service markets and reinforce entry strategies through increased marketing. Consolidation was important as well.  Perhaps surprisingly the research showed that 55% of those companies who reported in excess of 20% revenue growth highlighted a focus on domestic M&A over and above deals in other markets. 
   
   
3. Built from the core and matched tactics to markets. The most successful companies were more likely to primarily drive growth in their existing markets using their existing products. At the same time when they did expand into new markets they were also more likely to use existing products. Innovation with existing products at home or abroad was key to success.
   
   
4. Optimized operations and focused on customers. High growth companies pursued both internal and external approaches to building a strong and efficient business. To drive growth they made internal support functions as efficient as possible, and at the same time looked to build relationships with customers and focused on the supply chain.
   

As Karklins concludes “Building a highly successful business in the emerging markets has many of the same challenges and opportunities as one in the developed world. Rather than coping with these by developing highly innovative strategies our ‘emerging heroes’ are companies who have done the simple things very well.”

Notes to Editors

About Emerging Heroes 

Survey conducted by EIU for Ernst & Young in July/August 2010. 547 companies with turnover over US$500m in 47 countries.

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