Is it time to refocus?

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However logical it may have been a decade or so ago, pursuing a land-grab strategy no longer makes sense for multinationals seeking profit in Asia.

For two decades, Asia has been a tremendous source of growth for multinational companies and private equity firms. Profits, however, have proved more elusive. Many companies have struggled to adapt their products and value proposition to diverging local tastes, to establish the right go-to-market models, to contend with surprisingly formidable local competitors and to negotiate the region’s complex business environment. Still, many have stayed the course, convinced of the need to stake their claim in a region whose growth potential once seemed almost limitless.

EY - The Capital Agenda

Now, with Asia growing far slower than it was a decade ago, that approach is no longer sustainable. Companies that were betting on runaway growth need to rethink the Asia story and embrace a new capital strategy focused on depth—market leadership in a country or category—over breadth.

The challenge

Buying into the depth-over-breadth argument, of course, isn’t the same as executing on it. The challenge for organizations begins with figuring out exactly how and where they should focus their capital and other resources, and where they should fall back.

Asia is not a monolith. Political models, regulatory regimes, cultural norms, consumer behaviors and distribution channels vary from one country to the next, as does the maturity of each country’s infrastructure. Regions or markets inhospitable to some businesses are still attractive to others.

“The way we assess the depth of a market is by the size of the opportunity and our right to win in that market. Assessing your right to win requires that you assess the opportunity from multiple angles.” —Amit Banati, President, Asia-Pacific, Kellogg Company

Executing a depth-over-breadth capital strategy

Although a number of companies have begun transitioning to a depth-over-breadth capital strategy in Asia, it’s sometimes been done on a reactionary basis—a response to external events or pressure from directors or activist investors—rather than a deep analysis of their business. Companies seeking a more measured approach can find it in the following steps:

  • Conduct a portfolio review, reassessing the company’s ability to achieve market leadership and profitability in each of the countries and categories in which it competes. Look at what drives growth in a given market or category, the size of the opportunity, and the company’s ability to address the growth drivers in the highest-value markets.
  • Double down in priority countries by undertaking transformative deals — big-bang M&A transactions and partnerships — to boost market share quickly. While there’s nothing wrong with organic growth, tweaking products, pricing, cost structures and go-to-market strategies in a bid to boost revenues and profits organically can be slow-going, and harder to execute when growth is slowing and competition is stronger. Mergers and acquisitions, despite their own challenges, can quickly catapult a company into the top three by market share. This can be transformative.
  • Right-size go-to-market models. Depending on their scale, category and channel configurations, and strategic visions, companies should right-size their go-to-market models. Among the factors to be considered—all with a hard eye on market reality—are the impact on fixed-costs and margins, the company’s sales and distribution capabilities, its ability to find a reliable go-to-market partner, governance and control issues, and the company’s scale in channel.
  • Launch a large-scale cost-cutting initiative to improve profitability. Companies exiting or entering markets in emerging Asia may need to revisit their cost structure to jump-start a path to profitability. Under land-grab strategies premised on extraordinary growth, many companies established Asia operations with excess fat across the organization, including manufacturing, and throughout the supply chain. Some also entered into suboptimal agreements with external parties—third-party manufacturers, or marketing agencies.  An honest and critical zero-based budgeting exercise is needed.
  • Reorganize to emphasize country over category. Multinational companies with subscale operations across categories may find it helpful to take a country approach to competing in Asia, rather than a category approach. A category approach can work well when categories are large and distribution channels mature, as they are in the West. But in Asia, volumes in individual categories are often small.
  • Plan a path to exit, and limit losses, where market leadership and profitability are not realistic. There’s no pleasant way to exit a losing business. In some cases, companies simply need to swallow their medicine—shut down operations, write off the investment, move on. Where this is the case, companies should establish a dedicated divestiture team and be prepared to offer stakeholders a valid plan for redeploying any capital released by the retrenchment and make the exit as seamless and cost-effective as possible.

The upshot

Asia today is not the Asia of 20 years ago, or 10 years ago, or even five years ago. It continues to grow faster than most developed economies, but more slowly than it did in the past. It remains a region of great opportunity, but also one where profitability remains elusive for those unwilling to invest the resources necessary to tailor their offerings and business models to its individual markets. Companies that have yet to see Asia’s promise cascade to the bottom line must determine where they have a path to profitability and focus their attention there.

Depth, not breadth, will win the day.


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