ANNEX
UK MANUFACTURERS INNOVATION STRATEGIES IN
EMERGING MARKETS
1. RETHINKING
VALUE PROPOSITIONS
Customers in emerging markets are becoming more
sophisticated and demanding, expecting products that satisfy their
special requirements and preferences. The competition to develop
produce and services that meet these needs is now fierce.
Few executives surveyed reported that their
company had tailored its value proposition in emerging markets.
Exhibit 3
FEW COMPANIES OFFER VERY DIFFERENT PRODUCTS
Products sold in emerging markets compared
to those sold in home market.
Percentage of responses
All emerging markets = 10 emerging markets listed
Source: one or more member
firms of Deloitte Touche Tohmatsu
Exhibit 4
SIMILAR PERSPECTIVES ACROSS THE SECTORS
Products sold in emerging markets to those
in home market
Percentages of responses
Source: one or more member
firms of Deloitte Touche Tohmatsu
When the companies surveyed did vary their product
offerings, they were more likely to take the relatively easy steps
of adjusting their pricing on discounts, rather than offering
different product features or types to appeal to the unique requirement
of emerging market customers.
29% of the responses from executives surveyed
about individual emerging markets described pricing being very
different from their home market, 29%—discounts, rebates
and promotions, 21%—after-sale service, 14% product models/types
and 10% product features.
But companies that did not vary their product
offerings were more likely to advise greater success with 54%
of executives at companies reporting higher margins in emerging
markets than in their home market said they also offered different
product features, 63%—where they offered different models/types
and 88% had higher margins where there was differential pricing.
While smaller companies are often considered
more agile in seizing new opportunities, among the companies surveyed
the largest, most complex manufacturers had an edge that may be
due to their reservoirs of talent, global supply chains, and financial
resources. 63% of executives surveyed at larger companies said
they offered different product features in emerging markets than
those offered at home compared to just 33% among those at smaller
companies.
Going local
Successful companies realise they need to customise
existing products and design new products that appeal to local
tastes or requirements. Manufacturers can only be successful at
this if they understand the unique environment and buyer needs
in emerging markets so that they can appropriately tailor their
products.
The relatively small size of individual European
countries combined with a lower level of income than in developed
markets pose special issues. To recoup R&D costs, companies
need to design products that will appeal to the entire region,
not just a single Eastern European country. In addition, the ease
of purchasing products in nearby Western European countries and
the fact that several Eastern European countries are now members
of the European Union means that companies need to consider whether
introducing lower-cost products would cannibalise their existing
sales.
It is a matter of customer knowledge and assumptions
on what will work in emerging markets are made at the manufacturers'
peril. Companies need to invest resources to gain a deep understanding
of the requirements of customers in emerging markets.
Driving down prices
While some manufacturers have achieved success
in emerging markets by serving the growing number of affluent
consumers, some innovative manufacturers have focussed on the
opportunity to unleash vast new markets by delivering products
at substantially lower prices to lower income and middle income
consumers.
Many companies have reduced the minimum use
of consumer products sold in emerging markets such as toothpaste,
laundry detergent and shampoo. These smaller sized can be sold
at lower prices, unlocking untapped demand.
Other manufacturers have engaged in a more fundamental
redesign of their products to be able to slash prices.
2. GLOBALISING
RESEARCH AND
DEVELOPMENT
Meeting the needs of emerging markets depends
on a company getting close to its customers and then integrating
this knowledge with its R&D efforts. One way leading manufacturers
are working to accomplish this feat is by conducting R&D close
to emerging markets.
One motivation is cost reduction, through lower
costs for skilled engineers and also the potential for tax credits
and other government incentives but perhaps more importantly,
placing R&D close to suppliers and customers of emerging markets
allows design by engineers who better understand their needs,
facilities, collaborative product design and simplifies the resolution
of engineering related problems.
Exhibit 5
CUSTOMER KNOWLEDGE AND SPEED ARE KEY BENEFITS
FROM LOCAL R&D
Percentage of executives rating benefit of
locating R&D in emerging markets as extremely or very important.
Source: One or more member
firms of Deloitte Touche Tohmatsu
3. TAILORING
TALENT MANAGEMENT
To succeed in emerging markets, many manufacturers
will need to rethink how they recruit, develop, deploy and connect
the skilled employees on which they rely. Historically seen as
an inexhaustible supply of low-cost labour, many emerging markets
are now taking the same shortages of skilled labour that are all
too familiar in developed countries.
Competition among multinational corporations
for skilled employees, together with the growing demand from local
companies, has driven up salaries in emerging markets.
The talent squeeze has put a premium on training.
Global companies often need to increase their investment in upgrading
the skills of newly hired employees to global standards in such
areas as production control, quality control and technology applications.
Global companies have developed company-wide
the policies and practices to create consistency in their operations
around the world but they will need to find approaches that can
be adjusted to match the local culture and employee expectations.
4. MASTERING
THE COMPLEXITY
OF GLOBAL
VALUE CHAINS
For companies to deliver commercially viable
products at dramatically lower prices, an efficient global value
chain is essential. In Deloitte's ongoing benchmark research across
more than 850 manufacturers around the world, Deloitte has found
that only 15% of the largest, most global and most complex companies
have successfully mastered the growing complexity of their value
chains. These companies have, however, grown faster and are generating
profit levels up to 50% higher than those achieved by their less
capable peers.
As companies expand their sales in emerging
markets, companies will need to balance the efficiency that a
global value chain provides with the r4esponsiveness needed for
local subsidiaries to compete effectively.
One approach is to create "micro' operations
that can flexibly customise products to meet the needs of local
markets or customer segments, while basing them on the efficiency
and expertise provided by a global platform.
The design of a global value chain can be the
easy part of the process, it is in the implementation that problems
can arise. Each emerging market has different conditions that
need to be accommodated.
Manufacturers in emerging markets have an opportunity
to start with a "clean sheet" in developing their production
and delivery models, unconstrai9ned by their legacy infrastructure.
A fundamental question is whether a company should go it alone
or instead enter into a joint venture.
44% of responses in our emerging markets research
used joint ventures at least some of the time, with 19% using
them frequently. When companies first enter an emerging market
they often enter into a local joint venture to gain knowledge
of the local market, regulations, business culture and language.
There is then often an evolution to having wholly owned subsidiaries.
The use of advances information systems to increase
efficiency by providing more accurate, up-to-date information
has proved especially important in emerging markets.
5. MANAGING RISKS
Efficiency is always a paramount consideration
in designing an operating model. However, in emerging market companies
often should temper the drive for efficiency with the need to
design operations that mitigate the increased risks these companies
present. Operating in any country entails risks, but emerging
markets present special challenges. Global companies in these
markets must operate effectively in different cultures and languages,
guard against increased threats to their intellectual property,
be prepared to respond to potential political or economic instability
and comply with a myriad of local laws, regulations and tax regimes.
Governance risk is an added concern stemming
from such issues as the membership of directors in local subsidiaries,
corporate ethics and integrity, delegations of authority and joint
venture arrangements. Risks to supply chains can lead to delays
in manufacturing and distributing goods.
The political and regulatory environments in
emerging markets are often in flux. For example, in 2005, more
than 3,000 new laws were promulgated at national and provincial
levels in China. Changes can occur even more frequently at local
levels. In many countries there is a vigorous debate on the level
of state participation in commerce, the appropriate level of foreign
investment, and the need to preserve and expand employment.
Governments and quasi-governmental organisations
can promulgate technology and other standards that can effectively
constitute non-profit barrier to trade.
Manufacturers have to monitor these changing
environments and in many cases join together to advocate for open
standards and fewer barriers to competition.
Most companies are particularly focussed on
threats to their intellectual property in emerging markets. Risks
include the theft of key process and product know-how by staff
or joint venture partners and counterfeiting of branded products.
Statutory protections for intellectual property are either weak
or not enforced effectively.
To mitigate these risks, companies have to assume
additional costs in distributing proprietary activities across
facilities or selectively moving processes to more secure locations.
How can companies better manage risk in emerging
markets? To be successful, manufacturers need to do more than
simply protect their assets from "unrewarded" risks
such as non-compliance with regulatory requirements on operational
failure.
They should also consider the risks of failing
to capture the accelerated growth that led them to invest in emerging
markets in the first place.
Companies should assess the amount of risk they
are prepared to accept in each country, identify potential risks
associated with each of their investments and then compare their
risk exposure to their ability to exploit upside opportunities.
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16 October 2006
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