In the face of a Eurozone crisis, global deceleration, high debt within governments, widespread austerity measures, and market uncertainty, many companies have become frozen to the spot, eschewing bold investment decisions to hoard cash instead (estimated in October 2012 at US $1.3 trillion and UK £750 billion)1. Yet the apparent reluctance to do anything significant with these vast sums of capital is severely at odds with the market opportunity.
For instance, McKinsey estimates that by 2025, more than half of the world’s population will have joined the consuming class, driving annual consumption in emerging markets to US$30 trillion, from US$12 trillion today. Emerging markets could account for more than 70 percent of global economic growth during this period. The stakes could not be higher.
But the truth is that today’s companies are not always great at exploiting opportunities outside of their domestic markets—especially in emerging markets, which seem to offer the richest pickings for sustainable growth. McKinsey research shows that the largest companies headquartered in developed economies currently derive only 17 percent of their revenues from emerging markets, even though these markets already represent 36 percent of the global GDP. Despite advantages in scale, technology, and access to capital, multinationals often lose out to more-nimble local competitors.
So what do multinationals have to improve to fully exploit the emerging growth opportunities around the world? Of course, there are no instant answers to such a multifaceted problem but much of it revolves around customer behavior, distribution chains, maximizing the talent pool, and leveraging innovation, as well as managing risk. There is an emerging school of thought2 (backed by evidence) that larger corporations are better able to deal with these challenges than their smaller competitors, thanks to their ability to scale process and product innovations quickly using corporate assets that are hard for [smaller?] competitors to duplicate—from integrated global infrastructures and world-class business processes, to strong brands and extensive partner networks. Think about Apple’s mastery of its global supply chain and partner networks that allowed Apple to roll out the iPhone 5 in 31 countries since its September launch, supported by agreements with 240 carriers.
The most-successful multinationals also nurture and promote corporate “catalysts”—mission-driven leaders able to marshal their corporate assets to address broad corporate challenges that impede innovation and growth. As the scope of CFO responsibility broadens to include the management of IT, HR, procurement, and other lines of business, many CFOs are becoming corporate catalysts for change, heading up transformational projects that increase efficiencies, lower costs, and improve business agility to better capture opportunities in local and global markets.
In addition to being catalysts for change, CFOs aspiring to exploit global growth opportunities can only play a role in ensuring that their corporate assets are attuned to local market preferences. Strong brands that work admirably in familiar markets count for very little if the products are not tailored to local needs and the goods do not reach the consumer. For example, apparel that succeeds in the US domestic market may flounder in developing nations where body shape, levels of modesty, and custom are significantly different. But it is the complexity of distribution in large and structurally unfamiliar continents that can be most troublesome. In India, for example, the passage of goods is hampered by thousands of small distributors and millions of small stores. Getting products into these outlets at the right price and displayed appropriately is very expensive and time-consuming. Some businesses hire a staff of hundreds simply to check displays and pricing—something that would be unheard of in developed nations.
The notion that emerging markets can be exploited fully with a western approach to talent, culture, and HR practices alone is hopelessly optimistic. Tapping into local talent pools can be the difference between making or breaking it. In some locations there is no shortage of labor or well-trained graduates but considerable expenditure is required to recruit and train to appropriate standards. Success often hinges on the speed with which the local talent pool can be brought on stream and developed to new heights—but within the context of a clearly communicated global strategy.
But the way in which the talent pool is managed is also fundamental to leveraging innovation, whether it’s outward-bound or “reverse innovation,” where products and services are first introduced in emerging markets and transferred to developed markets.
The good news for global businesses is that the lag between invention and exploitation is shortening. For example, the transformational effects of the information, communication, and technology revolution on businesses have been felt in less than four decades. Today’s innovations (social media, mobile computing) are being exploited more quickly, rapidly changing business processes and raising growth at a faster pace.
Innovation is vital, yet history shows it is the application of new products and processes in the workplace that boosts growth. Getting inventions to work often requires changes to organizational culture and working practices. Collaboration is the watchword of the twenty-first century. Global companies that have this flexibility and are able to adapt their culture, wherever they operate in the world, have an advantage. So regardless of whether innovation is inward or outward-bound, it is the management of the global talent pool—putting people to work—and the harnessing of innovation rather than pure inventiveness that will ultimately prove pivotal to success.
Of course, change on this scale presents formidable challenges for risk management as companies grapple with diverse supply chains, local compliance regimes, and HR practices around the world, for example. It is arguably the inability to confidently identify and manage risk that is one of the factors that has held businesses back. Yet opportunity and risk are two sides of the same coin. Fortunately, one of the material advances of the last decade is the ability to more ably manage risk on an enterprisewide level.
History shows that companies that successfully navigate massive structural change go on to dominate their markets for decades to come. Westernized companies have all the tools and advantages at their disposal—the only thing holding them back could be themselves. Many global businesses will be looking to the emerging paradigm of the CFO as the catalyst that will enable them to regain the initiative from smaller businesses that have many of the same tools at their disposal—but not the experience, infrastructure, and know-how.
1 Deloitte study, “Show me the Money,” October 2012.
2 "The New Corporate Garage," Scott D. Anthony, the Harvard Business Review, September 2012.