News, Products and Information for Plumbing and Mechanical Contractors

Industry News

Study finds companies fall short of achieving goals in emerging markets

January 26th, 2007

Davos, Switzerland — Despite the size and remarkable growth of emerging markets, a surprising number of companies are falling short of achieving their business goals. In fact, just 47% of the more than 440 senior executives surveyed by Deloitte’s Global Manufacturing Industry Group said their companies had been extremely or very successful in meeting their revenue goals in emerging markets.

What is preventing companies from fulfilling their goals? “Most likely it’s because the complexity of their business continues to increase and it’s a daunting task to integrate and manage their emerging market operations,” suggested Gary Coleman, global managing director for manufacturing, and partner Deloitte & Touche USA LLP.

Presenting the new research findings of the “Innovation in Emerging Markets 2007 Annual Study” in Davos, Coleman observed the trend that, “Companies are locating higher-value activities such as complex production, sophisticated research and development (R&D), and sales and marketing operations in emerging markets.”

“What was originally seen as low-cost locations for routine operations, companies are moving up the value chain in emerging markets,” he explained. “With this move, the challenge to provide innovative products and services that capture market share in the rapidly growing emerging markets intensifies. This intensity brings complexity, which for many companies makes it even more difficult for them to achieve their original emerging market goals.”

The Deloitte 2007 study examined what companies are doing in the areas of talent, risk and structuring their operations to be successful in emerging markets.

A fierce war for talent
“More companies are realizing the need to customize their human resource strategies to the local realities while also recognizing that — just as in developed economies — developing, deploying and connecting their people will be essential to attracting and retaining higher-skilled employees,” said Coleman.

The study reveals that companies that use rewards and recognition and training, as well as compensation and benefits, as important human resource (HR) techniques were more likely to be successful in achieving their operational goals in emerging markets. For example, 73% of the companies that used rewards and recognition as an important HR technique said they were extremely or very successful in achieving their operational goals, compared to 51% who did not consider this an important technique.

Becoming risk intelligent
Locating operations in emerging markets brings increased risks in a variety of areas such intellectual property protection, geopolitical issues, and legal/regulatory issues to name a few. However, before investing in an emerging market, only 56% of companies surveyed conducted a very detailed risk assessment. And even fewer (45 percent) conduct a detailed risk assessment for their existing operations in emerging markets.

“It is especially important for companies to become risk intelligent to assess all the things that could prevent them from realizing its business goals,” said Coleman. “It’s important for companies to integrate their risk assessments into a single, comprehensive view, and instill a risk management into their culture.”

Trend towards wholly-owned operations
Although companies often begin in an emerging market with a joint venture or third-party arrangement, the study reveals that as they gain experience and become more comfortable more are moving towards using newly-created wholly-owned subsidiaries as their operating structure. Companies that have adopted this operating structure appear to be finding greater success in meeting their operational goals.

In addition, companies are looking to provide more autonomy at the local level — to gain local knowledge and respond quickly to opportunities—while leveraging the strengths from efficient global business processes and management expertise provided by headquarters.

“It’s a matter of striking the right balance between the efficiency offered by a centralized structure and the responsiveness provided by more decentralized decision-making,” said Coleman.

Achieving commercial success in emerging markets will require companies to rethink their business approach to these markets. Not only must they acquire new skills and organizational structures, they must let autonomy thrive, while leveraging strengths from headquarters. And they must develop and produce products at costs that meet the needs of consumers and industrial buyers with much lower per capita GDP characteristics.

Additional Research Findings

Investment Outlook

  • China continues to be the emerging market of greatest interest to executives. In fact, over the next five years, more than two-thirds of executives expect their company to locate or expand in China. Approximately 80 percent are likely to locate or expand both production and sales/distribution operations, while 44 percent are likely to locate or expand R&D operations in China over this period.
  • While China may have the limelight, the other emerging markets in Eastern Europe, Southeast Asia, Latin America and India are also expected to attract future investments. Over the next five years, in the case of each market, roughly half of executives surveyed expect their companies to locate or expand in these markets.
  • For Eastern Europe, 81 percent plan to locate or expand sales/distribution operations and 43 percent will locate or expand production operations.
  • A similar trend is expected for Southeast Asia with 72 percent of companies planning to locate or expand sales/distribution operations and 46 percent investing in production.
  • In addition to a high percent of companies expected to invest or expand sales and distribution in Latin American markets, 49 percent are likely to locate or expand production operations.
  • A third of executives surveyed expect their companies to invest in R&D in India.
  • Increasing revenues and market share are cited as the most important reason for investing in emerging markets (rated by 84 percent of executives surveyed). Other reasons indicated by executives included the goals of reducing costs (77 percent), using low-cost suppliers (69 percent), and achieving faster time to market (61 percent).
  • Winning the war for talent in emerging markets

  • Roughly one-quarter of executives surveyed said their company found it very difficult to attract qualified workers in China, India, Latin America, and Eastern Europe.
  • In most markets, executives reported the greatest difficulties in attracting more highly-skilled workers such as managerial, R&D, and sales/marketing personnel.
  • Some of the strategies that companies are using successfully in emerging markets include not hiring job applicants with a history of job hopping; rotating skilled employees for training or temporary assignments in developed markets; providing training to develop skills and career prospects; offering additional responsibilities or moving to new positions/assignments; customizing HR policies to local realities, e.g., providing healthcare to parents of employees and other benefits such as allowances for housing and transportation; and ensuring that they have a strong HR manager based locally
  • Although steps can be taken to reduce turnover, companies are recognizing that turnover will be higher in some emerging markets than they are used to be and are including this reality in their planning.
  • Risk management practices for emerging markets

  • Companies are most likely to conduct detailed assessments of risks associated with supply chain, legal/regulatory issues, and business continuity (around 75% surveyed practiced this). Surprisingly, risks due to geopolitical developments or terrorism are not examined in detail by most of the companies surveyed.
  • Protecting intellectual property (IP) is one of the greatest concerns that companies have regarding their emerging market investments. Among the most popular strategies that companies are taking to protect their IP include keeping high-value activities in developed markets; sourcing components from multiple emerging markets; distributing production across multiple emerging markets; and controlling access to proprietary information.
  • Structuring operations in emerging markets

  • The most popular operating structure in most locations for production and sales/distribution was a newly-created operation subsidiary (rather than an acquisition, joint venture, or outsourcing arrangement). This was particularly the case in China and Latin America with around two-thirds of companies surveyed preferring a newly-created operation.
  • Overall companies participating in the survey that used newly-created operations in emerging markets were more often successful in achieving their operational goals than companies that relied on other approaches—both for production and for sales/distribution operations.
  • As companies become more comfortable with operating in emerging markets, they appear to gravitate away from joint ventures and outsourcing arrangements towards wholly-owned subsidiaries (whether newly-created or acquisitions).
  • Operational costs were the most important factor driving the decision on which operating model to use (cited by 58% of executives surveyed). Other factors considered were time to market, legal/regulatory issues, local knowledge, need for control, and the amount of capital required.
  • For more information about the research, visit the Deloitte web site:

    “Innovation in Emerging Markets” is an annual study by the Deloitte Global Manufacturing Industry Group which examines what is required for companies to succeed and realize the enormous market potential of the developing economies including China, India, Southeast Asia, Eastern Europe, and Latin America. The 2007 study included a global online survey completed by over 440 senior executives from a broad spectrum of industry sectors in addition to in-depth case study interviews with senior executives. Released at a Deloitte CEO Lunch during The World Economic Forum in Davos, Switzerland, the executive summary titled “Innovation in Emerging Markets. 2007 Annual Study” highlights the key findings of the research. A detailed report will be released in early March 2007.

    Leave a Reply

    You must be logged in to post a comment or register today.

    PHC News Twitter
    Digital Editions
    Don McNeeley
    The McNeeley View
    Richard DiToma
    Plumbing Business
    Bob "Hot Rod" Rohr
    Radiant Insider
    Dan Foley
    From the Field
    Ellen Rohr
    Business Expert
    Bristol Stickney
    Solar Solutions
    Max Rohr
    Alternative Energy
    Linda Jennings
    Showroom Trends
    2014 Sponsors