building to win-final

7/31/2019 Building to Win-final

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Retail & Consumer

Building to winHow multinationals are structuring to compete inemerging markets


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With the current volatile condition o the global economy and any real recoveryin developed markets appearing to be some time away, the importance oemerging markets to global retail and consumer-products companies is clearerthan ever. Countries like China and India promise brighter returns to counterlagging results in more developed economies. Market- acing strategy is notthe only key to success or retail and consumer-products companies operatingin emerging markets, however. Internal organisation structures must provide

exibility on the ground, support long-term corporate direction, ensure timely,e ective decision-making and attract and grow the right talent. Striking theright balance between local, regional and corporate is critical.

How does the emerging market ft within the existing organisational structure?How are multinational organisations creating the kinds o structural plat ormsnecessary to compete and win in emerging markets where geography,cultural di erences, business practices and regulatory rameworks o tencollide?

Over the past decade multinationals have simplifed and standardisedprocesses globally to improve operational e fciencies, and they are continuingto do so. This report, produced in cooperation with the Economist IntelligenceUnit, examines how success ul companies are organising to create economieso scale; where power resides and why; what impact cultural values canhave on the organisation and why talent and leadership are such challengingareas to manage.

To all our interviewees, thank you or your time and insights.

We hope this report helps you build an approach to support long-term success.

Sincerely,

Carrie YuGlobal Retail and Consumer LeaderPricewaterhouseCoopers

Foreword


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Table oContents

01 Executive summary 3

02 Introduction 8

03 Global restructuring 13

04 In-country operating models 23

05 Corporate culture 30

06 Emerging talent 37

07 Conclusion 44

Page


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Building to winPricewaterhouseCoopers 3

01Executivesummary


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Building to win4 PricewaterhouseCoopers

The global retail and consumer sectors ace, at best, an uncertain outlook in2009. Most o the developed world is in recession and despite some glimmerso hope mainly in the orm o slowing rates o decline in key indicators real economic recovery is likely some distance away. Now, emerging markets,on which many companies in the retail and consumer sectors and indeed,many other sectors have been pinning their hopes or growth, are also beingdragged down into the mire. The depth and length o the emerging-markettroubles are o great concern to senior executives in the retail and consumer-products sectors. They have made large-scale investments in these countriesin recent years based on expectations o signifcant growth. Operations inemerging markets will be under intense pressure to deliver on these growthtargets despite the sombre outlook. With the economies o many developedmarkets still in ree all, the fnancial returns rom emerging markets are neededto shore up global profts as well as to justi y the investments made over thepast decade.

The coming year will see the retail and consumer-products sectors bu eted bythe ollowing trends:

Emerging markets have traditionally been expected to pick up the slack duringslowdowns in mature economies (in 2009, the US economy and Euro area areboth expected to contract by 2%, the UK by 2.6%). However, the outlook orthe retail and consumer-products sectors is ar rom certain given the globalnature o the current malaise. Latin American and transition economies arevulnerable to the downturns o trading partners in North America and WesternEurope respectively. Growth prospects remain more avourable in Asia, buoyedby the strong showing o China and India in recent years, but both ace slowerretail growth. The table shows how GDP growth levels are slowing in emergingmarkets. In the case o several countries such as Brazil, China and Russia,among others, growth is not expected to return to 2008 levels within the nextfve years.

Table 1: Slowing GDP growth levels2008 2009 2010 2011 2012 2013

Country GDP (% real change pa)

Brazil 5.3 1.6 3.2 4.1 4.0 4.0China 9.0 6.0 7.3 8.4 8.5 8.7India 5.3 5.0 6.6 7.8 8.1 7.9Indonesia 6.1 1.9 2.2 5.2 5.9 6.1Mexico 1.5 -1.8 1.4 3.5 3.8 3.5Poland 4.8 1.5 2.4 3.3 3.7 3.8Russia 6.0 1.0 4.0 4.6 4.6 4.7Ukraine 2.1 -6.0 2.0 3.8 5.0 4.8

Vietnam 6.2 3.0 4.0 4.3 5.1 6.5US 1.2 -2.0 0.6 1.5 1.9 2.1EU 0.9 -2.0 0.1 1.5 2.0 2.2World 6.1 2.5 4.6 5.9 6.2 6.2

Source: Economist Intelligence Unit

1The cooling down oemerging markets

Executivesummary

01

ActualsEstimatesForecasts


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01 Executivesummary

Declining trade between developed and emerging markets is already resultingin a slowdown in manu acturing, actory closures and rising unemploymentin Latin America, Central and Eastern Europe, and Asia. For countries thatexport high numbers o workers, such as Mexico, India and the Philippines, thecontraction o remittance ows is also starting to hurt.

This will lead to depressed consumer sentiment and a decline in the value opurchases in many markets. Essentials such as ood, beverages, tobacco andhousehold goods are unlikely to see sales all in volume terms, although theywill certainly experience a decline in value terms as consumers trade down tocheaper or discounted brands. Spending on apparel and consumer electronics,as well as leisure services such as restaurants and hotels, is more vulnerablesince consumers see it as less attractive in times o fnancial hardship.

Many governments have announced radical fnancial stimulus packages ina bid to maintain consumer spending. Barack Obama has pushed through amassive fscal stimulus (just under US$800bn) to start his term in o fce as USpresident. Developed and emerging markets are also increasing governmentspending to stimulate demand, although the impact o these packages will taketime to be elt.

Retail and consumer-products companies will discount heavily to maintainmarket share. For essential goods such as ood, consumers will switch tocheaper substitutes, which will beneft discount retailers at the expense o mid-market retailers, who are expected to alter pricing to protect market share.

Luxury-goods companies are heavily exposed as wealthier consumerseconomise and a lack o credit a ects more aspirational purchases. Whilethe luxury sector has traditionally been more resilient in downturns than the

mid-market, job losses in highly-paid areas such as banking will inevitablyflter through to lower sales. French luxury-goods group LVMH and UK-basedapparel brand Burberry, or example, have continued to see growth, buoyedby Asian markets and sustained demand or their high-profle brands. Both,however, have raised concerns about the impact that a sustained downturnwill have on sales in the coming years. French cosmetics frm LOral alsoexpects di fcult trading conditions during 2009. Luxury retailers will now acethe challenge o reducing prices without damaging proft margins or brandperception.

Companies will also be looking at their own internal structure and using theopportunity to drive out costs and eliminate redundancies. This includesreviewing internal processes to fnd e fciencies and putting common unctionsinto shared services organised on a regional or global level.

2 A worldwide slump inconsumer confdence

3Intense ocus on coste fciency and pricing


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01 Executivesummary

4Moves among

retailers to organiseto penetrate

emerging marketsbetter

5Moves among

consumer-productscompanies to seekeconomies o scale

Most retail companies that are operating in emerging markets have not beenthere or very long. Ample market opportunity in their home countries and thehigh levels o regulation abroad have traditionally acted as deterrents to oreigninvestment. In the past 15 years, however, retail companies have becomeaggressive in their quest to internationalise and capture market share in some othe ast-growing countries in Latin America, Eastern Europe and Asia.

The most international o retail companies now have a secure presence inemerging markets and are evaluating how they are internally structured andwhether they can trans orm themselves to penetrate these countries better. Thecompanies that do have enough critical mass in emerging markets are movingtowards regional structures, in which they are putting a management layerbetween global headquarters and in-country operations.

The regional structure has a number o benefts. For global headquarters, itspeeds up in ormation trans er rom the markets and enables better strategicdirection and control. Regional o fces also take a proactive stance on talent andleadership development. For local operations, the benefts include increasedaccess to global best practices, aster roll-out o technology and morecompelling career paths.

Many consumer-products companies are ar ahead o retailers, since theyhave been operating in emerging markets or a much longer period o time.Where they have in the past had a decentralised structure, consumer-products companies are in a period o trans ormation. They are streamliningand centralising parts o their organisation to reduce costs and eliminatingduplication o back-o fce unctions by establishing shared service centres thatsupport multiple markets or regions.

The net e ect is that consumer-products companies are centralising in someareas and remaining decentralised in others. Decision-making or consumer-related activities such as marketing, store promotions, pricing strategy andproduct localisation is still carried out at a country level. However, unctionssuch as HR, fnance, IT, acilities management, supply-chain management andprocurement are carried out by regional headquarters or organised into globalservice centres.

The trans ormation o consumer-products companies in emerging marketshas been spurred by the entry o oreign retailers. This has had a radical e ecton how consumer-products companies think about their supply chain anddistribution networks. Forging strong relationships with retail companies isa top priority as this is becoming a hugely important channel or increasingpenetration into emerging markets.


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01 Executivesummary

As well as expanding their physical operations into emerging markets, retailand consumer-products companies are also seeking to apply more o thecultural glue that binds their organisations together. Companies cite a globallyconsistent corporate culture, based on universal values o respect andcustomer service, as a key actor or maintaining their corporate identity as theyexpand into emerging markets. Firms make a concerted e ort not to imposea management culture that strongly leans towards any one national identity.Culture must be based on values that resonate regardless o the nationality oemployees.

Values must flter into all corporate decisions and ways o doing businessin emerging markets. For example, companies fnd that choosing joint-venture partners that share cultural and ethical values is a key determinanto a success ul and sustainable relationship. This is particularly importantbecause corporate conduct in emerging markets is vital to maintainingcompanies reputations at home. Compliance has been a key unction throughwhich companies have succeeded in ensuring that their values, ethics andsustainability policies are clearly defned.

Retail and consumer-products companies have created strong employmentbrands in emerging markets and are highly sought a ter by job seekers.However, a talent gap opens up at the mid-career and executive level as thereare ewer seasoned individuals in emerging markets. There is a perception,mostly alse, that sta in emerging markets will jump company or a small payincrease. What seems to be more the case is that companies have not correctlyidentifed or ocused on the most important actors that drive engagementand retention on an individual level. Companies should aim to create a totalrewards package that includes everything rom base pay to training and career-advancement opportunities.

It is vital that organisational knowledge be quickly and success ully trans erredinto emerging markets and, or this purpose, companies o ten assignexpatriates rom global headquarters and use talent-management policies that

acilitate mobility. Establishing regional headquarters can speed up knowledgetrans er as well as provide companies with a more strategic vantage point overtalent within a region.

6Emphasis on creating

consistent globalcorporate cultures that

are sensitive to thenational cultures oemerging markets

7Continued high demandor management talent in

emerging markets


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02 Introduction02Introduction


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With the global economic recession, emerging markets hold out the promiseo continued growth (albeit at a lower rate), without which many retail andconsumer-products companies ace the prospect o retrenchment. Companiesare looking to emerging markets particularly the BRIC countries o Brazil,Russia, India and China, in addition to other large emerging economies such asIndonesia, Mexico, Turkey and Vietnam to shore up their positions globally.Multinationals such as Unilever are ocusing on the prospect o up to one billionpeople joining the ranks o potential consumers or their products over the nextdecade and counting on a rising middle class in emerging markets to drivegrowth.

In the current environment, retail and consumer-products companies will needto penetrate deeper and increase market share at the same time as they reinin spending plans. This will require leveraging an organisational structure thatallows frms to be agile within individual markets while streamlining, simpli yingand centralising other parts o their operations.

A new landscape emergesRetail companies are at an entirely di erent stage o development in emergingmarkets compared with many consumer-products companies. The globalexpansion o retailers such as Wal-Mart, Tesco, Carre our and Metro, amongothers, has taken place within the past 15 years. Tesco, or example, frststarted operating in Thailand in 1998, established a joint venture in SouthKorea in 1999, and then went into Turkey in 2003, and China in 2004. Highlevels o regulation abroad and seemingly unsaturated markets at home havemeant that expanding overseas has only recently risen to the top o mostretailers agendas. In contrast, many consumer-products frms such as Procter& Gamble, Johnson & Johnson and Nestl are well over 100 years old (P&Gsheritage dates back to 1837) and have been operating in emerging markets ormore than 50 years. The latter opened its frst actory in Latin America in 1939and accelerated its expansion into emerging markets a ter the second worldwar.

Introduction02


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02 Introduction

As a result o their di erent stages o development, retail and consumer-products companies have di erent strategic objectives or their organisationalstructures. Retail companies are organising themselves into structures that willallow them to grow more quickly in emerging markets. They are establishingregional head o fces that manage a group o emerging-market operationsby providing strategic direction and planning support, developing talent orthe region and evaluating new opportunities or property acquisitions or newmarket entry.

For consumer-products companies, their objectives are to re-organise; theyalready have strong brand presence and local partnerships but are lookingto leverage economies o scale by streamlining and centralising non-coreactivities, empowering in-country marketing operations and enhancing theirdistribution networks and supply chains. I always look at it as globallye fcient and locally relevant; you cant be too global because there is no globalcustomer, says Paul Polman, ormerly Nestls executive vice-president orthe Americas (now CEO at Unilever). You cant be too local either anymore,because i youre not e fcient the competition will do it or you.

The ocus on supply chain and distribution is in large part driven by the entryo retailers into markets where consumer products are already established. Theentry o international retail companies into emerging markets has dramaticallychanged the landscape or consumer-products companies. Where developedmarkets have seen a shi t in the balance o power rom consumer-productsmanu acturers to retailers over the past three decades, this trend is nowoccurring in emerging markets too. And the emergence o global retailers is

orcing consumer-products companies to examine their cost bases and theirstructures. Paul Graham, CEO Asia Pacifc o DHL Exel Supply Chain, notes:Prior to the entrance o the global retailers, supply-chain e fciency and to alesser degree supply-chain costs have been o less importance with a view that

a lot o costs were borne by the local distributor.

I always look at it asglobally e fcient andlocally relevant. Paul Polman, ormerly executive vice-president or the Americas, Nestl (nowCEO at Unilever)


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Many international consumer-

products companies have beenprioritising investment in developingand emerging markets in recent years.Their twin objectives have been toposition themselves to exploit the growthpotential o the new consumer base,especially in Asia, and to leverage supplyside cost e fciencies or the benefto their worldwide businesses. Whilethe downturn will likely curtail overallinvestment spending in the near term,there is no reason to believe that thiswill reduce the priority on investment in,particularly, Asia. Indeed, the recessionmay well accelerate the trend on capacityretrenchment in Europe which has beenevident in recent years companies willnot want to risk exiting the downturn withuncompetitive cost structures, as thisis the time to get that work done i itsneeded.

There are some cases o companiesrepatriating production rom developingand emerging sources to make better useo surplus capacity becoming available inhome markets. This can be a particular

advantage i the ocus is now on cashdelivery through shortening supply

pipelines. But, or many companies, the

shi t rom European or North Americanproduction to developing and emergingmarkets is irreversible, and the challengeis to make the new ootprint work moree ectively.

For supply chain leadership in consumerpackaged goods, there has been agrowing trend towards establishingregional centres in developing andemerging markets, and there is evidencethat this continues despite the recentturbulence. These centres are chargedwith managing the capacity ootprint,ensuring good economies o scale insupply chain overheads and managing theinbound supply network. For many, it hasbeen essential to separate these regionalsupply chain unctions rom the authorityo local country leadership where regionaland local interests o ten clash. Singaporeand Hong Kong, with their outstandinglogistical connections, remain the centreso choice despite increasing costs.Companies increasingly incorporate global

unctions into these centres, especiallypurchasing, since the centre o gravity or

inbound supplies or many has shi tedsharply eastwards in recent years.

Ian Midgley, advisor, PricewaterhouseCoopers UKand ormer chie supply chain o fcer, Unilever

02 Introduction

Consumer-products companiesmarch to regional centres

... or many companiesthe shi t rom Europeanor North Americanproduction to developingand emerging markets isirreversible...


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02 Introduction

Few bright spots At the time o writing, there were some signs that the economic crisis was atleast bottoming out. But a real economic recovery at least in developedmarkets is unlikely to come until a ter 2013. While emerging markets lookrelatively better o they are expected to recover sooner overall, the short-term outlook or retail and consumer-products companies is a di fcult operatingenvironment globally.

In mature markets the threat o high-profle bankruptcies could have a pro oundimpact on the sector. US retailers such as Circuit City, Steve & Barrys, Linens nThings, Shoe Pavilion and Mervyns have already fled or bankruptcy. In theUK, urniture and high-street retailers MFI and Woolworths have gone intoadministration.

Global retailers with deep pockets could see operations expanding anddiversi ying through opportunistic acquisitions. Overall, however, there is likelyto be less interest in mergers and acquisitions. The PricewaterhouseCoopers12th Annual Global CEO Survey shows that only 16% o CEOs at consumer-products companies and 6% o CEOs in retail will ocus on mergers andacquisitions in 2009. We believe that we do all the right things in the currentfnancial crisis environment we prudently manage our cash ows and havetaken a decision to scale down capex [capital expenditure], ocus on highestreturns and shortest paybacks, and reduce short-term debt exposure, statesEvgeny Kornilov, the chie fnancial o fcer o X5 Retail Group, a Russian retailer,in the companys 2008 third-quarter report. We also chase all the opportunitiesthat this distressed market may o er. It is quite clear by now that the strongestand the smartest will success ully live through the crisis and come out aswinners, and it is our intention to continue to lead the way.

The global economic downturn is already having a sharp impact on propertymarkets, but alling prices will be a mixed blessing. On the one hand, they willlower the cost o entering markets around the world, and companies will beable to acquire new locations at a lower price. On the other hand, a sluggishproperty industry is re ective o a slowdown in demand.

We also chase all theopportunities that this

distressed market may o er. Evgeny Kornilov, CFO, X5 Retail Group


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03 Globalrestructuring03

Globalrestructuring


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Globalrestructuring

03

As companies evolve, expand and mature in emerging economiesthey are increasingly aware that their market- acing strategyis only one o the actors required to win market share. Theirorganisational structure, ability to roll out new processes quicklyand enter new markets in a cost-e ective way are equally, i notmore, important. To this end companies are changing their internalalignment and trans erring power to regional headquarters.

Key fndings: There is no right organisational structure or companies to adopt.

Success ul companies continuously evolve their structure depending ontheir strategy and stage o development in international markets.

This research shows a clear trend towards companies organisingthemselves around regional clusters with a regional head o fce. For retailcompanies, this means decentralising and allowing more exibility in themarkets. Consumer-products companies are coming rom the oppositedirection and centralising to beneft rom economies o scale.

A strong regional o fce can help oster a consistent corporate culture,leverage economies o scale and speed up knowledge trans er betweenglobal headquarters and country-level operations.

Cultural considerations must be taken into account when selecting thelocation or a regional o fce, in addition to actors such as transport linksand talent availability.

Challenges to regionalisation include unclear divisions o responsibilitiesbetween internal stakeholders and a lack o change management in theshi t o power rom local o fces to regional headquarters.

Market- acing strategyis only one o the

actors required to winmarket share.


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03 Globalrestructuring

One step at a time As discussed in the introduction, the most international o consumer-productscompanies have been operating in emerging markets or a lot longer thanthe most international o retail companies. For consumer-goods producers,overseas expansion typically begins with exporting abroad and entrustingmarketing and distribution to local agents. Retailers have been slower toexpand abroad since exporting their business models via ranchising requires arobust legal environment.

As sales overseas increase, companies set up in-country manu acturing andsales operations, requently with joint-venture partners. Regulatory changeis another actor in the decision to invest directly. By introducing Western-branded products and retail ormats into emerging markets, multinationals have

requently been able to skip the pioneering stage o the industry li e cycle 1 andconcentrate spending on marketing and distribution rather than research anddevelopment (R&D).

Table 2: A product-process li ecycle model

Extending the li e cycle?Industry development Characterised by:

Pioneering phase Low demand, low margins, high start-up costs

Growth phase Rising demand, expanding margins, little competition

Mature growth phase Above average growth, increasing competition, marginpressure

Mature phase Average growth, declining margins

Decline phase Declining growth

In order to urther penetrate emerging markets, however, increased investmentin product innovation is o ten required. Paul Graham, CEO Asia Pacifc oDHL Exel Supply Chain, notes: The challenge that global FMCG ( ast-movingconsumer goods) companies will ace is to develop local eel and avour whiledriving lowest cost to serve and to convince the consumer that there is still apoint o di erence.

1 Abernathy and Utterback 1978 theory, which presents a product-process li ecycle model. Asindustries mature, competition shi ts rom product to process innovation (more specialised ore fcient manu acturing to exploit economies o scale). In emerging markets, industries are at anearlier stage o li ecycle; there ore, frms compete on the basis o product di erentiation.

...the most internationalo consumer-productscompanies have beenoperating in emergingmarkets or a lot longerthan the most internationalo retail companies.


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Retailers ace the same hurdles. Organisationally, to introduce productinnovations, companies need to be decentralised to some degree. Theneed to streamline business processes at the same time pulls them towardscentralisation. Likewise, success ul retailers o ten use local sourcing or a high

percentage o the products that they stock, which limits opportunities to reapglobal economies o scale in procurement.

The global economic crisis is increasing the urgency or realising economieso scale and steering management ocus away rom new productdevelopment. Indeed, only 17% o CEOs at consumer-products companiessay they will be ocusing on product development in 2009, according to thePricewaterhouseCoopers 12th Annual Global CEO Survey .

Towards regionalisationThere is no such thing as the right organisational structure. As shown inTable 3, there are many examples o multinational companies that operatesuccess ully under a variety o organisational structures rom highlycentralised to regionally managed to entirely decentralised. Each o thesestructures has advantages and potential disadvantages. However, in thecourse o this research, one trend has become evident: international retail andconsumer-products companies, whether they are decentralised or centralised,are shi ting their balance o power in emerging markets towards regionalstructures (or dedicated emerging-market units).


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Organisationalstructure

Key eatures Advantages Potentialdisadvantages

Company caseexample

Centralised Reportinglines or most

unctions and

product groupsin emergingmarkets leadinto corporateheadquarters

Back o fceunctions are

centralised ando ten operated asshared services

Productand brandconsistency

Corporateheadquartershas control andinsight into localoperations

Back o fce coste fciency

Can lack productlocalisationabilities

Lack o localautonomy andagility

Slower decision-making

McDonalds

The companyhas a highlycentralisedglobal strategythat enables itto have a highdegree o brandand productconsistency

Regionalised In-marketindependenceon operationalissues

Individualmarkets reportinto regions

Regions reportinto headquarters

Achieves abalance ocentralised anddecentralised

Faster localdecision-makingthan a centralisedstructure

More centraloversight andcontrol than adecentralisedstructure

Ability to spotorganisational

synergies andstreamlineaccordingly

Regionalheadquartersrisk becoming anadditional layer obureaucracy

There mustbe a degreeo scale in themarkets be orea company cana ord regionaloverheads

Wal-Mart

Having previouslybeen a highlycentralisedcompany,Wal-Mart hasadopted regionalstructuresin Asia, the

Americas andEurope

Decentralised All unctions andproduct groupsreport locally

Top localmanagementreports to globalheadquarters

Fast localdecision-making

Agile localstructure andstrong productlocalisation ability

Duplicationo corporate

unctions

It is di fcult to rollout technologysystems globally

High in-marketcost base

Pernod Ricard

The companyhas a history odecentralisationsince 1975and is run likea ederation.The holdinggroup setssome strategybut decisionsare made in themarkets

Table 3: Organisational structures: Whats the right ft?


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Companies that have operated under decentralised structures have identifedopportunities to consolidate activities in order to reduce duplication andreap global economies o scale, trans erring processes and decision-makingto regional centres o excellence. They do not seek to centralise entirely asthis would take control too ar away rom the markets. The trans ormationprogramme o Anglo-Dutch ood, home and personal care giant Unilever,

or example, aims to reduce 100 in-country units to 20-25 multi-countryorganisations (MCOs) in addition to closing 51 actories. As o September 2008the company had established 29 MCOs and closed 14 actories. 2

Companies that have relied on developed markets or the bulk o their salesare fnding that international growth requires a shi t towards more decentralisedoperations. Brian Walker, vice-president APAC or Wal-Mart, notes that Wal-Marts structure has been centralised in some ways, and decentralised inothers we have always strived to think global and act local, keeping theneeds o local customers in mind. Individual markets have always had theauthority to make their own decisions within a governance ramework but haveall reported to the corporate headquarters in Bentonville, Arkansas. Now weare decentralising urther by pushing more governance authority to our regionalo fces.

Likewise, Kra t, an American processed- ood maker, aims to establish a moreexible, decentralised business model around our growth engines (South-

east Asia, Brazil, China and Russia). Kra t, Americas largest and the worldssecond largest ood company, has lagged behind the worlds largest,Nestl, in expanding internationally. Kra t makes 56.8% o its total revenue

rom the North American market and 26.6% within the EU. The proportion oits revenues that comes rom other international markets is only 16.6% 3. BothUnilever and Nestl are ar less dependent on their home region, Europe, ortheir share o total revenues.

2 Presentation by Unilevers CFO, Jim Lawrence at CAGNY Con erence. February 17th 20093 Kra t Annual Report, 2008


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By moving towards regional structures,companies are tacitly admitting that it isextremely di fcult to drive rapid growthin emerging markets with a centrally-runorganisation. The challenge, then, is tobridge the divide between headquartersand country markets and particularlybetween the developed and developingworlds. To do so, some Westernmultinationals are selecting locations orregional headquarters o fces that haveone oot in the West and one in the East.

According to Guenter Thumser, presidento Central and Eastern Europe and heado divisional laundry and home care atGerman consumer-products companyHenkel, you cannot steer expansion intoemerging markets rom one headquarters;

it is benefcial to have a regionalheadquarters which is closer to themarkets. Henkels regional headquarters

or Central and Eastern Europe is locatedin Vienna, Austria.

Mr Thumser explains that, even thebig markets which were opened rom[headquarters in] Dsseldor werelater trans erred to Vienna as it wasacknowledged that Vienna has ar greaterexperience in developing strategies thatwere close to the market. There is deeperinsight with hundreds o market-research

projects being carried out. He cautionsthat, expansion was not overnight, it tookover a decade o making smaller steps.

Henkels Global Excellence initiativeinvolves multiple projects aimed atensuring that the company has thestructures and processes in place tomaximise operational e fciency. It is, orexample, rationalising its production andsupply chain in addition to expanding theuse o shared services centres. Projectsinclude the expansion o a shared servicescentre in Slovakia and the trans ero centralised R&D operations to thecompanys three business sectors: laundryand home care; adhesive technologies;and cosmetics and toiletries.

Similarly, there were a number ostages involved in Procter & Gamblesrestructuring around three global businessunits beauty care, household care andhealth and well-being last year. In 1999back-o fce unctions were consolidatedinto one global business services unit,based in Costa Rica, the Philippinesand the UK. A degree o linguistichomogeneity is noteworthy. Spanish andEnglish language skills are widespread inCosta Rica and the Philippines.

Likewise, Austrias o fcial language isGerman. Mr Thumser says that Viennas

ocus is much more operational and weare directly involved in the countries.

He continues: One reason the regionalheadquarters is so success ul is that ithas one oot in the West and one in theEast. We are able to quickly roll out salessystems, strategies and tools at the speedo Western Europe into Eastern Europeand beneft rom synergies. The regionalheadquarters has a bridging e ect andis able to import knowledge quickly.Procter & Gambles consolidation andstandardisation o shared services hasbeen credited with speeding up Gillettesintegration ollowing its acquisition in2005.

Bridging the gap


...Western multinationalsare selecting locations orregional headquarters o fcesthat have one oot in theWest and one in the East.


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Where to locate the regional headquarters, particularly in some parts o theworld, is ar rom a straight orward decision. Paul Etchells, Coca-Colas deputygroup president or the Pacifc, notes that unlike Latin America, which hasgreater cultural homogeneity, Asia is not a natural grouping. Adding to thecomplexity o choosing regional o fces to serve Europe, Asia, A rica and theMiddle East is the large number o time zones and languages in each o theseregions. In contrast, companies typically run their Latin America operations

rom the US or out o Mexico City, Buenos Aires or Sao Paulo, o ten dependingon the order o entry into the regions various markets.

Important considerations include transport links, executive leadershipavailability and political stability. Mr Thumser o Henkel notes that Central andEastern Europe is a diverse region dominated by big countries such as Russia,Poland and Ukraine, but it also has many small countries, such as the Balticcountries. It is respect ul to the cultures o the region to be located in a smaller,neutral country or example, Austria rather than Moscow.

In 2008 Wal-Mart established a new regional o fce in Hong Kong, responsibleor overseeing the companys operations in China, India and Japan, in addition

to developing new business opportunities. The move ollows in the ootstepso the companys Miami regional o fce, which was established three yearsago to oversee the companys operations in Latin America and Canada. MrWalker says that the regional o fce has a strategic, not operational, role. Alloperational decisions are taken in the markets. The o fces role is to push outstrategic thinking and governance in existing markets, while looking or newbusiness opportunities across the region.

Mr Walker notes that, regionalisation started happening because we realisedyou cant do it rom the US. The markets are too large and too complex. Butin managing complexity, Mr Walker cautions that this structure can only worki we can ensure it is not an extra layer o bureaucracy. It has to be ocusedon the big picture and opening new markets. To manage emerging marketsthrough a regional ramework requires companies to have clear structures andresponsibilities. According to Mr Walker, to respond to the regionalisation,the central headquarters has realised the need to let individual markets have

reedom within a ramework. This enables us to better ocus on customerneeds at the market level.

regionalisation startedhappening because we

realised you cant do it romthe US. The markets are toolarge and too complex. Brian Walker, vice-president APAC, Wal-Mart


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Hong Kong was chosen or its transport links, its strategic location with oneoot in the East, one in the West, and also because o the wider availability o

an international base o talent compared with mainland China. We chose HongKong because you can get global, diverse talent which is essential because

Asia is a diverse region, says Mr Walker. The high degree o diversity within Asia has persuaded some companies not to sta their regional Asia o fcessolely with Asian nationals. There is so much diversity in the region that being

rom one Asian country doesnt necessarily mean that you can work well inanother, says one executive. It is better to have the best skills regardless onationality.

Brazil has become a major hub or shared services or the multinationalretailers and consumer-products frms operating in Latin America. As wellas having plenti ul skills availability, the country is economically stable andis being chosen as a location or back-o fce unctions and supply-chainand distribution-network management, says Ricardo Neves, a partner atPricewaterhouseCoopers Brazil. Considering the countries relative sizes,language and cultural proximity in Latin America, regionalisation and shared-services programmes have been more easily implemented in the region than inEurope or Asia where there are large di erences in culture, language and size othe countries.

Growing pains As with any business-process change, when companies change their structuresthere are o ten areas o blurred accountability or decision-making. This istypically more o a challenge or consumer-products companies when moving

rom decentralised structures to global category-led businesses.

When there are brand managers and marketing managers at global as well aslocal level, this can result in stalemates on decision-making. For example, abeverage company (which declined to be identifed or this report) describedgaps in governance that required a management initiative to resolve. Therewere several instances where either a global brand head or global marketinghead could veto an advertising campaign, but neither could overrule the other.

A small team went about documenting major decision-making rules in thebusiness, then sought senior management approval or all o the rules. Havingthe decision-making rules documented enabled the company to determinewhere power should lie in the organisation.

there are o ten areaso blurred accountabilityor decision-making whenmoving rom decentralisedstructures to globalcategory-led businesses.


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Complex matrix structures, or which consumer-products companies are well-known, are slowly being phased out. Executives interviewed or this reportacknowledge that matrix reporting lines still exist in a ew places, but issuessuch as decision-making ambiguity have been resolved. Some kind o matrixis inevitable when you reach a certain size, says the Russia general managero a luxury goods company. To know i it will work, just look up the chainto see how ar a dispute needs to go be ore its resolved. Too ar and its adisaster.

The trend is clear. To gain the benefts o centralisation (think global) anddecentralisation (act local), companies are moving towards regional-management structures. They are also simpli ying their governance anddecision-making to enable more agility in the markets. However, within themarkets themselves there is a lot o variation as to the operating modelsbeing employed. It is noteworthy that many companies are breaking away

rom their tried and tested home-market structures (usually wholly owningtheir operations) and trying new models such as ranchising or joint-venturepartnerships in order to succeed in emerging markets.

Complex matrix structures...are slowly being phased out.


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04 In-countryoperatingmodels04

In-countryoperatingmodels


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Companies o ten use joint ventures or ranchises rather thanwholly-owned subsidiaries in emerging markets. The main reasons

or this include regulation, level o market knowledge and desiredexposure to risk versus control.

In-countryoperatingmodels

04

Key fndings: Decisions about which business model to use in emerging markets are

based on the regulatory environment, the level o investment a companywants to make and how much local knowledge the frm possesses.

Joint ventures can provide companies with opportunities to quickly gainlocal expertise. The size o the large emerging markets can necessitatedi erent models even within a single country.

Joint-venture partnerships may help frms avoid large start-upinvestments, but their use ulness has a shel -li e. Partnerships should bestructured with an exit strategy in mind.

Companies should scrutinise all o their partners to ensure thatgovernance, ethics, supply chain and control mechanisms do not posehidden risks.


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04 In-countryoperatingmodels

Operating model Key eatures Advantages Potentialdisadvantages

Company caseexample

Wholly owned Operating inemerging marketsin entirely thesame way asin developed

markets, withoutco-ownershipstructures

Enables a companyto have ull controlover its operationsin the market andto be the sole

recipient o anyprofts

Has a high levelo risk attached particularlywhen companiesare entering new

markets or whichthey have noprecedent in theregion

May be prohibitedby regulation insome industriessuch as retail

Yum! Brands China

Where Yum!operates through

ranchises in mostmarkets, it operateswholly-ownedstores in China

Joint venture Operating under joint-ownershipstructures, eitherindefnitely or or aset period o time

Joint-venturepartners canprovide valuablelocal knowledge

Companiescan leveragethe productport olio o thelocal partner andtheir distributionnetworks

Reduces some othe risk o enteringnew markets

Joint ventureagreements can bedi fcult to exit

The governance,

supply chain andcontrols o a joint-venture partnermay contain hiddenrisks

Having a localpartner mayweaken or changecorporate culture

Tesco India

Tesco operatesunder joint-venture structurein India due tothe regulatoryconstraints onretailers

Franchise Allowing a localpartner to sella companysproducts and useits brand namedespite havinga completelyseparate ownershipstructure

The ranchiseegives a percentageo profts to the

ranchiser

Franchisingminimises fnancialrisk while enablinga company tocapture marketshare

Franchiseagreements canavoid managementspending lots otime on lesserimportant markets

Brand and qualitycontrols must bein place to managereputational risk

A company onlyreceives a shareo the profts,there ore thispractice is notsuited to high-value, high-growthmarkets

Requires themarket tohave a legal

ramework that

is robust enoughto support thecontractual ruleso the ranchiseagreement

Carre our Middle East

The frm operates

through ranchisingin the Middle Eastin order to capturemarket sharewithout divertingmanagementattention away rommarkets that aremore strategicallyimportant

Table 4: Finding the right operating model

The table below shows some o the reasons that companies choose di erent operating models in di erentmarkets.


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Regulated retailGovernment policy restricts the organisational structures that can be deployedby global companies entering di erent markets. Since retail companiesoperate in highly visible, labour-intensive industries, they are greatly a ectedby the political context within which they operate. Indias government has, orexample, liberalised oreign direct investment (FDI) policies or most sectors othe economy. Retailing, however, remains a conspicuous exception. Objectionsto the entry o oreign retailers on the part o the countrys 12 million-plus smallretailers make a major relaxation o FDI policy di fcult or the government.

Indias FDI policy does permit 100% oreign ownership in wholesale tradingoperations (such as cash and carry) and 51% ownership in single-brandretailing. German-headquartered retail company Metro opted to expand in Asiaby opening cash and carry outlets and thus has a model that works per ectly

or India. A company spokesperson says that Metros business in India grew by54.4% in fscal 2007 despite licence restrictions and the absence o modernin rastructure and supply chains.

Wal-Mart and Tesco, though normally engaged in ront-end retailing, havehad to ollow Metros lead in India and establish wholesale cash and carrybusinesses. Wal-Mart and Tesco are working through joint ventures with BhartiEnterprises and Trent the Tata Groups retailing arm respectively. At thesame time, they have entered into exclusive ranchise agreements to supplyretail technology to their partners. Though the two companies would doubtlesspre er to be permitted to enter the market directly, their current operations willprovide them with valuable experience in the Indian retail industry, which willstand them in good stead when they are eventually allowed to invest.


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Joint ventures can minimise riskMost companies have taken a step-by-step approach to internationalexpansion, allowing themselves time to learn rom each market experience andto leverage positioning in relatively hospitable markets to enter more dauntingones nearby. Taiwan, or example, has long served as a popular base orcompanies to gain experience prior to setting up operations in mainland China,with Taiwanese joint ventures and ranchises serving as important sources o

uture employees or mainland operations.

More recently, markets such as Turkey and Poland have been serving asstarting points or companies looking to expand deeper into Eastern Europe,the Middle East and North A rica. Duncan Tatton-Brown, ormer group fnancedirector at UK home-improvement chain Kingfsher, says the companywouldnt have elt as confdent in Russia i it had not experienced successin Poland. In turn, the company has applied lessons rom its experiences inRussia to its entry into Turkeys market.

Indeed, Mr Tatton-Brown says that one o the keys to success ul internationalexpansion is a step-by-step approach that can minimise the risks associatedwith big step changes, such as setting up company-owned warehousing ordistribution acilities. Joint-venture partners also can be use ul in this regardsince they requently already own assets on the ground.

A key point to bear in mind with regard to joint ventures, however, is that theyare likely to eventually outlive their use ulness, and they must be structuredaccordingly. At some point, companies may be able to reduce costs or increaseprofts by either changing joint-venture partner or by taking over the entireoperation themselves.

Turkey and Poland havebeen serving as startingpoints or companieslooking to expand deeperinto Eastern Europe, theMiddle East and North

A rica.

One o the keys tosuccess ul internationalexpansion is a step-by-step approach thatcan minimise the risksassociated with big stepchanges. Duncan Tatton-Brown, ormer groupfnance director, Kingfsher


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Benefting rom established local brands

Joint-venture partners are clearly o valuein markets that companies would struggleto develop on their own. A. Mahendran,managing director o Godrej Sara Lee andmentor director o Godrej Hershey, jointventures between Indias Godrej groupand the US companies Sara Lee andHershey, says that there is a belie withinboth Sara Lee and Hershey that theIndian partners know better than them,as ar as the Indian market is concerned.Both ventures are managed by the Indianpartner despite the act that they aremajority owned by the respective oreignpartners, who are only involved at theboard level.

Each venture involved the Americanpartner acquiring a stake in existingGodrej businesses and then introducingtheir brands through that business. Theresult is that each joint venture marketsa base o products that are alreadysuccess ul in the Indian market, reducingthe risk o introducing new products andleveraging the distribution network.

Godrej Sara Lee was established in 1995and has introduced Sara Lee productssuch as Ambi Pur air reshener, KIWIshoe polish and Brylcreem hair creamto the market. The joint ventures sales,

however, continue to be dominated bythe local brands which Godrej sold priorto the partnership. The joint venture isthe leader in Indias huge market ormosquito repellents (and claims to be theworlds largest manu acturer o mosquito-repellent mats). Likewise, Godrej Hersheyis a market leader in hard-boiled candyand soya milk and not, as yet, ocused onHersheys trademark chocolate.

As well as local brands, the Godrejgroup provides extensive distributionnetworks, vitally important given Indiasunderdeveloped retailing sector and vastrural hinterland. Godrej Hershey has 2,000distributors that reach more than 1m retailoutlets. In other words, the Godrej jointventure gives Hershey access to 2,000additional partners.


Joint-venture partnersare clearly o value inmarkets that companieswould struggle todevelop on their own.


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Business environment is another actor that plays a large role in decisionsrelating to how in-country operations are structured. For example, Yum! Brandsoperates through ranchising in the US but through wholly-owned restaurantsin China. As an early entrant, KFCs frst outlets in China were established at atime when the legal environment was not su fciently developed or ranchisingto be a viable model. Retaining control has acilitated the companys e ortsto develop a mass market positioning, adapting the menu to local tastes, orexample. As the legal environment across emerging markets has matured,companies such as doughnut maker Krispy Kreme have been able to expandinternationally by ranchising.

Developing a competitive market positioning requires a longer-termperspective. Marks & Spencers stores in India were operated by a ranchiseethat positioned the store as a premium retailer. The British retailer has nowentered a joint-venture agreement to develop larger ormat stores and increaselocal sourcing, allowing it to price more competitively. 4

4 Marks & Spencer press release, April 18th 2008

As the legal environmentacross emergingmarkets has matured,companies such asdoughnut maker KrispyKreme have been able toexpand internationally by

ranchising.


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05 Corporateculture05

Corporateculture


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Corporateculture

05

As multinational retailers and consumer-products companiesexpand globally, particularly into markets where there is littlecultural a fnity with the headquarters country, questions ariseas to whether a companys culture will be a help or hindrance inits e orts to penetrate markets. Companies have ound that it isbetter to ocus on corporate values rather than behaviours, takinga gentle approach that is respect ul o national sensitivities.

Key fndings: Finding joint-venture partners that share cultural and ethical values is a

key determinant o a success ul and sustainable relationship.

Core values matter more than workplace behaviours the latter areclosely linked to national cultures and norms and may not translate aswell in emerging markets.

Corporate conduct in emerging markets is vital to maintainingcompanies reputations at home. Compliance has been a key unctionthrough which companies have succeeded in ensuring that their values,ethics and sustainability policies are clearly defned.

Companies are pushing the green agenda in isolation rom each other.More industry collaboration would give these e orts greater impact.

A cultural evolutionOne actor behind the increasing adoption o regional structures is therecognition that exporting a companys culture requires more than exporting

ormats or setting up actories abroad. Success ul companies also export thecultural glue which binds the organisation together.

The key to building a strong and cohesive corporate culture in emergingmarkets is to ocus on the companys core values, rather than workplacebehaviours, since behaviours are more closely linked to national cultures ando ten do not translate well across borders. It must also be accepted that certainaspects o corporate culture may not resonate in particular emerging markets.

Success ul companiesalso export the culturalglue which binds theorganisation together.


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05 Corporateculture

Mr Walker, vice-president APAC or Wal-Mart, emphasises the importance ovalues. He observes: Theres an interesting relationship between corporateand country culture. Its got to do with values and driving the ones that arecritical to success. Wal-Marts values are respect or the individual, customerservice and striving or excellence. Mr Walker states that, these values areuniversal and resonate with all o our employees but are carried out di erentlydepending on where you are, ocusing on local customer needs. For example,there may be signifcant di erences in how employees demonstrate excellentcustomer service in Brazil versus China. The interpretation o excellence mustbe in keeping with the national culture.

As overseas operations grow in size, there can be a tendency or headquartersto try to orce management culture and behaviours in an attempt to aligncorporate culture across markets. This is not always help ul. There shouldbe some understanding that the culture o a large and mature organisation isnot necessarily su fciently entrepreneurial to succeed in emerging markets.Consequently, the culture must evolve to embrace a diversity o behaviourswithout promoting inconsistent values.

As subsidiaries develop di erent products or di erent markets, there is anincreased risk that the brand values o products developed or overseasmarkets con ict with the companys core values. Unilevers stated purpose andprinciples include an aim to make a positive impact in many ways: throughour brands, our commercial operations and relationships, through voluntarycontributions, and through the various other ways in which we engage withsociety. Yet the company has aced criticism that advertising or its success ulskin lightening products is patronising and discriminatory.

The Western standard o practice or dealing with di erent ethical standardsacross borders has been to articulate a global set o core values. However,these values re ect Western norms. As the global economic balance o powershi ts towards markets other than those in North America and Europe, we mightexpect to see new tensions around ethical norms and priorities as emergingmarkets exert more cultural and political in uence, argues ChristopherMichaelson, a director at PricewaterhouseCoopers US. There is a need toreconsider ethical norms in the context o emerging cultural and politicalpriorities in our changing world.

As overseas operationsgrow in size, there can be atendency or headquartersto try to orce managementculture and behavioursin an attempt to aligncorporate culture acrossmarkets.

...there is an increasedrisk that the brand valueso products developed oroverseas markets con ictwith the companys corevalues.


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05 Corporateculture

05 Corporateculture

When cultures collide

Di erences in ethical norms acrosscultures in business have led to con usionand misunderstanding or as long asbusiness has been done cross-culturally.Leading thinkers point to overlappingconsensus among core human valuesas a reason to believe that di erences arenot as undamental as they may seem.However, cultural and economic prioritiescan still get in the way o easy answers.Take the ollowing examples:

The giving and receiving o gi ts inbusiness is one way that good intentionscan be tainted by the appearance ocorruption. Whereas in some Asiancultures giving gi ts normally accompaniesthe execution o a business transactionas a signal o good aith, gi t giving isincreasingly rowned upon in North

America and Europe. Even i the gi t isgiven in good aith and not as a conditiono doing business, the appearance o(as well as the incipient potential or)corruption is reason enough or manyWestern companies to prohibit thepractice. This, however, can o endbusiness partners.

Recently, what the United Nations re ersto as di erential responsibility or climatechange mitigation between developed anddeveloping markets has caused cross-cultural tensions. Long-industrialisednations that have historically emitted thegreater proportion o greenhouse gasesinto the atmosphere have also enjoyed theeconomic benefts o decades o relativelyun ettered industrial activity. Emergingmarkets, meanwhile, are seeing theirchance at economic growth potentiallyimpeded by limitations on industrialactivity imposed by global environmentalagreements. Solving the tension odi erential responsibility must be a priorityin order to resolve the con ict airly andequitably.

Finally, child labour is a particular hotbutton among human rights advocatesand companies alike. However, thedefnitions o child and the expectationso a child in di erent cultures arein uenced by cultural traditions, as wellas economic need. Companies thathave sought to impose a minimum ageon oreign contract manu acturers have

ound that a universal standard may notbe acceptable to the diverse stakeholderswhose interests are involved.

Christopher Michaelson, director,PricewaterhouseCoopers US

Mark Hudson, UK retail and consumer leader,PricewaterhouseCoopers UK

As these examples show, di erent cultures have di erent perspectives depending on theirvantage point. There is no right or wrong answer, but there are several layers o subtlebut important di erences o opinion. The challenge or people engaged in internationalbusiness is to understand the other persons view by standing in their shoes and tobe able to manage both the relationship with the oreign team as well as the normsexpected at home. As the world becomes smaller, this challenge gets ever larger.


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05 Corporateculture

Doing goodWell-defned corporate social responsibility (CSR) programmes can helpensure that the companys values are consistent across markets. An additionalbeneft o CSR is to promote a standard set o rules. Operating under di erentrules due to di ering legal systems in di erent markets can be more costlythan adapting one set o rules above the minimum in any country as astandard or every market. Doing so can considerably reduce bureaucracy insubsidiary o fces lacking the manpower that administrative unctions have attheir disposal at head o fce.

Richard Wel ord, chairman o CSR Asia a promoter o more sustainablebusiness practices in Asia says that it is o ten the case that headquartershave great policies and procedures, but that internal communication isreally miserable. A company may have great poverty-alleviation strategies,but the people on the ground where poverty is an issue dont know aboutthem. He notes that it o ten takes a crisis or CSR to be taken seriously, andwhere companies have been success ul in pushing CSR down through theorganisation, it has o ten been through compliance. For example, Nike and

Adidas responded to criticism about the existence o sweatshops in theirsupply chains by introducing strict standards and processes to ensure thatethics policies are adhered to. Articulating a code o practice or suppliers canraise awareness o ethical standards throughout the organisation.

This trend o driving sustainability through both culture and compliance isgaining momentum. And its not only internal compliance. Retail companiesare taking the lead in pushing sustainable practices down through theirentire supply chain. Wal-Mart, or example, is in the process o setting out asustainability scorecard that will be used to assess its own internal buyers aswell as the frms suppliers. Consumer-products companies and their suppliers

will be orced to meet ever more stringent environmental and ethical standards.Wal-Mart will use a carrot-and-stick approach to respond to any ailure to meetthe targets. It will advise suppliers on how they can improve their environmentalrecords, but persistent poor per ormance will result in contract termination. InJuly 2008, Wal-Mart held an event or representatives o its supplier companiesand other sustainability experts to help the company design the index.

Operating under di erentrules due to di eringlegal systems in di erentmarkets can be more costlythan adapting one set orulesas a standard orevery market.

Articulating a code o

practice or suppliers canraise awareness o ethicalstandards throughout theorganisation.


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05 Corporateculture

Companies are working hard to improve their environmental records, as wellas align themselves to key social issues. However, rather than tackling all theenvironmental and societal challenges in the world, they are now ocusing onsignature issues that are core to their strategy and culture. Coca-Cola has, orexample, identifed water as a signature issue.

Increasing concern about reduced water supplies is a threat to Coca-Colasongoing business, since making Coca-Cola is a water-intensive process. CSR Asias Mr Wel ord says that the company has success ully reduced the amounto water that it takes to make Coca-Cola in China, but the company has also

aced serious protests over its use o water in India. Identi ying signature issuesthen in orms the type o organisational response that a company must employ.In Coca-Colas case, this means working with bottling companies to improvewater use. The ocus on water also eeds through to other CSR initiativessuch as providing drinking water to the victims and rescuers o the 2008Sichuan earthquake in China, working with the World Wildli e Fund to conserve

reshwater resources and taking part in an international sanitation or schoolsdevelopment programme. 5

Supply-chain collaborationOn one hand, companies appear to promote their environmental credentialswhile, on the other, they are slow to make progress when it comes to workingwith their competitors across the industry to increase levels o e fciency. MrGraham, CEO Asia Pacifc o DHL Exel Supply Chain, observes: Many Asianmarkets still see both local and global FMCG companies running separate

acilities but more importantly separate transport networks. A retailer mayreceive as many as eight or nine deliveries a day rom no more than two orthree suppliers. Mr Graham blames this on a real reluctance to collaborate.For consumer-products companies, this reluctance is because their distributionnetworks were at one time (and still are in some markets) a key competitivedi erentiator. However, the multinational retailers and logistics companies arechanging the distribution landscape in emerging markets. It is also likely thatcontinued oil price volatility as well as the global economic downturn will putpressure on companies to seek urther e fciencies in their supply chains anddistribution networks.

5 Coca-Cola China, 2007 Annual Sustainability Report, http://www.coca-cola.com.cn/responsibility.htm

On one hand, companiesappear to promote theirenvironmental credentialswhile, on the other, theyare slow to make progresswhen it comes to workingwith their competitors

across the industry toincrease levels o e fciency.


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05 Corporateculture

The world is watchingIn ormation availability over the Internet, and particularly the commentaryprovided by bloggers, makes it di fcult or companies to paper overinconsistencies in corporate values and ailures to address pressing socialconcerns. How companies behave in emerging markets will be scrutinised athome and accepting lower standards o service in emerging markets than in theWest can result in overwhelming media criticism.

This new global scrutiny can present some interesting dilemmas. For example,while ood companies are under pressure to promote healthier eating indeveloped markets, sales teams on the ground in emerging markets may fndless healthy oods easier to sell. Success ul companies will fnd ways to embedthe companys corporate values throughout the organisation rom top downand bottom up. Achieving this goal requires increased investment in trainingand a clear strategy.

In ormation availabilityover the Internet, andparticularly the commentaryprovided by bloggers, make

it di fcult or companies topaper over inconsistenciesin corporate values.


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06Emergingtalent


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Emergingtalent

06

For retail and consumer-products companies, their ability toexpand in emerging markets is largely dependent on their abilityto develop and retain the best talent in the region: individuals whocan bridge global and local cultures, trans er knowledge aroundthe organisation and ft with the companys culture. Un ortunately,talent retention and leadership issues are among the mostchallenging areas or retail and consumer-products companies tomanage in emerging markets.

Key fndings: Retail and consumer-products companies are highly sought a ter as

employers in emerging markets. Talent attraction is not a problem retention is.

Money talks, but not as much as development opportunities and careeradvancement.

Companies must anticipate the human-capital needs and challengesthat will present themselves in emerging markets. Too o ten, HRstrategies have not kept pace with market expansion.

The management team or regional headquarters must have seniorityand credibility with country-level general managers who have previouslyreported to headquarters.

Hiring local nationals is important at market level but not at the regionallevel, because regions such as Central and Eastern Europe and Asia areso diverse.


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06 Emergingtalent

Retention A lack o talent has always been blamed as a major bottleneck to emerging-market expansion. But retail and consumer-products companies have actuallybeen very success ul at building strong employment brands that attractindividuals early on in their careers. As a result, Western multinationals withhousehold brand names and good reputations are highly desired places towork. A talent crunch does in act appear at the management and leadershiplevel and stems rom high attrition among mid-career managers and a shortageo executive talent. I keep hearing that theres no talent, but I dont buy it,says one executive. Engagement and retention are what matter, notes PaulEtchells, Coca-Cola deputy group president or the Pacifc. We attract peopleat an early stage in their careers, but turnover is o ten high and retention canbe an issue, he says. The problem is not confned to Asia. Executives inLatin America and those in Central and Eastern Europe agree. When I meetother general managers, this is what they are talking about, notes the generalmanager o a luxury goods company in Russia.

Emerging markets are known or rampant poaching and wage in ation, whichhave given rise to a perception that employees can be retained with ever-largersalaries. It is true that money does talk particularly in emerging markets,where employees o ten come rom a background o hardship. Fast-growingeconomies have also experienced rising in ationary pressures, although suchpressures are easing as the global economy slows. Maarten van Beek, HRdirector or Latin America with Unilever Foodsolutions, says that in somecountries you can talk about great pension plans, but employees know whatin ation can do to these and they pre er to have the cash now.

Leading companies have shi ted their ocus towards development opportunitiesand career advancement in order to retain their best sta including

international rotations or those with leadership ability. Says Mr van Beek:The key or me is to build local capability and leave a generation o leadersand managers who have the capacity to drive the business in the uture. Thatmeans giving local people the right unctional and leadership skills. Movingmanagers to other countries in Latin America is a very good frst step, butalso sending people to North America or Europe to have a look at developedmarkets is also important.

The key or me is to buildlocal capability and leavea generation o leadersand managers who havethe capacity to drive thebusiness in the uture. Maarten van Beek, HR director or Latin

America, Unilever Foodsolutions


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06 Emergingtalent

There can be a mismatch in perceptions between what employers thinkmotivates their sta , and what the employees themselves consider tobe the most compelling aspect o their jobs. While base pay remains animportant motivator in emerging markets, Mark Gilbraith, a partner atPricewaterhouseCoopers China, says that companies should look at levels oemployee engagement and consider adopting broader rewards policies. Whatdrives this engagement varies by employee group as well as rom individualto individual. More work should be completed to understand the underlyingdrivers o engagement so that line managers and leadership and can workon a ew critical di erentiators that would increase retention, productivity andthe general attractiveness o the workplace. These di erentiators can be builtinto a total rewards package that includes everything rom base pay to careeropportunity, development and advancement.

One important signal o how ar emerging-markets employees can progressinternally is the representation o oreign nationals at the leadership level.Companies are making it a priority to develop talent locally to sta their in-country operations. However, there is still a large representation o expatriatesin emerging markets and at the regional level. This is partly because it is di fcultto fnd people who can open up a new market, then it takes time to hire ordevelop local people to run the business.

HR catches upPart o the retention problem stems rom the act that companies haveexpanded aster than their HR unctions. HR doesnt keep up. It catches uponce the problems are there, says the general manager o a luxury goods frmin Russia. High sta turnover can result in the HR department spending a loto time recruiting and inducting employees rather than creating more strategicretention strategies.

For Wal-Mart, the need to ocus on HR issues was another driver behind themove towards regional structures. Mr Walker points out that the HR unctionused to be managed rom the US, but the new regional structure strengthensthe frms people-development capability. Where bench building was donewithin individual markets, we can now use our growth strategy o globalleverage or people development. This means talent that is developed in onemarket can take best practices rom that market and implement them whenthey go to work in another one o our markets. This allows us to grow talent inthe region with a truly global and local point-o -view, he says.

There can be a mismatchin perceptions betweenwhat employers thinkmotivates their sta andwhat the employeesthemselves consider tobe the most compellingaspects o their jobs.


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06 Emergingtalent

Trans erring knowledge, quicklySpeed o knowledge trans er is a critical enabler o success in emergingmarkets. Most companies rely on people to spread knowledge, rather thantechnologies or processes. This is why organisational structures and talentmobility receive so much attention. Sta rotations between markets andheadquarters are not only valuable development and retention tools, but theyspread organisational knowledge and enable emerging leaders to be ullyimmersed in corporate culture.

Companies are taking a regional (i not global) view o talent management sothat they can spot opportunities or moving people to di erent countries andspreading best practices. Because we manage people at the regional andglobal level, we can o er better careers and development opportunities, saysMr van Beek, HR director or Latin America with Unilever Foodsolutions. Weknow where the talent is, what the challenges are, and it is easier to movepeople across borders. It is easier to use best practices rom one country andtranslate them to another country. I you have a local-country structure, you arenot able to do that.

A management training ground

A lack o management talent is a headache or retail and consumer-productscompanies in many markets. Unilevers subsidiary in India, HindustanUnilever Limited (HUL), however, has proven to be a ertile source o skilledmanagers or the companys operations globally. The Hewitt Top Companies

or Leaders 2007 Survey , or example, ranked Hindustan Unilever ourthout o 548 companies in 41 countries trailing General Electric, Procter &Gamble and Nokia.

According to D. Sundaram, Hindustan Unilevers vice chairman, over 100managers rom HUL are working in Unilevers subsidiaries outside o India.These include the chairmen o subsidiaries in Japan, Poland and Russia.Mr Sundaram says that the act that many o HULs managers are able togain international exposure helps us enormously, adding to the depth oexperience within HUL when managers return to India.

Managers employed by HUL at the entry level are care ully groomed orhigher positions through well-designed HR policies. The company has beenone o the frst to recognise the quality o the graduates coming rom the topIndian institutions (such as the Indian Institutes o Management). Accordingto Mr Sundaram, brands and people are our greatest assets, and these arenot re ected on the balance sheet.

Speed o knowledgetrans er is a critical enablero success in emergingmarkets.


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06 Emergingtalent

Sta fng regional headquartersTo really act local in the market, companies must employ managers whounderstand local culture and pre erably are a native o that country. Does thesame rule apply or regional o fces? No, say the executives interviewed or thisreport. It is more important to sta the regional headquarters with executivetalent o the right level o seniority and with a global, rather than local, outlook.

Making sure that the right level o seniority is in place is vital, since reportinglines rom the individual markets will change and the regional leadership musthave the appropriate level o credibility in the markets. Where companies havepreviously been decentralised, or there are strong local general managers in themarkets, regionalisation must be accompanied by a comprehensive change-management programme. Resistance in some places is inevitable. One globalbeverage company was orced to replace general managers in a number omarkets ollowing the frms move towards regionalisation as these individualswould not comply with the new structure.

As companies ollow the trend towards regionalisation, one o the mostsignifcant e ects on sta is that it involves a transition o power up or downthe organisation. The credibility, leadership and experience o the individualstasked with running the regional headquarters are more important than theirnationality. Additionally, as mentioned earlier in this report, regions such asEastern Europe and Asia do not share the cultural or linguistic similarities thatare present in Latin America. An executive rom China is not necessarily betterable to run operations in India or Indonesia than an executive rom the UK.

For retail and consumer-products companies, it is clear that the main challengethey are acing is to develop the right leadership capabilities globally, regionallyand in the emerging markets themselves. I they are not ocused on developingleaders and spreading organisational knowledge, companies will not be ableto drive organisational trans ormation and keep corporate culture and valuesaligned.

It is more important to stathe regional headquarterswith executive talent o theright level o seniority and

with a global, rather thanlocal, outlook.

Where companieshave previously beendecentralised, or there

are strong local generalmanagers in the markets,regionalisation mustbe accompanied by acomprehensive change-management programme.


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06 Emergingtalent

Global governance?

Diversity throughout the ranks o retail and consumer-products companyemployees has increased markedly in recent years. Yet, diversity at theboard level has o ten taken longer to realise. An Economist Intelligence Unitanalysis o 40 leading retail and consumer-products companies or this report

ound that only 15 have executives rom emerging markets on their boards odirectors, only marginally greater than the total in 2003 (please see ull table in Appendix 1).

We do have discussions about it, when were recruiting board positionsor North American companies, and they want to have someone rom an

emerging market particularly in Asia but once the search processstarts, other criteria take precedence, says Robert Grandy, managingdirector or fnancial services and board consulting with Korn/FerryInternational in Asia-Pacifc. It is very di fcult to get someone in Asia who may be in a ull-time position to commit to attending ten or soboard meetings in the US per year, he says, and another challenge is that

there are ewer Asians that have had a senior operating role with a largemultinational. While companies are keen to fnd board members romemerging markets, it is deemed more important to fnd members that havean operating role at a multinational frm or previous board-member expertise.

Since it is di fcult to recruit emerging-markets nationals externally or board-member positions at multinational companies, succession planning, globally,will become ever more important. This also illustrates the importance omanaging talent at a regional rather than purely local level.

It is very di fcult to getsomeone in Asia tocommit to attending ten orso board meetings in theUS per year. Robert Grandy, managing director orfnancial services and board consulting,Korn/Ferry International in Asia Pacifc


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07 Conclusion07Conclusion

As developed markets enter what appears likely to be a prolonged economicdownturn, the importance o emerging markets or multinationals will onlyincrease. Many are already reorganising themselves to take their emerging-market penetration to the next level. There is no one solution or every companyalthough many have ound more integrated regional operations to be a plat orm

or success. Regionalisation has enabled them to get a better understandingo markets, not only to drive strategy, but also to exert control. For those

just beginning the trans ormation, depending on whether they are comingrom a centralised or decentralised stance, the frst stage o regionalisation

may involve consolidating physical assets many companies that haverushed to carve out leading positions in new markets will have over-invested.Regionalisation enables them to leverage economies o scale in product-related

unctions such as R&D, procurement, manu acturing, distribution, as well as theback o fce IT, fnance and HR.

Cost reduction is a big driver or regionalisation not just operating costreduction, but lowering the cost to expand. The current environment will bevery challenging or multinationals with lean balance sheets, yet they need tokeep expanding and strengthening their positions in emerging markets. Havinga corporate structure that can enable ast expansion into a new market at a lowcost will be a critical di erentiator o success, particularly or retail companies.

As discussed in this report, however, the physical trans ormation is only parto the picture. The greater trans ormations under way are those that involvepeople and culture. It is only natural that people resist changes in power,authority and decision-making. For some companies taking fscal controlout o the hands o in-country management, this will be particularly pain ul.However, or the most part, regionalisation is seen as a positive step. It o ersnew career paths or leaders in emerging markets, it speeds up on-the-grounddecision-making, it provides a plat orm to move deeper into each region, and it

promotes the dissemination o organisational knowledge.

Key to the success o the regional structure is the management team. Notonly must regional management teams have a high degree o seniority andcredibility to allow them to manage across markets, but they must also havecredibility with the executive committee, especially i they are to preventheadquarters rom developing overly exuberant expectations or growth. Withemerging markets such as China expected to be among the ew growingeconomies in the near term, the risk o such exuberance is high indeed.

The greater trans ormationsunder way are those thatinvolve people and culture.


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Appendix 1

Composition o boards o directors in retail and consumer-products companies,compiled rom desk research and annual reports.

Company Number o emergingmarket nationals*

Number o women

2003 2008 2003 2008 Altria Group, Inc. 1 0 2 1

Anheuser-Busch InBev 0 3 0 0Best Buy Co., Inc. 1 3 1 1British American Tobacco p.l.c. 3 2 1 3Cadbury p.l.c. 0 0 1 1Campbell Soup Company 0 0 2 3

Carre our Group 0 0 0 1Colgate-Palmolive Company 0 1 3 2Diageo p.l.c. 0 0 1 2GAP Inc. 1 0 4 2General Mills, Inc. 0 1 4 5H&M Group 0 0 2 7Heineken N.V. 0 0 0 1H. J. Heinz Company 0 0 4 2Imperial Tobacco Group p.l.c. 0 0 0 2Inditex Group 0 0 2 1Johnson & Johnson 0 0 1 3Kellogg Company 1 1 2 2Kimberly-Clark Corporation 0 0 0 2Kra t Foods Inc. 2 1 3 5LOral Group 0 0 2 3LVMH 1 0 1 1McDonalds Corporation 0 0 2 3Metro Group 0 0 3 3Nestl SA 0 1 0 2Nike, Inc. 0 0 1 2PepsiCo 0 1 3 3Pernod Ricard SA n/a 0 3 4Philip Morris International Inc. n/a** 1 n/a** 0PPR SA 0 0 1 1Procter & Gamble Company 0 2 3 3Richemont SA 0 2 0 1SABMiller p.l.c. 1 6 1 2Starbucks Co ee Company 0 1 1 2Tesco p.l.c. 0 0 0 2The Coca-Cola Company 0 0 1 3The Home Depot, Inc. 1 0 1 2Unilever 1 2 0 2Wal-Mart Stores, Inc. 0 0 1 3Yum! Brands, Inc. 0 0 3 2

* Defned as born in an emerging-market country ** The company was spun o rom Altria in 2008


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Finance e ectiveness Australia Con Grapsas [email protected] Bill Kong [email protected] Martin Petry [email protected] Kong Edmund Lee [email protected] Tom Gunson [email protected] Mike Boyle [email protected]

Forensic services Australia Steve Ingram [email protected] Ste en Salvenmoser ste [email protected] K

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